<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
COMMISSION REGISTRANT AND STATE OF INCORPORATION IRS EMPLOYER
FILE NO. ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO.
-------- ---------------------------- ------------------
<S> <C> <C>
333-47647 American States Water Company 95-4676679
(A California Corporation)
630 East Foothill Boulevard
San Dimas, California 91773-9016
909-394-3600
000-01121 Southern California Water Company 95-1243678
(A California Corporation)
630 East Foothill Boulevard
San Dimas, California 91773-9016
909-394-3600
</TABLE>
Indicate by check mark whether 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 Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
American States Water Company Yes [x] No [ ]
Southern California Water Company Yes [x] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 12, 1998, the number of shares outstanding of
American States Water Company Common Shares, No Par Value was 8,957,671:
<PAGE> 2
AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1: Financial Statements 1
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 2 - 3
Consolidated Statements of Income for the Three Months Ended
June 30, 1998 and June 30, 1997 4
Consolidated Statements of Income for the Six Months Ended
June 30, 1998 and June 30, 1997 5
Consolidated Statements of Income for the Twelve Months Ended
June 30, 1998 and June 30, 1997 6
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and June 30, 1997 7
Notes to Financial Statements 8 - 9
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operation 10 - 19
PART II OTHER INFORMATION
Item 1: Legal Proceedings 19 - 21
Item 2: Changes in Securities 21
Item 3: Defaults Upon Senior Securities 21
Item 4: Submission of Matters to a Vote of Security Holders 21 - 23
Item 5: Other Information 23
Item 6: Exhibits and Reports on Form 8-K 24
Signature 25
</TABLE>
i
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
General
The basic financial statements included herein have been prepared by
the Registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations, although the Registrant believes that the disclosures are adequate
to make the information presented not misleading. In the opinion of management,
all adjustments necessary for a fair statement of results for the interim period
have been made.
It is suggested that these financial statements be read in conjunction
with the financial statements and notes thereto in the latest Annual Report on
Form 10-K of Southern California Water Company.
Filing Format
This quarterly report on Form 10-Q is a combined report being filed
separately by two different Registrants: American States Water Company ("AWR")
and Southern California Water Company ("SCW"). For more information, please see
Note 1 to the Notes to Financial Statements and the heading entitled General in
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operation. References in this report to "Registrant" are to AWR and SCW,
collectively unless otherwise specified. SCW makes no representations as to the
information contained in this report relating to AWR and its subsidiaries, other
than SCW.
1
<PAGE> 4
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
(Unaudited)
UTILITY PLANT, at cost (in thousands)
<S> <C> <C>
Water ................................................ $ 455,915 $ 446,605
Electric ......................................... 34,190 34,137
--------- ---------
490,105 480,742
Less - Accumulated depreciation .................. (131,927) (125,020)
--------- ---------
358,178 355,722
Construction work in progress .................... 39,391 27,901
--------- ---------
397,569 383,623
--------- ---------
OTHER PROPERTY AND INVESTMENTS ................... 1,335 1,355
--------- ---------
CURRENT ASSETS
Cash and cash equivalents ................... 1,471 4,186
Accounts receivable -
Customers, less reserves of $466
in 1998 and $269 in 1997 ................. 7,684 8,544
Other ..................................... 3,901 3,614
Unbilled revenue ............................ 9,314 9,106
Materials and supplies, at average cost ..... 1,287 1,299
Supply cost balancing accounts .............. 5,527 4,286
Prepayments and other ....................... 4,741 7,676
Accumulated deferred income taxes - net ..... 4,351 5,783
--------- ---------
38,276 44,494
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets ............... 21,744 22,337
Other deferred charges ...................... 5,695 5,265
--------- ---------
27,439 27,602
--------- ---------
$ 464,619 $ 457,074
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- --------
(Unaudited)
(in thousands)
<S> <C> <C>
CAPITALIZATION
Common shareholders' equity .............. $149,974 $151,053
Preferred shares ......................... 1,600 1,600
Preferred shares subject to mandatory
redemption requirements ................ 440 440
Long-term debt ........................... 130,772 115,286
-------- --------
282,786 268,379
-------- --------
CURRENT LIABILITIES
Notes payable to banks ................... 18,000 26,000
Long-term debt and preferred shares
due within one year .................... 231 231
Accounts payable ......................... 11,996 11,770
Taxes payable ............................ 5,883 9,115
Accrued payable .......................... 1,805 1,868
Other accrued liabilities ................ 7,569 7,196
-------- --------
45,484 56,180
-------- --------
OTHER CREDITS
Advances for construction ................ 54,258 55,574
Contributions in aid of construction ..... 32,441 28,467
Accumulated deferred income taxes - net .. 44,054 42,984
Unamortized investment tax credits ....... 3,201 3,246
Regulatory tax-related liability ......... 1,928 1,950
Other .................................... 467 294
-------- --------
136,349 132,515
-------- --------
$464,619 $457,074
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
-------- --------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ................................... $ 32,148 $ 36,895
Electric ................................ 2,853 2,448
-------- --------
35,001 39,343
-------- --------
OPERATING EXPENSES
Water purchased ......................... 8,157 9,758
Power purchased for pumping ............. 1,318 1,724
Power purchased for resale .............. 1,057 902
Groundwater production assessment ....... 2,128 2,457
Supply cost balancing accounts .......... (921) 2,123
Other operating expenses ................ 3,765 3,324
Administrative and general expenses ..... 5,383 5,463
Depreciation ............................ 2,975 2,751
Maintenance ............................. 1,826 1,730
Taxes on income ......................... 2,275 2,198
Other taxes ............................. 1,452 1,540
-------- --------
29,415 33,970
-------- --------
Operating income ........................ 5,586 5,373
OTHER INCOME ................................ (12) 216
-------- --------
Income before interest charges .......... 5,574 5,589
INTEREST CHARGES ............................ 2,807 2,508
-------- --------
NET INCOME .................................. 2,767 3,081
DIVIDENDS ON PREFERRED SHARES ............... (23) (23)
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS .. $ 2,744 $ 3,058
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 8,958 8,958
======== ========
Basic Earnings Per Common Share ............. $ 0.31 $ 0.34
======== ========
Dividends Declared Per Common Share ......... $ 0.315 $ 0.310
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE> 7
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
-------- --------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ................................... $ 58,314 $ 65,482
Electric ................................ 6,642 6,067
-------- --------
64,956 71,549
-------- --------
OPERATING EXPENSES
Water purchased ......................... 13,425 17,597
Power purchased for pumping ............. 2,624 3,006
Power purchased for resale .............. 2,444 2,294
Groundwater production assessment ....... 3,608 3,582
Supply cost balancing accounts .......... (1,237) 2,681
Other operating expenses ................ 7,026 6,802
Administrative and general expenses ..... 10,746 10,780
Depreciation ............................ 5,949 5,478
Maintenance ............................. 3,662 3,797
Taxes on income ......................... 3,744 3,303
Other taxes ............................. 2,997 3,118
-------- --------
54,988 62,438
-------- --------
Operating income ........................ 9,968 9,111
OTHER INCOME ................................ 131 260
-------- --------
Income before interest charges .......... 10,099 9,371
INTEREST CHARGES ............................ 5,489 4,978
-------- --------
NET INCOME .................................. 4,610 4,393
DIVIDENDS ON PREFERRED SHARES ............... (46) (46)
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS .. $ 4,564 $ 4,347
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 8,958 8,956
