-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TKxiNQsRqXY+PfqLq/ugJv/ihJF1a32IM0dNn8q1U9XG8VIWqgPX9d3fnjDaPjsO lDXxXkt1nIqQLV/wayW1MQ== 0000950130-98-005437.txt : 19981113 0000950130-98-005437.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950130-98-005437 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED WATER RESOURCES INC CENTRAL INDEX KEY: 0000715969 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 222441477 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08586 FILM NUMBER: 98745542 BUSINESS ADDRESS: STREET 1: 200 OLD HOOK RD CITY: HARRINGTON PARK STATE: NJ ZIP: 07640 BUSINESS PHONE: 2017849434 MAIL ADDRESS: STREET 1: 200 OLD HOOK ROAD CITY: HARRINGTON PARK STATE: NJ ZIP: 07640 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION ------------------------------------- WASHINGTON, D. C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 ------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to _______________________ Commission file number 1-858-6 ------------- United Water Resources Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New Jersey 22-2441477 - ------------------------------ ---------------------------- (State or other Jurisdiction (I.R.S. Employer of Incorporation) Identification No.) 200 Old Hook Road, Harrington Park, New Jersey 07640 - -------------------------------------------------------------------------------- (Address of principal executive office) (zip code) 201-784-9434 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __________ --------- Common shares of stock outstanding as of October 31, 1998 37,493,632 ----------- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ------------------------------- UNITED WATER RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (THOUSANDS OF DOLLARS)
SEPTEMBER 30, DECEMBER 31, 1998 1997 -------------- ------------ (UNAUDITED) ASSETS - ------ UTILITY PLANT, including $68,742 and $49,301 under construction $1,504,108 $1,439,854 LESS accumulated depreciation 321,380 296,820 ----------- ------------ 1,182,728 1,143,034 ----------- ------------ UTILITY PLANT ACQUISITION ADJUSTMENTS, NET 61,702 63,026 ----------- ------------ REAL ESTATE AND OTHER INVESTMENTS, less accumulated depreciation of $13,051 and $11,497 81,511 79,487 EQUITY INVESTMENTS 111,703 99,197 ----------- ------------ 193,214 178,684 CURRENT ASSETS: Cash and cash equivalents 6,948 8,546 Restricted cash 23,930 34,581 Accounts receivable and unbilled revenues, net 69,996 57,723 Prepaid and other current assets 15,465 11,705 ----------- ------------ 116,339 112,555 ----------- ------------ DEFERRED CHARGES AND OTHER ASSETS: Regulatory assets 80,659 79,748 Prepaid employee benefits 26,989 21,426 Unamortized debt expense 32,089 31,019 Other deferred charges and assets 26,137 28,850 ----------- ------------ 165,874 161,043 ----------- ------------ $1,719,857 $1,658,342 =========== ============ CAPITALIZATION AND LIABILITIES - ------------------------------- CAPITALIZATION: Common stock and retained earnings $ 447,817 $ 418,601 Preferred stock without mandatory redemption 9,000 9,000 Preferred stock with mandatory redemption 49,748 51,838 Preference stock, convertible, with mandatory redemption 30,507 34,741 Long-term debt 618,714 622,737 ----------- ------------ 1,155,786 1,136,917 ----------- ------------ CURRENT LIABILITIES: Notes payable 84,625 74,925 Preferred stock and long-term debt due within one year 6,279 8,022 Accounts payable and other current liabilities 52,661 40,156 Accrued taxes 28,982 26,878 Accrued interest and dividends 8,256 8,117 ----------- ------------ 180,803 158,098 ----------- ------------ DEFERRED CREDITS AND OTHER LIABILITIES: Deferred income taxes and investment tax credits 192,988 183,490 Customer advances for construction 29,134 27,356 Contributions in aid of construction 139,280 133,684 Other deferred credits and liabilities 21,866 18,797 ----------- ------------ 383,268 363,327 ----------- ------------ $1,719,857 $1,658,342 =========== ============
The accompanying notes are an integral part of these consolidated financial statements. UNITED WATER RESOURCES INC. AND SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME (THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS ---------------------- ---------------------- ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ---------------------- ---------------------- 1998 1997 1998 1997 ----------- --------- ---------- ---------- OPERATING REVENUES $108,748 $99,690 $270,409 $267,457 --------- -------- --------- ---------- OPERATING EXPENSES: Operation and maintenance 44,654 42,959 125,093 128,299 Depreciation and amortization 9,823 8,687 28,792 26,055 General taxes 14,789 13,875 41,051 39,299 --------- -------- --------- ---------- TOTAL OPERATING EXPENSES 69,266 65,521 194,936 193,653 --------- -------- --------- ---------- OPERATING INCOME 39,482 34,169 75,473 73,804 --------- -------- --------- ---------- INTEREST AND OTHER EXPENSES: Interest expense, net of amount capitalized 11,262 11,755 34,147 33,785 Allowance for funds used during construction (947) (240) (2,478) (2,072) Preferred stock dividends of subsidiaries 552 563 1,673 1,694 Equity earnings of affiliates (2,071) (3,565) (9,049) (9,173) Windfall profits tax of affiliate -- 10,334 -- 10,334 Other income, net (569) (396) (1,401) (1,720) --------- -------- --------- ---------- TOTAL INTEREST AND OTHER EXPENSES 8,227 18,451 22,892 32,848 --------- -------- --------- ---------- INCOME BEFORE INCOME TAXES 31,255 15,718 52,581 40,956 PROVISION FOR INCOME TAXES 10,765 8,185 15,817 15,871 --------- -------- --------- ---------- NET INCOME 20,490 7,533 36,764 25,085 Preferred and preference stock dividends 990 1,069 3,088 3,275 --------- -------- --------- ---------- NET INCOME APPLICABLE TO COMMON STOCK $ 19,500 $ 6,464 $ 33,676 $ 21,810 ========= ======== ========= ========== NET INCOME PER COMMON SHARE $0.52 $0.18 $0.91 $0.62 ======== ======= ======== ======== Average common shares outstanding 37,268 35,802 36,848 35,298 NET INCOME PER COMMON SHARE-ASSUMING DILUTION $0.51 $0.18 $0.90 $0.62 ======== ======= ======== ======== Average common shares outstanding 39,327 38,176 39,023 37,644 DIVIDENDS PER COMMON SHARE $0.23 $0.23 $0.69 $0.69 ======== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. UNITED WATER RESOURCES