<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 Quarter Ended MARCH 31, 1998 Commission file number 0-1121
-------------- ------
SOUTHERN CALIFORNIA WATER COMPANY
(Exact Name of Registrant as specified in its charter)
CALIFORNIA 95-1243678
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
630 EAST FOOTHILL BOULEVARD, SAN DIMAS, CALIFORNIA 91773
-------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (909) 394-3600
--------------
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of April 30, 1998, the number of shares outstanding
of the Registrant's Common Shares, Par Value $2.50,
was 8,957,671.
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SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1: Financial Statements 1
Balance Sheets as of March 31, 1998 and December 31, 1997 2 - 3
Statements of Income for the Three Months Ended
March 31, 1998 and March 31, 1997 4
Statements of Income for the Twelve Months Ended
March 31, 1998 and March 31, 1997 5
Cash Flow Statements for the Three Months Ended
March 31, 1998 and March 31, 1997 6
Notes to Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operation 8 - 17
PART II OTHER INFORMATION
Item 1: Legal Proceedings 17 - 19
Item 2: Changes in Securities 19
Item 3: Defaults Upon Senior Securities 19
Item 4: Submission of Matters to a Vote of Security Holders 19 - 21
Item 5: Other Information 21
Item 6: Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
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PART I
ITEM 1. FINANCIAL STATEMENTS
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 Registrant's
latest Annual Report for the year ended December 31, 1997 on Form 10-K.
1
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SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
UTILITY PLANT, at cost (in thousands)
Water..................................................... $ 450,385 $ 446,605
Electric.................................................. 34,113 34,137
--------- ---------
484,498 480,742
Less - Accumulated depreciation........................... (128,483) (125,020)
--------- ---------
356,015 355,722
Construction work in progress............................. 32,624 27,901
--------- ---------
388,639 383,623
--------- ---------
OTHER PROPERTY AND INVESTMENTS.............................. 1,388 1,355
--------- ---------
CURRENT ASSETS
Cash and cash equivalents................................. 2,210 4,186
Accounts receivable -
Customers, less reserves of $579
in 1998 and $466 in 1997.............................. 6,610 8,544
Other................................................... 4,918 3,614
Unbilled revenue.......................................... 7,601 9,106
Materials and supplies, at average cost................... 1,218 1,299
Supply cost balancing accounts............................ 4,603 4,286
Prepayments............................................... 6,203 7,676
Accumulated deferred income taxes - net................... 4,632 5,783
--------- ---------
37,995 44,494
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets............................. 22,070 22,337
Other deferred charges.................................... 5,422 5,265
--------- ---------
27,492 27,602
--------- ---------
$ 455,514 $ 457,074
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(Unaudited)
(in thousands)
<S> <C> <C>
CAPITALIZATION
Common shareholders' equity............................. $150,052 $151,053
Preferred shares........................................ 1,600 1,600
Preferred shares - mandatory redemption................. 440 440
Long-term debt.......................................... 130,275 115,286
-------- --------
282,367 268,379
-------- --------
CURRENT LIABILITIES
Notes payable to banks.................................. 12,000 26,000
Long-term debt and preferred shares - current........... 231 231
Accounts payable........................................ 11,077 11,770
Taxes payable........................................... 6,842 9,115
Accrued interest........................................ 2,359 1,868
Other accrued liabilities............................... 7,436 7,196
-------- --------
39,945 56,180
-------- --------
OTHER CREDITS
Advances for construction............................... 55,439 55,574
Contributions in aid of construction.................... 28,698 28,467
Accumulated deferred income taxes - net................. 43,549 42,984
Unamortized investment tax credits...................... 3,224 3,246
Regulatory tax-related liability........................ 1,939 1,950
Other................................................... 353 294
-------- --------
133,202 132,515
-------- --------
$455,514 $457,074
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
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(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water................................................... $26,166 $28,587
Electric................................................ 3,789 3,619
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29,955 32,206
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OPERATING EXPENSES
Water purchased......................................... 5,268 7,839
Power purchased for pumping............................. 1,306 1,282
Power purchased for resale.............................. 1,387 1,392
Groundwater production assessment....................... 1,480 1,125
Supply cost balancing accounts.......................... (316) 558
Other operating expenses................................ 3,261 3,478
Administrative and general expenses..................... 5,363 5,317
Depreciation............................................ 2,974 2,727
