-----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, IJ8EAyBfpftH+fZ6n4xTPwh7ykq26IBIwiMB3afdhLfl8OcRpXRb5rwk43ScsxNn 85xnq8dAXfgtD+l1ZzmlYQ== 0000950130-99-004645.txt : 19990810 0000950130-99-004645.hdr.sgml : 19990810 ACCESSION NUMBER: 0000950130-99-004645 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990809 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: 99681493 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 COMMISION --------------------------------- 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 June 30, 1999 -------------------- 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 July 31, 1999 38,784,848 ---------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements - ---------------------------- UNITED WATER RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (thousands of dollars)
June 30, December 31, 1999 1998 ------------ ------------ (unaudited) Assets - ------ Utility plant, including $34,765 and $47,348 under construction $ 1,577,009 $ 1,540,564 Less accumulated depreciation 344,609 328,224 ----------- ------------ 1,232,400 1,212,340 ----------- ------------ Utility plant acquisition adjustments, net 61,594 61,320 ----------- ------------ Real estate and other investments, less accumulated depreciation of $8,929 and $13,628 92,976 81,630 Equity investments 122,305 116,598 ----------- ------------ 215,281 198,228 Current assets: Cash and cash equivalents 7,680 8,011 Restricted cash 35,666 48,495 Accounts receivable and unbilled revenues, net 69,338 59,693 Prepaid and other current assets 13,826 12,235 ----------- ------------ 126,510 128,434 ----------- ------------ Deferred charges and other assets: Regulatory assets 69,350 76,548 Prepaid employee benefits 34,095 29,237 Unamortized debt expense 34,571 34,745 Other deferred charges and assets 23,957 28,270 ----------- ------------ 161,973 168,800 ----------- ------------ $ 1,797,758 $ 1,769,122 =========== ============ Capitalization and Liabilities - ------------------------------ Capitalization: Common stock and retained earnings $ 471,504 $ 456,029 Preferred stock without mandatory redemption 9,000 9,000 Preferred stock with mandatory redemption 22,259 49,748 Preference stock, convertible, with mandatory redemption 26,099 30,534 Long-term debt 663,831 652,969 ----------- ------------ 1,192,693 1,198,280 ----------- ------------ Current liabilities: Notes payable 103,700 93,400 Preferred stock and long-term debt due within one year 21,925 5,795 Accounts payable and other current liabilities 31,544 36,525 Accrued taxes 25,289 24,257 Accrued interest and dividends 9,250 8,023 ----------- ------------ 191,708 168,000 ----------- ------------ Deferred credits and other liabilities: Deferred income taxes and investment tax credits 198,573 195,368 Customer advances for construction 31,923 30,648 Contributions in aid of construction 148,617 143,327 Other deferred credits and liabilities 34,244 33,499 ----------- ------------ 413,357 402,842 ----------- ------------ $ 1,797,758 $ 1,769,122 =========== ============
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 six months ---------------------- --------------------- ended June 30, ended June 30, ---------------------- --------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Operating revenues $ 91,830 $ 86,219 $ 171,057 $ 161,661 --------- --------- --------- --------- Operating expenses: Operation and maintenance 42,758 41,138 85,034 80,439 Depreciation and amortization 10,459 9,601 21,646 18,969 General Taxes 13,952 13,209 27,319 26,262 --------- --------- --------- --------- Total operating expenses 67,169 63,948 133,999 125,670 --------- --------- --------- --------- Operating income 24,661 22,271 37,058 35,991 --------- --------- --------- --------- Interest and other expenses: Interest expense, net of amount capitalized 11,956 11,544 23,819 22,885 Allowance for funds used during construction (658) (668) (1,600) (1,531) Preferred stock dividends of subsidiaries 546 559 1,095 1,121 Gain on sale of Harrison Plaza -- -- (5,846) -- Equity earnings of affiliates (3,352) (4,820) (5,877) (6,978) Other income, net (924) (370) (1,104) (832) --------- --------- --------- --------- Total interest and other expenses 7,568 6,245 10,487 14,665 --------- --------- --------- --------- Income before income taxes 17,093 16,026 26,571 21,326 Provision for income taxes 5,189 3,956 8,308 5,052 --------- --------- --------- --------- Net income 11,904 12,070 18,263 16,274 Preferred and preference stock dividends 379 1,028 1,941 2,098 --------- --------- --------- --------- Net income applicable to common stock $ 11,525 $ 11,042 $ 16,322 $ 14,176 ========= ========= ========= ========= Net income per common share $ 0.30 $ 0.30 $ 0.43 $ 0.39 ========= ========= ========= ========= Average common shares outstanding 38,502 36,891 38,246 36,653 Net income per common share-assuming dilution $ 0.29 $ 0.30 $ 0.43 $ 0.39 ========= ========= ========= ========= Average common shares outstanding 40,407 38,931 40,247 38,719 Dividends per common share $ 0.24 $ 0.23 $ 0.48 $ 0.46 ========= ========= ========= =========
