<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 SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
COMMISSION REGISTRANT AND STATE OF INCORPORATION IRS EMPLOYER
File No. Address and Telephone Number Identification No.
- ---------- ------------------------------------- ------------------
<S> <C> <C>
333-47647 American States Water Company 95-4676679
(A California Corporation)
630 East Foothill Boulevard
San Dimas, California 91773-9016
909-394-3600
000-01121 Southern California Water Company 95-1243678
(A California Corporation)
630 East Foothill Boulevard
San Dimas, California 91773-9016
909-394-3600
</TABLE>
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
American States Water Company Yes [x] No [ ]
Southern California Water Company Yes [x] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 29, 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 October 29, 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
September 30, 1999 and December, 1998 2-3
Consolidated Statements of Income of American States Water Company for
the Three Months Ended September 30, 1999 and September 30, 1998 4
Consolidated Statements of Income of American States Water Company for
the Nine Months Ended September 30, 1999 and September 30, 1998 5
Consolidated Statements of Income of American States Water Company for
the Twelve Months Ended September 30, 1999 and September 30, 1998 6
Consolidated Statements of Cash Flow of American States Water Company for
the Nine Months Ended September 30, 1999 and September 30, 1998 7
Consolidated Balance Sheets of Southern California Water Company as of
September 30, 1999 and December 31, 1998 8-9
Consolidated Statements of Income of Southern California Water Company for
the Three Months Ended September 30, 1999 and September 30, 1998 10
Consolidated Statements of Income of Southern California Water Company for
the Nine Months Ended September 30, 1999 and September 30, 1998 11
Consolidated Statements of Income of Southern California Water Company for
the Twelve Months Ended September 30, 1999 and September 30, 1998 12
Consolidated Statements of Cash Flow of Southern California Water Company for
the Nine Months Ended September 30, 1999 and September 30, 1998 13
Notes to Financial Statements 14-16
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operation 17-31
Item 3: Quantitative and Qualitative Disclosures About Market Risks 32
PART II OTHER INFORMATION
Item 1: Legal Proceedings 32-34
Item 2: Changes in Securities 34
Item 3: Defaults Upon Senior Securities 34
Item 4: Submission of Matters to a Vote of Security Holders 34
Item 5: Other Information 34
Item 6: Exhibits and Reports on Form 8-K 34
</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 American States 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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -----------
(Unaudited)
(in thousands)
<S> <C> <C>
UTILITY PLANT, at cost
Water ......................................... $ 511,133 $ 482,989
Electric ...................................... 35,326 35,171
--------- ---------
546,459 518,160
Less -- Accumulated depreciation .............. (148,500) (138,423)
--------- ---------
397,959 379,737
Construction work in progress ................. 42,608 35,016
--------- ---------
440,567 414,753
--------- ---------
OTHER PROPERTY AND INVESTMENTS .................. 807 1,077
--------- ---------
CURRENT ASSETS
Cash and cash equivalents ..................... 3,479 620
Accounts receivable -
Customers, less reserves of $644
in 1999 and $403 in 1998 .................. 10,921 7,626
Other ....................................... 5,631 5,301
Unbilled revenue .............................. 13,124 9,303
Materials and supplies, at average cost ....... 1,228 994
Supply cost balancing accounts ................ 4,754 4,300
Prepayments and other ......................... 5,192 5,988
Accumulated deferred income taxes - net ....... 5,689 5,156
--------- ---------
50,018 39,288
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets ................. 20,410 21,506
Other deferred charges ........................ 8,771 8,047
--------- ---------
29,181 29,553
--------- ---------
$ 520,573 $ 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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -----------
(Unaudited)
(in thousands)
<S> <C> <C>
CAPITALIZATION
Common shareholders' equity ................... $ 159,734 $ 154,299
Preferred shares .............................. 1,600 1,600
Preferred shares subject to mandatory
redemption requirements ..................... 400 400
Long-term debt ................................ 160,217 120,809
--------- ---------
321,951 277,108
--------- ---------
CURRENT LIABILITIES
Notes payable to banks ........................ 11,000 38,000
Long-term debt and preferred shares
due within one year ......................... 510 260
Accounts payable .............................. 13,499 10,218
Taxes payable ................................. 9,157 5,900
Accrued interest .............................. 3,362 1,405
Other accrued liabilities ..................... 11,979 7,985
--------- ---------
49,507 63,768
--------- ---------
OTHER CREDITS
Advances for construction ..................... 56,650 54,743
Contributions in aid of construction .......... 38,850 36,530
Accumulated deferred income taxes - net ....... 48,141 46,902
Unamortized investment tax credits ............ 3,087 3,155
Regulatory tax-related liability .............. 1,873 1,906
Other ......................................... 514 559
--------- ---------
149,115 143,795
--------- ---------
$ 520,573 $ 484,671
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
------------- -----------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ....................................... $ 48,357 $ 43,813
Electric .................................... 3,240 3,189
--------- ---------
51,597 47,002
--------- ---------
OPERATING EXPENSES
Water purchased ............................. 12,628 11,104
Power purchased for pumping ................. 2,127 2,280
Power purchased for resale .................. 1,629 1,320
Groundwater production assessment ........... 1,832 1,934
Supply cost balancing accounts .............. (332) 182
Other operating expenses .................... 3,783 3,840
Administrative and general expenses ......... 6,792 5,151
Depreciation ................................ 3,380 3,639
Maintenance ................................. 2,064 1,770
