<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 MARCH 31, 1999
Commission Registrant and State of Incorporation IRS Employer
File No. Address and Telephone Number Identification No.
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
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 May 12, 1999, the number of Common Shares outstanding, No Par Value with
Stated Value of $2.50, of American States Water Company was 8,957,671,
all of which are listed on the New York Stock Exchange.
As of May 12, 1999, all of the 100 outstanding Common Shares of Southern
California Water Company are owned by American States Water Company.
<PAGE> 2
AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1: Financial Statements 1
Consolidated Balance Sheets of American States Water Company as of
March 31, 1999 and March 31, 1998 2-3
Consolidated Statements of Income of American States Water Company for
the Three Months Ended March 31, 1999 and March 31, 1998 4
Consolidated Statements of Income of American States Water Company for
the Twelve Months Ended March 31, 1999 and March 31, 1998 5
Consolidated Statements of Cash Flow of American States Water Company for
the Three Months Ended March 31, 1999 and March 31, 1998 6
Consolidated Balance Sheets of Southern California Water Company as of
March 31, 1999 and March 31, 1998 7-8
Consolidated Statements of Income of Southern California Water Company for
the Three Months Ended March 31, 1999 and March 31, 1998 9
Consolidated Statements of Income of Southern California Water Company for
the Twelve Months Ended March 31, 1999 and March 31, 1998 10
Consolidated Statements of Cash Flow of Southern California Water Company for
the Three Months Ended March 31, 1999 and March 31, 1998 11
Notes to Financial Statements 12-13
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operation 14-27
PART II OTHER INFORMATION
Item 1: Legal Proceedings 27-30
Item 2: Changes in Securities 30
Item 3: Defaults Upon Senior Securities 30
Item 4: Submission of Matters to a Vote of Security Holders 31
Item 5: Other Information 31
Item 6: Exhibits and Reports on Form 8-K 31
Signatures 32
</TABLE>
i
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
General
The basic financial statements included herein have been
prepared by 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 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 by two separate Registrants: American States Water Company (hereinafter
"AWR") and Southern California Water Company (hereinafter "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
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
(Unaudited)
UTILITY PLANT, at cost (in thousands)
Water ................................. $ 489,159 $ 482,989
Electric .............................. 35,171 35,171
------------ ------------
524,330 518,160
Less - Accumulated depreciation ....... (141,894) (138,423)
------------ ------------
382,436 379,737
Construction work in progress ......... 39,295 35,016
------------ ------------
421,731 414,753
------------ ------------
OTHER PROPERTY AND INVESTMENTS .......... 763 1,077
------------ ------------
CURRENT ASSETS
Cash and cash equivalents ............. 1,820 620
Accounts receivable -
Customers, less reserves of $349
in 1999 and $403 in 1998 .......... 6,890 7,626
Other ............................... 5,498 5,301
Unbilled revenue ...................... 9,061 9,303
Materials and supplies, at average cost 1,068 994
Supply cost balancing accounts ........ 4,774 4,300
Prepayments and other ................. 5,940 5,988
Accumulated deferred income taxes - net 5,143 5,156
------------ ------------
40,194 39,288
------------ ------------
DEFERRED CHARGES
Regulatory tax-related assets ......... 21,258 21,506
Other deferred charges ................ 8,854 8,047
------------ ------------
30,112 29,553
------------ ------------
$ 492,800 $ 484,671
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
(Unaudited)
(in thousands)
CAPITALIZATION
Common shareholders' equity ........... $ 154,393 $ 154,299
Preferred shares ...................... 1,600 1,600
Preferred shares subject to mandatory
redemption requirements ............. 400 400
Long-term debt ........................ 160,469 120,809
------------ ------------
316,862 277,108
------------ ------------
CURRENT LIABILITIES
Notes payable to banks ................ -- 38,000
Long-term debt and preferred shares
due within one year ................. 598 260
Accounts payable ...................... 9,623 10,218
Taxes payable ......................... 6,467 5,900
Accrued interest ...................... 2,934 1,405
Other accrued liabilities ............. 8,796 7,985
------------ ------------
28,418 63,768
------------ ------------
OTHER CREDITS
Advances for construction ............. 56,634 54,743
Contributions in aid of construction .. 37,828 36,530
Accumulated deferred income taxes - net 47,476 46,902
Unamortized investment tax credits .... 3,133 3,155
Regulatory tax-related liability ...... 1,895 1,906
Other ................................. 554 559
------------ ------------
147,520 143,795
------------ ------------
$ 492,800 $ 484,671
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
(in thousands, except
per share amounts)
OPERATING REVENUES
Water ................................... $ 32,259 $ 26,166
Electric ................................ 3,873 3,789
------------ ------------
36,132 29,955
------------ ------------
OPERATING EXPENSES
Water purchased ......................... 6,948 5,268
Power purchased for pumping ............. 1,442 1,306
Power purchased for resale .............. 1,191 1,387
Groundwater production assessment ....... 1,710 1,480
Supply cost balancing accounts .......... (474) (316)
Other operating expenses ................ 3,538 3,261
Administrative and general expenses ..... 6,384 5,363
Depreciation ............................ 3,510 2,974
Maintenance ............................. 2,138 1,836
Taxes on income ......................... 2,267 1,469
Other taxes ............................. 1,624 1,545
------------ ------------
30,278 25,573
------------ ------------
Operating income ........................ 5,854 4,382
OTHER INCOME/(LOSS) ......................... 99 143
------------ ------------
Income before interest charges .......... 5,953 4,525
INTEREST CHARGES ............................ 2,976 2,682
------------ ------------
NET INCOME .................................. 2,977 1,843
DIVIDENDS ON PREFERRED SHARES ............... (22) (23)
------------ ------------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS .. $ 2,955 $ 1,820
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 8,958 8,958
============ ============
Basic Earnings Per Common Share ............. $ 0.33 $ 0.20
============ ============
Dividends Declared Per Common Share ......... $ 0.320 $ 0.315
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Twelve Months Ended
March 31,
-----------------------------
1999 1998
--------- ---------
<S> <C> <C>
(in thousands, except
per share amounts)
OPERATING REVENUES
Water ................................... $ 140,952 $ 138,567
Electric ................................ 13,284 12,937
--------- ---------
154,236 151,504
--------- ---------
OPERATING EXPENSES
Water purchased ......................... 32,512 35,747
Power purchased for pumping ............. 7,145 7,578
Power purchased for resale .............. 4,817 5,183
Groundwater production assessment ....... 7,797 7,203
Supply cost balancing accounts .......... (129) 1,938
Other operating expenses ................ 14,739 12,856
Administrative and general expenses ..... 23,006 22,183
Depreciation ............................ 13,073 11,199
Maintenance ............................. 7,613 7,069
Taxes on income ......................... 10,928 10,194
Other taxes ............................. 6,203 6,250
--------- ---------
127,704 127,400
--------- ---------
Operating income ........................ 26,532 24,104
OTHER INCOME/(LOSS) ......................... 725 857
--------- ---------
Income before interest charges .......... 27,257 24,961
INTEREST CHARGES ............................ 11,501 10,369
--------- ---------
NET INCOME .................................. 15,756 14,592
DIVIDENDS ON PREFERRED SHARES ............... (89) (92)
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS .. $ 15,667 $ 14,500
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 8,958 8,958
========= =========
Basic Earnings Per Common Share ............. $ 1.75 $ 1.62
========= =========
Dividends Declared Per Common Share ......... $ 1.265 $ 1.250
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 8
AMERICAN STATES WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
(in thousands)
CASH FLOWS FROM
Operating Activities:
Net income ...................................... $ 2,977 $ 1,843
Adjustments for non-cash items:
Depreciation and amortization .................... 3,640 3,117
Deferred income taxes and
investment tax credits ....................... 802 1,950
Other - net .................................... (751) (1,035)
Changes in assets and liabilities:
Accounts receivable ............................ 736 1,933
Prepayments .................................... 48 1,473
Supply cost balancing accounts ................. (474) (317)
Accounts payable ............................... (595) (690)
Taxes payable .................................. 567 (2,273)
Unbilled revenue ............................... 242 1,506
Other .......................................... 2,404 (495)
-------- --------
Net Cash Provided ............................ 9,596 7,012
-------- --------
Investing Activities:
Construction expenditures ......................... (8,887) (7,575)
-------- --------
Net Cash Used ............................... (8,887) (7,575)
-------- --------
Financing Activities:
Issuance of securities ........................... -- 15,000
Receipt of advances and contributions ............ 2,128 755
Proceeds from long-term debt, net of
redemption of preferred shares ................. 39,660 (11)
Refunds on advances .............................. (409) (312)
Repayments of notes payable to banks ............ (38,000) (14,000)
Common and preferred dividends paid .............. (2,888) (2,845)
-------- --------
Net Cash Provided/(Used) .................... 491 (1,413)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 1,200 (1,976)
Cash and Cash Equivalents, Beginning of period ..... 620 4,186
-------- --------
Cash and Cash Equivalents, End of period ........... $ 1,820 $ 2,210
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 9
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
(Unaudited)
(in thousands)
UTILITY PLANT, at cost ..................
