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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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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 _____________ to ______________
Commission File No. 1-8586
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UNITED WATER RESOURCES INC.
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(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2441477
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(State of incorporation) (I.R.S. Employer
Identification No.)
200 OLD HOOK ROAD, HARRINGTON PARK, N.J. 07640
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 201-784-9434
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Securities registered pursuant to Section 12 (b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock (No par value) New York Stock Exchange
Outstanding at February 28, 1999 - 37,973,793
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Securities registered pursuant to Section 12 (g) of the Act: None
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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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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
At February 28, 1999, the registrant's Common Stock, no par value, held by
non-affiliates had an aggregate market value of $ 510,725,397. See Item 13.
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The following document is incorporated by reference in this Form 10-K:
United Water Resources Inc. Proxy Statement to be filed in
connection with the Registrant's Annual Meeting to be held
on May 10, 1999 as to Part III, items 10, 11, 12, and 13.
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PART I
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ITEM 1. BUSINESS
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(A) GENERAL DEVELOPMENT OF BUSINESS
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United Water Resources Inc. (United Water, or the Company) is a New Jersey
corporation that was incorporated on February 25, 1983 and has its principal
office at 200 Old Hook Road, Harrington Park, New Jersey 07640. On April 22,
1994, United Water completed a merger (the Merger) with GWC Corporation (GWC),
in which United Water was the surviving corporation. GWC's principal assets
included 100% of the stock of General Waterworks Corporation (now known as
United Waterworks Inc.), which currently owns regulated water and wastewater
utilities operating in 13 states. The Merger was accounted for under the
purchase method of accounting.
United Water's principal utility subsidiaries, United Water New Jersey
Inc., United Water New York Inc. and the utility subsidiaries of United
Waterworks, provide water and wastewater services to approximately two million
people in 13 states, with more than half of the Company's utility operations
located in northeastern New Jersey and southeastern New York. United Water New
Jersey was incorporated by an act of the New Jersey Legislature in 1869. United
Water New York was incorporated under the laws of New York in 1893 and is
wholly-owned by United Water New Jersey. United Waterworks was incorporated
under the laws of Delaware in 1942. Other significant wholly-owned subsidiaries
of United Water include: United Properties Group (United Properties), which is
engaged in real estate activities, including commercial rentals, land
development and sales, golf course operations and consulting services; United
Water UK Limited, an equal partner with Lyonnaise Europe in the Northumbrian
Partnership (the Partnership), which has acquired a 20% interest in Northumbrian
Water Group plc (NWG), a major investor-owned water and wastewater company in
the United Kingdom; United Water Mid-Atlantic, whose subsidiaries own and
operate water and wastewater systems; United Water
________________________________________________________________________________
NOTE: 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, among other things, 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, technological developments and Year 2000 issues 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.
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USA Inc. (United Water USA) which owns a 50% stake in United Water Services LLC
(United Water Services-described below); and United Water Canada Inc. (United
Water Canada) and United Water Mexico Inc. (United Water Mexico) which own a
33.3% and 20.5% interest in United Water Services Canada (UWS Canada) and United
Water Services Mexico (UWS Mexico), respectively. In addition, the Company has
entered into "public-private partnerships" with the cities of Hoboken and Jersey
City, New Jersey, whereby the municipalities retain ownership of their systems
while the Company operates and maintains them.
On July 28, 1997, United Water Services, a 50/50 joint venture between
United Water and Suez Lyonnaise des Eaux acquired the remaining 50% stake in JMM
Operational Services.
United Water Services provides contract operations and maintenance services
for water and wastewater facilities and is pursuing additional contract
operations. As a result, United Water Services was awarded several contracts.
The largest awards include a ten-year contract to operate the wastewater systems
in Milwaukee, Wisconsin, and a 20-year contract to operate the water system in
Atlanta, Georgia, with a minority partner. United Water Services also operates a
meter installation subsidiary, United Metering, which it purchased from United
Water in December 1997 for book value of $6.2 million.
In July 1997, the Company's subsidiaries, United Water Canada and United
Water Mexico acquired a 30% and a 20% interest in UWS Canada and UWS Mexico,
respectively. In December 1998, United Water purchased additional interests and
now has a 33.3% and a 20.5% interest in UWS Canada and UWS Mexico, respectively.
At December 31, 1998 and 1997, United Water had equity investments,
relating to contract services, of approximately $19.8 million and $20.2 million,
respectively, including investments in Canada and Mexico. This amount is
included in equity investments in the accompanying consolidated balance sheet.
United Water's share of earnings in these investments is included in equity
earnings of affiliates in the accompanying statement of consolidated income. See
Item 8, Note 2 to the consolidated financial statements for further details.
On June 28, 1996, United Water UK Limited and Lyonnaise Europe, a wholly-
owned subsidiary of Suez Lyonnaise des Eaux, formed the Partnership, which has
acquired a 20% interest in NWG. United Water's initial $62 million investment in
the Partnership was made through its wholly-owned subsidiary in the United
Kingdom, United Water UK Limited. Investment in the Partnership was $96.3
million and $78.7 million at December 31, 1998 and 1997, respectively, and is
included in equity investments in the consolidated balance sheet. United Water's
share of the Partnership's earnings, which totaled $17.1 million and $13.6
million (excluding the windfall profits tax) in 1998 and 1997, respectively, is
included in equity
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earnings of affiliates in the accompanying statement of consolidated income.
During 1997, the United Kingdom's new Labor Government imposed a one-time
"windfall profits" tax on privatized utilities. The levying of this one-time tax
negatively impacted the Company's earnings from its investment in NWG by $13.1
million, which was partially offset by a reduction in deferred taxes of $2.8
million, which resulted from a change in the UK corporate income tax rate from
33% to 31%. The result was a net loss of $10.3 million. The imposition of this
tax had been factored into the Company's financial analysis at the time of its
investment in NWG and was considered in determining the purchase price. The tax
did not have an effect on United Water's cash flow or ability to pay dividends,
nor did it affect the long-term benefit the Company expected to derive from its
investment in NWG. See Item 8, Note 2 to the consolidated financial statements
for further details.
In December 1996, the Company announced its intention to dispose of its
environmental testing business, Laboratory Resources, a wholly-owned subsidiary
of the Company, closing its operations in Teterboro, New Jersey. Subsequently,
in January 1997, it sold its laboratory facility in Brooklyn, Connecticut. The
Company accounted for this disposal in accordance with the provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions". The
subsidiary had been operating in a very competitive environment over a prolonged
period of time and had not contributed to the Company's earnings, with a net
loss of $1.5 million in 1996. The operating results of Laboratory Resources
prior to the date of discontinuance are shown separately in the accompanying
statement of consolidated income and all of the financial statements of prior
periods have been restated to reflect the discontinuance of Laboratory
Resources' operations. See Item 8, Note 14 to the consolidated financial
statements for further details.
In April 1995, the city of Rio Rancho, New Mexico (the City) and the
Company's utility subsidiary, which provided water and wastewater services to
customers in Rio Rancho, entered into an original stipulation in settlement of a
condemnation action and on June 30, 1995, the City assumed possession of the
operations of the utility subsidiary. The original stipulation was contested by
various parties, but the City retained possession of the utility's operations.
On March 29, 1996, the Company fully settled the condemnation proceeding
with the City. Under the terms of the agreement, the Company accepted $67
million for the water and wastewater systems of its New Mexico operations. This
transaction resulted in an after-tax gain of $4.3 million which is included in
the Company's 1996 earnings. See Item 8, Note 3 to the consolidated financial
statements for further details.
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(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
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See Item 1 (c) and Note 16 to the consolidated financial statements in Item
8 below for segment information.
(C) NARRATIVE DESCRIPTION OF BUSINESS
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As a holding company, United Water does not conduct any business
operations, except through its subsidiaries.
UTILITY INVESTMENTS
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The Company's principal business is providing water and wastewater services
to the public at large in areas where its regulated utility subsidiaries possess
franchises or other rights to provide such services. Its utility subsidiaries
are subject to rate regulation, generally by the regulatory authorities in the
states in which they operate.
United Water New Jersey supplies water service to over 179,000 customers in
60 municipalities in the northeastern part of New Jersey, serving most of Bergen
County and the northern part of Hudson County. The total population served is
about 750,000 persons. United Water New Jersey is subject to rate regulation by
the New Jersey Board of Public Utilities (BPU). United Water New Jersey's
principal source of water supply is the Hackensack River, with a watershed of
113 square miles, and is supplemented by water diversions from additional
streams and rivers, by ground water supplies drawn from wells and by the
purchase of water from contiguous water systems. United Water New Jersey also
obtains stream flow benefits from its wholly-owned subsidiary, United Water New
York, which owns and operates an impounding reservoir, Lake DeForest, on the
Hackensack River in Rockland County, New York, and has available additional
water supply from the Wanaque South Project. The Wanaque South Project, which
was completed in 1987, is a joint undertaking of United Water New Jersey and the
North Jersey District Water Supply Commission. United Water New Jersey has a 50%
interest in the utility plant of the Wanaque South Project and is responsible
for its proportionate share of operating expenses.
United Water New York supplies water service to over 64,000 customers in
Rockland County, New York, and is subject to rate regulation by the New York
Public Service Commission (PSC). The total population served is approximately
250,000 persons. United Water New York's principal source of supply is derived
from wells and surface supplies, including the Lake DeForest reservoir.
United Waterworks is a holding company that provides water and wastewater
services to a total of approximately 360,000 customers in 13 states through its
regulated water and wastewater utility subsidiaries. The utility subsidiaries of
United Waterworks serve a total population of about 1,000,000
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persons. Its water utilities obtain water primarily from wells and surface
supplies (lakes, ponds, reservoirs and streams), and in a few cases purchase
water wholesale from adjoining water systems, generally owned by municipalities.
United Waterworks' major water utility subsidiaries are generally not dependent
upon water purchased from others, except that United Water New Rochelle, a
wholly-owned subsidiary, purchases all of its water from an aqueduct system that
is owned by and serves the City of New York. United Waterworks believes that its
water utilities have adequate supplies of water for their present requirements,
but anticipates making future capital expenditures to expand their sources of
water supply, primarily through development of additional wells and expansion of
other facilities, to provide for projected increases in future demand because of
customer growth.
Subsidiaries of United Water Mid-Atlantic own and operate several small
water and wastewater utility systems that provide water supply, wastewater
collection and wastewater transmission services to approximately 6,300 customers
primarily in Plainsboro, Vernon Township and Mt. Arlington, New Jersey. United
Water Mid-Atlantic's subsidiaries are subject to regulation by the BPU.
The Company's water business is seasonal, as sales tend to be higher during
warm, dry periods. The Company's water utilities operate in some jurisdictions
in which water conservation regulations have from time to time been imposed
during periods of drought. To date, such regulations are not having a material
impact on the Company's results of operations. The Company's water utilities
have not experienced any long-term material disruption of service because of
contamination of their water supplies; however, the Company cannot predict what
effect such events, should they occur, would have on its business.
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. The Company
accounts for this investment under the equity method of accounting.
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The following table sets forth information concerning United Water's water
and wastewater utility operations, particularly the operations of the nine
larger utilities which in 1998 accounted for 83.9% of United Water's utility
customers, 91.7% of United Water's utility operating revenues and 91.5% of
United Water's net investment in utility plant.
<TABLE>
<CAPTION>
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# of Customers at 1998
Major Utility Operations Dec. 31, 1998 Revenues
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(in thousands)
<S> <C> <C>
United Water New Jersey 179,000 $125,507
United Water New York 64,000 43,108
United Waterworks Subsidiaries:
United Water Florida 53,516 27,826
United Water Idaho 59,310 22,662
United Water Pennsylvania 47,437 21,361
United Water New Rochelle 30,243 18,552
United Water Delaware 32,784 17,195
United Water Toms River 45,614 14,563
United Water Arkansas 19,299 7,572
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Subtotal 531,203 298,346
Other utility operations 101,680 27,129
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Total utility operations 632,883 $325,475
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</TABLE>
The Company's water utility subsidiaries chemically and physically treat,
filter or otherwise improve the quality of the water. Treated water is
distributed to customers through the utility subsidiaries' distribution mains,
assisted by pumping facilities where necessary. The Company's utility operations
provide water that meets or surpasses the minimum standards of the Federal Safe
Drinking Water Act (SDWA) of 1974, as amended.
Customers. In 1998, the Company's utility revenues were derived as
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follows: 63% from residential customers, 26% from commercial customers, 7% from
industrial customers and 4% from fire protection customers. Of the Company's
604,811 water utility customers at December 31, 1998, 541,813 (90%) were
residential customers, 54,846 (9%) were commercial customers and 8,152 (1%) were
industrial customers. The Company also had 28,072 wastewater customers at
December 31, 1998, many of whom were also water customers of the Company. The
Company does not depend on any single customer, because no single customer
accounted for more than 10% of the Company's consolidated utility revenues in
1998.
Capital Expenditures. The Company's additions to utility plant were $99.7
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million in 1998 as compared to $83.3 million in 1997. For a discussion of the
Company's capital expenditures, see Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations, below.
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Competition and Franchises. Substantially all of the Company's utility
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subsidiaries serve an area or areas in which the subsidiaries own and operate
the sole public water or wastewater system. Accordingly, the Company's utility
businesses are, in most cases, free from direct competition. The Company
believes that its utility subsidiaries possess, with relatively minor exceptions
and qualifications, such governmental franchises, water rights, licenses and
permits as are necessary for the continuation of the water and wastewater
operations as now conducted. Many such franchises, rights, licenses and permits
are perpetual and others are expected to be renewed as they expire. The
Company's utility subsidiaries derive their rights to install and maintain
distribution mains under streets and other public places from statutes,
municipal ordinances and permits from state and local authorities. In most
cases, these rights are non-exclusive.
Governmental Acquisition. In most of the states in which the Company has
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water or wastewater operations, there exists the right of governmental
acquisition. The price to be paid under condemnation is usually determined in
accordance with the eminent domain statutes of the state governing the taking of
land or other property by condemnation, which statutes generally provide for the
payment of a price which reflects the fair value of the condemned property. A
condemnation action was commenced in 1994 against United Waterworks' water and
wastewater utility subsidiary in New Mexico and was settled in 1996. See Item 8,
Note 3 to the consolidated financial statements, below.
Rate Matters. The Company's utility subsidiaries are subject to regulation
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by state regulatory commissions (or, in one case, by a local authority) having
jurisdiction over their respective service areas with regard to rates, services,
safety, accounting, issuance of securities, changes in ownership, control or
organization and other matters. The rates charged by the Company's utility
subsidiaries are fixed by the regulatory authority having jurisdiction over the
respective utility. The Company's present rate structure consists of various
rate and service classifications. The profitability of the Company's utility
subsidiaries is to a large extent dependent upon the timeliness and adequacy of
the rate relief allowed by regulatory authorities. Accordingly, the Company
maintains a centralized rate management staff which monitors expense increases,
capital expenditures and other factors affecting the financial performance of
its utility subsidiaries and prepares, files and litigates rate cases. In
certain jurisdictions, procedures have been established by the utility
regulatory authorities to permit a more rapid, and less costly, recovery of
certain expense increases. The Company believes that all of its regulated
utilities are in compliance in all material respects with the appropriate state
regulations. For a discussion of rate increases granted to the Company's utility
subsidiaries in 1998 as well as other rate matters, see Item 8, Note 11 to the
consolidated financial statements, below.
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NON-REGULATED OPERATIONS
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Several of the Company's subsidiaries are engaged in activities which are
not subject to regulation of rates, service and similar matters by state public
utility commissions. The Company's principal non-regulated operations include
(a) United Properties, a subsidiary engaged in real estate activities, (b) a 50%
investment in United Water Services, which provides contract operations and
maintenance services for water and wastewater facilities and (c) public-private
partnerships with the cities of Jersey City and Hoboken, New Jersey.
United Properties United Properties is a non-regulated business engaged in
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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 owns and
manages a portfolio of real estate located in New Jersey, New York, Delaware,
Idaho and Florida. United Properties also provides consulting and advisory
services in support of the real estate assets of the other United Water
companies.
United Water Services As mentioned above, on July 28, 1997, United Water
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Services acquired the remaining 50% stake in JMM Operational Services.
United Water Services provides contract operations and maintenance services
for water and wastewater facilities and is pursuing additional contract
operations. As a result, United Water Services was awarded several contracts.
The largest awards include a ten-year contract to operate the wastewater systems
in Milwaukee, Wisconsin, and a 20-year contract to operate the water system in
Atlanta, Georgia, with a minority partner. United Water Services also operates a
meter installation subsidiary, United Metering, which it purchased from United
Water in December 1997 for book value of $6.2 million.
In July 1997, the Company's subsidiaries, United Water Canada and United
Water Mexico, acquired a 30% and a 20% interest in UWS Canada and UWS Mexico,
respectively, which provide contract operations and maintenance services for
water and wastewater facilities. In December 1998, United Water purchased
additional interests and now has a 33.3% and a 20.5% interest in UWS Canada and
UWS Mexico, respectively. The Company's investments in United Water Services,
UWS Canada and UWS Mexico are accounted for under the equity method of
accounting.
Public-Private Partnerships United Water is forming public-private
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partnerships and similar arrangements in which municipalities retain ownership
of their systems while the Company operates and maintains them. The Company
entered into public-private partnerships with the cities of Jersey City and
Hoboken, New Jersey in May 1996 and July 1994, respectively.
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EMPLOYEE RELATIONS
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The Company and its subsidiaries have approximately 1,400 employees.
Subsidiaries of the Company are parties to agreements with labor unions covering
approximately 560 employees at 10 locations. During the past five years, the
Company has experienced no work stoppages. The Company considers its employee
relations to be good.
ENVIRONMENTAL REGULATION
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The Company and its subsidiaries are subject to environmental regulation by
state and federal agencies. The state agencies typically consist of one
responsible for public health and another responsible for environmental
protection. The United States Environmental Protection Agency (EPA) administers
numerous federal statutes which encompass both public health and environmental
protection concerns.
At the Federal level, the SDWA provides minimum standards for potable water
quality and monitoring. State statutes and regulations, which are also
applicable, impose standards which, in some cases, are more stringent than the
Federal standards. The Company believes that all its water utilities are
currently in compliance in all material respects with, and have all permits
required by, the SDWA and other applicable Federal and state health and
environmental statutes and regulations.
During 1996, the EPA issued revisions and a timetable for future revisions
of its regulations, which resulted in additional and more stringent standards
under the SDWA. Although the Company projects that additional expenditures for
utility plant will be required as a result of the 1996 amendments to the SDWA,
it anticipates that regulatory authorities will allow a recovery of and return
on any investment needed. Accordingly, the Company does not expect any
significant adverse financial impact from these regulations on the Company's
results of operations or financial condition.
The Federal Water Pollution Control Act, also known as the Clean Water Act,
and state laws in a number of jurisdictions regulate certain effluent discharges
into waterways. These laws are administered by the EPA at the federal level and
by state agencies. These laws require the Company's utility subsidiaries to
obtain permits for effluent discharges associated with water and wastewater
treatment operations and these permits typically impose limitations with respect
to quality and quantity of effluent discharges. The Company believes that its
utility subsidiaries are currently in compliance in all material respects with,
and have all permits required by, these pollution control statutes.
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Of the projected $262 million (excluding the effects of inflation)
aggregate capital expenditures of United Water's utility subsidiaries over the
next five years, approximately 25% are estimated to be related to compliance
with environmental laws and regulations.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
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SALES
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Northumbrian Partnership In June 1996, a wholly-owned subsidiary of United
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Water, and Lyonnaise Europe, formed the Partnership, which has acquired a 20%
interest in NWG, a major investor-owned water and wastewater company in the
United Kingdom. The Company accounts for this investment under the equity method
of accounting. See Item 8, Note 2 to the consolidated financial statements,
below.
United Water Services In July 1997, the Company's subsidiaries, United
---------------------
Water Canada and United Water Mexico, acquired a 30% and a 20% interest in UWS
Canada and UWS Mexico, respectively, which provide contract operations and
maintenance services for water and wastewater facilities. In December 1998,
United Water purchased additional interests and now has a 33.3% and a 20.5%
interest in UWS Canada and UWS Mexico. The Company accounts for these
investments under the equity method of accounting.
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ITEM 2. PROPERTIES
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REGULATED UTILITY OPERATIONS
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United Water's utility subsidiaries own, operate and maintain a total of
406 wells, 104 water treatment plants, with the largest plant having treatment
capacities of up to 200 million gallons per day (MGD), 16 wastewater treatment
plants, with the largest plant having treatment capacities of up to 3.25 MGD,
and 219 ground and elevated storage tanks. The Company's utility subsidiaries
also own numerous impounding basins, lift stations and purification stations,
generally located on land owned by the respective subsidiaries. In addition, the
Company's utility subsidiaries own a total of approximately 7,522 miles of water
transmission and distribution mains and 328 miles of wastewater collection
mains. The water mains and wastewater collection facilities are located in
easements and rights-of-way on or under public highways, streets, waterways and
other public places pursuant to statutes, municipal ordinances and permits from
state and local authorities, or on or under property owned by the respective
subsidiaries or occupied under property rights from the owners, which rights are
deemed adequate for the purposes for which they are used. In addition, the
Company's subsidiaries own pipelines, meters, services, fire hydrants,
transportation vehicles, construction equipment, office furniture and equipment,
and computer equipment. United Water's subsidiaries own or lease office space at
their respective locations.
In connection with the Wanaque South Project, United Water New Jersey owns
a 17-mile aqueduct from the Wanaque Reservoir to the Oradell Reservoir, along
with a booster pumping station. United Water New Jersey also owns 50% of the
other elements of the Wanaque South Project, including an 11-mile aqueduct and
related pump stations, a roller compacted concrete dam and reservoir, and has
contracted rights to yields derived from the Passaic and Ramapo rivers.
NON-REGULATED OPERATIONS
- ------------------------
United Properties owns approximately 570 acres of land held for sale or
under development principally in New Jersey, New York and Florida, and 567,671
square feet of office and retail properties. In addition, United Properties owns
or holds interests in two golf properties in New Jersey.
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ITEM 3. LEGAL PROCEEDINGS
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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 judgment seeking dismissal of the lawsuit. Oral argument on such motion
was held on March 14, 1997 and on April 1, 1997, a decision was issued granting
United Metering's motion to dismiss the lawsuit. Plaintiffs appealed the
decision to the Appellate Division of the Supreme Court of the State of New
York. Arguments were heard in October 1998 and a settlement in principle in the
amount of $285,000 was reached in December 1998 prior to the issuance of the
Appellate Division's decision.
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 a hearing on the issue of
damages, the Westchester Court issued a decision, dated December 20, 1996,
awarding the plaintiff $1,330,000. The Westchester Court subsequently partially
vacated its December 20, 1996 decision on the ground that the relief granted
exceeded the plaintiff's original demand and reduced the award to $805,000. On
October 7, 1997, the Westchester Court entered a judgment in favor of the
plaintiff in the amount of $862,758, which included interest from December 20,
1996. United Water New Rochelle has appealed the judgment and the prior
decisions on its motions to vacate the default judgment. United Water New
Rochelle believes that it has meritorious arguments on appeal and on the
original matter, should it be reopened. Further, United Water New Rochelle has
initiated a legal action seeking reimbursement from
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third parties of any ultimate liability resulting in this matter. Management
believes the resolution of this matter will not have a material adverse effect
upon the financial position or results of operations of the Company.
United Water Toms River, a wholly-owned subsidiary of United Waterworks,
has been approached by counsel for several families in its franchise area to
notify them that counsel is considering filing a class action lawsuit naming
United Water Toms River as one of at least three defendants and alleging
personal injuries sustained as a result of contaminated water being delivered to
the potential plaintiffs. Counsel has reviewed testing data accumulated by the
New Jersey Department of Environmental Protection and United Water Toms River
which show that United Water Toms River has delivered water to its customers in
complete conformance with all applicable federal and state water quality
standards. Suit has not been filed. An agreement tolling the statute of
limitations for at least eighteen months has been signed with the potential
plaintiffs and took effect February 1998. 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.
During September 1998, David Chardavoyne, a former senior executive of the
Company, brought a lawsuit against the Company in the United States District
Court for the District of Connecticut. In the lawsuit, Chardavoyne claims that
the Company breached and wrongfully terminated his employment agreement. His
complaint seeks over $1 million in damages. Management believes it has
meritorious defenses to this lawsuit. Management further believes the resolution
of this matter will not have a material adverse effect upon the financial
position or results of operations of the Company.
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.
14
<PAGE>
On January 22, 1998, the Pierson Lakes Homeowners Association, Inc. and
various individuals (Plaintiffs) commenced a lawsuit against UWNY and Ramapo
Land Co., Inc. in the Supreme Court of the State of New York, Rockland County.
