<PAGE>
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, 1997
-------------------------
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, 1997 36,043,233
-----------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -------------------------------
UNITED WATER RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
- ------
UTILITY PLANT, including $55,312 and $27,947 under construction $1,405,369 $1,349,194
LESS accumulated depreciation 290,721 267,639
---------- ----------
1,114,648 1,081,555
---------- ----------
UTILITY PLANT ACQUISITION ADJUSTMENTS, NET 63,470 64,710
---------- ----------
REAL ESTATE AND OTHER INVESTMENTS, less accumulated
depreciation of $11,247 and $9,909 79,884 83,340
EQUITY INVESTMENTS 97,722 82,433
---------- ----------
177,606 165,773
CURRENT ASSETS:
Cash and cash equivalents 5,983 8,961
Restricted cash 38,902 27,203
Accounts receivable and unbilled revenues, net 70,277 65,911
Prepaid and other current assets 18,290 11,681
---------- ----------
133,452 113,756
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS:
Regulatory assets 79,173 74,062
Prepaid employee benefits 19,219 16,139
Unamortized debt expense 31,277 30,720
Other deferred charges and assets 27,373 34,265
---------- ----------
157,042 155,186
---------- ----------
$1,646,218 $1,580,980
========== ==========
CAPITALIZATION AND LIABILITIES
- ------------------------------
CAPITALIZATION:
Common stock and retained earnings $ 414,005 $ 391,490
Preferred stock without mandatory redemption 9,000 9,000
Preferred stock with mandatory redemption 53,344 53,978
Preference stock, convertible, with mandatory redemption 34,702 39,283
Long-term debt 608,734 558,093
---------- ----------
1,119,785 1,051,844
---------- ----------
CURRENT LIABILITIES:
Notes payable 73,025 93,225
Preferred stock and long-term debt due within one year 21,368 29,546
Accounts payable and other current liabilities 37,033 37,594
Accrued taxes 28,391 17,690
Accrued interest and dividends 9,152 8,411
---------- ----------
168,969 186,466
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes and investment tax credits 180,726 174,530
Customer advances for construction 26,431 25,259
Contributions in aid of construction 130,934 126,395
Other deferred credits and liabilities 19,373 16,486
---------- ----------
357,464 342,670
---------- ----------
$1,646,218 $1,580,980
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
UNITED WATER RESOURCES INC. AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
---------------------- ----------------------
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES $99,690 $97,871 $267,457 $250,211
------- ------- -------- --------
OPERATING EXPENSES:
Operation and maintenance 42,959 42,667 128,299 116,583
Depreciation and amortization 8,687 7,980 26,055 23,332
General taxes 13,875 13,304 39,299 37,869
------- ------- -------- --------
TOTAL OPERATING EXPENSES 65,521 63,951 193,653 177,784
------- ------- -------- --------
OPERATING INCOME 34,169 33,920 73,804 72,427
------- ------- -------- --------
INTEREST AND OTHER EXPENSES:
Interest expense, net of amount capitalized 11,755 11,819 33,785 33,613
Allowance for funds used during construction (240) (1,049) (2,072) (2,238)
Preferred stock dividends of subsidiaries 563 568 1,694 1,710
Gain on New Mexico settlement -- -- -- (10,372)
Equity earnings of affiliates (3,565) (3,421) (9,173) (2,959)
Windfall profits tax of affiliate 10,334 -- 10,334 --
Other income, net (396) (239) (1,720) (1,893)
------- ------- -------- --------
TOTAL INTEREST AND OTHER EXPENSES 18,451 7,678 32,848 17,861
------- ------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 15,718 26,242 40,956 54,566
PROVISION FOR INCOME TAXES 8,185 9,314 15,871 22,432
------- ------- -------- --------
INCOME FROM CONTINUING OPERATIONS 7,533 16,928 25,085 32,134
Preferred and preference stock dividends 1,069 1,137 3,275 3,477
------- ------- -------- --------
NET INCOME APPLICABLE TO COMMON STOCK
FROM CONTINUING OPERATIONS 6,464 15,791 21,810 28,657
Loss from discontinued operations -- (270) -- (892)
------- ------- -------- --------
NET INCOME APPLICABLE TO COMMON STOCK $ 6,464 $15,521 $ 21,810 $ 27,765
======= ======= ======== ========
Average common shares outstanding (thousands) 35,985 33,986 35,454 33,505
NET INCOME PER COMMON SHARE
Continuing operations $0.18 $ 0.47 $0.62 $ 0.86
Discontinued operations -- (.01) -- (.03)
------- ------- -------- --------
Total $0.18 $ 0.46 $0.62 $ 0.83
======= ======= ======== ========
DIVIDENDS PER COMMON SHARE $0.23 $ 0.23 $0.69 $ 0.69