Maintenance............................................. 1,836 2,067
Taxes on income......................................... 1,469 1,105
Other taxes............................................. 1,545 1,578
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25,573 28,468
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Operating income........................................ 4,382 3,738
OTHER INCOME............................................. 143 44
------- -------
Income before interest charges.......................... 4,525 3,782
INTEREST CHARGES.......................................... 2,682 2,470
------- -------
NET INCOME............................................... 1,843 1,312
DIVIDENDS ON PREFERRED SHARES............................. 23 23
------- -------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS................ $ 1,820 $ 1,289
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............. 8,958 8,956
======= =======
Basic Earnings Per Common Share.......................... $ 0.20 $ 0.14
======= =======
Dividends Declared Per Common Share...................... $ 0.315 $ 0.310
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
-------- --------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water.................................................... $138,567 $141,524
Electric................................................. 12,937 11,815
-------- --------
151,504 153,339
-------- --------
OPERATING EXPENSES
Water purchased.......................................... 35,747 39,497
Power purchased for pumping.............................. 7,578 7,428
Power purchased for resale............................... 5,183 5,665
Groundwater production assessment........................ 7,203 5,674
Supply cost balancing accounts........................... 1,938 2,798
Other operating expenses................................. 12,856 13,785
Administrative and general expenses...................... 22,183 21,241
Depreciation............................................. 11,199 10,304
Maintenance.............................................. 7,069 8,459
Taxes on income.......................................... 10,194 9,770
Other taxes.............................................. 6,250 6,261
-------- --------
127,400 130,882
-------- --------
Operating income......................................... 24,104 22,457
OTHER INCOME............................................... 857 527
-------- --------
Income before interest charges........................... 24,961 22,984
INTEREST CHARGES........................................... 10,369 10,380
-------- --------
NET INCOME................................................. 14,592 12,604
DIVIDENDS ON PREFERRED SHARES.............................. 92 93
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS................. $ 14,500 $ 12,511
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.............. 8,958 8,168
======== ========
Basic Earnings Per Common Share............................ $ 1.62 $ 1.53
======== ========
Dividends Declared Per Common Share........................ $ 1.25 $ 1.23
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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SOUTHERN CALIFORNIA WATER COMPANY
CASH FLOW STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
-------- -------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM -
Operating Activities:
Net income.............................................. $ 1,843 $ 1,312
Adjustments for non-cash items:
Depreciation and amortization......................... 3,117 2,831
Deferred income taxes and
investment tax credits.............................. 1,950 463
Other - net........................................... (1,035) (278)
Changes in current assets and liabilities:
Accounts receivable................................... 1,933 (636)
Prepayments........................................... 1,473 1,445
Supply cost balancing accounts........................ (317) 559
Accounts payable...................................... (690) (4,056)
Taxes payable......................................... (2,273) (1,030)
Unbilled revenue...................................... 1,506 1,576
Other................................................. (495) 1,123
-------- -------
Net Cash Provided................................. 7,012 3,309
-------- -------
Investing Activities:
Construction expenditures................................. (7,575) (4,066)
-------- -------
Net Cash Used..................................... (7,575) (4,066)
-------- -------
Financing Activities:
Receipt of advances and contributions................... 755 487
Issuance of securities.................................. 15,000 3,963
Repayments of long-term debt and
redemption of preferred shares........................ (11) (40)
Refunds on advances..................................... (312) (493)
Net change in notes payable to banks.................... (14,000) (3,500)
Common and preferred dividends paid..................... (2,845) (2,801)
-------- -------
Net Cash Provided................................. (1,413) (2,384)
-------- -------
Net Increase (Decrease) in Cash and Cash Equivalents...... (1,976) (3,141)
Cash and Cash Equivalents, Beginning of Period............ 4,186 3,783
-------- -------
Cash and Cash Equivalents, End of Period.................. $ 2,210 $ 642
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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SOUTHERN CALIFORNIA WATER COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. 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 under the
caption "Notes to Financial Statements."