Water ................................. $ 489,159 $ 482,989
Electric .............................. 35,171 35,171
------------ ------------
524,330 518,160
Less - Accumulated depreciation ....... (141,894) (138,423)
------------ ------------
382,436 379,737
Construction work in progress ......... 39,295 35,016
------------ ------------
421,731 414,753
------------ ------------
OTHER PROPERTY AND INVESTMENTS .......... 763 763
------------ ------------
CURRENT ASSETS
Cash and cash equivalents ............. 1,524 524
Accounts receivable -
Customers, less reserves of $349
in 1999 and $403 in 1998 .......... 6,865 7,498
Other ............................... 5,467 5,376
Unbilled revenue ...................... 9,061 9,303
Materials and supplies, at average cost 1,068 994
Supply cost balancing accounts ........ 4,774 4,300
Prepayments and other ................. 5,940 5,988
Accumulated deferred income taxes - net 5,163 5,173
------------ ------------
39,862 39,156
------------ ------------
DEFERRED CHARGES
Regulatory tax-related assets ......... 21,259 21,506
Other deferred charges ................ 8,737 7,997
------------ ------------
29,996 29,503
------------ ------------
$ 492,352 $ 484,175
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 10
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
(Unaudited)
(in thousands)
CAPITALIZATION
Common shareholders' equity ........... $ 155,726 $ 155,721
Long-term debt ........................ 160,469 120,809
------------ ------------
316,195 276,530
------------ ------------
CURRENT LIABILITIES
Notes payable to banks ................ -- 38,000
Long-term debt and preferred shares
due within one year ................. 598 260
Accounts payable ...................... 9,544 10,054
Taxes payable ......................... 6,767 6,147
Accrued interest ...................... 2,934 1,405
Other accrued liabilities ............. 8,796 7,984
------------ ------------
28,639 63,850
------------ ------------
OTHER CREDITS
Advances for construction ............. 56,634 54,744
Contributions in aid of construction .. 37,828 36,530
Accumulated deferred income taxes - net 47,476 46,902
Unamortized investment tax credits .... 3,133 3,155
Regulatory tax-related liability ...... 1,895 1,906
Other ................................. 552 558
------------ ------------
147,518 143,795
------------ ------------
$ 492,352 $ 484,175
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 11
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---------- ----------
<S> <C> <C>
($ in thousands, except
per share amounts)
OPERATING REVENUES
Water ................................... $ 32,213 $ 26,166
Electric ................................ 3,873 3,789
---------- ----------
36,086 29,955
---------- ----------
OPERATING EXPENSES
Water purchased ......................... 6,948 5,268
Power purchased for pumping ............. 1,442 1,306
Power purchased for resale .............. 1,191 1,387
Groundwater production assessment ....... 1,710 1,480
Supply cost balancing accounts .......... (474) (316)
Other operating expenses ................ 3,528 3,261
Administrative and general expenses ..... 6,322 5,363
Depreciation ............................ 3,376 2,974
Maintenance ............................. 2,137 1,836
Taxes on income ......................... 2,316 1,469
Other taxes ............................. 1,623 1,545
---------- ----------
30,119 25,573
---------- ----------
Operating income ........................ 5,967 4,382
OTHER INCOME/(LOSS) ......................... 99 143
---------- ----------
Income before interest charges .......... 6,066 4,525
INTEREST CHARGES ............................ 2,976 2,682
---------- ----------
NET INCOME .................................. 3,090 1,843
DIVIDENDS ON PREFERRED SHARES ............... -- (23)
---------- ----------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS .. $ 3,090 $ 1,820
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 100 100
========== ==========
Basic Earnings Per Common Share ............. $ 30,900 $ 18,200
========== ==========
Dividends Declared Per Common Share ......... $ 30,900 $ 28,216
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements. All
Information has been adjusted to reflect formation of holding company in 1998.
9
<PAGE> 12
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Twelve Months Ended
March 31,
1999 1998
---------- ----------
<S> <C> <C>
($ in thousands, except
per share amounts)
OPERATING REVENUES
Water ................................... $ 140,840 $ 138,567
Electric ................................ 13,284 12,937
---------- ----------
154,124 151,504
---------- ----------
OPERATING EXPENSES
Water purchased ......................... 32,512 35,747
Power purchased for pumping ............. 7,145 7,578
Power purchased for resale .............. 4,817 5,183
Groundwater production assessment ....... 7,797 7,203
Supply cost balancing accounts .......... (129) 1,938
Other operating expenses ................ 14,702 12,856
Administrative and general expenses ..... 22,842 22,183
Depreciation ............................ 12,672 11,199
Maintenance ............................. 7,612 7,069
Taxes on income ......................... 11,207 10,194
Other taxes ............................. 6,201 6,250
---------- ----------
127,378 127,400
---------- ----------
Operating income ........................ 26,746 24,104
OTHER INCOME/(LOSS) ......................... 1,186 857
---------- ----------
Income before interest charges .......... 27,932 24,961
INTEREST CHARGES ............................ 11,500 10,369
---------- ----------
NET INCOME .................................. 16,432 14,592
DIVIDENDS ON PREFERRED SHARES ............... (23) (92)
---------- ----------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS .. $ 16,409 $ 14,500
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 100 100
========== ==========
Basic Earnings Per Common Share ............. $ 164,090 $ 145,000
========== ==========
Dividends Declared Per Common Share ......... $ 118,004 $ 111,523
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements. All
information has been adjusted to reflect formation of holding company in 1998.