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
UNITED WATER RESOURCES INC. AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1997 1996
---- ----
OPERATING ACTIVITIES:
<S> <C> <C>
NET INCOME $ 25,085 $ 31,242
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 27,001 24,612
Gain on New Mexico settlement -- (10,372)
Equity loss (earnings) of affiliates 1,161 (2,959)
Proceeds from sales of properties 8,705 2,517
Gain on sale of properties (3,662) (1,245)
Improvements to property under development (1,011) (843)
Deferred income taxes and investment tax credits, net 6,196 14,609
Allowance for funds used during construction
(AFUDC) (2,072) (2,237)
Changes in assets and liabilities, net of
effect of New Mexico settlement and acquisitions:
Accounts receivable and unbilled revenues (4,366) (12,302)
Prepaid and other current assets (6,609) (847)
Prepaid employee benefits (3,080) (2,797)
Regulatory assets (5,111) (5,912)
Accounts payable and other current liabilities (561) 450
Accrued taxes 10,701 (450)
Accrued interest and dividends 741 3,383
Other, net 2,153 (5,177)
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 55,271 31,672
------ ------
INVESTING ACTIVITIES:
Additions to utility plant (excludes AFUDC) (48,497) (43,245)
Additions to real estate and other investments (17,500) (4,459)
Investment in Northumbrian Partnership -- (61,792)
Proceeds from New Mexico settlement -- 31,670
Acquisitions, net of cash received -- (6,794)
Investments in service contracts -- (5,500)
Change in restricted cash (11,699) 19,837
------ ------
NET CASH USED IN INVESTING ACTIVITIES (77,696) (70,283)
------ ------
FINANCING ACTIVITIES:
Change in notes payable (20,200) 34,225
Additional long-term debt 60,368 30,538
Reduction in preferred stock and long-term debt (18,539) (13,495)
Issuance of common stock 19,723 14,147
Dividends on common stock (24,341) (22,716)
Dividends on preferred and preference stock (3,275) (3,477)
Net contributions and advances for construction 5,711 4,041
------ -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,447 43,263
------ -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,978) 4,652
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,961 4,529
------ -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,983 $ 9,181
====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
UNITED WATER RESOURCES INC. AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1997 1996
---- ----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest (net of amount capitalized) $32,098 $29,321
Income taxes paid 3,608 5,232
</TABLE>
Supplemental disclosures of non-cash transactions:
Additional common stock was issued upon the conversion of 359,294 and 351,158
shares of preference stock valued at $5 million and $4.8 million during 1997 and
1996, respectively.
In connection with the New Mexico settlement in the first quarter of 1996,
liabilities of $20.2 million were transferred to the city of Rio Rancho.
In connection with the acquisitions of Matchaponix and Princeton Meadows in the
second quarter of 1996, the Company forgave a $5 million note receivable and
assumed liabilities of $5.2 million.
<PAGE>
UNITED WATER RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
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 1996 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 Affiliates in the Statement of Consolidated Income.
NOTE 3 - INVESTMENT IN JMM OPERATIONAL SERVICES
- -----------------------------------------------
On July 28, 1997, United Water Services LLC, 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, JMM-OSI became a wholly owned
subsidiary of United Water Services LLC. Prior to the restructuring, United
Water Services LLC (formerly the United Water Resources-Lyonnaise des Eaux
Partnership) 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.
<PAGE>
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, Pennsylvania, 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.
NEW MEXICO SETTLEMENT
- ---------------------
On March 29, 1996, the Company settled the condemnation proceeding with the
city of Rio Rancho, New Mexico. The agreement was approved on the same day by
the Thirteenth Judicial District Court in New Mexico. Under the terms of the
agreement, the Company agreed to accept $67 million for the water and wastewater
systems of its United Water New Mexico operations (including capital
expenditures incurred in 1995). Results of this transaction are included in the
Company's first quarter 1996 earnings.