INC. AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (THOUSANDS OF DOLLARS) (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- 1998 1997 -------- -------- OPERATING ACTIVITIES: NET INCOME $ 36,764 $ 25,085 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization 29,799 27,001 Equity (earnings) loss of affiliates (9,049) 1,161 Proceeds from sales of properties 3,057 8,705 Gain on sale of properties (1,535) (3,662) Improvements to property under development (1,207) (1,011) Deferred income taxes and investment tax credits, net 9,498 6,196 Allowance for funds used during construction (AFUDC) (2,478) (2,072) Changes in assets and liabilities: Accounts receivable and unbilled revenues (12,273) (4,366) Prepaid and other current assets (3,760) (6,609) Prepaid employee benefits (5,563) (3,080) Regulatory assets (911) (5,111) Accounts payable and other current liabilities 12,505 (561) Accrued taxes 2,104 10,701 Accrued interest and dividends 139 741 Other, net 2,302 2,153 ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 59,392 55,271 ------- ------- INVESTING ACTIVITIES: Additions to utility plant (excludes AFUDC) (62,438) (48,497) Additions to real estate and other properties (3,742) (1,641) Additions to equity investments (2,245) (15,859) Change in restricted cash 10,651 (11,699) ------- ------- NET CASH USED IN INVESTING ACTIVITIES (57,774) (77,696) ------- ------- FINANCING ACTIVITIES: Change in notes payable 9,700 (20,200) Additional long-term debt 40,233 60,368 Reduction in preferred stock and long-term debt (48,089) (18,539) Issuance of common stock 16,076 19,723 Dividends on common stock (25,422) (24,341) Dividends on preferred and preference stock (3,088) (3,275) Net contributions and advances for construction 7,374 5,711 ------- ------- NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (3,216) 19,447 ------- ------- NET DECREASE IN CASH AND CASH EQUIVALENTS (1,598) (2,978) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,546 8,961 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,948 $ 5,983 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. UNITED WATER RESOURCES INC. AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (THOUSANDS OF DOLLARS, EXCEPT SHARE DATA) (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------- 1998 1997 Supplemental disclosures of cash flow information: -------- -------- Interest (net of amount capitalized) $33,001 $32,098 Income taxes paid 4,676 3,608 Supplemental disclosures of non-cash transactions: Additional common stock was issued upon the conversion of 330,280 and 359,294 shares of preference stock valued at $4.6 million and $5 million during 1998 and 1997, respectively. UNITED WATER RESOURCES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 NOTE 1 - GENERAL - ---------------- In the opinion of United Water Resources (United Water, or the Company), the accompanying unaudited consolidated financial statements contain all adjustments, which consist of normal recurring adjustments, necessary for the fair presentation of the results for the interim periods. Additional footnote disclosure concerning accounting policies and other matters are disclosed in the Company's audited consolidated financial statements included in its 1997 Annual Report on Form 10-K, which should be read in conjunction with these financial statements. Certain prior year amounts have been reclassified to conform with current year presentation. Due to the seasonal nature of the Company's operations, financial results for interim periods are not necessarily indicative of the results for a twelve month period. NOTE 2 - INVESTMENT IN NORTHUMBRIAN PARTNERSHIP - ----------------------------------------------- On June 28, 1996, United Water and Lyonnaise Europe plc formed the Northumbrian Partnership (the Partnership), an equal partnership which has acquired a 20% interest in Northumbrian Water Group Plc, the fifth largest investor-owned water company (by population served) in the United Kingdom. United Water's share of the Partnership's earnings is included in Equity earnings of affilates in the Statement of Consolidated Income. NOTE 3 - INVESTMENT IN UNITED WATER SERVICES - -------------------------------------------- On July 28, 1997, United Water Services LLC (formerly the United Water Resources-Lyonnaise des Eaux Partnership), a joint venture between United Water and Suez Lyonnaise des Eaux, acquired Montgomery Watson's 50% stake in JMM Operational Services (JMM-OSI). As a result, United Water Services Inc. (formerly JMM-OSI) became a wholly owned subsidiary of United Water Services LLC. Prior to the restructuring, United Water Services LLC owned a 50% interest in JMM-OSI and Montgomery Watson owned the remaining 50% interest. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- GENERAL - ------- United Water's principal utility subsidiaries include United Water New Jersey, United Water New York and United Waterworks. United Water New Jersey and United Water New York (a subsidiary of United Water New Jersey) provide public water supply services to more than one million people in northern New Jersey and southern New York. United Waterworks provides public water supply services to approximately one million people in 13 states. Its major utility operations are located in Arkansas, Delaware, Florida, Idaho, New Jersey, New York and Pennsylvania. In addition, its utility in Florida also provides wastewater collection and treatment services, generally to its water customers. The water utility business is cyclical in nature, as both revenues and earnings are higher in the summer months when customer consumption is higher than in the cooler months. United Properties Group (United Properties), United Water's real estate subsidiary, is a non-regulated business engaged in real estate investment and development activities, including commercial office and retail properties, residential and commercial land development, golf course operations and consulting services. It owns a portfolio of real estate located in New Jersey, New York, Idaho, Delaware and Florida. United Properties also provides consulting and advisory services in support of the real estate assets of the other United Water companies. WINDFALL PROFITS TAX - -------------------- United Water has a 10% ownership interest in Northumbrian Water Group (Northumbrian), a major investor-owned water services company in the United Kingdom. The United Kingdom's new Labor Government imposed a one-time "windfall profits" tax on privatized utilities in the third quarter of 1997. The levying of this one-time tax negatively impacted the Company's third quarter earnings from its investment in Northumbrian by $13.1 million, which was partially offset by the effect of a change in the tax rate on deferred taxes of $2.8 million. The result was a net impact of $10.3 million. The imposition of this tax had been factored into the Company's financial analysis at the time of its investment in Northumbrian and was considered in determining the purchase price. The tax will not have an effect on United Water's cash flow or its ability to pay dividends nor will it affect the long-term benefit the Company derives from its investment in Northumbrian. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Capital expenditures are generally incurred by United Water's utility subsidiaries in connection with the normal upgrading and expansion of existing water and wastewater facilities and to comply with existing environmental regulations. United Water considers its utility plant to be adequate and in good condition. These capital expenditures are necessary to meet growth requirements and to comply with environmental laws and regulations. Excluding the effects of inflation, the capital expenditures of United Water's utility subsidiaries are projected to aggregate $277 million over the next five years, including $62 million and $61 million in 1998 and 1999, respectively. This total includes $178 million for United Waterworks and $95 million for United Water New Jersey and United Water New York. The expenditures related to compliance with environmental laws and regulations are estimated to be approximately 25% of the projected capital expenditures over the 1998-2002 period. To the best of management's knowledge, the Company is in compliance with all major environmental laws and regulations. United Water anticipates that its future capital expenditures will be funded by internally generated funds, external debt financings and the issuance of additional common and preferred stock, including shares issued to existing shareholders, bondholders, customers and employees under the Company's dividend reinvestment and stock purchase plans. In addition, United Waterworks and United Water New York participate in a number of tax-exempt financings for the purpose of funding capital expenditures. Funds are drawn down on these financings as qualified capital expenditures are made. As of September 30, 1998, $23.9 million of proceeds from these financings have not yet been disbursed to the Company and are included in the consolidated balance sheet as restricted cash. The amount and timing of the use of these proceeds and of future financings will depend on actual capital expenditures, the timeliness and adequacy of rate relief, the availability and cost of capital, and the ability to meet interest and fixed charge coverage requirements. In June 1997, United Water issued $40 million of 7.45%-7.9% Senior Notes ($15 million due 2007 and $25 million due 2022). Proceeds from the notes were used to refinance existing short-term debt of the Company. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) - ------------------------------- In August 1997, United Waterworks issued $20 million of 5.3% tax-exempt Water Resource Development Revenue Bonds, due 2027, through the Idaho Water Resource Board. The proceeds will be used to finance a portion of the costs of certain facilities to be owned by United Water Idaho (a subsidiary of United Waterworks). In December 1994, United Waterworks entered into a medium-term note program that enabled United Waterworks to issue up to $75 million of debt with terms ranging from 9 months to 30 years. The interest rates are set as notes are issued under the program. The first $10 million of notes under this program were issued in 1995. In October 1997, United Waterworks issued $15 million of notes under this program, at a rate of 6.8%, with the full amount maturing in 2007. In February 1998, United Waterworks issued an additional $40 million of notes under this program ($20 million at 6.97% due 2023, $15 million at 7.1% due 2028 and $5 million at 6.9% due 2017). The proceeds were used to redeem outstanding notes payable. United Properties currently expects to spend $29.4 million over the next five years for capital expenditures on its existing real estate portfolio. Expenditures are projected to be $10.6 million and $5.3 million in 1998 and 1999, respectively. Funding for these expenditures is anticipated to come from sales of properties, operations of existing commercial properties and golf courses, and proceeds of new financings. At September 30, 1998, United Water had cash and cash equivalents of $6.9 million (excluding restricted cash) and unused short-term bank lines of credit of $219.3 million. Management expects that unused credit lines currently available, cash flows from operations and cash generated from the dividend reinvestment and stock purchase plans will be sufficient to meet anticipated future operational needs. YEAR 2000 COMPLIANCE - -------------------- GENERAL - ------- United Water has been addressing the Year 2000 (Y2K) issues for the last four years. Achieving Y2K compliance and readiness has been a major focus of United Water since the development and approval of the Information Technology Strategic Plan in 1994. This strategic plan was designed specifically to upgrade the technology infrastructure and to align technology with the stated goals and business direction of United Water. The strategic plan addressed the need to redesign the technical infrastructure of United Water as well as replace the aging legacy systems and the existing computer environment. Addressing the Y2K issue was a critical element in designing the new technical infrastructure as well as evaluating and selecting the new application systems. PROJECT - ------- United Water's corporate Y2K project encompasses five key components: 1) survey and inventory, 2) assessment of risk, 3) identification and survey of critical vendors/service providers, 4) completion of the replacement of the