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, 1997
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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, 1998 - 36,386,537
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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, 1998, the registrant's Common Stock, no par value, held by
non-affiliates had an aggregate market value of $ 500,279,887. 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 tentatively to be held on May 11,
1998 as to Part III, items 10, 11, 12, and 13.
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 Mid-Atlantic, whose subsidiaries own and operate water and wastewater
systems; 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
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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, 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.
2
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 30%
and 20% interest in United Water Services Canada and United Water Services
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 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 $78.7
million and $74.9 million at December 31, 1997 and 1996, respectively, and is
included in equity investments in the consolidated balance sheet. United
Water's share of the Partnership's earnings, which totaled $13.6 million and $6
million in 1997 and 1996, 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 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 will not have an effect on United Water's cash flow or ability to pay
dividends, nor will it affect the long-term benefit the Company expects to
derive from its investment in NWG.
On July 28, 1997, United Water Services (formerly the United Water
Resources-Lyonnaise des Eaux Partnership), an entity owned by subsidiaries of
United Water and Suez Lyonnaise des Eaux (formerly Lyonnaise des Eaux), acquired
Montgomery Watson Inc.'s (Montgomery Watson) 50% stake in JMM Operational
Services Inc. (JMM-OSI). As a result, JMM-OSI (now known as United Water
Services Inc.) became a wholly-owned subsidiary of United Water Services.
Prior to the restructuring, United Water Services owned a 50% interest in JMM-
OSI, and Montgomery Watson owned the remaining 50% interest.
United Water Services provides contract operations and maintenance services
for water and wastewater facilities. During 1997, United Water Services pursued
additional contract operations. As a result, in January 1998, United Water
Services was awarded a ten-year contract to operate the wastewater
3
systems in Milwaukee, Wisconsin. In addition, United Water Services purchased
United Water's meter installation subsidiary, United Metering Inc. (United
Metering), for book value of $6.2 million, in December 1997.
In July 1997, the Company's subsidiaries, United Water Canada and United
Water Mexico acquired a 30% and a 20% interest in United Water Services Canada
and United Water Services Mexico, respectively.
At December 31, 1997, United Water had an equity investment of
approximately $20.2 million in North America, relating to contract services,
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.
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.
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 has accounted for this disposal in accordance with the provisions of
Accounting Principles Board (APB) 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
net losses of $1.5 million and $2.6 million in 1996 and 1995, respectively. The
Company recorded an impairment loss of $1.5 million net of income taxes for its
investment in the environmental testing business, which was included in the net
loss for the year ended December 31, 1995 (see Item 7, Significant Items-
"Impairment
4
of Long-Lived Assets" in the Management's Discussion and Analysis of Financial
Condition and Results of Operations below). 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.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
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See 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.
REGULATED UTILITY OPERATIONS
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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 177,600 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.
5
United Water New York supplies water service to over 63,000 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 340,000 customers in 13 states through its
regulated water and wastewater utility subsidiaries. The utility subsidiaries
of United Waterworks serve a total population of about 930,000 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 6,000 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.
6
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 1997 accounted for 83.9% of United Water's utility
customers, 91.4% of United Water's utility operating revenues and 91.7% of
United Water's net investment in utility plant.
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# of Customers at 1997
Major Utility Operations Dec. 31, 1997 Revenues
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(in thousands)
United Water New Jersey 177,600 $121,628
United Water New York 63,000 42,613
United Waterworks Subsidiaries:
United Water Florida 50,922 25,455
United Water Idaho 57,730 22,064
United Water Pennsylvania 46,482 19,064
United Water New Rochelle 30,207 18,010
United Water Delaware 32,152 16,574
United Water Toms River 44,813 14,153
United Water Arkansas 19,195 6,775
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Subtotal 522,101 286,336
Other utility operations 100,302 27,010
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Total utility operations 622,403 $313,346
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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 1997, the Company's utility revenues were derived as
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follows: 62% from residential customers, 26% from commercial customers, 8% from
industrial customers and 4% from fire protection customers. Of the Company's
595,364 water utility customers at December 31, 1997, 533,645 (90%) were
residential customers, 53,327 (9%) were commercial customers and 8,392 (1%) were
industrial customers. The Company also had 27,039 wastewater customers at
December 31, 1997, 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
1997.
Capital Expenditures. The Company's additions to utility plant were $83.3
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million in 1997 as compared to $74.6 million in 1996. 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.
7
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
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regulation 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 1997 as well as other rate matters, see
Item 8, Note 11 to the consolidated financial statements, below.
8
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 the Northumbrian Partnership, which acquired a 20% interest in
Northumbrian Water Group plc in the United Kingdom, and (c) a 50% investment in
a joint venture partnership with Suez Lyonnaise des Eaux which, in turn, owns
100% of United Water Services, which provides operations and management services
for water and wastewater treatment facilities.
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 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.
Northumbrian Partnership In June 1996, a wholly-owned subsidiary of Untied
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Water, and Lyonnaise Europe, formed the Partnership, which acquired a 20%
interest in NWG. The Company accounts for this investment under the equity
method of accounting.
United Water Services As mentioned above, on July 28, 1997, United Water
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Services, acquired Montgomery Watson's 50% stake in JMM-OSI resulting in United
Water Services Inc. becoming a wholly-owned subsidiary of United Water Services.
United Water Services provides contract operations and maintenance services
for water and wastewater facilities. During 1997, United Water Services pursued
additional contract operations. As a result, in January 1998, United Water
Services was awarded a ten-year contract to operate the wastewater systems in
Milwaukee, Wisconsin. In addition, United Water Services purchased United
Water's meter installation subsidiary, United Metering, for book value of $6.2
million, in December 1997.
In July 1997, the Company's subsidiaries, United Water Canada and United
Water Mexico, acquired a 30% and a 20% interest in United Water Services Canada
and United Water Services Mexico, respectively, which provide contract
operations and maintenance services for water and wastewater facilities. The
Company's investments in United Water Services, United Water Services Canada and
United Water Services Mexico are accounted for under the equity method of
accounting.
9
Public-Private Partnerships United Water is a leader in forming public-
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private 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.
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 532 employees at 9 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 1986, 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 1986 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.
10
Of the projected $277 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. 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
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Water Canada and United Water Mexico, acquired a 30% and a 20% interest in
United Water Services Canada and United Water Services Mexico, respectively,
which provide contract operations and maintenance services for water and
wastewater facilities. Results for 1997 were insignificant to the consolidated
financial statements. 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
363 wells, 84 water treatment plants, with treatment capacities of up to 200
million gallons per day (MGD), 16 wastewater treatment plants, with treatment
capacities of up to 3 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 7,339 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
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United Properties owns approximately 629 acres of land held for sale or
under development principally in New Jersey and New York 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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Three suits were filed by Safas Corporation, New Regime Company and
Aircraft Engineering Products against United Water, Dundee Water Power & Land
Co. (Dundee) and United Water New Jersey in September and November 1994 and May
1995 in the Superior Court of New Jersey (the NJ Court), Passaic County. The
suits allege that the plaintiffs suffered property damage as a result of an
alleged breach in a berm surrounding the Dundee Canal, allowing water to escape.
The Dundee Canal is the property of Dundee, a corporation of which United Water
owns 50% of the outstanding common stock. North Jersey District Water Supply
Commission, the other 50% shareholder, has also been named as a defendant.
Initially, the plaintiffs in the Safas and New Regime suits voluntarily
dismissed United Water and United Water New Jersey without prejudice from their
actions. In August 1995, Safas and New Regime reinstituted their suits against
United Water and United Water New Jersey. Plaintiffs, in the aggregate, seek
damages of several million dollars. On May 14, 1997, United Water and United
Water New Jersey filed a motion for Summary Judgment seeking to be dismissed
from the action. The plaintiff filed a motion for partial summary judgment for
its claim that Dundee is strictly liable for damage resulting from the breach.
Both motions were argued before the NJ Court on July 24, 1997. On July 30,
1997, the NJ Court granted the Company's motion for summary judgment dismissing
it from the action, but denied United Water New Jersey's motion for summary
judgment. The NJ Court also denied plaintiff's motion for partial summary
judgment seeking strict liability. The Order granting summary judgment on
behalf of the Company was entered on September 29, 1997. The case proceeded to
trial on January 20, 1998 against Dundee, United Water New Jersey and North
Jersey District Water Supply Commission. On January 26 and 27, 1998,
settlements totaling $4,767,447 were reached with all of the plaintiffs and were
placed on the record. This amount will be paid by the insurance carriers for
Dundee and North Jersey, it having been acknowledged by all parties that United
Water New Jersey was not paying any money toward the settlement. United Water
New Jersey was dismissed as a party defendant and the case has now been
concluded.
United Water Delaware (formerly Wilmington Suburban Water Corporation), a
subsidiary of United Waterworks, was the subject of a Criminal Violation Notice
issued by New Castle County, Delaware Department of Public Works (the Notice).
The Notice, dated April 15, 1992, describes the violation as an illegal
placement of fill in a floodplain in contravention of the New Castle County
Zoning and Drainage Codes. United Water Delaware alleges that the illegal fill
was placed on land it owns by one or more third parties without the knowledge or
approval of United Water Delaware. Violation notice forms were also issued to
other similarly situated property owners, and United Water Delaware has taken
part in many discussions concerning the level of participation by all such
parties in a remediation. An
13
application for approval of a remediation plan was submitted to the New Castle
County Department of Planning on May 26, 1995 and the County accepted this
proposal on September 1, 1995. United Water Delaware and New Castle County
entered into a Release and Settlement Agreement (the Agreement) dated April 9,
1996. Pursuant to the Agreement, New Castle County had withdrawn the Notice
against United Water Delaware. The withdrawal of the Notice was conditioned on
United Water Delaware undertaking in good faith to implement the remediation
plan. As of April 15, 1997, certain conditions precedent to the Company's
obligation to complete the remediation work had not been fulfilled by New Castle
County. Management believes that the resolution of this matter will not have a
material adverse effect upon the financial position or results of operations of
the Company.