2. 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.
3. In November, 1996, Registrant 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). Registrant's
current investment in SWP is approximately $1.8 million and is included
in utility plant. In April 1998, Registrant 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 "Rates and
Regulation" for more information.
4. Registrant implemented increased water rates in three of its rate-making
districts on January 1, 1998. Registrant filed applications with the
CPUC to increase water rates applicable to 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.
5. As permitted by the CPUC, Registrant maintains water and electric supply
cost balancing accounts to account for under-collections and
over-collections of revenues designed to recover such costs.
Recoverability of such costs are recorded in income and charged to
balancing accounts when such costs are incurred. The balancing accounts
are credited when such costs are recovered through rate adjustments.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
Southern California Water Company ("Registrant") is a public
utility company engaged principally in the purchase, production, distribution
and sale of water (SIC No. 4941). Registrant also distributes electricity in one
community (SIC No. 4911). Registrant, regulated by the California Public
Utilities Commission ("CPUC"), was incorporated on December 31, 1929 under the
laws of the State of California as American States Water Services Company of
California as the result of the consolidation of 20 water utility companies.
From time to time, additional water companies and municipal water districts have
been acquired and properties in limited service areas have been sold.
Registrant's present name was adopted in 1936.
Registrant 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 March 31, 1998, about 73% of Registrant's
water customers were located in the greater metropolitan areas of Los Angeles
and Orange Counties. Registrant also provides electric service to the City of
Big Bear Lake and surrounding areas in San Bernardino County. Beginning in June,
1996, all electric energy sold by Registrant to customers in its Bear Valley
Electric customer service area was purchased under an energy brokerage contract
with ENOVA Energy Management, Inc. Prior to June, 1996, all energy sold was
purchased from the Southern California Edison Company subsidiary of Edison
International. Registrant served 241,667 water customers and 20,671 electric
customers at March 31, 1998, or a total of 262,338 customers compared with
261,164 total customers at March 31, 1997.
RESULTS OF OPERATION
Basic earnings per common share for the three months ended March
31, 1998 increased by 42.9% to $0.20 per share as compared to $0.14 per share
for the comparable period last year. Basic earnings for the twelve months ended
March 31, 1998 increased by 5.9% to $1.62 per share as compared to $1.53 per
share for the twelve months ended March 31, 1997. The increase in the recorded
results primarily reflect reduced supply costs during the first quarter of 1998
as is more fully discussed below.
As compared to last year, water sales volumes for the three
months ended March 31, 1998 decreased by 13.4% 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 sales volumes for the twelve months ended March
31, 1998 were relatively the same as the same period ended March 31, 1997. Water
operating revenues for the three and twelve months ended March 31, 1998
decreased by 8.5% and 2.1%, respectively, from the same time periods ended March
31, 1997 due to the decrease in water volumes sold and a decrease in rates
authorized to collect previously under-recovered supply costs. Registrant has
filed for new rates to collect under-recovered supply costs and anticipates, but
can give no assurance, that the CPUC will authorize the new rates. Registrant
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 decreased by 5.5% for the
three months ended March 31, 1998 as compared to last year due principally to
the heavier winter snows experienced in Registrant's service area during the
quarter which reduced the use of snow-making machines. As compared to last year,
kilowatt-hour sales declined by 0.7% for the twelve months ended March 31, 1998.
Electric operating revenues for the three and twelve month periods ending March
31, 1998 increased by 4.7% and 9.5%,
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respectively, over the comparable periods last year due to a change in rate
design. See the section entitled "Rates and Regulation" for more information.
Purchased water costs decreased by 32.8% and 9.5%,
respectively, for the three and twelve months ended March 31, 1998 as compared
to the same periods ending in 1997 due to decreased amounts of purchased water
in Registrant's resource mix. In addition, the three month results reflect
reimbursement by two oil companies of approximately $852,000 in incremental
supply costs incurred by Registrant due to groundwater contamination caused by
the oil companies. The twelve month results reflect recovery of an additional $1
million from the same oil companies recorded during the fourth quarter of 1997.