aging legacy applications, and 5) contingency planning and testing. In September 1997 a multi-company, cross-functional task force was established to conduct a company wide survey and inventory of United Water's technical environment including critical vendors and service providers. The inventory of United Water's technical environment is 100% complete. The inventory of United Water's physical environment including embedded chip technology is considered approximately 75% complete and is scheduled for completion by the end of the fourth quarter 1998. YEAR 2000 COMPLIANCE (CONTINUED) - -------------------- As part of this project, a Y2K risk assessment model was used to determine areas of impact and risk as well as to prioritize the remaining workload of this project. The risk assessment phase of this project is considered 85% complete and is scheduled for completion by the end of the fourth quarter 1998. As a part of the original task force, critical vendors and service providers for all companies were identified and surveyed as to the status of their compliance and readiness for Y2K. Those vendors have been surveyed and the Company is awaiting results. This phase of the project is considered approximately 65% complete and is scheduled for completion by the end of the first quarter 1999. The fourth phase of this project is the completion of the replacement of the legacy application systems and the technical infrastructure at United Water. In 1994, United Water also identified the need to replace the aging customer information systems as a result of the Information Technology Strategic Plan. The implementation of this customer information system is considered 75% complete. It is targeted for full completion by the end of first quarter 1999. Until that software can be customized to address the full enterprise requirements, the Y2K problem will be addressed by the use of a third party's system at certain subsidiaries, which is Y2K compatible. This interim solution provided a Y2K resolution until the final completion of the new customer information system. In 1995, United Water created the design and the architecture as the basis for United Water's new technical infrastructure. That design included a client server platform with state-of-the-art ERP software. Concurrent with the design of the architecture, a decision was made to replace all the financial applications within the Company. The new Integrated Financial Management System (IFMS) included the full financial suite of software including general ledger, time/expense entry, procurement, inventory, budgeting, project costing, and asset management that are Y2K compliant. The first modules went live in January 1997 and all modules were complete by November 1997. This project is considered 90% complete. In addition, several other systems were earmarked for replacement and/or upgrades and are in various stages of completion. All system replacements and/or upgrades are scheduled to be finalized by the end of the second quarter 1999. The last phase of the Y2K project focuses on contingency planning/testing and emergency preparedness. To conduct this final phase, a smaller focused task force was developed to coordinate the planning and testing of this critical phase of the plan. The major focus of the contingency plan is to address automation failure of both the Company's financial and operational systems as well as those of its critical vendors. This phase is considered approximately 25% complete as of the end of third quarter 1998 with final completion scheduled for the end of first quarter 1999. Overall, United Water is on schedule with all phases of the Y2K project and sees no significant impediment to a timely completion of this project as scheduled. YEAR 2000 COMPLIANCE (CONTINUED) - -------------------- COSTS - ----- The total cost associated with Y2K compliance and readiness is not expected to be material to the Company's financial position. This is in part due to the fact that Y2K issues have been addressed through the development and implementation of the technical infrastructure of United Water. Costs to date have been associated with the replacement of infrastructure and systems. In essence, Y2K readiness is a by-product of the strategic infrastructure initiatives out of the 1994 Information Technology Strategic Plan. Costs for the remainder of 1998 and 1999 are not expected to exceed $200,000 as of this date. RISKS - ----- United Water has equity investments in the Northumbrian Partnership and United Water Services. In addition, the Company and United Water Services have entered into several public-private partnerships, including contracts to operate the water and/or wastewater systems of the cities of Milwaukee and Atlanta, that are currently being tested for Y2K compliance. Northumbrian Water Group, whose investors include Northumbrian Partnership (see Note 2), and United Water Services have implemented Y2K compliance plans which include dedicating resources to identify and assess any Y2K sensitive problems. Contingency plans are being created and tested at all locations. In addition, manual processes are being identified to be implemented in the case of total automation failure. All systems are expected to be tested and compliant by the third quarter of 1999. The uncertainty of Y2K readiness could have a detrimental effect on the income from any of these investment sources. United Water is maintaining close contact with all of the above referenced entities to ensure that appropriate and prudent action is being taken. The failure to correct a significant Y2K problem could result in an interruption and/or failure of normal business activities or operations. In addition, due to the uncertainty of the Y2K readiness of third party suppliers and service providers, the Company is unable to determine at this time whether the consequences of third party Y2K failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Y2K project is expected to significantly reduce the Company's level of uncertainty about the Y2K problem. The Company believes that, with the implementation of the new technical infrastructure including the new business systems and completion of the Y2K project as scheduled, the possibility of significant interruptions of normal operations should be reduced. The