Taxes on income ............................. 5,705 4,740
Other taxes ................................. 1,723 1,610
--------- ---------
41,331 37,570
--------- ---------
Operating income ............................ 10,266 9,432
OTHER INCOME/(LOSS) ............................. 150 (209)
--------- ---------
Income before interest charges .............. 10,416 9,223
INTEREST CHARGES ................................ 3,726 2,849
--------- ---------
NET INCOME ...................................... 6,690 6,374
DIVIDENDS ON PREFERRED SHARES ................... (22) (23)
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ...... $ 6,668 $ 6,351
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.... 8,958 8,958
========= =========
Basic Earnings Per Common Share ................. $ 0.74 $ 0.71
========= =========
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 BALANCE SHEETS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
1999 1998
------------- -----------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ....................................... $ 119,914 $ 102,127
Electric .................................... 9,931 9,831
--------- ---------
129,845 111,958
--------- ---------
OPERATING EXPENSES
Water purchased ............................. 26,946 24,529
Power purchased for pumping ................. 5,140 4,904
Power purchased for resale .................. 5,150 3,764
Groundwater production assessment ........... 5,520 5,542
Supply cost balancing accounts .............. (453) (1,055)
Other operating expenses .................... 11,170 10,866
Administrative and general expenses ......... 20,544 15,897
Depreciation ................................ 10,270 9,588
Maintenance ................................. 5,874 5,432
Taxes on income ............................. 11,395 8,484
Other taxes ................................. 4,918 4,607
--------- ---------
106,474 92,558
--------- ---------
Operating income ............................ 23,371 19,400
OTHER INCOME .................................... 409 (78)
--------- ---------
Income before interest charges .............. 23,780 19,322
INTEREST CHARGES ................................ 9,707 8,338
--------- ---------
NET INCOME ...................................... 14,073 10,984
DIVIDENDS ON PREFERRED SHARES ................... (66) (68)
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ...... $ 14,007 $ 10,916
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ... 8,958 8,958
========= =========
Basic Earnings Per Common Share ................. $ 1.56 $ 1.22
========= =========
Dividends Declared Per Common Share ............. $ 0.960 $ 0.945
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 8
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
FOR THE TWELVE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
------------- -----------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ....................................... $ 152,645 $ 135,138
Electric .................................... 13,301 13,325
--------- ---------
165,946 148,463
--------- ---------
OPERATING EXPENSES
Water purchased ............................. 33,251 31,949
Power purchased for pumping ................. 7,245 7,006
Power purchased for resale .................. 6,399 5,302
Groundwater production assessment ........... 7,545 7,007
Supply cost balancing accounts .............. 630 (1,083)
Other operating expenses .................... 14,762 14,218
Administrative and general expenses ......... 26,635 21,819
Depreciation ................................ 13,219 12,323
Maintenance ................................. 7,753 7,286
Taxes on income ............................. 13,041 11,098
Other taxes ................................. 6,436 6,175
--------- ---------
136,916 123,100
--------- ---------
Operating income ............................ 29,030 25,363
OTHER INCOME .................................... 1,257 223
--------- ---------
Income before interest charges .............. 30,287 25,586
INTEREST CHARGES ................................ 12,576 10,979
--------- ---------
NET INCOME ...................................... 17,711 14,607
DIVIDENDS ON PREFERRED SHARES ................... (88) (91)
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ...... $ 17,623 $ 14,516
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ... 8,958 8,958
========= =========
Basic Earnings Per Common Share ................. $ 1.97 $ 1.62
========= =========
Dividends Declared Per Common Share ............. $ 1.275 $ 1.260
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 9
AMERICAN STATES WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
------------- -----------
(in thousands)
<S> <C> <C>
OPERATING REVENUES
CASH FLOWS FROM -
Operating Activities:
Net income .................................. $ 14,073 $ 10,985
Adjustments for non-cash items:
Depreciation and amortization ............... 10,667 9,926
Deferred income taxes and
investment tax credits .................. 1,701 3,447
Other - net ............................... (2,308) 3,408
Changes in assets and liabilities:
Accounts receivable ....................... (3,295) (1,958)
Prepayments ............................... 796 3,410
Supply cost balancing accounts ............ (454) (1,098)
Accounts payable .......................... 3,281 109
Taxes payable ............................. 3,257 1,058
Unbilled revenue .......................... (3,821) (2,731)
Other ..................................... 5,383 (376)
--------- ---------
Net Cash Provided ....................... 29,280 26,180
--------- ---------
Investing Activities:
Construction expenditures .................... (32,646) (30,386)
--------- ---------
Net Cash Used .......................... (32,646) (30,386)
--------- ---------
Financing Activities:
Issuance of securities ...................... 39,968 15,000
Receipt of advances and contributions ....... 3,564 2,831
Repayments of long-term debt, net of
redemption of preferred shares ............ (309) 541
Refunds on advances ........................ (1,333) (2,536)
Repayments of notes payable to banks ....... (27,000) (7,000)
Common and preferred dividends paid ......... (8,665) (8,532)
--------- ---------
Net Cash Provided ...................... 6,225 304
--------- ---------
Net Increase (Decrease) in Cash and
Cash Equivalents ............................ 2,859 (3,902)
Cash and Cash Equivalents, Beginning
of period ................................... 620 4,186
--------- ---------