See the section entitled "Environmental Matters - Matters Related to Culver City
System" for more information.
The cost of power purchased for pumping increased by 1.9% and
2.0%, respectively, for the three and twelve months ended March 31, 1998 as
compared to the same period ended March 31, 1997 due chiefly to an increase in
pumped groundwater in Registrant's total water supply.
As compared to the three months ended March 31, 1997, the cost
of power purchased for resale decreased by 0.4% and 8.5%, respectively, for the
three and twelve months ended March 31, 1998 as a result of both reduced
kilowatt-hour sales and lower energy costs obtained through open market
purchases.
Groundwater production assessments are 31.6% and 26.9% higher
for the three and twelve months ended March 31, 1998, respectively, due to the
increased volumes of pumped water in Registrant's total water supply.
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 three and twelve months ended March 31, 1998 result from
the decrease in rates designed to recover previously under-collected purchased
water supply costs, supply costs for power purchased for pumping and for resale
and groundwater production assessments. Although the balancing account mechanism
insulates earnings from changes in costs of purchased water, power purchased for
pumping and groundwater production assessments, all of which are outside the
immediate control of Registrant, it is not designed to insulate earnings against
changes in supply mix.
Other operating expenses decreased by 6.2% and 6.7%,
respectively, for the three and twelve months ended March 31, 1998 as compared
to the same periods ended March 31, 1997 due chiefly to a decrease in the amount
of time being charged to this category.
Administrative and general expenses increased by 4.4% for the
twelve months ended March 31, 1998 as compared to the same periods ended March
31, 1997. This increase is due principally to an increase in costs related to a
review of the adequacy of Registrant's pension and 401(k) plans.
Depreciation expense increased by 9.1% and 8.7%, respectively,
for the three and twelve months ended March 31, 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 32.9% and 4.3% for the three and
twelve months ended March 31, 1998 as compared to the three and twelve months
ended March 31, 1997 as a result of higher pre-tax income.
9
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Other taxes decreased by 2.1% for the three months ended March
31, 1998 as compared to last year due to lower revenues which decreased amounts
accrued for franchise fees.
Maintenance expense decreased by 11.2% and 16.4% for the three
and twelve months ended March 31, 1998 as compared to the three and twelve
months ended March 31, 1997, respectively, principally due to increased
maintenance on wells necessary during the first two quarters of 1997. It is
anticipated, however, that maintenance expense will increase during the
remainder of the year and when the heavy rains cease.
Interest expense for the three months ended March 31, 1998
increased by 8.6% as compared to the same period last year due primarily to
increased short-term bank borrowing during the three month period.
LIQUIDITY AND CAPITAL RESOURCES
Registrant's construction program is designed to ensure its
customers high quality service. Registrant 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, Registrant upgrades its electric
and water supply facilities and is aggressively scheduling meter replacements
that conform with CPUC requirements. Registrant's Board of Directors has
approved anticipated net capital expenditures of approximately $27.1 million in
1998.
Registrant funds the majority of its operating expenses,
interest payments on its debt, dividends on its outstanding common and preferred
shares and makes its mandatory sinking fund payments through internal sources.
However, because of the seasonal nature of its water and electric businesses,
Registrant utilizes its short-term borrowing capacity on occasion to finance
current operating expenses.
Registrant 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 Registrant under its three bank lines of credit was $37
million as of March 31, 1998. As of March 31, 1998, Registrant had a total of
$12 million in borrowing outstanding under those bank lines of credit.
Registrant routinely employs short-term bank borrowing as an interim financing
source prior to executing either a long-term debt or equity issue. Registrant
issued $15 million in long-term debt in March 1998 with the net proceeds used to
repay short-term bank borrowings. Registrant 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 March 31, 1998, Registrant supplied a
total of 13,886,000 ccf of water as compared to 16,240,000 ccf for the three
months ended March 31, 1997. Of the total 13,886,000 ccf of water supplied
during the first quarter of 1998, approximately 63.7% came from pumped sources
and 36.2% was purchased from others, principally the Metropolitan Water District
of Southern California ("MWD") and its member agencies. The remaining 0.1% of
total supply came from the United States Bureau of Reclamation (the "Bureau")
under a no-cost contract. For the three months
10
<PAGE> 13
ended March 31, 1997, 54.2%, 45.7% and 0.1% was supplied from pumped sources,
purchased from MWD and the Bureau, respectively.
