<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, 1999
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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
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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
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(Address of principal executive office) (zip code)
201-784-9434
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(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 ______
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Common shares of stock outstanding as of October 31, 1999 38,865,445
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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UNITED WATER RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(thousands of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- ------------
(unaudited)
<S> <C> <C>
Assets
- ------
Utility plant, including $38,814 and $47,348 under construction $1,595,336 $1,540,564
Less accumulated depreciation 351,010 328,224
---------- ----------
1,244,326 1,212,340
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Utility plant acquisition adjustments, net 61,133 61,320
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Real estate and other investments, less accumulated
depreciation of $9,543 and $13,628 93,815 81,630
Equity investments 129,235 116,598
---------- ----------
223,050 198,228
Current assets:
Cash and cash equivalents 4,173 8,011
Restricted cash 32,764 48,495
Accounts receivable and unbilled revenues, net 71,108 59,693
Prepaid and other current assets 18,626 12,235
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126,671 128,434
---------- ----------
Deferred charges and other assets:
Regulatory assets 66,710 76,548
Prepaid employee benefits 36,585 29,237
Unamortized debt expense 34,215 34,745
Other deferred charges and assets 25,982 28,270
---------- ----------
163,492 168,800
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$1,818,672 $1,769,122
========== ==========
Capitalization and Liabilities
- ------------------------------
Capitalization:
Common stock and retained earnings $ 475,931 $ 456,029
Preferred stock without mandatory redemption 9,000 9,000
Preferred stock with mandatory redemption 21,943 49,748
Preference stock, convertible, with mandatory redemption 26,128 30,534
Long-term debt 663,791 652,969
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1,196,793 1,198,280
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Current liabilities:
Notes payable 105,700 93,400
Preferred stock and long-term debt due within one year 21,894 5,795
Accounts payable and other current liabilities 42,178 36,525
Accrued taxes 23,273 24,257
Accrued interest and dividends 9,114 8,023
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202,159 168,000
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Deferred credits and other liabilities:
Deferred income taxes and investment tax credits 198,293 195,368
Customer advances for construction 33,913 30,648
Contributions in aid of construction 151,633 143,327
Other deferred credits and liabilities 35,881 33,499
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419,720 402,842
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$1,818,672 $1,769,122
========== ==========
</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,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues $107,374 $108,748 $278,431 $270,409
-------- -------- -------- --------
Operating expenses:
Operation and maintenance 56,683 44,654 141,717 125,093
Depreciation and amortization 11,534 9,823 33,180 28,792
General Taxes 14,719 14,789 42,038 41,051
-------- -------- -------- --------
Total operating expenses 82,936 69,266 216,935 194,936
-------- -------- -------- --------
Operating income 24,438 39,482 61,496 75,473
-------- -------- -------- --------
Interest and other expenses:
Interest expense, net of amount capitalized 12,415 11,262 36,234 34,147
Allowance for funds used during construction (758) (947) (2,358) (2,478)
Preferred stock dividends of subsidiaries 540 552 1,635 1,673
Gain on sale of Harrison Plaza -- -- (5,846) --
Equity earnings of affiliates (3,272) (2,071) (9,149) (9,049)
Other income, net (1,212) (569) (2,316) (1,401)
-------- -------- -------- --------
Total interest and other expenses 7,713 8,227 18,200 22,892
-------- -------- -------- --------
Income before income taxes 16,725 31,255 43,296 52,581
Provision for income taxes 4,915 10,765 13,223 15,817
-------- -------- -------- --------
Net income 11,810 20,490 30,073 36,764
Preferred and preference stock dividends 378 990 2,319 3,088
-------- -------- -------- --------
Net income applicable to common stock $ 11,432 $ 19,500 $ 27,754 $ 33,676
======== ======== ======== ========
Net income per common share $ 0.29 $ 0.52 $ 0.72 $ 0.91
======== ======== ======== ========
Average common shares outstanding 38,808 37,268 38,420 36,848
Net income per common share-assuming dilution $ 0.29 $ 0.51 $ 0.72 $ 0.90
======== ======== ======== ========
Average common shares outstanding 40,845 39,327 40,422 39,023
Dividends per common share $ 0.24 $ 0.23 $ 0.72 $ 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,
---------------------------------------
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net income $ 30,073 $ 36,764
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 34,316 29,799
Equity earnings of affiliates (9,149) (9,049)
Gain on sale of South Gate (596) --
Proceeds from sales of properties 225 3,057
Loss/(gain) on sale of properties 42 (1,535)
Gain on sale of Harrison Plaza (5,846) --
Improvements to property under development (1,390) (1,207)
Deferred income taxes and investment tax credits, net 2,976 9,498
Allowance for funds used during construction (AFUDC) (2,358) (2,478)
Changes in assets and liabilities:
Accounts receivable and unbilled revenues (11,366) (12,273)
Prepaid and other current assets (6,401) (4,259)
Prepaid employee benefits (7,287) (5,064)
Regulatory assets 6,490 (911)
Accounts payable and other current liabilities 5,474 8,366
Accrued taxes (1,281) 2,104
Accrued interest & dividends 1,091 139
Other, net 3,224 6,441
-------- --------
Net cash provided by operating activities 38,237 59,392
-------- --------
Investing activities:
Additions to utility plant (excludes AFUDC) (55,610) (62,438)
Additions to real estate and other properties (43,329) (3,742)
Additions to equity investments (3,600) (2,245)
Acquisition of South County Water Company (2,589) --
Proceeds from sale of South Gate 1,888 --
Proceeds from sale of Harrison Plaza 39,502 --
Change in restricted cash 15,731 10,651
-------- --------
Net cash used in investing activities (48,007) (57,774)
-------- --------
Financing activities:
Change in notes payable 12,300 9,700
Additional long-term debt 30,000 40,233
Reduction in preferred stock and long-term debt (30,884) (48,089)
Issuance of common stock 15,301 16,076
Dividends on common stock (27,675) (25,422)
Dividends on preferred and preference stock (2,319) (3,088)
Net contributions and advances for construction 9,209 7,374
-------- --------
Net cash provided by/(used in) financing activities 5,932 (3,216)
-------- --------
Net decrease in cash and cash equivalents (3,838) (1,598)
Cash and cash equivalents at beginning of period 8,011 8,546
-------- --------
Cash and cash equivalents at end of period $ 4,173 $ 6,948
======== ========
</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,
---------------------------------------
1999 1998
---- ----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest (net of amount capitalized) $33,826 $33,001
Income taxes paid 3,972 4,676
</TABLE>
Supplemental disclosures of non-cash transactions:
Additional common stock was issued upon the conversion of 340,294 and 330,280
shares of preference stock valued at $4.7 million and $4.6 million during 1999
and 1998, respectively.