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 36 cents per share, which was partially
offset by a change in the deferred tax rate of seven cents per share. The result
was a net impact of 29 cents per share. 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 $297 million over the next five years,
including $63 million and $61 million in 1997 and 1998, respectively. This
total includes $204 million for United Waterworks and $88 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 1997-2001
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,
1997, $38.9 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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------
In June 1996, United Water entered into a $30 million long-term note
agreement with Credit Lyonnais to partially fund its investment in the
Northumbrian Partnership. The loan bears interest at a LIBOR-based floating
rate and is payable in annual installments through June 2006. The Company
purchased an offsetting interest rate cap to limit its exposure under this
financing to a maximum interest rate of 8.6%. The remainder of the investment
was funded through borrowings on United Water's various short-term bank lines of
credit.
In November 1996, United Water New Jersey issued three series of Variable
Rate Demand Water Facilities Revenue Refunding Bonds (the Bonds) aggregating
$130 million ($50 million due 2025 and $80 million due 2026), through the New
Jersey Economic Development Authority (the EDA). Proceeds from the Bonds were
used to refund an equal aggregate principal amount of 6%-7% bonds issued by the
EDA in 1987 to finance or refinance a portion of the costs of acquiring and
constructing certain water transmission, transportation, storage and
distribution facilities located in Bergen, Passaic and Hudson counties in New
Jersey. In December 1996, the Company purchased a five-year interest rate cap
to limit its exposure under this financing to a maximum interest rate of 7%.
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.
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) and used for the public distribution of water.
In December 1994, United Waterworks entered into a medium-term note program
that will enable United Waterworks to issue up to $75 million of debt with terms
ranging from 9 months to 30 years. The interest rates will be set as notes are
issued under the program. 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. The first $10 million of notes under this program were issued in 1995.
The proceeds were used to redeem outstanding notes payable.
United Properties currently expects to spend $24.9 million over the next
five years for capital expenditures on its existing real estate portfolio.
Expenditures are projected to be $11.8 million and $2.4 million in 1997 and
1998, 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, 1997, United Water had cash and cash equivalents of $6
million (excluding restricted cash) and unused short-term bank lines of credit
of $158.4 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.
<PAGE>
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 1996, the Company's regulated utilities received ten rate settlement
awards with an aggregate annual rate revenue increase of $11.1 million. An
estimated $4.2 million of this amount was reflected in 1996's revenues while the
remaining $6.9 million of carryover impact of the rate awards received in 1996
is expected to increase revenues in 1997. Eight rate settlements were awarded
to the Company's regulated utilities during 1997 with an aggregate annual rate
revenue increase of $7.5 million. An estimated $5.2 million of this amount will
be reflected in 1997's revenues.
At the end of September 1997, there were seven rate cases pending in which
the Company has requested an aggregate annual rate increase of $7.4 million. The
most significant rate case pending was filed by United Water Pennsylvania. In
May 1997, United Water Pennsylvania filed for rate relief in the amount of $3
million, or a 15.4% increase in revenues. The rate filing includes
postretirement benefit costs and a proposed change to monthly billing of all
customers. Hearings are expected to take place during the fourth quarter.
Generally, the rate awards the Company's operating utilities actually
receive are less than the amounts requested, primarily due to circumstances that
change while the rate case is being processed. The Company expects to file
additional rate cases in 1997 but does not expect that those rate awards, if
received in 1997, will have a significant impact on revenues in 1997.
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1997
- -------------------------------------------------------------
OVERVIEW
United Water's net income applicable to common stock for the third quarter
of 1997 decreased to $6.5 million from $15.5 million in the comparable period in
1996. Net income per common share for the third quarter of 1997 was 18 cents as
compared to 46 cents for the same period last year. Utility investments, which
include the Northumbrian Partnership, contributed 24 cents per share in 1997
compared with 52 cents per share in 1996. Earnings for 1997 include a 29 cents
per share charge resulting from the "windfall profits" tax in the United
Kingdom. Results for 1997 and 1996 included six cents and seven cents,
respectively, for corporate charges primarily for interest and preferred and
preference dividends.
OPERATING REVENUES
The $1.8 million increase in revenues from the same period in 1996 was
attributable to the following factors:
<TABLE>
<CAPTION>
(thousands of dollars) Increase (Decrease)
------------------------------------------------------
<S> <C> <C>
Utilities:
Rate awards $ 3,041 3.1%
Consumption 1,016 1.1%
Growth 28 0.0%
Real estate (1,387) (1.4%)
Other operations (879) (0.9%)
------------------------------------------------------
$ 1,819 1.9%
------------------------------------------------------
</TABLE>
The 3.1% increase in revenues from rate awards in the third quarter of 1997
includes the impact of 1996 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 1997. The 1.4% decrease in real estate revenues
was mainly due to five property sales in 1997 compared with ten property sales
for the same period in 1996. The decrease in other operations is primarily due
to a lower number of meter installations, partially offset by revenues from
public-private partnerships.