======== ========
Basic Earnings Per Common Share ............. $ 0.51 $ 0.49
======== ========
Dividends Declared Per Common Share ......... $ 0.630 $ 0.620
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 8
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30,
-----------------------------
1998 1997
--------- ---------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ................................... $ 133,819 $ 140,975
Electric ................................ 13,342 11,813
--------- ---------
147,161 152,788
--------- ---------
OPERATING EXPENSES
Water purchased ......................... 34,146 38,835
Power purchased for pumping ............. 7,171 7,471
Power purchased for resale .............. 5,337 5,464
Groundwater production assessment ....... 6,874 6,642
Supply cost balancing accounts .......... (1,105) 3,119
Other operating expenses ................ 13,298 13,907
Administrative and general expenses ..... 22,104 21,553
Depreciation ............................ 11,423 10,529
Maintenance ............................. 7,165 8,398
Taxes on income ......................... 10,271 9,045
Other taxes ............................. 6,162 6,480
--------- ---------
122,846 131,443
--------- ---------
Operating income ........................ 24,315 21,345
---------
---------
OTHER INCOME ............................... 629 541
--------- ---------
Income before interest charges .......... 24,944 21,886
INTEREST CHARGES ........................... 10,667 10,305
--------- ---------
NET INCOME .................................. 14,277 11,581
DIVIDENDS ON PREFERRED SHARES ............... (92) (93)
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS .. $ 14,185 $ 11,488
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 8,958 8,445
========= =========
Basic Earnings Per Common Share ............. $ 1.58 $ 1.36
========= =========
Dividends Declared Per Common Share ......... $ 1.255 $ 1.235
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 9
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM Operating Activities:
Net income ...................................... $ 4,610 $ 4,393
Adjustments for non-cash items:
Depreciation and amortization .................... 6,324 5,671
Deferred income taxes and
investment tax credits ....................... 3,028 577
Other - net .................................... 1,314 (798)
Changes in assets and liabilities:
Accounts receivable ............................ 859 (2,412)
Prepayments .................................... 2,935 2,457
Supply cost balancing accounts ................. (1,241) 2,091
Accounts payable ............................... 230 (1,008)
Taxes payable .................................. (3,232) 713
Unbilled revenue ............................... (207) 2,119
Other .......................................... 32 499
-------- --------
Net Cash Provided ............................ 14,652 14,302
-------- --------
Financing Activities:
Issuance of securities ........................... 14,999 5,370
Receipt of advances and contributions ............ 1,844 619
Repayments of long-term debt and
redemption of preferred shares ................. 486 (59)
Refunds on advances ............................. (1,871) (2,393)
Net change in notes payable to banks ............. (8,000) (2,000)
Common and preferred dividends paid .............. (5,688) (5,605)
-------- --------
Net Cash Provided/(Used) .................... 1,770 (4,068)
-------- --------
Investing Activities:
Construction expenditures ......................... (19,137) (13,448)
-------- --------
Net Cash Used ............................... (19,137) (13,448)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (2,715) (3,214)
Cash and Cash Equivalents, Beginning of period ..... 4,186 3,783
-------- --------
Cash and Cash Equivalents, End of period ........... $ 1,471 $ 569
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 10
AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Shareholders of Southern California Water Company ("SCW") approved the
formation of a holding company arrangement on April 28, 1998. Effective at
12:01 a.m. on July 1, 1998, American States Water Company ("AWR"), which
was a wholly-owned subsidiary of SCW, become the parent company of SCW. As
of the effective date, holders of SCW preferred and common shares become
holders of AWR preferred and common shares and the stock certificates
representing SCW preferred and common shares now represent AWR preferred
and common shares. It is anticipated that certain non-regulated
transactions, presently included in "other income" on SCW's and AWR's
consolidated balance sheets and income statement will be transferred to AWR
during the third quarter of 1998. Future reports will present separate
balance sheets and income statements for AWR and SCW. Unless otherwise
stated in this report, the term Registrant applies to both AWR and SCW,
collectively. For the balance sheets at June 30, 1998 and December 31, 1997
and, for all periods then ended, all of the financial statements are for
SCW only.
2. For a summary of significant accounting policies and other information
relating to these interim financial statements, reference is made to pages
28 through 32 of the 1997 Annual Report to Shareholders of SCW under the
caption "Notes to Financial Statements."
3. Basic earnings per common share are calculated pursuant to SFAS No. 128 -
Earnings per Share - and are based on the weighted average number of common
shares outstanding during each period and net income after deducting
preferred dividend requirements. Registrant has no dilutive securities
outstanding and, accordingly, diluted earnings per share is not shown.
4. In November, 1996, SCW filed an application with the California Public
Utilities Commission (CPUC) seeking approval of its recovery through rates
of costs associated with its participation in the Coastal Aqueduct
Extension of the State Water Project (SWP). SCW's current investment in SWP
is approximately $1.8 million and is included in utility plant. In April
1998, SCW filed an amended application with the CPUC requesting recovery of
costs associated with SWP from future customers. Registrant is currently
unable to predict if the CPUC will authorize recovery through rates of all
or any costs associated with its participation in SWP. See the section
entitled "Rates and Regulation" for more information.
5. SCW implemented increased water rates in three of its rate-making districts
on January 1, 1998. SCW filed applications with the CPUC to increase water
rates applicable in six rate-making districts in March 1998 in addition to
seeking recovery of costs associated with its general office functions from
all customer service areas. See the section entitled "Rates and Regulation"
for more information.
6. As permitted by the CPUC, SCW maintains water and electric supply cost
balancing accounts to account for under-collections and over-collections of
revenues designed to recover such costs. Recoverability or refund of such
over/under collections are recorded in income when received from customers
and charged to balancing accounts when such costs are incurred. The
balancing accounts are reversed when such costs are recovered through rate
adjustments.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
American States Water Company ("AWR") was formed in 1998 and
incorporated in the State of California as the result of approval by
shareholders of Southern California Water Company ("SCW") to form a holding
company. AWR is a holding company which operates through its subsidiaries and
has no material assets other that the stock of SCW. Effective at 12:01 a.m. on
July 1, 1998, AWR became the parent company of SCW. Because the effective date
of this transaction is outside of the period covered by the interim report on
Form 10-Q, the financial statements included herein represent the consolidated
financial statements of Registrant. AWR's principal subsidiary, SCW, is a public
utility company engaged principally in the purchase, production, distribution
and sale of water (SIC No. 4941). SCW also distributes electricity in one
community (SIC No. 4911). SCW is regulated by the California Public Utilities
Commission ("CPUC") and was incorporated on December 31, 1929 under the laws of
the State of California.
SCW is organized into three regions operating within 75 communities in
10 counties in the State of California and provides water service in 21 customer
service areas. As of June 30, 1998, about 73% of SCW's water customers were
located in the greater metropolitan areas of Los Angeles and Orange Counties.
SCW also provides electric service to the City of Big Bear Lake and surrounding
areas in San Bernardino County. All electric energy sold by SCW to customers in
its Bear Valley Electric customer service area was purchased under an energy
brokerage contract with ENOVA Energy Management, Inc.