This litigation is related to the above-referenced lawsuit by Ramapo Land Co.,
Inc. against UWNY in connection with maintenance and repair obligations and
water releases from Cranberry and Potake Lakes. The Pierson Lakes lawsuit seeks
declaratory relief, injunctive relief and money damages against UWNY and Ramapo
Land Co. in amounts in excess of $25 million. In addition to claims relating to
alleged failure to maintain the dams and spillways, Plaintiffs claim that the
water releases have damaged the recreational and aesthetic value of the lakes,
as well as their docks, boats and other personal property. Management is
vigorously defending this action and is also pursuing settlement negotiations
with the various parties. Management believes that the resolution of this matter
will not have a material adverse effect upon the financial position or results
of operations of the Company.
United Water is not a party to any other litigation other than routine
litigation incidental to the business of United Water. None of such litigation,
either individually or in the aggregate, is material to the business of United
Water.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
During the fourth quarter of 1998, there were no matters submitted to a
vote of security holders.
15
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------- ---------------------------------------------------------------------
United Water's common stock is traded on the New York Stock Exchange under
the symbol UWR. The high and low sales prices for United Water's common stock
for 1998, 1997 and 1996 and the dividends paid on the common stock in each
quarter were as follows:
<TABLE>
<CAPTION>
(dollars) STOCK PRICE DIVIDEND
- --------------------------------------------------------------------------------
QUARTER HIGH LOW
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 Fourth $25.000 $16.500 $.24
Third 19.250 16.375 .23
Second 18.438 15.750 .23
First 19.875 17.500 .23
- --------------------------------------------------------------------------------
1997 Fourth $19.750 $16.000 $.23
Third 19.813 17.000 .23
Second 19.375 16.375 .23
First 18.500 15.000 .23
- --------------------------------------------------------------------------------
1996 Fourth $16.625 $14.625 $.23
Third 17.500 12.750 .23
Second 13.500 12.000 .23
First 13.250 12.000 .23
- --------------------------------------------------------------------------------
</TABLE>
The high and low stock prices from January 1 to February 28, 1999, were $24.063
and $19.250. There were 18,059 holders of record of United Water's common stock
as of February 28, 1999.
Dividend Policy The Company has paid continuous cash dividends on its
---------------
common stock since 1886. Under the Company's current common stock dividend
policy, quarterly dividends are paid by the Company, generally on March 1, June
1, September 1 and December 1. Each future declaration of dividends, however,
shall be made at the sole discretion of the Board of Directors, and only out of
cumulative earnings available therefor.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
<TABLE>
<CAPTION>
Year ended December 31,
- ----------------------------------------------------------------------------------------------------------------
(thousands of dollars except per share data) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data
- ---------------------
Operating revenues $ 356,210 $ 351,409 $ 332,045 $ 319,536 $ 284,767
Operating income 97,600 95,644 95,699 82,183 83,847
Net income applicable to
common stock 43,929 29,331 34,010 17,343 27,887
Net income per common share 1.19 .83 1.01 .54 1.01
Net income per common share-
assuming dilution 1.17 .83 1.00 .54 1.01
Dividends paid per share .93 .92 .92 .92 .92
================================================================================================================
Balance Sheet Data (at end of period)
- -------------------------------------
Total assets $1,769,122 $1,658,342 $1,582,097 $1,516,708 $1,457,427
Long-term debt 652,969 622,737 558,093 558,658 505,204
Preferred stock
without mandatory redemption 9,000 9,000 9,000 9,000 9,000
Preferred and preference stock
with mandatory redemption 80,282 86,579 93,261 98,091 98,173
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Operating revenues and operating income represent results from continuing
operations. Prior year amounts have been restated to conform with current year
presentation.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
SIGNIFICANT ITEMS
The following items had a significant impact on the financial results of United
Water Resources (United Water, or the Company):
INVESTMENT IN UNITED WATER SERVICES
On July 28, 1997, United Water Services, a 50/50 joint venture between
United Water and Suez Lyonnaise des Eaux acquired the remaining 50% stake in JMM
Operational Services.
United Water Services provides contract operations and maintenance services
for water and wastewater facilities and is pursuing additional contract
operations. As a result, United Water Services was awarded several contracts.
The largest awards include a ten-year contract to operate the wastewater systems
in Milwaukee, Wisconsin, and a 20-year contract to operate the water system in
Atlanta, Georgia, with a minority partner. United Water Services also operates a
meter installation subsidiary, United Metering, which it purchased from United
Water in December 1997 for book value of $6.2 million.
In July 1997, the Company also acquired a 30% and a 20% interest in United
Water Services Canada (UWS Canada) and United Water Services Mexico (UWS
Mexico), respectively. In December 1998, United Water purchased additional
interests and now has a 33.3% and a 20.5% interest in UWS Canada and UWS Mexico,
respectively.
At December 31, 1998 and 1997, United Water had equity investments,
relating to contract services of approximately $19.8 million and $20.2 million,
respectively, including investments in Canada and Mexico. This amount is
included in equity investments in the accompanying consolidated balance sheet.
United Water's share of earnings in these investments is included in equity
earnings of affiliates in the accompanying statement of consolidated income.
INVESTMENT IN NORTHUMBRIAN PARTNERSHIP
On June 28, 1996, United Water and Lyonnaise Europe (a wholly-owned
subsidiary of Suez Lyonnaise des Eaux) formed the Northumbrian Partnership (the
Partnership), an equal partnership which has acquired a 20% interest in
Northumbrian Water Group plc (NWG), a major investor-owned water and wastewater
company in the United Kingdom. United Water's initial $62 million investment in
the Partnership was made through its wholly-owned subsidiary in the United
Kingdom, United Water UK Limited. Investment in the Partnership was $96.3
million and $78.7 million at December 31, 1998 and 1997, respectively, and is
included in equity investments in the consolidated balance sheet. United Water's
share of the Partnership's earnings, which totaled $17.1 million and $13.6
million in 1998 and 1997,
18
<PAGE>
respectively, is included in equity earnings of affiliates in the accompanying
statement of consolidated income.
During 1997, the United Kingdom's new Labor Government imposed a one-time
"windfall profits" tax on privatized utilities. The levying of this one-time tax
negatively impacted the Company's earnings from its investment in NWG by $13.1
million, which was partially offset by the effect of a change in the tax rate on
deferred taxes of $2.8 million. The result was a net impact of $10.3 million.
The imposition of this tax had been factored into the Company's financial
analysis at the time of its investment in NWG and was considered in determining
the purchase price. The tax did not have an effect on United Water's cash flow
or ability to pay dividends, nor did it affect the long-term benefit the Company
expected to derive from its investment in NWG.
DISCONTINUED OPERATIONS
In December 1996, the Company announced its intention to dispose of its
environmental testing business, Laboratory Resources, a wholly-owned subsidiary
of the Company, closing its operations in Teterboro, New Jersey. Subsequently,
in January 1997, it sold its laboratory facility in Brooklyn, Connecticut. The
Company accounted for this disposal in accordance with the provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions". The
subsidiary had been operating in a very competitive environment over a prolonged
period of time and had not contributed to the Company's earnings, with a net
loss of $1.5 million in 1996. The operating results of Laboratory Resources
prior to the date of discontinuance are shown separately in the accompanying
statement of consolidated income and all of the financial statements of prior
periods have been restated to reflect the discontinuance of Laboratory
Resources' operations. See Note 14 to the consolidated financial statements for
further details.
TRANSFER OF NEW MEXICO OPERATIONS
United Waterworks owned a utility subsidiary which provided water and
wastewater services to customers in Rio Rancho, New Mexico. In April 1995, the
city of Rio Rancho (the City) and the Company's utility subsidiary entered into
an original stipulation in settlement of a condemnation action and on June 30,
1995, the City assumed possession of the operations of the utility subsidiary.
The original stipulation was contested by various parties, but the City retained
possession of the utility's operations.
On March 29, 1996, the Company fully settled the condemnation proceeding
with the City. Under the terms of the agreement, the Company accepted $67
million for the water and wastewater systems of its New Mexico operations. This
transaction resulted in an after-tax gain of $4.3 million which is included
19
<PAGE>
in the Company's 1996 earnings.
LIQUIDITY AND CAPITAL RESOURCES
As shown in the consolidated statement of cash flows, the Company's major
uses of cash in 1998 included: $106 million of capital expenditures and $38.5
million of common, preferred and preference dividends paid to shareholders. The
major sources of funds to meet these cash needs included: $85.2 million of
additional long-term debt; $80.2 million of cash provided by operations; $23.1
million of proceeds from the issuance of additional shares of common stock; and
an $18.5 million increase in short-term notes payable.
Capital expenditures are generally incurred by United Water's utility
subsidiaries in connection with the normal upgrading and expansion of existing
water and wastewater facilities and to comply with existing environmental
regulations. United Water considers its utility plant to be adequate and in good
condition. These capital expenditures are necessary to meet growth requirements
and to comply with environmental laws and regulations. Excluding the effects of
inflation, the capital expenditures of United Water's utility subsidiaries are
projected to aggregate $262 million over the next five years, including $57
million and $58 million in 1999 and 2000, respectively. This total includes $165
million for United Waterworks and $92 million for United Water New Jersey and
United Water New York. The expenditures related to compliance with environmental
laws and regulations are estimated to be approximately 25% of the projected
capital expenditures over the 1999-2003 period. To the best of management's
knowledge, the Company is in compliance with all major environmental laws and
regulations.
United Water anticipates that its future capital expenditures will be
funded by internally generated funds, external debt financings and the issuance
of additional common and preferred stock, including shares issued to existing
shareholders, bondholders, customers, and employees under the Company's dividend
reinvestment and stock purchase plans. In addition, United Water's regulated
utilities participate in a number of tax-exempt financings to fund capital
expenditures. The companies draw down funds on these financings as qualified
capital expenditures are made. As of December 31, 1998, $48.5 million of
proceeds from these financings had 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.
20
<PAGE>
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 are being 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 ($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 June 1996, United Water entered into a $30 million long-term note
agreement with Credit Lyonnais to partially fund its investment in the
Northumbrian Partnership. The loan bears interest at a London Interbank Offered
Rate based floating rate and is payable in annual installments through June
2006. In December 1998, the Company entered into an interest rate swap agreement
which fixed the interest rate at 5.24% for 1999 and 5.34% for the years 2000
through 2003.
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. See Note 7
to the consolidated financial statements for further details.
At December 31, 1998, United Water had cash and cash equivalents of $8
million (excluding restricted cash) and unused short-term bank lines of credit
of $186.4 million. Management expects that cash flows provided by operations,
unused credit lines currently available and cash generated from the dividend
reinvestment and stock purchase plans will be sufficient to meet anticipated
future operational needs.
21
<PAGE>
YEAR 2000 COMPLIANCE
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.
22
<PAGE>
THE COMPANY'S STATE OF READINESS
- --------------------------------
Consistent with the five phases of the Y2K program, the primary element in
United Water's Y2K readiness strategy has been to replace aging IT and non-IT
systems, where necessary. This strategy evolved from ITSP which, independent of
the Y2K program, identified the need to replace technical infrastructure,
including IT and non-IT systems, in order to position United Water and its
operating affiliates for a smooth transition into the 21st century. In addition
to replacement activities, the Company has also undertaken remediation efforts
to upgrade, repair and improve existing IT and non-IT systems where appropriate.
These efforts are intended to result in the replacement and upgrading of IT and
non-IT systems critical to the operation of the Company, including the provision
of water and wastewater services, financial applications, customer information
systems and operational systems, such as the Supervisory Control and Data
Acquisition System (SCADA), which monitors and controls industrial processes.
In addition, United Water is currently refining contingency plans and
related tests to further mitigate the risk of service interruptions at each of
its locations. These contingency plans have been developed, and the testing of
each plan is anticipated to be completed by the end of the first quarter of
1999. 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 December 31, 1998, 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 99%, non-IT 99%; 3)
remediation: IT 93%, non-IT 93%; 4) testing: IT 50%, non-IT 50%; and 5)
contingency planning: IT 60%, non-IT 60%. All replacements and upgrades are
scheduled to be completed by the end of the second quarter of 1999.
In addition to its own Y2K program, the Company has been involved with Y2K
compliance efforts undertaken by one of its equity investments, United Water
Services (UWS).
UWS, which is engaged in providing contract operations to U.S. cities, is
implementing a Y2K program following the guidelines established by the Company.
This program has been applied to all UWS's project sites and has resulted in the
production of inventories, risk assessments, testing methodologies and
contingency plans for Y2K compliance. All systems are expected to be finalized
and tested by the end of the second quarter of 1999.
23
<PAGE>
Where UWS has assumed responsibility for part or all of the Y2K compliance
efforts of its operating affiliates in the various cities, it is actively
coordinating Y2K corrective measures with the cities and their Y2K consultants
or representatives, where applicable, to mitigate business interruption
exposures associated with the Y2K problem.
United Water is maintaining close contact with UWS and other entities in
which it has equity interests to ascertain that appropriate and prudent action
is being taken in order to achieve Y2K compliance.
RELATIONSHIPS WITH THIRD PARTIES
- --------------------------------
United Water has identified the following third party relationships to be
addressed as part of the Y2K program: regulatory agencies, critical vendors and
service providers.
United Water is in continuous communication with appropriate regulatory
agencies regarding the Y2K issue. All requests for information and status
reports, as well as other specific regulatory requirements are handled on a
priority basis. Management believes that the Company is in compliance with all
regulatory matters relating to Y2K.
The Company has contacted its critical vendors and service providers to
determine the degree of their Y2K readiness. The responses received to date
indicate that those vendors and service providers either are or will be Y2K
compliant. The status of those vendors and service providers who have either not
responded or are not yet compliant is being tracked closely. The electric power
and telecommunications industries have been identified as the most critical
service providers for the water industry. In the localities in which United
Water operates, it is closely monitoring the progress of the local electric
power and telecommunications companies and will continue to scrutinize the
progress of these providers. The Company is actively monitoring the Y2K
compliance status of its critical vendors and service providers and has received
approximately 75% of responses. The Company intends to continue monitoring these
critical vendors and service providers through its transition into the 21st
century.
COSTS
- ------
United Water's Y2K readiness evolved from the strategic initiatives of the
ITSP which was budgeted as part of the Company's ongoing capital expenditures
since 1994. As a result, United Water has been able to keep to a minimum
expenses related to Y2K compliance outside of the ITSP budget. The Company's
principal technology costs to date have been associated with the planned
replacement of IT and non-IT systems, which has not been accelerated due to the
Y2K issue.
24
<PAGE>
United Water estimates its costs to date related to Y2K compliance efforts
that fall outside the ITSP budget are approximately $.2 million. Additional
non-ITSP budgeted costs expected to be incurred over the remainder of the
program are estimated to be $.7 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.
The estimates and conclusions included in the 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.
CONTINGENCY PLANS
- -----------------
The primary elements of contingency planning include procurement of back-up
energy sources, typically adding portable power generators where appropriate,
deployment of key personnel on critical dates relating to century date change
and providing for the efficient flow of communication both internally and
externally in the event of interruption of service during critical dates
relating to the century date change.
25
<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. See Note 1 to the consolidated financial statements.
During 1998, the Company's regulated utilities received fourteen rate
decisions with an aggregate annual revenue increase of $8.7 million, which
includes $2.4 million in increased revenues effective on an interim basis for
United Water Delaware. An estimated $4.7 million of this amount was reflected in
1998's revenues while the remaining $4 million is expected to increase revenues
in 1999. Current year revenues also reflect the carryover impact of the rate
awards granted in 1997 in the amount of $5.1 million. See Note 11 to the
consolidated financial statements for further details.
At the end of January 1999, the Company had five rate cases pending
requesting an aggregate annual rate increase of $10.9 million. The most
significant rate cases pending were filed by United Water Florida and United
Water Delaware. These filings were made to meet increased investment in utility
plant and higher operation and maintenance costs. In May 1998, United Water
Florida applied to the Florida Public Service Commission for rate relief in the
amount of $2.2 million, or 24.3%, in water revenues and $3.1 million, or 18.7%,
in wastewater revenues. A decision on the United Water Florida application is
expected before the end of the first quarter of 1999.
On March 11, 1998, United Water Delaware applied to the Delaware Public
Service Commission for rate relief in the amount of $4.1 million, or 24.8%, in
water revenues. On May 11, 1998, interim rates of $2.4 million were placed in
effect, subject to refund. A decision on this application is expected before the
end of the second quarter of 1999. The Company believes the outcome of this
application will not have a material effect on earnings.
26
<PAGE>
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 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.
The Company expects that the Commission will enter an Order on remand which will
eliminate the prospect of refunding any part of the $2.3 million.
The Company has requested and received recovery of its regulatory assets
for postretirement benefits other than pension as well as the recognition of the
current expense for these benefits for the majority of its regulated
subsidiaries. The regulatory assets are expected to be recovered over an average
period of 15 years. At December 31, 1998, three regulated subsidiaries were
awaiting decisions from the applicable commissions. Management believes it will
receive favorable decisions on the pending cases prior to the end of 1999.
Generally, the rate awards actually received by the Company's operating
utilities are less than the amounts requested, primarily due to differing
positions of the parties involved and/or updated information provided during the
proceedings.
27
<PAGE>
REAL ESTATE ACTIVITIES
United Properties Group (United Properties) owns and manages a portfolio of
real estate located in New Jersey, New York, Delaware, Idaho, and Florida,
consisting of commercial properties, golf courses and land under development.
United Properties expects to spend $25.9 million over the next five years
for capital expenditures on its existing real estate portfolio, including $8.3
million and $6.9 million in 1999 and 2000, respectively. Funding for United
Properties' activities is anticipated to come from sales of properties,
operations of existing commercial properties and golf courses, and proceeds from
new financings. The timing of these expenditures will depend upon market
conditions and the attainment of necessary approvals.
RESULTS OF OPERATIONS
OVERVIEW
United Water's net income applicable to common stock for 1998 was $43.9
million, or $1.19 per common share, as compared to $29.3 million, or $.83 per
common share, earned in 1997. Earnings for 1997 included a net $10.3 million
charge resulting from the "windfall profits" tax in the United Kingdom. Income
before non-recurring items was $43.9 million, or $1.19 per common share for 1998
compared with $39.7 million, or $1.12 per common share for 1997. This increase
was attributable to improved domestic utility performance as a result of rate
awards, higher water consumption and a property tax settlement relating to a
prior year. In addition, the Company experienced higher earnings from the
Northumbrian Partnership primarily due to the effect on deferred taxes of a
decrease in the UK corporate tax rate.
United Water's net income applicable to common stock for 1997 was $29.3
million, or $.83 per common share, as compared to $34 million, or $1.01 per
common share, earned in 1996. Earnings for 1997 included a net $10.3 million
charge resulting from the "windfall profits" tax in the United Kingdom. Income
from continuing operations and before non-recurring items was $39.7 million, or
$1.12 per common share for 1997 compared with $34.1 million, or $1.01 per common
share for 1996. This increase was attributable to a $6 million increase in
equity earnings of affiliates during 1997, which resulted from a full year of
operations in the United Kingdom. Earnings for 1996 included a one-time, after-
tax gain of $4.3 million, or $.13 per common share, resulting from a
condemnation settlement in New Mexico which was offset by a charge relating to
the discontinuance of the Company's environmental testing business.
28
<PAGE>
OPERATING REVENUES
Operating revenues increased $4.8 million, or 1.4%, in 1998 and $19.4
million, or 5.8%, in 1997 from the prior years, as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1998 VS. 1997 1997 vs. 1996
(thousands of dollars) INCREASE (DECREASE) Increase (Decrease)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Utilities:
Rate awards $ 9,790 2.8% $10,650 3.2%
Consumption 1,346 0.4% 137 0.0%
Growth 993 0.3% 3,276 1.0%
Real estate (3,879) (1.1%) 6,306 1.9%
Other operations (3,449) (1.0%) (1,005) (0.3%)
- -----------------------------------------------------------------------------------
$ 4,801 1.4% $19,364 5.8%
- -----------------------------------------------------------------------------------
</TABLE>
1998 VERSUS 1997
The 2.8% increase in revenues from rate awards in 1998 includes the impact
of fifteen 1997 and fourteen current year increases for the Company's operating
utilities. Higher consumption due to favorable weather conditions in northeast
service areas resulted in an increase in revenues of $1.3 million in 1998. The
increase in revenues due to growth is partially attributable to increased
customers at several operating utilities. Real estate revenues decreased $3.9
million primarily due to lower land sale revenues as a result of a significant
land sale in the first quarter of 1997, partially offset by higher golf course
revenues. The $3.4 million decrease in operating revenues from other operations
was primarily attributable to the absence of revenues from the Company's meter
installation subsidiary, which was sold in the fourth quarter of 1997, partially
offset by an increase in revenues from the public-private partnership with
Jersey City, New Jersey.
1997 VERSUS 1996
The 3.2% increase in revenues from rate awards in 1997 includes the impact
of ten 1996 and fifteen 1997 increases for the Company's operating utilities.
The increase in revenues due to growth is partially attributable to the
acquisitions of two utilities in New Jersey in the second quarter of 1996 as
well as increased customers at several operating utilities. Real estate revenues
were higher as compared to 1996, primarily due to a $5.8 million increase in
property sales, which included a significant land sale, in addition to higher
golf course revenues. The $1 million decrease in operating revenues from other
operations was primarily attributable to lower revenues from meter installation
contracts, partially offset by the benefit of a full year of operations from the
public-private partnership with Jersey City, which commenced in May 1996. In
December 1997, United Water sold United Metering, its meter installation
subsidiary, to United Water Services. As a result, United Water retains 50%
ownership in United Metering.
29
<PAGE>
OPERATING EXPENSES
Operating expenses increased $2.8 million in 1998 and $19.4 million in 1997
from the prior years, as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1998 VS. 1997 1997 vs. 1996
(thousands of dollars) DECREASE INCREASE Increase
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operation and maintenance $ (560) (0.3%) 13,069 8.4%
Depreciation and amortization 5,256 15.1% 3,842 12.5%
General taxes (1,851) (3.6%) 2,508 5.1%
- -------------------------------------------------------------------------
</TABLE>
1998 VERSUS 1997
The decrease in operation and maintenance expenses was due primarily to the
absence of costs from the Company's meter installation subsidiary, which was
sold in the fourth quarter of 1997 as well as a $3.9 million decrease in the
cost of real estate properties sold, primarily due to a significant land sale in
the first quarter of 1997. This was partially offset by the write-off of
deferred start-up charges under Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" as well as higher outside services and employee
benefits costs at several of the Company's subsidiaries.
The $5.3 million increase in depreciation and amortization was primarily
attributable to utility plant additions by the Company's utility subsidiaries,
as well as accelerated amortization associated with the service contract in
Jersey City.
General taxes decreased $1.9 million, or 3.6%, in 1998 primarily due to a
property tax settlement received in the fourth quarter of 1998. This was
partially offset by higher real estate, franchise and gross receipts taxes in
utility operations.
1997 VERSUS 1996
The increase in operation and maintenance expenses was due primarily to a
$2.6 million increase in the cost of real estate properties sold, $2.4 million
in additional operating expenses as a result of a full year of operations of the
public-private partnership with Jersey City, higher outside services and
employee benefits costs at several of the Company's subsidiaries, and additional
operating expenses incurred relating to the acquisitions of two utilities in New
Jersey in May 1996. These increases were partially offset by lower costs from
meter installation contracts.
The $3.8 million increase in depreciation and amortization was primarily
attributable to utility plant additions by United Waterworks' utility
subsidiaries, as well as amortization associated with the service contract in
Jersey City .
General taxes increased $2.5 million, or 5.1%, in 1997 primarily due to
higher real estate, franchise and gross receipts taxes in utility operations.
30
<PAGE>
INTEREST EXPENSE
Interest expense increased $.5 million in 1998 and $.4 million in 1997
compared to prior years. See the statement of consolidated capitalization and
Note 4 to the consolidated financial statements for further details on long-term
debt and notes payable.
EQUITY EARNINGS OF AFFILIATES
The $.8 million increase in equity earnings of affiliates in 1998 was due
mainly to a $3.5 million increase in earnings from the Northumbrian Partnership
which resulted primarily from the effect on deferred taxes of a decrease in the
UK corporate tax rate.
This was partially offset by a $2.2 million decrease in combined earnings
from United Water Services, UWS Canada and UWS Mexico. This decrease was
primarily attributable to business development costs associated with ongoing
efforts to expand contract operations. One of the successes resulting from these
efforts came in November 1998, when United Water Services was awarded a 20-year
contract, with annual revenues of $21.4 million, to operate the water system in
Atlanta, Georgia, with a minority partner. The Company also experienced lower
equity earnings as a result of a one-time condemnation settlement by its other
equity investment, Dundee Water Power and Land.
