<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 JUNE 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 July 31, 1998 37,211,079
-----------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -------------------------------
UNITED WATER RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
- ------
UTILITY PLANT, including $56,656 and $49,301 under construction $1,478,207 $1,439,854
LESS accumulated depreciation 312,766 296,820
----------- ------------
1,165,441 1,143,034
----------- ------------
UTILITY PLANT ACQUISITION ADJUSTMENTS, NET 62,143 63,026
----------- ------------
REAL ESTATE AND OTHER INVESTMENTS, less accumulated
depreciation of $12,512 and $11,497 81,294 79,487
EQUITY INVESTMENTS 108,846 99,197
----------- ------------
190,140 178,684
CURRENT ASSETS:
Cash and cash equivalents 1,982 8,546
Restricted cash 27,613 34,581
Accounts receivable and unbilled revenues, net 60,990 57,723
Prepaid and other current assets 11,478 11,705
----------- -----------
102,063 112,555
----------- -----------
DEFERRED CHARGES AND OTHER ASSETS:
Regulatory assets 80,116 79,748
Prepaid employee benefits 25,315 21,426
Unamortized debt expense 32,285 31,019
Other deferred charges and assets 28,562 28,850
----------- -----------
166,278 161,043
----------- -----------
$1,686,065 $1,658,342
=========== ===========
CAPITALIZATION AND LIABILITIES
- ------------------------------
CAPITALIZATION:
Common stock and retained earnings $ 431,380 $ 418,601
Preferred stock without mandatory redemption 9,000 9,000
Preferred stock with mandatory redemption 51,565 51,838
Preference stock, convertible, with mandatory redemption 30,484 34,741
Long-term debt 619,322 622,737
----------- -----------
1,141,751 1,136,917
----------- -----------
CURRENT LIABILITIES:
Notes payable 85,695 74,925
Preferred stock and long-term debt due within one year 7,417 8,022
Accounts payable and other current liabilities 39,659 40,156
Accrued taxes 27,258 26,878
Accrued interest and dividends 7,562 8,117
----------- -----------
167,591 158,098
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes and investment tax credits 190,088 183,490
Customer advances for construction 28,879 27,356
Contributions in aid of construction 136,784 133,684
Other deferred credits and liabilities 20,972 18,797
----------- -----------
376,723 363,327
----------- -----------
$1,686,065 $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 SIX MONTHS
---------------------- ----------------------
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES $86,219 $87,761 $161,661 $167,767
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Operation and maintenance 41,138 41,278 80,439 85,340
Depreciation and amortization 9,601 8,740 18,969 17,368
General taxes 13,209 12,752 26,262 25,424
---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES 63,948 62,770 125,670 128,132
---------- ---------- ---------- ----------
OPERATING INCOME 22,271 24,991 35,991 39,635
---------- ---------- ---------- ----------
INTEREST AND OTHER EXPENSES:
Interest expense, net of amount capitalized 11,544 11,001 22,885 22,030
Allowance for funds used during construction (668) (1,135) (1,531) (1,832)
Preferred stock dividends of subsidiaries 559 564 1,121 1,131
Equity earnings of affiliates (4,820) (2,927) (6,978) (5,608)
Other income, net (370) (628) (832) (1,324)
---------- ---------- ---------- ----------
TOTAL INTEREST AND OTHER EXPENSES 6,245 6,875 14,665 14,397
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 16,026 18,116 21,326 25,238
PROVISION FOR INCOME TAXES 3,956 5,801 5,052 7,686
---------- ---------- ---------- ----------
NET INCOME 12,070 12,315 16,274 17,552
Preferred and preference stock dividends 1,028 1,071 2,098 2,206
---------- ---------- ---------- ----------
NET INCOME APPLICABLE TO COMMON STOCK $11,042 $11,244 $ 14,176 $ 15,346
========== ========== ========== ==========
NET INCOME PER COMMON SHARE $0.30 $0.32 $0.39 $0.44
======= ======= ======== ========
Average common shares outstanding 36,891 35,378 36,653 35,062
NET INCOME PER COMMON SHARE-ASSUMING DILUTION $0.30 $0.31 $0.39 $0.44
======= ======= ======== ========
Average common shares outstanding 38,931 37,753 38,719 37,394
DIVIDENDS PER COMMON SHARE $0.23 $0.23 $0.46 $0.46
======= ======= ======== ========
</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 SIX MONTHS ENDED JUNE 30,