Cash and Cash Equivalents, End
of period ................................... $ 3,479 $ 284
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 10
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
(in thousands)
<S> <C> <C>
UTILITY PLANT, at cost
Water ......................................... $ 511,133 $ 482,989
Electric ...................................... 35,326 35,171
--------- ---------
546,459 518,160
Less - Accumulated depreciation ............... (148,500) (138,423)
--------- ---------
397,959 379,737
Construction work in progress ................. 42,608 35,016
--------- ---------
440,567 414,753
--------- ---------
OTHER PROPERTY AND INVESTMENTS .................. 786 763
--------- ---------
CURRENT ASSETS
Cash and cash equivalents ..................... 2,992 524
Accounts receivable -
Customers, less reserves of $644
in 1999 and $403 in 1998 .................. 10,684 7,498
Other ....................................... 7,697 5,376
Unbilled revenue .............................. 13,124 9,303
Materials and supplies, at average cost ....... 1,228 994
Supply cost balancing accounts ................ 4,754 4,300
Prepayments and other ......................... 5,192 5,988
Accumulated deferred income taxes - net ....... 5,712 5,173
--------- ---------
51,383 39,156
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets ................. 20,410 21,506
Other deferred charges ........................ 8,651 7,997
--------- ---------
29,061 29,503
--------- ---------
$ 521,797 $ 484,175
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 11
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
(in thousands)
<S> <C> <C>
CAPITALIZATION
Common shareholders' equity ................... $ 160,912 $ 155,721
Long-term debt ................................ 160,217 120,809
--------- ---------
321,129 276,530
--------- ---------
CURRENT LIABILITIES
Notes payable to banks ........................ 11,000 38,000
Long-term debt and preferred shares
due within one year ......................... 510 260
Accounts payable .............................. 15,292 10,054
Taxes payable ................................. 9,413 6,147
Accrued interest .............................. 3,362 1,405
Other accrued liabilities ..................... 11,976 7,984
--------- ---------
51,553 63,850
--------- ---------
OTHER CREDITS
Advances for construction ..................... 56,650 54,744
Contributions in aid of construction .......... 38,850 36,530
Accumulated deferred income taxes - net ....... 48,141 46,902
Unamortized investment tax credits ............ 3,087 3,155
Regulatory tax-related liability .............. 1,873 1,906
Other ......................................... 514 558
--------- ---------
149,115 143,795
--------- ---------
$ 521,797 $ 484,175
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 12
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
------------ ------------
($ in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ....................................... $ 48,250 $ 43,797
Electric .................................... 3,240 3,189
--------- ---------
51,490 46,986
--------- ---------
OPERATING EXPENSES
Water purchased ............................. 12,628 11,104
Power purchased for pumping ................. 2,127 2,280
Power purchased for resale .................. 1,629 1,320
Groundwater production assessment ........... 1,832 1,934
Supply cost balancing accounts .............. (332) 182
Other operating expenses .................... 3,758 3,835
Administrative and general expenses ......... 6,639 5,149
Depreciation ................................ 3,380 3,505
Maintenance ................................. 2,064 1,770
Taxes on income ............................. 5,728 4,787
Other taxes ................................. 1,723 1,610
--------- ---------
41,176 37,476
--------- ---------
Operating income ............................ 10,314 9,510
OTHER INCOME/(LOSS) ............................. 149 (104)
--------- ---------
Income before interest charges .............. 10,463 9,406
INTEREST CHARGES ................................ 3,725 2,849
--------- ---------
NET INCOME ...................................... 6,738 6,557
DIVIDENDS ON PREFERRED SHARES ................... -- --
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ...... $ 6,738 $ 6,557
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ... 100 100
========= =========
Basic Earnings Per Common Share ................. $ 67,380 $ 65,570
========= =========
Dividends Declared Per Common Share ............. $ 29,000 $ 30,450
========= =========
</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 STATEMENTS OF INCOME
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
------------ ------------
($ in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ....................................... $ 119,673 $ 102,111
Electric .................................... 9,931 9,831
--------- ---------
129,604 111,942
--------- ---------
OPERATING EXPENSES
Water purchased ............................. 26,946 24,527
Power purchased for pumping ................. 5,140 4,904
Power purchased for resale .................. 5,150 3,764
Groundwater production assessment ........... 5,520 5,542
Supply cost balancing accounts .............. (453) (1,055)
Other operating expenses .................... 11,122 10,861
Administrative and general expenses ......... 20,235 15,897
Depreciation ................................ 10,136 9,454
Maintenance ................................. 5,872 5,432
Taxes on income ............................. 11,472 8,531
Other taxes ................................. 4,916 4,607
--------- ---------
106,056 92,464
--------- ---------
Operating income ............................ 23,548 19,478
OTHER INCOME .................................... 385 27
--------- ---------
Income before interest charges .............. 23,933 19,505
INTEREST CHARGES ................................ 9,707 8,338
--------- ---------
NET INCOME ...................................... 14,226 11,167
DIVIDENDS ON PREFERRED SHARES ................... -- (46)
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ...... $ 14,226 $ 11,121
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ... 100 100
========= =========
Basic Earnings Per Common Share ................. $ 142,260 $ 111,210
========= =========
Dividends Declared Per Common Share ............. $ 90,400 $ 86,883
========= =========
</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.