INCOME TAXES
The effective income tax rates on income before preferred and preference
stock dividends were 27.9% in 1998, 36.4% in 1997 and 36.5% in 1996. An analysis
of income taxes is included in Note 12 to the consolidated financial statements.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" effective for all fiscal
years beginning after June 15, 1999. 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.
31
<PAGE>
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, and
therefore, high inflation could have a detrimental effect on the Company until
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 occurred 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.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Report of Independent Accountants 34
Consolidated Balance Sheet at
December 31, 1998 and 1997 35
Statement of Consolidated Income for each of the
years ended December 31, 1998, 1997 and 1996 36
Statement of Consolidated Common Equity for each of
the years ended December 31, 1998, 1997 and 1996 37
Statement of Consolidated Cash Flows for each of the
years ended December 31, 1998, 1997 and 1996 38
Statement of Consolidated Capitalization at
December 31, 1998 and 1997 39
Notes to Consolidated Financial Statements 40 - 66
Financial Statement Schedules:
For the three years ended December 31, 1998
VIII - Consolidated Valuation and Qualifying Accounts 73
</TABLE>
All other schedules are omitted because they are not applicable, or the required
information is shown in the consolidated financial statements or notes thereto.
Financial statements of any 50%-owned investments have been omitted because the
registrant's proportionate share of net income and total assets of each is less
than 20% of the respective consolidated amounts, and the investment in and the
amount advanced to each is less than 20% of consolidated total assets.
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
United Water Resources
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of United Water Resources and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of United Water Resources' management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
New York, New York
February 25, 1999
34
<PAGE>
CONSOLIDATED BALANCE SHEET
UNITED WATER RESOURCES AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31,
(thousands of dollars) 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
UTILITY PLANT, including $47,348 and $49,301 under construction $1,540,564 $1,439,854
Less accumulated depreciation 328,224 296,820
---------- ----------
1,212,340 1,143,034
UTILITY PLANT ACQUISITION ADJUSTMENTS,
Less accumulated amortization of $11,411 and $9,527 61,320 63,026
REAL ESTATE AND OTHER INVESTMENTS,
Less accumulated depreciation of $13,628 and $11,497 81,630 79,487
EQUITY INVESTMENTS 116,598 99,197
---------- ----------
198,228 178,684
CURRENT ASSETS:
Cash and cash equivalents 8,011 8,546
Restricted cash 48,495 34,581
Accounts receivable and unbilled revenues, less allowance of $1,204 and $2,528 59,693 57,723
Prepaid and other current assets 12,235 11,705
---------- ----------
128,434 112,555
DEFERRED CHARGES AND OTHER ASSETS:
Regulatory assets 76,548 79,748
Prepaid employee benefits 29,237 21,426
Unamortized debt expense 34,745 31,019
Other deferred charges and assets 28,270 28,850
---------- ----------
168,800 161,043
$1,769,122 $1,658,342
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stock and retained earnings $ 456,029 $ 418,601
Preferred stock without mandatory redemption 9,000 9,000
Preferred stock with mandatory redemption 49,748 51,838
Preference stock, convertible, with mandatory redemption 30,534 34,741
Long-term debt 652,969 622,737
---------- ----------
1,198,280 1,136,917
CURRENT LIABILITIES:
Notes payable 93,400 74,925
Preferred stock and long-term debt due within one year 5,795 8,022
Accounts payable and other current liabilities 36,525 32,833
Accrued taxes 24,257 26,878
Accrued interest and dividends 8,023 8,117
---------- ----------
168,000 150,775
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes and investment tax credits 195,368 183,490
Customer advances for construction 30,648 27,356
Contributions in aid of construction 143,327 133,684
Other deferred credits and liabilities 33,499 26,120
---------- ----------
402,842 370,650
Commitments and contingencies (Notes 6 and 11)
$1,769,122 $1,658,342
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
STATEMENT OF CONSOLIDATED INCOME
UNITED WATER RESOURCES AND SUBSIDIARIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Years ended December 31,
(thousands except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES $ 356,210 $ 351,409 $ 332,045
OPERATING EXPENSES:
Operation and maintenance 168,387 168,947 155,878
Depreciation and amortization 39,950 34,694 30,852
General taxes 50,273 52,124 49,616
--------- --------- ---------
TOTAL OPERATING EXPENSES 258,610 255,765 236,346
--------- --------- ---------
OPERATING INCOME 97,600 95,644 95,699
INTEREST AND OTHER EXPENSES:
Interest expense, net of amount capitalized 45,917 45,372 44,951
Allowance for funds used during construction (4,567) (3,397) (3,355)
Preferred stock dividends of subsidiaries 2,223 2,256 2,277
Gain on New Mexico settlement -- -- (10,372)
Windfall profits tax of affiliate -- 10,334 --
Equity earnings of affiliates (11,451) (10,647) (4,617)
Other income, net (1,959) (2,529) (2,083)
--------- --------- ---------
TOTAL INTEREST AND OTHER EXPENSES 30,163 41,389 26,801
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 67,437 54,255 68,898
PROVISION FOR INCOME TAXES 19,450 20,579 25,878
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 47,987 33,676 43,020
Preferred and preference stock dividends 4,058 4,345 4,613
--------- --------- ---------
NET INCOME APPLICABLE TO COMMON STOCK
FROM CONTINUING OPERATIONS $ 43,929 $ 29,331 $ 38,407
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of income
tax benefit of $824 - - (1,532)
Loss on disposal of discontinued business, net
of income tax benefit of $1,543 - - (2,865)
--------- --------- ---------
Loss from discontinued operations - - (4,397)
--------- --------- ---------
NET INCOME APPLICABLE TO COMMON STOCK $ 43,929 $ 29,331 $ 34,010
========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING 37,028 35,492 33,707
NET INCOME (LOSS) PER COMMON SHARE
Continuing operations $ 1.19 $ .83 $ 1.14
Discontinued operations - - (.13)
--------- --------- ---------
TOTAL $ 1.19 $ .83 $ 1.01
========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING-ASSUMING DILUTION 39,192 37,838 36,218
NET INCOME (LOSS) PER COMMON SHARE
Continuing operations $ 1.17 $ .83 $ 1.12
Discontinued operations - - (.12)
--------- --------- ---------
TOTAL $ 1.17 $ .83 $ 1.00
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
36
<PAGE>
STATEMENT OF CONSOLIDATED COMMON EQUITY
UNITED WATER RESOURCES AND SUBSIDIARIES
<TABLE>
<CAPTION>
Common Stock Cumulative
Number Translation Retained
(thousands) of shares Amount Adjustment Earnings
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 32,880 $304,663 -- $ 53,639
Dividend reinvestment and stock purchase plans 1,375 18,845 -- --
Cumulative translation adjustment -- -- $6,703 --
Conversion of 5% preference stock 294 4,624 -- --
Net income applicable to common stock -- -- -- 34,010
Cash dividends paid on common stock, $.92 per share -- -- -- (30,994)
- -----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 34,549 328,132 6,703 56,655
Dividend reinvestment and stock purchase plans 1,446 25,083 -- --
Cumulative translation adjustment -- -- 591 --
Conversion of 5% preference stock 300 4,742 -- --
Net income applicable to common stock -- -- -- 29,331
Cash dividends paid on common stock, $.92 per share -- -- -- (32,636)
- -----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 36,295 357,957 7,294 53,350
Dividend reinvestment and stock purchase plans 1,264 23,068 -- --
Cumulative translation adjustment -- -- 464 --
Conversion of 5% preference stock 277 4,394 -- --
Net income applicable to common stock -- -- -- 43,929
Cash dividends paid on common stock, $.93 per share -- -- -- (34,427)
- -----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 37,836 $385,419 $7,758 $ 62,852
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE>
STATEMENT OF CONSOLIDATED CASH FLOWS
UNITED WATER RESOURCES AND SUBSIDIARIES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Years ended December 31,
(thousands of dollars) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
NET INCOME $ 47,987 $ 33,676 $ 38,623
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 41,300 35,959 32,068
Deferred income taxes and investment tax credits, net 11,878 8,934 18,399
Gain on New Mexico settlement -- -- (10,372)
Equity earnings of affiliates (11,451) (313) (4,617)
Proceeds from sale of United Metering -- 6,223 --
Proceeds from sales of properties 3,761 11,068 4,385
Gain on sales of properties (2,605) (5,220) (935)
Improvements to property under development (2,125) (1,376) (1,333)
Loss on disposal of discontinued operations -- -- 4,408
Allowance for funds used during construction (4,567) (3,397) (3,355)
Changes in assets and liabilities, net of effect of
New Mexico settlement and acquisitions:
Accounts receivable and unbilled revenues (1,970) 2,551 (3,729)
Prepayments (530) (311) 3,397
Prepaid employee benefits (7,811) (5,287) (3,757)
Regulatory assets 3,200 (4,569) (8,821)
Accounts payable and other current liabilities 3,692 1,131 1,520
Accrued taxes (2,621) 8,863 (5,727)
Accrued interest and dividends (94) (294) 16
Other, net 2,110 417 (12,973)
--------- --------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 80,154 88,055 47,197
--------- --------- --------
INVESTING ACTIVITIES:
Additions to utility plant (excludes allowance for funds
used during construction) (99,722) (83,321) (74,569)
Additions to real estate and other properties (4,177) (2,080) (5,569)
Additions to equity investments (4,784) (15,859) (63,042)
Acquisitions, net of cash received -- -- (6,794)
Proceeds from New Mexico settlement -- -- 31,670
Investments in service contracts -- -- (5,500)
Change in restricted cash (13,914) (7,378) 25,474
--------- --------- --------
NET CASH USED IN INVESTING ACTIVITIES (122,597) (108,638) (98,330)
--------- --------- --------
FINANCING ACTIVITIES:
Change in notes payable 18,475 (18,300) 49,725
Additional long-term debt 85,233 75,565 30,538
Reduction in preferred stock and long-term debt (59,318) (34,585) (15,550)
Issuance of common stock 23,068 25,083 18,845
Dividends on common stock (34,427) (32,636) (30,994)
Dividends on preferred and preference stock (4,058) (4,345) (4,613)
Net contributions and advances for construction 12,935 9,386 7,614
--------- --------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 41,908 20,168 55,565
--------- --------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (535) (415) 4,432
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,546 8,961 4,529
--------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,011 $ 8,546 $ 8,961
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE>
STATEMENT OF CONSOLIDATED CAPITALIZATION
UNITED WATER RESOURCES AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31,
(thousands of dollars) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK AND RETAINED EARNINGS:
Common stock, no par value--authorized 100,000,000 shares $ 401,370 $ 373,927
Less treasury shares, at cost (15,951) (15,970)
Retained earnings 62,852 53,350
Cumulative translation adjustment 7,758 7,294
---------- ----------
TOTAL COMMON STOCK AND RETAINED EARNINGS 456,029 418,601
---------- ----------
CUMULATIVE PREFERRED STOCK WITHOUT MANDATORY REDEMPTION:
United Water New Jersey, authorized 2,000,000 shares,
stated value--$100 per share, issuable in series:
4 1/2% Series, authorized and outstanding 30,000 shares 3,000 3,000
4.55% Series, authorized and outstanding 60,000 shares 6,000 6,000
---------- ----------
TOTAL PREFERRED STOCK WITHOUT MANDATORY REDEMPTION 9,000 9,000
---------- ----------
CUMULATIVE PREFERRED AND PREFERENCE STOCK WITH MANDATORY REDEMPTION,
NET OF AMOUNT DUE WITHIN ONE YEAR:
United Water New Jersey:
5% Series, authorized 15,000 shares; outstanding 6,000 and 6,600 shares 540 600
7 3/8% Series, authorized and outstanding 150,000 shares 15,000 15,000
United Water New York:
Authorized 100,000 shares, stated value--$100 per share issuable in series:
$8.75 Series, issued and outstanding 22,000 and 24,000 shares 2,000 2,200
$9.84 Series, issued and outstanding 46,880 and 50,000 shares 4,375 4,688
United Water Idaho: 5%, authorized and outstanding 7,399 and 7,415 shares 607 605
United Water Resources:
7 5/8% Series B, authorized 300,000 shares; outstanding 285,000 and 300,000 shares 27,226 28,745
5% Series A, convertible preference, authorized 3,983,976 shares;
outstanding 2,296,278 and 2,628,142 shares 30,534 34,741
---------- ----------
TOTAL PREFERRED AND PREFERENCE STOCK WITH MANDATORY REDEMPTION 80,282 86,579
---------- ----------
LONG-TERM DEBT, NET OF AMOUNT DUE WITHIN ONE YEAR:
United Water New Jersey:
First mortgage bonds, 5.8%-5.9%, due 2024 (weighted average 5.85%) 40,000 40,000
Unsecured promissory notes, variable rates, due 2025-2026
(weighted average 3.51% and 4.54%) 165,000 130,000
United Water New York:
First mortgage bonds, 9 3/8%, due 2001 600 900
Unsecured promissory notes, 5.65%-8.98%, due 2023-2025 (weighted average 6.74%) 51,000 51,000
United Water Resources:
Promissory notes, 9.38%, due 2019 25,000 25,000
Promissory notes, floating LIBOR-based interest rate, due 2006 24,000 26,000
Promissory notes, 7.45%-7.9%, due 2007-2022 (weighted average 7.73%) 40,000 40,000
United Waterworks:
Unsecured debt, 5.30%-10.05%, due 2000-2028 (weighted average 7.07% and 7.55%) 282,815 280,365
United Properties Group:
Mortgage notes, 8%-10%, due 1999-2006 (weighted average 9.97% and 9.92%) 15,697 17,265
Floating rate LIBOR-based term loan, due 2000 7,211 7,251
New Jersey Wastewater Treatment Loans, 0%-4.2%, due 2013
(weighted average 2.48% and 2.22%) 1,646 1,931
United Water Mid-Atlantic: Promissory note at floating interest rate, due 2004 - 3,025
---------- ----------
TOTAL LONG-TERM DEBT 652,969 622,737
---------- ----------
TOTAL CAPITALIZATION $1,198,280 $1,136,917
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of United Water Resources (United Water, or the Company) and the
subsidiaries in which it has more than 50% ownership. The Company accounts for
investments in which it has significant influence under the equity method of
accounting. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Certain
prior year amounts have been reclassified to conform with current year
presentation.
DESCRIPTION OF BUSINESS: United Water's principal utility subsidiaries include
United Water New Jersey, United Water New York and United Waterworks. These
subsidiaries provide water and wastewater services to approximately two million
people in 13 states. Other significant wholly-owned subsidiaries of United Water
include: United Properties Group (United Properties), which is engaged in real
estate activities including commercial rentals, land development and sales, golf
course operations, and consulting services; United Water UK, an equal partner
with Lyonnaise Europe (a wholly-owned subsidiary of Suez Lyonnaise des Eaux) in
the Northumbrian Partnership, which has acquired a 20% interest in Northumbrian
Water Group plc (NWG), a major investor-owned water and wastewater company in
the United Kingdom; and United Water Mid-Atlantic, which owns and operates water
and wastewater systems. In addition, the Company has entered into public-private
partnerships with the cities of Hoboken and Jersey City, New Jersey, whereby the
municipalities retain ownership of their systems while the Company operates and
maintains them. United Water also has several equity investments in the contract
services business.
United Water's domestic utility subsidiaries are subject to regulation by the
public utility commissions of the states in which they operate. Their
accounting must comply with the applicable uniform system of accounts prescribed
by these regulatory commissions and must also conform to generally accepted
accounting principles as applied to rate-regulated public utilities. The
Company continues to follow
40
<PAGE>
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.
EQUITY INVESTMENTS: The Company holds an indirect investment in NWG and has
representation on its board of directors, and owns a 50% stake in United Water
Services and a 33.3% and 20.5% interest in United Water Services Canada (UWS
Canada) and United Water Services Mexico (UWS Mexico), respectively. The Company
accounts for these investments under the equity method of accounting by
recording its proportionate share of earnings included in equity investments in
the consolidated balance sheet and equity earnings of affiliates in the
statement of consolidated income.
FOREIGN CURRENCY TRANSLATION: Financial statements for United Water UK are
translated into U.S. dollars at year-end exchange rates for assets and
liabilities and weighted average exchange rates for income and expenses. The
resulting cumulative translation adjustment is recorded as a separate component
of stockholders' equity in the Company's statement of consolidated common
equity.
Transactions for UWS Canada and UWS Mexico are recorded in U.S. dollars.
Therefore, a foreign currency translation adjustment is not required for these
entities.
UTILITY PLANT: Utility plant is recorded at original cost, which includes
direct and indirect labor and material costs associated with construction
activities, related operating overheads and an allowance for funds used during
construction (AFUDC). AFUDC is a non-cash credit to income and includes both
the cost of borrowed funds and a return on equity funds attributable to plant
under construction.
The original cost of utility property retired or otherwise disposed of in the
normal course of business is charged to accumulated depreciation, and salvage
(net of removal cost) is credited thereto; no gain or loss is recognized. The
costs of property repairs, replacements and renewals of minor property items are
included in maintenance expense when incurred.
41
<PAGE>
UTILITY PLANT ACQUISITION ADJUSTMENTS: Utility plant acquisition adjustments
represent the difference between the purchase price and the book value of net
assets acquired, and are amortized, generally, on a straight-line basis over a
40-year period. Utility plant acquisition adjustments include a premium paid to
acquire operating utilities. At each balance sheet date, the Company evaluates
the realizability of utility plant acquisition adjustments on the basis of
expected future undiscounted cash flows. Based on its most recent evaluation,
the Company believes that no impairment of utility plant acquisition adjustments
exists at December 31, 1998.
ADVANCES AND CONTRIBUTIONS IN AID OF CONSTRUCTION: When required by the public
utility commissions of the states in which the Company's utility subsidiaries
operate, outside parties, generally customers and developers, make payments to
the Company to fund certain utility capital expenditures to provide water or
wastewater service to new customers. Non-refundable amounts received by the
Company are recorded as contributions in aid of construction, except where the
Company is required to record such amounts directly as a reduction to utility
plant. Refundable amounts received are recorded as advances, and are refundable,
for limited periods of time, generally as new customers begin to receive
service. The remaining balance of any advances received, after the Company has
made all required refunds of such advances, is transferred to contributions in
aid of construction.
The balances of advances and contributions are used to reduce utility plant in
determining rate base, and plant funded by advances and contributions is
generally not depreciated. However, the public utility commissions in several of
the states in which the Company operates permit the depreciation of plant funded
by contributions in aid of construction, but also require that contributions be
amortized, so that there is no net effect on income from the depreciation of the
contributed plant. For income tax purposes, advances and contributions received
after 1986 and through June 1996 are included as taxable income, and the related
plant is depreciated for tax purposes. In accordance with changes in the tax
law, effective June 12, 1996, advances and contributions are no longer included
in taxable income, nor is the related plant depreciated for tax purposes.
JOINTLY OWNED FACILITIES: Utility plant includes United Water New Jersey's 50%
interest in the Wanaque South Water Supply Project, the net book value of which
was $42 million and $42.8 million at December 31, 1998 and 1997, respectively.
United Water New Jersey's share of the project's operating expenses is included
in operation and maintenance expenses.
42
<PAGE>
REGULATORY ASSETS: Included in deferred charges and other assets are regulatory
items that are expected to be recognized when included in future rates and
recovered from customers as directed by the state public utility commissions.
These regulatory assets include items that the public utility commissions have
ordered the Company's regulated utilities to defer and prudently incurred costs
where the Company expects that recovery is probable because of the past
practices of the public utility commissions.
Regulatory assets consisted of the following at December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(thousands of dollars) 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Recoverable income taxes $39,328 $39,818
Deferred employee benefits 20,918 22,918
Rate case 3,308 2,459
Tank painting 3,117 3,181
Other 9,877 11,372
- -------------------------------------------------------------------
Total regulatory assets $76,548 $79,748
- -------------------------------------------------------------------
</TABLE>
REAL ESTATE: Real estate properties are carried at the lower of cost, which
includes original purchase price and direct development costs, discounted cash
flow value or fair value. Real estate taxes and interest costs are capitalized
during the development period. The amount of interest capitalized was $650,890
in 1998, $651,251 in 1997 and $620,000 in 1996. Real estate operating revenues
include rental income from commercial properties, proceeds from the disposition
of real estate properties, revenues from golf course operations and fees from
consulting services.
UNAMORTIZED DEBT EXPENSE: Debt premium, debt discount and deferred debt
expenses are amortized to income or expense over the lives of the applicable
issues.
REVENUES FROM UTILITY OPERATIONS: United Water New Jersey and United Waterworks
recognize as revenues billings to customers, plus estimated revenues for
consumption for the period from the date of the last billing to the balance
sheet date. United Water New York recognizes revenues as bills are rendered to
customers and does not accrue for unbilled revenues. United Water New York and
United Water New Rochelle have been directed by the New York Public Service
Commission to institute a Revenue Reconciliation Clause, which requires the
reconciliation of billed revenues with pro forma revenues that were used to set
rates. Any variances outside a threshold range are accrued or deferred for
subsequent recovery from or refund to customers. At December 31, 1998 and 1997,
United Water New York and United Water New Rochelle had $4.4 million and $3.6
million, respectively, of net unamortized revenue
43
<PAGE>
accruals, resulting from revenues which were less than the amounts used to set
rates. These amounts are expected to be recovered over a three-year period.
REVENUES FROM REAL ESTATE ACTIVITIES: Revenues from real estate sales are
recognized when the transaction is consummated and title has passed. Revenues
from real estate transactions were $4.9 million, $11.2 million and $5.4 million
in 1998, 1997 and 1996, respectively.
United Properties owns several office buildings, with an aggregate net book
value of $57.7 million (net of accumulated depreciation of $11 million) at
December 31, 1998, which are leased to tenants under various operating leases.
The following is a schedule, by year, of the minimum future rental income on
non-cancelable operating leases outstanding at December 31, 1998:
<TABLE>
- --------------------------------------------------------------
(thousands of dollars)
- --------------------------------------------------------------
<S> <C>
1999 $ 5,827
2000 6,408
2001 6,359
2002 6,251
2003 5,532
Thereafter 22,901
- --------------------------------------------------------------
Total minimum future rental income $53,278
- --------------------------------------------------------------
</TABLE>
REVENUES FROM PUBLIC-PRIVATE PARTNERSHIPS: In May 1996, United Water entered
into a five-year contract with Jersey City to operate its municipal water
system. This contract stipulates that the city can terminate the contract in the
fourth and fifth years, subject to a termination penalty. If the city terminated
the contract, this would not have a material effect on United Water's financial
position or results of operations. The contract also provides for monthly
service fees which are recorded as revenues when billed. In addition, certain
incentives based on collection and marketing goals are recognized when earned.
Service fee revenues for the years ended December 31, 1998 and 1997 and for the
eight months ended December 31, 1996 were $10 million, $9.2 million and $4.7
million, respectively.
In 1994, the Company entered into a ten-year contract with the city of Hoboken
to operate, maintain and manage its municipal water system. In 1996, this
contract was extended for an additional ten years. Under this contract, revenues
are recorded monthly based upon customer billings. Revenues for the years ended
December 31, 1998, 1997 and 1996 were $4 million, $3.9 million and $3.5 million,
respectively.
44
<PAGE>
DEPRECIATION: Depreciation of utility plant and real estate properties is
recognized using the straight-line method over the estimated service lives of
the properties. Utility plant depreciation rates are prescribed by the public
utility commissions. The provisions for depreciation in 1998, 1997 and 1996 were
equivalent to 2.4%, 2.3% and 2.1%, respectively, of average depreciable utility
plant in service. Real estate properties are depreciated over estimated lives
ranging between 25 and 50 years. For federal income tax purposes, depreciation
is computed using accelerated methods and, in general, shorter depreciable lives
as permitted under the Internal Revenue Code.
INCOME TAXES: The Company and its eligible subsidiaries file a consolidated
federal income tax return. Federal income taxes are deferred under the liability
method in accordance with SFAS No. 109, "Accounting for Income Taxes." Under the
liability method, deferred income taxes are provided for all differences between
financial statement and tax basis of assets and liabilities. Additional deferred
income taxes and offsetting regulatory assets or liabilities are recorded to
recognize that income taxes will be recoverable or refundable through future
revenues.
Investment tax credits arising from property additions are deferred and
amortized over the estimated service lives of the related properties.