Registrant served 242,052 water customers and 20,661 electric
customers at June 30, 1998, or a total of 262,713 customers compared with
261,378 total customers at June 30, 1997. Registrant had 462 employees as of
June 30, 1998 compared to 471 employees at June 30, 1997.
RESULTS OF OPERATION
Basic earnings per common share for the three months ended June 30,
1998 decreased by 8.8% to $0.31 per share as compared to $0.34 per share for the
comparable period last year principally as a result of reduced revenues
resulting from the mild weather. For the six months ended June 30, 1998, basic
earnings per share increased by 4.1% to $0.51 as compared to $0.49 for the six
months ended June 30, 1997. Basic earnings for the twelve months ended June 30,
1998 increased by 16.2% to $1.58 per share as compared to $1.36 per share for
the twelve months ended June 30, 1997.
As compared to last year, water sales volumes for the three, six and
twelve months ended June 30, 1998 decreased by 22.6%, 21.4% and 10.2% as
compared to last year due primarily to the extremely wet weather conditions
throughout the State of California. In Southern California alone, average
precipitation is more than twice the normal amount. Water operating revenues for
the three, six and twelve months ended June 30, 1998 decreased by 12.9%, 10.9%
and 5.1%, respectively, from the same time periods ended June 30, 1997 due
principally to the decrease in water volumes sold as well as a decrease in rates
authorized to collect previously under-recovered supply costs. Registrant
anticipates that under-recovered supply costs will be collected in rates
approved by the CPUC pursuant to SCW's pending general rate case applications.
However, Registrant can give no assurance that the CPUC will authorize all or
any of the requested rate increase. SCW implemented new rates in three of its
customers service areas in January 1998. See the section entitled "Rates and
Regulation" for more information.
Kilowatt-hour sales of electricity increased by 18.2%, 3.4% and 3.2%
for the three, six and twelve months ended June 30, 1998, respectively, as
compared to the same periods last year and, as a
9
<PAGE> 12
result of the increased sales and new rates effective January 1, 1998, electric
operating revenues for the same periods increased by 16.5%, 9.5% and 12.9%,
respectively, from last year.
Purchased water costs are 16.4%, 23.7%, and 12.1% lower, respectively,
for the three, six and twelve months ended June 30, 1998 as compared to the same
periods last year reflecting decreased amounts of purchased water in SCW's
resource mix. The comparison for the periods ended June 30, 1998 to prior
periods ended June 30, 1997 are each affected equally by refunds received by SCW
from the Metropolitan Water District ("MWD") which totaled approximately $1.984
million in the aggregate
Costs of power purchased for pumping decreased by 23.5%, 12.7% and
4.0%, respectively, for the three, six and twelve months ended June 30, 1998 as
compared to the same periods ended June 30, 1997 due to decreased pumped water
volumes in SCW's resource mix.
Costs of power purchased for resale increased by 17.2% and 6.5% for
the three and six months ended June 30, 1998, respectively, as compared to the
same periods ended June 30, 1998. The increased costs are the result generally
of increased kilowatt-hour sales. For the twelve months ended June 30, 1998,
costs of power purchased for resale decreased by 2.3% due to lower energy prices
resulting, in part, from deregulation of the electric energy market in
California.
Groundwater production assessments are 13.4% lower for the three
months ended June 30, 1998 as compared to the period ended June 30, 1997 due
principally to the reduced volumes of pumped water in SCW's resource mix. For
the six and twelve months ended June 30, 1998 as compared to the comparable
periods last year, groundwater production assessments increased by 0.7% and
3.5%. These periods are each affected by the increased amount of pumped water in
SCW's resource mix, relative to amounts in the related prior periods.
A positive entry for the provision for supply cost balancing accounts
reflects recovery of previously under-collected supply costs. Conversely, a
negative entry for the provision for supply cost balancing accounts reflects an
under-collection of previously incurred supply costs. The negative entries for
the three, six and twelve months ended June 30, 1998 result from expiration in
January 1998 of a surcharge designed to recover previously under-collected
purchased water supply costs, supply costs for power purchased for pumping and
groundwater production assessments. Registrant anticipates that previously
under-collected supply costs will be recovered as part of new rates effective in
January 1999. Please see the section entitled "Rates and Regulation" for more
information. The balancing account mechanism insulates earnings from changes in
costs of purchased water, power purchased for pumping or resale and groundwater
production assessments, all of which are outside the immediate control of
Registrant. However, the balancing account is not designed to insulate earnings
against changes in supply mix as occurred during the first and second quarters
of 1997. See the section entitled "Water Supply."
Other operating expenses increased by 13.3% and 3.3%, respectively,
for the three and six months ended June 30, 1998 as compared to the same periods
ended June 30, 1998 due chiefly to an increase in the percentage of labor being
charged to this category. For the twelve months ended June 30, 1998, other
operating expenses decreased by 4.4% as compared to the twelve month period
ended June 30, 1997 as a result of increased construction work being performed
during the last six months of 1997 which reduced labor amounts which would
otherwise have been charged to expense versus amounts that would have been
capitalized.
Administrative and general expenses decreased by 1.5% and 0.3% for the
three and six months ended June 30, 1998, respectively, as compared to the same
periods ended June 30, 1997 due principally to stability in costs associated
with health insurance, recovery of post-retirement medical
10
<PAGE> 13
benefits and pension and 401-k plan costs, in addition to reduction of nine
employees. Administrative and general expenses increased by 2.6% for the twelve
months ended June 30, 1998 as compared to the twelve months ended June 30, 1997
as a result of increased health care costs effective in January 1997.
Depreciation expense increased by 8.1%, 8.6% and 8.5%, respectively,
for the three, six and twelve months ended June 30, 1998 reflecting, among other
things, the effects of recording approximately $39 million in net plant
additions during 1997, depreciation on which began in January 1998.
Taxes on income increased by approximately 3.5%, 13.4% and 13.6%,
respectively, for the three, six and twelve months ended June 30, 1998 as
compared to the three, six and twelve months ended June 30, 1997 primarily as a
result of higher pre-tax income.
For the three, six and twelve month periods ending June 30, 1998,
other taxes decreased by 5.7%, 3.9% and 4.9%, respectively, as compared to the
same time periods ending June 30, 1997 primarily due to decreased franchise fee
payments resulting from lower revenues.
Maintenance expense increased by 5.5% for the three months ended June
30, 1998 as compared to the prior period ended June 30, 1997 reflecting
increased maintenance on wells, hydrants and valves. For the six and twelve
months ended June 30, 1998, maintenance expense decreased by 3.6% and 14.7% as
compared to the same periods ended June 30, 1997 due principally to increased
meter replacement work which is capitalized as well as the wet weather
conditions during the last six months which hindered maintenance activities.
Interest expense for the three, six and twelve months ended June 30,
1998 increased by 11.9%, 10.3% and 3.5%, respectively, over the comparable 1997
time periods ended June 30 due primarily to the issuance of $15 million in
additional long term debt to finance capital expenditures as well as an increase
in bank borrowing during these periods.