During the twelve months ended March 31, 1998, Registrant
supplied 84,050,000 ccf of water as compared to 85,714,471 ccf supplied during
the twelve months ended March 31, 1997. During the twelve month period ended
March 31, 1998, pumped sources provided 55.5% of total supply, 42.7% was
purchased from MWD and the remaining 1.8% was supplied by the Bureau. For the
twelve months ended March 31, 1996, 54.6%, 44.1% and 1.3%, respectively, was
supplied from pumped sources, purchased from MWD and the Bureau.
MWD is organized to deliver imported water to areas within its
jurisdiction. Registrant 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 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 steps to secure 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 Registrant which pump groundwater, overall
groundwater conditions remain at adequate levels allowing Registrant to use
groundwater in its resource mix and decrease its dependence on increasingly
expensive purchased water. Registrant believes that its water supplies from all
sources are adequate to meet current year projected demands, with the possible
exception of Registrant's Arden-Cordova customer service area. See the section
entitled "Environmental Matters - Matters Related to the Arden-Cordova system".
Hydrologists are cautious in making any predictions about the
effects of the "El Nino" weather pattern since weather patterns in the state of
California are generally unpredictable and the El Nino weather patterns do not
always repeat themselves. However, Registrant believes that, to the extent the
El Nino weather pattern continues to bring above normal precipitation, thereby
reducing sales volumes, its revenues and earnings during the second quarter of
1998 may be 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
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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.
Registrant currently tests its wells and water systems for more
than 90 contaminants, currently covering all contaminants listed in the SDWA.
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, Registrant has experienced
increased operating costs for testing to determine the levels, if any, of the
contaminants in Registrant'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 Registrant 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 Registrant 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
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 will be promulgated
by November 1998. The final ESWTR, in any of the forms currently proposed, would
apply to each of Registrant'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 and are expected to affect two
of Registrant's systems.
12
<PAGE> 15
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 Registrant'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 Registrant
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 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
Registrant is a voluntary member of the EPA's "Partnership for
Safe Water", a national program designed to further protection of the public
from diseases caused by cryptosporidium and other microscopic organisms. As a
volunteer in the program, Registrant 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.
13
<PAGE> 16
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
Three of the 27 wells in Registrant's Arden-Cordova system have,
for several years, been subject to contamination by tricholoroethylene. GenCorp
Aerojet has, by court decree, been responsible for all costs related to the
provision of well-head treatment. Although the ten-year agreement between
Registrant and Aerojet Corporation expired in 1996, Aerojet Corporation has
agreed to reimburse Registrant for the continuing costs, if any, associated with
well-head treatment at all three wells.
In January, 1997, Registrant was notified that ammonium
perchlorate in amounts above the state-determined action level had been detected
in three of its wells in its Arden-Cordova system. GenCorp Aerojet has, in the
past, used ammonium perchlorate in their processing as an oxidizer of rocket
fuels. Registrant has taken the three wells detected with ammonium perchlorate
out of service. 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 requires Registrant 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, Registrant found ammonium perchlorate in
three additional wells and had removed those wells from service until it was
determined that the levels were below the state-determined action level. Those
wells have been returned to service. Registrant provides periodic monitoring of
these wells to ensure that levels of perchlorate are below the action level
currently in effect. GenCorp Aerojet has reimbursed Registrant for all necessary
and reasonable activities in the construction of a pipeline to for
interconnection of the Folsom City and Arden-Cordova water systems to provide an
alternative source(s) of water supply in Registrant's Arden-Cordova customer
service area.
Registrant 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.
In February 1998, Registrant 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.