On October 28, 1994, IU International Corporation (IU) filed suit in the
Superior Court of the State of Delaware against United Waterworks alleging
breach of contract and seeking reimbursement from United Waterworks of more than
$3 million, as well as interest thereon. IU's claim is based on certain tax
indemnifications that were part of a stock purchase agreement entered into by
IU, Lyonnaise American Holding, Inc. (LAH), United Waterworks and GWC
Corporation (former parent of United Waterworks) in connection with the 1982
purchase of 50% of the outstanding common stock of United Waterworks by LAH. On
June 16, 1995, United Waterworks, LAH and IU entered into a settlement agreement
pursuant to which United Waterworks agreed to pay IU $800,000 on the date of
execution of such agreement. In addition, United Waterworks agreed to pay IU an
additional amount of up to approximately $1.15 million plus interest thereon
(such interest commencing as of September 15, 1993) at United Waterworks'
average short-term borrowing rate. Such payments become due in the event and at
the time that certain tax benefits previously claimed by United Waterworks with
respect to its 1992 tax year reach "finality" through the running of the statute
of limitations on the 1992 tax year or when it is determined that such tax
benefits are allowable by the Internal Revenue Service. On June 16, 1995,
United Waterworks paid $800,000 to IU. Pursuant to the settlement agreement, on
June 30, 1995, the parties filed with the court a stipulation of dismissal of
the lawsuit with prejudice. On September 15, 1996, the statute of limitations
expired with respect to the 1992 tax year. As a result, on November 19, 1996,
United Waterworks paid IU $977,000 of the $1.15 million. The remaining balance
was paid on April 16, 1997.
A class action lawsuit was filed in the Supreme Court of the State of New
York, New York County, on May 28, 1996 by Steven Tagliaferri and John
Ambroselli, individually and on behalf of a class of employees (Plaintiffs)
against United Metering Inc., 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
14
Metering filed a response denying Plaintiffs' claims and made a motion for
summary judgement seeking dismissal of the lawsuit. Oral argument on such
motion was held on March 14, 1997 and on April 1, 1997, a decision was issued
granting United Metering's motion to dismiss the lawsuit. Plaintiffs have
appealed the decision to the Appellate Division of the Supreme Court of the
State of New York. No date has been set by the Court to hear appellate
arguments. Management believes that the resolution of this matter will not have
a material adverse effect upon the financial position or results of operations
of the Company.
On July 20, 1994, the Townhouse at Lake Isle Home Owners Association,
Inc. filed suit against United Water New Rochelle (formerly New Rochelle Water
Company), a subsidiary of United Waterworks, in the Supreme Court of the State
of New York, Westchester County (the Westchester Court). The suit seeks to
recover for alleged property damage arising out of repeated leaks in service
lines installed in or about 1982 by the developer of a townhouse complex in
Eastchester, New York. The bulk of the relief sought by the plaintiff involves
monetary damages for the cost of replacing the service lines, which belong to
United Water New Rochelle. The plaintiff did not seek injunctive relief. A
default judgment on the issue of liability was entered against United Water New
Rochelle on December 2, 1994. United Water New Rochelle has diligently
prosecuted motions to reopen and appeal from the default judgment, on the
principal ground that the default resulted from a failure by United Water New
Rochelle's insurance carrier and claims processing service provider to timely
file an answer to the plaintiff's complaint. To date, motions to vacate the
default judgment have not been successful. Following an inquest on the issue of
damages, the Westchester Court issued a decision, dated December 20, 1996,
awarding the plaintiff $1,330,000. The Westchester Court subsequently partially
vacated its December 20, 1996 decision on the ground that the relief granted
exceeded the plaintiff's original demand and reduced the award to $805,000. On
October 7, 1997, the Westchester Court entered a judgment in favor of the
plaintiff in the amount of $862,758, which included interest from December 20,
1996. United Water New Rochelle has filed a Notice of Appeal from the judgment,
and is also appealing 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 is seeking reimbursement from third parties of any ultimate
liability resulting in this matter. Management believes the resolution of this
matter will not have a material adverse effect upon the financial position or
results of operations of the Company.
United Water Toms River, a wholly-owned subsidiary of United Waterworks,
has been approached by counsel for several families in its franchise area to
notify them that counsel is considering filing a class action lawsuit naming
United Water Toms River as one of at least three defendants alleging personal
injuries sustained as a result of contaminated water being delivered to the
potential plaintiffs. While suit
15
has not been filed, counsel has reviewed testing data accumulated by the New
Jersey Department of Environmental Protection and United Water Toms River which
shows that United Water Toms River has delivered water to its customers in
complete conformance with all applicable federal and state water quality
standards. An agreement tolling the statute of limitations for at least one year
has been signed with the potential plaintiffs. Company counsel and officials
continue in a dialogue with counsel for the potential plaintiffs and other
potential defendants.
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 1997, there were no matters submitted to a
vote of security holders.
16
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 1997, 1996 and 1995 and the dividends paid on the common stock in each
quarter were as follows:
(dollars) STOCK PRICE DIVIDEND
- ------------------------------------------------
QUARTER HIGH LOW
- ------------------------------------------------
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
- -----------------------------------------------
1995 Fourth $13.000 $11.750 $.23
Third 13.500 12.500 .23
Second 14.125 12.875 .23
First 14.125 12.500 .23
The high and low stock prices from January 1 to February 28, 1998, were $19.875
and $17.500. There were 18,205 holders of record of United Water's common stock
as of February 28, 1998.
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.
17
ITEM 6. SELECTED FINANCIAL DATA
- ------- --------------------------
Year ended December 31,
- ------------------------------------------------------------------------------------------------------------
(thousands of dollars except per share data) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
Income Statement Data
- ---------------------
Operating revenues $ 351,409 $ 332,045 $ 319,536 $ 284,767 $191,703
Operating income 95,644 95,699 82,183 83,847 56,500
Net income applicable to
common stock 29,331 34,010 17,343 27,887 19,978
Net income per common share .83 1.01 .54 1.01 1.03
Net income per common share-
assuming dilution .83 1.00 .54 1.01 1.03
Dividends paid per share .92 .92 .92 .92 .92
============================================================================================================
Balance Sheet Data (at end of period)
- -------------------------------------
Total assets $1,658,342 $1,582,097 $1,516,708 $1,457,427 $740,526
Long-term debt 622,737 558,093 558,658 505,204 276,753
Preferred stock
without mandatory redemption 9,000 9,000 9,000 9,000 9,000
Preferred and preference stock
with mandatory redemption 86,579 93,261 98,091 98,173 23,840
- ------------------------------------------------------------------------------------------------------------
Operating revenues and operating income represent results from continuing
operations. Prior year amounts have been restated to conform with current year
presentation.
The Merger of United Water with GWC, which occurred on April 22, 1994, affects
the comparability of the information presented in the Selected Financial Data
for the 1994, 1995, 1996 and 1997 fiscal years versus the information for the
respective prior years.
18
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 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 $78.7
million and $74.9 million at December 31, 1997 and 1996, respectively, and is
included in equity investments in the consolidated balance sheet. United
Water's share of the Partnership's earnings, which totaled $13.6 million and $6
million in 1997 and 1996, 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 will not have an effect on United
Water's cash flow or ability to pay dividends, nor will it affect the long-term
benefit the Company expects to derive from its investment in NWG.
INVESTMENT IN UNITED WATER SERVICES
On July 28, 1997, United Water Services (formerly the United Water
Resources-Lyonnaise des Eaux Partnership), a joint venture between United Water
and Suez Lyonnaise des Eaux (formerly Lyonnaise des Eaux) acquired Montgomery
Watson's 50% stake in JMM Operational Services (JMM-OSI). As a result, United
Water Services Inc. (formerly JMM-OSI) became a wholly-owned subsidiary of
United Water Services.
United Water Services provides contract operations and maintenance services
for water and wastewater facilities. During 1997, United Water Services pursued
additional contract operations. As a
19
result, in January 1998, United Water Services was awarded a ten-year contract
to operate the wastewater systems in Milwaukee, Wisconsin. In addition, United
Water Services purchased United Water's meter installation subsidiary, United
Metering, for book value of $6.2 million, in December 1997.
In July 1997, the Company also acquired a 30% and a 20% interest in United
Water Services Canada and United Water Services Mexico, respectively.
At December 31, 1997, United Water had an equity investment of
approximately $20.2 million in North America, relating to contract services,
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.
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 has accounted for this disposal in accordance with the provisions of
Accounting Principles Board (APB) 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
net losses of $1.5 million and $2.6 million in 1996 and 1995, respectively. The
Company recorded an impairment loss of $1.5 million net of income taxes for its
investment in the environmental testing business, which was included in the net
loss for the year ended December 31, 1995 (see "Impairment of Long-Lived Assets"
below). 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.
20
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.