LIQUIDITY AND CAPITAL RESOURCES
SCW's construction program is designed to ensure its customers high
quality service. SCW maintains an ongoing distribution main replacement program
throughout its customer service areas, based on the priority of leaks detected,
fire protection enhancement and a reflection of the underlying replacement
schedule. In addition, SCW upgrades its electric and water supply facilities and
is aggressively scheduling meter replacements that conform with CPUC
requirements. SCW's Board of Directors has approved anticipated net capital
expenditures of approximately $27.1 million in 1998.
SCW funds the majority of its operating expenses, interest payments on
its debt, dividends on its outstanding common shares and makes its mandatory
sinking fund payments through internal sources. However, because of the seasonal
nature of its water and electric businesses, SCW utilizes its short-term
borrowing capacity on occasion to finance current operating expenses. AWR funds
its operating expenses and dividends on its outstanding common and preferred
shares through dividend from SCW.
SCW continues to rely on external sources, including short-term bank
borrowing, the receipt of contributions-in-aid-of-construction and advances for
construction and install-and-convey advances, to fund the majority of its
construction expenditures. The aggregate short-term borrowing capacity available
to SCW under its three bank lines of credit was $37 million as of June 30, 1998.
As of June 30, 1998, Registrant had a total of $18 million in borrowing
outstanding under those bank lines of
11
<PAGE> 14
credit. SCW routinely employs short-term bank borrowing as an interim financing
source prior to executing either a long-term debt or equity issue. SCW issued
$15 million in long-term debt in March 1998 with the net proceeds used to repay
a portion of then outstanding short-term bank borrowings. SCW anticipates that
it will issue additional long-term debt in 1998 with the proceeds initially used
to repay bank borrowing and, after that, to fund construction expenditures.
Registrant has no derivative financial instruments, financial
instruments with significant off-balance sheet risks or financial instruments
with concentrations of credit risk.
WATER SUPPLY
For the three months ended June 30, 1998, SCW produced a total of
18,749,000 ccf of water. Of this amount, approximately 60.6% came from pumped
sources and 39.3% was purchased from others, principally the MWD. The remaining
amount was supplied by the Bureau of Reclamation (the "Bureau") under a no-cost
contract. During the three months ended June 30, 1997, SCW produced 24,218,000
ccf of water, 55.0% of which came from pumped sources, 44.3% was purchased and
the remainder was supplied by the Bureau.
For the six months ended June 30, 1998, SCW produced 32,635,000 ccf of
water, 61.9% of which came from pumped sources, 38.0% was purchased and the
remaining amount was supplied by the Bureau. During the six months ended June
30, 1997, SCW produced 40,458,000 ccf of water. Of this amount, 54.7% came from
pumped sources, 44.9% was purchased and the remainder was provided by the
Bureau.
During the twelve months ended June 30, 1998, SCW produced 78,581,000
ccf of water. Of this amount, approximately 56.8% of total supply came from
pumped sources, 41.4% was purchased and the remaining was supplied by the
Bureau. During the twelve months ended June 30, 1997, SCW produced 86,635,000
ccf of water. Of this amount, 54.1% of total supply came from pumped sources,
44.6% was purchased and the remainder came from the Bureau.
The MWD is a water district organized under the laws of the State of
California for the purpose of delivering imported water to areas within its
jurisdiction. SCW has 52 connections to the water distribution facilities of MWD
and other municipal water agencies. MWD imports water from two principal
sources: the Colorado River and the State Water Project ("SWP"). Available water
supplies from the Colorado River and the SWP have historically been sufficient
to meet most of MWD's requirements and MWD's supplies from these sources are
anticipated to continue to remain adequate through 1998. MWD's import of water
from the Colorado River is expected to decrease in future years due to the
requirements of the Central Arizona Project in the State of Arizona. In
response, MWD has taken a number of steps to construct additional storage
capacity and increase available water supplies, including effecting transfers of
water rights from other sources.
Precipitation during the 1997-1998 winter period as a result of the
"El Nino" weather pattern provided adequate supply to fill most of the state's
reservoirs to near capacity and the outlook for water supply in 1998 is
favorable. In those districts of SCW which pump groundwater, overall groundwater
conditions remain at adequate levels allowing SCW to use groundwater in its
resource mix and decrease its dependence on increasingly expensive purchased
water. SCW believes that its water supplies from all sources are adequate to
meet current year projected demands.
Hydrologists are cautious in making any predictions about the
long-term effects of the "El Nino" weather pattern, since weather patterns in
the state of California are generally unpredictable and the
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<PAGE> 15
El Nino weather patterns do not always repeat themselves. However, to the extent
the El Nino weather pattern has brought above normal precipitation, SCW's sales
volumes, revenues and earnings have been negatively impacted.
ENVIRONMENTAL MATTERS
1996 Amendments to Federal Safe Drinking Water Act
On August 6, 1996, amendments (the "1996 SDWA amendments") to the Safe
Drinking Water Act (the "SDWA") were signed into law. The 1996 SDWA revised the
1986 amendments to the SDWA with a new process for selecting and regulating
contaminants. The EPA can only regulate contaminants that may have adverse
health effects, are known or likely to occur at levels of public health concern,
and the regulation of which will provide "a meaningful opportunity for health
risk reduction." The EPA has published a list of contaminants for possible
regulation and must update that list every five years. In addition, every five
years, the EPA must select at least five contaminants on that list and determine
whether to regulate them. The new law allows the EPA to bypass the selection
process and adopt interim regulations for contaminants in order to address
urgent health threats. Current regulations, however, remain in place and are not
subject to the new standard-setting provisions. The California Department of
Health Services, acting on behalf of the EPA, administers the EPA's program in
California.
The 1996 SDWA amendments allow the EPA for the first time to base
primary drinking water regulations on risk assessment and cost/benefit
considerations and on minimizing overall risk. The EPA must base regulations on
best available, peer-reviewed science and data from best available methods. For
proposed regulations that involve the setting of maximum contaminant levels
("MCL's"), the EPA must use, and seek public comment on, an analysis of
quantifiable and non-quantifiable risk-reduction benefits and cost for each such
MCL.
SCW currently tests its wells and water systems for more than 90
contaminants, currently covering all contaminants listed in the SDWA, except for
those from which SCW has received an exemption. Water from wells found to
contain levels of contaminants above the established MCL's is either treated or
blended before it is delivered to customers.
Since the SDWA became effective, SCW has experienced increased
operating costs for testing to determine the levels, if any, of the constituents
in SCW's sources of supply and additional expense to lower the level of any
contaminants in order to meet the MCL standards. Such costs and the costs of
controlling any other contaminants may cause SCW to experience additional
capital costs as well as increased operating costs.
Registrant is currently unable to predict the ultimate impact that the
1996 SDWA amendments might have on its financial position or its results of
operation. The ratemaking process provides SCW with the opportunity to recover
prudently incurred capital and operating costs associated with water quality.
Management believes that such incurred costs will be authorized for recovery by
the CPUC.