estimates and conclusions included in the Y2K update contain forward- looking statements and are based on management's best estimates of future events. The risks involved in completing Y2K compliance include the availability of resources, unanticipated problems identified in the ongoing compliance review and the ability of outside vendors/service providers to be Y2K compliant. RATE MATTERS - ------------ The profitability of United Water's regulated utilities is, to a large extent, dependent upon adequate and timely rate relief. The Company anticipates that the regulatory authorities that have jurisdiction over its utility operations will allow the Company's regulated utilities to earn a reasonable return on their utility investments. The Company continues to follow Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," for its regulated utilities. SFAS No. 71 provides for the recognition of regulatory assets and liabilities as allowed by state regulators that are considered probable of recovery. During 1997, the Company's regulated utilities received fifteen rate settlement awards with an aggregate annual revenue increase of $10.7 million. An estimated $5.6 million of this amount was reflected in 1997's revenues while the remaining $5.1 million of carryover impact of the rate awards received in 1997 is expected to increase revenues in 1998. At the end of September 1998, there were nine rate cases pending in which the Company has requested an aggregate annual rate increase of $11.6 million. The most significant rate cases pending were filed by United Water Delaware and United Water Florida. On March 11, 1998, United Water Delaware filed a request to increase revenues by $4.1 million, or 24.8%. The Company placed $2.4 million in increased revenues into effect on an interim basis on May 11, 1998. In May 1998, United Water Florida filed for a proposed agency action requesting a combined increase over existing rates of $5.3 million, or 18.1%. In a separate matter stemming from a prior rate case, in October 1996, United Water Delaware placed $2.3 million in increased revenues in effect, subject to refund. On July 15, 1997, the Delaware Public Utility Commission granted the Company a permanent rate increase of $1.6 million. On July 16, 1997, the Company filed an appeal and application for a stay of the Commission's Order. On July 29, 1997, the Delaware Superior Court granted a stay of the Commission decision pending the appeal. On March 31, 1998, the Delaware Superior Court handed down a decision finding for the Commission on all issues. The Company appealed to the Supreme Court of Delaware on April 28, 1998. Oral argument will be held on November 10, 1998. The Company is fully reserved for all amounts subject to refund and therefore, the final outcome will not have a material effect on earnings. Generally, the rate awards the Company's operating utilities actually receive are less than the amounts requested, primarily due to differing positions of the parties involved and/or updated information provided during the proceedings. The Company expects to file additional rate cases in 1998 but does not expect that those rate awards, if received in 1998, will have a significant impact on revenues in 1998. RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 - ------------------------------------------------------------- OVERVIEW United Water's net income applicable to common stock for the third quarter of 1998 increased to $19.9 million from $7 million in the comparable period in 1997. Diluted earnings per common share for the third quarter of 1998 were 51 cents as compared to 18 cents for the same period last year. Utility investments, which include the Northumbrian Partnership, contributed $21.9 million, or 55 cents per diluted share, in 1998 compared with $8.7 million, or 23 cents per diluted share, in 1997. Earnings for 1997 included a $10.3 million charge resulting from the "windfall profits" tax in the United Kingdom. Results for both 1998 and 1997 included five cents for corporate charges primarily for interest and preferred and preference dividends. OPERATING REVENUES The $9.1 million increase in revenues from the same period in 1997 was attributable to the following factors: (thousands of dollars) Increase/(Decrease) ------------------------------------------------------ Utilities: Rate awards $4,113 4.1% Consumption 3,364 3.4% Growth 735 0.7% Real estate 1,579 1.6% Other operations (733) (0.7%) ------------------------------------------------------ $9,058 9.1% ------------------------------------------------------ The 4.1% increase in revenues from rate awards in the third quarter of 1998 includes the impact of 1997 and current year increases for several of the Company's operating utilities. The increase in revenues due to consumption is primarily attributable to favorable weather conditions in several service areas during the third quarter of 1998. Revenues due to growth increased mainly due to the acquisition of a utility in Florida in the fourth quarter of 1997, as well as customer growth at several operating utilities. The $1.6 million increase in real estate revenues was mainly due to higher golf course revenues as well as nine property sales in 1998 compared with five property sales for the same period in 1997. The decrease in other operations is primarily due to the absence of revenues from the Company's meter installation subsidiary, which was sold in the fourth quarter of 1997, partially offset by the timing of recording incentive revenues from the public-private partnership with Jersey City, New Jersey. OPERATING EXPENSES The increase in operating expenses from the same period in 1997 is due to the following: (thousands of dollars) Increase ------------------------------------------------ Operation and maintenance $1,695 3.9% Depreciation and amortization 1,136 13.1% General taxes 914 6.6% ------------------------------------------------ The increase in operation and maintenance expenses was due primarily to higher outside services and computer support services at several of the Company's subsidiaries. This was partially offset by the absence of operating expenses incurred by the Company's meter installation subsidiary, which was sold in December 1997. RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 (CONTINUED) - ------------------------------------------------------------- The $1.1 million increase in depreciation and amortization was primarily attributable to utility plant additions by the Company's utility subsidiaries. General taxes increased $914,000 primarily due to higher real estate, franchise and gross receipts taxes in utility operations. EQUITY EARNINGS OF AFFILIATES The $1.5 million decrease in equity earnings of affiliates is due to a $.8 million decrease in earnings from United Water Services. This decrease was attributable to business development costs associated with ongoing efforts to expand contract operations as well as additional ownership interest in United Water Services (see Note 3). In addition, excluding the effect of the windfall profits tax, earnings from the Northumbrian Partnership decreased $.3 million, resulting primarily from lower equity earnings from Northumbrian Water Group as well as higher interest rates on UK debt. The Company also experienced lower earnings from other equity investments. INCOME TAXES The effective income tax rates on income before preferred and preference stock dividends were 33.8% and 50.3% in the third quarter of 1998 and 1997, respectively. The decrease in the effective rate is primarily attributable to the tax treatment of the earnings from the Northumbrian Partnership, as well as the effect of the "windfall profits" tax in 1997. The Company considers the undistributed earnings to be permanently reinvested and has not provided deferred taxes on these earnings. RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 (CONTINUED) - ------------------------------------------------------------- EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings per Share"(EPS), which specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock or potential common stock. This statement supersedes Accounting Principles Board (APB) Opinion No. 15, "Earnings per Share". This statement defines two earnings per share calculations, basic and diluted. The objective of basic EPS is to measure the performance of an entity over the reporting period by dividing income available to common stock by the weighted average shares outstanding. The objective of diluted EPS is consistent with that of basic EPS, that is to measure the performance of an entity over the reporting period, while giving effect to all dilutive potential common shares that were outstanding during the period. The calculation of diluted EPS is similar to basic EPS except both the numerator and denominator are increased for the conversion of potential common shares. The following table is a reconciliation of the numerator and denominator under each method: (thousands, except per share data) For the three months ended September 30, 1998 1997 ------------------------------------------------------------- BASIC EPS: Net income applicable to common stock $19,500 $ 6,464 Average common shares outstanding 37,268 35,802 Net income per common share $ .52 $ .18 ASSUMING DILUTION: Net income applicable to common stock $19,500 $ 6,464 Convertible preference stock 423 502 ------- ------- $19,923 $ 6,966 Average common shares outstanding 37,268 35,802 Stock options 143 183 Convertible preference stock 1,916 2,191 ------- ------- 39,327 38,176 Net income per common share $ .51 $ .18 ------------------------------------------------------------- RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 - ------------------------------------------------------------ OVERVIEW United Water's net income applicable to common stock for the nine months ended September 30, 1998 increased to $35.1 million from $23.4 million in the comparable period in 1997. Diluted earnings per common share were 90 cents as compared to 62 cents for the same period last year. Results for 1997 included a $10.3 million charge resulting from the "windfall profits" tax in the United Kingdom. OPERATING REVENUES The $3 million increase in revenues from the same period in 1997 was attributable to the following factors: (thousands of dollars) Increase/(Decrease) ---------------------------------------------------- Utilities: Rate awards $ 7,026 2.6% Consumption 1,027 0.4% Growth 1,672 0.6% Real estate (3,670) (1.4%) Other operations (3,103) (1.1%) ---------------------------------------------------- $ 2,952 1.1% ---------------------------------------------------- The 2.6% increase in revenues from rate awards includes the impact of 1997 and current year increases for several of the Company's operating utilities. The increase in revenues due to consumption is primarily attributable to favorable weather conditions in several service areas during the third quarter of 1998. The increase in revenues due to growth is primarily attributable to the acquisition of a utility in Florida in the fourth quarter of 1997, as well as customer growth at several operating utilities. The 1.4% decrease in real estate revenues was due to a significant land sale in the first quarter of 1997 partially offset by higher golf course revenues as well as the sale of twenty three parcels of land in 1998 compared to twelve parcels in the same period in 1997. Other operations decreased 1.1% mainly due to the absence of revenues from the Company's meter installation subsidiary, which was sold in the fourth quarter of 1997, partially offset by the timing of recording incentive revenues from the public-private partnership with Jersey City, New Jersey. OPERATING EXPENSES The increase in operating expenses from the same period in 1997 is due to the following: (thousands of dollars) (Decrease)/Increase ------------------------------------------------- Operation and maintenance $(3,206) (2.5%) Depreciation and amortization 2,737 10.5% General taxes 1,752 4.5% ------------------------------------------------- The $3.2 million decrease in operation and maintenance expenses was due primarily to the absence of costs associated with a significant land sale in 1997, as well as operating expenses incurred by the Company's meter installation subsidiary, which was sold in December 1997. This was partially offset by higher outside services and computer support services at several of the Company's subsidiaries as well as higher operating expenses resulting from the public-private partnership with Jersey City. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 (CONTINUED) - ------------------------------------------------------------ The $2.7 million increase in depreciation and amortization was primarily attributable to utility plant additions by the Company's utility subsidiaries. General taxes increased $1.8 million primarily due to higher real estate, franchise and gross receipts taxes in utility operations. EQUITY EARNINGS OF AFFILIATES The slight decrease in equity earnings of affiliates is due to a $2.6 million decrease in earnings from United Water Services. This decrease was attributable to business development costs associated with ongoing efforts to expand contract operations as well as additional ownership interest in United Water Services. In addition, the Company experienced lower earnings from other equity investments. This was partially offset by a $2.9 million increase in earnings, excluding the effect of the windfall profits tax, from the Northumbrian Partnership, resulting primarily from the effect on deferred taxes of a change in the UK corporate tax rate. INCOME TAXES The effective income tax rates on income before preferred and preference stock dividends were 29.2% and 37.2% in the first half of 1998 and 1997, respectively. The decrease in the effective rate is primarily attributable to the tax treatment of the earnings from the Northumbrian Partnership, as well as the effect of the "windfall profits" tax in 1997. The Company considers the undistributed earnings to be permanently reinvested and has not provided deferred taxes on these earnings. EARNINGS PER SHARE In February 1997, the FASB issued SFAS No. 128, EPS, which specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock or potential common stock. This statement supersedes APB Opinion No. 15, "Earnings per Share". This statement defines two earnings per share calculations, basic and diluted. The objective of basic EPS is to measure the performance of an entity over the reporting period by dividing income available to common stock by the weighted average shares outstanding. The objective of diluted EPS is consistent with that of basic EPS, that is to measure the performance of an entity over the reporting period, while giving effect to all dilutive potential common shares that were outstanding during the period. The calculation of diluted EPS is similar to basic EPS except both the numerator and denominator are increased for the conversion of potential common shares. The following table is a reconciliation of the numerator and denominator under each method: RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 (CONTINUED) - ------------------------------------------------------------ (thousands, except per share data) For the nine months ended September 30, 1998 1997 ------------------------------------------------------------- BASIC EPS: Net income applicable to common stock $33,676 $21,810 Average common shares outstanding 36,848 35,298 Net income per common share $ .91 $ .62 ASSUMING DILUTION: Net income applicable to common stock $33,676 $21,810 Convertible preference stock 1,387 1,573 ------- ------- $35,063 $23,383 Average common shares outstanding 36,848 35,298 Stock options 148 155 Convertible preference stock 2,027 2,191 ------- ------- 39,023 37,644 Net income per common share $ .90 $ .62 ------------------------------------------------------------- NEW ACCOUNTING STANDARDS In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which requires that business segment financial information be reported in the financial statements utilizing the management approach. The Company believes it is in compliance with this statement. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities". SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income. Due to its limited use of derivative instruments, management believes the adoption of SFAS No. 133 will not have a significant effect on the Company's financial position or results of operations. In April 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities". This SOP provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. Management is assessing the effect, if any, this SOP would have on the Company. EFFECTS OF INFLATION Operating income from utility operations is normally not materially affected by inflation because cost increases generally lead to proportionate increases in revenues allowed through the regulatory process. However, there is a lag in the recovery of higher expenses through the regulatory process; therefore, high inflation could have a detrimental effect on the Company until sufficient rate increases are received. Conversely, lower inflation and lower interest rates tend to result in reductions in the rates of return allowed by the utility commissions, as has happened over the last several years. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 (CONTINUED) - ------------------------------------------------------------ PROSPECTIVE INFORMATION In addition to the historical information contained herein, this report contains a number of "forward-looking statements," within the meaning of the Securities Exchange Act of 1934. Such statements address future events and conditions concerning the adequacy of water supply and utility plant, capital expenditures, earnings on assets, resolution and impact of litigation, liquidity and capital resources and accounting matters. Actual results in each case could differ materially from those projected in such statements, by reason of factors including, without limitation, general economic conditions, competition, actions by regulators and other governmental authorities, and technological developments affecting the Company's operations, markets, services and prices, and other factors discussed in the Company's filings with the Securities and Exchange Commission, including this report. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - --------------------------- A class action lawsuit was filed in the Supreme Court of the State of New York, New York County, on May 28, 1996 by Steven Tagliaferri and John Ambroselli, individually and on behalf of a class of employees (Plaintiffs) against United Metering Inc., an affiliate of United Water Services, for breach of contract. Plaintiffs claim that United Metering failed to comply with prevailing wage rate regulations in connection with work performed pursuant to certain public works contracts awarded by the New York City Department of Environmental Protection. The damages sought are in excess of $600,000. United Metering filed a response denying Plaintiffs' claims and made a motion for summary judgement seeking dismissal of the lawsuit. Oral argument on such motion was held on March 14, 1997 and on April 1, 1997, a decision was issued granting United Metering's motion to dismiss the lawsuit. Plaintiffs appealed the decision to the Appellate Division of the Supreme Court of the State of New York. Arguments were heard in October and a judgment is pending. The parties were granted 90 days by the Appeals Court to enter into a settlement agreement prior to the issuance of such judgment. Management believes that the resolution of this matter will not have a material adverse effect upon the financial position or results of operations of the Company. On July 20, 1994, the Townhouse at Lake Isle Home Owners Association, Inc. filed suit against United Water New Rochelle (formerly New Rochelle Water Company), a subsidiary of United Waterworks, in the Supreme Court of the State of New York, Westchester County (the Westchester Court). The suit seeks to recover for alleged property damage arising out of repeated leaks in service lines installed in or about 1982 by the developer of a townhouse complex in Eastchester, New York. The bulk of the relief sought by the plaintiff involves monetary damages for the cost of replacing the service lines, which belong to United Water New Rochelle. The plaintiff did not seek injunctive relief. A default judgment on the issue of liability was entered against United Water New Rochelle on December 2, 1994. United Water New Rochelle has diligently prosecuted motions to reopen and appeal from the default judgment, on the principal ground that the default resulted from a failure by United Water New Rochelle's insurance carrier and claims processing service provider to timely file an answer to the plaintiff's complaint. To date, motions to vacate the default judgment have not been successful. Following an inquest on the issue of damages, the Westchester Court issued a decision, dated December 20, 1996, awarding the plaintiff $1,330,000. The Westchester Court subsequently partially vacated its December 20, 1996 decision on the ground that the relief granted exceeded the plaintiff's original demand and reduced the award to $805,000. On October 7, 1997, the Westchester Court entered a judgment in favor of the plaintiff in the amount of $862,758, which included interest from December 20, 1996. United Water New Rochelle has appealed the judgment and the prior decisions on its motions to vacate the default judgment. United Water New Rochelle believes that it has meritorious arguments on appeal and on the original matter, should it be reopened. Further, United Water New Rochelle has initiated a legal action seeking reimbursement from third parties of any ultimate liability resulting in this matter. Management believes the resolution of this matter will not have a material adverse effect upon the financial position or results of operations of the Company. LEGAL PROCEEDINGS (CONTINUED) - ----------------- United Water Toms River, a wholly-owned subsidiary of United Waterworks, has been approached by counsel for several families in its franchise area to notify them that counsel is considering filing a class action lawsuit naming United Water Toms River as one of at least three defendants alleging personal injuries sustained as a result of contaminated water being delivered to the potential plaintiffs. Counsel has reviewed testing data accumulated by the New Jersey Department of Environmental Protection and United Water Toms River which shows that United Water Toms River has delivered water to its customers in complete conformance with all applicable federal and state water quality standards. Suit has not been filed. An agreement tolling the statute of limitations for at least one year has been signed with the potential plaintiffs. United Water Toms River has also entered into a joint defense agreement with other potential defendants, Ciba-Geigy and Union Carbide. This agreement will allow the potential defendants to work together until all disputes with the potential plaintiffs have been resolved. United Water is not a party to any other litigation other than routine litigation incidental to the business of United Water. None of such litigation, either individually or in the aggregate, is material to the business of United Water. ITEM 5. ADVANCE NOTICE - ------------------------------ Rule 14a-4 of the Securities and Exchange Commission's proxy rules allows the Company to use discretionary voting authority to vote on matters coming before an annual meeting of stockholders, if the Company does not have notice of the matter at least 45 days before the date corresponding to the date on which the Company first mailed its proxy materials for the prior year's annual meeting of stockholders or the date specified by an overriding advance notice provision in the Company's By-Laws. The Company's By-Laws do not contain such an advance notice provision. For the Company's Annual Meeting of Stockholders expected to be held on May 10, 1999, stockholders must submit such written notice to the executive offices of United Water at 200 Old Hook Road, Harrington Park, New Jersey 07640; Attention: Corporate Secretary on or before January 25, 1999. S I G N A T U R E Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED WATER RESOURCES INC. ------------------------------ (Registrant) Date: November 12, 1998 By JOHN J. TURNER ----------------- ------------------------------ (Signature) John J. Turner Treasurer DULY AUTHORIZED AND CHIEF ACCOUNTING OFFICER EX-27 2 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET, STATEMENT OF CONSOLIDATED INCOME AND STATEMENT OF CONSOLIDATED CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 PER-BOOK 1,182,728 193,214 116,339 165,874 61,702 1,719,857 386,213 0 61,604 447,817 80,255 9,000 618,714 0 84,625 0 4,207 2,072 0 0 473,167 1,719,857 270,409 15,817 194,936 210,753 59,656 11,255 70,911 34,147 36,764 3,088 33,676 25,422 0 59,392 0.91 0.90
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