IMPAIRMENT OF LONG-LIVED ASSETS
During 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
effective for financial statements for fiscal years beginning after December 15,
1995. The statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable and specifies the criteria for the determination and measurement of
an impairment loss. United Water adopted SFAS No. 121 during 1995 and, as a
result of changes in market conditions, development plans, projections of cash
flows and other considerations, recorded a $12.1 million pre-tax impairment loss
for various parcels of land held by its real estate subsidiary and for its
investment in the environmental testing business for the year ended December 31,
1995. See Note 1 to the consolidated financial statements for further details.
LIQUIDITY AND CAPITAL RESOURCES
As shown in the consolidated statement of cash flows, the Company's major
uses of cash in 1997 included: $86.8 million of capital expenditures; $37
million of common, preferred and preference dividends paid to shareholders; and
a $18.3 million decrease in short-term notes payable. The major sources of
funds to meet these cash needs included: a $88.1 million of cash provided by
operations; $75.6 million of additional long-term debt; and $25.1 million of
proceeds from the issuance of additional shares of common stock.
Capital expenditures are generally incurred by United Water's utility
subsidiaries in connection with the normal upgrading and expansion of existing
water and wastewater facilities and to comply with existing environmental
regulations. United Water considers its utility plant to be adequate and in
good condition. These capital expenditures are necessary to meet growth
requirements and to comply with environmental laws and regulations. Excluding
the effects of inflation, the capital expenditures of United Water's utility
subsidiaries are projected to aggregate $277 million over the next five years,
including $62 million and $61 million in 1998 and 1999, respectively. This
total includes $178 million for United Waterworks and $95 million for United
Water New Jersey and United Water New York. The expenditures related to
compliance with environmental laws and regulations are estimated to be
approximately 25% of
21
the projected capital expenditures over the 1998-2002 period. To the best of
management's knowledge, the Company is in compliance with all major
environmental laws and regulations.
United Water anticipates that its future capital expenditures will be
funded by internally generated funds, external debt financings and the issuance
of additional common and preferred stock, including shares issued to existing
shareholders, bondholders, customers and employees under the Company's dividend
reinvestment and stock purchase plans. In addition, United 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, 1997, $34.6 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 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 (LIBOR)-based floating rate and is payable in annual installments through
June 2006. The Company purchased an offsetting interest rate cap to limit its
exposure under this financing to a maximum interest rate of 8.6%. The remainder
of the investment was funded through borrowings on United Water's various short-
term bank lines of credit.
In November 1996, United Water New Jersey issued three series of Variable
Rate Demand Water Facilities Revenue Refunding Bonds (the Bonds) aggregating
$130 million ($50 million due 2025 and $80 million due 2026), through the New
Jersey Economic Development Authority (the EDA). Proceeds from the Bonds were
used to refund an equal aggregate principal amount of 6%-7% bonds issued by the
EDA in 1987 to finance or refinance a portion of the costs of acquiring and
constructing certain water transmission, transportation, storage and
distribution facilities located in Bergen, Passaic and Hudson counties in New
Jersey. During 1997, the Company experienced an average interest rate of 3.2%
on the Bonds. In December 1996, the Company purchased a five-year interest rate
cap to limit its exposure under this financing to a maximum interest rate of 7%.
In June 1997, United Water issued $40 million of 7.45%-7.9% Senior Notes
($15 million due 2007 and $25 million due 2022). Proceeds from the notes were
used to refinance existing short-term debt of the Company.
22
In August 1997, United Waterworks issued $20 million of 5.3% tax-exempt
Water Resource Development Revenue Bonds, due 2027, through the Idaho Water
Resource Board. The proceeds will be used to finance a portion of the costs of
certain facilities to be owned by United Water Idaho (a subsidiary of United
Waterworks).
In December 1994, United Waterworks entered into a medium-term note program
that enabled United Waterworks to issue up to $75 million of debt with terms
ranging from 9 months to 30 years. The interest rates are set as notes are
issued under the program. The first $10 million of notes under this program
were issued in 1995. In October 1997, United Waterworks issued $15 million of
notes under this program, at a rate of 6.8%, with the full amount maturing in
2007. In February 1998, United Waterworks issued an additional $40 million of
notes under this program ($20 million at 6.97% due 2023, $15 million at 7.1% due
2028 and $5 million at 6.9% due 2017). The proceeds were used to redeem
outstanding notes payable.
At December 31, 1997, United Water had cash and cash equivalents of $8.5
million (excluding restricted cash) and unused short-term bank lines of credit
of $157.8 million. The Company and a subsidiary are negotiating committed
credit line agreements which would provide $135 million of credit lines,
including $67.5 million for a five year period at LIBOR-based rates. 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.
YEAR 2000 COMPLIANCE
United Water has assembled a task force to ensure all computer systems and
applications are prepared for the year 2000. Since 1994, the Company has been
in the process of replacing the core business and operating systems with newer
technology. As a result, all systems are scheduled to be year 2000 compliant by
the end of 1998. All work done in relation to addressing year 2000 compliance
has been performed as a by-product of another project. To date, there have been
no significant costs associated solely with year 2000 compliance issues. The
Company is currently seeking compliance certification from external interface
vendors and service providers. An action plan has been developed that will
identify any additional costs and resource commitments required. The Company
does not believe there will be material future costs associated with year 2000
requirements.
23
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 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 1997, the Company's regulated utilities received fifteen rate
decisions with an aggregate annual revenue increase of $10.7 million. An
estimated $5.6 million of this amount was reflected in 1997's revenues while the
remaining $5.1 million is expected to increase revenues in 1998. Current year
revenues also reflect the carryover impact of the rate awards granted in 1996 in
the amount of $5 million. See Note 11 to the consolidated financial statements
for further details.
In May 1997, United Water Pennsylvania applied for rate relief in the
amount of $3 million, or 15.42%, in water revenues. The increase was requested
primarily to fund capital investments and meet higher operation and maintenance
costs. In January 1998, the Company was granted a favorable decision allowing
an increase in revenues of $2.1 million, or 11%.
At the end of January 1998, there were six rate cases pending in which the
Company has requested an aggregate annual rate increase of $5.1 million. The
most significant rate case pending was filed by United Water Idaho. In November
1997, United Water Idaho applied to the Idaho Public Utilities Commission for
rate relief in the amount of $3.4 million, or 15.47%, in water revenues to meet
increased investment in utility plant and higher operation and maintenance
costs. A decision is expected before the end of the second quarter of 1998.
On October 26, 1996, United Water Delaware placed $2.3 million in increased
revenues in effect, subject to refund. On July 15, 1997, the Delaware Public
Utility Commission granted the Company a permanent rate increase of $1.6
million. On July 16, 1997, the Company filed an appeal and application for a
stay of the Commission's Order. On July 29, 1997, the Delaware Superior Court
granted a stay of the Commission decision pending the appeal. Management
believes that it will prevail in its appeal and any potential refunds will not
have a material effect on earnings.
24
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, 1997, eight 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 1998.
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.
25
REAL ESTATE ACTIVITIES
United Properties Group (United Properties) owns a portfolio of real estate
located in New Jersey, New York, Delaware, Idaho and Florida, consisting of
commercial properties, golf courses and land available for development. United
Properties is pursuing joint ventures, sales or direct development opportunities
for the various properties in its portfolio. In December 1995, United
Properties recorded a $9.4 million pre-tax impairment loss (which was included
in the $12.1 million impairment loss recorded by the Company) for various
parcels of land located in Orange and Rockland counties, New York, in accordance
with SFAS No. 121.
United Properties expects to spend $29.4 million over the next five years
for capital expenditures on its existing real estate portfolio, including $10.6
million and $5.3 million in 1998 and 1999, respectively. Funding for United
Properties' activities is anticipated to come from sales of properties,
operations of existing commercial properties and golf courses, and proceeds of
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 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 for 1997 compared with $34.1 million, or $1.01 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.
United Water's net income applicable to common stock for 1996 was $34
million, or $1.01 per common share, as compared to $17.3 million, or $.54 per
common share, earned in 1995. Income from continuing operations and before non-
recurring items was $34.1 million, or $1.01 for 1996 compared with $26.6
million, or $.83 for 1995. 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. Earnings for
1995
26
included the incurrence of non-cash, pre-tax charges of $12.1 million relating
to the write-down of various assets at the Company's real estate and
environmental testing businesses as well as a pre-tax charge of $1.5 million for
costs associated with an unconsummated business development proposal.
OPERATING REVENUES
Operating revenues increased $19.4 million, or 5.8%, in 1997 and $12.5
million, or 3.9%, in 1996 from the prior years, as follows:
- -----------------------------------------------------------------------------
1997 VS. 1996 1996 vs. 1995
(thousands of dollars) INCREASE (DECREASE) Increase (Decrease)
- -----------------------------------------------------------------------------
Utilities:
Rate awards $10,650 3.2% 6,591 2.1%
Consumption 137 0.0% (3,060) (0.9%)
Growth 3,276 1.0% 4,559 1.4%
Transfer of New
Mexico Operations - - (5,990) (1.9%)
Real estate 6,306 1.9% 3,336 1.0%
Other operations (1,005) (0.3%) 7,073 2.2%
- -----------------------------------------------------------------------------
$19,364 5.8% $12,509 3.9%
- -----------------------------------------------------------------------------
1997 VERSUS 1996
The 3.2% increase in revenues from rate awards in 1997 includes the impact
of ten 1996 and fifteen current year 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, New Jersey,
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 will retain 50% ownership in United Metering.
27
1996 VERSUS 1995
The 2.1% increase in revenues from rate awards in 1996 includes the impact
of eleven 1995 and ten 1996 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. The
transfer of utility operations in Rio Rancho, New Mexico, which occurred in
March 1996, and a 0.9% decrease in consumption due to unfavorable weather
conditions in several service areas partially offset these revenue increases.