Proposed Enhanced Surface Water Treatment Rule
On July 29, 1994, the EPA proposed an Enhanced Surface Water Treatment
Rule ("ESWTR") which would require increased surface-water treatment to decrease
the risk of microbial contamination. The EPA has proposed several versions of
the ESWTR for promulgation. The version selected for promulgation will be
determined based on data collected by certain water suppliers and
13
<PAGE> 16
forwarded to the EPA pursuant to EPA's Information Collection Rule, which
requires such water suppliers to monitor microbial and other contaminants in
their water supplies and to conduct certain tests in respect of such
contaminants. The EPA has proposed an Interim ESWTR applicable only to systems
serving greater than 10,000 persons. The final Interim ESWTR is expected to be
promulgated by November 1998. The final ESWTR, in any of the forms currently
proposed, would apply to each of SCW's five surface water treatment plants and
is expected to be promulgated by November 2000. However, because it is
impossible to predict the version of the ESWTR that will be promulgated,
Registrant is unable to predict what additional costs, if any, will be incurred
to comply with the ESWTR.
Regulation of Disinfection/Disinfection By-Products
Registrant will also be subject to the new regulations concerning
disinfection/disinfection by-products ("DBPs"), Stage I of which regulations are
expected to become effective in November, 1998 with compliance required by 2001.
Stage I will require reduction of tri-halomethane contaminants from 100
micrograms per liter to 80 micrograms per liter. Although two of SCW's systems
are impacted by this rule, SCW is presently considering modifications to its
treatment in its Bay Point system in order to comply with the rule.
The EPA must adopt Stage II rules pertaining to DBPs according to a
negotiated schedule by 2000. The EPA is not allowed to use the new cost/benefit
analysis provided for in the 1996 SDWA amendments for establishing the Stage II
rules applicable to DBPs but may utilize the regulatory negotiating process
provided for in the 1996 SDWA amendments to develop the Stage II rule. The final
rule is expected by 2002.
Ground Water Disinfection Rule
By December, 1998, the EPA is scheduled to propose regulations
requiring disinfection of certain groundwater systems and provide guidance on
determining which systems must provide disinfection facilities. The final rule
is expected by December 1999. The EPA may utilize the cost/benefit analysis
provided in the 1996 SDWA amendments to establish such regulations. It is
anticipated that the regulations will apply to several of SCW's systems using
groundwater supplies. While no assurance can be given as to the nature and cost
of any additional compliance measures, if any, Registrant does not believe that
such regulations will impose significant compliance costs, since SCW already
currently engages in disinfection of its groundwater systems.
Regulation of Radon and Arsenic
Registrant will be subject to new regulations regarding radon and
arsenic. EPA must propose an arsenic rule by January 1, 2000 and adopt a rule
one year later. Although EPA originally had 180 days after enactment of the 1996
SDWA amendments to develop a plan to study ways to reduce arsenic health risk
uncertainties and was authorized to enter into cooperative agreements to carry
out the study, the studies are still being conducted. Depending on the MCL
eventually established for arsenic, compliance could cause Registrant to
implement costly well-head treatment remedies such as ion exchange or,
alternatively, to purchase additional and more expensive water supplies already
in compliance, for blending with well sources.
The EPA has withdrawn its proposed radon rule and has arranged for the
National Academy of Sciences to conduct a risk assessment and a study of
risk-reduction benefits associated with various mitigation measures. The EPA is
expected to establish an MCL based on the findings of the National Academy of
Sciences' risk assessment report and to set an alternative MCL based on
potential
14
<PAGE> 17
mitigation measures for overall radon reduction. Although Registrant
is unable to predict what the standard for radon might eventually be, Registrant
itself is currently conducting studies to determine the best treatment for
affected wells, which treatment could range from simple aeration to filtration
through granular activated carbon.
Voluntary Efforts to Exceed Surface Water Treatment Standards
SCW is a voluntary member of the EPA's "Partnership for Safe Water", a
national program designed to further protect the public from diseases caused by
cryptosporidium and other microscopic organisms. As a volunteer in the program,
SCW has committed to exceed current regulations governing surface water
treatment to ensure that its surface treatment facilities are performing as
efficiently as possible.
Fluoridation of Water Supplies
Registrant is subject to State of California Assembly Bill 733 which
requires fluoridation of water supplies for public water systems serving more
than 10,000 service connections. Although the bill requires affected systems to
install treatment facilities only when public funds have been made available to
cover capital and operating costs, the bill requires the CPUC to authorize cost
recovery through rates should public funds for operation of the facilities, once
installed, become unavailable in future years.
Matters Relating to Arden-Cordova System
In January, 1997, SCW was notified that ammonium perchlorate in
amounts above the state-determined action level had been detected in three of
its 27 wells serving its Arden-Cordova system. GenCorp Aerojet has, in the past,
used ammonium perchlorate in their processing as an oxidizer of rocket fuels.
SCW took the three wells detected with ammonium perchlorate out of service at
that time. Although neither the EPA nor the DOHS has established a drinking
water standard for ammonium perchlorate, DOHS has established an action level of
18 ppb which required SCW to notify customers in its Arden-Cordova customer
service area of detection of ammonium perchlorate in amounts in excess of this
action level. In April, 1997, SCW found ammonium perchlorate in three additional
wells and, at that time, removed those wells from service until it was
determined that the levels were below the state-determined action level. Those
wells were returned to service. SCW provided periodic monitoring of these wells
to determine that levels of perchlorate are below the action level currently in
effect.
In February 1998, SCW was informed that a substance called
nitrosodimethylemine ("NDMA") had been detected in amounts in excess of the EPA
reference dosage for health risks in three of its wells in its Arden-Cordova
system. Each of the wells has been removed from service. NDMA is an additional
by-product from the production of rocket fuel and it is believed that such
contamination is related to the activities of Aerojet-General Corporation.
GenCorp Aerojet has reimbursed SCW for all necessary and reasonable activities
in the construction of a pipeline to interconnect with the City of Folsom water
system to provide an alternative source(s) of water supply in SCW's
Arden-Cordova customer service area as well as reimburse SCW for costs
associated with the drilling and equipping of two new wells.
SCW and GenCorp Aerojet are in negotiations on other matters related
to procedures to address cleanup of the contaminated wells, costs associated
with the cleanup, costs associated with increased costs of purchased water as
compared to pumped sources and costs associated with developing new sources of
groundwater supply. Registrant is unable to predict when the negotiations will
be completed or the likely outcome of such negotiations.
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<PAGE> 18
Matters Relating to Culver City System
The compound methyl tertiary butyl ether ("MTBE") has been detected in
the Charnock Basin located in the city of Santa Monica and Culver City, which
lies within SCW's service area. MTBE is an oxygenate used in reformulated fuels.
At the request of the Regional Water Quality Control Board, the City of Santa
Monica and the California Environmental Protection Agency, SCW removed two of
its wells in the Culver City system from service in October, 1996 to help in
efforts to avoid further spread of the MTBE contamination plume. Neither of
these wells has been found to be contaminated with MTBE. SCW is purchasing water
from the MWD at an increased cost to replace the water supply formerly pumped
from the two wells removed from service.
Several studies are under way to determine the possible sources and
causes of the MTBE contamination. The federal EPA is pursuing an enforcement
effort to reach a settlement with the potentially responsible parties on matters
relating to the cleanup of the contamination. Registrant is unable to predict
the outcome of the EPA's enforcement efforts. Two of the potentially responsible
parties and SCW have executed an agreement, effective through 1998, which
provides for reimbursement of SCW's legal and consulting costs related to this
matter as well as on-going reimbursement from such parties for increased costs
incurred by SCW in purchasing replacement water. SCW and such parties are
negotiating an extension of this agreement to remain effective until the
underlying groundwater contamination is remediated.