10
<PAGE> 13
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
(in thousands)
CASH FLOWS FROM -
Operating Activities:
Net income ...................................... $ 3,090 $ 1,843
Adjustments for non-cash items:
Depreciation and amortization .................... 3,506 3,117
Deferred income taxes and
investment tax credits ....................... 799 1,950
Other - net .................................... (867) (1,035)
Changes in assets and liabilities:
Accounts receivable ............................ 633 1,933
Prepayments .................................... 48 1,473
Supply cost balancing accounts ................. (474) (317)
Accounts payable ............................... (549) (690)
Taxes payable .................................. 620 (2,273)
Unbilled revenue ............................... 242 1,506
Other .......................................... 2,550 (495)
---------- ----------
Net Cash Provided ............................ 9,598 7,012
---------- ----------
Investing Activities:
Construction expenditures ......................... (8,887) (7,575)
---------- ----------
Net Cash Used ............................... (8,887) (7,575)
---------- ----------
Financing Activities:
Issuance of securities ........................... -- 15,000
Receipt of advances and contributions ............ 2,128 755
Proceeds from long-term debt, net of
redemption of preferred shares ................. 39,660 (11)
Refunds on advances ............................. (409) (312)
Repayments of notes payable to banks ............. (38,000) (14,000)
Common and preferred dividends paid .............. (3,090) (2,845)
---------- ----------
Net Cash Provided/(Used) .................... 289 (1,413)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 1,000 (1,976)
Cash and Cash Equivalents, Beginning of period ..... 524 4,186
---------- ----------
Cash and Cash Equivalents, End of period ........... $ 1,524 $ 2,210
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE> 14
AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. American States Water Company (AWR) was incorporated in 1998 in
connection with the formation of a holding company by Southern
California Water Company (SCW) and became a public company on July 1,
1998. AWR has no material assets other than the common stock of Southern
California Water Company (SCW). SCW is a public utility company engaged
principally in the purchase, production, distribution and sale of water,
and the distribution and sale of electric energy in several mountain
communities. Unless otherwise stated in this report, the term Registrant
applies to both AWR and SCW, collectively.
2. For a summary of significant accounting policies and other information
relating to these interim financial statements, reference is made to
pages 24 through 31 of the 1998 Annual Report to Shareholders of AWR
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. On April 22, 1998, the CPUC issued an order denying SCW's application
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. SCW is investigating its
options to recover its investment in SWP including contributions from
developers on a per-lot or other basis or, failing that, sale of its 500
acre-foot entitlement in SWP. Management believes the value of the asset
will be recovered. See the section entitled "Rates and Regulation" for
more information.
5. SCW implemented increased water rates in six rate-making districts in
January 1999. SCW has filed applications to increase rates in four water
ratemaking districts, effective January 2000. 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.
12
<PAGE> 15
7. AWR currently has two principal business units: water service and
electric distribution utility operations conducted through its SCW
subsidiary, and non-regulated activities through its ASUS subsidiary.
All activities of Registrant currently are geographically located within
the State of California, except for one contract providing customer
service and billing services to a utility located in the state of
Arizona. SCW is a regulated utility which operates both water and
electric systems. Registrant has no material operations other than its
SCW subsidiary. On a stand alone basis, AWR has no material assets other
than its investments in its subsidiaries. The tables below set forth
information relating to SCW's operating segments. SCW manages its
operations on a regional basis using the five categories below as
broad-level measures of profitability. In addition to the amounts set
forth, certain assets have been allocated. The identifiable assets are
net of respective accumulated provisions for depreciation.
<TABLE>
<CAPTION>
(dollars in thousands) For The Three Months Ended March 31, 1999
- ----------------------------------------------------------------------------------------------------------------
Water Electric
------------------------------------------
Region I Region II Region III
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues $ 5,322 $ 14,872 $ 12,016 $ 3,876
Operating income before income taxes 818 2,915 2,917 1,633
Identifiable assets 100,478 126,049 170,099 24,048
Depreciation expense 684 1,009 1,348 335
Capital additions 3,721 4,308 2,392 471
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Three Months Ended March 31, 1998
- ----------------------------------------------------------------------------------------------------------------
Water Electric
------------------------------------------
Region I Region II Region III
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues $ 4,638 $ 12,117 $ 9,408 $ 3,792
Operating income before income taxes 756 2,505 1,277 1,313
Identifiable assets 88,178 113,897 161,386 26,234
Depreciation expense 639 843 1,229 263
Capital additions $ 3,103 $ 2,436 $ 3,917 $ 352
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Twelve Months Ended March 31, 1999
- ----------------------------------------------------------------------------------------------------------------
Water Electric
------------------------------------------
Region I Region II Region III
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues $ 25,611 $ 60,026 $ 55,192 $ 13,295
Operating income before income taxes 6,861 12,142 14,783 4,167
Identifiable assets 100,478 126,049 170,099 24,048
Depreciation expense 2,601 3,537 4,819 1,715
Capital additions 13,936 24,929 5,656 1,846
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Twelve Months Ended March 31, 1998
- ---------------------------------------------------------------------------------------------------------------
Water Electric
------------------------------------------
Region I Region II Region III
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues $ 24,404 $ 60,272 $ 53,879 $ 12,949
Operating income before income taxes 6,210 11,449 12,578 4,061
Identifiable assets 88,178 113,897 161,386 26,234
Depreciation expense 2,375 3,123 4,685 1,016
Capital additions $ 11,253 $ 19,575 $ 11,283 $ 2,085
---------- ---------- ---------- ----------
</TABLE>
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<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING INFORMATION
Certain matters discussed in this report (including any
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 the Company or Registrant "believes,"
"anticipates," "expects" or words of similar import. Similarly, statements that
describe the Company'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 ready.
GENERAL
American States Water Company (AWR) was incorporated in 1998 in
connection with the formation of a holding company by Southern California Water
Company (SCW) and became a public company on July 1, 1998. AWR has no material
assets other than the common stock of SCW. 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 customer service area
(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. AWR has another subsidiary, American States Utility Services, Inc.
(ASUS) which contracts to lease, operate and maintain governmentally owned water
and wastewater systems and to provide other services to local governments to
assist them in the operation and maintenance of their water and wastewater
systems. Neither AWR nor ASUS are regulated by the CPUC.
SCW is organized into three regions and one electric customer
service area operating within 75 communities in 10 counties in the State of
California and provides water service in 21 customer service areas. Region I
incorporates 7 customer service areas in northern and central California, Region
II has 4 customer service areas located in Los Angeles; Region III incorporates
10 water customer service areas. 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 Sempra Energy
Corporation.
SCW served 242,882 water customers and 20,898 electric customers
at March 31, 1999, or a total of 263,780 customers, compared with 262,338 total
customers at March 31, 1998.
SCW's utility operations exhibit seasonal trends. Although SCW's
water utility operations have a diversified customer base, revenues derived from
commercial and residential water customers accounted for approximately 94.0% and
90.8% of total water revenues for the three and twelve months ended March 31,
1999, respectively as compared to 98.0% and 93.2% for the three and twelve
months ended March 31, 1998, respectively.