Registrant is negotiating with Aerojet-General Corporation to resolve issues
surrounding the NDMA cleanup including funding for new wells to replace
contaminated water supplies. Registrant, however, is currently unable to
determine the outcome of such negotiations. Registrant is advised to the extent
its wells remain out-of-service and based upon historical summer peak day
demands for the Arden-Cordova system, that there may be insufficient water
supply capacity to meet summer demands in 1998. Registrant anticipates that
rationing may be necessary to conserve available water supplies. Because of the
flat rate structure in its Arden-Cordova customer service area, Registrant does
not anticipate that revenues will be materially affected although supply costs
are anticipated to decline.
14
<PAGE> 17
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 Registrant'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,
Registrant 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. Registrant is purchasing water from the Metropolitan Water District
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 Registrant have executed an agreement, effective through 1998, which
provides for reimbursement of Registrant's legal and consulting costs related to
this matter as well as on-going reimbursement from such parties for increased
costs incurred by Registrant in purchasing replacement water. Registrant and
such parties are negotiating an extension of this agreement to remain effective
until the underlying groundwater basin has been cleaned up by the potentially
responsible parties.
Bear Valley Electric
There have been no environmental matters that have materially
affected or are currently materially affecting Registrant's Bear Valley Electric
customer service area.
RATES AND REGULATION
Registrant 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.
The 22 customer service areas of Registrant are grouped into 16
water districts and one electric district for rate-making purposes. Registrant's
water rates vary among the 16 rate-making districts due to differences in
operating conditions and costs. Registrant 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 Registrant's customer service areas were
increased on January 1, 1998. In March 1998, Registrant 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 Registrant's general office
functions from all customer service areas. Registrant is unable to predict if
the CPUC will authorize all or any of the proposed increases although it is not
anticipated that new rates, if approved, would be effective before January,
1999.
15
<PAGE> 18
Pursuant to a settlement agreement, new rates were effective in
May 1996 in Registrant'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 Registrant'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 Registrant's Arden-Cordova and
Simi Valley customer service areas. 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 Registrant,
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, Registrant filed an application with the CPUC
seeking recovery through rates of costs associated with its participation the
coastal aqueduct extension of the State Water Project ("SWP"). In April 1998,
Registrant 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
Registrant 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. For example, in December, 1996, Registrant and U.S.
Water, L.L.C., a limited liability company owned by the Bechtel Group and by
Northwest Water Holdings, Inc., a subsidiary of United Utilities PLC, a water
and electric utility based in the United Kingdom, formed Golden State Water
Company LLC ("GSWC") for the purpose of pursuing potential opportunities to
lease, or operate and maintain, municipally owned retail water supply and
distribution systems and water treatment, wastewater collection and wastewater
treatment facilities in California. The joint venture currently acts as the
manager of the water department of the City of Compton, California pursuant to a
short-term contract. GSWC has submitted additional bids in response to requests
for proposal. The bids remain subject to approval by the cities and no assurance
can be given that GSWC's bids will be approved or that GSWC will ultimately be
retained to operate and maintain the cities' water systems or perform any other
services for them. There can be no assurance that any other such opportunities
will materialize or that, if they do, Registrant (either jointly with GSWC or
alone) would be successful in consummating any such lease and/or maintenance and
operation arrangements.
16
<PAGE> 19
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, rate, 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 circumstance affecting anticipated revenues and costs.
PART II
ITEM 1. LEGAL PROCEEDINGS
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 they are, and at all
relevant times were, (1) customers of Registrant, (2) that Registrant 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 (USEPA) superfund site, and (3) 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 Registrant's
actions have caused, and continue to cause, injuries to the plaintiffs' person,
personal property and financial interests in unspecified amounts. 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. Registrant was initially served with the
original Complaint on June 3, 1997. On July 31, 1997, Registrant's Motion for a
Change of Venue for this matter from Downtown Los Angeles to Pasadena,
California was granted
Registrant has provided water service in portions of the San
Gabriel Valley for over 60 years along with over 30 other water purveyors.
Portions of the San Gabriel Valley have been designated a USEPA superfund site.
Registrant is not a potentially responsible party with respect to contamination
of the site or sites in the San Gabriel Valley which have been designated as
superfund sites. Registrant has commenced and is continuing a review and
evaluation of plaintiff's claims and its insurance coverage for these potential
liabilities allegedly arising over the past 30 years. Ten plaintiff's were
served with interrogatories approximately 45 days ago. A Case Management Order
has been agreed upon and within the next 30 days Interrogatories will be sent to
the remaining plaintiffs.