<PAGE>
UNITED WATER RESOURCES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
Note 1 - General
- ----------------
In the opinion of United Water Resources (United Water, or the Company),
the accompanying unaudited consolidated financial statements contain all
adjustments, which consist of normal recurring adjustments, necessary for the
fair presentation of the results for the interim periods. The year-end balance
sheet data was derived from audited financial statements, but does not include
all disclosures required by generally accepted accounting principles.
Additional footnote disclosure concerning accounting policies and other matters
are disclosed in the Company's audited consolidated financial statements
included in its 1998 Annual Report on Form 10-K, which should be read in
conjunction with these financial statements. Certain prior year amounts have
been reclassified to conform with current year presentation.
Due to the seasonal nature of the Company's operations, financial results
for interim periods are not necessarily indicative of the results for a twelve
month period.
Item 2. Management's Discussion and Analysis of Financial Condition
- ---------------------------------------------------------------------
And Results of Operations
-------------------------
General
- -------
United Water's principal utility subsidiaries include United Water New
Jersey, United Water New York and United Waterworks. United Water New Jersey and
United Water New York (a subsidiary of United Water New Jersey) provide public
water supply services to more than one million people in northern New Jersey and
southern New York. United Waterworks provides public water supply services to
approximately one million people in 13 states. Its major utility operations are
located in Arkansas, Delaware, Florida, Idaho, New Jersey, New York and
Pennsylvania. In addition, its utility in Florida also provides wastewater
collection and treatment services, generally to its water customers. The water
utility business is cyclical in nature, as both revenues and earnings are higher
in the summer months when customer consumption is higher than in the cooler
months.
United Properties Group (United Properties), United Water's real estate
subsidiary, is a non-regulated business engaged in real estate investment and
development activities, including commercial office and retail properties,
residential and commercial land development and sales, golf course operations
and consulting services. It owns a portfolio of real estate located in New
Jersey, New York, Idaho, Delaware, Florida and Maryland. United Properties also
provides consulting and advisory services in support of the real estate assets
of the other United Water companies.
Strategic Initiatives
- ---------------------
During the third quarter of 1999, United Water announced strategic
initiatives designed to strengthen the long-term performance of the Company.
. On July 13, United Water announced that it was offering a voluntary
early retirement program to employees who qualified based on age and
length of service. The program ended September 14, and resulted in a
one-time charge to net income of approximately $4.5 million.
<PAGE>
. On August 23, the Company announced an agreement for Suez Lyonnaise des
Eaux to acquire the remaining shares of United Water it does not already
own for $35 per share. As a result, United Water's stock price
increased. This resulted in an after-tax charge of $1.9 million for
existing stock options under the management incentive plan. The
acquisition is pending shareholder and regulatory approvals.
Sale of Several Small Utilities
- -------------------------------
In July 1999, the Company announced that it entered into a definitive
agreement to sell several small utility subsidiaries to American Water Works
Company for approximately $49 million in cash. These utilities collectively
provide water service to about 35,000 customers and represent less than 4% of
the Company's regulated assets and under 2% of the population it serves. The
decision to sell these subsidiaries was made in an effort to focus United
Water's core utility business in service areas experiencing significant growth
and development. Completion of the transaction is contingent upon regulatory
approvals and is anticipated that closings will occur during 1999 as various
approvals are received.
On August 26, 1999, the Company announced that it sold the water system
assets of United Water South Gate to Utilities, Inc. for $1.9 million. The sale
resulted in a pre-tax gain of $596,000 and is included in other income in the
accompanying statement of consolidated income.
Gain on sale of Harrison Plaza
- ------------------------------
In March 1999, United Properties sold two office buildings (Harrison Plaza)
with a property basis of $30.7 million, for $42.1 million. This transaction
resulted in a pre-tax gain of $5.8 million and net cash proceeds of $39.5
million. Cash proceeds of $15.6 million were used to pay off long-term debt
related to the office buildings.