STATEMENT OF CASH FLOWS: United Water considers all highly liquid investments
with original maturities of three months or less to be cash equivalents. The
Company made cash payments for interest (net of amounts capitalized) and federal
and state income taxes as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest, net of amounts capitalized $44,651 $44,400 $43,728
Income taxes 11,520 7,413 11,921
- --------------------------------------------------------------------------------
</TABLE>
The following is a supplemental schedule of non-cash transactions in 1998 and
1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(thousands of dollars) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Cumulative translation adjustment $ 464 $ 591
Conversion of 5% preference stock 4,576 4,967
- --------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
NOTE 2 -EQUITY INVESTMENTS
On June 28, 1996, United Water and Lyonnaise Europe formed the Northumbrian
Partnership (the Partnership), an equal partnership which has acquired a 20%
interest in NWG, a major investor-owned water and wastewater company in the
United Kingdom. United Water's initial $62 million investment in the Partnership
was made through its wholly-owned subsidiary in the United Kingdom, United Water
UK Limited. Investment in the Partnership was $96.3 million and $78.7 million at
December 31, 1998 and 1997, respectively, and is included in equity investments
in the consolidated balance sheet. United Water's share of the Partnership's
earnings, which totaled $17.1 million and $13.6 million (excluding the windfall
profits tax) in 1998 and 1997, respectively, is included in equity earnings of
affiliates in the accompanying statement of consolidated income.
During 1997, the United Kingdom's new Labor Government imposed a one-time
"windfall profits" tax on privatized utilities. The levying of this one-time tax
negatively impacted the Company's earnings from its investment in NWG by $13.1
million, which was partially offset by the effect of a change in the tax rate on
deferred taxes of $2.8 million. The result was a net impact of $10.3 million.
The imposition of this tax had been factored into the Company's financial
analysis at the time of its investment in NWG and was considered in determining
the purchase price. The tax did not have an effect on United Water's cash flow
or ability to pay dividends, nor did it affect the long-term benefit the Company
expected to derive from its investment in NWG.
On July 28, 1997, United Water Services, a 50/50 joint venture between United
Water and Suez Lyonnaise des Eaux acquired the remaining 50% stake in JMM
Operational Services.
United Water Services provides contract operations and maintenance services for
water and wastewater facilities and is pursuing additional contract operations.
As a result, United Water Services was awarded several contracts. The largest
awards include a ten-year contract to operate the wastewater systems in
Milwaukee, Wisconsin, and a 20-year contract to operate the water system in
Atlanta, Georgia, with a minority partner. United Water Services also operates
a meter installation subsidiary, United Metering, which it purchased from United
Water in December 1997 for book value of $6.2 million.
In July 1997, the Company also acquired a 30% and a 20% interest in UWS Canada
and UWS Mexico, respectively. In December 1998, United Water purchased
additional interests and now has a 33.3% and
46
<PAGE>
a 20.5% interest in UWS Canada and UWS Mexico, respectively.
At December 31, 1998 and 1997, United Water had equity investments, relating to
contract services of approximately $19.8 million and $20.2 million,
respectively, including investments in Canada and Mexico. This amount is
included in equity investments in the accompanying consolidated balance sheet.
United Water's share of earnings in these investments is included in equity
earnings of affiliates in the accompanying statement of consolidated income.
NOTE 3 - NEW MEXICO SETTLEMENT
On March 29, 1996, the Company settled the condemnation proceeding with the city
of Rio Rancho, New Mexico (the City). The agreement was approved on the same day
by the Thirteenth Judicial District Court in New Mexico. Under the terms of the
agreement, the Company agreed to accept $67 million for the water and wastewater
systems of its United Water New Mexico operations. Results of this transaction
are included in the Company's first quarter 1996 earnings.
NOTE 4 - NOTES PAYABLE
United Water and its subsidiaries have a number of credit lines with banks.
Borrowings under these credit lines generally bear interest at rates between the
London Interbank Offered Rate (LIBOR) and the prime lending rate. United Water
pays commitment fees under arrangements with certain of these banks to
compensate them for services and to support these lines of credit. There are no
legal restrictions placed on the withdrawal or other use of these bank balances.
The total credit lines available, the amounts utilized and the weighted average
interest rates at December 31 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
(thousands of dollars) 1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Total credit lines available $280,500 $235,800
Utilized:
Drawn 93,400 74,925
Pledged 655 3,055
Weighted average interest rates 5.5% 5.9%
- -----------------------------------------------------------------
</TABLE>
47
<PAGE>
NOTE 5 - LONG-TERM DEBT
The long-term debt repayments over each of the next five years are as follows:
1999--$3.7 million; 2000--$12.2 million; 2001--$19.7 million; 2002--$4.7 million
and 2003--$4.8 million. United Water New Jersey, United Water New York, United
Waterworks and other subsidiaries of United Water are subject to certain
restrictive covenants related to their issued debt.
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 are being 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). 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 June 1996, United Water entered into a $30 million long-term note agreement
with Credit Lyonnais to partially fund its investment in the Northumbrian
Partnership. The loan bears interest at a LIBOR-based floating rate and is
payable in annual installments through June 2006. In December 1998, the Company
entered into an interest rate swap agreement which fixed the interest rate at
5.24% for 1999 and 5.34% for the years 2000 through 2003.
48
<PAGE>
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. See Note 7 to the
consolidated financial statements for further details.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Capital Expenditures
The future capital expenditures of the Company'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. United Properties
currently projects spending $25.9 million over the next five years for capital
expenditures on its existing real estate portfolio, including $8.3 million and
$6.9 million in 1999 and 2000, respectively.
Operating Leases
United Water's total consolidated rental expense was approximately $6.5 million
in 1998, $6.2 million in 1997 and $5.1 million in 1996. The minimum future
lease payments under all non-cancelable operating leases, which consist
primarily of buildings and automobiles, at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
(thousands of dollars)
- -----------------------------------------------------------------
<S> <C>
1999 $ 4,828
2000 3,576
2001 2,106
2002 1,137
2003 480
Thereafter 1,840
- ------------------------------------------------------------------
Total minimum future lease payments $13,967
- ------------------------------------------------------------------
</TABLE>
49
<PAGE>
Legal Matters
United Water has been notified that it may be one of several defendants in a
lawsuit involving cancer incidences in Dover Township, New Jersey. A complaint
has not been filed; however, an agreement was signed on January 29, 1998 with
the potential plaintiffs that would toll the statute of limitations for a time
period of at least eighteen months. Management believes if a lawsuit is
commenced, the Company will have meritorious defenses, and there will be a
number of parties against whom it will have recourse. Therefore, the Company
believes that the ultimate disposition of this matter will not have a material
adverse effect on the financial position or results of operations.
The Company has various purchase commitments for materials, supplies and other
services incidental to the ordinary conduct of business. In addition, the
Company is routinely involved in legal actions arising in the ordinary course of
its utility operations. In the opinion of management, none of these matters will
have a material adverse impact on the Company.
NOTE 7 - PREFERRED AND PREFERENCE STOCK
The utility subsidiaries of the Company have issued and outstanding cumulative
preferred stock, generally with mandatory redemption provisions requiring annual
sinking fund payments. These sinking fund requirements total $2,073,000 in each
of the years 1999 and 2000 and $4,216,000 in 2001 through 2003. The redemption
of cumulative preferred stock was $2,073,000 in 1998 and $260,000 in each of the
years 1997 and 1996. In addition, except as described in the next paragraph,
optional sinking fund provisions can be exercised and redemptions made at
specific prices for all preferred stock issues. Redemptions require payment of
accrued and unpaid dividends up to the date fixed for redemption.
As a result of the merger with GWC Corporation in 1994, United Water issued
3,341,078 shares ($46 million par value) of 5% Series A cumulative convertible
preference stock, valued at $43.3 million at the time of the merger and $30
million of 7 5/8% Series B cumulative preferred stock, valued at $31.1 million
at the time of the merger. Lyonnaise American Holding, Inc.(LAH) owned 97.7% of
the Series A preference stock outstanding. The Series B preferred stock has a
$1.5 million mandatory annual redemption commencing in 1998. Shares of the
Series B preferred stock could not be redeemed by the Company prior to September
1, 1997. Each share of the Series A preference stock outstanding may be
converted into .83333 shares of United Water common stock at any time commencing
April 22, 1996. However, under the Governance Agreement between United Water and
LAH, LAH may convert no more
50
<PAGE>
than 10% of the Series A preference stock it owns during the year commencing
April 22, 1996, and an additional 10% cumulatively per year thereafter until
April 22, 2003, at which time these conversion restrictions end. During 1998,
331,864 shares of the Series A preference stock with a value of $4.6 million
were converted into 276,543 shares of United Water common stock with a value of
$4.4 million. During 1997, 360,014 shares of the Series A preference stock with
a value of $5 million were converted into 299,958 shares of United Water common
stock with a value of $4.7 million. As a result, at December 31, 1998, LAH owned
approximately 29.5% of the issued and outstanding United Water common stock and
approximately 98.1% of the issued and outstanding United Water 5% cumulative
convertible preference stock. United Water may not redeem any of the
outstanding, unconverted Series A preference stock prior to maturity on April
22, 2004.
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.
51
<PAGE>
NOTE 8 - INCENTIVE STOCK PLANS
Under the Company's management incentive plan, the following options have been
granted to key employees:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Options Per Option
- -----------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1995 814,670 $14.508
Granted 204,300 12.250
Exercised (120,813) 12.965
Canceled or expired (10,340) 14.703
- -----------------------------------------------------------------------------
Outstanding at December 31, 1996 887,817 $14.196
Granted 370,840 15.580
Exercised (439,605) 15.032
Canceled or expired (20,062) 15.501
- -----------------------------------------------------------------------------
Outstanding at December 31, 1997 798,990 $14.345
Granted 408,480 18.625
Exercised (186,808) 15.182
Canceled or expired (23,380) 18.626
- -----------------------------------------------------------------------------
OUTSTANDING AT
DECEMBER 31, 1998 997,282 $15.841
- -----------------------------------------------------------------------------
</TABLE>
All options are currently exercisable and represent the only stock options
outstanding at December 31, 1998. A total of 2,026,175 common shares are
reserved for issuance under the management incentive plan.
In May 1993, the shareholders approved the creation of dividend units to be
issued in conjunction with stock options granted under the management incentive
plan. One dividend unit may be attached to each unexercised option to purchase a
share of United Water common stock, which entitles the option holder to accrue,
as a credit against the option exercise price, the aggregate dividends actually
paid on a share of United Water common stock while the dividend unit is in
effect. In May 1997, the shareholders amended the plan to provide that the
dividend units be granted separately and detached from the stock options and
accrue dividends for a predetermined period of time, after which, they are
distributed. United Water recorded compensation expense of $2.6 million in 1998,
$2.3 million in 1997 and $2.5 million in 1996 with respect to the management
incentive plan.
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
123, "Accounting for Stock-Based Compensation," which establishes financial
accounting and reporting standards for stock-
52
<PAGE>
based employee compensation plans. The statement defines a fair value based
method of accounting for employee stock options and similar equity instruments
and encourages the use of that method of accounting for all employee stock
compensation plans. However, SFAS No. 123 also permits the measurement of
compensation costs using the intrinsic value based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company has elected to account for its employee
stock compensation plans under the guidance prescribed by APB Opinion No. 25 and
has made the required pro forma disclosures of net income and earnings per share
as if the fair value based method of accounting defined in SFAS No. 123 had been
applied as indicated below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(thousands of dollars except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $43,929 $29,331 $34,010
Pro forma 44,140 29,273 34,079
Earnings per common share:
As reported $ 1.19 $ .83 $ 1.01
Pro forma 1.19 .83 1.01
Earnings per common share-assuming dilution:
As reported $ 1.17 $ .83 $ 1.00
Pro forma 1.17 .83 1.01
- --------------------------------------------------------------------------------
</TABLE>
The fair value for these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for the years ended December 31, 1998, 1997 and 1996, respectively:
expected volatility of 21.1%, 20.3% and 21.5%; risk-free interest rates of 5.5%,
6.4% and 5.5%; expected life of 6 years and dividend yields of 5.0% in 1998,
5.9% in 1997 and 0.0% in 1996. The weighted average fair value of each option
granted during the years ended December 31, 1998, 1997 and 1996 was $2.99, $2.30
and $4.30, respectively. The Black-Scholes option-pricing model requires the
input of highly subjective assumptions including the expected stock price
volatility. Changes in the subjective input assumptions can materially affect
the fair value estimate. In management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
In May 1988, the shareholders approved a restricted stock plan for certain key
employees. United Water issued 1,250 shares in 1996 in connection with the
restricted stock plan. Such shares are earned by the recipients over a five-
year period. United Water recorded compensation expense of $69,000 in 1996 with
respect to this restricted stock plan.
53
<PAGE>
NOTE 9 - SHAREHOLDER RIGHTS PLAN
In July 1989, the board of directors of United Water approved a Shareholder
Rights Plan designed to protect shareholders against unfair and unequal
treatment in the event of a proposed takeover. It also guards against partial
tender offers and other hostile tactics to gain control of United Water without
paying all shareholders a fair price. Under the plan, each share of United
Water's common stock also represents one Series A Participating Preferred Stock
Purchase Right (Right) until the Rights become exercisable. The Rights attach to
all of United Water's common stock outstanding as of August 1, 1989, or
subsequently issued, and expire on August 1, 1999.
The Rights would be exercisable only if a person or group acquired 20% or more
of United Water's common stock or announced a tender offer that would lead to
ownership by a person or group of 20% or more of the common stock.
In certain cases where an acquirer purchased more than 20% of United Water's
common stock, the Rights would allow shareholders (other than the acquirer) to
purchase shares of United Water's common stock at 50% of market price,
diminishing the value of the acquirer's shares and diluting the acquirer's
equity position in United Water. If United Water were acquired in a merger or
other business combination transaction, under certain circumstances the Rights
could be used to purchase shares in the acquirer at 50% of the market price.
Subject to certain conditions, if a person or group acquired 20% or more of
United Water's common stock, United Water's board of directors may exchange each
Right held by shareholders (other than the acquirer) for one share of common
stock or 1/100 of a share of Series A Participating Preferred Stock. If an
acquirer successfully purchased 80% of United Water's common stock after
tendering for all of the stock, the Rights would not operate. If holders of a
majority of the shares of United Water's common stock approved a proposed
acquisition under specified circumstances, the Rights would be redeemed at one
cent each. They could also be redeemed by United Water's board of directors for
one cent each at any time prior to the acquisition of 20% of the common stock by
an acquirer.
On September 15, 1993, United Water's Shareholder Rights Plan was amended in
connection with United Water's execution of a merger agreement with GWC
Corporation. The amendment generally excepts the majority stockholder of United
Water (Suez Lyonnaise des Eaux) and its affiliates and associates from
triggering the Rights through the execution of the merger agreement, the
performance of the transactions contemplated therein or otherwise.
54
<PAGE>
NOTE 10 - EMPLOYEE BENEFITS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". This statement addresses disclosure
only. It does not address measurement or recognition. United Water adopted SFAS
No. 132 in 1998.
DEFINED BENEFIT PENSION PLANS: Most of United Water's employees are covered by
trusteed, non-contributory, defined benefit pension plans. Benefits under these
plans are based upon years of service and the employee's compensation during the
last five years of employment. United Water's policy is to fund amounts accrued
for pension expense to the extent deductible for federal income tax purposes. It
is expected that no funding will be made for 1998.
POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS: The Company sponsors a defined
benefit postretirement plan that covers hospitalization, major medical benefits
and life insurance benefits for retired salaried and non-salaried employees.
The Company is funding a portion of its postretirement health care benefits
through contributions to Voluntary Employees' Beneficiary Association (VEBA)
Trusts.
55
<PAGE>
The following sets forth the qualified plans' funded status and reconciles that
funded status to the amounts recognized in the Company's balance sheet as of
December 31:
PENSION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(thousands of dollars) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $138,092 $124,342
Service cost 4,367 3,553
Interest cost 9,971 9,439
Actuarial loss 5,119 7,492
Benefits paid (6,970) (6,734)
- --------------------------------------------------------------------------------
Benefit obligation at end of year 150,579 138,092
- --------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 200,853 174,560
Actual return on plan assets 33,118 33,027
Benefits paid (6,970) (6,734)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year* 227,001 200,853
- --------------------------------------------------------------------------------
Funded status 76,422 62,761
Unrecognized transition obligation (3,569) (4,196)
Unrecognized actuarial gain (45,483) (39,154)
Unrecognized prior service cost 1,867 2,015
- --------------------------------------------------------------------------------
PREPAID BENEFIT COST $ 29,237 $ 21,426
- --------------------------------------------------------------------------------
</TABLE>
*Primarily stocks and bonds, including $13.7 million and $11.2 million,
respectively, in common stock of United Water.
56
<PAGE>
OTHER BENEFITS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(thousands of dollars) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 51,900 $ 42,903
Service cost 2,953 2,091
Interest cost 3,954 3,299
Actuarial loss 2,620 5,312
Benefits paid (1,044) (1,705)
- --------------------------------------------------------------------------------
Benefit obligation at end of year 60,383 51,900
- --------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 21,704 16,695
Actual return on plan assets 4,207 3,562
Employer contribution 2,223 3,152
Benefits paid (1,044) (1,705)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year 27,090 21,704
- --------------------------------------------------------------------------------
Funded status (33,293) (30,196)
Unrecognized transition obligation 20,470 21,911
Unrecognized actuarial gain (7,419) (7,818)
- --------------------------------------------------------------------------------
ACCRUED BENEFIT COST $(20,242) $(16,103)
- --------------------------------------------------------------------------------
</TABLE>
The components of net periodic pension income for the Company's qualified and
supplemental plans were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 4,600 $ 3,726 $ 3,945
Interest cost 10,438 9,842 9,379
Expected return on plan assets (19,748) (16,275) (14,950)
Amortization of transition obligation (583) (583) (543)
Amortization of gain (1,941) (1,549) (967)
Amortization of prior service cost 226 268 400
- --------------------------------------------------------------------------------
NET PERIODIC PENSION INCOME $ (7,008) $ (4,571) $ (2,736)
- --------------------------------------------------------------------------------
</TABLE>
Assumptions as of December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Assumed discount rate 7.125% 7.375% 7.75%
Expected return on assets 10.0% 9.5% 9.5%
Range of compensation increase 3.75-4.5% 3.75-4.5% 3.75-4.5%
- --------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
Net periodic postretirement benefit cost components were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 2,953 $ 2,091 $ 2,404
Interest cost 3,954 3,299 3,095
Expected return on plan assets (1,896) (1,396) (1,098)
Amortization of transition obligation 1,441 1,441 1,441
Amortization of gain (90) (462) (114)
- --------------------------------------------------------------------------------
NET PERIODIC BENEFIT COST $ 6,362 $ 4,973 $ 5,728
- --------------------------------------------------------------------------------
</TABLE>
Assumptions as of December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Assumed discount rate 7.375% 7.625% 8.0%
Expected return on assets 9.5% 9.5% 9.5%
- --------------------------------------------------------------------------------
</TABLE>
The associated health care cost trend rate used in measuring the postretirement
benefit obligation at December 31, 1998 was 7.1%, gradually declining to 5.5% in
2002 and thereafter. Changing the assumed health care cost trend rate by one
percentage point in each year results in changes in service cost and interest,
and plan obligation as follows:
<TABLE>
<CAPTION>
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
- --------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Effect on total service and interest cost components $ 1.5 $( 1.1)
Effect on postretirement benefit obligation 9.6 (7.7)
</TABLE>
Postretirement health care costs in excess of those currently included in rates
have been deferred in those jurisdictions where their recovery is deemed
probable. At December 31, 1998 and 1997, United Water had regulatory assets
relating to deferred employee benefits of $20.9 million and $22.9 million,
respectively, for recovery in future rates.
SUPPLEMENTAL BENEFIT PLANS: Certain categories of employees are covered by non-
funded supplemental plans. The projected benefit obligations of these plans at
December 31, 1998 and 1997 totaled $6.5 million
58
<PAGE>
and $6.2 million, respectively. At December 31, 1998 and 1997, the unfunded
accumulated benefit obligations of $6 million and $5.9 million, respectively,
have been recorded in other deferred credits and liabilities and intangible
pension assets of $372,000 and $678,000, respectively, are included in deferred
charges and other assets.
United Water maintains defined contribution savings plans which permit employees
to make voluntary contributions with Company matching as defined by the plan
agreements. United Water made contributions of $1,764,000, $1,155,000 and
$1,167,000 in 1998, 1997 and 1996, respectively, to defined contribution savings
plans.
NOTE 11 - RATE MATTERS
The following rate decisions were rendered to United Water's regulated utilities
during 1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Effective Allowed Annual %
(thousands of dollars) Date ROE Increase Increase
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pennsylvania 2/03/98 11.00 $2,140 11.0
Pennsylvania-DSIC* 4/01/98 -- 32 0.2
Delaware (1998 case) 5/11/98 N/A 2,385 (a) 14.4
Pennsylvania-STAS** 6/01/98 -- (23) (b) 0.1
Pennsylvania-DSIC* 7/01/98 -- 41 0.2
Idaho 7/06/98 10.75 1,916 8.7
Indiana (4 rate cases) 7/08/98 10.50 1,041 18.3
New York (Sloatsburg/Pothat) 7/18/98 -- 29 8.8
New Rochelle (Purchased Water) 8/24/98 -- 453 (c) 2.6
Pennsylvania-DSIC* 10/01/98 -- 30 0.22
New Rochelle (Revenue Rec.) 11/01/98 -- 81 (d) 0.5
New Rochelle (3rd Stage) 11/19/98 -- 491 (e) 2.8
Owego 1/01/99 10.00 21 2.33
Pennsylvania-DSIC* 1/01/99 -- 54 0.3
- ---------------------------------------------------------------------------------------
Totals $8,691
- ---------------------------------------------------------------------------------------
</TABLE>
* Distribution System Improvement Charge
** State Tax Adjustment Surcharge
(a) Interim increase, granted subject to refund. Decision pending.
(b) Reduction on the Capital Stock and Franchise Tax.
(c) Pass-through for purchased water expense increase.
(d) One-third of a three-year recovery.
(e) Third-stage increase of a three-year settlement.
59
<PAGE>
At December 31, 1998, the most significant rate cases pending were filed by
United Water Florida and United Water Delaware. The increases were requested
primarily to fund capital investments and meet higher operation and maintenance
costs. In May 1998, United Water Florida applied for rate relief in the amount
of $2.2 million, or 24.3%, in water revenues and $3.1 million, or 18.7%, in
wastewater revenues.
In March 1998, United Water Delaware applied for rate relief in the amount of
$4.1 million or 24.8%, in water revenues. On May 11, 1998, United Water
Delaware placed $2.4 million in increased revenues in effect, subject to refund.
Management believes that any potential refunds will not have a material effect
on earnings.
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 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.
The Company expects that the Commission will enter an Order on remand which will
eliminate the prospect of refunding any part of the $2.3 million.
The Company has requested and received recovery of its regulatory assets for
postretirement benefits other than pension as well as the recognition of the
current expense for these benefits for the majority of its regulated
subsidiaries. The regulatory assets are expected to be recovered over an average
period of 15 years. At December 31, 1998, three regulated subsidiaries were
awaiting decisions from the applicable commissions. Management believes it will
receive favorable decisions on the pending cases prior to the end of 1999.
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.
60
<PAGE>
NOTE 12 - INCOME TAXES
DEFERRED INCOME TAX ASSETS AND LIABILITIES: Deferred tax liabilities (assets)
and deferred investment tax credits consisted of the following at December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
(thousands of dollars) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Basis differences of property, plant
and equipment $140,094 $130,891
Real estate transactions and
capitalized costs 15,726 15,586
Prepaid employee benefits 10,941 8,550
Other liabilities 24,151 23,052
- ---------------------------------------------------------------------------
Gross deferred tax liabilities 190,912 178,079
- ---------------------------------------------------------------------------
Alternative minimum tax credit
carryforwards (12,754) (11,223)
Other assets (4,763) (5,862)
- ---------------------------------------------------------------------------
Gross deferred tax assets (17,517) (17,085)
- ---------------------------------------------------------------------------
Deferred investment tax credits 21,973 22,496
- ---------------------------------------------------------------------------
Total deferred income taxes
and investment tax credits $195,368 $183,490
- ---------------------------------------------------------------------------
</TABLE>
INCOME TAX PROVISION: A reconciliation of income tax expense at the statutory
federal income tax rate to the actual income tax expense for 1998, 1997 and 1996
is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 35% 35% 35%
Federal taxes at statutory rates on pretax
income before preferred stock
dividends of subsidiaries $24,389 $19,779 $22,544
Utility plant acquisition adjustment 733 641 1,725
State income taxes, net of federal benefit 985 835 1,823
Deferred investment tax credits (523) (510) (499)
Equity in foreign investments (5,985) (1,135) (2,476)
Other (149) 969 394
- --------------------------------------------------------------------------------
Provision for income taxes $19,450 $20,579 $23,511
- --------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
Income tax expense for 1998, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 7,146 $10,668 $ 5,919
State 1,349 969 1,310
- --------------------------------------------------------------------------------
Total current $ 8,495 $11,637 $ 7,229
- --------------------------------------------------------------------------------
Deferred (prepaid):
Accelerated depreciation $ 8,305 $ 7,437 $ 7,612
Contributions and advances for
construction 401 200 (1,855)
Prepaid employee benefits 2,391 1,400 1,931
UWNJ debt refinancing - - 3,053
Real estate transactions
and capitalized costs 117 (181) 64
Alternative minimum tax (1,531) (1,507) (741)
Investment tax credits (523) (510) (499)
State income taxes, net of federal benefit 192 316 972
Transfer of New Mexico operations - - 5,365
Other 1,603 1,787 380
- --------------------------------------------------------------------------------
Total deferred $10,955 $ 8,942 $16,282
- --------------------------------------------------------------------------------
Total provision for income taxes $19,450 $20,579 $23,511
- --------------------------------------------------------------------------------
</TABLE>
The Company considers the undistributed earnings of United Water UK to be
permanently reinvested and has not provided deferred taxes on these earnings.
