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