In June 1999, United Properties purchased three office/retail buildings for
$40.6 million. Cash proceeds from the sale of Harrison Plaza of $23.9 million,
as well as $16.8 million of short-term debt were used to finance this purchase.
Redemption of Preferred Stock
- -----------------------------
On December 8, 1998, the Company called for redemption of the remaining
285,000 shares of its 7 5/8% Series B cumulative preferred stock. The
redemption, which occurred on January 8, 1999, resulted in the payment of
principal, accrued dividends and premium totaling $30 million, with $1.3 million
relating to the premium paid on the early redemption. The preferred stock was
redeemed with $30 million of 6.07%-7.04% Senior Notes due 2005-2019.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Capital expenditures are generally incurred by United Water's utility
subsidiaries in connection with the normal upgrading and expansion of existing
water and wastewater facilities and to comply with existing environmental
regulations. United Water considers its utility plant to be adequate and in
good condition. These capital expenditures are necessary to meet growth
requirements and to comply with environmental laws and regulations. Excluding
the effects of inflation, the capital expenditures of United Water's utility
subsidiaries are projected to aggregate $262 million over the next five years,
including $57 million and $58 million in 1999 and 2000, respectively. This
total includes $165 million for United Waterworks and $92 million for United
Water New Jersey and United Water New York. The expenditures related to
compliance with environmental laws and regulations are estimated to be
approximately 25% of the projected capital expenditures over the 1999-2003
period. To the best of management's knowledge, the Company is in compliance
with all major environmental laws and regulations.
United Water anticipates that its future capital expenditures will be
funded by internally generated funds and external financings. In addition,
United Water's regulated utilities participate in a number of tax-exempt
financings for the purpose of funding capital expenditures. Funds are drawn
down on these financings as qualified capital expenditures are made. As of
September 30, 1999, $32.8 million of proceeds from these financings have not yet
been disbursed to the Company and are included in the consolidated balance sheet
as restricted cash. The amount and timing of the use of these proceeds and of
future financings will depend on actual capital expenditures, the timeliness and
adequacy of rate relief, the availability and cost of capital, and the ability
to meet interest and fixed charge coverage requirements.
In December 1994, United Waterworks entered into a medium-term note program
that enabled United Waterworks to issue up to $75 million of debt with terms
ranging from 9 months to 30 years. The interest rates are set as notes are
issued under the program. The first $10 million of notes under this program
were issued in 1995. An additional $15 million of notes were issued in 1997.
In February 1998, United Waterworks issued an additional $40 million of notes
under this program ($20 million at 6.97% due 2023, $15 million at 7.1% due 2028
and $5 million at 6.9% due 2017). In November 1998, United Waterworks issued
the final $10 million of notes under this program ($5 million at 6.44% due 2008
and $5 million at 6.97% due 2023). The proceeds were used to redeem outstanding
notes payable.
In December 1998, United Water New Jersey issued $35 million of 5% Water
Facilities Revenue Bonds through the New Jersey Economic Development Authority
due 2028. The proceeds are being used to finance the cost of acquiring,
constructing and reconstructing certain water transmission, transportation,
storage, treatment, and distribution facilities located in Passaic, Bergen,
Sussex, and Hudson counties in New Jersey.
In January 1999, United Water issued $30 million of Senior Notes ($5
million at 6.07% due 2005, $10 million at 6.43% due 2009, $10 million at 6.7%
due 2019, and $5 million at 7.04% due 2019). The proceeds were used to redeem
all remaining shares of 7 5/8% Series B cumulative preferred stock.
<PAGE>
Liquidity and Capital Resources (continued)
- --------------------------------
United Properties currently expects to spend $25.9 million over the next
five years for capital expenditures on its existing real estate portfolio.
Expenditures are projected to be $8.3 million and $6.9 million in 1999 and 2000,
respectively. Funding for these expenditures is anticipated to come from sales
of properties, operations of existing commercial properties and golf courses,
and proceeds of new financings.
At September 30, 1999, United Water had cash and cash equivalents of $4.2
million (excluding restricted cash) and unused short-term bank lines of credit
of $199.1 million. Management expects that unused credit lines currently
available and cash flows from operations will be sufficient to meet anticipated
future operational needs.
<PAGE>
Year 2000 Readiness Status
- --------------------------
Overview
- --------
United Water is implementing a Year 2000 (Y2K) program designed to
mitigate, to the fullest extent possible, the impact of the century date change
on the Company's computer systems and automated processes, including those that
affect the delivery of water and wastewater services. The Company initiated
this program in 1994 with the Information Technology Strategic Plan (the ITSP),
which addressed all areas of technology and automation within United Water. A
key component of that plan was the identification of the Y2K problem and the
need to address Y2K issues affecting all aspects of the Company's operations.
With respect to each project or initiative undertaken at United Water since 1994
that has Y2K ramifications, the Company has addressed "Y2K readiness" as a
critical component of that project.
United Water defines Y2K readiness as the ability of the Company to advance
into the next century with minimal effect on the Company's critical computer
systems and automated processes that control the delivery of water and
wastewater services, and affect the Company's operations, liquidity or financial
condition.
The Y2K program addresses internal systems and processes consisting of
application software, hardware, databases, networks, personal computers, data
processing equipment and operating systems (collectively, information technology
or IT systems) and embedded technology or microprocessors in non-computer
equipment (collectively, non-IT systems). The Y2K program also addresses the
assessment and monitoring of the Y2K compliance status of third parties upon
which the Company relies. This program encompasses the following five phases:
1) survey and inventory, 2) assessment of risk, including the identification and
survey of critical vendors and service providers, 3) remediation of non-
compliant systems, including the replacement of aging legacy applications, 4)
testing and validation of the remediation efforts, and 5) contingency planning
and related testing.