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 six months ended June 30, --------------------------------- 1999 1998 -------- -------- Operating activities: Net income $ 18,263 $ 16,274 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22,396 19,642 Equity earnings of affiliates (5,877) (6,978) Proceeds from sales of properties 225 1,646 Loss/(gain) on sale of properties 42 (785) Gain on sale of Harrison Plaza (5,846) -- Improvements to property under development (1,067) (656) Deferred income taxes and investment tax credits, net 3,205 6,598 Allowance for funds used during construction (AFUDC) (1,600) (1,531) Changes in assets and liabilities: Accounts receivable and unbilled revenues (9,596) (3,267) Prepaid and other current assets (1,591) 227 Prepaid employee benefits (4,858) (3,889) Regulatory assets 7,145 (368) Accounts payable and other current liabilities (5,306) (497) Accrued taxes 1,011 380 Accrued interest & dividends 1,227 (555) Other, net 1,476 169 -------- -------- Net cash provided by operating activities 19,249 26,410 -------- -------- Investing activities: Additions to utility plant (excludes AFUDC) (33,686) (37,606) Additions to real estate and other properties (42,199) (2,918) Additions to equity investments -- (2,245) Acquisition of South County Water Company (2,589) -- Proceeds from sale of Harrison Plaza 39,502 -- Change in restricted cash 12,829 6,968 -------- -------- Net cash used in investing activities (26,143) (35,801) -------- -------- Financing activities: Change in notes payable 10,300 10,770 Additional long-term debt 30,000 40,233 Reduction in preferred stock and long-term debt (30,497) (44,526) Issuance of common stock 13,144 10,756 Dividends on common stock (18,361) (16,931) Dividends on preferred and preference stock (1,941) (2,098) Net contributions and advances for construction 3,918 4,623 -------- -------- Net cash provided by financing activities 6,563 2,827 -------- -------- Net decrease in cash and cash equivalents (331) (6,564) Cash and cash equivalents at beginning of period 8,011 8,546 -------- -------- Cash and cash equivalents at end of period $ 7,680 $ 1,982 ======== ========
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 six months ended June 30, --------------------------------- 1999 1998 ------- -------- Supplemental disclosures of cash flow information: Interest (net of amount capitalized) $21,662 $22,859 Income taxes paid 1,140 1,484
Supplemental disclosures of non-cash transactions: Additional common stock was issued upon the conversion of 339,394 and 328,624 shares of preference stock valued at $4.7 million and $4.5 million during 1999 and 1998, respectively. UNITED WATER RESOURCES INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1999 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. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principle. Additional footnote disclosure concerning accounting policies and other matters are disclosed in the Company's audited consolidated financial statements included in its 1998 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. 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 and sales, golf course operations and consulting services. It owns a portfolio of real estate located in New Jersey, New York, Idaho, Delaware, Florida and Maryland. United Properties also provides consulting and advisory services in support of the real estate assets of the other United Water companies. Sale of Several Small Utilities - ------------------------------- In July 1999, the Company announced that it entered into a definitive agreement to sell several small utility subsidiaries to American Water Works Company for approximately $49 million in cash. These utilities collectively provide water service to about 35,000 customers and represent less than 4% of the Company's regulated assets and under 2% of the population it serves. The decision to sell these subsidiaries was made in an effort to focus United Water's core utility business in service areas experiencing significant growth and development. Completion of the transaction is contingent upon regulatory approvals and is anticipated that closings will occur during 1999 as various approvals are received. Early Retirement Program - ------------------------ In another strategic move designed to further strengthen the Company, United Water also announced that it will offer a voluntary early retirement program to 90 employees who qualify based on age and length of service. The Company estimates that the program, which commenced on August 1, will result in a workforce reduction of approximately 4% of the Company's employees and a one-time cost of approximately $5 million to be incurred during 1999. It is anticipated that impact of this cost will partially offset the anticipated gain on the sale of its utility properties. Gain on sale of Harrison Plaza - ------------------------------ In March 1999, United Properties sold two