11
<PAGE> 14
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
------------ ------------
($ in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ....................................... $ 152,355 $ 135,123
Electric .................................... 13,301 13,325
--------- ---------
165,656 148,448
--------- ---------
OPERATING EXPENSES
Water purchased ............................. 33,251 31,949
Power purchased for pumping ................. 7,245 7,006
Power purchased for resale .................. 6,399 5,302
Groundwater production assessment ........... 7,545 7,007
Supply cost balancing accounts .............. 630 (1,082)
Other operating expenses .................... 14,694 14,214
Administrative and general expenses ......... 26,224 21,817
Depreciation ................................ 12,952 12,189
Maintenance ................................. 7,750 7,286
Taxes on income ............................. 13,301 11,145
Other taxes ................................. 6,434 6,175
--------- ---------
136,425 123,008
--------- ---------
Operating income ............................ 29,231 25,440
OTHER INCOME .................................... 1,589 328
--------- ---------
Income before interest charges .............. 30,820 25,768
INTEREST CHARGES ................................ 12,576 10,979
--------- ---------
NET INCOME ...................................... 18,244 14,789
DIVIDENDS ON PREFERRED SHARES ................... 0 (69)
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ...... $ 18,244 $ 14,720
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ... 100 100
========= =========
Basic Earnings Per Common Share ................. $ 182,440 $ 147,200
========= =========
Dividends Declared Per Common Share ............. $ 118,837 $ 115,100
========= =========
</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.
12
<PAGE> 15
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM
Operating Activities:
Net income .................................. $ 14,226 $ 11,167
Adjustments for non-cash items:
Depreciation and amortization ............... 10,533 9,926
Deferred income taxes and
investment tax credits .................. 1,696 3,444
Other - net ............................... (2,563) 5,772
Changes in assets and liabilities:
Accounts receivable ....................... (3,186) (1,906)
Prepayments ............................... 796 3,410
Supply cost balancing accounts ............ (454) (1,098)
Accounts payable .......................... 5,238 (150)
Taxes payable ............................. 3,265 1,109
Unbilled revenue .......................... (3,821) (2,731)
Other ..................................... 3,400 (265)
--------- ---------
Net Cash Provided ....................... 29,130 28,678
--------- ---------
Investing Activities:
Construction expenditures .................... (32,511) (30,851)
--------- ---------
Net Cash Used .......................... (32,511) (30,851)
--------- ---------
Financing Activities:
Issuance of securities ...................... 39,968 15,000
Receipt of advances and contributions ....... 3,564 2,831
Repayments of long-term debt, net of
redemption of preferred shares ............ (310) (1,499)
Refunds on advances ........................ (1,333) (2,536)
Repayments of notes payable to banks ........ (27,000) (7,000)
Common and preferred dividends paid ......... (9,040) (8,733)
--------- ---------
Net Cash Provided (Used) ............... 5,849 (1,937)
--------- ---------
Net Increase (Decrease) in Cash and
Cash Equivalents ............................ 2,468 (4,110)
Cash and Cash Equivalents, Beginning
of period .................................. 524 4,186
--------- ---------
Cash and Cash Equivalents, End
of period .................................. $ 2,992 $ 76
========= =========
</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.
13
<PAGE> 16
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, 1999, the CPUC issued an order denying SCW's application
seeking approval of its recovery through rates of approximately $2.4
million in costs associated with its participation in the Coastal Aqueduct
Extension of the State Water Project ("SWP"). SCW's investment in SWP is
currently 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
ultimately 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. Recovery 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.
14
<PAGE> 17
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 American States Utility Services,
Incorporated (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. Included in 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 September 30, 1999
- -----------------------------------------------------------------------------------------------------
Water Electric
---------------------------------------------
Region I Region II Region III
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $8,401 $19,910 $19,935 $3,244
Operating income before income taxes 2,874 5,245 6,910 1,013
Identifiable assets 106,132 135,102 174,579 25,410
Depreciation expense 684 1,010 1,350 336
Capital additions 3,864 5,253 3,560 577
--------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Three Months Ended September 30, 1998
- -----------------------------------------------------------------------------------------------------
Water Electric
---------------------------------------------
Region I Region II Region III
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $8,439 $17,066 $18,289 $3,192
Operating income before income taxes 3,035 4,234 6,414 614
Identifiable assets 95,741 119,418 165,657 24,933
Depreciation expense 639 842 1,230 794
Capital additions 1,681 3,128 (868) 436
--------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Nine Months Ended September 30, 1999
- -----------------------------------------------------------------------------------------------------
Water Electric
---------------------------------------------
Region I Region II Region III
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $20,531 $52,577 $46,556 $9,940
Operating income before income taxes 5,200 13,015 13,494 3,311
Identifiable assets 106,132 135,102 174,579 25,410
Depreciation expense 2,052 3,030 4,046 1,008
Capital additions 9,574 15,710 9,961 1,535
--------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Nine Months Ended September 30, 1998
- -----------------------------------------------------------------------------------------------------
Water Electric
---------------------------------------------
Region I Region II Region III
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $18,974 $43,147 $39,982 $9,839
Operating income before income taxes 5,376 9,649 10,275 2,709
Identifiable assets 95,741 119,418 165,657 24,933
Depreciation expense 1,917 2,528 3,689 1,320
Capital additions 9,427 9,042 6,221 1,323
--------------------------------------------------------------
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
(dollars in thousands) For The Twelve Months Ended September 30, 1999
- -----------------------------------------------------------------------------------------------------
Water Electric
---------------------------------------------
Region I Region II Region III
--------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Operating revenues $26,484 $66,703 $59,157 $13,312
Operating income before income taxes 6,623 15,098 16,360 4,451
Identifiable assets 106,132 135,102 174,579 25,410
Depreciation expense 2,691 3,873 5,058 1,330
Capital additions 13,465 29,725 10,921 1,939
--------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Twelve Months Ended September 30, 1998
- -----------------------------------------------------------------------------------------------------
Water Electric
---------------------------------------------
Region I Region II Region III
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $24,604 $58,319 $52,188 $13,337
Operating income before income taxes 6,794 13,036 12,854 3,901
Identifiable assets 95,741 119,418 165,657 24,933
Depreciation expense 2,496 3,287 4,835 1,571
Capital additions 13,485 20,000 6,113 1,971
--------------------------------------------------------------
</TABLE>
16
<PAGE> 19
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
Registrant's future plans, objectives, estimates or goals are also
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed or implied
in the 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 and changes in market conditions for debt and equity; future climatic
conditions; legislative, regulatory and other circumstances affecting
anticipated revenues and costs; the number and effectiveness of competitors in
Registrant's markets; changes in legislation; the nature and pace of
technological changes; Registrant's ability to identify future markets and
successfully expand existing ones; the mix of products and services offered in
Registrant's target markets; and abilities of other companies to remain or
become year 2000 ready. These important factors should be considered in
evaluating any statement contained herein and/or made by Registrant or on its
behalf.