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<PAGE> 17
RESULTS OF OPERATION
Basic earnings per common share for the three months ended March
31, 1999 increased by 65.0% to $0.33 per share as compared to $0.20 per share
for the comparable period last year. Basic earnings for the twelve months ended
March 31, 1999 increased by 8.0% to $1.75 per share as compared to $1.62 per
share for the twelve months ended March 31, 1998. The increase in the recorded
results primarily reflects higher revenues during the first quarter of 1999 as
is more fully discussed below.
As compared to last year, water sales volumes for the three
months ended March 31, 1999 increased by 15.9% due primarily to the much drier
and warmer weather conditions throughout Southern California this year. Water
sales volumes for the twelve months ended March 31, 1999 decreased by 5.1% as
compared to the comparable period last year reflecting reduced sales during the
second quarter of 1998 as a result of the "El Nino" weather condition. Water
operating revenues for the three months ended March 31, 1999 increased by 23.3%
from the same time period ended March 31, 1998 due to the increase in water
volumes sold and the general rate increases effective January 1, 1999. As
compared to the twelve months ended March 31, 1998, water operating revenues
increased by 1.7% reflecting the net effect of lower water volumes sold and
general rate increases. Registrant implemented new rates in six of its customer
service areas in January 1999. See the section entitled "Rates and Regulation"
for more information.
Kilowatt-hour sales of electricity increased by 7.4% and 6.1%,
respectively, for the three and twelve months ended March 31, 1999 as compared
to last year due principally to lack of winter snows experienced in Registrant's
service area during the quarter, which increased the use of snow-making
machines. Electric operating revenues for the three and twelve month periods
ending March 31, 1999 increased by 2.2% and 2.7%, respectively, over the
comparable periods last year due principally to the increase in kilowatt-hour
sales to industrial power users, of which rates are relatively lower.
Purchased water costs increased by 31.9% for the three months
ended March 31, 1999 as compared to the same period ending in 1998 due to an
increase in volumes purchased. The three-month comparison is also affected by
reimbursements of approximately $852,000 received during the first quarter of
1998 compared with reimbursements of $286,000 received during the quarter ended
March 31, 1999. Purchased water costs for the twelve months ended March 31, 1999
decreased by 9.0% reflecting a 11.9% decrease in volumes purchased.
The cost of power purchased for pumping increased by 10.4% for
the three months ended March 31, 1999 due primarily to an increase in pumped
groundwater in Registrant's total water supply. For the twelve months ended
March 31, 1999, the cost decreased by 5.7% chiefly as the result of reduced
energy costs from SCW's suppliers.
As compared to the three and twelve months ended March 31, 1998,
the cost of power purchased for resale decreased by 14.1% and 7.1%,
respectively, for the three and twelve months ended March 31, 1999 due to
reduced accruals for energy demand from Registrant's energy supplier. Additional
accruals will be implemented in the second quarter of 1999.
Groundwater production assessments are 15.5% higher for the
three months ended March 31, 1999 due to increased volumes of pumped water in
SCW's total water supply. For the twelve months ended March 31, 1999,
groundwater production assessments increased by 8.2% reflecting additional
assessments associated with increased pumping in SCW's Metropolitan and Orange
County customer service areas.
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<PAGE> 18
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.
Registrant currently has a net under-collection position. Recovery of previously
under-collected supply cost was lower for the three and twelve months ended
March 31, 1999 than the same periods of 1998 due to expiration of surcharges
designed to recover those costs. It is anticipated that new rates effective
January 1999 will increase collection of these under-collected costs. The
balancing account mechanism insulates earnings from changes in the unit cost of
supply costs which are outside the immediate control of Registrant. However, the
balancing account is not designed to insulate earnings against changes in supply
mix.
Other operating expenses increased by 8.5% for the three months
ended March 31, 1999 as compared to the same periods ended March 31, 1998
reflecting increased costs for water treatment and laboratory testing, and
higher amounts accrued for uncollectibles, as the result of increased revenues.
As compared to the twelve months ended March 31, 1998, other operating expenses
increased by 14.6% due chiefly to an increase in the amount of time being
charged to this category.
Administrative and general expenses increased by 19.0% and 3.7%
for the three months and twelve months ended March 31, 1999 as compared to the
same periods ended March 31, 1998. This increase is due principally to an
increase in costs associated with the terminated acquisition of Dominguez
Services Corp., increased employee benefit costs, and additional amounts
reserved for legal proceedings. See the section entitled "Legal Proceedings" for
more information.
Depreciation expense increased by 18.0% and 16.7%, respectively,
for the three and twelve months ended March 31, 1999 reflecting, among other
things, the effects of recording approximately $38 million in net plant
additions during 1998, depreciation on which began in January 1999. In addition,
the final amortization of start-up and organizational costs associated with the
formation of AWR is reflected in the twelve months ended March 31, 1999. There
were no similar amortization costs for the twelve months ended March 31, 1998.
Maintenance expense increased by 16.4% and 7.7% for the three
and twelve months ended March 31, 1999 as compared to the three and twelve
months ended March 31, 1998, respectively, reflecting the effects of the wet
weather conditions experienced earlier in 1998 which hindered maintenance
activities.
Taxes on income increased by 54.3% and 7.2% for the three and
twelve months ended March 31, 1999 as compared to the three and twelve months
ended March 31, 1998 as a result of higher pre-tax income.
Other taxes increased by 5.1% for the three months ended March
31, 1999 as compared to the same period last year due to increased franchise
fees resulting from higher revenues. For the twelve months ended March 31, 1999,
the other tax expense decreased slightly chiefly as the result of reduced
payroll related taxes.
Other income decreased by 30.8% for the three months ended March
31, 1999 as compared to the same period last year resulting from the sale of a
water lease right in February of 1998. There was no similar income for the three
months ended March 31, 1999. As compared to the twelve months ended March, 1998,
other income decreased by 15.4% in the comparable period ended March 31, 1999
due principally to costs incurred in December 1998 associated with termination
of Registrant's non-regulated joint venture agreement.
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<PAGE> 19
Interest expense increased by 11.0% and 10.9% for the three and
twelve months ended March 31, 1999 as compared to the three and twelve months
ended March 31, 1998, respectively. The increases are due to $40 million in
additional long-term debt issued in January, 1999, partially offset by
retirement of $10 million of 10.10% note in December, 1998.
LIQUIDITY AND CAPITAL RESOURCES
AWR funds its operating expenses, dividends on its outstanding
Common and Preferred Shares and makes its mandatory sinking fund payments
principally through dividends from SCW. AWR has filed a Registration Statement
with the Securities and Exchange Commission (SEC) for issuance, from time to
time, of up to $60 million in Common Shares, Preferred Shares and/or debt
securities. The proceeds will be used primarily for investment in its
subsidiaries.
SCW funds the majority of its operating expenses, interest
payments on its debt and dividends on its outstanding Common Shares through
internal sources. SCW continues to rely on external sources, including
short-term bank borrowing, contributions-in-aid-of-construction, advances for
construction and install-and-convey advances, to fund the majority of its
construction expenditures.
SCW issued $40 million in long-term debt in January 1999 under a
Registration Statement filed with the SEC. The funds were used to reduce
short-term bank borrowings. The aggregate short-term borrowing capacity
available to SCW under its three bank lines of credit was $47 million as of
March 31, 1999. As of that date, there was no borrowing against these lines.
Because of the seasonal nature of its water and electric operations, SCW
utilizes its short-term borrowing capacity to finance current operating
expenses.