Real estate revenues were higher as compared to 1995, primarily due to a $3
million increase in property sales in addition to higher golf course revenues
and rental income. The $7.1 million increase in operating revenues from other
operations was primarily attributable to the commencement of the public-private
partnership with Jersey City, New Jersey, in May 1996, as well as higher
revenues from meter installation contracts for the city of New York.
OPERATING EXPENSES
The changes in operating expenses in 1997 as compared to 1996 were as follows:
----------------------------------------------------------
Total
(thousands of dollars) Increase
----------------------------------------------------------
Operation and
maintenance $13,069 8.4%
Depreciation and
amortization 3,842 12.5%
General taxes 2,508 5.1%
----------------------------------------------------------
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.
28
The changes in operating expenses in 1996 as compared to 1995 were as
follows:
- ---------------------------------------------------------------------------------
Total Net of New Mexico
(thousands of dollars) Increase (Decrease) New Mexico Increase (Decrease)
- ---------------------------------------------------------------------------------
Operation and
maintenance $(3,406) (2.1%) $(2,957) $ (449) (0.3%)
Depreciation and
amortization 1,565 5.3% (776) 2,341 8.0%
General taxes 834 1.7% (235) 1,069 2.2%
- ---------------------------------------------------------------------------------
Operation and maintenance expenses in 1995 included a $12.1 million unusual non-
cash charge relating to the write-down of various assets at the Company's real
estate and environmental testing businesses. The decrease was offset by an
$11.4 million increase in operation and maintenance expenses in 1996 due
primarily to $4.5 million in additional operating expenses in connection with
the public-private partnership with Jersey City, a $1.8 million increase in the
operation and maintenance expenses of the Company's utility subsidiaries due to
higher purchased water and chemical costs and $1 million relating to the
acquisitions of two utilities in New Jersey in May 1996. Higher cost from meter
installation contracts and property sales also contributed to this increase.
The $2.3 million increase in depreciation and amortization was primarily
attributable to utility plant additions by United Waterworks' utility
subsidiaries, as well as amortization attributable to the service contract in
Jersey City.
General taxes increased $1.1 million, or 2.2%, in 1996 primarily due to
higher real estate and franchise taxes in utility operations.
INTEREST EXPENSE
Interest expense increased $.4 million, or 0.9% in 1997 as compared to 1996
primarily due to additional long-term debt used to finance the Partnership in
the United Kingdom as well as to fund capital expenditures at the utility
operations. This was partially offset by a lower interest rate experienced on
variable rate bonds resulting from a refinancing in November 1996. Consolidated
interest expense increased $2.4 million, or 5.6% in 1996 as compared to 1995
predominantly due to additional long-term debt incurred to finance the
Partnership in the United Kingdom as well as to fund capital expenditures at the
utility operations.
29
EQUITY EARNINGS OF AFFILIATES
The $6 million increase in equity earnings of affiliates was mainly due to
a $7.6 million increase in earnings from the Northumbrian Partnership, which was
formed in June 1996.
This increase was partially offset by a $1.4 million decrease in earnings
from United Water Services. This decrease was primarily due to business
development costs associated with ongoing efforts to expand contract operations.
One of the successes which resulted from these efforts came in January 1998,
when United Water Services was awarded a ten-year contract, with annual revenues
of $30 million, to operate the wastewater systems in Milwaukee, Wisconsin.
OTHER INCOME
Other income was $1 million lower in 1996 as compared to 1995 primarily due
to $838,000 of interest income generated by the remaining $34 million escrow
deposit on the transfer of New Mexico operations and a favorable settlement of a
$584,000 legal dispute at United Water Toms River in 1995.
INCOME TAXES
The effective income tax rates on income before preferred and preference
stock dividends were 36.4% in 1997, 36.5% in 1996 and 36.8% in 1995. An
analysis of income taxes is included in Note 12 to the consolidated financial
statements.
NEW ACCOUNTING STANDARDS
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" (EPS),
which specifies the computation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock or potential
common stock. This statement supersedes APB Opinion No. 15, "Earnings per
Share". The statement defines two earnings per share calculations, basic and
diluted. The objective of basic EPS is to measure the performance of an entity
over the reporting period by dividing income available to common stock by the
weighted average shares outstanding. The objective of diluted EPS is consistent
with that of basic EPS, that is to measure the performance of an entity over the
reporting period, while giving effect to all dilutive potential common shares
that were outstanding during the period. United Water implemented SFAS No. 128
during 1997. See Note 15 to the consolidated financial statements for further
details.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which requires that business segment
financial information be reported in the financial statements utilizing the
management appoach. The Company believes it is in compliance with this
statement. See Note 16 to the consolidated financial statements for segment
information.
30
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.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -----------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
PAGE
Financial Statements: ----
Report of Independent Accountants 33
Consolidated Balance Sheet at
December 31, 1997 and 1996 34
Statement of Consolidated Income for each of the
years ended December 31, 1997, 1996 and 1995 35
Statement of Consolidated Common Equity for each of
the years ended December 31, 1997, 1996 and 1995 36
Statement of Consolidated Cash Flows for each of the
years ended December 31, 1997, 1996 and 1995 37
Statement of Consolidated Capitalization at
December 31, 1997 and 1996 38
Notes to Consolidated Financial Statements 39 - 63
Financial Statement Schedules:
For the three years ended December 31, 1997
VIII - Consolidated Valuation and Qualifying Accounts 70
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.
32
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, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, 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.
As discussed in Note 1 to the consolidated financial statements, during the
year ended December 31, 1995, the company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of."
PRICE WATERHOUSE LLP
New York, New York
February 25, 1998
33
CONSOLIDATED BALANCE SHEET
UNITED WATER RESOURCES AND SUBSIDIARIES
December 31,
(thousands of dollars) 1997 1996
- -----------------------------------------------------------------------------------------------------------
ASSETS
UTILITY PLANT, including $49,301 and $27,947 under construction $1,439,854 $1,349,194
Less accumulated depreciation 296,820 267,639
1,143,034 1,081,555
UTILITY PLANT ACQUISITION ADJUSTMENTS,
Less accumulated amortization of $12,328 and $10,776 63,026 64,710
REAL ESTATE AND OTHER INVESTMENTS,
Less accumulated depreciation of $11,497 and $9,909 79,487 83,340
EQUITY INVESTMENTS 99,197 82,433
---------- ----------
178,684 165,773
CURRENT ASSETS:
Cash and cash equivalents 8,546 8,961
Restricted cash 34,581 27,203
Accounts receivable and unbilled revenues, less allowance of $2,528 and $2,549 57,723 65,911
Prepaid and other current assets 11,705 11,681
---------- ----------
112,555 113,756
DEFERRED CHARGES AND OTHER ASSETS:
Regulatory assets 79,748 75,179
Prepaid employee benefits 21,426 16,139
Unamortized debt expense 31,019 30,720
Other deferred charges and assets 28,850 34,265
---------- ----------
161,043 156,303
$1,658,342 $1,582,097
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stock and retained earnings $ 418,601 $ 391,490
Preferred stock without mandatory redemption 9,000 9,000
Preferred stock with mandatory redemption 51,838 53,978
Preference stock, convertible, with mandatory redemption 34,741 39,283
Long-term debt 622,737 558,093
---------- ----------
1,136,917 1,051,844
CURRENT LIABILITIES:
Notes payable 74,925 93,225
Preferred stock and long-term debt due within one year 8,022 29,546
Accounts payable and other current liabilities 40,156 37,594
Accrued taxes 26,878 17,690
Accrued interest and dividends 8,117 8,411
---------- ----------
158,098 186,466
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes and investment tax credits 183,490 174,530
Customer advances for construction 27,356 25,259
Contributions in aid of construction 133,684 126,395
Other deferred credits and liabilities 18,797 17,603
---------- ----------
363,327 343,787
Commitments and contingencies (Notes 6 and 11)
---------- ----------
$1,658,342 $1,582,097
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
34
STATEMENT OF CONSOLIDATED INCOME
UNITED WATER RESOURCES AND SUBSIDIARIES
- -----------------------------------------------------------------------------------
Years ended December 31,
(thousands of dollars except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------
OPERATING REVENUES $351,409 $332,045 $319,536
OPERATING EXPENSES:
Operation and maintenance 168,947 155,878 159,284
Depreciation and amortization 34,694 30,852 29,287
General taxes 52,124 49,616 48,782
-------- -------- --------
TOTAL OPERATING EXPENSES 255,765 236,346 237,353
-------- -------- --------
OPERATING INCOME 95,644 95,699 82,183
INTEREST AND OTHER EXPENSES:
Interest expense, net of amount capitalized 45,372 44,951 42,548
Allowance for funds used during construction (3,397) (3,355) (1,855)
Preferred stock dividends of subsidiaries 2,256 2,277 2,297
Gain on New Mexico settlement -- (10,372) --
Windfall profits tax of affiliate 10,334 -- --
Equity earnings of affiliates (10,647) (4,617) 2,087
Other income, net (2,529) (2,083) (3,093)
-------- -------- --------
TOTAL INTEREST AND OTHER EXPENSES 41,389 26,801 41,984
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 54,255 68,898 40,199
PROVISION FOR INCOME TAXES 20,579 25,878 15,439
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 33,676 43,020 24,760
Preferred and preference stock dividends 4,345 4,613 4,795