17
<PAGE> 20
Registrant 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 makes claims based on Negligence, Strict Liability,
Trespass, Nuisance, Negligence per se, Absolute Liability for Ultrahazardous
Activity and Fraudulent Concealment. The complaint makes allegations that
Registrant 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 with 19
wrongful death plaintiffs. The complaint encompasses a geographical area which
includes, as far as can be ascertained, little of Registrant'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 names as potentially responsible parties in the Superfund Site
effecting this area. On February 16, 1998, a Second Amended Complaint was
received with some new plaintiffs who were generally spouses of previously named
wrongful death plaintiffs. This latest version of the complaint contains new
causes of action for battery, and unfair business practices with a request for
injunctive relief to abate a nuisance created as a result of alleged
contamination. A Motion to Change Venue from Los Angeles County to Ventura
County was granted.
Registrant was served in January 1998 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"). The claims
center around the allegation that the plaintiffs in this matter have been
damaged as a result of water delivered to them by Registrant and other
defendants which 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.
Registrant was served on April 24, 1998 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 Cal. 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 exemplary damages, according to proof at trial, as well as
attorney's fees on certain causes of action, costs of suit, injunctive,
restitutionary relief, disgorged profits and civil penalties, medical monitoring
according to proof and other unspecified relief. Registrant has not yet
responded to the allegations in court.
In light of the breadth of plaintiff's claims, the lack of
factual information regarding plaintiff's claims and injuries, if any, 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 lawsuits. Registrant intends to vigorously defend itself against these
claims.
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 Registrant, 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
18
<PAGE> 21
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 provides for compliance reports to
be submitted by all Class A and B water utilities, including Registrant, by July
15, 1998 for a report to be issued based upon these filings by the Water
Division of the CPUC by May 16, 1999 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 leaves open the possibility of evidentiary hearings and
further action by the CPUC.
The CPUC did, however, in the OII set out at considerable length
the jurisdiction of the CPUC and the DOHS on water quality and water safety
issues and noted the "potentially enormous" implications to the water utilities,
their customers and the jurisdiction of the CPUC if the plaintiffs in the
several pending lawsuits prevail. One commissioner, in his published remarks
concerning the OII, expressly noted that these lawsuits "directly affect" the
ability of the CPUC to perform its statutory obligations and noted both
potential water supply problems if the plaintiffs in these actions prevail and
the cost to all water utility customers from mere prosecution of these actions.
In April 1998, the CPUC served the OII upon the plaintiff's attorneys in the
Adler, Santamaria and Allen Matters as well as the various courts. The
Registrant is presently unable to predict the effects the OII may have on any of
the lawsuits.
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.
ITEM 2. CHANGES IN SECURITIES
As of March 31, 1998, earned surplus amounted to $52,721,000,
none of which was restricted as to payment of cash dividends on Registrant's
Common Shares by any terms of Registrant's debt instruments.
As of March 31, 1998, authorized but unissued Common Shares
includes 89,226 and 71,408 Common Shares reserved for issuance under
Registrant's Dividend Reinvestment and Common Share Purchase Program and
Investment Incentive Program ("401-k"), respectively. Common Shares reserved for
the 401-k Plan are in relation to the matching contributions by Registrant and
for investment purposes by participants.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On or about March 17, 1998, common and preferred shareholders of
Registrant were mailed a Notice of Annual Meeting and a Proxy Statement.
Shareholders were requested to vote their shares for the election of a slate of
seven directors to serve until the next annual meeting and until their
19
<PAGE> 22
successors are chosen and qualified. The following table presents the results of
the election presented at the Annual Meeting of Shareholders held on April 28,
1998:
<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 held on April 28, 1998,
shareholders 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 American States Water Company, SCW Acquisition
Corp. and Registrant, pursuant to which SCW Acquisition Corp. would merge with
and into Registrant, with Registrant thereby becoming a wholly-owned subsidiary
of American States Water Company. The consummation of the merger and formation
of the holding company, American States Water Company is, in part, dependent
upon receipt of approval to do so from the CPUC. CPUC approval is anticipated to
be received prior to year-end 1998, although Registrant can give no assurances
that such approval will be forthcoming.