OPERATING EXPENSES
The increase in operating expenses from the same period in 1996 is due to
the following:
<TABLE>
<CAPTION>
(thousands of dollars) Increase
---------------------------------------------------
<S> <C> <C>
Operation and maintenance $292 0.7%
Depreciation and amortization 707 8.9%
General taxes 571 4.3%
---------------------------------------------------
</TABLE>
The $707,000 increase in depreciation and amortization was primarily
attributable to utility plant additions by United Waterworks' utility
subsidiaries.
General taxes increased $571,000 primarily due to higher franchise and gross
receipts taxes in utility operations.
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1997 (CONTINUED)
- -------------------------------------------------------------
INCOME TAXES
The effective income tax rates on income before preferred and preference
stock dividends were 50.3% and 34.7% in the third quarter of 1997 and 1996,
respectively. The increase in the effective rate is primarily attributable to
the tax treatment of the earnings from the Northumbrian Partnership, which
includes the effect of the "windfall profits" tax. The Company considers the
undistributed earnings to be permanently reinvested and has not provided
deferred taxes on these earnings.
<PAGE>
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1997
- ------------------------------------------------------------
OVERVIEW
United Water's net income applicable to common stock for the nine months
ended September 30, 1997 decreased to $21.8 million from $27.8 million in the
comparable period in 1996. Net income per common share was 62 cents as compared
to 83 cents for the same period last year. Results for 1997 included a 29 cents
per share charge from the "windfall profits" tax as well as a significant land
sale that contributed five cents per share. In 1996, the Company recorded a
one-time contribution of 13 cents per share resulting from a condemnation
settlement in New Mexico.
OPERATING REVENUES
The $17.2 million increase in revenues from the same period in 1996 was
attributable to the following factors:
<TABLE>
<CAPTION>
(thousands of dollars) Increase (Decrease)
------------------------------------------------------
<S> <C> <C>
Utilities:
Rate awards $ 9,418 3.8%
Consumption (1,290) (0.5%)
Growth 2,651 1.0%
Real estate 6,268 2.5%
Other operations 199 0.1%
------------------------------------------------------
$ 17,246 6.9%
------------------------------------------------------
</TABLE>
The 3.8% increase in revenues from rate awards includes the impact of 1996
and current year increases for several of the Company's operating utilities. The
increase in revenues due to growth is partially attributable to the acquisitions
of two utilities in New Jersey in the second quarter of 1996. A decrease in
consumption due to unfavorable weather conditions in several service areas
partially offset these revenue increases. The 2.5% increase in real estate
revenues is primarily due to a significant land sale in the first quarter of
1997. The slight increase in other operations is mainly due to revenues from
the public-private partnership with Jersey City which commenced in May 1996,
partially offset by a lower number of meter installations.
OPERATING EXPENSES
The increase in operating expenses from the same period in 1996 is due to
the following:
<TABLE>
<CAPTION>
(thousands of dollars) Increase
--------------------------------------------------------
<S> <C> <C>
Operation and maintenance $11,716 10.0%
Depreciation and amortization 2,723 11.7%
General taxes 1,430 3.8%
-------------------------------------------------------
</TABLE>
The $11.7 million increase in operation and maintenance expenses was due
primarily to an increase in the costs associated with land sales in 1997,
expenses incurred as a result of the commencement of the public-private
partnership with Jersey City in the second quarter of 1996, higher outside
services and employee benefits costs at several of the Company's subsidiaries
and additional operating expenses incurred relating to the acquisitions of two
utilities in New Jersey in May 1996. These were partially offset by lower meter
installation costs.
<PAGE>
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1997 (CONTINUED)
- ------------------------------------------------------------
The $2.7 million increase in depreciation and amortization was primarily
attributable to utility plant additions by United Waterworks' utility
subsidiaries, as well as amortization attributable to the service contract in
Jersey City.
General taxes increased $1.4 million primarily due to higher real estate,
franchise and gross receipts taxes in utility operations.