office buildings (Harrison Plaza) with a property basis of $30.7 million, for $42.1 million. This transaction resulted in a pre-tax gain of $5.8 million and net cash proceeds of $39.5 million. Cash proceeds of $15.6 million were used to pay off long-term debt related to the office buildings. In June 1999, United Properties purchased three office/retail buildings for $40.6 million. Cash proceeds from the sale of Harrison Plaza of $23.9 million, as well as $16.8 million of short-term debt were used to finance this purchase. Redemption of Preferred Stock - ----------------------------- On December 8, 1998, the Company called for redemption of the remaining 285,000 shares of its 7 5/8% Series B cumulative preferred stock. The redemption, which occurred on January 8, 1999, resulted in the payment of principal, accrued dividends and premium totaling $30 million, with $1.3 million relating to the premium paid on the early redemption. The preferred stock was redeemed with $30 million of 6.07%-7.04% Senior Notes due 2005-2019. 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 $262 million over the next five years, including $57 million and $58 million in 1999 and 2000, respectively. This total includes $165 million for United Waterworks and $92 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 1999-2003 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 Water's regulated utilities 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 June 30, 1999, $35.7 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 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. An additional $15 million of notes were issued in 1997. 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). In November 1998, United Waterworks issued the final $10 million of notes under this program ($5 million at 6.44% due 2008 and $5 million at 6.97% due 2023). The proceeds were used to redeem outstanding notes payable. In December 1998, United Water New Jersey issued $35 million of 5% Water Facilities Revenue Bonds through the New Jersey Economic Development Authority due 2028. The proceeds are being used to finance the cost of acquiring, constructing and reconstructing certain water transmission, transportation, storage, treatment, and distribution facilities located in Passaic, Bergen, Sussex, and Hudson counties in New Jersey. In January 1999, United Water issued $30 million of Senior Notes ($5 million at 6.07% due 2005, $10 million at 6.43% due 2009, $10 million at 6.7% due 2019, and $5 million at 7.04% due 2019). The proceeds were used to redeem all remaining shares of 7 5/8% Series B cumulative preferred stock. United Properties currently expects to spend $25.9 million over the next five years for capital expenditures on its existing real estate portfolio. Expenditures are projected to be $8.3 million and $6.9 million in 1999 and 2000, 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 June 30, 1999, United Water had cash and cash equivalents of $7.7 million (excluding restricted cash) and unused short-term bank lines of credit of $201.1 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 Readiness Status - -------------------------- Overview - -------- United Water is implementing a Year 2000 (Y2K) program designed to mitigate, to the fullest extent possible, the impact of the century date change on the Company's computer systems and automated processes, including those that affect the delivery of water and wastewater services. The Company initiated this program in 1994 with the Information Technology Strategic Plan (the ITSP), which addressed all areas of technology and automation within United Water. A key component of that plan was the identification of the Y2K problem and the need to address Y2K issues affecting all aspects of the Company's operations. With respect to each project or initiative undertaken at United Water since 1994 that has Y2K ramifications, the Company has addressed "Y2K readiness" as a critical component of that project. United Water defines Y2K readiness as the ability of the Company to advance into the next century with minimal effect on the Company's critical computer systems and automated processes that control the delivery of water and wastewater services, and affect the Company's operations, liquidity or financial condition. The Y2K program addresses internal systems and processes consisting of application software, hardware, databases, networks, personal computers, data processing equipment and operating systems (collectively, information technology or IT systems) and embedded technology or microprocessors in non-computer equipment (collectively, non-IT systems). The Y2K program also addresses the assessment and monitoring of the Y2K compliance status of third parties upon which the Company relies. This program encompasses the following five phases: 1) survey and inventory, 2) assessment of risk, including the identification and survey of critical vendors and service providers, 3) remediation of non- compliant systems, including the replacement of aging