Bear Valley Electric
There have been no environmental matters that have materially affected
or are currently materially affecting SCW's Bear Valley Electric customer
service area.
RATES AND REGULATION
SCW is subject to regulation by the CPUC as to its water and electric
business and properties. The CPUC has broad powers to regulate public utilities
with respect to service and facilities, rates, classifications of accounts,
valuation of properties and the purchase, disposition and mortgaging of
properties necessary or useful in rendering public utility service. The CPUC
also has authority over the issuance of securities, the granting of certificates
of convenience and necessity as to the extension of services and facilities and
various other matters, including transactions with affiliates. AWR is not
regulated by the CPUC.
The 22 customer service areas of SCW are grouped into 16 water
districts and one electric district for rate-making purposes. SCW's water rates
vary among the 16 rate-making districts due to differences in operating
conditions and costs. SCW continuously monitors operations in each of these
districts so that it may file applications for rate changes, when warranted, on
a district-by-district basis, in accordance with the CPUC's procedure. Under the
CPUC's practices, rates may be increased by three methods: general rate
increases, offsets for certain expense increases and advice letter filings
related to certain plant additions.
Rates in three of SCW's customer service areas were increased on
January 1, 1998. In March 1998, SCW filed applications with the CPUC to increase
water rates applicable to six other rate-making districts as well as for
recovery of costs associated with SCW's general office functions from all
customer service areas. CPUC Staff filed its report on SCW's applications to
increase rates on July 10, 1998. Representatives of SCW and CPUC Staff have
settled all issues in these applications with the exception of return on equity.
Hearings before the administrative law judge assigned to the applications were
concluded on August 6, 1998. SCW filed for a return on equity of 11.5% and CPUC
Staff recommends a significantly lower return on equity of 8.2%. Registrant
believes that future earnings and cash flow could be significantly and adversely
impacted if the 8.2% return on equity is upheld by the CPUC in its final
decision. Registrant is currently unable to predict the outcome of the CPUC
decision on the settlement stipulation, the return on equity or if, ultimately,
the CPUC will authorize all or any of the proposed increases. It is not
anticipated that new rates, if approved, would be effective before January,
1999.
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<PAGE> 19
Pursuant to a settlement agreement, new rates were effective in May
1996 in SCW's Bear Valley Electric customer service area that were completely
offset by an increase in the amortization of an over-collection in the supply
cost balancing account. The net result was no increase in revenues. An
additional step increase was effective in January, 1997. In January 1998,
amortization of the over-collection in the supply cost balancing account was
complete and, as a result, rates increased accordingly.
In January 1998, the CPUC authorized a memorandum account for legal
expenses associated with SCW's involvement in water quality related lawsuits in
its San Gabriel Valley customer service area. In March 1998, the CPUC authorized
similar memorandum accounts for legal expenses in SCW's Arden-Cordova customer
service area. Moreover, and partially in response to the lawsuits, the CPUC has
initiated an Order Instituting Investigation ("OII") into whether its existing
standards and policies regarding drinking water quality adequately protect the
public health and whether those standards and policies are being uniformly
complied with by water utilities, including SCW, under its jurisdiction. See the
section entitled "Legal Proceedings" for more information.
The CPUC also has two active Orders Instituting Rulemaking ("OIR") -
one to provide guidelines for acquisition and mergers of water companies; the
other to provide guidelines for the privatization and excess capacity as it
relates to investor-owned water companies. Settlement discussions have begun in
both OIR's although Registrant is unable to predict the outcome of such
discussions or whether the CPUC will issue guidelines under either or both of
the OIR's.
In November 1996, SCW filed an application with the CPUC seeking
recovery through rates of costs associated with its participation in the coastal
aqueduct extension of the State Water Project ("SWP"). In April 1998, SCW filed
an amended application with the CPUC requesting recovery of its costs associated
with participation in SWP from future customers. Registrant is currently unable
to predict if the CPUC will authorize recovery of all or any of the costs
associated with its participation in SWP. See "Notes to Financial Statements"
for more information.
WATER-RELATED OPPORTUNITIES
AWR continues to pursue strategic opportunities related to the
operation of municipally-owned water systems on both a stand-alone basis and as
part of a joint venture.
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<PAGE> 20
YEAR 2000 COMPLIANCE
Registrant has, since 1995, been in the process of replacing and/or
upgrading as necessary its core business information and operating systems with
newer technologies. Registrant is currently implementing upgrades which are 2000
compliant to certain of its business information systems, and is completing an
inventory of its operating systems to ensure what measures, if any, are
necessary to ensure that they are 2000 compliant. To date, there have been no
significant costs associated with year 2000 compliance issues and Registrant
does not believe that future costs associated with such issues will be material.
Registrant is currently seeking compliance certification from external vendors
and service providers. Registrant is finalizing an action plan that identifies
any remaining considerations with regard to year 2000 compliance.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this Report (including the documents
incorporated herein by reference) are forward-looking statements intended to
qualify for the safe harbor from liability established by the Private Securities
Litigation Reform Act of 1995. These forward-looking statements can generally be
identified as such because the context of the statement will include words such
as Registrant "believes," "anticipates," "expects" or words of similar import.
Similarly, statements that describe Registrant's future plans, objectives,
estimates or goals are also forward-looking statements. Such statements address
future events and conditions concerning capital expenditures, earnings,
litigation, rates, water quality and other regulatory matters, adequacy of water
supplies, liquidity and capital resources, opportunities related to operations
of municipally-owned water systems and accounting matters. Actual results in
each case could differ materially from those currently anticipated in such
statements, by reason of factors such as utility restructuring, including
ongoing local, state and federal activities; future economic conditions,
including changes in customer demand; future climatic conditions; legislative,
regulatory and other circumstances affecting anticipated revenues and costs; and
abilities of other companies to remain or become year 2000 compliant.
PART II
ITEM 1. LEGAL PROCEEDINGS
Water Quality-Related Litigation
On April 24, 1997, a complaint in multiple counts seeking recovery for
negligence, wrongful death, strict liability, trespass, public nuisance, private
nuisance, negligence per se, strict liability for ultrahazardous activities and
fraudulent concealment was filed in Los Angeles Superior Court on behalf of
approximately 145 plaintiffs (the "Adler Matter"). After preliminary Demurrers
and Motions to Strike, these same plaintiffs filed a First Amended Complaint on
or about October 16, 1997 seeking recovery on essentially the same theories.
Plaintiffs allege that SCW has provided and continues to provide them with
allegedly contaminated water from wells located in an area of the San Gabriel
Valley that has been designated a federal environmental superfund site, and that
the maintenance of this contaminated well water has resulted in contamination of
the soil, subsurface soil, and surrounding air, with trichloroethylene,
perchloroethene, carbon tetrachloride and other solvents. Plaintiffs further
allege that SCW's actions have caused, and continue to cause, injuries to the
plaintiffs. Plaintiffs seek damages, including general, special, and punitive
damages, according to proof at trial, as well as attorney's fees on certain
causes of action, costs of suit, and other unspecified relief.