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
prior to May 1, 1999, and with Illinova Energy Partners since May 1, 1999.
SCW served 243,669 water customers and 21,039 electric customers at
September 30, 1999, or a total of 264,708 customers, compared with 263,260 total
customers at September 30, 1998.
17
<PAGE> 20
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 86.4%,
88.5% and 90.7% of total water revenues for the three, nine and twelve months
ended September 30, 1999, respectively as compared to 85.3%, 89.0% and 91.5% for
the three, nine and twelve months ended September 30, 1998, respectively.
RESULTS OF OPERATION
Basic earnings per common share for the three months ended September 30,
1999 increased by 4.2% to $0.74 per share as compared to $0.71 per share for the
comparable period last year. Basic earnings per common share for the nine months
ended September 30, 1999 increased by 27.9% to $1.56 per share as compared to
$1.22 per share for the comparable period last year. Basic earnings for the
twelve months ended September 30, 1999 increased by 21.6% to $1.97 per share as
compared to $1.62 per share for the twelve months ended September 30, 1998. The
increase in the recorded results primarily reflects higher revenues during 1999
as is more fully discussed below.
As compared to last year, water sales volumes for the three, nine and
twelve months ended September 30, 1999 increased by 0.3%, 9.3% and 6.6%,
respectively, due primarily to the much drier and warmer weather conditions
throughout Southern California this year. Water operating revenues for the
three, nine and twelve months ended September 30, 1999 increased by 10.4%,
17.4%, and 13.0%, respectively, from the same periods ended September 30, 1998
due to the increase in water volumes sold and the general rate increases
effective January 1, 1999. Registrant implemented new rates in six of its
customer service areas in January 1999. See the section entitled "Rates and
Regulation" for more information.
For the three months ended September 30, 1999, kilowatt-hour sales of
electricity increased by 2.2% as compared to the same period ended September 30,
1998 and, as a result, electric operating revenues for the quarter ended
September 30, 1999 increased by 1.6%. Kilowatt-hour sales increased by 3.2% and
2.8%, respectively, for the nine and twelve months ended September 30, 1999 as
compared to last year due principally to lack of winter snows experienced in
Registrant's service area during the first quarter of this year, which increased
the use of snow making machines. Electric operating revenues for the nine and
twelve month periods ending September 30, 1999 increased only by 1.0% and
decreased slightly by 0.2%, respectively, over the comparable periods last year
due to the fact that the increases in kilowatt-hour sales were contributed by
industrial power users, billed at relatively lower rates.
Purchased water costs increased by 13.7% for the three months ended
September 30, 1999 as compared to the same period ending in 1998 due to a 5.4%
increase in volumes purchased, and reimbursements from potentially responsible
parties related to contamination in SCW's Culver City CSA of approximately
$290,000 received during the three months ended September 30, 1998, there were
no such reimbursements in the third quarter of 1999. For the nine months ended
September 30, 1999, purchased water costs increased by 9.9% as compared to the
same period last year, reflecting a 10.0% increase in volumes purchased. The
nine-month comparison is also affected by higher reimbursements for well
contamination as mentioned above in the period of 1998, offset by a refund of
$1.4 million received by SCW in April of 1999 from the Water Replenishment
district of Southern California (WRD). As compared to the twelve months ended
September 30, 1998, purchased water costs increased by only 4.1% due to an
additional WRD refund of $1.4 million received in December 1998. The
twelve-month comparison is also affected by the mentioned reimbursements related
to contamination of approximately $2,429,000 received during the twelve months
ended September 30, 1998 compared with reimbursements of $859,000 received
during the period ended September 30, 1999. See the section entitled
"Environmental Matters Matters Related to Culver City System."
18
<PAGE> 21
Cost of power purchased for pumping decreased by 6.7% for the three months
ended September 30, 1999 due to a 7.9% decrease in water pumped as compared to
the same period of last year. Cost of power purchased for pump increased by 4.8%
and 3.4%, respectively, for the nine and twelve months ended September 30, 1999
as compared to the same periods ended September 30, 1998 due to an increase in
pumped groundwater in SCW's water supply mix resulting from the increased sales
volumes.
As compared to the three, nine and twelve months ended September 30, 1998,
the cost of power purchased for resale increased by 23.4%, 36.8% and 20.7%,
respectively, for the three, nine and twelve months ended September 30, 1999 due
primarily to additional accruals for energy demand charges from Registrant's
energy supplier in 1999.
Groundwater production assessments are 5.3% lower for the three months
ended September 30, 1999 due primarily to a decrease in pumped groundwater
during the this quarter. For the twelve months ended September 30, 1999,
groundwater production assessments increased by 7.7%, reflecting increased
volumes of pumped water in SCW's total water supply and additional assessments
particularly associated with increased pumping in SCW's Metropolitan, Orange
County and San Dimas customer service areas.