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 in accordance with industry standards, local requirements and CPUC
requirements. SCW's Board of Directors has approved anticipated net capital
expenditures of approximately $42.1 million for 1999. Neither AWR nor ASUS have
any material capital expenditures.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Registrant has no derivative financial instruments, financial
instruments with significant off-balance sheet risks or financial instruments
with concentrations of credit risk. The disclosure required is, therefore, not
applicable.
WATER SUPPLY
For the three months ended March 31, 1999, SCW supplied a total
of 16,065,000 ccf of water as compared to 13,886,000 ccf for the three months
ended March 31, 1998. Of the total 16,065,000 ccf of water supplied during the
first quarter of 1999, approximately 62.2% came from pumped sources and 37.7%
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 ended March 31, 1998, 63.7%, 36.2% and
0.1% was supplied from pumped sources, purchased from MWD and the Bureau,
respectively.
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<PAGE> 20
During the twelve months ended March 31, 1999, SCW supplied
80,556,000 ccf of water as compared to 84,050,000 ccf supplied during the twelve
months ended March 31, 1998. During the twelve month period ended March 31,
1999, pumped sources provided 60.6% of total supply, 39.3% was purchased from
MWD and the remaining 0.1% was supplied by the Bureau. For the twelve months
ended March 31, 1998, 55.5%, 42.7% and 1.8%, respectively, was supplied from
pumped sources, purchased from MWD and 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 1999. 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.
The outlook for water supply in 1999 remains favorable. The
California Department of Water Resources (DWR) has announced that during 1999,
an abundant water supply will be available to the State Water Project and DWR
expects to make 100 percent of water deliveries. In those customer services
areas of SCW which pump groundwater, overall groundwater conditions remains at
adequate levels.
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 U. S. Environmental Protection Agency (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 DOHS, 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 according to
requirements listed in the SDWA. Water from wells found to contain levels of
contaminants above the established MCLs is treated before it is delivered to
customers.
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<PAGE> 21
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 CPUC 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
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 adopted an Interim ESWTR applicable only to systems
serving greater than 10,000 persons. The long-term 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 is also subject to the new regulations concerning
disinfection/disinfection by-products (DBP's), Stage I of which regulations were
effective in November, 1998 with full compliance required by 2001. Stage I
requires reduction of tri-halomethane contaminants from 100 micrograms per liter
to 80 micrograms per liter. Two of SCW's systems are immediately impacted by
this rule. SCW implemented modifications to the treatment process in its Bay
Point and Cordova systems. It is anticipated that both systems will be in full
compliance by 2001.
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 Rule
By August 1999, 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 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.
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<PAGE> 22
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. The 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. It is anticipated that the completed study will be available for
review in 1999. 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
National Academy of Sciences has completed its study and has agreed with much of
EPA's original findings but has slightly reduced the ingestion risk initially
assumed by EPA. 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 by August 1999. Although Registrant is unable to predict the standard
for radon, Registrant itself is currently conducting studies to determine the
best treatment for affected wells.
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 commits 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. Aerojet-General Corporation 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 parts per billion (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
periodically monitors these wells to determine that levels of perchlorate are
below the action level currently in effect.
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<PAGE> 23
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.
Aerojet-General Corporation has reimbursed SCW for constructing 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 Aerojet-General Corporation 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. SCW and Aerojet-General
Corporation have reached an agreement in principal on these matters. The
agreement requires initial payment of approximately $950,000 for costs
associated with certain water supply facilities. The remainder of the costs are
subject to further reimbursement, including interest, over no more than a
fifteen month period. The reimbursement from Aerojet-General reduces SCW's
utility plant and costs of purchased water.
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 within
SCW's Culver City customer 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. Pursuant to an agreement with SCW,
two of the potentially responsible parties have reimbursed SCW's legal and
consulting costs related to this matter as well as for increased costs incurred
by SCW in purchasing replacement water. SCW and such parties have negotiated a
month-to-month extension of this agreement which is anticipated to remain
effective until the underlying groundwater basin contamination is remediated.
Bear Valley Electric
SCW has been, in conjunction with the Southern California Edison
unit of Edison International, planning to upgrade transmission facilities to
115kv (the "115kv Project")in order to meet increased energy and demand
requirements. The 115kv Project is subject to an environmental impact report
(EIR) and delays in approval of the EIR may impact service in SCW's Bear Valley
electric customer service area. SCW has, however, taken other measures,
including some measures that will be enacted on an emergency basis, to meet load
growth in order mitigate delays in approval of the EIR.
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<PAGE> 24
RATES AND REGULATION
SCW is subject to regulation by the CPUC, which has broad powers
with respect to service and facilities, rates, classifications of accounts,
valuation of properties, the purchase, disposition and mortgaging of properties
necessary or useful in rendering public utility service, the issuance of
securities, the granting of certificates of convenience and necessity as to the
extension of services and facilities and various other matters. AWR and ASUS are
not directly regulated by the CPUC. The CPUC does, however, regulate certain
transaction between SCW and its unregulated affiliates.
The 22 customer service areas of SCW are grouped into 16 water
districts and one electric district for ratemaking purposes. Water rates vary
among the 16 ratemaking districts due to differences in operating conditions and
costs. SCW monitors operations on a regional basis in each of these districts so
that applications for rate changes may be filed, when warranted. Under the
CPUC's practices, rates may be increased by three methods: general rate case
increases (GRC's), offsets for certain expense increases and advice letter
filings related to certain plant additions. GRC's are typically for three-year
periods, which include step increases for the second and third year. Rates are
based on projected expenses and capital costs. GRC's have a typical regulatory
lag of one year. Offset rate increases typically have a two to four month
regulatory lag.
New water rates were implemented in three of SCW's customer
service areas in January 1, 1998 to recover costs associated with capital
projects in those areas. Step increases in rates were effective in April 1998 in
Barstow and in May 1998 in Santa Maria. Increased rates for six additional water
ratemaking districts and recovery of costs associated with SCW's general office
functions were effective January 1, 1999. Step increases in rate for
Arden-Cordova, Bay Point and Los Osos were also effective in January, 1999.
Applications to increase water rates were filed for four water
ratemaking districts in March 1999. The new rates, if authorized in total or in
part by the CPUC, would be effective January 1, 2000.
SCW has filed an application with the CPUC to combine tariff
schedules into regional rates for the customer service areas that make up SCW's
Region III. A final decision from the CPUC is anticipated by the fourth quarter
of 1999.
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.
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<PAGE> 25
On April 22, 1999, the CPUC issued an order denying SCW's
application 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. SCW is investigating its options to recover
its investment in SWP including contributions from developers on a per-lot or
other basis or, failing that, sale of its 500 acre-foot entitlement in SWP. See
the "Notes to Financial Statements" for more information.
YEAR 2000 ISSUE
Registrant continues to evaluate its exposure to the Year 2000
(Y2K) problem that arises from the fact that many existing computer systems may
contain date sensitive embedded technology that uses only two digits to identify
a year in the date field. Based on the assumption that the first two digits of
the date field are always "19", such systems may misinterpret dates after
December 31, 1999. Because Registrant is dependent upon the proper functioning
of these computer systems and other equipment containing date sensitive
technology, a failure of these systems could have a material and adverse affect
on Registrant resulting in business interruption or shutdown, financial loss,
regulatory citations and legal liability.