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SCW was served with the original Complaint in the Adler matter on June
3, 1997. On July 31, 1997, SCW's Motion for a Change of Venue for this matter
from Downtown Los Angeles to Pasadena, California was granted. On June 23, 1998,
the judge assigned to the Adler Matter, acting on the Court's own motion, issued
a stay until June 15, 1999 of all proceedings in the Adler matter pending the
outcome of the CPUC's OII proceeding. As a result, Registrant anticipates that
activity related to this matter will not be significant during the period in
which the stay is in effect.
SCW was served on November 3, 1997 as Doe I in the matter of
Santamaria v. Suburban Water Systems which was filed in Los Angeles Superior
court. The complaint alleges that SCW sold, but did not create, contaminated
water to certain of the 379 individual plaintiffs claiming personal injury and
property damage (the "Santamaria Matter"). In addition, there are 10 wrongful
death claims. The complaint encompasses a geographical area which includes, as
far as can be ascertained, little of SCW's systems. The complaint differs from
the Adler matter in that the plaintiffs have also named Suburban Water Systems,
Southwest Water Co., Covina Irrigating Co., California Domestic Water Company,
San Gabriel Valley Water Company, and certain parties that have been named as
potentially responsible parties in the superfund site in this area.
On July 8, 1998, the judge assigned to the Santamaria Matter, acting
on the Court's own motion, issued a one-year stay of all proceedings in this
matter pending the outcome of the CPUC's OII proceeding.
In January 1998 SCW was named a defendant in the matter of Nathaniel
Allen, Jr., et al. V. Aerojet-General Corporation, et al which was filed in
Sacramento Superior court. The complaint makes claims based on wrongful death,
personal injury, property damage as a result of nuisance and trespass, medical
monitoring, and diminution of property values (the "Allen Matter"). SCW and
other defendants have delivered water to plaintiffs which allegedly is, or has
been in the past, contaminated with a number of chemicals, including TCE, PCE,
carbon tetrachloride, perchlorate, Freon-113, hexavalent chromium and other,
unnamed, chemicals. On February 9, 1998, defendant McDonnell Douglas Corporation
removed this case to United States District Court for the Eastern District of
California. A Motion for Partial Dismissal or in the Alternative to Strike and
for a More Definitive Statement was also filed by McDonnell Douglas Corporation.
SCW filed its Demurrers and Motion to Strike in this matter on June 5, 1998 and
a hearing is scheduled for August 31, 1998.
In April 1998 SCW was named a defendant in the matter of Daphne Adams,
et al. v. Aerojet General, et al. which was filed in Sacramento Superior court
(the "Adams Matter"). The complaint makes claims based on negligence, strict
liability, trespass, public nuisance, private nuisance, negligence per se,
absolute liability for ultrahazardous activity, fraudulent concealment,
violation of California business and professions code section 17200 et seq.,
intentional infliction of emotional distress, intentional spoilage of evidence,
negligent destruction of evidence needed for prospective civil Litigation,
wrongful death and medical monitoring. Plaintiffs seek damages, including
general, punitive and
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exemplary damages, as well as attorney's fees, costs of suit, injunctive,
restitutionary relief, disgorged profits and civil penalties, medical monitoring
according to proof and other unspecified relief. SCW filed its Demurrers and
Motion to Strike in this matter on June 5, 1998 and a hearing is scheduled for
August 31, 1998.
In light of the breadth of plaintiff's claims, the lack of factual
information regarding plaintiff's claims and injuries, if any, and the fact that
no discovery has yet been completed, Registrant is unable at this time to
determine what, if any, potential liability it may have with respect to claims
in these matters. Registrant intends to vigorously defend itself against these
claims.
Other Litigation
Registrant is also subject to ordinary routine litigation incidental
to its business. Other than as disclosed above, no legal proceedings are
pending, except such incidental litigation, to which Registrant is a party or of
which any of its properties is the subject which are believed to be material.
Order Instituting Investigation
In response to these and similar actions, the CPUC in March 1998
issued an Order Instituting Investigation ("OII") directed to all Class A and B
water utilities in the state of California, including SCW, into whether existing
standards and policies regarding drinking water quality adequately protect the
public health and whether those standards and policies are being uniformly
complied with by those water utilities. The OII notes the constitutional and
statutory jurisdiction of the CPUC and the DOHS to establish and enforce
adherence to water quality standards for water delivered by utilities to their
customers and, in the case of the CPUC, to establish rates which permit water
utilities to furnish safe water meeting the established water quality standards
at prices which are both affordable and that allow the utility to earn a
reasonable return on its investment. The OII initially provides for compliance
reports to be submitted by all Class A and B water utilities, including SCW, on
a series of questions dealing with the safety of current drinking water
standards, compliance by water utilities with such standards, appropriate
remedies for failure to comply with safe drinking water standards and whether
stricter or additional safe drinking water standards are required. The OII
initially required all Class A and B water utilities to submit their reports by
July 15, 1998 although the deadline has been extended to September 11, 1998. It
is anticipated that the Water Division of the CPUC will issue its report, based
on these filings by the utilities, by January 4, 1999. Although the OII leaves
open the possibility of evidentiary hearings and further action by the CPUC,
Registrant is currently unable to predict the outcome of this proceeding.
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<PAGE> 23
ITEM 2. CHANGES IN SECURITIES
As of June 30, 1998, earned surplus amounted to $52,643,000, none of
which is restricted as to payment of cash dividends on SCW's Common Shares by
any terms of SCW's debt instruments.
As of June 30, 1998, authorized but unissued Common Shares includes
89,226 and 71,408 Common Shares reserved for issuance under AWR's Dividend
Reinvestment and Common Share Purchase Program ("DRP") and Investment Incentive
Program ("401-k" Plan), respectively. Common Shares reserved for the 401-k Plan
are in relation to the matching contributions by SCW and for investment purposes
by participants.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The results of the election of directors as presented at the Annual
Meeting of Shareholders of SCW held on April 28, 1998 are shown below; and the
same persons were elected as directors of AWR by SCW, as the sole shareholder of
AWR.