EQUITY EARNINGS IN AFFILIATES
The $6.2 million increase in equity earnings of affiliates was mainly due to
a $7 million increase in earnings from the Northumbrian Partnership which was
formed in June 1996, partially offset by lower earnings from other equity
investments.
INCOME TAXES
The effective income tax rates on income before preferred and preference
stock dividends were 37.2% and 40.0% in the first nine months of 1997 and 1996,
respectively. The decrease in the effective rate is primarily attributable to
the impact of the New Mexico settlement in the first quarter of 1996 and the tax
treatment of the earnings from the Northumbrian Partnership, which is offset by
the effect of the "windfall profits" tax. The Company considers the
undistributed earnings to be permanently reinvested and has not provided
deferred taxes on these earnings.
NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share". This statement, which is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods, establishes simplified standards for computing and presenting earnings
per share (EPS). It requires dual presentation of basic and diluted EPS on the
face of the income statement for entities with complex capital structures and
disclosure of the calculation of each EPS amount. The Company does not
anticipate that adoption of this standard will have a significant impact on
reported EPS.
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.
<PAGE>
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1997 (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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ---------------------------
Three suits were filed by Safas Corporation, New Regime Company and
Aircraft Engineering Products against United Water, Dundee Water Power & Land
Co. (Dundee) and United Water New Jersey in September and November 1994 and May
1995 in the Superior Court of New Jersey, Passaic County. The suits allege that
the plaintiffs suffered property damage as a result of an alleged breach in a
berm surrounding the Dundee Canal, allowing water to escape. The Dundee Canal
is the property of Dundee, a corporation of which United Water owns 50% of the
outstanding common stock. North Jersey District Water Supply Commission, the
other 50% shareholder, has also been named as a defendant. Initially, the
plaintiffs in the Safas and New Regime suits voluntarily dismissed United Water
and United Water New Jersey without prejudice from their actions. In August
1995, Safas and New Regime reinstituted their suits against United Water and
United Water New Jersey. Plaintiffs, in the aggregate, seek damages of several
million dollars. On May 14, 1997, United Water and United Water New Jersey
filed a motion for Summary Judgement seeking to be dismissed from the action.
The plaintiff filed a motion for partial summary judgement for its claim that
Dundee is strictly liable for damage resulting from the breach. Both motions
were argued before the Court on July 24, 1997. On July 30, 1997, the Court
granted United Water's motion for summary judgement dismissing it from the
action, but denied United Water New Jersey's motion for summary judgement. The
Court also denied plaintiff's motion for partial summary judgement seeking
strict liability. The Order granting summary judgement on behalf of United
Water was entered on September 29, 1997. Pursuant to a Case Management Order
issued in October 1997, the parties have been directed to complete discovery by
December 23, 1997. Trial is scheduled to commence in January of 1998. Both
United Water's and the North Jersey District Water Supply Commission's
respective policies of insurance name Dundee as an additional insured. The
Company is of the opinion that it, United Water New Jersey and Dundee have
adequate insurance to cover claims of this nature.
United Water Delaware (formerly Wilmington Suburban Water Corporation), a
subsidiary of United Waterworks, was the subject of a Criminal Violation Notice
issued by New Castle County (the County), Delaware Department of Public Works
(the Notice). The Notice, dated April 15, 1992, describes the violation as
being an illegal placement of fill in a floodplain in contravention of the New
Castle County Zoning and Drainage Codes. United Water Delaware alleges that the
illegal fill was placed on land it owns by one or more third parties without
knowledge or approval of United Water Delaware. Violation notice forms were also
issued to other similarly situated property owners, and United Water Delaware
has taken part in many discussions concerning the level of participation by all
such parties in a remediation. An application for approval of a remediation
plan was submitted to the New Castle County Department of Planning on May 26,
1995 and the County accepted this proposal on September 1, 1995. United Water
Delaware and New Castle County entered into a Release and Settlement Agreement
(the Agreement) dated April 9, 1996. Pursuant to the Agreement, New Castle
County had withdrawn the Notice against United Water Delaware. The withdrawal
of the Notice was conditioned on United Water Delaware undertaking in good faith
to implement the remediation plan. As of April 15, 1997, certain conditions
precedent to the Company's obligation to complete the remediation work had not
been fulfilled by the County. 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.