At December 31, 1998 and 1997, cumulative undistributed earnings were $18.8
million and $5.4 million, respectively. These undistributed earnings could
become subject to additional tax if remitted, or deemed remitted, as a dividend.
Management believes it is not practicable to determine the amount of the
unrecognized deferred tax liability.
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts at December 31, 1998 and 1997, of those current assets and
liabilities that are considered financial instruments approximates their fair
values at those dates because of the short maturity of those instruments. Such
current assets and liabilities include cash and cash equivalents, restricted
cash, accounts receivable and unbilled revenues, notes payable, accounts payable
and other current liabilities, and accrued interest and dividends. Real estate
and other investments consist primarily of real estate and equity investments in
affiliates and are not financial instruments. The Company understands that there
are no quoted market prices for the Company's preferred stock, preference stock
or long-term debt. The fair values of the Company's long-term debt and preferred
and preference stock have been determined by discounting their future cash flows
using approximate current market interest rates for securities of a
62
<PAGE>
similar nature and duration.
The estimated fair values of United Water's financial instruments at December 31
were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Carrying Fair
(thousands of dollars) amount value
- --------------------------------------------------------------------------------
<S> <C> <C>
1998
Long-term debt $652,969 $715,993
Preferred and preference stock with
mandatory redemption 80,282 87,601
- --------------------------------------------------------------------------------
1997
Long-term debt $622,737 $673,321
Preferred and preference stock with
mandatory redemption 86,579 96,425
- --------------------------------------------------------------------------------
</TABLE>
The Company's customer advances for construction have a carrying value of $30.6
million and $27.4 million at December 31, 1998 and 1997, respectively. Their
relative fair values cannot be accurately estimated since future refund payments
depend on several variables, including new customer connections, customer
consumption levels and future rate increases. The Company holds an interest rate
cap to limit its exposure to a maximum interest rate of 7% on the United Water
New Jersey Variable Rate Demand Water Facilities Refunding Bonds aggregating
$130 million. In addition, United Water entered into an interest rate swap
agreement on the $30 million long-term note agreement with Credit Lyonnais which
fixed the interest rate at 5.24% for 1999 and 5.34% for the years 2000 through
2003. The fair values and carrying amounts of these financial instruments were
not material at December 31, 1998.
NOTE 14 - DISCONTINUED OPERATIONS
In December 1996, the Company announced its intention to dispose of its
environmental testing business, closing its Laboratory Resources' operation in
Teterboro, New Jersey. Subsequently, in January 1997, it sold its laboratory
facility in Brooklyn, Connecticut. The subsidiary had been operating in a very
competitive environment over a prolonged period of time and had not contributed
to the Company's earnings, with a net loss of $1.5 million in 1996. The Company
recorded an estimated provision of $1.1 million, net of income taxes, for
severance, future lease obligations and other related costs, included in the
loss on disposal of discontinued business in the accompanying statement of
consolidated income. The operating results of Laboratory Resources prior to the
date of discontinuance are shown separately in the accompanying statement of
consolidated income and all of the financial statements of prior periods have
been restated to reflect the discontinuance of Laboratory Resources' operations.
63
<PAGE>
NOTE 15 - 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. The statement defines two earnings per share calculations, basic
and diluted. The following table is a reconciliation of the numerator and
denominator under each method:
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Per Share
(thousands except per share data) Income Shares Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS:
Net income applicable to common
stock from continuing operations $43,929 37,028 $1.19
Net income applicable to common stock $43,929 37,028 $1.19
ASSUMING DILUTION:
Net income applicable to common
stock from continuing operations $43,929 37,028
Stock options - 165
Convertible preference stock 1,829 1,999
------- ------
Net income applicable to common stock $45,758 39,192 $1.17
- --------------------------------------------------------------------------------
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Per Share
(thousands except per share data) Income Shares Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS:
Net income applicable to common
stock from continuing operations $29,331 35,492 $.83
Net income applicable to common stock $29,331 35,492 $.83
ASSUMING DILUTION:
Net income applicable to common
stock from continuing operations $29,331 35,492
Stock options - 156
Convertible preference stock 2,076 2,190
------- ------
Net income applicable to common stock $31,407 37,838 $.83
- --------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Per Share
(thousands except per share data) Income Shares Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS:
Net income applicable to common
stock from continuing operations $38,407 33,707 $1.14
Loss from discontinued operations (4,397) 33,707 (.13)
Net income applicable to common stock $34,010 33,707 $1.01
ASSUMING DILUTION:
Net income applicable to common
stock from continuing operations $38,407 33,707
Stock options - 21
Convertible preference stock 2,342 2,490
------- ------
$40,749 36,218 $1.12
Loss from discontinued operations (4,397) 36,218 (.12)
Net income applicable to common stock $36,352 36,218 $1.00
- --------------------------------------------------------------------------------
</TABLE>
NOTE 16 - 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 and Florida.
65
<PAGE>
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
(thousands of dollars) Investments Estate Eliminations Consolidated
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Operating revenues $ 325,475 $16,196 $14,539 $ 356,210
Depreciation and amortization 35,594 1,593 2,763 39,950
Interest expense 39,361 1,742 4,814 45,917
Equity earnings of affiliates 17,103 - (5,652) 11,451
Provision for income taxes 23,288 1,985 (5,823) 19,450
Capital expenditures 100,034 5,038 952 106,024
Identifiable assets 1,626,876 91,739 50,507 1,769,122
- --------------------------------------------------------------------------------------------
1997
Operating revenues $ 313,346 $20,075 $17,988 $ 351,409
Depreciation and amortization 31,519 1,419 1,756 34,694
Interest expense 38,936 1,750 4,686 45,372
Equity earnings of affiliates 3,304 - (2,991) 313
Provision for income taxes 21,546 2,439 (3,406) 20,579
Capital expenditures 83,342 2,431 1,004 86,777
Identifiable assets 1,512,966 88,388 56,988 1,658,342
- --------------------------------------------------------------------------------------------
1996
Operating revenues $ 299,283 $13,769 $18,993 $ 332,045
Depreciation and amortization 28,157 1,296 1,399 30,852
Interest expense 39,161 1,750 4,040 44,951
Equity earnings of affiliates 5,991 - (1,374) 4,617
Provision for income taxes 26,924 1,066 (2,112) 25,878
Capital expenditures 75,726 2,831 2,914 81,471
Identifiable assets 1,461,302 90,212 30,583 1,582,097
- --------------------------------------------------------------------------------------------
</TABLE>
66
<PAGE>
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
UNITED WATER RESOURCES AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
QUARTER
(thousands of dollars, except per share data) FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Operating revenues $75,442 $86,219 $108,748 $85,801
Operating income 13,720 22,271 39,482 22,127
Net income applicable to common stock 3,134 11,042 19,500 10,253
Net income per common share $ .09 $ .30 $ .52 $ .27
Net income per common share-diluted $ .09 $ .30 $ .51 $ .27
- ---------------------------------------------------------------------------------------------
1997
Operating revenues $80,006 $87,761 $ 99,690 $83,952
Operating income 14,644 24,991 34,169 21,840
Net income applicable to common stock 4,102 11,244 6,464 7,521
Net income per common share $ .12 $ .32 $ .18 $ .21
Net income per common share-diluted $ .12 $ .31 $ .18 $ .21
- ---------------------------------------------------------------------------------------------
1996
Operating revenues $69,759 $82,581 $ 97,871 $81,834
Operating income 14,092 24,415 33,920 23,272
Net income applicable to common stock 4,881 7,363 15,521 6,245
Net income per common share $ .15 $ .22 $ .46 $ .18
Net income per common share-diluted $ .15 $ .22 $ .44 $ .18
- ---------------------------------------------------------------------------------------------
</TABLE>
As disclosed in Note 2 to the consolidated financial statements, the Company
recorded a net $10.3 million charge resulting from the "windfall profits" tax in
the United Kingdom during the third quarter of 1997.
As disclosed in Note 3 to the consolidated financial statements, the Company
settled the condemnation proceeding with the city of Rio Rancho. As a result, an
after-tax gain of $4.3 million is included in the Company's 1996 first quarter
earnings.
67
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
There were no changes in or disagreements with accountants on accounting
and financial disclosure in 1998.
68
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The information called for by Items 10 (including any information relating
to delinquent filers under Section 16 of the Securities Exchange Act of 1934),
11, 12 and 13 is omitted because the registrant will file with the Securities
and Exchange Commission, not later than 120 days after the close of the year
covered by this Form 10-K, a definitive proxy statement pursuant to Regulation
14A involving the election of directors which is hereby incorporated by
reference.
In determining which persons may be affiliates of the registrant for the
purpose of disclosing on the cover page of this Form 10-K the market value of
voting shares held by non-affiliates, the registrant has excluded shares held by
the members of its Board of Directors, executive officers and beneficial owners
of more than 10% of the common stock outstanding to the extent that they have
not disclaimed beneficial ownership. No determination has been made that any
director or person connected with a director is an affiliate or that any other
person is not an affiliate. The registrant specifically disclaims any intent to
characterize any person as being or not being an affiliate.
69
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
The following documents are filed as part of this report:
(a) Financial Statements and Supplementary Data: See Item 8
(b) Reports on Form 8-K filed in the fourth quarter of 1998: None
(c) Exhibits:
3(a) Restated Certificate of Incorporation (Articles of Incorporation) of
United Water Resources Inc., dated July 14, 1987 (Filed as Exhibit
4(b) to Registration Statement No. 33-20067)
3(b) Certificate of Correction to Restated Certificate of Incorporation of
United Water Resources Inc., dated August 13, 1987 (Filed as Exhibit
4(c) to Registration Statement No. 33-20067)
3(c) Certificate of Amendment to the Restated Articles of Incorporation of
United Water Resources Inc., dated April 22, 1994, amending Articles
5, 6, 7 and 9 (Filed as Exhibit 3(c) to Registration Statement No. 33-
61617)
3(d) Certificate of Amendment to the Restated Certificate of Incorporation
of United Water Resources Inc., dated June 3, 1997, amending Articles
5(a) (Filed as Exhibit 3(d) to Registration Statement No. 333-30229)
3(e) Amended By-laws of United Water Resources, dated as of March 10, 1994
(Filed as Exhibit 4(l) to Form 10-K for year ended December 31, 1993)
4(a) Specimen of United Water Resources Common Stock (Filed as Exhibit 4(d)
to Registration Statement No. 2-90540)
4(b) Governance Agreement between United Water Resources and Lyonnaise
American Holding Inc., dated April 22, 1994 (Filed in Appendix A to
Registration Statement No. 33-51703)
4(c) Amendment No. 1 to Governance Agreement between United Water Resources
and Lyonnaise American Holding, Inc., dated June 27, 1996 (Filed as
Exhibit 4(g) to Registration Statement No. 333-30229)
4(d) Amendment No. 2 to Governance Agreement between United Water Resources
and Lyonnaise American Holding, Inc., dated July 14, 1997
70
<PAGE>
4(e) Additional instruments defining rights of holders of the Company's
long-term debt are not being filed because the securities authorized
under each such agreement do not exceed 10% of the total assets of the
Company and its subsidiaries on a consolidated basis. The Company
agrees to furnish to the Commission a copy of each such agreement upon
request.
4(f) Certificate of Amendment to the Restated Articles of Incorporation of
United Water Resources Inc., dated April 22, 1994 for Series A
Cumulative Convertible Preference Stock of United Water Resources Inc.
(Filed as Exhibit 4(a) to Registration Statement No. 33-61617)
4(g) Certificate of Amendment to the Restated Articles of Incorporation of
United Water Resources Inc., dated April 22, 1994 for Series B 7 5/8%
Cumulative Preferred Stock of United Water Resources Inc. (Filed as
Exhibit 4(b) to Registration Statement No. 33-61617)
4(h) Rights Agreement dated July 12, 1989, amended September 15, 1993,
between United Water Resources Inc. and ChaseMellon Shareholders
Services, L.L.C. (as successor to First Interstate Bank of California)
(Filed originally as Exhibit 4(c) to Registration Statement No. 33-
32672)
10(a) Executive Employment Agreement, effective January 1, 1998, between and
among United Water Resources Inc. and Michael C.J. Fallon
10(b) Executive Employment Agreement, effective January 1, 1999, between and
among United Water Resources Inc. and W. Marie Zanavich
10(c) Executive Employment Agreement, effective January 1, 1999, between and
among United Water Resources Inc. and Walton F. Hill
10(d) Executive Employment Agreement between and among United Water
Resources Inc. and Donald L. Correll (Filed as Exhibit 10(a) to Form
10-K for the fiscal year ended December 31, 1997)
10(e) Executive Employment Agreement between and among United Water
Resources Inc. and David E. Chardavoyne (Filed as Exhibit 10(b) to
Form 10-K for the fiscal year ended December 31, 1997)
10(f) Executive Employment Agreement between and among United Water
Resources Inc. and Frank DeMicco (Filed as Exhibit 10(c) to Form 10-K
for the fiscal year ended December 31, 1997)
10(g) Executive Employment Agreement between and among United Water
Resources Inc. and Joseph Simunovich (Filed as Exhibit 10(d) to Form
10-K for the fiscal year ended December 31, 1997)
71
<PAGE>
10(h) Executive Employment Agreement between and among United Water
Resources Inc. and John J. Turner (Filed as Exhibit 10(e) to Form 10-K
for the fiscal year ended December 31, 1997)
10(i) Executive Employment Agreement between and among United Water
Resources Inc. and William Colford (Filed as Exhibit 10(f) to Form 10-
K for the fiscal year ended December 31, 1997)
10(j) Executive Employment Agreement between and among United Water
Resources Inc. and Robert Iacullo (Filed as Exhibit 10(g) to Form 10-K
for the fiscal year ended December 31, 1997)
10(k) Executive Employment Agreement between and among United Water
Resources Inc. and John Marino (Filed as Exhibit 10(h) to Form 10-K
for the fiscal year ended December 31, 1997)
10(l) Executive Employment Agreement between and among United Water
Resources Inc. and John Martinowich (Filed as Exhibit 10(i) to Form
10-K for the fiscal year ended December 31, 1997)
10(m) Executive Employment Agreement between and among United Water
Resources Inc. and Richard B. McGlynn (Filed as Exhibit 10(c) to Form
10-K for the fiscal year ended December 31, 1994)
21 Subsidiaries of registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
72
<PAGE>
UNITED WATER RESOURCES INC.
SCHEDULE VIII - CONSOLIDATED VALUATION AND
QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S>
ALLOWANCE FOR DOUBTFUL ACCOUNTS: <C> <C> <C>
Balance at beginning of period $ 2,528 $ 2,549 $ 1,299
Charges to costs and expenses 1,613 1,587 3,162
Accounts written off (3,128) (1,770) (2,116)
Recoveries of accounts written off 191 162 204
------- ------- -------
BALANCE AT END OF PERIOD $ 1,204 $ 2,528 $ 2,549
======= ======= =======
REAL ESTATE VALUATION RESERVE:
Balance at beginning of period $ 3,201 $ 3,465 $12,696
Sales of properties (1,036) (264) (9,231)
------- ------- -------
BALANCE AT END OF PERIOD $ 2,165 $ 3,201 $ 3,465
======= ======= =======
</TABLE>
73
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
March 18, 1999 By DONALD L. CORRELL
- --------------------- -----------------------------
Donald L. Correll
Chairman, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Chairman, President
DONALD L. CORRELL and Chief Executive Officer March 18, 1999
- --------------------------------
(Donald L. Correll)
Secretary
DOUGLAS W. HAWES and Director March 18, 1999
- --------------------------------
(Douglas W. Hawes)
JOHN J. TURNER Treasurer March 18, 1999
- --------------------------------
(John J. Turner)
</TABLE>
DIRECTORS
---------
<TABLE>
<S> <C> <C> <C>
EDWARD E. BARR 3/18/99 ROBERT L. DUNCAN, JR. 3/18/99
- ---------------------------------- ------- ------------------------------------- -------
(Edward E. Barr) Date (Robert L. Duncan, Jr.) Date
FRANK J. BORELLI 3/18/99 JON F. HANSON 3/18/99
- ---------------------------------- ------- ------------------------------------- -------
(Frank J. Borelli) Date (Jon F. Hanson) Date
THIERRY BOURBIE 3/18/99 DOUGLAS W. HAWES 3/18/99
- ---------------------------------- ------- ------------------------------------- -------
(Thierry Bourbie) Date (Douglas W. Hawes) Date
CHARLES CHAUMIN 3/18/99 GEORGE F. KEANE 3/18/99
- ---------------------------------- ------- ------------------------------------- -------
(Charles Chaumin) Date (George F. Keane) Date
LAWRENCE R. CODEY 3/18/99 DENNIS M. NEWNHAM 3/18/99
- ---------------------------------- ------- ------------------------------------- -------
(Lawrence R. Codey) Date (Dennis M. Newnham) Date
DONALD L. CORRELL 3/18/99 MARCIA L. WORTHING 3/18/99
- ---------------------------------- ------- ------------------------------------- -------
(Donald L. Correll) Date (Marcia L. Worthing) Date
PETER DEL COL 3/18/99
- ---------------------------------- -------
(Peter Del Col) Date
</TABLE>
<PAGE>
Exhibit 4 (d)
AMENDMENT NO. 2 TO
GOVERNANCE AGREEMENT
This Amendment No. 2 (this "Amendment No. 2") to the Governance Agreement
(as hereinafter defined), between United Water Resources Inc., a New Jersey
corporation ("UWR"), and Lyonnaise American Holding, Inc., a Delaware
corporation (the "Stockholder"), is dated as of July 14, 1997.
WITNESSETH
----------
WHEREAS, UWR and the Stockholder are parties to a Governance Agreement
dated and effective as of April 22, 1994 (the "Original Governance Agreement");
and
WHEREAS, UWR and the Stockholder are parties to an Amendment No. 1 to the
Original Governance Agreement, dated as of June 27, 1996 ("Amendment No. 1"; and
the Original Governance Agreement, as so amended, being hereinafter called the
"Governance Agreement"); and
WHEREAS, UWR, the Stockholder and Montgomery Watson, Inc., a Delaware
corporation ("MW"), propose to restructure their pre-existing relationships by
entering into a Master Agreement (the "Master Agreement"), dated as of July 14,
1997, with Montgomery Watson Americas, Inc., a California corporation ("MWA"),
United Water Services LLC, a Delaware limited liability company ("UWS"), and
Suez Lyonnaise des Eaux ("Lyonnaise"), ancillary to or in connection with which
Master Agreement there are to be a number of other agreements, instruments and
actions among, between, with or by any one or more of the foregoing parties to
the Master Agreement and any one or more of certain other entities, including,
without limitation, United Water Services Canada L.P., an Ontario limited
partnership, and United Water Services Mexico LLC, a Delaware limited liability
company (collectively, the "North American Restructuring"); and
WHEREAS, UWR is willing to enter into the North American Restructuring only
upon fulfillment of certain conditions, including, without limitation, the
clarification of certain implications of the North American Restructuring under
the Governance Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby mutually acknowledged, the parties hereto agree
as follows:
1. Amendments. The Governance Agreement shall be and hereby is amended as
----------
follows:
(a) Section 3.5(a). The following sentence shall be added at
--------------
the end of Section 3.5(a): "It is understood and agreed that Unrelated Business
shall in any event exclude the North American Restructuring (as defined in
Amendment No. 2 to this Agreement, dated as of July 14, 1997)."
74
<PAGE>
(b) Section 6.1(d). The words "or (iii)" in Section 6.1(d) shall be
--------------
replaced with the following phrase: "(iii) the investment or involvement of UWR
or any affiliated or associated Person as part of the North American
Restructuring (as defined in Amendment No. 2 to this Agreement, dated as of July
14, 1997) or (iv)".
2. Continued Effect. Except for the amendments provided for above, all
----------------
terms, provisions, covenants, representations, warranties, agreements and
conditions contained in the Governance Agreement remain in full force and effect
and shall not be deemed to be waived, modified or amended hereby.
3. Effectiveness. This Amendment No. 2 shall become effective upon the
-------------
execution and delivery hereof by UWR and the Stockholder.
4. Governing Law. This Amendment No. 2 shall be governed by and
-------------
construed and enforced in accordance with the laws of the State of New Jersey,
without giving effect to the principles of conflicts of laws thereof.
5. Counterparts. This Amendment No. 2 may be executed by the parties
------------
hereto in counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
6. Definitions. Capitalized terms not otherwise defined herein shall
-----------
have the meanings accorded to them in the Governance Agreement.
75
<PAGE>
IN WITNESS WHEREOF, UWR and the Stockholder have caused this Amendment No.
2 to be duly executed by their respective authorized officers as of the date set
forth at the head of this Amendment No. 2.
UNITED WATER RESOURCES INC.
By: ________________________________________
Name:
Title:
LYONNAISE AMERICAN HOLDING, INC.
By: ________________________________________
Name:
Title:
Suez Lyonnaise des Eaux ("Lyonnaise") represents and warrants that the agreement
of Lyonnaise to this Amendment No. 2 set forth below has been duly executed and
delivered by Lyonnaise and, assuming due authorization and valid execution and
delivery of this Amendment No. 2 by UWR and the Stockholder, such Amendment No.
2 is a valid and binding obligation of Lyonnaise, enforceable in accordance with
its terms. Lyonnaise agrees, and agrees to cause each Lyonnaise Affiliate, to
be bound by those provisions of this Amendment No. 2 binding on or applying to
the Stockholder or the Stockholder Affiliates.
Suez Lyonnaise des Eaux
By: _________________________________________
Name:
Title:
76
<PAGE>
Exhibit 10(a)
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT effective as of January 1, 1998 (the "Commencement Date") by and
between United Water Resources Inc., a New Jersey corporation, and its
subsidiaries (collectively, the "Company"), and Michael C.J. Fallon (the
"Executive") (this "Agreement").
The Company desires to employ the Executive and the Executive is willing to
be employed by the Company, on the terms and conditions hereinafter provided.
In order to effect the foregoing, the parties hereto wish to enter into an
employment agreement on the terms and conditions set forth below. Accordingly,
in consideration of the premises and the respective covenants and agreements of
the parties herein contained, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Employment. The Company hereby agrees to employ the Executive,
----------
and the Executive hereby agrees to be employed by the Company, on the terms and
conditions set forth herein.
2. Term. The Executive's employment under this Agreement shall
----
commence on the Commencement Date and shall end at the close of business on
December 31, 2000; provided, however, that the Term shall thereafter be
-------- -------
automatically extended for each succeeding 1-year period unless either party
hereto provides the other party with a written notice at least 60 days prior to
the end of the then current Term, advising that the party providing the notice
shall not agree to so extend the Term (the "Term"). Notwithstanding the
preceding, the Term shall not extent beyond the date on which the Executive
attains age 65 without the prior written consent of the Company; provided,
--------
however, that the end of the Term solely on account of the Executive attaining
- -------
age 65 shall not entitle the Executive to any benefits under Section 7.
3. Title, Duties and Authority. The Executive shall serve as
---------------------------
President of United Properties Group, Incorporated and Vice President of United
Water Management and Services Inc. and shall have such responsibilities and
duties (consistent with the Executive's position as President of United
Properties Group, Incorporated and Vice President of United Water Management and
Services Inc.) as may from time to time be assigned to the Executive by the
Company, and shall have all of the powers and duties usually incident to the
offices of President of United Properties Group, Incorporated and Vice President
of United Water Management and Services Inc. The Executive shall devote
substantially all of his working time and efforts to the business and affairs of
the Company, except for vacations, illness or incapacity.