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. A net under-collection of balancing accounts for
the three months ended September 30, 1999 reflects higher energy demand charges,
and water right leases that were not fully covered in rates. Recovery of
previously under-collected supply cost was higher for the nine and twelve months
ended September 30, 1999 than the same periods of 1998 due to rates effective
January 1999, authorized to implement new supply costs and to increase
collection of these under-collected costs. The WRD refunds discussed previously
helped to decrease previously under-collected supply costs.
Other operating expenses decreased slightly by 1.5% for the three months
ended September 30, 1999 and increased by 2.8% and 3.8%, respectively, for the
nine and twelve months ended September 30, 1999 as compared to the same periods
ended September 30, 1998. The increases from the nine and twelve-month
comparisons were due to increased costs for water treatment, and higher amounts
accrued for uncollectible accounts as a result of increased revenues.
Administrative and general expenses increased by 31.9%, 29.2% and 22.1%,
respectively, for the three, nine and twelve months ended September 30, 1999 as
compared to the same periods ended September 30, 1998. This increase was 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 certain legal proceedings. See the section entitled "Legal
Proceedings" for more information.
Depreciation expense increased by 7.1% and 7.3%, respectively, for the nine
and twelve months ended September 30, 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 was reflected in the twelve months ended September 30, 1999. There were
no similar amortization costs for the twelve months ended September 30, 1998. As
compared to the three months ended September 30, 1998, depreciation decreased by
7.1% due to a catch-up adjustment in the third quarter of 1998.
19
<PAGE> 22
As compared to the three months ended September 30, 1998, maintenance
expense increased by 16.6% during the third quarter of 1999 due to increased
maintenance projects as anticipated in Registrant's second quarter Form 10-Q
report. Maintenance expense increased by 8.1% and 6.4%, respectively, for the
nine and twelve months ended September 30, 1999 as compared to the same periods
ended September 30, 1998, reflecting the effects of the wet weather conditions
experienced earlier in 1998 which hindered maintenance activities.
Taxes on income increased by 20.4%, 34.3% and 17.5% for the three, nine and
twelve months ended September 30, 1999 as compared to the three and twelve
months ended September 30, 1998 as a result of higher pre-tax income.
Other taxes increased by 7.0%, 6.8% and 4.2%, respectively, for the three,
nine and twelve months ended September 30, 1999, respectively, as compared to
the same periods last year reflecting increased franchise fee payments resulting
from higher revenues, and increased property taxes due to higher property
valuation assessments.
As compared to the same periods ended September 30, 1998, other income for
the three and nine months ended September 30, 1999 increased due to reduced
expenditures related to SCW's non-regulated joint-venture which was terminated
in December 1998, and higher revenues in the period of 1999 from Registrant's
water right lease. As compared to the twelve months ended September 30, 1998,
other income increased by 463.7% in the comparable period ended September 30,
1999 due principally to the flow-through of tax benefits related to refinancing
of long-term debt, partially offset by costs incurred in December 1998
associated with termination of the non-regulated joint venture agreement.
Interest expense increased by 30.8%, 16.4% and 14.5% for the three, nine
and twelve months ended September 30, 1999 as compared to the three, nine and
twelve months ended September 30, 1998, respectively. The increases were due to
$40 million in additional long-term debt issued in January, 1999 and interest
charges recorded in the third quarter of 1999 related to the State Water
Project, partially offset by the retirement of $10 million of 10.10% note in
December, 1998. The nine-month and twelve-month comparisons were also affected
by the issuance of $15 million in long-term debt in March 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. As of
September 30, 1999, no securities had been issued under this Registration
Statement.
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
September 30, 1999. As of that date, Registrant had a total of $11 million in
borrowing outstanding
20
<PAGE> 23
under those bank lines of credit. 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 $49.1 million for 1999 and $55.7 million for 2000. Of the amount
authorized for 1999, $29.6 million has incurred as of September 30, 1999.
Neither AWR nor ASUS have any material capital expenditures.
WATER SUPPLY
For the three months ended September 30, 1999, SCW supplied a total of
26,826,000 ccf of water as compared to 26,730,000 ccf for the three months ended
September 30, 1998. Of the total 26,826,000 ccf of water supplied during the
third quarter of 1999, approximately 54.6% came from pumped sources and 42.3%
was purchased from others, principally the Metropolitan Water District of
Southern California (MWD) and its member agencies. The remaining 3.1% of total
supply came from the United States Bureau of Reclamation (the "Bureau) under a
no-cost contract. For the three months ended September 30, 1998, 60.0%, 39.0%
and 1.0% was supplied from pumped sources, purchased from MWD and the Bureau,
respectively.
For the nine months ended September 30, 1999, SCW supplied a total of
64,116,000 ccf of water, 58.4% of which came from pumped sources, 39.7% was
purchased and the remaining amount was supplied by the Bureau. During the nine
months ended September 30, 1998, SCW produced 59,365,000 ccf of water. Of this
amount 61.0% came from pumped sources, 39.0% was purchased and the remainder was
provided by the Bureau.
During the twelve months ended September 30, 1999, SCW supplied 83,128,000
ccf of water as compared to 78,068,000 ccf supplied during the twelve months
ended September 30, 1998. During the twelve month period ended September 30,
1999, pumped sources provided 59.0% of total supply, 39.6% was purchased from
MWD and the remaining 1.4% was supplied by the Bureau. For the twelve months
ended September 30, 1998, 60.0%, 39.0% and 1.0%, 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 water supply outlook remains favorable for most areas of the State.