legacy applications, 4) testing and validation of the remediation efforts, and 5) contingency planning and related testing. In addition, management believes that United Water has complied with the various Y2K requirements of the regulatory agencies that supervise its activities. Such compliance includes responding to surveys and questionnaires, filing status reports, participating in task forces and sub-committees for the purpose of meeting Y2K readiness targets, and contingency planning efforts. The Company's State of Readiness - -------------------------------- Consistent with the five phases of the Y2K program, the primary element in United Water's Y2K readiness strategy has been to replace aging IT and non-IT systems, where necessary. This strategy evolved from ITSP which, independent of the Y2K program, identified the need to replace technical infrastructure, including IT and non-IT systems, in order to position United Water and its operating affiliates for a smooth transition into the 21st century. In addition to replacement activities, the Company has also undertaken remediation efforts to upgrade, repair and improve existing IT and non-IT systems where appropriate. These efforts are intended to result in the replacement and upgrading of IT and non-IT systems critical to the operation of the Company, including the provision of water and wastewater services, financial applications, customer information systems and operational systems, such as the Supervisory Control and Data Acquisition System (SCADA), which monitors and controls industrial processes. In addition, United Water is currently refining contingency plans and related tests to further mitigate the risk of service interruptions at each of its locations. These contingency plans have been developed, and the initial testing of each plan has been completed. The major focus of the contingency plans is to address the possibility of automation failure of critical vendors and service providers so that the Company can sustain its operational systems in the event of any such failure. As of June 30, 1999, the status of the Company's progress toward completion of the five phases of the Y2K program was as follows: 1) survey and inventory: IT 100%, non-IT 100%; 2) assessment of risk: IT 100%, non-IT 100%; 3) remediation: IT 95%, non-IT 94%; 4) testing: IT 95%, non-IT 94%; and 5) contingency planning: IT 100%, non-IT 100%. In addition to its own Y2K program, the Company has been involved with Y2K compliance efforts undertaken by one of its equity investments, United Water Services (UWS). UWS, which is engaged in providing contract operations to U.S. cities, is implementing a Y2K program following the guidelines established by the Company. This program has been applied to all UWS's project sites and has resulted in the production of inventories, risk assessments, testing methodologies and contingency plans for Y2K compliance. All systems are expected to be finalized and tested by the end of the third quarter of 1999. Where UWS has assumed responsibility for part or all of the Y2K compliance efforts of its operating affiliates in the various cities, it is actively coordinating Y2K corrective measures with the cities and their Y2K consultants or representatives, where applicable, to mitigate business interruption exposures associated with the Y2K problem. United Water is maintaining close contact with UWS and other entities in which it has equity interests to ascertain that appropriate and prudent action is being taken in order to achieve Y2K compliance. Relationships with Third Parties - -------------------------------- United Water has identified the following third party relationships to be addressed as part of the Y2K program: regulatory agencies, critical vendors and service providers. United Water is in continuous communication with appropriate regulatory agencies regarding the Y2K issue. All requests for information and status reports, as well as other specific regulatory requirements are handled on a priority basis. Management believes that the Company is in compliance with all regulatory matters relating to Y2K. The Company has contacted its critical vendors and service providers to determine the degree of their Y2K readiness. The responses received to date indicate that those vendors and service providers either are or will be Y2K compliant. The status of those vendors and service providers who have either not responded or are not yet compliant is being tracked closely. The electric power and telecommunications industries have been identified as the most critical service providers for the water industry. In the localities in which United Water operates, it is closely monitoring the progress of the local electric power and telecommunications companies and will continue to scrutinize the progress of these providers. The Company is actively monitoring the Y2K compliance status of its critical vendors and service providers and has received approximately 75% of responses. The Company intends to continue monitoring