In addition, management believes that United Water has complied with the
various Y2K requirements of the regulatory agencies that supervise its
activities. Such compliance includes responding to surveys and questionnaires,
filing status reports, participating in task forces and sub-committees for the
purpose of meeting Y2K readiness targets, and contingency planning efforts.
The Company's State of Readiness
- --------------------------------
Consistent with the five phases of the Y2K program, the primary element in
United Water's Y2K readiness strategy has been to replace aging IT and non-IT
systems, where necessary. This strategy evolved from ITSP which, independent of
the Y2K program, identified the need to replace technical infrastructure,
including IT and non-IT systems, in order to position United Water and its
operating affiliates for a smooth transition into the 21st century. In addition
to replacement activities, the Company has also undertaken remediation efforts
to upgrade, repair and improve existing IT and non-IT systems where appropriate.
These efforts are intended to result in the replacement and upgrading of IT and
non-IT systems critical to the operation of the Company, including the provision
of water and wastewater services, financial applications, customer information
systems and operational systems, such as the Supervisory Control and Data
Acquisition System (SCADA), which monitors and controls industrial processes.
<PAGE>
Year 2000 Readiness Status (continued)
- ---------------------------
In addition, United Water is currently refining contingency plans and
related tests to further mitigate the risk of service interruptions at each of
its locations. These contingency plans have been developed, and the initial
testing of each plan has been completed. The major focus of the contingency
plans is to address the possibility of automation failure of critical vendors
and service providers so that the Company can sustain its operational systems in
the event of any such failure.
As of September 30, 1999, the status of the Company's progress toward
completion of the five phases of the Y2K program was as follows: 1) survey and
inventory: IT 100%, non-IT 100%; 2) assessment of risk: IT 100%, non-IT 100%; 3)
remediation: IT 98%, non-IT 94%; 4) testing: IT 95%, non-IT 94%; and 5)
contingency planning: IT 100%, non-IT 100%.
In addition to its own Y2K program, the Company has been involved with Y2K
compliance efforts undertaken by one of its equity investments, United Water
Services (UWS).
UWS, which is engaged in providing contract operations to U.S. cities, is
implementing a Y2K program following the guidelines established by the Company.
This program has been applied to all UWS's project sites and has resulted in the
production of inventories, risk assessments, testing methodologies and
contingency plans for Y2K compliance. All systems are expected to be finalized
and tested by the end of November 1999.
Where UWS has assumed responsibility for part or all of the Y2K compliance
efforts of its operating affiliates in the various cities, it is actively
coordinating Y2K corrective measures with the cities and their Y2K consultants
or representatives, where applicable, to mitigate business interruption
exposures associated with the Y2K problem.
United Water is maintaining close contact with UWS and other entities in
which it has equity interests to ascertain that appropriate and prudent action
is being taken in order to achieve Y2K compliance.
Relationships with Third Parties
- --------------------------------
United Water has identified the following third party relationships to be
addressed as part of the Y2K program: regulatory agencies, critical vendors and
service providers.
United Water is in continuous communication with appropriate regulatory
agencies regarding the Y2K issue. All requests for information and status
reports, as well as other specific regulatory requirements are handled on a
priority basis. Management believes that the Company is in compliance with all
regulatory matters relating to Y2K.
The Company has contacted its critical vendors and service providers to
determine the degree of their Y2K readiness. The responses received to date
indicate that those vendors and service providers either are or will be Y2K
compliant. The status of those vendors and service providers who have either
not responded or are not yet compliant is being tracked closely. The electric
power and telecommunications industries have been identified as the most
critical service providers for the water industry. In the localities in which
United Water operates, it is closely monitoring the progress of the local
electric power and telecommunications companies and will continue to scrutinize
the progress of these providers. The Company is actively monitoring the Y2K
compliance status of its critical vendors
<PAGE>
Year 2000 Readiness Status (continued)
- --------------------------
and service providers and has received approximately 75% of responses. The
Company intends to continue monitoring these critical vendors and service
providers through its transition into the 21st century.
Costs
- -----
United Water's Y2K readiness evolved from the strategic initiatives of the
ITSP which was budgeted as part of the Company's ongoing capital expenditures
since 1994. As a result, United Water has been able to keep to a minimum
expenses related to Y2K compliance outside of the ITSP budget. The Company's
principal technology costs to date have been associated with the planned
replacement of IT and non-IT systems, which has not been accelerated due to the
Y2K issue.
United Water estimates its costs to date related to Y2K compliance efforts
that fall outside the ITSP budget are approximately $.9 million. Additional
non-ITSP budgeted costs expected to be incurred over the remainder of the
program are estimated to be $.1 million. These costs include SCADA upgrade as
required, internal employee time, as well as other miscellaneous costs.
Risks
- -----
The most reasonably likely worst case scenarios due to Y2K non-compliance
issues would be fluctuations in water pressure, aesthetic water quality and
other temporary service interruptions. This would be attributable to third party
failures including electric power and telecommunications outages.
In addition, a Y2K failure from any of the Company's large equity
investments including its investment in the Northumbrian Partnership, could have
a detrimental effect on the Company's results of operations.