Registrant has been actively assessing its Y2K readiness since
early 1997 and has inventoried its significant computer hardware and software
programs. Since Registrant is dependent upon its management information and
customer service systems, upgrades to these systems have been a priority.
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, all of which are intended to be Y2K ready. All major upgrades to
these systems are completed and were operational at year-end 1998. Costs
associated with the implementation and upgrade of major management information
and customer service software systems, as well as upgrades to mainframe hardware
systems, have been approved by the CPUC and are being recovered through rates.
In addition to work being done on its internal systems,
Registrant has sought compliance certification from external vendors and service
providers. Testing on Registrant's interface with financial and other
institutions with which it does business is being conducted to ensure Y2K
readiness. In order to more fully address Y2K readiness of its field equipment,
major vendors and service providers, Registrant engaged the services of a
nationally-recognized business consulting firm and has completed its written
plan to address the Y2K issue. Registrant has established a Year 2000 Task Force
consisting of senior management and operating personnel which will complete the
inventory of computer systems and other devices with embedded technology, as
well as other considerations potentially not revealed in preliminary internal
analyses.
Registrant's general process for addressing the Y2K issue is (i)
to inventory all systems that may have a potential Y2K impact, (ii) to determine
the materiality of these non-Y2K ready systems, (iii) to replace and test,
correct and test, or prepare for the failure of material items that have been
determined to be non-Y2K ready, and (iv) to prepare contingency plans. Some,
less critical systems may not be fully Y2K ready, but are not anticipated to
materially affect Registrant's operations.
Registrant is significantly dependent on third party suppliers,
such as energy and telecommunication companies and wholesale water suppliers. In
order to conduct its business, Registrant has initiated due diligence with
certain of its major service providers to address their Y2K readiness. In the
event that such suppliers might be adversely affected by Y2K, Registrant is
preparing its contingency plan which will likely include, among other things,
increased staffing during critical periods, manual back-up for automated systems
and the use of electric generators capable of providing power during a
23
<PAGE> 26
black-out. Registrant does not have, and may never fully have, sufficient
information about the Y2K exposure or remediation plans of these third parties
to adequately predict the risks posed by them to Registrant. If the third
parties have Y2K problems that are not remedied, resulting problems could
include loss of utility services and disruption of water supplies.
To date, there have been no significant costs associated with
Y2K readiness that have not been approved by the CPUC for recovery through
rates. Registrant estimates that it may incur up to $800,000 in expense
depending on the results of on-going tests, to address Y2K readiness. Registrant
believes that the future costs, which are prudently incurred, will also be
allowed for recovery through rates. The CPUC has notified all utilities under
its jurisdiction, including SCW, that it will review their Y2K preparations.
RISK FACTOR SUMMARY
This section (written in plain English) summarizes certain risks
of our business that may affect our future financial results. We also
periodically file with the Securities and Exchange Commission documents that
include more information on these risks. It is important for investors to read
these documents.
Litigation
SCW has recently been sued in nine water-quality related lawsuits:
o a suit filed on April 24, 1997 alleging personal injury and
property damage as a result of the sale of water from wells
located in an area of the San Gabriel Valley that has been
designated a federal superfund site
o a suit filed on November 3, 1997 alleging personal injury and
property damage as a result of the sale of water; few of our
systems are located in the geographical area covered by this
suit
o a suit filed on January 8, 1998 alleging personal injury and
property damage as a result of the delivery of contaminated
water in SCW's Arden-Cordova service area
o a suit filed on February 2, 1998 alleging personal injury and
property damage as a result of the sale of water from wells
located in an area of the San Gabriel Valley that has been
designated a superfund site
o a suit filed on February 4, 1998 alleging personal injury and
property damage as a result of the sale of water from wells
located in an area of the San Gabriel Valley that has been
designated a superfund site
o a suit filed in April 1998 alleging personal injury and property
damage as a result of the delivery of contaminated water in
SCW's Arden-Cordova service area
o three suits filed on July 30, 1998 alleging personal injury and
property damage as a result of the sale of water from wells
located in an area of the San Gabriel Valley that has been
designated a superfund site
In March 1998, the CPUC issued an order instituting investigation (the
"OII") as a result of these types of suits being filed against water utilities
in California. The CPUC is seeking to determine:
o whether existing standards and policies regarding drinking water
quality adequately protect the public health
o whether water utilities are following existing standards
24
<PAGE> 27
The lawsuits have been stayed pending the outcome of the OII and a
hearing held on April 19, 1999 before the First District Court of Appeals. We
anticipate the Court will issue a ruling by June 30, 1999. We anticipate that
the CPUC will issue a decision in the OII on or about June 1999. We are unable
to predict the nature of the Court's actions, the CPUC's final decision or the
outcome of the lawsuits. An adverse outcome in this type of litigation is,
however, likely to be material.
The CPUC has authorized a memorandum account for legal expenses incurred
by water utilities, including SCW, in the water quality lawsuits. Under the
memorandum account procedure, SCW may recover litigation costs from ratepayers
to the extent authorized by the CPUC. The CPUC has not yet authorized SCW to
recover any of its litigation costs.
Environmental Regulation
We are subject to increasingly stringent environmental regulations that
will result in increasing capital and operating costs. These regulations
include:
o the 1996 amendments to the Safe Drinking Water Act that require
increased testing and treatment of water to reduce specified
contaminants to minimum containment levels
o interim regulations expected to be adopted before the end of
1998 requiring increased surface-water treatment to decrease the
risk of microbial contamination; these regulations will affect
SCW's five surface water treatment plants
o additional regulation of disinfection/disinfection byproducts
expected to be adopted before the end of 1998; these regulations
will potentially affect two of SCW's systems
o additional regulations expected to be adopted before the end of
1998 requiring disinfection of certain groundwater systems;
these regulations will potentially impact several of SCW's
systems using groundwater supplies
o potential regulation of radon and arsenic
o new California requirements to fluoridate public water systems
serving over 10,000 customers
We may be able to recover costs incurred to comply with these
regulations through the ratemaking process for our regulated systems. We may
also be able to recover certain of these costs under our contractual
arrangements with municipalities. In certain circumstances, we may recover costs
from parties responsible or potentially responsible for contamination.
Rates and Regulation
SCW is subject to regulation by the CPUC. AWR and ASUS are not directly
subject to CPUC regulation. The CPUC may, however, regulate transactions between
SCW and AWR, including the manner in which overhead costs are allocated between
SCW and AWR and the pricing of services rendered by SCW to AWR.
SCW's revenues depend substantially on the rates that it is permitted to
charge its customers. SCW may increase rates in three ways:
o by filing for a general rate increase
o by filing for recovery of certain expenses
o by filing an "advice letter" for certain plant additions,
thereby increasing rate base
In addition, SCW recovers certain supply costs through a balancing
account mechanism. Supply costs include the cost of purchased water and power
and groundwater production assessments. The balancing account mechanism is
intended to insulate SCW's earnings from changes in supply costs that
25
<PAGE> 28
are beyond SCW's control. The balancing account is not, however, designed to
insulate SCW's earnings against changes in supply mix. As a result, SCW may not
recover increased costs due to increased use of purchased water through the
balancing account mechanism. In addition, balancing account adjustments, if
authorized by the CPUC, may result in either increases or decreases in revenues
attributable to supply costs incurred in prior periods, depending upon whether
there has been an undercollection or overcollection of supply costs.