<PAGE>
LEGAL PROCEEDINGS (CONTINUED)
- -----------------
On October 28, 1994, IU International Corporation (IU) filed suit in the
Superior Court of the State of Delaware against United Waterworks alleging
breach of contract and seeking reimbursement from United Waterworks of more than
$3 million, as well as interest thereon. IU's claim is based on certain tax
indemnifications that were part of a stock purchase agreement entered into by
IU, Lyonnaise American Holding, Inc. (LAH), United Waterworks and GWC
Corporation (former parent of United Waterworks) in connection with the 1982
purchase of 50% of the outstanding common stock of United Waterworks by LAH. On
June 16, 1995, United Waterworks, LAH and IU entered into a settlement agreement
pursuant to which United Waterworks agreed to pay IU $800,000 on the date of
execution of such agreement. In addition, United Waterworks agreed to pay IU an
additional amount of up to approximately $1.15 million plus interest thereon
(such interest commencing as of September 15, 1993) at United Waterworks'
average short-term borrowing rate. Such payments become due in the event and at
the time that certain tax benefits previously claimed by United Waterworks with
respect to its 1992 tax year reach "finality" through the running of the statute
of limitations on the 1992 tax year or when it is determined that such tax
benefits are allowable by the Internal Revenue Service. On June 16, 1995,
United Waterworks paid $800,000 to IU. Pursuant to the settlement agreement, on
June 30, 1995, the parties filed with the court a stipulation of dismissal of
the lawsuit with prejudice. On September 15, 1996, the statute of limitations
expired on the 1992 tax year. As a result, on November 19, 1996, United
Waterworks paid IU $977,000 of the $1.15 million. The remaining balance was
paid on April 16, 1997.
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., a subsidiary of United Water, 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 have
appealed the decision to the Appellate Division of the Supreme Court of the
State of New York. No date has been set by the Court to hear appellate
arguments. 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 the Company, in the Supreme Court of the State of New
York, Westchester County. The suit seeks to recover for alleged property damage
arising out of the 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 plaintiff involves monetary damages for the cost of replacing
the service lines, which belong to the Company. The plaintiff did not seek
injunctive relief. A default judgement on the issue of liability was entered
against United Water New Rochelle on December 2, 1994. The Company has
diligently prosecuted motions to reopen and appeal from the default judgement,
on the principal ground that the default resulted from a failure by the
Company'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 judgement have not been successful. Following an inquest on the issue of
damages, the Court issued a decision, dated December 20, 1996, awarding the
plaintiff $1,330,000. The 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
Court entered a judgement in favor of the plaintiff in the
<PAGE>
LEGAL PROCEEDINGS (CONTINUED)
- -----------------
amount of $862,758, which included interest from December 20, 1996. The Company
has filed a Notice of Appeal from the judgement, and is also appealing prior
decisions on its motions to vacate the default judgement. The Company believes
that it has meritorious arguments on appeal and on the original matter, should
it be reopened. Further, the Company expects to seek 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.
United Water is not a party to any other litigation other than the 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.
<PAGE>
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 10, 1997 By JOHN J. TURNER
----------------- --------------------------------
(Signature)
John J. Turner
Treasurer
DULY AUTHORIZED AND CHIEF
ACCOUNTING OFFICER
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
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 refefence to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,114,648
<OTHER-PROPERTY-AND-INVEST> 177,606
<TOTAL-CURRENT-ASSETS> 133,452
<TOTAL-DEFERRED-CHARGES> 157,042
<OTHER-ASSETS> 63,470
<TOTAL-ASSETS> 1,646,218
<COMMON> 359,881
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 54,124
<TOTAL-COMMON-STOCKHOLDERS-EQ> 414,005
88,046
9,000
<LONG-TERM-DEBT-NET> 608,734
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 73,025
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 21,108
260
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 432,040
<TOT-CAPITALIZATION-AND-LIAB> 1,646,218
<GROSS-OPERATING-REVENUE> 267,457
<INCOME-TAX-EXPENSE> 15,871
<OTHER-OPERATING-EXPENSES> 193,653
<TOTAL-OPERATING-EXPENSES> 209,524
<OPERATING-INCOME-LOSS> 57,933
<OTHER-INCOME-NET> 937
<INCOME-BEFORE-INTEREST-EXPEN> 58,870
<TOTAL-INTEREST-EXPENSE> 33,785
<NET-INCOME> 25,085
3,275
<EARNINGS-AVAILABLE-FOR-COMM> 21,810
<COMMON-STOCK-DIVIDENDS> 24,341
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 55,271
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
</TABLE>