---------------------------------
1998 1997
---------- ---------
OPERATING ACTIVITIES:
<S> <C> <C>
NET INCOME $ 16,274 $ 17,552
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 19,642 17,993
Equity earnings of affiliates (6,978) (5,608)
Proceeds from sales of properties 1,646 7,863
Gain on sale of properties (785) (3,379)
Improvements to property under development (656) (667)
Deferred income taxes and investment tax credits, net 6,598 3,112
Allowance for funds used during construction (AFUDC) (1,531) (1,832)
Changes in assets and liabilities:
Accounts receivable and unbilled revenues (3,267) (1,986)
Prepaid and other current assets 227 (3,052)
Prepaid employee benefits (3,889) (1,262)
Regulatory assets (368) (1,590)
Accounts payable and other current liabilities (497) 1,228
Accrued taxes 380 4,765
Accrued interest and dividends (555) (841)
Other, net 169 (2,109)
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 26,410 30,187
---------- ---------
INVESTING ACTIVITIES:
Additions to utility plant (excludes AFUDC) (37,606) (31,553)
Additions to real estate and other properties (2,918) (1,188)
Additions to equity investments (2,245) (1,000)
Change in restricted cash 6,968 3,748
---------- ---------
NET CASH USED IN INVESTING ACTIVITIES (35,801) (29,993)
---------- ---------
FINANCING ACTIVITIES:
Change in notes payable 10,770 (27,500)
Additional long-term debt 40,233 40,368
Reduction in preferred stock and long-term debt (44,526) (17,691)
Issuance of common stock 10,756 13,258
Dividends on common stock (16,931) (16,112)
Dividends on preferred and preference stock (2,098) (2,206)
Net contributions and advances for construction 4,623 3,426
---------- ---------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES 2,827 (6,457)
---------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,564) (6,263)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,546 8,961
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,982 $ 2,698
========== =========
</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 SIX MONTHS ENDED JUNE 30,
---------------------------------
1998 1997
-------- ---------
Supplemental disclosures of cash flow information:
Interest (net of amount capitalized) $22,859 $22,246
Income taxes paid/(refunded) 1,484 (987)
Supplemental disclosures of non-cash transactions:
Additional common stock was issued upon the conversion of 328,624 and 359,294
shares of preference stock valued at $4.5 million and $5 million during 1998 and
1997, respectively.
<PAGE>
UNITED WATER RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 Other Income
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.
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 June 30, 1998,
$27.6 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.
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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------
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 June 30, 1998, United Water had cash and cash equivalents of $2
million (excluding restricted cash) and unused short-term bank lines of credit
of $217 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
- --------------------
United Water is continuing to ensure that all computer systems and
applications are prepared for the year 2000. Since 1994, the Company has been
in the process of replacing the core business and operating systems with newer
technology. As a result, all enterprise-wide systems are scheduled to be year
2000 compliant by the end of 1998. All work done in relation to addressing
year 2000 compliance has been performed as a by-product of another project. To
date, there have been no significant costs associated solely with year 2000
compliance issues. The Company is seeking compliance certification from
external interface vendors and service providers. An action plan has been
developed that will identify any additional costs and resource commitments
required. The Company does not believe there will be material future costs
associated with year 2000 requirements.
<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 June 1998, there were eight rate cases pending in which
the Company has requested an aggregate annual rate increase of $11 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%.
The filing was officially accepted on June 23, 1998.