There are also a number of matters pending before the CPUC that may
affect our future financial results. These matters include:
o applications filed by SCW to increase rates in four of its 16
rate-making jurisdictions; a final decision is not expected
until near year-end 1999
o an application filed to consolidate the rate-making
jurisdictions located in SCW's Region III area into a single
tariff
o the OII
o new guidelines under consideration by the CPUC for the
acquisition and merger of water utilities and for privatization
transactions
Adequacy of Water Supplies
The adequacy of water supplies varies from year to year depending upon a
variety of factors, including
o rainfall
o the amount of water stored in reservoirs
o the amount used by our customers and others
o water quality, and
o legal limitations on use.
As a result of heavier than normal rainfall in the winter of 1997-1998,
most of California's reservoirs remain at or near capacity and the outlook for
water supply in the near term is generally favorable. Population growth and
increases in the amount of water used have, however, increased limitations on
use to prevent overdrafting of groundwater basins. The import of water from the
Colorado River, one of our important sources of supply, is expected to decrease
in future years due to the requirements of the Central Arizona Project. We also
have in recent years taken wells out of service due to water quality problems.
Water shortages could be caused by above factors and may affect us in
several ways:
o they adversely affect supply mix by causing us to rely on more
expensive purchased water
o they adversely affect operating costs
o they may result in an increase in capital expenditures for
building pipelines to connect to alternative sources of supplies
and reservoirs and other facilities to conserve or reclaim water
We may be able to recover increased operating and construction costs for
our regulated systems through the ratemaking process. We may also be able to
recover certain of these costs under the terms of our contractual agreements
with municipalities.
26
<PAGE> 29
In certain circumstances, we may recover these costs from third parties
that may be responsible, or potentially responsible, for groundwater
contamination. We are currently completing negotiations with Aerojet General
Corporation regarding costs associated with the cleanup of the groundwater
supply for our Arden-Cordova System and for the increased costs of purchasing
water and developing new sources of groundwater supply. We are also negotiating
with two potentially responsible parties on matters relating to the clean-up and
purchase of replacement water in the Charnock Basin located in the cities of
Santa Monica and Culver City. These two potentially responsible parties have
previously reimbursed us for replacement water and certain legal and consulting
expenses. The Charnock Basin is in SCW's service territory.
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 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 (TCE), perchloroethene (PCE), 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.
On June 24, 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 Order Instituting
Investigation (OII) proceeding described below. Plaintiffs in the Adler matter
petitioned the Second District Court of Appeal for a Writ of Mandamus to have
the stay lifted. Prior to hearings before the Appellate Court, the Court advised
all parties of a potential conflict of interest due to the fact that two
clerical staff members of the Court were plaintiffs in one of the consolidated
cases, Santamaria v. Suburban Water Systems. As a result, the Adler matter and
all the consolidated cases were transferred to the First District Court of
Appeal in San Francisco. The Writ of Mandamus was heard by the First District
Appellate Court on April 19, 1999.
SCW was served on November 3, 1997 as Doe 1 in the matter of
Santamaria v. Suburban Water Systems which was filed in Los Angeles Superior
Court (the "Santamaria Matter"). On August 27, 1998, the judge assigned to the
Santamaria Matter sustained SCW's demurrer without leave to amend and dismissed
the action against SCW. Plaintiff's filed a Notice of Appeal with the Second
District Court of Appeals and this matter was consolidated with the Adler and
other cases. A conflict of interest arose as was mentioned previously. As a
result, the Notice of Appeal was transferred to the First District Court of
Appeal. The Santamaria matter heard by the First District Appellate Court on
April 19, 1999, along with the other cases. Registrant is unable to predict at
this time what actions the Court may take or what rulings the Court may make
with regard to these matters.
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
27
<PAGE> 30
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"). Plaintiffs allege that 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. SCW filed Demurrers and Motion to Strike in this matter on June 5,
1998. On August 31, 1998, the judge assigned to the Allen Matter, acting on the
Court's own motion, issued a stay until June 15, 1999 of all proceedings in the
Allen matter pending the outcome of the CPUC's OII proceeding. The plaintiff's
petitioned the Third District Court of Appeal for a Writ of Mandamus to overrule
the stay. The Court denied the petition. Plaintiff's then petitioned the
California Supreme Court for relief from the Appellate Court's ruling. The
California Supreme Court denied plaintiff's petition. Thus the stay in the Allen
Matter remains in effect.
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. Plaintiff's seek damages, including
general, punitive and exemplary damages, as well as attorney's fees, costs of
suit, injunctive and 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. On
August 31, 1998, the judge assigned to the Adams Matter, acting on the Court's
own motion, issued a stay until June 15, 1999 of all proceedings in the Adams
matter pending the outcome of the CPUC's OII proceeding. The plaintiff's
petitioned the Third District Court of Appeal for a Writ of Mandamus to overrule
the stay. The Court denied the petition. Plaintiff's then petitioned the
California Supreme Court for relief from the Appellate Court's ruling. The
California Supreme Court denied plaintiff's petition. Thus the stay in the Adams
Matter remains in effect.
On July 30, 1998, a complaint in multiple counts, styled
Georgianna Dominguez, et al. v. Southern California Water Company, et al., was
filed in Los Angeles Superior Court seeking recovery for negligence, wrongful
death, strict liability, permanent trespass, continuing trespass, public
permanent nuisance, public continuing nuisance, private permanent nuisance,
private continuing nuisance, negligence per se, absolute liability for
ultrahazardous activity and fraudulent concealment on behalf of six plaintiffs
(the "Dominguez Matter"). Plaintiff's seek damages, including general and
special damages according to proof, punitive and exemplary damages, as well as
attorney's fees, costs of suit and other unspecified relief. SCW was served with
the complaint on September 21, 1998.
By Stipulation, the Dominguez Matter has been "attached" to the
Adler Matter, and the parties have agreed that the Dominguez Matter will be
bound by actions taken in the Adler Matter. Parties to the Stipulation have,
however reserved any rights that might be distinct in the Dominguez Matter.
Thus, the Dominguez matter is presently under the same stay order as was issued
in the Adler Matter.
On October 13, 1998, a complaint in multiple counts was filed in
Los Angeles Superior Court, styled Anderson, et al. v. Suburban Water Systems,
et al., which seeks recovery for negligence, wrongful death, strict liability,
permanent trespass, continuing trespass, continuing nuisance, permanent
nuisance, negligence per se, absolute liability for ultrahazardous activity,
fraudulent concealment, conspiracy/fraudulent concealment, battery and unfair
business practices on behalf of 180 plaintiffs (the "Anderson Matter").
Plaintiff's seek damages, including general and special damages according to
proof,
28
<PAGE> 31
punitive and exemplary damages, as well as attorney's fees, costs of suit and
other unspecified relief. SCW has not yet been served in this matter.
On December 30, 1998, SCW was named as a defendant in a
complaint in multiple counts, styled Abarca, et al. v. City of Pomona, et al.,
filed in Los Angeles Superior Court which seeks recovery for negligence,
wrongful death, strict liability, permanent trespass, continuing trespass,
continuing nuisance, permanent nuisance, negligence per se, absolute liability
for ultrahazardous activity, fraudulent concealment, conspiracy/fraudulent
concealment, battery and unfair business practices on behalf of 383 plaintiffs
(the "Abarca Matter"). Plaintiff's seek damages, including general and special
damages according to proof, punitive and exemplary damages, as well as
attorney's fees, costs of suit and other unspecified relief. SCW has not yet
been served in this matter.