these critical vendors and service providers through its transition into the 21st century. Costs - ----- United Water's Y2K readiness evolved from the strategic initiatives of the ITSP which was budgeted as part of the Company's ongoing capital expenditures since 1994. As a result, United Water has been able to keep to a minimum expenses related to Y2K compliance outside of the ITSP budget. The Company's principal technology costs to date have been associated with the planned replacement of IT and non-IT systems, which has not been accelerated due to the Y2K issue. United Water estimates its costs to date related to Y2K compliance efforts that fall outside the ITSP budget are approximately $.7 million. Additional non-ITSP budgeted costs expected to be incurred over the remainder of the program are estimated to be $.4 million. These costs include SCADA upgrade as required, internal employee time, as well as other miscellaneous costs. Risks - ----- The most reasonably likely worst case scenarios due to Y2K non-compliance issues would be fluctuations in water pressure, aesthetic water quality and other temporary service interruptions. This would be attributable to third party failures including electric power and telecommunications outages. In addition, a Y2K failure from any of the Company's large equity investments including its investment in the Northumbrian Partnership, could have a detrimental effect on the Company's results of operations. Contingency Plans - ----------------- The primary elements of contingency planning include procurement of back-up energy sources, typically adding portable power generators where appropriate, deployment of key personnel on critical dates relating to century date change and providing for the efficient flow of communication both internally and externally in the event of interruption of service during critical dates relating to the century date change. The estimates and conclusions included in this Y2K update 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 and 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 1998, the Company's regulated utilities received fourteen rate settlement awards with an aggregate annual revenue increase of $8.7 million. An estimated $4.7 million of this amount was reflected in 1998's revenues while the remaining $4 million of carryover impact of the rate awards received in 1998 is expected to increase revenues in 1999. At the end of June 1999, there were four rate cases pending in which the Company has requested an aggregate annual rate increase of $5.1 million. The most significant rate case pending was filed by United Water New Rochelle. In July 1999, United Water New Rochelle applied for a multi-year rate increase. The filing requested an increase in revenues of $3.3 million, or 17.2% for the 12 months ending May 31, 2001, an additional increase of $3.7 million, or 16.4% for the 12 months ending May 31, 2002 and a final increase of $4.1 million, or 15.6% for the 12 months ending May 31, 2003. These increases were requested primarily to fund capital investments. On March 11, 1998, United Water Delaware filed a request to increase revenues by $4.1 million, or 24.8%. On May 11, 1998, interim rates of $2.4 million were placed in effect, subject to refund. A final decision was received in June 1999 for $2 million. The difference of $.4 million will be refunded to customers. The Company is fully reserved for these refunds. On October 26, 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 decided in favor of the Commission. The Company appealed this decision to the Supreme Court of Delaware and on February 11, 1999, the Supreme Court reversed the Commission's decision which denied the $.7 million annual revenue increase, subject to refund and remanded the matter to the Commission. In June 1999, the Commission approved a stipulation permitting the Company to retain all revenues collected without refund and permitting the rates currently in effect to become permanent. 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 1999 but does not expect that those rate awards, if received in 1999, will have a significant impact on revenues in 1999. Results of Operations - Three Months Ended June 30, 1999 - -------------------------------------------------------- Overview United Water's net income applicable to common stock for the second quarter of 1999 increased to $11.5 million from $11 million in the comparable period in 1998. Net income per common share for the second quarter of 1999 and 1998 was 30 cents. Domestic utilities contributed $11.2 million, or 29 cents per share, in 1999 compared with $8.5 million, or 23 cents per share, in 1998. Earnings for 1998 included an 8 cent per share contribution from the effect on deferred taxes of a decrease in the UK corporate tax rate. Results for both 1999 and 1998 included six cents for corporate charges relating to interest and preferred and preference dividends. Operating Revenues The $5.6 million increase in revenues from the same period in 1998 was attributable