On October 26, 1996, United Water Delaware placed $2.3 million in
increased revenues in effect, subject to refund. On July 15, 1997, the Delaware
Public Utility Commission granted the Company a permanent rate increase of $1.6
million. On July 16, 1997, the Company filed an appeal and application for a
stay of the Commission's Order. On July 29, 1997, the Delaware Superior Court
granted a stay of the Commission decision pending the appeal. On March 31,
1998, the Delaware Superior Court handed down a decision finding for the
Commission on all issues. The Company appealed to the Supreme Court of Delaware
on April 28, 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 JUNE 30, 1998
- --------------------------------------------------------
OVERVIEW
United Water's net income applicable to common stock for the second
quarter of 1998 decreased to $11 million from $11.2 million in the comparable
period in 1997. Net income per common share for the second quarter of 1998 was
30 cents as compared to 32 cents for the same period last year. Utility
investments, which include the Northumbrian Partnership, contributed $14
million, or 38 cents per share, in 1998 compared with $13.4 million, or 38 cents
per share, in 1997. Results for 1998 and 1997 included six cents and seven
cents, respectively, for corporate charges primarily for interest and preferred
and preference dividends.
OPERATING REVENUES
The $1.5 million decrease in revenues from the same period in 1997 was
attributable to the following factors:
(thousands of dollars) Increase/(Decrease)
------------------------------------------------------
Utilities:
Rate awards $ 1,497 1.7%
Consumption (2,427) (2.8%)
Growth 278 0.3%
Real estate 1,011 1.2%
Other operations (1,901) (2.2%)
------------------------------------------------------
$ (1,542) (1.8%)
------------------------------------------------------
The 1.7% increase in revenues from rate awards in the second 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 growth is
primarily attributable to the acquisition of a utility in Florida in the fourth
quarter of 1997, as well as increased customers at several operating utilities.
A decrease in consumption due to unfavorable weather conditions in several
service areas more than offset these revenue increases. The increase in real
estate revenues was mainly due to higher golf course revenues as well as eight
property sales in 1998 compared with four property sales for the same period in
1997. The $1.9 million 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 and to the timing of recording incentive
revenues from the public-private partnership with Jersey City, New Jersey, in
1997.
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 $(140) (0.3%)
Depreciation and amortization 861 9.9%
General taxes 457 3.6%
------------------------------------------------------
The slight decrease in operation and maintenance expenses was due
primarily to the absence of 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 insurance costs at several of the
Company's subsidiaries as well as an increase in the costs associated with land
sales in 1998.
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 (CONTINUED)
- --------------------------------------------------------
The $861,000 increase in depreciation and amortization was primarily
attributable to utility plant additions by the Company's utility subsidiaries.
General taxes increased $457,000 primarily due to higher real estate,
franchise and gross receipts taxes in utility operations.
EQUITY EARNINGS OF AFFILIATES
The $1.9 million increase in equity earnings of affiliates is due to a
$3 million increase in earnings from the Northumbrian Partnership, resulting
primarily from the effect on deferred taxes of a change in the UK corporate tax
rate. This was partially offset by a $1.1 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).
INCOME TAXES
The effective income tax rates on income before preferred and
preference stock dividends were 23.9% and 31.1% in the second 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. 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 JUNE 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 June 30, 1998 1997
- ----------------------------------------------------------------
BASIC EPS:
Net income applicable to common stock $11,042 $11,244
Average common shares outstanding 36,891 35,378
Net income per common share $ .30 $ .32
ASSUMING DILUTION:
Net income applicable to common stock $11,042 $11,244
Convertible preference stock 462 503
------- -------
$11,504 $11,747
Average common shares outstanding 36,891 35,378
Stock options 124 184
Convertible preference stock 1,916 2,191
------- -------
38,931 37,753
Net income per common share $ .30 $ .31
- ----------------------------------------------------------------
<PAGE>
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998
- ------------------------------------------------------
OVERVIEW
United Water's net income applicable to common stock for the six
months ended June 30, 1998 decreased to $14.2 million from $15.3 million in the
comparable period in 1997. Net income per common share was 39 cents as compared
to 44 cents for the same period last year. Results for 1997 included a
significant land sale that contributed five cents per share.