77
<PAGE>
4. Compensation and Benefits.
-------------------------
(a) Base Salary. During the Term, the Company shall pay the
-----------
Executive a base salary ("Base Salary"), payable in equal installments in
accordance with the Company's normal practice for paying base salaries to its
executive employees. The Base Salary shall initially be payable at the rate of
$163,000.00 per annum, and shall be subject to annual review by the Company for
discretionary annual increases.
(b) MIP. The Executive shall participate in the United Water
---
Resources Inc. Management Incentive Plan (the "MIP") or any successor plan
established by the Company.
(c) Employee Benefits. The Executive shall be entitled to
-----------------
participate in all of the Company's employee benefit plans made available by the
Company (or any affiliate thereof) to its executives during the Term as may be
in effect from time to time.
(d) Expenses. During the Term, the Executive shall be entitled
--------
to receive prompt reimbursement upon submission of expense claims to the Company
for all reasonable and customary expenses incurred by the Executive in
performing services hereunder, provided that such expenses are incurred and
accounted for in accordance with the policies and procedures established by the
Company for its executive employees.
(e) Vacations. The Executive shall be entitled to paid vacation,
---------
paid holidays, sick days and personal days pursuant to the Company's regular
policies applicable to its executive employees.
(f) Taxes. The Company may withhold from any amounts payable
-----
under this Agreement such federal, state, local and/or other taxes as shall be
required to be withheld pursuant to any applicable law or regulation.
5. Termination. The Executive's employment hereunder may be
-----------
terminated under the following circumstances:
(a) Death. The Executive's employment hereunder shall terminate
-----
upon the Executive's death.
(b) Disability. If, as a result of the Executive's incapacity
----------
due to physical or mental illness, the Executive shall become entitled to the
receipt of benefits under the Company's long-term disability plan, and within 30
days after a written Notice of Termination (as defined in Section 6(a)) is given
to the Executive by the Company, the Executive shall not have returned to the
performance of his duties hereunder on a full-time basis, the Company may
terminate the Executive's employment hereunder for "Disability."
78
<PAGE>
(c) Cause. The Company may terminate the Executive's
-----
employment hereunder for Cause. For purposes of this Agreement, the Company
shall have "Cause" to terminate the Executive's employment hereunder upon:
(i) the failure by the Executive to substantially perform the
Executive's duties hereunder (other than any such failure resulting from the
Executive's incapacity due to physical or mental illness);
(ii) the willful violation by the Executive of any of the
Executive's material obligations hereunder;
(iii) the willful engaging by the Executive in misconduct which
is materially injurious to the business or reputation of the Company or any of
its affiliates; or
(iv) the Executive's conviction of a felony.
Notwithstanding the foregoing, the Executive shall not be
terminated for Cause without:
(A) at least 15 days' advance notice to the Executive setting
forth the reasons for the Company's intention to terminate the Executive's
employment hereunder for Cause;
(B) the failure of the Executive to cure the nonperformance,
violation or misconduct described in the notice referred to in clause (A)
of this paragraph, if cure thereof is possible, to the reasonable
satisfaction of the Board of Directors of United Water Resources Inc. (the
"Board"), within 15 days of such notice; and
(C) delivery to the Executive of a Notice of Termination (as
defined in Section 6 (a)) from the Company notifying him that in the good
faith opinion of a majority of the Board, the Company is entitled to
terminate the Executive for Cause as set forth above, and specifying the
particulars thereof in detail.
(d) Good Reason. The Executive may terminate his employment
-----------
hereunder for "Good Reason" by providing a Notice of Termination to the Company
within 30 days after the occurrence, without the Executive's consent, of one of
the following events that has not been cured within 15 days after written notice
thereof has been given to the Company by the Executive:
(i) a material and adverse change in the Executive's title,
status, authority, duties or function (in each case, other than as may be
contemplated by this Agreement);
79
<PAGE>
(ii) any failure to pay the Executive's Base Salary or MIP
payment (s) when due;
(iii) a change of the Executive's place of employment by the
Company to a location which is greater than 50 miles from the location of
the Executive's place of employment by the Company as of the Commencement
Date; or
(iv) the willful violation by the Company of any of the
Company's material obligations hereunder.
(e) Without Cause. The Company may terminate the Executive's
-------------
employment hereunder without Cause by providing the Executive with a Notice of
Termination.
(f) Without Good Reason. The Executive may terminate the
-------------------
Executive's employment hereunder without Good Reason by providing the Company
with a Notice of Termination.
6. Termination Procedure.
---------------------
(a) Notice of Termination. Any termination of the Executive's
---------------------
employment by the Company or by the Executive (other than a termination on
account of the Executive's death pursuant to Section 5(a)) shall be communicated
by a written Notice of Termination to the other party hereto in accordance with
Section 10. For purposes of this Agreement, a "Notice of Termination" shall mean
a notice which shall indicate the specific termination provision in this
Agreement relied upon and the Date of Termination, and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment hereunder pursuant to the provision so
indicated.
(b) Date of Termination. "Date of Termination" shall mean:
-------------------
(i) if the Executive's employment is terminated on account of
the Executive's death pursuant to Section 5(a), the date of the Executive's
death;
(ii) if the Executive's employment is terminated on account of
the Executive's Disability pursuant to Section 5(b), 30 days after a Notice
of Termination has been provided pursuant thereto (provided that the
Executive shall not have returned to the performance of the Executive's
duties on a full-time basis during such thirty-(30) day period);
(iii) if the Executive's employment is terminated for Cause
pursuant to Section 5(c), the date specified in the Notice of Termination
provided pursuant thereto; and
80
<PAGE>
(iv) if the Executive's employment is terminated for any other
reason, the date on which Notice of Termination is provided or any later
date (within 30 days) set forth in such Notice of Termination.
7. Compensation Upon Termination.
-----------------------------
(a) Death. If the Executive's employment with the Company is
-----
terminated on account of the Executive's death pursuant to Section 5(a), the
Company shall as soon as practicable pay to the Executive's estate or as may be
directed by the legal representatives of the Executive's estate any Base Salary
accrued and due to the Executive under Section 4(a) through the Executive's Date
of Termination and such prorated MIP payment, the amount, if any, of which shall
be determined in the sole discretion of the Compensation Committee of the Board
(the "Compensation Committee"). The Company shall provide the Executive through
the Date of Termination with continued participation in the employee benefit
plans provided to the Executive pursuant to Section 4(c) as of the Executive's
Date of Termination. Other than the foregoing, the Company shall have no further
obligations to the Executive hereunder.
(b) Disability. If the Executive's employment with the Company
----------
is terminated on account of the Executive's Disability pursuant to Section 5(b),
the Company shall as soon as practicable pay the Executive any Base Salary
accrued and due to the Executive under Section 4(a) through the Executive's Date
of Termination and such prorated MIP payment, the amount, if any, of which shall
be determined in the sole discretion of the Compensation Committee. The Company
shall provide the Executive through the Executive's Date of Termination with
continued participation in the employee benefit plans provided to the Executive
pursuant to Section 4(c) as of the Executive's Date of Termination. Other than
the foregoing, the Company shall have no further obligations to the Executive
hereunder.
(c) By the Company for Cause or By the Executive Without Good
---------------------------------------------------------
Reason. If the Executive's employment with the Company is terminated by the
- ------
Company for Cause pursuant to Section 5(c) or by the Executive without Good
Reason pursuant to Section 5(f), the Company shall as soon as practicable pay
the Executive any Base Salary accrued and due to the Executive under Section
4(a) through the Executive's Date of Termination and the Executive shall forfeit
his entire then unpaid MIP payment(s), if any. The Company shall provide the
Executive through his Date of Termination with continued participation in the
employee benefit plans provided to the Executive pursuant to Section 4(c) as of
his Date of Termination. Other than the foregoing, the Company shall have no
further obligations to the Executive hereunder.
(d) Termination By the Company Without Cause or By the
--------------------------------------------------
Executive for Good Reason. If the Executive's employment with the Company is
- -------------------------
terminated by the Company (other than for Disability or Cause), or by the
Executive for Good Reason pursuant to Section 5(d), then the Company shall:
<PAGE>
(i) within 30 days of the Executive's Date of Termination, pay the
Executive any Base Salary accrued and due the Executive under Section 4(a)
through his Date of Termination and any unpaid MIP payment(s) for any
previously completed calendar year(s);
(ii) (A) if the Executive's Date of Termination occurs within 24
months following a Change of Control, as defined below, within 30 days of
the Executive's Date of Termination, pay the Executive an amount equal to
150% of his Base Salary in effect as of his Date of Termination, or (B) if
the Executive's Date of Termination does not occur within 24 months
following a Change of Control, as defined below, continue to pay the
Executive his Base Salary in effect as of his Date of Termination for the
18-month period immediately following his Date of Termination (or until
such earlier time that the Executive violates the provisions of Section 8)
at the times such payments would otherwise have been made under Section
4(a);
(iii) (A) if the Executive's Date of Termination occurs within 24
months following a Change of Control, as defined below, within 30 days of
the Executive's Date of Termination, pay the Executive an amount equal to
150% of his then current "Cash Target Amount" under the MIP, or (B) if the
Executive's Date of Termination does not occur within 24 months following a
Change of Control, as defined below, continue to pay the Executive an
annual MIP payment for the 18-month period immediately following his Date
of Termination (or until such earlier time that the Executive violates the
provisions of Section 8), each such payment in an amount based upon his
current "Cash Target Amount" under the MIP, to be paid at the times such
payments would otherwise have been made under the MIP; and
(iv) provide the Executive for the 18-month period commencing
immediately following his Date of Termination (or until such earlier time
that the Executive violates the provisions of Section 8), with continued
participation (or equivalent benefits if such participation is not legally
permissible (cash payments in the case of tax-qualified retirement plan
benefits)) in the employee benefit plans provided to the Executive pursuant
to Section 4(c) as of his Date of Termination.
Other than the foregoing, the Company shall have no further obligations to the
Executive hereunder.
For purposes of this Agreement, a "Change of Control" of the Company
shall mean the first to occur of any of the following events:
(i) any "Person" (as defined in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and as such term is
modified in Sections 13(d) and 14(d) of the Exchange Act), excluding (A)
the Company or any of its subsidiaries, (B) a trustee or any fiduciary
holding securities under an employee benefit plan of the Company or any of
its subsidiaries, or an underwriter temporarily holding securities
82
<PAGE>
pursuant to an offering of such securities, in each case with respect to
the securities so held, or (C) a corporation or other entity owned,
directly or indirectly, by holders of voting securities of the Company in
substantially the same proportions as their ownership of the Company, is or
becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company (not including
in the securities beneficially owned by such Person any securities acquired
directly from the Company or its subsidiaries or other affiliates
controlled by the Company or any such subsidiary) representing 20% or more
of the combined ordinary (in the absence of contingencies) voting power of
the Company's then outstanding securities; provided, however, that if such
-------- -------
"Person" shall be Suez Lyonnaise des Eaux or an affiliate thereof, solely
for purposes thereof the above reference to "20%" shall instead be deemed
to refer to the sum of the amount of the "Maximum Stockholder Investment
Percentage" (as defined in Section 1.1 of the Governance Agreement between
United Water Resources Inc. and Lyonnaise American Holding, Inc., dated as
of April 22, 1994) plus two percentage points; or
(ii) during any period of not more than two consecutive calendar
years (commencing January 1, 1998), individuals who at the beginning of
such period constitute the Board, together with any new director (other
than a director designated by a person who has entered into an agreement
with the Company to effect a transaction triggering the operation of clause
(i) or (iii) of this paragraph) whose election by the Board or nomination
for election by the Company's shareholders was approved by a vote of at
least two-thirds of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination
for election was previously so approved, cease for any reason to constitute
a majority thereof; or
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other entity, or a plan of
liquidation of the Company or an agreement for the sale or disposition by
the Company of its assets as an entirety or substantially as an entirety,
other than (A) a transaction which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding, by being converted into voting securities
of the surviving entity, or otherwise), in combination with the ownership
by any trustee or other fiduciary of securities under an employee benefit
plan of the Company, at least 80% of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such transaction, or (B) a transaction effected to
implement a recapitalization of the Company (or similar transaction) in
which no person acquires more than 20% of the combined voting power of the
Company's then outstanding securities (or if such person so acquiring more
than 20% of such combined voting power is Suez Lyonnaise des Eaux or an
affiliate thereof, solely for the purposes thereof the above reference to
"20%" shall instead be deemed to refer to the sum of the Maximum
Stockholder Investment Percentage plus two percentage points).
83
<PAGE>
8. Restrictions.
------------
(a) Reasonable Covenants. It is expressly understood by and
--------------------
between the Company and the Executive that the covenants contained in this
Section 8 are an essential element of this Agreement and that but for the
agreement by the Executive to comply with these covenants and thereby not to
diminish the value of the organization and goodwill of the Company or any
affiliate of the Company, if any, including without limitation relations with
their employees, suppliers, customers and accounts, the Company would not enter
into this Agreement. The Executive has independently consulted with his legal
counsel and after such consultation agrees that such covenants are reasonable
and proper.
(b) Noncompetition; No Diversion of Customers; Etc. During the
----------------------------------------------
Term and for 18 months after the Executive's Date of Termination, the Executive
shall not:
(i) engage directly, alone or in association with or as a
shareholder, principal, agent, partner, officer, director, employee or
consultant of any other organization or entity, in competition with the
businesses of the Company and/or any of its affiliates as of the
Executive's Date of Termination;
(ii) divert to any competitor of the Company or any of its
affiliates, any customer of the Company or any of its affiliates or any
"prospective customer" (as defined in the last paragraph of this Section
8(b)) of the Company or any of its affiliates; or
(iii) solicit or encourage any officer, employee or consultant of the
Company or any of its affiliates to leave the employ of the Company or any
of its affiliates for employment by or with any competitor of the Company
or any of its affiliates;
provided, however, that the Executive may invest in stocks, bonds or other
- -------- -------
securities of any competitor of the Company or any of its affiliates if:
(A) such stocks, bonds or other securities are listed on any
national or regional securities exchange or have been registered under
Section 11 (g) of the Securities Exchange Act of 1934;
(B) the Executive's investment does not exceed, in the case of
any class of the capital stock of any one issuer, 1% of the issued and
outstanding shares, or, in the case of other securities, 1% of the
aggregate principal amount thereof issued and outstanding; and
84
<PAGE>
(C) such investment would not prevent, directly or indirectly,
the transaction of business by the Company and/or any of its affiliates
with any state, district, territory or possession of the United States or
any governmental subdivision, agency or instrumentality thereof by virtue
of any statute, law, regulation or administrative practice.
If, at any time, the provisions of this Section 8(b) shall be
determined to be invalid or unenforceable by reason of being vague or
unreasonable as to area, duration or scope of activity, this Section 8(b) shall
be considered severable and shall become and shall be immediately amended solely
with respect to such area, duration and scope of activity as shall be determined
to be reasonable and enforceable by the court or other body having jurisdiction
over the matter and the Executive agrees that this Section 8(b) as so amended
shall be valid and binding as though any invalid or unenforceable provision had
not been included herein. Except as provided in this Section 8 and in Section
3, nothing in this Agreement shall prevent or restrict the Executive from
engaging in any business or industry in any capacity.
For purposes of clause (ii) of this Section 8(b), the term
"prospective customer" shall mean any entity, business or individual included on
a list of prospective customers provided to the Executive by the Company within
15 days following his Date of Termination, which list contains the names of
those entities, businesses and individuals with whom the Company had been in
contact prior to the Executive's Date of Termination for purposes of
establishing a customer relationship therewith. Any entity, business or
individual not appearing on the aforementioned list of prospective customers due
to the failure of the Executive to advise the Company of such contact shall be
considered a "prospective customer" for purposes of clause (ii) of this Section
8(b).
(c) Public Support and Assistance. The Executive agrees that
-----------------------------
following any termination of his employment hereunder by the Company, the
Executive shall not disclose or cause to be disclosed any negative, adverse or
derogatory comments or information of a substantial nature about the Company or
its management, or about any product or service provided by the Company, or
about the Company's prospects for the future (including any such comments or
information with respect to affiliates of the Company). The Company and/or any
of its affiliates may seek the assistance, cooperation or testimony of the
Executive following any such termination in connection with any investigation,
litigation or proceeding arising out of matters within the knowledge of the
Executive and related to the Executive's position as an officer or employee of
the Company, and in any such instance, the Executive shall provide such
assistance, cooperation or testimony and the Company shall pay the Executive's
reasonable costs and expenses in connection therewith; in addition, if such
assistance, cooperation or testimony requires more than a nominal commitment of
the Executive's time, the Company shall compensate the Executive for such time
as a per diem rate derived from the Executive's Base Salary at the time of the
Executive's Date of Termination.
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(d) Nondisclosure of Confidential Information. During the Term,
-----------------------------------------
the Executive shall hold in a fiduciary capacity for the benefit of the Company
and its affiliates all Confidential Information (as defined below). After
termination of the Executive's employment with the Company, the Executive shall
keep secret and confidential all Confidential Information and shall not use or
disclose to any third party in any fashion or for any purpose whatsoever, any
Confidential Information. As used herein, "Confidential Information" shall mean
any information regarding this Agreement, or any other information regarding the
Company or its affiliates which is not available to the general public, and/or
not generally known outside the Company or any such affiliate, to which the
Executive has or shall have had access at any time during the course of the
Executive's employment with the Company, including, without limitation, any
information relating to the Company's (and its affiliates'):
(i) business, operations, plans, strategies, prospects or
objectives;
(ii) products, technologies, processes, specifications, research
and development operations or plans;
(iii) customers and customer lists
(iv) sales, service, support and marketing practices and
operations;
(v) financial condition and results of operations;
(vi) operational strengths and weaknesses; and
(vii) personnel and compensation policies and procedures.
Notwithstanding the foregoing provisions of this Section 8, the Executive may
discuss this Agreement with the members of the Executive's immediate family and
with the Executive's personal legal and tax advisors.
(e) Specific Performance. Without intending to limit the
--------------------
remedies available to the Company, the Executive agrees that damages at law
would be an insufficient remedy to the Company in the event that the Executive
violates any of the provisions of this Section 8, and that the Company may apply
for and, upon the requisite showing, have injunctive relief in any court of
competent jurisdiction to restrain the breach or threatened breach of or
otherwise to specifically enforce any of the covenants contained in this Section
8.
9. Excise Tax Gross-Up Payment. If any payments to the Executive
---------------------------
by the Company under this Agreement ("Payments") are subject to the tax (the
"Excise Tax") imposed by Section 4999 of the Code, the Company shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of any Excise Tax on the Payments and
all income taxes and Excise Tax upon such
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Company payment, shall be equal to the Payments. The determination of whether
any Payments are subject to the Excise Tax shall be based on the opinion of tax
counsel selected by the Company and reasonably acceptable to the Executive,
whose fees and expenses shall be paid by the Company. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay federal, state and local income taxes at the highest marginal rate of income
taxation applicable to any individual residing in the jurisdiction in which the
Executive resides in the calendar year in which the Gross-Up Payment is to be
made. In the event that the Excise Tax is subsequently determined to be less
than the amount taken into account hereunder at the time of termination of the
Executive's employment, the Executive shall repay the Company, at the time that
the amount of such reduction of Excise Tax is finally determined, the portion of
the Gross-Up Payment attributable to such reduction (plus that portion of the
Gross-Up Payment attributable to the Excise Tax and federal, state and local
income tax imposed on the Gross-Up Payment being repaid by the Executive to the
extent that such repayment results in a reduction in Excise Tax and/or a
federal, state or local income tax deduction) plus interest on the amount of
such repayment at the rate provided in Section 1274(b) (2) (B) of the Code. In
the event that the Excise Tax is determined to exceed the amount taken into
account hereunder at the time of the termination of the Executive's employment
(including by reason of any payment the existence or amount of which cannot be
determined at the time of the Gross-Up Payment), the Company shall make an
additional Gross-Up Payment in respect of such excess (plus any interest,
penalties or additions payable by the Executive with respect to such excess) at
the time that the amount of such excess is finally determined. The Executive and
the Company shall each reasonably cooperate with the other in connection with
any administrative or judicial proceedings concerning the existence or amount of
liability for Excise Tax with respect to the Payments.
10. Notice. For the purposes of this Agreement, notices, demands and
------
all other communications provided for herein shall be in writing and shall be
deemed to have been duly given when delivered or (unless otherwise specified)
mailed by United States certified or registered mail, return receipt requested,
postage prepaid, addressed as follows:
If to the Executive:
Michael C.J. Fallon
250 Titus Road
North Salem, NY 10560
If to the Company:
Office of the General Counsel
United Water Resources Inc.
200 Old Hook Road
Harrington Park, NJ 07640-1799
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Or to such other address as either of the parties may have furnished to the
other in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
11. Successors. Without the prior written consent of the Executive,
----------
this Agreement cannot be assigned by the Company except that it shall be binding
automatically on any successors and assigns of all or substantially all of the
business and/or assets of the Company (whether direct or indirect, by purchase,
merger, consolidation or otherwise). In addition, without the prior written
consent of the Company, this Agreement cannot be assigned by the Executive,
except that the right to receive payments or benefits hereunder may be
transferred by will or the laws of descent and distribution. This Agreement and
all rights of the Executive hereunder shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives.
12. Arbitration. Except as provided in Section 8(e), all
-----------
controversies, claims or disputes arising out of or relating to this Agreement
shall be settled by binding arbitration under the rules of the American
Arbitration Association then in effect in the State of New Jersey, as the sole
and exclusive remedy of either party, and judgment upon any such award rendered
by the arbitrator(s) may be entered in any court of competent jurisdiction. The
costs of arbitration shall be borne by the unsuccessful party or otherwise as
determined by the arbitrators in their discretion.
13. Governing Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of New
Jersey without regard to conflicts of law principles.
14. Amendments. No provision of this Agreement may be modified,
----------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer of the Company as may be
specifically designated for such purpose by the Board. No waiver by either
party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
15. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
16. Entire Agreement. This Agreement sets forth the entire agreement
----------------
of the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement.
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17. Indemnification. The Company shall indemnify the Executive to
---------------
the full extent permitted by the New Jersey Business Corporation Act and any
provision of the By-Laws of the Company, as amended from time to time, generally
applicable to officers and directors of the Company, for all amounts (including
without limitation, judgements, fines, settlement payments, expenses and
attorneys' fees) incurred or paid by the Executive in connection with any
action, suit, investigation or proceeding arising out of or relating to the
performance by the Executive of services for, or the actions by the Executive as
an officer or employee of, the Company or any affiliate of the Company or any
other person or enterprise at the Company's request. Nothing in this Section 17
or elsewhere in this Agreement is intended to prevent the Company from
indemnifying the Executive to any greater extent than is required by this
Section 17.
18. Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity or enforceability of
any other provision hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
UNITED WATER RESOURCES INC.
By: _______________________________________
Name:
Title:
MICHAEL C.J. FALLON
___________________________________________
MARCIA L. WORTHING
___________________________________________
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Exhibit 10(b)
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT effective as of January 1, 1999 (the "Commencement Date") by and
between United Water Resources Inc., a New Jersey corporation, and its
subsidiaries (collectively, the "Company"), and W. Marie Zanavich (the
"Executive") (this "Agreement").
The Company desires to employ the Executive and the Executive is willing to
be employed by the Company, on the terms and conditions hereinafter provided.
In order to effect the foregoing, the parties hereto wish to enter into an
employment agreement on the terms and conditions set forth below. Accordingly,
in consideration of the premises and the respective covenants and agreements of
the parties herein contained, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Employment. The Company hereby agrees to employ the Executive,
----------
and the Executive hereby agrees to be employed by the Company, on the terms and
conditions set forth herein.
2. Term. The Executive's employment under this Agreement shall
----
commence on the Commencement Date and shall end at the close of business on
December 31, 2001; provided, however, that the Term shall thereafter be
-------- -------
automatically extended for each succeeding 1-year period unless either party
hereto provides the other party with a written notice at least 60 days prior to
the end of the then current Term, advising that the party providing the notice
shall not agree to so extend the Term (the "Term"). Notwithstanding the
preceding, the Term shall not extent beyond the date on which the Executive
attains age 65 without the prior written consent of the Company; provided,
--------
however, that the end of the Term solely on account of the Executive attaining
- -------
age 65 shall not entitle the Executive to any benefits under Section 7.
3. Title, Duties and Authority. The Executive shall serve as Vice
---------------------------
President Information Technology/CIO of United Water Management and Services
Inc. and shall have such responsibilities and duties (consistent with the
Executive's position as Vice President Information Technology/CIO) as may from
time to time be assigned to the Executive by the Company, and shall have all of
the powers and duties usually incident to the office of Vice President
Information Technology/CIO. The Executive shall devote substantially all of his
working time and efforts to the business and affairs of the Company, except for
vacations, illness or incapacity.