-------- -------- --------
NET INCOME APPLICABLE TO COMMON STOCK
FROM CONTINUING OPERATIONS $ 29,331 $ 38,407 $ 19,965
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of income
tax benefit of $824 in 1996 and $1,235
in 1995 - (1,532) (2,622)
Loss on disposal of discontinued business, net
of income tax benefit of $1,543 - (2,865) -
-------- -------- --------
Loss from discontinued operations - (4,397) (2,622)
-------- -------- --------
NET INCOME APPLICABLE TO COMMON STOCK $ 29,331 $ 34,010 $ 17,343
======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING 35,492 33,707 31,995
NET INCOME (LOSS) PER COMMON SHARE
Continuing operations $ .83 $ 1.14 $ .62
Discontinued operations - (.13) (.08)
-------- -------- --------
TOTAL $ .83 $ 1.01 $ .54
======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING-ASSUMING DILUTION 37,838 36,218 31,995
NET INCOME (LOSS) PER COMMON SHARE
Continuing operations $ .83 $ 1.12 $ .62
Discontinued operations - (.12) (.08)
-------- -------- --------
TOTAL $ .83 $ 1.00 $ .54
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements
35
STATEMENT OF CONSOLIDATED COMMON EQUITY
UNITED WATER RESOURCES AND SUBSIDIARIES
Common Stock Cumulative
Number Translation Retained
(thousands) of shares Amount Adjustment Earnings
- ----------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 31,281 $284,784 -- $ 65,711
Dividend reinvestment and stock purchase plans 1,599 19,879 -- --
Net income applicable to common stock -- -- -- 17,343
Cash dividends paid on common stock, $.92 per share -- -- -- (29,415)
- ----------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
36
STATEMENT OF CONSOLIDATED CASH FLOWS
UNITED WATER RESOURCES AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------
Years ended December 31,
(thousands of dollars) 1997 1996 1995
- --------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
NET INCOME $ 33,676 $ 38,623 $22,138
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 35,959 32,068 30,922
Deferred income taxes and investment tax credits, net 8,934 18,399 (7,762)
Gain on New Mexico settlement -- (10,372) --
Equity earnings of affiliates (313) (4,617) 2,087
Proceeds from sale of United Metering 6,223 -- --
Proceeds from sales of properties 11,068 4,385 1,684
Gain on sale of properties (5,220) (935) (607)
Improvements to property under development (1,376) (1,333) (1,178)
Loss on disposal of discontinued operations -- 4,408 --
Impairment loss -- -- 12,105
Allowance for funds used during construction (3,397) (3,355) (1,855)
Changes in assets and liabilities, net of effect of
New Mexico settlement and
acquisitions:
Accounts receivable and unbilled revenues 2,551 (3,729) (3,335)
Prepayments (311) 3,397 (954)
Prepaid employee benefits (5,287) (3,757) (861)
Regulatory assets (4,569) (8,821) 3,771
Accounts payable and other current liabilities 2,957 2,519 (4,647)
Accrued taxes 8,863 (5,727) (2,774)
Accrued interest and dividends (294) 16 (1,923)
Other, net (1,409) (13,972) (8,005)
--------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 88,055 47,197 38,806
--------- -------- --------
INVESTING ACTIVITIES:
Additions to utility plant (excludes allowance for funds
used during construction) (83,321) (74,569) (70,227)
Additions to real estate and other properties (2,080) (5,569) (6,039)
Additions to equity investments (15,859) (63,042) (1,900)
Acquisitions, net of cash received -- (6,794) --
Proceeds from New Mexico settlement -- 31,670 35,330
Investments in service contracts -- (5,500) --
Change in restricted cash (7,378) 25,474 (22,450)
--------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (108,638) (98,330) (65,286)
--------- -------- --------
FINANCING ACTIVITIES:
Change in notes payable (18,300) 49,725 (32,950)
Additional long-term debt 75,565 30,538 67,000
Reduction in preferred stock and long-term debt (34,585) (15,550) (10,299)
Issuance of common stock 25,083 18,845 19,879
Dividends on common stock (32,636) (30,994) (29,415)
Dividends on preferred and preference stock (4,345) (4,613) (4,795)
Net contributions and advances for construction 9,386 7,614 11,749
--------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20,168 55,565 21,169
--------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (415) 4,432 (5,311)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,961 4,529 9,840
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,546 $ 8,961 $ 4,529
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
37
STATEMENT OF CONSOLIDATED CAPITALIZATION
UNITED WATER RESOURCES AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------
December 31,
(thousands of dollars) 1997 1996
- ----------------------------------------------------------------------------------------------------------------
COMMON STOCK AND RETAINED EARNINGS:
Common stock, no par value--authorized 100,000,000 shares $ 373,927 $ 344,687
Less treasury shares, at cost (15,970) (16,555)
Retained earnings 53,350 56,655
Cumulative translation adjustment 7,294 6,703
---------- ----------
TOTAL COMMON STOCK AND RETAINED EARNINGS 418,601 391,490
---------- ----------
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 6,600 and 7,200 shares 600 660
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, authorized and outstanding 24,000 and 26,000 shares 2,200 2,400
$9.84 Series, authorized and outstanding 50,000 shares 4,688 5,000
United Water Idaho: 5%, authorized and outstanding 7,415 and 7,901 shares 605 654
United Water Resources:
7 5/8% Series B, authorized and outstanding 300,000 shares 28,745 30,264
5% Series A, convertible preference, authorized 3,983,976 shares;
outstanding 2,628,142 and 2,988,156 shares 34,741 39,283
---------- ----------
TOTAL PREFERRED AND PREFERENCE STOCK WITH MANDATORY REDEMPTION 86,579 93,261
---------- ----------
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 4.54%) 130,000 130,000
United Water New York:
First mortgage bonds, 9 3/8%, due 2001 900 1,200
Unsecured promissory notes, 5.65%-8.98%, due 2023-2025 (weighted average 6.74%) 51,000 52,100
United Water Resources:
Promissory notes, 9.38%, due 2019 25,000 25,000
Promissory notes, floating LIBOR-based interest rate, due 2006 26,000 28,000
Promissory notes, 7.45%-7.9%, due 2007-2022 (weighted average 7.73%) 40,000 -
United Waterworks:
Unsecured debt, 6.15%-10.15%, due 1999-2027 (weighted average 7.55%) 280,365 246,630
United Properties Group:
Mortgage notes, 8%-10%, due 1999-2006 (weighted average 9.92%) 17,265 17,153
Floating rate LIBOR-based term loan, due 2000 7,251 7,399
New Jersey Wastewater Treatment Loans, 0%-4.2%, due 2013 (weighted average 2.22%) 1,931 2,036
United Water Services: Promissory note with JMM, 8%, due 1999 - 5,000
United Water Mid-Atlantic: Promissory note at floating interest rate, due 2004 3,025 3,575
---------- ----------
TOTAL LONG-TERM DEBT 622,737 558,093
---------- ----------
TOTAL CAPITALIZATION $1,136,917 $1,051,844
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
38
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; United Water USA which owns a 50% stake in United
Water Services; United Water Canada and United Water Mexico which own a 30% and
a 20% interest in United Water Services Canada and United Water Services Mexico,
respectively; 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's 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. This accounting
allows, among other things, the
39
recognition of intercompany profit in situations where it is probable such
profit will be recovered in the ratemaking process and the recording of assets
and liabilities not generally recorded by non-regulated enterprises. 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.
EQUITY INVESTMENTS: The Company holds an indirect investment in NWG and has
representation on its board of directors. United Water USA owns a 50% stake in
United Water Services; United Water Canada and United Water Mexico own a 30% and
20% interest in United Water Services Canada and United Water Services Mexico,
respectively.
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 United Water Services Canada and United Water Services 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.
40
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, 1997.
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 $42.8 million and $43.6 million at December 31, 1997 and 1996, respectively.
United Water New Jersey's share of the project's operating expenses is included
in operation and maintenance expenses.
41
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:
- -----------------------------------------------
(thousands of dollars) 1997 1996
- -----------------------------------------------
Recoverable income taxes $39,818 $40,398
Deferred employee benefits 22,918 21,347
Tank painting 3,181 2,731
Other 13,831 10,703
- -----------------------------------------------
Total regulatory assets $79,748 $75,179
- -----------------------------------------------
REAL ESTATE: Real estate properties are carried at the lower of cost, which
includes original purchase price and direct development costs, or fair value.
Real estate taxes and interest costs are capitalized during the development
period. The amount of interest capitalized was $651,251 in 1997, $620,000 in
1996 and $1.4 million in 1995. 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 (PSC) 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, 1997 and 1996,
United Water New York and United Water New Rochelle had $3.6 million and $3.1
million, respectively, of net unamortized revenue
42
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 $11.2 million, $5.4 million and $2.4 million
in 1997, 1996 and 1995, respectively.
United Properties owns several office buildings, with an aggregate net book
value of $46.6 million (net of accumulated depreciation of $9.7 million) at
December 31, 1997, 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, 1997:
- ---------------------------------------------
(thousands of dollars)
- ---------------------------------------------
1998 $ 5,392
1999 5,635
2000 5,955
2001 5,923
2002 5,913
Thereafter 5,500
- ---------------------------------------------
Total minimum future rental income $34,318
- ---------------------------------------------
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 provides for monthly service fees which are recorded as
revenues when billed. Additionally, certain incentives based on collection and
marketing goals are recognized when earned. Service fee revenues for the year
and eight months ended December 31, 1997 and 1996 were $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, 1997, 1996 and 1995 were $3.9 million, $3.5 million and
$3.2 million, respectively.