Contingency Plans
- -----------------
The major focus in contingency planning for the remainder of the year is to
continue to test and revise as necessary the contingency plans in place at each
operating company. In addition, United Water is assembling a Business
Continuity Management Team at the corporate level responsible for directing and
implementing corporate-wide Y2K disaster recovery plans. This group is also
responsible for declaring a corporate-wide disaster and providing direction to
all United Water business units during any recovery process that may be
necessary. This team will be called into action under the authority of the
executive staff which has the responsibility for approving actions regarding
Business Continuity Planning at United Water.
The focus of contingency planning at United Water continues to be on
providing uninterrupted service to our customers.
The estimates and conclusions included in this Y2K update are based on
management's best estimates of future events. The risks involved in completing
Y2K compliance include the availability of resources, unanticipated problems
identified in the ongoing compliance review and the ability of outside vendors
and service providers to be Y2K compliant.
<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 1998, the Company's regulated utilities received fourteen rate
settlement awards with an aggregate annual revenue increase of $8.7 million. An
estimated $4.7 million of this amount was reflected in 1998's revenues while the
remaining $4 million of carryover impact of the rate awards received in 1998 is
expected to increase revenues in 1999.
At the end of September 1999, there were three rate cases pending in which
the Company has requested an aggregate annual rate increase of $3.8 million. The
most significant rate case pending was filed by United Water New Rochelle. In
July 1999, United Water New Rochelle applied for a multi-year rate increase.
The filing requested an increase in revenues of $3.3 million, or 17.2% for the
12 months ending May 31, 2001, an additional increase of $3.7 million, or 16.4%
for the 12 months ending May 31, 2002 and a final increase of $4.1 million, or
15.6% for the 12 months ending May 31, 2003. These increases were requested
primarily to fund capital investments.
On March 11, 1998, United Water Delaware filed a request to increase
revenues by $4.1 million, or 24.8%. On May 11, 1998, interim rates of $2.4
million were placed in effect, subject to refund. A final decision was received
in June 1999 for $2 million. The difference of $.4 million has been refunded to
customers. The Company is fully reserved for these refunds.
On October 26, 1996, United Water Delaware placed $2.3 million in increased
revenues in effect, subject to refund. On July 15, 1997, the Delaware Public
Utility Commission granted the Company a permanent rate increase of $1.6
million. On July 16, 1997, the Company filed an appeal and application for a
stay of the Commission's Order. On July 29, 1997, the Delaware Superior Court
granted a stay of the Commission decision pending the appeal. On March 31,
1998, the Delaware Superior Court decided in favor of the Commission. The
Company appealed this decision to the Supreme Court of Delaware and on February
11, 1999, the Supreme Court reversed the Commission's decision which denied the
$.7 million annual revenue increase, subject to refund and remanded the matter
to the Commission. In June 1999, the Commission approved a stipulation
permitting the Company to retain all revenues collected without refund and
permitting the rates currently in effect to become permanent.
Generally, the rate awards the Company's operating utilities actually
receive are less than the amounts requested, primarily due to differing
positions of the parties involved and/or updated information provided during the
proceedings. The Company expects to file additional rate cases in 1999 but does
not expect that those rate awards, if received in 1999, will have a significant
impact on revenues in 1999.
<PAGE>
Results of Operations - Three Months Ended September 30, 1999
- -------------------------------------------------------------
Overview
United Water's net income applicable to common stock for the third quarter
of 1999 decreased to $11.4 million from $19.5 million in the comparable period
in 1998. Net income per common share for the third quarter of 1999 and 1998 was
29 cents and 52 cents, respectively. Earnings for 1999 were impacted by the
strategic initiatives announced during the period, which resulted in a total
after-tax charge of $6.4 million, or 17 cents.
Operating Revenues
The $1.4 million decrease in revenues from the same period in 1998 was
attributable to the following factors:
<TABLE>
<CAPTION>
(thousands of dollars) Increase (Decrease)
----------------------------------------------
Utilities:
<S> <C> <C>
Rate awards $ 1,197 1.1%
Consumption (1,559) (1.4%)
Growth 726 0.7%
Real estate (1,356) (1.3%)
Other operations (382) (0.4%)
----------------------------------------------
($ 1,374) (1.3%)
----------------------------------------------
</TABLE>
The 1.1% increase in revenues from rate awards in the third quarter of 1999
includes the impact of 1998 and current year increases for several of the
Company's operating utilities. Lower consumption due to mandatory water
restrictions from a drought in northeast service areas contributed to a decrease
in revenues of $1.6 million in 1999. The increase in revenues due to growth is
primarily attributable to the acquisition of South County Water Company in Idaho
in the first quarter of 1999, as well as increased customers at the Florida
operating utility. The 1.3% decrease in real estate revenues was due to no
property sales in 1999 compared with nine property sales for the same period in
1998. Other operations decreased 0.4% mainly due to the timing of recording
incentive revenues from the public-private partnership with Jersey City.
Operating Expenses
The increase in operating expenses from the same period in 1998 is due to
the following:
<TABLE>
<CAPTION>
(thousands of dollars) Increase (Decrease)
-----------------------------------------------------------
<S> <C> <C>
Operation and maintenance $12,029 26.9%
Depreciation and amortization 1,711 17.4%
General taxes (70) (0.5%)
-----------------------------------------------------------
</TABLE>
The $12 million increase in operation and maintenance expenses was due
primarily to a $9.9 million charge resulting from the strategic initiatives
recorded during the third quarter of 1999. In addition, expenses increased due
to higher transmission and distribution expenses as well as outside service
costs. These were partially offset by lower land sale costs as a result of
fewer property sales in 1999.