SCW was served on March 19, 1999 as Doe 1 in the matter styled
Celi, et al. v. San Gabriel Valley Water Company, et al., filed in Los Angeles
Superior Court which seeks recovery for negligence, wrongful death, strict
liability, permanent trespass, continuing trespass, public continuing nuisance,
public permanent nuisance, private permanent nuisance, private continuing
nuisance, negligence per se, absolute liability for ultrahazardous activity and
fraudulent concealment (the "Celi Matter"). Plaintiff's seek damages, including
general and special damages according to proof, punitive and exemplary damages,
as well as attorney's fees, costs of suit and other unspecified relief.
SCW was served on March 19, 1999 as Doe 3 in the matter styled
Boswell, et al. v. Suburban Water Systems, et al., filed in Los Angeles Superior
Court which seeks recovery for negligence, wrongful death, strict liability,
permanent trespass, continuing trespass, public continuing nuisance, public
permanent nuisance, private permanent nuisance, private continuing nuisance,
negligence per se, absolute liability for ultrahazardous activity and fraudulent
concealment (the "Boswell Matter"). Plaintiff's seek damages, including general
and special damages according to proof, punitive and exemplary damages, as well
as attorney's fees, costs of suit and other unspecified relief.
SCW was served on March 19, 1999 as Doe 1 in the matter styled
Demciuc, et al. v. Suburban Water Systems, et al., filed in Los Angeles Superior
Court which seeks recovery for negligence, wrongful death, strict liability,
permanent trespass, continuing trespass, public continuing nuisance, public
permanent nuisance, private permanent nuisance, private continuing nuisance,
negligence per se, absolute liability for ultrahazardous activity and fraudulent
concealment (the "Demciuc Matter"). Plaintiff's seek damages, including general
and special damages according to proof, punitive and exemplary damages, as well
as attorney's fees, costs of suit and other unspecified relief.
SCW was served on March 19, 1999 as Doe 1 in the matter styled
Criner, et al. v. San Gabriel Valley Water Company, et al., filed in Los Angeles
Superior Court which seeks recovery for negligence, wrongful death, strict
liability, permanent trespass, continuing trespass, public continuing nuisance,
public permanent nuisance, private permanent nuisance, private continuing
nuisance, negligence per se, absolute liability for ultrahazardous activity and
fraudulent concealment (the "Criner Matter"). Plaintiff's seek damages,
including general and special damages according to proof, punitive and exemplary
damages, as well as attorney's fees, costs of suit and other unspecified relief.
The Celi, Boswell, Domcuic and Criner Matters will be bound by
actions taken in the Adler Matter, although the parties have reserved any rights
that might be distinct in these matters.
In light of the breadth of plaintiff claims in these matters,
the lack of factual information regarding plaintiff's claims and injuries, if
any, and the fact that no discovery has yet been completed,
29
<PAGE> 32
SCW is unable at this time to determine what, if any, potential liability it may
have with respect to these claims. Registrant intends to vigorously defend
against these claims.
ORDER INSTITUTING INVESTIGATION
In March 1998, the CPUC issued an Order Instituting
Investigation (OII) to regulated water utilities in the state of California,
including SCW. The purpose of the OII is to determine 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 delineates the constitutional and
statutory jurisdiction of the CPUC and the California Department of Health
Services (DOHS) in establishing and enforcing adherence to water quality
standards. The CPUC's jurisdiction provides for the establishment of rates which
permit water utilities to furnish safe water meeting the established water
quality standards at prices which are both affordable and allow the utility to
earn a reasonable return on its investment. SCW has provided its response to a
series of questions dealing with the adequacy 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
increased enforcement and additional drinking water standards are necessary.
On May 3, 1999, the CPUC issued a draft of its Scoping
Memorandum in the OII which established the focus of the OII. The Scoping
Memorandum requires the water utilities, including SCW, and all other parties to
the OII to provide answers, by May 14, 1999, to additional questions. SCW
anticipates that it will provide the additional information in a timely manner,
although the date may be extended.
The CPUC has issued a proposed decision which established that
the CPUC has jurisdiction over those water utilities subject to its regulation
in matters related to water quality. A final decision in this matter is
anticipated by the end of May 1999. Registrant is unable to predict if the
final decision will differ in any manner from the proposed decision.
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.
ITEM 2. CHANGES IN SECURITIES
As of March 31, 1999, earned surplus amounted to $57,062,000,
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, 1999, 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.
30
<PAGE> 33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On or about March 24, 1999, common and preferred shareholders of
AWR 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 three Class I
directors to serve for a two-year term expiring at the end of the Annual Meeting
of Shareholders in 2001, and until their successors are chosen and qualified.
The following table presents the results of the election presented at the Annual
Meeting of Shareholders held on April 27, 1999:
<TABLE>
<CAPTION>
Name "For" "Against"
---- ----- ---------
<S> <C> <C>
James L. Anderson 95.71% 4.29%
Anne R Holloway 95.25% 4.75%
Floyd E. Wicks 95.74% 4.26%
</TABLE>
At the organizational meeting of the Board of Directors, Lloyd E. Ross was
elected as Chairman of the Board.
ITEM 5. OTHER INFORMATION
On April 26, 1999, the Board of Directors of Registrant declared
a regular quarterly dividend of $0.32 per common share. The dividend will be
paid June 1, 1999 to shareholders of record as of the close of business on May
10, 1999. 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.
31
<PAGE> 34
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
By : s/ Linda J. Matlick
-----------------------------------------
Linda J. Matlick
Controller
Southern California Water Company
Dated: May 12, 1999
32
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS AND INCOME STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS FILED
HEREIN.
</LEGEND>
<CIK> 0000092116
<NAME> SOUTHERN CALIFORNIA WATER COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 421,731
<OTHER-PROPERTY-AND-INVEST> 763
<TOTAL-CURRENT-ASSETS> 40,194
<TOTAL-DEFERRED-CHARGES> 30,112
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 492,800
<COMMON> 22,394
<CAPITAL-SURPLUS-PAID-IN> 74,937
<RETAINED-EARNINGS> 57,062
<TOTAL-COMMON-STOCKHOLDERS-EQ> 154,393
400
1,600
<LONG-TERM-DEBT-NET> 160,469
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 160,119
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 94
40
<CAPITAL-LEASE-OBLIGATIONS> 908
<LEASES-CURRENT> 464
<OTHER-ITEMS-CAPITAL-AND-LIAB> 0
<TOT-CAPITALIZATION-AND-LIAB> 492,800
<GROSS-OPERATING-REVENUE> 36,132
<INCOME-TAX-EXPENSE> 2,267
<OTHER-OPERATING-EXPENSES> 28,011
<TOTAL-OPERATING-EXPENSES> 30,278
<OPERATING-INCOME-LOSS> 5,854
<OTHER-INCOME-NET> 99
<INCOME-BEFORE-INTEREST-EXPEN> 5,953
<TOTAL-INTEREST-EXPENSE> 2,976
<NET-INCOME> 2,977
22
<EARNINGS-AVAILABLE-FOR-COMM> 2,955
<COMMON-STOCK-DIVIDENDS> 2,867
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 9,596
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