Water year forecasts made by the California Department of Water Resources (DWR)
are about 110 percent of average statewide ranging from 130 percent in the North
Coast region to 65 percent in the southern Sierra.
21
<PAGE> 24
California's northern reservoirs remain near full capacity. Seasonal
precipitation is nearly average overall with above average amounts in the
northern parts of the State and less in the south. In those customer
services areas of SCW which pump groundwater, overall groundwater conditions and
supplies remain 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.
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
22
<PAGE> 25
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 February 2000, 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.
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 proposed new radon regulations following a National Academy of
Sciences risk assessment and study of risk-reduction benefits associated with
various mitigation measures. The National Academy of Sciences study is in
agreement with much of EPA's original findings but has slightly reduced the
ingestion risk initially assumed by EPA. EPA established an MCL of 300
picoCuries per liter based on the findings and has also established an
alternative MCL of 4000 picoCuries per liter, based upon potential mitigation
measures for overall radon reduction. The final rule will be effective in
August, 2000. The Registrant is currently conducting studies to determine the
best treatment for affected wells.
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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 Corp. 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.
In February 1998, SCW was informed that nitrosodimethylemine (NDMA) had
been detected in amounts in excess of the EPA reference dosage for health risks
in four of its wells in its Arden-Cordova system. Each of the wells has been
removed from service. Another well was also been removed from service in end of
September, 1999 due to the contamination. 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 Corp. Aerojet-General Corp. 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 Corp. are in negotiations on other matters related
to procedures to address cleanup of the contaminated wells, costs associated
with the cleanup, increased costs of purchased water as compared to pumped
sources and costs associated with developing new sources of groundwater supply.
SCW and Aerojet-General Corp. are attempting to negotiate an agreement on these
matters. The agreement would require initial payment of approximately $950,000
for costs associated with certain water supply facilities. The remainder of the
costs is subject to further reimbursement, including interest, over no more than
a fifteen month period. Assuming the negotiations are
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consummated favorably to SCW, the reimbursement from Aerojet-General Corp.
reduces SCW's utility plant and costs of purchased water. SCW remains vigilant
in its efforts to assure a safe water supply is available to customers in its
Arden-Cordova system from the local groundwater basin, although no assurance can
be given that current or future negotiations will successfully address this
objective.
On October 25, 1999, SCW filed a lawsuit against the California Regional
Water Quality Control Board ("CRWQCB") alleging that the CRWQCB has willfully
allowed portions of the Sacramento County Groundwater Basin to be injected with
chemical pollution that is destroying the underground water supply in SCW's
Ranch Cordova customer service area. In a separate case, also filed on October
25, 1999, SCW sued Aerojet General Corp. for causing the contamination. The
inverse condemnation suit was filed after the CRWQCB and Aerojet General Corp.
rejected SCW's urgent calls to action to protect the customers and water supply
of SCW. Registrant is unable to predict what actions, if any, the CRWQCB or
Aerojet General Corp. will take in response to the lawsuits.
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.
On September 22, 1999, the U.S. EPA and the Los Angeles Regional Water
Quality Control Board ordered Shell Oil Company, Shell Oil Products Company and
Equilon Enterprises LLC to provide replacement drinking water to both SCW and
the City of Santa Monica due to MTBE contamination of the Charnock Sub-Basin
drinking water. The agencies are continuing to investigate the causes of MTBE
pollution and intend to ensure that all responsible parties contribute to its
clean up. Registrant is unable to predict the outcome of the EPA's enforcement
efforts. Pursuant to an agreement with SCW in December, 1998, two of the
potentially responsible parties (the "Participants") 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. However, a notice of
termination from the "Participants" to the settlement agreement and a
conditional termination from one of the responsible parties was received in
October, 1999. SCW and such parties are currently in the process of negotiation.
No assurances can be given that current or future negotiations will result in
complete restoration of SCW's water rights or that continued reimbursement of
SCW's costs will be forthcoming.
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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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 transactions
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 rates 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. A draft decision has been issued by the Administrative
Law Judge assigned to this matter that supports the settlement on all issues
reached between SCW and CPUC Staff. A final decision from the CPUC is
anticipated in the fourth quarter of 1999 although it is not anticipated that
new rates, if authorized in total or in part by the CPUC, would be effective
prior to 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. The
Administrative Law Judge assigned to this matter has issued a draft decision
that supports SCW's application. 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 SCW's involvement in water quality related lawsuits in
its San Gabriel Valley customer service area. In March 1998, the CPUC authorized
similar memorandum accounts for SCW'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 SCW, under its jurisdiction. See the
section entitled "Legal Proceedings" for more information.
The CPUC also has two active Orders Instituting Rulemaking (OIR) -- one to
provide guidelines for acquisition and mergers of water companies; the other to
provide guidelines for the privatization and use of excess capacity as it
relates to regulated water companies. The administrative law judge assigned to
the OIR on privatization and excess capacity has issued a proposed order in that
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proceeding. SCW is reviewing the proposed decision but believes that it does not
adequately reflect the record. As such, SCW has provided comments on the
proposed decision. SCW is unable to predict the outcome of the CPUC's final
order in either of the OIR's.
On April 22, 1999, the CPUC issued an order denying SCW's application
seeking approval of its recovery through rates of approximately $2.4 million in
costs associated with its participation in the Coastal Aqueduct Extension of the
State Water Project ("SWP"). SCW's investment in SWP is currently 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. SCW believes that its full
investment and on-going costs associated with its ownership will be fully
recovered. 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 believes that, as of
September 30, 1999, all mission critical inventory items are Y2K ready for the
date change from the year 1999 to 2000.