<PAGE>
Results of Operations - Three Months Ended September 30, 1999 (continued)
- -------------------------------------------------------------
The $1.7 million increase in depreciation and amortization was primarily
attributable to an increase in depreciation rates as a result of regulatory
changes as well as the placement in service of a new customer information system
at the end of 1998.
Equity Earnings of Affiliates
The $1.2 million increase in equity earnings of affiliates is due to $.4
million increases in earnings from the Northumbrian Partnership, as well as from
the Company's other equity investment, Dundee Water Power and Land, which
resulted from a one-time condemnation settlement recorded in the third quarter
of 1998. The Company also experienced a $.4 million increase in earnings from
United Water Services.
Income Taxes
The effective income tax rates on income before preferred and preference
stock dividends were 28.5% and 33.8% in the third quarter of 1999 and 1998,
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 from the Northumbrian Partnership
to be permanently reinvested and has not provided deferred taxes on these
earnings.
Earnings per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings per Share"(EPS), which specifies the computation,
presentation and disclosure requirements for earnings per share for entities
with publicly held common stock or potential common stock. This statement
defines two earnings per share calculations, basic and diluted. The following
table is a reconciliation of the numerator and denominator under each method:
<TABLE>
<CAPTION>
(thousands, except per share data)
For the three months ended September 30, 1999 1998
----------------------------------------------------------
<S> <C> <C>
Basic EPS:
Net income applicable to common stock $11,432 $19,500
Average common shares outstanding 38,808 37,268
Net income per common share $ .29 $ .52
Assuming dilution:
Net income applicable to common stock $11,432 $19,500
Convertible preference stock 378 423
------- -------
$11,810 $19,923
Average common shares outstanding 38,808 37,268
Stock options 406 143
Convertible preference stock 1,631 1,916
------- -------
40,845 39,327
Net income per common share $ .29 $ .51
---------------------------------------------------------
</TABLE>
<PAGE>
Results of Operations - Nine Months Ended September 30, 1999
- ------------------------------------------------------------
Overview
United Water's net income applicable to common stock for the nine months
ended September 30, 1999 decreased to $27.8 million from $33.7 million in the
comparable period in 1998. Net income per common share was 72 cents as compared
to 91 cents for the same period last year. Results for 1999 included an after-
tax charge of 17 cents per common share from the strategic initiatives partially
offset by the Harrison Plaza sale that contributed nine cents per common share.
Earnings for 1998 included an eight cent per share contribution from the effect
on deferred taxes of a decrease in the UK corporate tax rate. Results for 1999
and 1998 included 18 cents and 19 cents, respectively for corporate charges
relating to interest and preferred and preference dividends.
Operating Revenues
The $8 million increase in revenues from the same period in 1998 was
attributable to the following factors:
<TABLE>
<CAPTION>
(thousands of dollars) Increase (Decrease)
-------------------------------------------
<S> <C> <C>
Utilities:
Rate awards $ 6,000 2.2%
Consumption 4,470 1.7%
Growth 1,875 0.7%
Real estate (3,475) (1.3%)
Other operations (848) (0.3%)
-------------------------------------------
$ 8,022 3.0%
-------------------------------------------
</TABLE>
The 2.2% increase in revenues from rate awards includes the impact of 1998
and current year increases for several of the Company's operating utilities.
Higher consumption due to favorable weather conditions in the majority of
service areas resulted in an increase in revenues of $4.5 million in 1999,
despite the impact of mandatory water restrictions. The increase in revenues
due to growth is primarily attributable to the acquisition of South County Water
Company in Idaho in the first quarter of 1999, as well as increased customers at
the Florida operating utility. The 1.3% decrease in real estate revenues was
due to one property sale in 1999 compared with twenty three property sales for
the same period in 1998, as well as lower rental revenue. Other operations
decreased 0.3% mainly due to the timing of recording incentive revenues from the
public-private partnership with Jersey City.
Operating Expenses
The increase in operating expenses from the same period in 1998 is due to
the following:
<TABLE>
<CAPTION>
(thousands of dollars) Increase
-------------------------------------------------
<S> <C> <C>
Operation and maintenance $16,624 13.3%
Depreciation and amortization 4,388 15.2%
General taxes 987 2.4%
-------------------------------------------------
</TABLE>
<PAGE>
Results of Operations - Nine Months Ended September 30, 1999 (continued)
- ------------------------------------------------------------
The $16.6 million increase in operation and maintenance expenses was due
primarily to a $9.9 million charge resulting from the strategic initiatives
recorded during the third quarter of 1999. In addition, expenses increased due
to higher power and outside service costs, as well as increased maintenance
costs resulting from a greater number of main breaks in the Northeast service
area. The Company also experienced higher operating expenses from the public-
private partnership with Jersey City. These were partially offset by lower land
sale costs as a result of fewer property sales in 1999.
The $4.4 million increase in depreciation and amortization was primarily
attributable to an increase in depreciation rates as a result of regulatory
changes as well as the placement in service of a new customer information system
at the end of 1998.