to the following factors: (thousands of dollars) Increase (Decrease) -------------------------------------------------- Utilities: Rate awards $ 1,717 2.0% Consumption 4,849 5.6% Growth 770 0.9% Real estate (1,721) (2.0%) Other operations (4) 0.0% -------------------------------------------------- $ 5,611 6.5% -------------------------------------------------- The 2% increase in revenues from rate awards in the second quarter of 1999 includes the impact of 1998 and current year increases for several of the Company's operating utilities. Higher consumption due to favorable weather conditions resulted in an increase in revenues of $4.8 million in 1999. The increase in revenues due to growth is primarily attributable to the acquisition of South County Water Company in Idaho in the first quarter of 1999, as well as increased customers at the Florida operating utility. The 2% decrease in real estate revenues was due to one property sale in 1999 compared with eight property sales for the same period in 1998, as well as lower rental revenue resulting from the absence of revenues from the Harrison Plaza building which was sold in the first quarter of 1999. Operating Expenses The increase in operating expenses from the same period in 1998 is due to the following: (thousands of dollars) Increase ----------------------------------------------------- Operation and maintenance $1,620 3.9% Depreciation and amortization 858 8.9% General taxes 743 5.6% ----------------------------------------------------- The $1.6 million increase in operation and maintenance expenses was due primarily to higher power, outside services and employee benefits costs, as well as increased maintenance costs resulting from a greater number of main breaks in the Northeast service area. These were partially offset by lower land sale costs as a result of fewer property sales in 1999. Results of Operations - Three Months Ended June 30, 1999 (continued) - -------------------------------------------------------- The $858,000 increase in depreciation and amortization was primarily attributable to an increase in depreciation rates as a result of regulatory changes as well as the placement in service of a new customer information system at the end of 1998. General taxes increased $743,000 primarily due to higher real estate, gross receipts and franchise taxes in utility operations. Equity Earnings of Affiliates The $1.5 million decrease in equity earnings of affiliates is due to a $1.8 million decrease in earnings from the Northumbrian Partnership, resulting primarily from the effect on deferred taxes of a decrease in the UK corporate tax rate, during the second quarter of 1998. This was partially offset by a $.3 million increase in earnings from United Water Services. Income Taxes The effective income tax rates on income before preferred and preference stock dividends were 29.4% and 23.9% in the second quarter of 1999 and 1998, respectively. The increase in the effective rate is primarily attributable to the tax treatment of the earnings from the Northumbrian Partnership. The Company considers the undistributed earnings from the Northumbrian Partnership to be permanently reinvested and has not provided deferred taxes on these earnings. 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 defines two earnings per share calculations, basic and diluted. The following table is a reconciliation of the numerator and denominator under each method: (thousands, except per share data) For the three months ended June 30, 1999 1998 ---------------------------------------------------------- Basic EPS: Net income applicable to common stock $11,525 $11,042 Average common shares outstanding 38,502 36,891 Net income per common share $ .30 $ .30 Assuming dilution: Net income applicable to common stock $11,525 $11,042 Convertible preference stock 380 462 ------- ------- $11,905 $11,504 Average common shares outstanding 38,502 36,891 Stock options 210 124 Convertible preference stock 1,695 1,916 ------- ------- 40,407 38,931 Net income per common share $ .29 $ .30 ---------------------------------------------------------- Results of Operations - Six Months Ended June 30, 1999 - ------------------------------------------------------ Overview United Water's net income applicable to common stock for the six months ended June 30, 1999 increased to $16.3 million from $14.2 million in the comparable period in 1998. Net income per common share was 43 cents as compared to 39 cents for the same period last year. Results for 1999 included the Harrison Plaza sale that contributed nine cents per common share. Earnings for 1998 included an 8 cent per share contribution from the effect on deferred taxes of a decrease in the UK corporate tax rate. Results for 1999 and 1998 included 13 cents and 12 cents, respectively for corporate charges relating to interest and preferred and preference dividends. Operating Revenues The $9.4 million increase in revenues from the same period in 1998 was attributable to the following factors: (thousands of