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 1997, 1996 and 1995
were equivalent
43
to 2.3%, 2.1% 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:
- -----------------------------------------------------------------
(thousands of dollars) 1997 1996 1995
- -----------------------------------------------------------------
Interest, net of amounts capitalized $44,400 $43,728 $43,701
Income taxes 7,413 11,921 15,415
- -----------------------------------------------------------------
The following is a supplemental schedule of non-cash transactions in 1997:
- -------------------------------------------------------------
(thousands of dollars) 1997
- -------------------------------------------------------------
Cumulative translation adjustment $ 591
Conversion of 360,014 shares of 5% preference stock 4,967
- -------------------------------------------------------------
44
The following is a supplemental schedule of non-cash transactions in 1996:
- --------------------------------------------------------------
(thousands of dollars) 1996
- --------------------------------------------------------------
New Mexico settlement:
Liabilities transferred to Rio Rancho $20,244
Cumulative translation adjustment 6,703
Conversion of 352,922 shares of 5% preference stock 4,869
Acquisition of Princeton Meadows and Matchaponix:
Note receivable forgiven 5,000
Liabilities assumed 5,172
- --------------------------------------------------------------
ASSET IMPAIRMENT: During 1995, as a result of changes in market conditions,
development plans, projections of cash flows and other considerations, the
Company revalued certain investments in its real estate and environmental
testing subsidiaries. Measurements of value used by the Company included market
prices and the use of discounted cash flows. The Company recorded a $12.1
million non-cash impairment loss during 1995, included as part of operation and
maintenance expenses in the statement of consolidated income, in accordance with
the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of".
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 $78.7 million and
$74.9 million at December 31, 1997 and 1996, respectively, and is included in
equity investments in the consolidated balance sheet. United Water's share of
the Partnership's earnings, which totaled $13.6 million (excluding the windfall
profits tax) and $6 million in 1997 and 1996, 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
45
considered in determining the purchase price. The tax will not have an effect on
United Water's cash flow or ability to pay dividends, nor will it affect the
long-term benefit the Company expects to derive from its investment in NWG.
On July 28, 1997, United Water Services (formerly the United Water Resources-
Lyonnaise des Eaux Partnership), a joint venture between United Water and Suez
Lyonnaise des Eaux (formerly Lyonnaise des Eaux) acquired Montgomery Watson's
50% stake in JMM Operational Services (JMM-OSI). As a result, United Water
Services Inc. (formerly JMM-OSI) became a wholly-owned subsidiary of United
Water Services.
United Water Services provides contract operations and maintenance services for
water and wastewater facilities. During 1997, United Water Services pursued
additional contract operations. As a result, in January 1998, United Water
Services was awarded a ten-year contract to operate the wastewater systems in
Milwaukee, Wisconsin. In addition, United Water Services purchased United
Water's meter installation subsidiary, United Metering, for book value of $6.2
million, in December 1997.
In July 1997, the Company also acquired a 30% and a 20% interest in United Water
Services Canada and United Water Services Mexico, respectively.
At December 31, 1997, United Water had an equity investment of approximately
$20.2 million in North America, relating to contract services, 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. The
Company lost revenues since June 30, 1995 when the City took possession of the
utility's operations. For the first six months of 1995, the Company's Rio
Rancho utility had revenues of $6 million.
46
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 range of interest
rates at December 31 were as follows:
- -----------------------------------------------------------
(thousands of dollars) 1997 1996
- -----------------------------------------------------------
Total credit lines available $235,800 $229,500
Utilized:
Drawn 74,925 93,225
Pledged 3,055 3,055
Interest rates 5.9% TO 8.3 % 5.5% to 8.3%
- -----------------------------------------------------------
During 1996, the Company utilized approximately $30 million of its various
short-term lines of credit to fund its investment in the Northumbrian
Partnership.
The Company and a subsidiary are negotiating committed credit line agreements
which would provide $135 million of credit lines, including $67.5 million for a
five year period at LIBOR-based rates.
NOTE 5 - LONG-TERM DEBT
The long-term debt repayments over each of the next five years are as follows:
1998--$5.9 million; 1999--$6 million; 2000--$13.4 million; 2001--$21 million
and 2002--$6 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 debt issued by those subsidiaries.
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.
47
In August 1997, United Waterworks issued $20 million of 5.3% tax-exempt Water
Resource Development Revenue Bonds, due 2027, through the Idaho Water Resource
Board. The proceeds will be used to finance a portion of the costs of certain
facilities to be owned by United Water Idaho (a subsidiary of United
Waterworks).
In December 1994, United Waterworks entered into a medium-term note program that
enabled United Waterworks to issue up to $75 million of debt with terms ranging
from 9 months to 30 years. The interest rates are set as notes are issued under
the program. The first $10 million of notes under this program were issued in
1995. In October 1997, United Waterworks issued $15 million of notes under this
program, at a rate of 6.8%, with the full amount maturing in 2007. In February
1998, United Waterworks issued an additional $40 million of notes under this
program ($20 million at 6.97% due 2023, $15 million at 7.1% due 2028 and $5
million at 6.9% due 2017). The proceeds were used to redeem outstanding notes
payable.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Capital Expenditures
The future capital expenditures of the Company's utility subsidiaries are
projected to aggregate $277 million over the next five years, including $62
million and $61 million in 1998 and 1999, respectively. United Properties
currently projects spending $29.4 million over the next five years for capital
expenditures on its existing real estate portfolio, including $10.6 million and
$5.3 million in 1998 and 1999, respectively.
Operating Leases
United Water's total consolidated rental expense was approximately $6.2 million
in 1997, $5.1 million in 1996 and $4.1 million in 1995. The minimum future
lease payments under all non-cancelable operating leases, which consist
primarily of buildings and automobiles, at December 31, 1997 are as follows:
- ----------------------------------------------
(thousands of dollars)
- ----------------------------------------------
1998 $ 4,506
1999 3,059
2000 1,860
2001 1,018
2002 448
Thereafter 1,109
- ----------------------------------------------
Total minimum future lease payments $12,000
- ----------------------------------------------
48
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 with the potential
plaintiffs that would toll the statute of limitations for a time period of at
least one year. Management believes if a lawsuit is commenced, it 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 1998
through 2000 and $4,216,000 in each of the years 2001 and 2002. The redemption
of cumulative preferred stock was $260,000 in each of the years 1997, 1996 and
1995. 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 10% of
49
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 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, 1997, LAH owned approximately 28.4% of the issued and
outstanding United Water common stock and approximately 98.2% 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.
NOTE 8 - INCENTIVE STOCK PLANS
Under the Company's management incentive plan, the following options have been
granted to key employees:
Weighted Average
Number of Exercise Price
Options Per Option
- ------------------------------------------------------------------
Outstanding at December 31, 1994 704,792 $14.829
Granted 210,020 13.250
Exercised (12,047) 11.501
Canceled or expired (88,095) 14.491
- ------------------------------------------------------------------
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 (19,002) 15.574
- ------------------------------------------------------------------
OUTSTANDING AT
DECEMBER 31, 1997 800,050 $14.345
- ------------------------------------------------------------------
All options are currently exercisable and represent the only stock options
outstanding at December 31, 1997. A total of 1,572,483 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
50
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, at which,
they are distributed. United Water recorded compensation expense of $2.3 million
in 1997, $2.5 million in 1996 and $228,000 in 1995 with respect to the
management incentive plan. The increase in compensation expense in 1997 and 1996
is attributable to stock appreciation.
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-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:
- -------------------------------------------------------------------------
(thousands of dollars except per share data) 1997 1996 1995
- -------------------------------------------------------------------------
Net income:
As reported $29,331 $34,010 $17,343
Pro forma 29,355 34,079 17,160
Earnings per common share:
As reported $ .83 $ 1.01 $ .54
Pro forma .83 1.01 .54
Earnings per common share-assuming dilution:
As reported $ .83 $ 1.00 $ .54
Pro forma .83 1.01 .54
- -------------------------------------------------------------------------
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, 1997, 1996 and 1995, respectively:
expected volatility of 20.31%, 21.46% and 21.48%; risk-free interest rates of
6.4%, 5.47% and 7.85%; expected life of 6 years and dividend yields of 5.92% in
1997 and 0.0% for 1996 and 1995. The weighted average fair value of each option
granted during the years ended December 31, 1997,
51
1996 and 1995 was $2.30, $4.30 and $5.52, 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 and 2,500 shares in 1995 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 and $67,000 in 1995 with respect to this restricted stock
plan.
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
52
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 GWC
Corporation 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.
NOTE 10 - EMPLOYEE BENEFITS
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 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.