General taxes increased $1 million primarily due to higher real estate,
gross receipts and franchise taxes in utility operations.
Equity Earnings of Affiliates
The slight increase in equity earnings of affiliates is due to a $1.2
million decrease in earnings from the Northumbrian Partnership, resulting
primarily from the effect on deferred taxes of a decrease in the UK corporate
tax rate, during the second quarter of 1998. This was partially offset by a $1
million increase in earnings from United Water Services, as well as an increase
in earnings from the Company's other equity investment, Dundee Water Power and
Land, which resulted from a one-time condemnation settlement recorded in the
third quarter of 1998.
Income Taxes
The effective income tax rates on income before preferred and preference
stock dividends were 29.4% and 29.2% in the first nine months of 1999 and 1998,
respectively. The slight increase in the effective rate is primarily
attributable to the tax treatment of the Harrison Plaza sale as well as earnings
from the Northumbrian Partnership. The Company considers the undistributed
earnings from the Northumbrian Partnership to be permanently reinvested and has
not provided deferred taxes on these earnings.
Earnings per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share"(EPS),
which specifies the computation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock or potential
common stock. This statement defines two earnings per share calculations, basic
and diluted. The following table is a reconciliation of the numerator and
denominator under each method:
<PAGE>
Results of Operations - Nine Months Ended September 30, 1999 (continued)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
(thousands, except per share data)
For the nine months ended September 30, 1999 1998
----------------------------------------------------------
<S> <C> <C>
Basic EPS:
Net income applicable to common stock $27,754 $33,676
Average common shares outstanding 38,420 36,848
Net income per common share $ .72 $ .91
Assuming dilution:
Net income applicable to common stock $27,754 $33,676
Convertible preference stock 1,199 1,387
------- -------
$28,953 $35,063
Average common shares outstanding 38,420 36,848
Stock options 258 148
Convertible preference stock 1,744 2,027
------- -------
40,422 39,023
Net income per common share $ .72 $ .90
----------------------------------------------------------
</TABLE>
<PAGE>
Results of Operations - Nine Months Ended September 30, 1999 (continued)
- ------------------------------------------------------------
Segment Information
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which requires that business segment
financial information be reported in the financial statements utilizing the
management approach. Those segments include utility investments, real estate
and non-regulated business.
United Water's utility investments include its regulated, domestic
subsidiaries, United Water New Jersey, United Water New York, and the utility
subsidiaries of United Waterworks and United Water Mid-Atlantic. These regulated
utilities provide water and wastewater services to the public at large in areas
where they possess franchises or other rights to provide such services. The
utility subsidiaries are subject to rate regulation, generally by the regulatory
authorities in the states in which they operate. In addition, the Company holds
a 50% investment in the Northumbrian Partnership, which acquired a 20% interest
in Northumbrian Water Group, a major investor-owned water and wastewater company
in the United Kingdom.
United Properties Group is a non-regulated business engaged in real estate
investment and development activities, including commercial office and retail
properties, residential and commercial land development and sales, golf course
operations and consulting services. United Properties Group owns a portfolio of
real estate located in New Jersey, New York, Delaware, Idaho, Florida and
Maryland.
The Company's non-regulated sector consists primarily of a 50% investment in
United Water Services, a 50/50 joint venture with Suez Lyonnaise des Eaux, which
provides contract operations and maintenance services for water and wastewater
facilities. In addition, United Water entered into public-private partnerships
with the cities of Jersey City and Hoboken, New Jersey. Under these
arrangements, the municipalities retain ownership of their systems while the
Company operates and maintains them. Parent and elimination companies are also
included in this segment.
<TABLE>
<CAPTION>
Parent, Non-Regulated
Utility Real Water Services and
(In millions) Investments Estate Eliminations Consolidated
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 259,991 $ 8,424 $ 10,016 $ 278,431
Net income/(loss) 37,820 3,320 (13,386) 27,754
Identifiable assets 1,670,833 98,102 49,737 1,818,672
- --------------------------------------------------------------------------------
</TABLE>
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" effective for all fiscal years beginning after June 15,
2000. SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income. Due to
its limited use of derivative instruments, management believes the adoption of
SFAS No. 133 will not have a significant effect on the Company's financial
position or results of operations.
<PAGE>
Results of Operations - Nine Months Ended September 30, 1999 (continued)
- ------------------------------------------------------------
Effects of Inflation
Operating income from utility operations is normally not materially
affected by inflation because cost increases generally lead to proportionate
increases in revenues allowed through the regulatory process. However, there is
a lag in the recovery of higher expenses through the regulatory process;
therefore, high inflation could have a detrimental effect on the Company until
sufficient rate increases are received. Conversely, lower inflation and lower
interest rates tend to result in reductions in the rates of return allowed by
the utility commissions, as has happened over the last several years.