At the Annual Meeting of Shareholders held on April 28, 1998,
shareholders also ratified by a 62.68% affirmative vote of the votes present in
person or represented by proxy and entitled to vote, certain provisions of the
articles of incorporation of American States Water Company providing for the
classification of its Board of Directors for purposes of the election of
American States Water Company's directors, the implementation of such provisions
being effective upon the listing of the common shares of American States Water
Company on the New York Stock Exchange. The trading symbol for American States
Water Company will be AWR.
At the Annual Meeting of Shareholders held on April 28, 1998,
shareholders also ratified by a 60.60% affirmative vote of the votes present in
person or represented by proxy and entitled to vote, certain provisions of the
articles of incorporation of American States Water Company providing that (a)
certain business combinations involving American States Water Company, and/or
the sale of all or substantially all of American States Water Company'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
American States Water Company's continuing directors (as defined in American
States Water Company's Articles of Incorporation) or by the affirmative vote of
at least 66 2/3% of the combined voting power of American States Water Company's
outstanding shares, voting together as a single class (other than any series of
New Preferred Shares not entitled to vote thereon), (b) amendments to American
States Water Company's bylaws relating to the calling of shareholders' meetings
and the bringing of business thereat be approved by either a majority of
American States Water Company's Board or by the affirmative vote of at least 66
2/3% of the combined voting power of American States Water Company's outstanding
shares, voting together as a single class (other than any series of New
Preferred Shares not entitled to vote thereon), and (c) amendments to the
provisions of American States Water Company's Articles of Incorporation
described above be approved by the affirmative vote of 66 2/3% of the combined
voting power of American States Water Company's
20
<PAGE> 23
outstanding shares, voting together as a single class (other than any series of
New Preferred Shares not entitled to vote thereon);
ITEM 5. OTHER INFORMATION
On April 27, 1998, the Board of Directors of Registrant declared
a regular quarterly dividend of $0.315 per common share. The dividend will be
paid June 1, 1998 to shareholders of record as of the close of business on May
11, 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
21
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer and chief financial officer.
SOUTHERN CALIFORNIA WATER COMPANY
By: s/ McCLELLAN HARRIS III
----------------------------------
McClellan Harris III
Vice President - Finance,
Chief Financial Officer,
Treasurer and Secretary
Dated: May 12, 1998
22
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) BALANCE
SHEETS AND INCOME STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS FILED
HEREWITH.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-01-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 388,639
<OTHER-PROPERTY-AND-INVEST> 1,388
<TOTAL-CURRENT-ASSETS> 37,995
<TOTAL-DEFERRED-CHARGES> 27,492
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 455,514
<COMMON> 22,394
<CAPITAL-SURPLUS-PAID-IN> 74,937
<RETAINED-EARNINGS> 52,721
<TOTAL-COMMON-STOCKHOLDERS-EQ> 150,052
480
1,600
<LONG-TERM-DEBT-NET> 130,275
<SHORT-TERM-NOTES> 12,000
<LONG-TERM-NOTES-PAYABLE> 129,537
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 66
40
<CAPITAL-LEASE-OBLIGATIONS> 929
<LEASES-CURRENT> 125
<OTHER-ITEMS-CAPITAL-AND-LIAB> 160,916
<TOT-CAPITALIZATION-AND-LIAB> 455,514
<GROSS-OPERATING-REVENUE> 29,955
<INCOME-TAX-EXPENSE> 1,469
<OTHER-OPERATING-EXPENSES> 24,104
<TOTAL-OPERATING-EXPENSES> 25,573
<OPERATING-INCOME-LOSS> 4,382
<OTHER-INCOME-NET> 143
<INCOME-BEFORE-INTEREST-EXPEN> 4,525
<TOTAL-INTEREST-EXPENSE> 2,682
<NET-INCOME> 1,843
23
<EARNINGS-AVAILABLE-FOR-COMM> 1,820
<COMMON-STOCK-DIVIDENDS> 2,822
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 7,012
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