4. Compensation and Benefits.
-------------------------
(a) Base Salary. During the Term, the Company shall pay the
-----------
Executive a base salary ("Base Salary"), payable in equal installments in
accordance with the Company's
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<PAGE>
normal practice for paying base salaries to its executive employees. The Base
Salary shall initially be payable at the rate of $140,700.00 per annum, and
shall be subject to annual review by the Company for discretionary annual
increases.
(b) MIP. The Executive shall participate in the United Water
---
Resources Inc. Management Incentive Plan (the "MIP") or any successor plan
established by the Company.
(c) Employee Benefits. The Executive shall be entitled to
-----------------
participate in all of the Company's employee benefit plans made available by the
Company (or any affiliate thereof) to its executives during the Term as may be
in effect from time to time.
(d) Expenses. During the Term, the Executive shall be entitled
--------
to receive prompt reimbursement upon submission of expense claims to the Company
for all reasonable and customary expenses incurred by the Executive in
performing services hereunder, provided that such expenses are incurred and
accounted for in accordance with the policies and procedures established by the
Company for its executive employees.
(e) Vacations. The Executive shall be entitled to paid
---------
vacation, paid holidays, sick days and personal days pursuant to the Company's
regular policies applicable to its executive employees.
(f) Taxes. The Company may withhold from any amounts payable
-----
under this Agreement such federal, state, local and/or other taxes as shall be
required to be withheld pursuant to any applicable law or regulation.
5. Termination. The Executive's employment hereunder may be
-----------
terminated under the following circumstances:
(a) Death. The Executive's employment hereunder shall terminate
-----
upon the Executive's death.
(b) Disability. If, as a result of the Executive's incapacity
----------
due to physical or mental illness, the Executive shall become entitled to the
receipt of benefits under the Company's long-term disability plan, and within 30
days after a written Notice of Termination (as defined in Section 6(a)) is given
to the Executive by the Company, the Executive shall not have returned to the
performance of his duties hereunder on a full-time basis, the Company may
terminate the Executive's employment hereunder for "Disability."
(c) Cause. The Company may terminate the Executive's employment
-----
hereunder for Cause. For purposes of this Agreement, the Company shall have
"Cause" to terminate the Executive's employment hereunder upon:
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<PAGE>
(i) the failure by the Executive to substantially perform the
Executive's duties hereunder (other than any such failure resulting from the
Executive's incapacity due to physical or mental illness);
(ii) the willful violation by the Executive of any of the
Executive's material obligations hereunder;
(iii) the willful engaging by the Executive in misconduct which
is materially injurious to the business or reputation of the Company or any of
its affiliates; or
(iv) the Executive's conviction of a felony.
Notwithstanding the foregoing, the Executive shall not be
terminated for Cause without:
(A) at least 15 days' advance notice to the Executive setting
forth the reasons for the Company's intention to terminate the Executive's
employment hereunder for Cause ;
(B) the failure of the Executive to cure the nonperformance,
violation or misconduct described in the notice referred to in clause (A)
of this paragraph, if cure thereof is possible, to the reasonable
satisfaction of the Board of Directors of United Water Resources Inc. (the
"Board"), within 15 days of such notice; and
(C) delivery to the Executive of a Notice of Termination (as
defined in Section 6 (a)) from the Company notifying him that in the good
faith opinion of a majority of the Board, the Company is entitled to
terminate the Executive for Cause as set forth above, and specifying the
particulars thereof in detail.
(d) Good Reason. The Executive may terminate his employment
-----------
hereunder for "Good Reason" by providing a Notice of Termination to the Company
within 30 days after the occurrence, without the Executive's consent, of one of
the following events that has not been cured within 15 days after written notice
thereof has been given to the Company by the Executive:
(i) a material and adverse change in the Executive's title,
status, authority, duties or function (in each case, other than as may be
contemplated by this Agreement);
(ii) any failure to pay the Executive's Base Salary or MIP
payment (s) when due;
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<PAGE>
(iii) a change of the Executive's place of employment by the
Company to a location which is greater than 50 miles from the location of
the Executive's place of employment by the Company as of the Commencement
Date; or
(iv) the willful violation by the Company of any of the Company's
material obligations hereunder.
(e) Without Cause. The Company may terminate the Executive's
-------------
employment hereunder without Cause by providing the Executive with a Notice of
Termination.
(f) Without Good Reason. The Executive may terminate the
-------------------
Executive's employment hereunder without Good Reason by providing the Company
with a Notice of Termination.
6. Termination Procedure.
---------------------
(a) Notice of Termination. Any termination of the Executive's
---------------------
employment by the Company or by the Executive (other than a termination on
account of the Executive's death pursuant to Section 5(a)) shall be communicated
by a written Notice of Termination to the other party hereto in accordance with
Section 10. For purposes of this Agreement, a "Notice of Termination" shall
mean a notice which shall indicate the specific termination provision in this
Agreement relied upon and the Date of Termination, and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment hereunder pursuant to the provision so
indicated.
(b) Date of Termination. "Date of Termination" shall mean:
-------------------
(i) if the Executive's employment is terminated on account of the
Executive's death pursuant to Section 5(a), the date of the Executive's death;
(ii) if the Executive's employment is terminated on account of
the Executive's Disability pursuant to Section 5(b), 30 days after a Notice of
Termination has been provided pursuant thereto (provided that the Executive
shall not have returned to the performance of the Executive's duties on a full-
time basis during such thirty-(30) day period);
(iii) if the Executive's employment is terminated for Cause
pursuant to Section 5(c), the date specified in the Notice of Termination
provided pursuant thereto; and
(iv) if the Executive's employment is terminated for any other
reason, the date on which Notice of Termination is provided or any later date
(within 30 days) set forth in such Notice of Termination.
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<PAGE>
7. Compensation Upon Termination.
-----------------------------
(a) Death. If the Executive's employment with the Company is
-----
terminated on account of the Executive's death pursuant to Section 5(a), the
Company shall as soon as practicable pay to the Executive's estate or as may be
directed by the legal representatives of the Executive's estate any Base Salary
accrued and due to the Executive under Section 4(a) through the Executive's Date
of Termination and such prorated MIP payment, the amount, if any, of which shall
be determined in the sole discretion of the Compensation Committee of the Board
(the "Compensation Committee"). The Company shall provide the Executive through
the Date of Termination with continued participation in the employee benefit
plans provided to the Executive pursuant to Section 4(c) as of the Executive's
Date of Termination. Other than the foregoing, the Company shall have no further
obligations to the Executive hereunder.
(b) Disability. If the Executive's employment with the Company
----------
is terminated on account of the Executive's Disability pursuant to Section 5(b),
the Company shall as soon as practicable pay the Executive any Base Salary
accrued and due to the Executive under Section 4(a) through the Executive's Date
of Termination and such prorated MIP payment, the amount, if any, of which shall
be determined in the sole discretion of the Compensation Committee. The Company
shall provide the Executive through the Executive's Date of Termination with
continued participation in the employee benefit plans provided to the Executive
pursuant to Section 4(c) as of the Executive's Date of Termination. Other than
the foregoing, the Company shall have no further obligations to the Executive
hereunder.
(c) By the Company for Cause or By the Executive Without Good
---------------------------------------------------------
Reason. If the Executive's employment with the Company is terminated by the
- ------
Company for Cause pursuant to Section 5(c) or by the Executive without Good
Reason pursuant to Section 5(f), the Company shall as soon as practicable pay
the Executive any Base Salary accrued and due to the Executive under Section
4(a) through the Executive's Date of Termination and the Executive shall forfeit
his entire then unpaid MIP payment(s), if any. The Company shall provide the
Executive through his Date of Termination with continued participation in the
employee benefit plans provided to the Executive pursuant to Section 4(c) as of
his Date of Termination. Other than the foregoing, the Company shall have no
further obligations to the Executive hereunder.
(d) Termination By the Company Without Cause or By the
--------------------------------------------------
Executive for Good Reason. If the Executive's employment with the Company is
- -------------------------
terminated by the Company (other than for Disability or Cause), or by the
Executive for Good Reason pursuant to Section 5(d), then the Company shall:
(i) within 30 days of the Executive's Date of Termination, pay the
Executive any Base Salary accrued and due the Executive under Section 4(a)
through his Date of Termination and any unpaid MIP payment(s) for any
previously completed calendar year(s);
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<PAGE>
(ii) (A) if the Executive's Date of Termination occurs within 24
months following a Change of Control, as defined below, within 30 days of
the Executive's Date of Termination, pay the Executive an amount equal to
150% of his Base Salary in effect as of his Date of Termination, or (B) if
the Executive's Date of Termination does not occur within 24 months
following a Change of Control, as defined below, continue to pay the
Executive his Base Salary in effect as of his Date of Termination for the
18-month period immediately following his Date of Termination (or until
such earlier time that the Executive violates the provisions of Section 8)
at the times such payments would otherwise have been made under Section
4(a);
(iii) (A) if the Executive's Date of Termination occurs within 24
months following a Change of Control, as defined below, within 30 days of
the Executive's Date of Termination, pay the Executive an amount equal to
150% of his then current "Cash Target Amount" under the MIP, or (B) if the
Executive's Date of Termination does not occur within 24 months following a
Change of Control, as defined below, continue to pay the Executive an
annual MIP payment for the 18-month period immediately following his Date
of Termination (or until such earlier time that the Executive violates the
provisions of Section 8), each such payment in an amount based upon his
current "Cash Target Amount" under the MIP, to be paid at the times such
payments would otherwise have been made under the MIP; and
(iv) provide the Executive for the 18-month period commencing
immediately following his Date of Termination (or until such earlier time
that the Executive violates the provisions of Section 8), with continued
participation (or equivalent benefits if such participation is not legally
permissible (cash payments in the case of tax-qualified retirement plan
benefits)) in the employee benefit plans provided to the Executive pursuant
to Section 4(c) as of his Date of Termination.
Other than the foregoing, the Company shall have no further obligations to the
Executive hereunder.
For purposes of this Agreement, a "Change of Control" of the Company
shall mean the first to occur of any of the following events:
(i) any "Person" (as defined in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and as such term is
modified in Sections 13(d) and 14(d) of the Exchange Act), excluding (A)
the Company or any of its subsidiaries, (B) a trustee or any fiduciary
holding securities under an employee benefit plan of the Company or any of
its subsidiaries, or an underwriter temporarily holding securities pursuant
to an offering of such securities, in each case with respect to the
securities so held, or (C) a corporation or other entity owned, directly or
indirectly, by holders of voting securities of the Company in substantially
the same proportions as their ownership of the Company, is or becomes the
"Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company (not including in
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<PAGE>
the securities beneficially owned by such Person any securities acquired
directly from the Company or its subsidiaries or other affiliates
controlled by the Company or any such subsidiary) representing 20% or more
of the combined ordinary (in the absence of contingencies) voting power of
the Company's then outstanding securities; provided, however, that if such
"Person" shall be Suez Lyonnaise des Eaux or an affiliate thereof, solely
for purposes thereof the above reference to "20%" shall instead be deemed
to refer to the sum of the amount of the "Maximum Stockholder Investment
Percentage" (as defined in Section 1.1 of the Governance Agreement between
United Water Resources Inc. and Lyonnaise American Holding, Inc., dated as
of April 22, 1994) plus two percentage points; or
(ii) during any period of not more than two consecutive calendar years
(commencing January 1, 1999), individuals who at the beginning of such
period constitute the Board, together with any new director (other than a
director designated by a person who has entered into an agreement with the
Company to effect a transaction triggering the operation of clause (i) or
(iii) of this paragraph) whose election by the Board or nomination for
election by the Company's shareholders was approved by a vote of at least
two-thirds of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election
was previously so approved, cease for any reason to constitute a majority
thereof; or
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other entity, or a plan of
liquidation of the Company or an agreement for the sale or disposition by
the Company of its assets as an entirety or substantially as an entirety,
other than (A) a transaction which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding, by being converted into voting securities
of the surviving entity, or otherwise), in combination with the ownership
by any trustee or other fiduciary of securities under an employee benefit
plan of the Company, at least 80% of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such transaction, or (B) a transaction effected to
implement a recapitalization of the Company (or similar transaction) in
which no person acquires more than 20% of the combined voting power of the
Company's then outstanding securities (or if such person so acquiring more
than 20% of such combined voting power is Suez Lyonnaise des Eaux or an
affiliate thereof, solely for the purposes thereof the above reference to
"20%" shall instead be deemed to refer to the sum of the Maximum
Stockholder Investment Percentage plus two percentage points).
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8. Restrictions.
------------
(a) Reasonable Covenants. It is expressly understood by and
--------------------
between the Company and the Executive that the covenants contained in this
Section 8 are an essential element of this Agreement and that but for the
agreement by the Executive to comply with these covenants and thereby not to
diminish the value of the organization and goodwill of the Company or any
affiliate of the Company, if any, including without limitation relations with
their employees, suppliers, customers and accounts, the Company would not enter
into this Agreement. The Executive has independently consulted with his legal
counsel and after such consultation agrees that such covenants are reasonable
and proper.
(b) Noncompetition; No Diversion of Customers; Etc. During the
----------------------------------------------
Term and for 18 months after the Executive's Date of Termination, the Executive
shall not:
(i) engage directly, alone or in association with or as a
shareholder, principal, agent, partner, officer, director, employee or
consultant of any other organization or entity, in competition with the
businesses of the Company and/or any of its affiliates as of the
Executive's Date of Termination;
(ii) divert to any competitor of the Company or any of its
affiliates, any customer of the Company or any of its affiliates or any
"prospective customer" (as defined in the last paragraph of this Section
8(b)) of the Company or any of its affiliates; or
(iii) solicit or encourage any officer, employee or consultant of the
Company or any of its affiliates to leave the employ of the Company or any
of its affiliates for employment by or with any competitor of the Company
or any of its affiliates;
provided, however, that the Executive may invest in stocks, bonds or other
- -------- -------
securities of any competitor of the Company or any of its affiliates if:
(A) such stocks, bonds or other securities are listed on any
national or regional securities exchange or have been registered under
Section 11 (g) of the Securities Exchange Act of 1934;
(B) the Executive's investment does not exceed, in the case of
any class of the capital stock of any one issuer, 1% of the issued and
outstanding shares, or, in the case of other securities, 1% of the
aggregate principal amount thereof issued and outstanding; and
(C) such investment would not prevent, directly or indirectly,
the transaction of business by the Company and/or any of its affiliates
with any state, district, territory or possession of the United States or
any governmental subdivision, agency or instrumentality thereof by virtue
of any statute, law, regulation or administrative practice.
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If, at any time, the provisions of this Section 8(b) shall be
determined to be invalid or unenforceable by reason of being vague or
unreasonable as to area, duration or scope of activity, this Section 8(b) shall
be considered severable and shall become and shall be immediately amended solely
with respect to such area, duration and scope of activity as shall be determined
to be reasonable and enforceable by the court or other body having jurisdiction
over the matter and the Executive agrees that this Section 8(b) as so amended
shall be valid and binding as though any invalid or unenforceable provision had
not been included herein. Except as provided in this Section 8 and in Section
3, nothing in this Agreement shall prevent or restrict the Executive from
engaging in any business or industry in any capacity.
For purposes of clause (ii) of this Section 8(b), the term
"prospective customer" shall mean any entity, business or individual included on
a list of prospective customers provided to the Executive by the Company within
15 days following his Date of Termination, which list contains the names of
those entities, businesses and individuals with whom the Company had been in
contact prior to the Executive's Date of Termination for purposes of
establishing a customer relationship therewith. Any entity, business or
individual not appearing on the aforementioned list of prospective customers due
to the failure of the Executive to advise the Company of such contact shall be
considered a "prospective customer" for purposes of clause (ii) of this Section
8(b).
(c) Public Support and Assistance. The Executive agrees that
-----------------------------
following any termination of his employment hereunder by the Company, the
Executive shall not disclose or cause to be disclosed any negative, adverse or
derogatory comments or information of a substantial nature about the Company or
its management, or about any product or service provided by the Company, or
about the Company's prospects for the future (including any such comments or
information with respect to affiliates of the Company). The Company and/or any
of its affiliates may seek the assistance, cooperation or testimony of the
Executive following any such termination in connection with any investigation,
litigation or proceeding arising out of matters within the knowledge of the
Executive and related to the Executive's position as an officer or employee of
the Company, and in any such instance, the Executive shall provide such
assistance, cooperation or testimony and the Company shall pay the Executive's
reasonable costs and expenses in connection therewith; in addition, if such
assistance, cooperation or testimony requires more than a nominal commitment of
the Executive's time, the Company shall compensate the Executive for such time
as a per diem rate derived from the Executive's Base Salary at the time of the
Executive's Date of Termination.
(d) Nondisclosure of Confidential Information. During the Term,
-----------------------------------------
the Executive shall hold in a fiduciary capacity for the benefit of the Company
and its affiliates all Confidential Information (as defined below). After
termination of the Executive's employment with the Company, the Executive shall
keep secret and confidential all Confidential Information and shall not use or
disclose to any third party in any fashion or for any purpose whatsoever, any
Confidential Information. As used herein, "Confidential Information" shall mean
any information regarding this Agreement, or any other information regarding the
Company or its affiliates which is not available to the general public, and/or
not generally known outside the Company or any such
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affiliate, to which the Executive has or shall have had access at any time
during the course of the Executive's employment with the Company, including,
without limitation, any information relating to the Company's (and its
affiliates'):
(i) business, operations, plans, strategies, prospects or
objectives;
(ii) products, technologies, processes, specifications, research and
development operations or plans;
(iii) customers and customer lists
(iv) sales, service, support and marketing practices and operations;
(v) financial condition and results of operations;
(vi) operational strengths and weaknesses; and
(vii) personnel and compensation policies and procedures.
Notwithstanding the foregoing provisions of this Section 8, the Executive may
discuss this Agreement with the members of the Executive's immediate family and
with the Executive's personal legal and tax advisors.
(e) Specific Performance. Without intending to limit the
--------------------
remedies available to the Company, the Executive agrees that damages at law
would be an insufficient remedy to the Company in the event that the Executive
violates any of the provisions of this Section 8, and that the Company may apply
for and, upon the requisite showing, have injunctive relief in any court of
competent jurisdiction to restrain the breach or threatened breach of or
otherwise to specifically enforce any of the covenants contained in this Section
8.
9. Excise Tax Gross-Up Payment. If any payments to the Executive by
---------------------------
the Company under this Agreement ("Payments") are subject to the tax (the
"Excise Tax") imposed by Section 4999 of the Code, the Company shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of any Excise Tax on the Payments and
all income taxes and Excise Tax upon such Company payment, shall be equal to the
Payments. The determination of whether any Payments are subject to the Excise
Tax shall be based on the opinion of tax counsel selected by the Company and
reasonably acceptable to the Executive, whose fees and expenses shall be paid by
the Company. For purposes of determining the amount of the Gross-Up Payment, the
Executive shall be deemed to pay federal, state and local income taxes at the
highest marginal rate of income taxation applicable to any individual residing
in the jurisdiction in which the Executive resides in the calendar year in which
the Gross-Up Payment is to be made. In the event that the Excise Tax is
subsequently determined to be less than the amount taken into account hereunder
at the time of termination of
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the Executive's employment, the Executive shall repay the Company, at the time
that the amount of such reduction of Excise Tax is finally determined, the
portion of the Gross-Up Payment attributable to such reduction (plus that
portion of the Gross-Up Payment attributable to the Excise Tax and federal,
state and local income tax imposed on the Gross-Up Payment being repaid by the
Executive to the extent that such repayment results in a reduction in Excise Tax
and/or a federal, state or local income tax deduction) plus interest on the
amount of such repayment at the rate provided in Section 1274(b) (2) (B) of the
Code. In the event that the Excise Tax is determined to exceed the amount taken
into account hereunder at the time of the termination of the Executive's
employment (including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company shall
make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Executive with respect to such
excess) at the time that the amount of such excess is finally determined. The
Executive and the Company shall each reasonably cooperate with the other in
connection with any administrative or judicial proceedings concerning the
existence or amount of liability for Excise Tax with respect to the Payments.
10. Notice. For the purposes of this Agreement, notices, demands and
------
all other communications provided for herein shall be in writing and shall be
deemed to have been duly given when delivered or (unless otherwise specified)
mailed by United States certified or registered mail, return receipt requested,
postage prepaid, addressed as follows:
If to the Executive:
W. Marie Zanavich
1 Broadway
Park Ridge, NJ 07656
If to the Company:
Office of the General Counsel
United Water Resources Inc.
200 Old Hook Road
Harrington Park, NJ 07640-1799
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Or to such other address as either of the parties may have furnished to the
other in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
11. Successors. Without the prior written consent of the Executive,
----------
this Agreement cannot be assigned by the Company except that it shall be binding
automatically on any successors and assigns of all or substantially all of the
business and/or assets of the Company (whether direct or indirect, by purchase,
merger, consolidation or otherwise). In addition, without the prior written
consent of the Company, this Agreement cannot be assigned by the Executive,
except that the right to receive payments or benefits hereunder may be
transferred by will or the laws of descent and distribution. This Agreement and
all rights of the Executive hereunder shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives.
12. Arbitration. Except as provided in Section 8(e), all
-----------
controversies, claims or disputes arising out of or relating to this Agreement
shall be settled by binding arbitration under the rules of the American
Arbitration Association then in effect in the State of New Jersey, as the sole
and exclusive remedy of either party, and judgment upon any such award rendered
by the arbitrator(s) may be entered in any court of competent jurisdiction. The
costs of arbitration shall be borne by the unsuccessful party or otherwise as
determined by the arbitrators in their discretion.
13. Governing Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of New
Jersey without regard to conflicts of law principles.
14. Amendments. No provision of this Agreement may be modified,
----------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer of the Company as may be
specifically designated for such purpose by the Board. No waiver by either
party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
15. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
16. Entire Agreement. This Agreement sets forth the entire agreement
----------------
of the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement.
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17. Indemnification. The Company shall indemnify the Executive to
---------------
the full extent permitted by the New Jersey Business Corporation Act and any
provision of the By-Laws of the Company, as amended from time to time, generally
applicable to officers and directors of the Company, for all amounts (including
without limitation, judgements, fines, settlement payments, expenses and
attorneys' fees) incurred or paid by the Executive in connection with any
action, suit, investigation or proceeding arising out of or relating to the
performance by the Executive of services for, or the actions by the Executive as
an officer or employee of, the Company or any affiliate of the Company or any
other person or enterprise at the Company's request. Nothing in this Section 17
or elsewhere in this Agreement is intended to prevent the Company from
indemnifying the Executive to any greater extent than is required by this
Section 17.
18. Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity or enforceability of
any other provision hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
UNITED WATER RESOURCES INC.
By:________________________________________
Name:
Title:
W. MARIE ZANAVICH
___________________________________________
DONALD L. CORRELL
___________________________________________
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EXHIBIT 10(C)
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT effective as of January 1, 1999 (the "Commencement Date") by and
between United Water Resources Inc., a New Jersey corporation, and its
subsidiaries (collectively, the "Company"), and Walton F. Hill (the "Executive")
(this "Agreement").
The Company desires to employ the Executive and the Executive is willing to
be employed by the Company, on the terms and conditions hereinafter provided.
In order to effect the foregoing, the parties hereto wish to enter into an
employment agreement on the terms and conditions set forth below. Accordingly,
in consideration of the premises and the respective covenants and agreements of
the parties herein contained, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Employment. The Company hereby agrees to employ the Executive,
----------
and the Executive hereby agrees to be employed by the Company, on the terms and
conditions set forth herein.
2. Term. The Executive's employment under this Agreement shall
----
commence on the Commencement Date and shall end at the close of business on
December 31, 2001; provided, however, that the Term shall thereafter be
-------- -------
automatically extended for each succeeding 1-year period unless either party
hereto provides the other party with a written notice at least 60 days prior to
the end of the then current Term, advising that the party providing the notice
shall not agree to so extend the Term (the "Term"). Notwithstanding the
preceding, the Term shall not extent beyond the date on which the Executive
attains age 65 without the prior written consent of the Company; provided,
--------
however, that the end of the Term solely on account of the Executive attaining
- -------
age 65 shall not entitle the Executive to any benefits under Section 7.
3. Title, Duties and Authority. The Executive shall serve as Vice
---------------------------
President - Regulatory Business of United Water Management and Services Inc. and
shall have such responsibilities and duties (consistent with the Executive's
position as Vice President - Regulatory Business) as may from time to time be
assigned to the Executive by the Company, and shall have all of the powers and
duties usually incident to the office of Vice President - Regulatory Business.
The Executive shall devote substantially all of his working time and efforts to
the business and affairs of the Company, except for vacations, illness or
incapacity.