The following sets forth the plan's funded status and reconciles that funded
status to the amounts recognized in the Company's balance sheet as of December
31:
- -----------------------------------------------------------------------------
(thousands of dollars) 1997 1996
- -----------------------------------------------------------------------------
Accumulated postretirement benefit obligation (APBO):
Retirees $(17,706) $(13,484)
Fully eligible actives (16,241) (12,729)
Other actives (17,953) (16,690)
- -----------------------------------------------------------------------------
Total (51,900) (42,903)
Plan assets at fair value 21,704 16,696
- -----------------------------------------------------------------------------
Funded status (30,196) (26,207)
Unrecognized transition obligation 21,911 23,351
Unrecognized gain (7,818) (11,426)
- -----------------------------------------------------------------------------
Accrued postretirement benefit cost $(16,103) $(14,282)
- -----------------------------------------------------------------------------
53
Net periodic postretirement benefit cost components were as follows:
- -----------------------------------------------------------------------
(thousands of dollars) 1997 1996 1995
- -----------------------------------------------------------------------
Service cost $ 2,091 $ 2,404 $2,521
Interest cost 3,299 3,095 3,578
Actual return on plan assets (3,562) (1,887) 88
Amortization of transition obligation 1,441 1,441 1,453
Amortization of gain (462) (114) --
Net amortization and deferral 2,166 789 (649)
- -----------------------------------------------------------------------
Net periodic postretirement benefit cost $ 4,973 $ 5,728 $6,991
- -----------------------------------------------------------------------
The assumed discount rate and expected return on assets used in determining the
APBO were as follows:
- --------------------------------------------------
1997 1996 1995
- --------------------------------------------------
Assumed discount rate 7.625% 8.0% 7.375%
Expected return on assets 9.5% 9.5% 8.25%
- --------------------------------------------------
The associated health care cost trend rate used in measuring the postretirement
benefit obligation at December 31, 1997 was 9.0%, gradually declining to 5.0% in
2002 and thereafter. Increasing the assumed health care cost trend rate by one
percentage point in each year would increase the APBO as of December 31, 1997,
by $7.8 million, to a total of $59.7 million, and the aggregate net periodic
postretirement benefit cost for 1997 by $1.4 million, to a total of $6.4
million. 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, 1997 and 1996, United Water had regulatory
assets relating to deferred employee benefits of $22.9 million and $21.3
million, respectively, for recovery in future rates.
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 1997.
54
The components of net periodic pension income for the Company's qualified and
supplemental defined benefit plans were as follows:
- ----------------------------------------------------------------
(thousands of dollars) 1997 1996 1995
- ----------------------------------------------------------------
Current year service cost $ 3,726 $ 3,945 $ 2,959
Interest cost 9,842 9,379 9,144
Actual return on plan assets (33,027) (20,442) (32,235)
Net amortization and deferral 14,888 4,382 19,632
- ----------------------------------------------------------------
Net periodic pension income $ (4,571) $ (2,736) $ (500)
- ----------------------------------------------------------------
The status of the funded plans at December 31 was as follows:
- --------------------------------------------------------------------
(thousands of dollars) 1997 1996
- --------------------------------------------------------------------
Accumulated benefit obligation:
Vested $113,577 $102,964
Non-vested 2,841 2,608
- --------------------------------------------------------------------
Total $116,418 $105,572
- --------------------------------------------------------------------
Fair value of plan assets (primarily
stocks and bonds, including
$11.2 million and $8.9 million,
respectively, in common stock
of United Water) $200,853 $174,561
Projected benefit obligation (PBO) 138,092 124,342
- --------------------------------------------------------------------
Plan assets in excess of PBO 62,761 50,219
Unrecognized prior service cost 2,015 2,185
Unrecognized net gain (39,154) (31,442)
Remaining unrecognized net transition asset
from applying the standard in
1987 (amortized over 18 years) (4,196) (4,823)
- --------------------------------------------------------------------
Prepaid pension cost recognized
in the consolidated balance sheet $ 21,426 $ 16,139
- --------------------------------------------------------------------
The major actuarial assumptions used in the foregoing calculations were as
follows:
- -----------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------
Assumed discount rate 7.375% 7.75% 7.25%
Assumed range of compensation increase 3.75-4.5% 3.75-4.5% 3.75-5%
Expected long-term rate of return on
plan assets 9.5% 9.5% 8.75%
- -----------------------------------------------------------------------
55
SUPPLEMENTAL BENEFIT PLANS: Certain categories of employees are covered by non-
funded supplemental plans. The projected benefit obligations of these plans at
December 31, 1997 and 1996 totaled $6.2 million and $6.5 million, respectively.
The unfunded accumulated benefit obligation of $5.9 million has been recorded in
other deferred credits and liabilities and an intangible pension asset of
$678,000 is included in deferred charges and other assets at December 31, 1997.
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 $1,155,000, $1,167,000 and
$1,093,000 in 1997, 1996 and 1995, respectively, to defined contribution savings
plans.
NOTE 11 - RATE MATTERS
The following rate decisions were rendered to United Water's regulated utilities
during 1997:
- ---------------------------------------------------------------------------
Effective Allowed Annual %
(thousands of dollars) Date ROE Increase Increase
- ---------------------------------------------------------------------------
New York 5/01 11.00 $ 880 2.1
Great Gorge - Wastewater 5/13 -- (a) 130 21.6
Florida - Water 5/19 11.57 2,362 32.4
- Wastewater 5/19 11.57 2,290 14.6
Connecticut 7/01 -- (130) (b) --
Delaware 7/15 10.75 1,550 11.0
New Rochelle 7/19 -- 390 (c) 2.2
South Gate 8/05 -- 7 (d) 0.4
Arkansas 10/15 10.75 867 13.6
Virginia 10/20 -- 128 (e) 16.1
New Rochelle 11/19 10.70 900 5.2
Connecticut 12/01 -- 47 (f) 1.9
New Jersey 1/01/98 -- 1,075 (f) 0.9
Toms River 1/01/98 -- 234 (f) 1.6
Lambertville 1/01/98 -- 18 (f) 2.7
- ---------------------------------------------------------------------------
Totals $ 10,748
- ---------------------------------------------------------------------------
(a) Not applicable since the Company has a negative rate base.
(b) Gross earnings tax repeal.
(c) Pass-through for purchased water expense increase.
(d) Annual adjustment clause increase based on inflation and other factors.
(e) Interim increases, granted subject to refund.
(f) Limited issue proceeding for postretirement benefits.
56
At December 31, 1997, the most significant rate cases pending were filed by
United Water Pennsylvania and United Water Idaho. In May 1997, United Water
Pennsylvania applied for rate relief in the amount of $3 million, or 15.42%, in
water revenues. The increase was requested primarily to fund capital
investments and meet higher operation and maintenance costs. In January 1998,
the Company was granted a favorable decision allowing an increase in revenues of
$2.1 million, or 11%.
In November 1997, United Water Idaho applied to the Idaho Public Utilities
Commission for rate relief in the amount of $3.4 million, or 15.47%, in water
revenues to meet increased investment in utility plant and higher operation and
maintenance costs. A decision is expected before the end of the second quarter
of 1998.
On October 26, 1996, United Water Delaware placed $2.3 million in increased
revenues in effect, subject to refund. On July 15, 1997, the Delaware Public
Utility Commission granted the Company a permanent rate increase of $1.6
million. On July 16, 1997, the Company filed an appeal and application for a
stay of the Commission's Order. On July 29, 1997, the Delaware Superior Court
granted a stay of the Commission decision pending the appeal. Management
believes that it will prevail in its appeal and any potential refunds will not
have a material effect on earnings.
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, 1997, eight 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 1998.
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.
57
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:
- -------------------------------------------------------------
(thousands of dollars) 1997 1996
- -------------------------------------------------------------
Basis differences of property, plant
and equipment $130,891 $122,410
Real estate transactions and
capitalized costs 15,586 15,886
Other liabilities 32,929 33,279
- -------------------------------------------------------------
Gross deferred tax liabilities 179,406 171,575
- -------------------------------------------------------------
Alternative minimum tax credit
carryforwards (11,223) (9,716)
Other assets (7,189) (10,335)
- -------------------------------------------------------------
Gross deferred tax assets (18,412) (20,051)
- -------------------------------------------------------------
Deferred investment tax credits 22,496 23,006
- -------------------------------------------------------------
Total deferred income taxes
and investment tax credits $183,490 $174,530
- -------------------------------------------------------------
INCOME TAX PROVISION: A reconciliation of income tax expense at the statutory
federal income tax rate to the actual income tax expense for 1997, 1996 and 1995
is as follows:
- -----------------------------------------------------------------------------
(thousands of dollars) 1997 1996 1995
- -----------------------------------------------------------------------------
Statutory tax rate 35% 35% 35%
Federal taxes at statutory rates on pretax
income before preferred stock
dividends of subsidiaries $19,779 $22,544 $13,523
Utility plant acquisition adjustment 641 1,725 682
State income taxes, net of federal benefit 835 1,823 290
Deferred investment tax credits (510) (499) (489)
Equity in foreign investments (1,135) (2,476) -
Other 969 394 198
- -----------------------------------------------------------------------------
Provision for income taxes $20,579 $23,511 $14,204
- -----------------------------------------------------------------------------
58
Income tax expense for 1997, 1996 and 1995 consisted of the following:
- -------------------------------------------------------------------------------
(thousands of dollars) 1997 1996 1995
- -------------------------------------------------------------------------------
Current:
Federal $10,668 $ 5,919 $11,518
State 969 1,310 1,731
- -------------------------------------------------------------------------------
Total current $11,637 $ 7,229 $13,249
- -------------------------------------------------------------------------------
Deferred (prepaid):
Accelerated depreciation $ 7,437 $ 7,612 $ 8,420
Contributions and advances for
construction 200 (1,855) (3,228)
Prepaid employee benefits 1,400 1,931 1,626
UWNJ debt refinancing - 3,053 -
Real estate transactions
and capitalized costs (181) 64 (3,383)
Alternative minimum tax (1,507) (741) (1,007)
Investment tax credits (510) (499) (489)
State income taxes, net of federal benefit 316 972 (718)
Transfer of New Mexico operations - 5,365 -
Other 1,787 380 (266)
- -------------------------------------------------------------------------------
Total deferred $ 8,942 $16,282 $ 955
- -------------------------------------------------------------------------------
Total provision for income taxes $20,579 $23,511 $14,204
- -------------------------------------------------------------------------------
The Company considers the undistributed earnings of United Water UK to be
permanently reinvested and has not provided deferred taxes on these earnings.