dollars) Increase (Decrease) ---------------------------------------------------- Utilities: Rate awards $ 5,124 3.2% Consumption 5,125 3.2% Growth 1,731 1.0% Real estate (2,118) (1.3%) Other operations (466) (0.3%) ---------------------------------------------------- $ 9,396 5.8% ---------------------------------------------------- The 3.2% increase in revenues from rate awards includes the impact of 1998 and current year increases for several of the Company's operating utilities. Higher consumption due to favorable weather conditions resulted in an increase in revenues of $5.1 million in 1999. The increase in revenues due to growth is primarily attributable to the acquisition of South County Water Company in Idaho in the first quarter of 1999, as well as increased customers at the Florida operating utility. The 1.3% decrease in real estate revenues was due to one property sales in 1999 compared with fourteen property sales for the same period in 1998, as well as lower rental revenue. Other operations decreased 0.3% mainly due to the timing of recording incentive revenues from the public-private partnership with Jersey City. Operating Expenses The increase in operating expenses from the same period in 1998 is due to the following: (thousands of dollars) Increase ------------------------------------------------ Operation and maintenance $ 4,595 5.7% Depreciation and amortization 2,677 14.1% General taxes 1,057 4.0% ------------------------------------------------ The $4.6 million increase in operation and maintenance expenses was due primarily to higher power, outside services and chemical costs, as well as increased maintenance costs resulting from a greater number of main breaks in the Northeast service area. These were partially offset by lower land sale costs as a result of fewer property sales in 1999. Results of Operations - Six Months Ended June 30, 1999 (continued) - ------------------------------------------------------ The $2.7 million increase in depreciation and amortization was primarily attributable to an increase in depreciation rates as a result of regulatory changes as well as the placement in service of a new customer information system at the end of 1998. General taxes increased $1.1 million primarily due to higher real estate, gross receipts and franchise taxes in utility operations. Equity Earnings of Affiliates The $1.1 million decrease in equity earnings of affiliates is due to a $1.7 million decrease in earnings from the Northumbrian Partnership, resulting primarily from the effect on deferred taxes of a decrease in the UK corporate tax rate, during the second quarter of 1998. This was partially offset by a $.5 million increase in earnings from United Water Services. Income Taxes The effective income tax rates on income before preferred and preference stock dividends were 30.0% and 22.5% in the first six months of 1999 and 1998, respectively. The increase in the effective rate is primarily attributable to the tax treatment of the Harrison Plaza sale as well as earnings from the Northumbrian Partnership. The Company considers the undistributed earnings from the Northumbrian Partnership 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, "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 defines two earnings per share calculations, basic and diluted. The following table is a reconciliation of the numerator and denominator under each method: (thousands, except per share data) For the six months ended June 30, 1999 1998 ---------------------------------------------------------- Basic EPS: Net income applicable to common stock $16,322 $14,176 Average common shares outstanding 38,246 36,653 Net income per common share $ .43 $ .39 Assuming dilution: Net income applicable to common stock $16,322 $14,176 Convertible preference stock 821 965 ------- ------- $17,143 $15,141 Average common shares outstanding 38,246 36,653 Stock options 199 150 Convertible preference stock 1,802 1,916 ------- ------- 40,247 38,719 Net income per common share $ .43 $ .39 ---------------------------------------------------------- Results of Operations - Six Months Ended June 30, 1999 (continued) - ------------------------------------------------------ Segment Information In June 1997, the FASB issued SFAS No. 131, "Disclosure 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. Those segments include utility investments, real estate and non-regulated business. United Water's utility investments include its regulated, domestic subsidiaries, United Water New Jersey, United Water New York, and the utility subsidiaries of United Waterworks and United Water Mid-Atlantic. These regulated utilities provide water and wastewater services to the public at large in areas where they possess franchises or other rights to provide such services. The utility subsidiaries are subject to rate regulation, generally by the regulatory authorities in the states in which they operate. In addition, the Company holds a 50% investment in the Northumbrian Partnership, which acquired a 