4. Compensation and Benefits.
-------------------------
(a) Base Salary. During the Term, the Company shall pay the
-----------
Executive a base salary ("Base Salary"), payable in equal installments in
accordance with the Company's normal practice for paying base salaries to its
executive employees. The Base Salary shall initially
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be payable at the rate of $134,000.00 per annum, and shall be subject to annual
review by the Company for discretionary annual increases.
(b) MIP. The Executive shall participate in the United Water
---
Resources Inc. Management Incentive Plan (the "MIP") or any successor plan
established by the Company.
(c) Employee Benefits. The Executive shall be entitled to
-----------------
participate in all of the Company's employee benefit plans made available by the
Company (or any affiliate thereof) to its executives during the Term as may be
in effect from time to time.
(d) Expenses. During the Term, the Executive shall be entitled
--------
to receive prompt reimbursement upon submission of expense claims to the Company
for all reasonable and customary expenses incurred by the Executive in
performing services hereunder, provided that such expenses are incurred and
accounted for in accordance with the policies and procedures established by the
Company for its executive employees.
(e) Vacations. The Executive shall be entitled to paid
---------
vacation, paid holidays, sick days and personal days pursuant to the Company's
regular policies applicable to its executive employees.
(f) Taxes. The Company may withhold from any amounts payable
-----
under this Agreement such federal, state, local and/or other taxes as shall be
required to be withheld pursuant to any applicable law or regulation.
5. Termination. The Executive's employment hereunder may be
-----------
terminated under the following circumstances:
(a) Death. The Executive's employment hereunder shall terminate
-----
upon the Executive's death.
(b) Disability. If, as a result of the Executive's incapacity
----------
due to physical or mental illness, the Executive shall become entitled to the
receipt of benefits under the Company's long-term disability plan, and within 30
days after a written Notice of Termination (as defined in Section 6(a)) is given
to the Executive by the Company, the Executive shall not have returned to the
performance of his duties hereunder on a full-time basis, the Company may
terminate the Executive's employment hereunder for "Disability."
(c) Cause. The Company may terminate the Executive's employment
-----
hereunder for Cause. For purposes of this Agreement, the Company shall have
"Cause" to terminate the Executive's employment hereunder upon:
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(i) the failure by the Executive to substantially perform the
Executive's duties hereunder (other than any such failure resulting from the
Executive's incapacity due to physical or mental illness);
(ii) the willful violation by the Executive of any of the
Executive's material obligations hereunder;
(iii) the willful engaging by the Executive in misconduct
which is materially injurious to the business or reputation of the Company or
any of its affiliates; or
(iv) the Executive's conviction of a felony.
Notwithstanding the foregoing, the Executive shall not be
terminated for Cause without:
(A) at least 15 days' advance notice to the Executive setting
forth the reasons for the Company's intention to terminate the Executive's
employment hereunder for Cause;
(B) the failure of the Executive to cure the nonperformance,
violation or misconduct described in the notice referred to in clause (A)
of this paragraph, if cure thereof is possible, to the reasonable
satisfaction of the Board of Directors of United Water Resources Inc. (the
"Board"), within 15 days of such notice; and
(C) delivery to the Executive of a Notice of Termination (as
defined in Section 6 (a)) from the Company notifying him that in the good
faith opinion of a majority of the Board, the Company is entitled to
terminate the Executive for Cause as set forth above, and specifying the
particulars thereof in detail.
(d) Good Reason. The Executive may terminate his employment
-----------
hereunder for "Good Reason" by providing a Notice of Termination to the Company
within 30 days after the occurrence, without the Executive's consent, of one of
the following events that has not been cured within 15 days after written notice
thereof has been given to the Company by the Executive:
(i) a material and adverse change in the Executive's title,
status, authority, duties or function (in each case, other than as may be
contemplated by this Agreement);
(ii) any failure to pay the Executive's Base Salary or MIP
payment(s) when due;
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(iii) a change of the Executive's place of employment by the
Company to a location which is greater than 50 miles from the location of
the Executive's place of employment by the Company as of the Commencement
Date; or
(iv) the willful violation by the Company of any of the
Company's material obligations hereunder.
(e) Without Cause. The Company may terminate the Executive's
-------------
employment hereunder without Cause by providing the Executive with a Notice of
Termination.
(f) Without Good Reason. The Executive may terminate the
-------------------
Executive's employment hereunder without Good Reason by providing the Company
with a Notice of Termination.
6. Termination Procedure.
---------------------
(a) Notice of Termination. Any termination of the
---------------------
Executive's employment by the Company or by the Executive (other than a
termination on account of the Executive's death pursuant to Section 5(a)) shall
be communicated by a written Notice of Termination to the other party hereto in
accordance with Section 10. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon and the Date of Termination, and shall
set forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment hereunder pursuant to the
provision so indicated.
(b) Date of Termination. "Date of Termination" shall mean:
-------------------
(i) if the Executive's employment is terminated on account of
the Executive's death pursuant to Section 5(a), the date of the Executive's
death;
(ii) if the Executive's employment is terminated on account of
the Executive's Disability pursuant to Section 5(b), 30 days after a Notice
of Termination has been provided pursuant thereto (provided that the
Executive shall not have returned to the performance of the Executive's
duties on a full-time basis during such thirty-(30) day period);
(iii) if the Executive's employment is terminated for Cause
pursuant to Section 5(c), the date specified in the Notice of Termination
provided pursuant thereto; and
(iv) if the Executive's employment is terminated for any other
reason, the date on which Notice of Termination is provided or any later
date (within 30 days) set forth in such Notice of Termination.
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7. Compensation Upon Termination.
-----------------------------
(a) Death. If the Executive's employment with the Company is
-----
terminated on account of the Executive's death pursuant to Section 5(a), the
Company shall as soon as practicable pay to the Executive's estate or as may be
directed by the legal representatives of the Executive's estate any Base Salary
accrued and due to the Executive under Section 4(a) through the Executive's Date
of Termination and such prorated MIP payment, the amount, if any, of which shall
be determined in the sole discretion of the Compensation Committee of the Board
(the "Compensation Committee"). The Company shall provide the Executive through
the Date of Termination with continued participation in the employee benefit
plans provided to the Executive pursuant to Section 4(c) as of the Executive's
Date of Termination. Other than the foregoing, the Company shall have no
further obligations to the Executive hereunder.
(b) Disability. If the Executive's employment with the Company
----------
is terminated on account of the Executive's Disability pursuant to Section 5(b),
the Company shall as soon as practicable pay the Executive any Base Salary
accrued and due to the Executive under Section 4(a) through the Executive's Date
of Termination and such prorated MIP payment, the amount, if any, of which shall
be determined in the sole discretion of the Compensation Committee. The Company
shall provide the Executive through the Executive's Date of Termination with
continued participation in the employee benefit plans provided to the Executive
pursuant to Section 4(c) as of the Executive's Date of Termination. Other than
the foregoing, the Company shall have no further obligations to the Executive
hereunder.
(c) By the Company for Cause or By the Executive Without Good
---------------------------------------------------------
Reason. If the Executive's employment with the Company is terminated by the
- ------
Company for Cause pursuant to Section 5(c) or by the Executive without Good
Reason pursuant to Section 5(f), the Company shall as soon as practicable pay
the Executive any Base Salary accrued and due to the Executive under Section
4(a) through the Executive's Date of Termination and the Executive shall forfeit
his entire then unpaid MIP payment(s), if any. The Company shall provide the
Executive through his Date of Termination with continued participation in the
employee benefit plans provided to the Executive pursuant to Section 4(c) as of
his Date of Termination. Other than the foregoing, the Company shall have no
further obligations to the Executive hereunder.
(d) Termination By the Company Without Cause or By the
--------------------------------------------------
Executive for Good Reason. If the Executive's employment with the Company is
- -------------------------
terminated by the Company (other than for Disability or Cause), or by the
Executive for Good Reason pursuant to Section 5(d), then the Company shall:
(i) within 30 days of the Executive's Date of Termination, pay the
Executive any Base Salary accrued and due the Executive under Section 4(a)
through his Date of Termination and any unpaid MIP payment(s) for any
previously completed calendar year(s);
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(ii) (A) if the Executive's Date of Termination occurs within 24
months following a Change of Control, as defined below, within 30 days of
the Executive's Date of Termination, pay the Executive an amount equal to
150% of his Base Salary in effect as of his Date of Termination, or (B) if
the Executive's Date of Termination does not occur within 24 months
following a Change of Control, as defined below, continue to pay the
Executive his Base Salary in effect as of his Date of Termination for the
18-month period immediately following his Date of Termination (or until
such earlier time that the Executive violates the provisions of Section 8)
at the times such payments would otherwise have been made under Section
4(a);
(iii) (A) if the Executive's Date of Termination occurs within 24
months following a Change of Control, as defined below, within 30 days of
the Executive's Date of Termination, pay the Executive an amount equal to
150% of his then current "Cash Target Amount" under the MIP, or (B) if the
Executive's Date of Termination does not occur within 24 months following a
Change of Control, as defined below, continue to pay the Executive an
annual MIP payment for the 18-month period immediately following his Date
of Termination (or until such earlier time that the Executive violates the
provisions of Section 8), each such payment in an amount based upon his
current "Cash Target Amount" under the MIP, to be paid at the times such
payments would otherwise have been made under the MIP; and
(iv) provide the Executive for the 18-month period commencing
immediately following his Date of Termination (or until such earlier time
that the Executive violates the provisions of Section 8), with continued
participation (or equivalent benefits if such participation is not legally
permissible (cash payments in the case of tax-qualified retirement plan
benefits)) in the employee benefit plans provided to the Executive pursuant
to Section 4(c) as of his Date of Termination.
Other than the foregoing, the Company shall have no further obligations to the
Executive hereunder.
For purposes of this Agreement, a "Change of Control" of the Company
shall mean the first to occur of any of the following events:
(i) any "Person" (as defined in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and as such term is
modified in Sections 13(d) and 14(d) of the Exchange Act), excluding (A)
the Company or any of its subsidiaries, (B) a trustee or any fiduciary
holding securities under an employee benefit plan of the Company or any of
its subsidiaries, or an underwriter temporarily holding securities pursuant
to an offering of such securities, in each case with respect to the
securities so held, or (C) a corporation or other entity owned, directly or
indirectly, by holders of voting securities of the Company in substantially
the same proportions as their ownership of the Company, is or becomes the
"Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company (not including in
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the securities beneficially owned by such Person any securities acquired
directly from the Company or its subsidiaries or other affiliates
controlled by the Company or any such subsidiary) representing 20% or more
of the combined ordinary (in the absence of contingencies) voting power of
the Company's then outstanding securities; provided, however, that if such
-------- -------
"Person" shall be Suez Lyonnaise des Eaux or an affiliate thereof, solely
for purposes thereof the above reference to "20%" shall instead be deemed
to refer to the sum of the amount of the "Maximum Stockholder Investment
Percentage" (as defined in Section 1.1 of the Governance Agreement between
United Water Resources Inc. and Lyonnaise American Holding, Inc., dated as
of April 22, 1994) plus two percentage points; or
(ii) during any period of not more than two consecutive calendar
years (commencing January 1, 1999), individuals who at the beginning of
such period constitute the Board, together with any new director (other
than a director designated by a person who has entered into an agreement
with the Company to effect a transaction triggering the operation of clause
(i) or (iii) of this paragraph) whose election by the Board or nomination
for election by the Company's shareholders was approved by a vote of at
least two-thirds of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination
for election was previously so approved, cease for any reason to constitute
a majority thereof; or
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other entity, or a plan of
liquidation of the Company or an agreement for the sale or disposition by
the Company of its assets as an entirety or substantially as an entirety,
other than (A) a transaction which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding, by being converted into voting securities
of the surviving entity, or otherwise), in combination with the ownership
by any trustee or other fiduciary of securities under an employee benefit
plan of the Company, at least 80% of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such transaction, or (B) a transaction effected to
implement a recapitalization of the Company (or similar transaction) in
which no person acquires more than 20% of the combined voting power of the
Company's then outstanding securities (or if such person so acquiring more
than 20% of such combined voting power is Suez Lyonnaise des Eaux or an
affiliate thereof, solely for the purposes thereof the above reference to
"20%" shall instead be deemed to refer to the sum of the Maximum
Stockholder Investment Percentage plus two percentage points).
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8. Restrictions.
------------
(a) Reasonable Covenants. It is expressly understood by and
--------------------
between the Company and the Executive that the covenants contained in this
Section 8 are an essential element of this Agreement and that but for the
agreement by the Executive to comply with these covenants and thereby not to
diminish the value of the organization and goodwill of the Company or any
affiliate of the Company, if any, including without limitation relations with
their employees, suppliers, customers and accounts, the Company would not enter
into this Agreement. The Executive has independently consulted with his legal
counsel and after such consultation agrees that such covenants are reasonable
and proper.
(b) Noncompetition; No Diversion of Customers; Etc. During the
----------------------------------------------
Term and for 18 months after the Executive's Date of Termination, the Executive
shall not:
(i) engage directly, alone or in association with or as a
shareholder, principal, agent, partner, officer, director, employee or
consultant of any other organization or entity, in competition with the
businesses of the Company and/or any of its affiliates as of the
Executive's Date of Termination;
(ii) divert to any competitor of the Company or any of its
affiliates, any customer of the Company or any of its affiliates or any
"prospective customer" (as defined in the last paragraph of this Section
8(b)) of the Company or any of its affiliates; or
(iii) solicit or encourage any officer, employee or consultant of the
Company or any of its affiliates to leave the employ of the Company or any
of its affiliates for employment by or with any competitor of the Company
or any of its affiliates;
provided, however, that the Executive may invest in stocks, bonds or other
- -------- -------
securities of any competitor of the Company or any of its affiliates if:
(A) such stocks, bonds or other securities are listed on any
national or regional securities exchange or have been registered under
Section 11 (g) of the Securities Exchange Act of 1934;
(B) the Executive's investment does not exceed, in the case
of any class of the capital stock of any one issuer, 1% of the issued and
outstanding shares, or, in the case of other securities, 1% of the
aggregate principal amount thereof issued and outstanding; and
(C) such investment would not prevent, directly or
indirectly, the transaction of business by the Company and/or any of its
affiliates with any state, district, territory or possession of the United
States or any governmental subdivision, agency or instrumentality thereof
by virtue of any statute, law, regulation or administrative practice.
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If, at any time, the provisions of this Section 8(b) shall be
determined to be invalid or unenforceable by reason of being vague or
unreasonable as to area, duration or scope of activity, this Section 8(b) shall
be considered severable and shall become and shall be immediately amended solely
with respect to such area, duration and scope of activity as shall be determined
to be reasonable and enforceable by the court or other body having jurisdiction
over the matter and the Executive agrees that this Section 8(b) as so amended
shall be valid and binding as though any invalid or unenforceable provision had
not been included herein. Except as provided in this Section 8 and in Section 3,
nothing in this Agreement shall prevent or restrict the Executive from engaging
in any business or industry in any capacity.
For purposes of clause (ii) of this Section 8(b), the term
"prospective customer" shall mean any entity, business or individual included on
a list of prospective customers provided to the Executive by the Company within
15 days following his Date of Termination, which list contains the names of
those entities, businesses and individuals with whom the Company had been in
contact prior to the Executive's Date of Termination for purposes of
establishing a customer relationship therewith. Any entity, business or
individual not appearing on the aforementioned list of prospective customers due
to the failure of the Executive to advise the Company of such contact shall be
considered a "prospective customer" for purposes of clause (ii) of this Section
8(b).
(c) Public Support and Assistance. The Executive agrees that
-----------------------------
following any termination of his employment hereunder by the Company, the
Executive shall not disclose or cause to be disclosed any negative, adverse or
derogatory comments or information of a substantial nature about the Company or
its management, or about any product or service provided by the Company, or
about the Company's prospects for the future (including any such comments or
information with respect to affiliates of the Company). The Company and/or any
of its affiliates may seek the assistance, cooperation or testimony of the
Executive following any such termination in connection with any investigation,
litigation or proceeding arising out of matters within the knowledge of the
Executive and related to the Executive's position as an officer or employee of
the Company, and in any such instance, the Executive shall provide such
assistance, cooperation or testimony and the Company shall pay the Executive's
reasonable costs and expenses in connection therewith; in addition, if such
assistance, cooperation or testimony requires more than a nominal commitment of
the Executive's time, the Company shall compensate the Executive for such time
as a per diem rate derived from the Executive's Base Salary at the time of the
Executive's Date of Termination.
(d) Nondisclosure of Confidential Information. During the Term, the
-----------------------------------------
Executive shall hold in a fiduciary capacity for the benefit of the Company and
its affiliates all Confidential Information (as defined below). After
termination of the Executive's employment with the Company, the Executive shall
keep secret and confidential all Confidential Information and shall not use or
disclose to any third party in any fashion or for any purpose whatsoever, any
Confidential Information. As used herein, "Confidential Information" shall mean
any information regarding this Agreement, or any other information regarding the
Company or its affiliates which is not available to the general public, and/or
not generally known outside the Company or any such
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<PAGE>
affiliate, to which the Executive has or shall have had access at any time
during the course of the Executive's employment with the Company, including,
without limitation, any information relating to the Company's (and its
affiliates'):
(i) business, operations, plans, strategies, prospects or
objectives;
(ii) products, technologies, processes, specifications,
research and development operations or plans;
(iii) customers and customer lists
(iv) sales, service, support and marketing practices and
operations;
(v) financial condition and results of operations;
(vi) operational strengths and weaknesses; and
(vii) personnel and compensation policies and procedures.
Notwithstanding the foregoing provisions of this Section 8, the Executive may
discuss this Agreement with the members of the Executive's immediate family and
with the Executive's personal legal and tax advisors.
(e) Specific Performance. Without intending to limit the
--------------------
remedies available to the Company, the Executive agrees that damages at law
would be an insufficient remedy to the Company in the event that the Executive
violates any of the provisions of this Section 8, and that the Company may apply
for and, upon the requisite showing, have injunctive relief in any court of
competent jurisdiction to restrain the breach or threatened breach of or
otherwise to specifically enforce any of the covenants contained in this Section
8.
9. Excise Tax Gross-Up Payment. If any payments to the Executive by
---------------------------
the Company under this Agreement ("Payments") are subject to the tax (the
"Excise Tax") imposed by Section 4999 of the Code, the Company shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of any Excise Tax on the Payments and
all income taxes and Excise Tax upon such Company payment, shall be equal to the
Payments. The determination of whether any Payments are subject to the Excise
Tax shall be based on the opinion of tax counsel selected by the Company and
reasonably acceptable to the Executive, whose fees and expenses shall be paid by
the Company. For purposes of determining the amount of the Gross-Up Payment,
the Executive shall be deemed to pay federal, state and local income taxes at
the highest marginal rate of income taxation applicable to any individual
residing in the jurisdiction in which the Executive resides in the calendar year
in which the Gross-Up Payment is to be made. In the event that the Excise Tax
is subsequently determined to be less than the amount taken into account
hereunder at the time of termination of
112
<PAGE>
the Executive's employment, the Executive shall repay the Company, at the time
that the amount of such reduction of Excise Tax is finally determined, the
portion of the Gross-Up Payment attributable to such reduction (plus that
portion of the Gross-Up Payment attributable to the Excise Tax and federal,
state and local income tax imposed on the Gross-Up Payment being repaid by the
Executive to the extent that such repayment results in a reduction in Excise Tax
and/or a federal, state or local income tax deduction) plus interest on the
amount of such repayment at the rate provided in Section 1274(b) (2) (B) of the
Code. In the event that the Excise Tax is determined to exceed the amount taken
into account hereunder at the time of the termination of the Executive's
employment (including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company shall
make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Executive with respect to such
excess) at the time that the amount of such excess is finally determined. The
Executive and the Company shall each reasonably cooperate with the other in
connection with any administrative or judicial proceedings concerning the
existence or amount of liability for Excise Tax with respect to the Payments.
10. Notice. For the purposes of this Agreement, notices, demands and
------
all other communications provided for herein shall be in writing and shall be
deemed to have been duly given when delivered or (unless otherwise specified)
mailed by United States certified or registered mail, return receipt requested,
postage prepaid, addressed as follows:
If to the Executive:
Walton F. Hill
15 Wethersfield Lane
Highland Mills, NY 10930
If to the Company:
Office of the General Counsel
United Water Resources Inc.
200 Old Hook Road
Harrington Park, NJ 07640-1799
113
<PAGE>
Or to such other address as either of the parties may have furnished to the
other in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
11. Successors. Without the prior written consent of the Executive,
----------
this Agreement cannot be assigned by the Company except that it shall be binding
automatically on any successors and assigns of all or substantially all of the
business and/or assets of the Company (whether direct or indirect, by purchase,
merger, consolidation or otherwise). In addition, without the prior written
consent of the Company, this Agreement cannot be assigned by the Executive,
except that the right to receive payments or benefits hereunder may be
transferred by will or the laws of descent and distribution. This Agreement and
all rights of the Executive hereunder shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives.
12. Arbitration. Except as provided in Section 8(e), all
-----------
controversies, claims or disputes arising out of or relating to this Agreement
shall be settled by binding arbitration under the rules of the American
Arbitration Association then in effect in the State of New Jersey, as the sole
and exclusive remedy of either party, and judgment upon any such award rendered
by the arbitrator(s) may be entered in any court of competent jurisdiction. The
costs of arbitration shall be borne by the unsuccessful party or otherwise as
determined by the arbitrators in their discretion.
13. Governing Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of New
Jersey without regard to conflicts of law principles.
14. Amendments. No provision of this Agreement may be modified,
----------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer of the Company as may be
specifically designated for such purpose by the Board. No waiver by either
party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
15. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
16. Entire Agreement. This Agreement sets forth the entire agreement
----------------
of the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement.
114
<PAGE>
17. Indemnification. The Company shall indemnify the Executive to
---------------
the full extent permitted by the New Jersey Business Corporation Act and any
provision of the By-Laws of the Company, as amended from time to time, generally
applicable to officers and directors of the Company, for all amounts (including
without limitation, judgements, fines, settlement payments, expenses and
attorneys' fees) incurred or paid by the Executive in connection with any
action, suit, investigation or proceeding arising out of or relating to the
performance by the Executive of services for, or the actions by the Executive as
an officer or employee of, the Company or any affiliate of the Company or any
other person or enterprise at the Company's request. Nothing in this Section 17
or elsewhere in this Agreement is intended to prevent the Company from
indemnifying the Executive to any greater extent than is required by this
Section 17.
18. Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity or enforceability of
any other provision hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
UNITED WATER RESOURCES INC.
By: _________________________________
Name:
Title:
WALTON F. HILL
_____________________________________
DONALD L. CORRELL
_____________________________________
115
<PAGE>
Exhibit 21
UNITED WATER RESOURCES INC.
LIST OF SUBSIDIARIES OF THE REGISTRANT
Names of Companies and their Subsidiaries States of Incorporation
- ----------------------------------------- -----------------------
United Water New Jersey Inc. New Jersey
United Water New York Inc. New York
United Waterworks Inc. Delaware
United Water Idaho Inc. Idaho
United Water Florida Inc. Florida
United Water Pennsylvania Inc. Pennsylvania
United Water New Rochelle Inc. New York
United Water Delaware Inc. Delaware
United Water Toms River Inc. New Jersey
14 other subsidiaries in the water services business 7 states
United Water Mid-Atlantic Inc. New Jersey
Owns 9 subsidiaries in the water services business New Jersey
United Properties Group Incorporated New York
Owns 8 subsidiaries in the real estate business 3 states
United Water UK Limited N/A
Laboratory Resources, Inc. New Jersey
Twelve (12) other subsidiaries in businesses related to the 4 states
water industry or providing services to affiliates
116
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
-----------------------------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-61617) and
the Registration Statement on Form S-8 (No. 333-30229) of United Water Resources
of our report dated February 25, 1999, appearing on page 34 of this Annual
Report on Form 10-K. We also consent to the reference to us under the heading
"Experts" in the Prospectus constituting part of the Registration Statement on
Form S-3 (No. 33-61617).
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 23, 1999
117
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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<OTHER-ASSETS> 61,320
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<CAPITAL-SURPLUS-PAID-IN> 0
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<TOTAL-COMMON-STOCKHOLDERS-EQ> 456,029
80,282
9,000
<LONG-TERM-DEBT-NET> 652,969
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 93,400
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 3,722
2,073
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 471,647
<TOT-CAPITALIZATION-AND-LIAB> 1,769,122
<GROSS-OPERATING-REVENUE> 356,210
<INCOME-TAX-EXPENSE> 19,450
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<TOTAL-OPERATING-EXPENSES> 278,060
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<TOTAL-INTEREST-EXPENSE> 45,917
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4,058
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