<TABLE>
<CAPTION>
NAME "FOR" "AGAINST"
---- ----- ---------
<S> <C> <C>
James L. Anderson 94.78% 5.22%
Jean E. Auer 94.75% 5.25%
William V. Caveney 94.62% 5.38%
N.P. Dodge, Jr. 94.69% 5.31%
Robert F. Kathol 94.41% 5.59%
Lloyd E. Ross 94.72% 5.28%
Floyd E. Wicks 94.81% 5.19%
</TABLE>
At the Annual Meeting of Shareholders of SCW held on April 28, 1998,
shareholders of SCW approved by a 96.28% affirmative vote of the votes present
in person or represented by proxy and entitled to vote, the principal terms of
an Agreement of Merger by and among AWR, SCW Acquisition Corp. and SCW, pursuant
to which SCW Acquisition Corp. would merge with and into SCW, with SCW thereby
becoming a wholly-owned subsidiary of AWR. CPUC approval of the merger was
received on June 23, 1998 and the holding company became effective on July 1,
1998 at 12:01 a.m.. The following table lists the results of the election
presented at the Annual Meeting of Shareholders of SCW on April 28, 1998:
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<PAGE> 24
<TABLE>
<CAPTION>
"BROKER
"FOR" "AGAINST" "ABSTAIN" NON-VOTES"
----- --------- --------- ----------
<S> <C> <C> <C> <C>
Votes 641,315 11,324 13,449 151,254
Percentage 96.28% 1.70% 2.02% --
</TABLE>
At the Annual Meeting of Shareholders of SCW held on April 28, 1998,
shareholders of SCW ratified certain provisions of the articles of incorporation
of AWR providing for the classification of its Board of Directors for purposes
of the election of AWR's directors. The Meeting of Shareholders of SCW on April
28, 1998:
<TABLE>
<CAPTION>
"BROKER
"FOR" "AGAINST" "ABSTAIN" NON-VOTES"
----- --------- --------- ----------
<S> <C> <C> <C> <C>
Votes 417,448 231,905 16,634 151,355
Percentage 62.68% 34.82% 2.50% --
</TABLE>
At the Annual Meeting of Shareholders of SCW held on April 28, 1998,
shareholders ratified certain provisions of the articles of incorporation of AWR
providing that (a) certain business combinations involving AWR, and/or the sale
of all or substantially all of AWR's assets, would require, in addition to any
Board and/or shareholder approvals required under applicable law, approval
either by the affirmative vote of a majority of AWR's continuing directors (as
defined in AWR's Articles of Incorporation) or by the affirmative vote of at
least 66 2/3% of the combined voting power of AWR's outstanding shares, voting
together as a single class (other than any series of New Preferred Shares not
entitled to vote thereon), and (b) certain amendments to AWR's bylaws relating
to the calling of shareholders' meetings and the bringing of business thereat be
approved by either a majority of AWR's Board or by the affirmative vote of at
least 66 2/3% of the combined voting power of AWR's outstanding shares, voting
together as a single class (other than any series of New Preferred Shares not
entitled to vote thereon). The following table lists the results of the election
presented at the Annual Meeting of Shareholders of SCW on April 28, 1998:
<TABLE>
<CAPTION>
"BROKER
"FOR" "AGAINST" "ABSTAIN" NON-VOTES"
----- --------- --------- ----------
<S> <C> <C> <C> <C>
Votes 403,593 244,478 17,916 151,355
Percentage 60.60% 36.71% 2.69% --
</TABLE>
22
<PAGE> 25
ITEM 5. OTHER INFORMATION
Declaration of Dividends
On August 3, 1998, the Board of Directors of AWR declared a regular
quarterly dividend of $0.315 per common share. The dividend will be paid
September 1, 1998 to shareholders of record of AWR as of the close of business
on August 14, 1998. In other actions, the Board of Directors declared regular
quarterly dividends of $0.25 per share, $0.265625 per share and $0.3125 per
share on its 4%, 4-1/4% and 5% Cumulative Preferred Shares, respectively.
New Director
On August 3, 1998, the Board of Directors of AWR elected Anne Holloway
to serve as the eighth member of its Board of Directors. Mrs. Holloway will
serve as a Class I director and her initial term of office will expire at the
Annual Meeting of Shareholders of AWR in April 1999. Mrs. Holloway was also
elected a director of SCW
Shareholder Proposals
Any proposal which a shareholder intends to submit to present at
Registrant's next annual meeting of shareholders, but does not intend to submit
for inclusion in Registrant's proxy statement, must be received at the principal
executive office of Registrant prior to February 1, 1999 in order to be
considered timely under the proxy rules of the Securities and Exchange
Commission. Registrant will have discretionary authority to vote on all matters
properly coming before the annual meeting of shareholders that have not been
timely received, unless otherwise instructed. Under Registrant's bylaws, for a
proposal to be properly brought before the annual meeting of shareholders by a
shareholder, all of the following requirements must be satisfied:
(1) the shareholder must give notice to Registrant of the proposal at
its principal executive office;
(2) the shareholder must be a shareholder of record at the time of
the giving of the notice;
(3) the notice must be received by Registrant during the period of
January 29, 1999 through February 12, 1999; and
(4) the shareholder must be entitled to vote at the annual meeting of
shareholders.
Proposals submitted by a shareholder for inclusion in Registrant's
proxy statement must be received at Registrant's principal executive office by
November 13, 1998.
23
<PAGE> 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits on Securities and Exchange Commission Form
8-K were filed during the period covered by this report and are incorporated
herein by reference:
Agreement of Merger, dated as of June 25, 1998, by and among Southern
California Water Company, SCW Acquisition Corp., and American States
Water Company.
Press Release, dated June 30, 1998, of SCW announcing the formation
of AWR, its new holding company.
(b) The following Reports on Securities and Exchange Commission Form
8-K were filed during the period covered by this report:
Changes in Control of Registrant -- relating to approval by
shareholders with a majority of the voting power of the common and
preferred stock of SCW to the principal terms of an Agreement of
Merger, dated as of June 25, 1998 by and among Southern California
Water Company, SCW Acquisition Corp., and American States Water
Company. Under the Agreement of Merger, SCW became a wholly-owned
subsidiary of AWR and its common and preferred shareholders became
holders of all of the AWR Common and Preferred Shares, respectively.
Exhibit 27 Financial Data Schedule
24
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer and chief financial officer.
AMERICAN STATES WATER COMPANY
and its subsidiary
SOUTHERN CALIFORNIA WATER COMPANY
By : s/ McClellan Harris III
---------------------------------
McClellan Harris III
Vice President - Finance,
Chief Financial Officer,
Treasurer and Secretary
Date: August 14, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATON EXTRACTED FROM (A) BALANCE
SHEETS AND INCOME STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS FILED
HEREWITH.
</LEGEND>
<CIK> 0001056903
<NAME> SOUTHERN CALIFORNIA WATER CO.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 397,569
<OTHER-PROPERTY-AND-INVEST> 1,335
<TOTAL-CURRENT-ASSETS> 38,276
<TOTAL-DEFERRED-CHARGES> 27,439
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 464,619
<COMMON> 22,394
<CAPITAL-SURPLUS-PAID-IN> 74,937
<RETAINED-EARNINGS> 52,643
<TOTAL-COMMON-STOCKHOLDERS-EQ> 149,974
480
1,600
<LONG-TERM-DEBT-NET> 130,772
<SHORT-TERM-NOTES> 18,000
<LONG-TERM-NOTES-PAYABLE> 130,029
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 66
40
<CAPITAL-LEASE-OBLIGATIONS> 934
<LEASES-CURRENT> 125
<OTHER-ITEMS-CAPITAL-AND-LIAB> 163,602
<TOT-CAPITALIZATION-AND-LIAB> 464,619
<GROSS-OPERATING-REVENUE> 64,956
<INCOME-TAX-EXPENSE> 3,744
<OTHER-OPERATING-EXPENSES> 51,244
<TOTAL-OPERATING-EXPENSES> 54,988
<OPERATING-INCOME-LOSS> 9,968
<OTHER-INCOME-NET> 131
<INCOME-BEFORE-INTEREST-EXPEN> 10,099
<TOTAL-INTEREST-EXPENSE> 5,489
<NET-INCOME> 4,610
46
<EARNINGS-AVAILABLE-FOR-COMM> 4,564
<COMMON-STOCK-DIVIDENDS> 5,643
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 14,652
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