OPERATING REVENUES
The $6.1 million decrease in revenues from the same period in 1997 was
attributable to the following factors:
(thousands of dollars) Increase/(Decrease)
----------------------------------------------
Utilities:
Rate awards $ 2,900 1.7%
Consumption (2,325) (1.4%)
Growth 939 0.6%
Real estate (5,248) (3.1%)
Other operations (2,372) (1.4%)
----------------------------------------------
$ (6,106) (3.6%)
----------------------------------------------
The 1.7% 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 growth is primarily attributable to
the acquisition of a utility in Florida in the fourth quarter of 1997, as well
as increased customers at several operating utilities. A decrease in consumption
due to unfavorable weather conditions in several service areas partially offset
these revenue increases. The 3.1% decrease in real estate revenues was due to a
significiant land sale in the first quarter of 1997 partially offset by higher
golf course revenues as well as the sale of fourteen parcels of land in 1998
compared to seven parcels in the same period in 1997. Other operations decreased
1.4% mainly due to the absence of revenues from the Company's meter installation
subsidiary, which was sold in the fourth quarter of 1997.
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 $(4,901) (5.7%)
Depreciation and amortization 1,601 9.2%
General taxes 838 3.3%
-------------------------------------------------------
The $4.9 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
operating expenses resulting from the public-private partnership with Jersey
City.
<PAGE>
Results of Operations - Six Months Ended June 30, 1998 (continued)
- ------------------------------------------------------
The $1.6 million increase in depreciation and amortization was
primarily attributable to utility plant additions by the Company's utility
subsidiaries.
General taxes increased $838,000 primarily due to higher real estate,
franchise and gross receipts taxes in utility operations.
OTHER INCOME
The decrease in other income of $.5 million was mainly due to the sale
of four investment properties during 1997.
EQUITY EARNINGS OF AFFILIATES
The $1.4 million increase in equity earnings of affiliates is due to a
$3.2 million increase in earnings from the Northumbrian Partnership, resulting
primarily from the effect on deferred taxes of a change in the UK corporate tax
rate. This was partially offset by a $1.8 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.
INCOME TAXES
The effective income tax rates on income before preferred and
preference stock dividends were 22.5 % and 29.1 % 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. 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 - SIX MONTHS ENDED JUNE 30, 1998 (CONTINUED)
- ------------------------------------------------------
(thousands, except per share data)
For the six months ended June 30, 1998 1997
- ---------------------------------------------------------------
BASIC EPS:
Net income applicable to common stock $14,176 $15,346
Average common shares outstanding 36,653 35,062
Net income per common share $ .39 $ .44
ASSUMING DILUTION:
Net income applicable to common stock $14,176 $15,346
Convertible preference stock 965 1,072
------- -------
$15,141 $16,418
Average common shares outstanding 36,653 35,062
Stock options 150 141
Convertible preference stock 1,916 2,191
------- -------
38,719 37,394
Net income per common share $ .39 $ .44
- ---------------------------------------------------------------
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 - SIX MONTHS ENDED JUNE 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 have appealed the
decision to the Appellate Division of the Supreme Court of the State of New
York. The case is scheduled for the September 1998 Term of the Court. 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 from 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.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED WATER RESOURCES INC.
------------------------------
(Registrant)
Date: August 10, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,165,441
<OTHER-PROPERTY-AND-INVEST> 190,140
<TOTAL-CURRENT-ASSETS> 102,063
<TOTAL-DEFERRED-CHARGES> 166,278
<OTHER-ASSETS> 62,143
<TOTAL-ASSETS> 1,686,065
<COMMON> 380,786
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 50,594
<TOTAL-COMMON-STOCKHOLDERS-EQ> 431,380
82,049
9,000
<LONG-TERM-DEBT-NET> 619,322
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 85,695
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 5,345
2,072
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 451,202
<TOT-CAPITALIZATION-AND-LIAB> 1,686,065
<GROSS-OPERATING-REVENUE> 161,661
<INCOME-TAX-EXPENSE> 5,052
<OTHER-OPERATING-EXPENSES> 125,670
<TOTAL-OPERATING-EXPENSES> 130,722
<OPERATING-INCOME-LOSS> 30,939
<OTHER-INCOME-NET> 8,220
<INCOME-BEFORE-INTEREST-EXPEN> 39,159
<TOTAL-INTEREST-EXPENSE> 22,885
<NET-INCOME> 16,274
2,098
<EARNINGS-AVAILABLE-FOR-COMM> 14,176
<COMMON-STOCK-DIVIDENDS> 16,931
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 26,410
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
</TABLE>