20% interest in Northumbrian Water Group, a major investor-owned water and wastewater company in the United Kingdom. United Properties Group is a non-regulated business engaged in real estate investment and development activities, including commercial office and retail properties, residential and commercial land development and sales, golf course operations and consulting services. United Properties Group owns a portfolio of real estate located in New Jersey, New York, Delaware, Idaho, Florida and Maryland. The Company's non-regulated sector consists primarily of a 50% investment in United Water Services, a 50/50 joint venture with Suez Lyonnaise des Eaux, which provides contract operations and maintenance services for water and wastewater facilities. In addition, United Water entered into public-private partnerships with the cities of Jersey City and Hoboken, New Jersey. Under these arrangements, the municipalities retain ownership of their systems while the Company operates and maintains them. Parent and elimination companies are also included in this segment. Parent, Non-Regulated Utility Real Water Services and (In millions) Investments Estate Eliminations Consolidated - -------------------------------------------------------------------------------- Operating revenues $ 159,705 $ 4,870 $ 6,482 $ 171,057 Net income/(loss) 20,636 3,163 (7,477) 16,322 Identifiable assets 1,647,276 97,615 52,867 1,797,758 - -------------------------------------------------------------------------------- New Accounting Standards In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities" effective for all fiscal years beginning after June 15, 2000. 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. Results of Operations - Six Months Ended June 30, 1999 (continued) - ------------------------------------------------------ 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. 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 - ------------------------- 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 and 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 show 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 eighteen months has been signed with the potential plaintiffs and took effect February 1998. A second agreement is being executed by the potential parties; this agreement would extend the tolling period for an additional eighteen months and take effect at the expiration of the first agreement. 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. On September 22, 1998, Ramapo Land Co., Inc. commenced a lawsuit against United Water New York (UWNY), a wholly-owned subsidiary of the Company, in the Supreme Court of the State of New York, Rockland County, seeking specific performance of certain provisions of a 1990 Water Release Agreement between UWNY and Ramapo Land. The Water Release Agreement allows UWNY to release water from Cranberry and Potake Lakes to augment flows in the Ramapo River. The lawsuit alleges that UWNY has failed to meet certain maintenance and repair obligations with respect to Cranberry and Potake dams and that water releases have exceeded permitted levels. Management is vigorously defending the litigation and is actively pursuing settlement. If the lawsuit is not resolved successfully, UWNY's water releases from Cranberry and Potake Lakes could be affected, which in turn could impact UWNY's operation of the Ramapo Valley Well Field during periods when the Ramapo River is at low flow. 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 January 22, 1998, the Pierson Lakes Homeowners Association, Inc. and various individuals (Plaintiffs) commenced a lawsuit against UWNY and Ramapo Land Co., Inc. in the Supreme Court of the State of New York, Rockland County. This litigation is related to the above-referenced lawsuit by Ramapo Land Co., Inc. against UWNY in connection with maintenance and repair obligations and water releases from Cranberry and Potake Lakes. The Pierson Lakes lawsuit seeks declaratory relief, injunctive relief and money damages against UWNY and Ramapo Land Co. in amounts in excess of $25 million. In addition to claims relating to alleged failure to maintain the dams and spillways, Plaintiffs claim that the water releases have damaged the recreational and aesthetic value of the lakes, as well as their docks, boats and other personal property. Management is vigorously defending this action and is also pursuing settlement negotiations with the various parties. 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. 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. 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: August 9, 1999 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 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 PER-BOOK 1,232,400 215,281 126,510 161,973 61,594 1,797,758 410,692 0 60,812 471,504 48,358 9,000 663,831 0 103,700 0 21,352 573 0 0 479,440 1,797,758 171,057 8,308 133,999 142,307 28,750 13,332 42,082 23,819 18,263 1,941 16,322 18,361 0 19,249 0.43 0.43
-----END PRIVACY-ENHANCED MESSAGE-----