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, 1997 and 1996, 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
similar nature and duration.
59
The estimated fair values of United Water's financial instruments at December 31
were as follows:
- ---------------------------------------------------------
Carrying Fair
(thousands of dollars) amount value
- ---------------------------------------------------------
1997
Long-term debt $622,737 $673,321
Preferred and preference stock with
mandatory redemption 86,579 96,425
- ---------------------------------------------------------
1996
Long-term debt $558,093 $573,230
Preferred and preference stock with
mandatory redemption 93,261 96,832
- ---------------------------------------------------------
The Company's customer advances for construction have a carrying value of $27.4
million and $25.3 million at December 31, 1997 and 1996, 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 two interest
rate caps to limit its exposure to maximum interest rates of 7% on the United
Water New Jersey Variable Rate Demand Water Facilities Refunding Bonds
aggregating $130 million and 8.6% on the long-term note agreement with Credit
Lyonnais for $30 million. The fair values and carrying amounts of these
financial instruments were not material at December 31, 1997.
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 net losses of $1.5 million and $2.6 million in
1996 and 1995, respectively. The Company recorded an impairment loss of $1.5
million net of income taxes for its investment in the environmental testing
business in accordance with the provisions of SFAS 121, which was included in
the net loss for the year ended December 31, 1995. 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
60
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.
Assets of $1.4 million, consisting primarily of cash and accounts receivable,
and $5.1 million are included in the consolidated balance sheet at December 31,
1996 and 1995, respectively.
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. This statement supersedes APB Opinion No. 15, "Earnings per
Share". The statement defines two earnings per share calculations, basic and
diluted. The objective of basic EPS is to measure the performance of an entity
over the reporting period by dividing income available to common stock by the
weighted average shares outstanding. The objective of diluted EPS is consistent
with that of basic EPS, that is to measure the performance of an entity over the
reporting period, while giving effect to all dilutive potential common shares
that were outstanding during the period. The calculation of diluted EPS is
similar to basic EPS except both the numerator and denominator are increased for
the conversion of potential common shares. The following table is a
reconciliation of the numerator and denominator under each method:
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------
Per Share
(thousands of dollars except per share data) Income Shares Amount
- --------------------------------------------------------------------------
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 $31,407 37,838 $ .83
- --------------------------------------------------------------------------
61
FOR THE YEAR ENDED DECEMBER 31, 1996
- -----------------------------------------------------------------------------
Per Share
(thousands of dollars except per share data) Income Shares Amount
- -----------------------------------------------------------------------------
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 $36,352 36,218 $1.00
- -----------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
- -----------------------------------------------------------------------------
Per Share
(thousands of dollars except per share data) Income Shares Amount
- -----------------------------------------------------------------------------
BASIC EPS:
Net income applicable to common
stock from continuing operations $19,965 31,995 $ .62
Loss from discontinued operations (2,622) 31,995 (.08)
Net income applicable to common stock $17,343 31,995 $ .54
ASSUMING DILUTION*:
Net income applicable to common
stock from continuing operations $19,965 31,995
Convertible preference stock 2,523 2,784
------- ------
$22,488 34,779 $ .65
Loss from discontinued operations (2,622) 34,779 (.08)
Net income applicable to common $19,866 34,779 $ .57
- -----------------------------------------------------------------------------
*According to SFAS No. 128, diluted EPS shall not have an antidilutive effect on
earnings. Therefore, basic EPS figures are presented on the face of the
consolidated statement of income.
62
NOTE 16 - SEGMENT INFORMATION
- --------------------------------------------------------------------------------
Parent, Non-
Regulated Water
Real Services and
(thousands of dollars) Utilities Estate Eliminations Consolidated
- --------------------------------------------------------------------------------
1997
Operating revenues $ 313,346 $20,075 $ 17,988 $ 351,409
Income before income taxes 60,391 5,879 (12,015) 54,255
Depreciation and amortization 31,519 1,419 1,756 34,694
Capital expenditures 83,342 2,431 1,004 86,777
Identifiable assets 1,433,458 88,231 136,653 1,658,342
- --------------------------------------------------------------------------------
1996
Operating revenues $ 299,283 $13,769 $ 18,993 $ 332,045
Income before income taxes 69,905 2,576 (3,583) 68,898
Depreciation and amortization 28,157 1,296 1,399 30,852
Capital expenditures 75,726 2,831 2,914 81,471
Identifiable assets 1,385,448 90,212 106,437 1,582,097
- --------------------------------------------------------------------------------
1995
Operating revenues $ 297,183 $10,433 $ 11,920 $ 319,536
Income before income taxes 55,084 (7,228) (7,657) 40,199
Depreciation and amortization 27,180 1,299 808 29,287
Capital expenditures 70,854 3,789 2,801 77,444
Identifiable assets 1,361,492 92,265 62,951 1,516,708
- --------------------------------------------------------------------------------
63
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
UNITED WATER RESOURCES AND SUBSIDIARIES
- -----------------------------------------------------------------------------------
QUARTER
(thousands of dollars, except per share data) FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------
1995
Operating revenues $69,323 $81,257 $94,215 $74,741
Operating income 14,286 24,289 35,213 8,399
Net income applicable to common stock 831 7,571 14,394 (5,453)
Net income per common share $ .03 $ .24 $ .45 $ (.17)
Net income per common share-diluted $ .03 $ .24 $ .43 $ (.17)
- -----------------------------------------------------------------------------------
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.
As disclosed in Note 1 to the consolidated financial statements, the Company
recorded a $12.1 million non-cash, pre-tax impairment loss in the fourth quarter
of 1995 for various parcels of land held by its real estate subsidiary and for
its investment in the environmental testing business.
64
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 1997.
65
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.
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.
66
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 1997: 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 Goverance 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) 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.
67
4(e) Certficate 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(f) 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(g) 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 Donald L. Correll
10(b) Executive Employment Agreement, effective January 1, 1998, between and
among United Water Resources Inc. and David E. Chardavoyne
10(c) Executive Employment Agreement, effective January 1, 1998, between and
among United Water Resources Inc. and Frank DeMicco
10(d) Executive Employment Agreement, effective January 1, 1998, between and
among United Water Resources Inc. and Joseph Simunovich
10(e) Executive Employment Agreement, effective January 1, 1998, between and
among United Water Resources Inc. and John J. Turner
10(f) Executive Employment Agreement, effective January 1, 1998, between and
among United Water Resources Inc. and William Colford
10(g) Executive Employment Agreement, effective January 1, 1998, between and
among United Water Resources Inc. and Robert Iacullo
10(h) Executive Employment Agreement, effective January 1, 1998, between and
among United Water Resources Inc. and John Marino
10(i) Executive Employment Agreement, effective January 1, 1998, between and
among United Water Resources Inc. and John Martinowich
10(j) 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)
68
21 Subsidiaries of registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
69
U N I T E D W A T E R R E S O U R C E S I N C.
SCHEDULE VIII - CONSOLIDATED VALUATION AND
QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)
DECEMBER 31,
------------------------------
1997 1996 1995
---- ---- ----
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Balance at beginning of period $ 2,549 $ 1,299 $ 1,373
Charges to costs and expenses 1,587 3,162 1,967
Accounts written off (1,770) (2,116) (2,275)
Recoveries of accounts written off 162 204 234
------- ------- --------
BALANCE AT END OF PERIOD $ 2,528 $ 2,549 $ 1,299
======= ======= ========
REAL ESTATE VALUATION RESERVE:
Balance at beginning of period $ 3,465 $ 12,696 $ 3,266
Charges to costs and expenses --- --- 9,430
Sales of properties (264) (9,231) ---
------- ------- -------
BALANCE AT END OF PERIOD $ 3,201 $ 3,465 $12,696
======= ======= =======
70
S I G N A T U R E S
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 12, 1998 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.
SIGNATURE TITLE DATE
--------- ----- ----
Chairman, President
DONALD L. CORRELL and Chief Executive Officer March 12, 1998
- -------------------------
(Donald L. Correll)
Secretary
DOUGLAS W. HAWES and Director March 12, 1998
- -------------------------
(Douglas W. Hawes)
JOHN J. TURNER Treasurer March 12, 1998
- -------------------------
(John J. Turner)
DIRECTORS
---------
EDWARD E. BARR 3/12/98 JON F. HANSON 3/12/98
- --------------------------- ------- -------------------- -------
(Edward E. Barr) Date (Jon F. Hanson) Date
FRANK J. BORELLI 3/12/98 DOUGLAS W. HAWES 3/12/98
- --------------------------- ------- -------------------- -------
(Frank J. Borelli) Date (Douglas W. Hawes) Date
THIERRY BOURBIE 3/12/98 GEORGE F. KEANE 3/12/98
- --------------------------- ------- -------------------- -------
(Thierry Bourbie) Date (George F. Keane) Date
LAWRENCE R. CODEY 3/12/98 DENNIS M. NEWNHAM 3/12/98
- --------------------------- ------- -------------------- -------
(Lawrence R. Codey) Date (Dennis M. Newnham) Date
DONALD L. CORRELL 3/12/98 JACQUES F. PETRY 3/12/98
- --------------------------- ------- -------------------- -------
(Donald L. Correll) Date (Jacques F. Petry) Date
PETER DEL COL 3/12/98 MARCIA L. WORTHING 3/12/98
- --------------------------- ------- -------------------- -------
(Peter Del Col) Date (Marcia L. Worthing) Date
ROBERT L. DUNCAN, JR. 3/12/98
- --------------------------- -------
(Robert L. Duncan, Jr.) Date