Prospective Information
In addition to the historical information contained herein, this report
contains a number of "forward-looking statements," within the meaning of the
Securities Exchange Act of 1934. Such statements address future events and
conditions concerning the adequacy of water supply and utility plant, capital
expenditures, earnings on assets, resolution and impact of litigation, liquidity
and capital resources and accounting matters. Actual results in each case could
differ materially from those projected in such statements, by reason of factors
including, without limitation, general economic conditions, competition, actions
by regulators and other governmental authorities, and technological developments
affecting the Company's operations, markets, services and prices, and other
factors discussed in the Company's filings with the Securities and Exchange
Commission, including this report.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ---------------------------
United Water Toms River, a wholly-owned subsidiary of United Waterworks,
has been approached by counsel for several families in its franchise area to
notify them that counsel is considering filing a class action lawsuit naming
United Water Toms River as one of at least three defendants and alleging
personal injuries sustained as a result of contaminated water being delivered to
the potential plaintiffs. Counsel has reviewed testing data accumulated by the
New Jersey Department of Environmental Protection and United Water Toms River
which show that United Water Toms River has delivered water to its customers in
complete conformance with all applicable federal and state water quality
standards. Suit has not been filed. An initial agreement tolling the statute
of limitations for at least eighteen months was signed with the potential
plaintiffs and took effect February 1998. A second agreement, extending the
tolling period for an additional eighteen months, was executed in July 1999.
United Water Toms River has also entered into a joint defense agreement with
other potential defendants, Ciba-Geigy and Union Carbide. This agreement will
allow the potential defendants to work together until all disputes with the
potential plaintiffs have been resolved.
On September 22, 1998, Ramapo Land Co., Inc. commenced a lawsuit against
United Water New York (UWNY), a wholly-owned subsidiary of the Company, in the
Supreme Court of the State of New York, Rockland County, seeking specific
performance of certain provisions of a 1990 Water Release Agreement between UWNY
and Ramapo Land. The Water Release Agreement allows UWNY to release water from
Cranberry and Potake Lakes to augment flows in the Ramapo River. The lawsuit
alleges that UWNY has failed to meet certain maintenance and repair obligations
with respect to Cranberry and Potake dams and that water releases have exceeded
permitted levels. Management is vigorously defending the litigation and is
actively pursuing settlement. If the lawsuit is not resolved successfully,
UWNY's water releases from Cranberry and Potake Lakes could be affected, which
in turn could impact UWNY's operation of the Ramapo Valley Well Field during
periods when the Ramapo River is at low flow. Management believes that the
resolution of this matter will not have a material adverse effect upon the
financial position or results of operations of the Company.
On January 22, 1998, the Pierson Lakes Homeowners Association, Inc. and
various individuals (Plaintiffs) commenced a lawsuit against UWNY and Ramapo
Land Co., Inc. in the Supreme Court of the State of New York, Rockland County.
This litigation is related to the above-referenced lawsuit by Ramapo Land Co.,
Inc. against UWNY in connection with maintenance and repair obligations and
water releases from Cranberry and Potake Lakes. The Pierson Lakes lawsuit seeks
declaratory relief, injunctive relief and money damages against UWNY and Ramapo
Land Co. in amounts in excess of $25 million. In addition to claims relating to
alleged failure to maintain the dams and spillways, Plaintiffs claim that the
water releases have damaged the recreational and aesthetic value of the lakes,
as well as their docks, boats and other personal property. Management is
vigorously defending this action and is also pursuing settlement negotiations
with the various parties. Management believes that the resolution of this
matter will not have a material adverse effect upon the financial position or
results of operations of the Company.
<PAGE>
Legal Proceedings (continued)
- -----------------
Two lawsuits were recently filed contesting the pending merger by and among
Lyonnaise American Holding, Inc. ("LAH"), Suez Lyonnaise des Eaux ("SLDE") and
United Water. These suits are (1) Herbert Behrens vs. Donald L. Correll et al.,
filed on August 25, 1999 in the Superior Court of New Jersey Chancery Division,
Bergen County and (2) Lawrence Steinberg vs. United Water et al., filed on
August 24, 1999 in the Superior Court of New Jersey Chancery Division, Bergen
County.
These suits allege, among other things, breach of fiduciary duty by United
Water and its directors because the merger was purportedly agreed to without an
appropriate evaluation of UWR's worth to an acquisition candidate. Both suits
seek, in addition to other relief, an injunction preventing SLDE and LAH from
acquiring UWR for the consideration stated in the merger agreement.
UWR believes that these suits are entirely without merit and intends to
vigorously defend against them.
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>
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 9, 1999 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 FINANCIAL 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,244,326
<OTHER-PROPERTY-AND-INVEST> 223,050
<TOTAL-CURRENT-ASSETS> 126,671
<TOTAL-DEFERRED-CHARGES> 163,492
<OTHER-ASSETS> 61,133
<TOTAL-ASSETS> 1,818,672
<COMMON> 413,001
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 62,930
<TOTAL-COMMON-STOCKHOLDERS-EQ> 475,931
48,071
9,000
<LONG-TERM-DEBT-NET> 663,791
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 105,700
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 21,321
573
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 494,285
<TOT-CAPITALIZATION-AND-LIAB> 1,818,672
<GROSS-OPERATING-REVENUE> 278,431
<INCOME-TAX-EXPENSE> 13,223
<OTHER-OPERATING-EXPENSES> 216,935
<TOTAL-OPERATING-EXPENSES> 230,158
<OPERATING-INCOME-LOSS> 48,273
<OTHER-INCOME-NET> 18,034
<INCOME-BEFORE-INTEREST-EXPEN> 66,307
<TOTAL-INTEREST-EXPENSE> 36,234
<NET-INCOME> 30,073
2,319
<EARNINGS-AVAILABLE-FOR-COMM> 27,754
<COMMON-STOCK-DIVIDENDS> 27,675
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 38,237
<EPS-BASIC> 0.72
<EPS-DILUTED> 0.72
</TABLE>