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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 portable generators capable of providing power during a black-out.
Registrant exercised the first of several "dry runs" on August 26, 1999 which
simulated a Y2K situation that implemented Registrant's contingency plan. The
dry run proved to be an effective exercise that identified areas of strength and
weakness, and provided real-life experience from which to make informed
decisions about future dry runs and Y2K preparation.
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.
On September 2, 1999, the CPUC issued an order denying regulated water
utilities the authority to create memorandum accounts for Y2K expenses. The
Order, however, provides that, after January 1, 2000, regulated water utilities
may file for recovery of capital investment, not otherwise included in current
rates, associated with Y2K mitigation efforts. To date, Registrant has incurred
$470,000 incurred in costs associated with Y2K readiness that are not in rates
and estimates that an additional $5,700,000 in capital expenditure will be
incurred prior to December 1999. Registrant believes that these costs as well as
future Y2K-related investments which are prudently incurred, will be recovered
through rates.
The CPUC has notified all utilities under its jurisdiction, including SCW,
that it will review their Y2K preparations. SCW has submitted its Y2K
contingency plan to the CPUC in accordance with its direction. On September 30,
1999, SCW announced that it was Y2K compliant.
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 eleven water-quality related lawsuits:
- 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
- a suit filed on July 29, 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
- a suit filed on December 8, 1997 alleging personal injury and
property damage as a result of the delivery of contaminated water
in SCW's Arden-Cordova service area
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- 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
- 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
- a suit filed in March 2, 1998 alleging personal injury and
property damage as a result of the delivery of contaminated water
in SCW's Arden-Cordova service area
- a suit filed on June 29, 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
- two 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
- a suit filed on December 3, 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
- a suit filed in July 22, 1999 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
On September 1, 1999, in an historic ruling governing the oversight of
water quality in California, the First District Court of Appeal in San Francisco
has held that the CPUC has pre-emptive jurisdiction over regulated public
utilities and ordered dismissal of a series of lawsuits against water utilities,
including seven of the mentioned lawsuits against SCW. The plaintiffs
subsequently appealed to the California Supreme Court on October 11, 1999. The
Supreme Court has 60 days to accept or reject the petition. Management can not
predict whether the plaintiffs will be successful in the appeal or whether the
Supreme Court will accept or reject their appeal.
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:
- whether existing standards and policies regarding drinking water
quality adequately protect the public health
- whether water utilities are following existing standards
We anticipate that the CPUC will issue a decision in the OII by end of this
year. 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. As of September 30, 1999, Registrant had
incurred $850,600 in the OII-related memorandum account.
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Environmental Regulation
SCW is subject to increasingly stringent environmental regulations that
will result in increasing capital and operating costs. These regulations
include:
- 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
- interim regulations expected to be adopted before the end of 2000
requiring increased surface-water treatment to decrease the risk of
microbial contamination; these regulations will affect SCW's five
surface water treatment plants
- additional regulation of disinfection/disinfection byproducts expected
to be adopted before the end of 2002; these regulations will
potentially affect two of SCW's systems
- additional regulations expected to be adopted before the end of 2000
requiring disinfection of certain groundwater systems; these
regulations will potentially impact several of SCW's systems using
groundwater supplies
- potential regulation of radon and arsenic
- new California requirements to fluoridate public water systems serving
over 10,000 customers
SCW 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:
- by filing for a general rate increase
- by filing for recovery of certain expenses
- 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 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.
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There are also a number of matters pending before the CPUC that may affect our
future financial results. These matters include:
- 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 although a tentative settlement has been worked out
- an application filed to consolidate the rate-making jurisdictions
located in SCW's Region III area into a single tariff
- the OII
- 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
- rainfall
- the amount of water stored in reservoirs
- the amount used by our customers and others
- water quality, and
- legal limitations on use.
As a result of heavier than normal rainfall in the winter of 1998-1999,
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:
- they adversely affect supply mix by causing the Company to rely on
more expensive purchased water
- they adversely affect operating costs
- 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. The Company may also be
able to recover certain of these costs under the terms of our contractual
agreements with municipalities.
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
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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.
ITEM 3. 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.
PART II
ITEM 1. LEGAL PROCEEDINGS
SCW is a defendant in eleven lawsuits involving several claims pertaining
to water quality. Nine of the lawsuits involve customer service areas located in
Los Angeles county in the southern portion of the State of California; two of
the lawsuits involve a customer service area located in Sacramento county in
northern California. See the section entitled "Risk Factor Summary" for more
information.
On September 1, 1999, the First District Court of Appeal in San Francisco,
in a published opinion entitled Hartwell Corporation v. The Superior Court of
Ventura County, held that the CPUC had pre-emptive jurisdiction over regulated
public utilities and ordered dismissal of a series of lawsuits pertaining to
water quality filed against water utilities, including SCW. Seven out of eleven
lawsuits against SCW have been ordered for dismissal by the state Court of
Appeals -- the Adler, Santamaria, Anderson, Dominguez, Celi, Boswell, and
Demciuc Matters. On October 11, 1999, one group of plaintiffs have appealed to
the California Supreme Court. The Supreme Court has 60 days to either accept or
reject the petition. Management can not predict whether or not the Supreme Court
will accept the plaintiff's petition or whether the plaintiffs will be
successful in the appeal.
On December 3, 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 was served on June 18, 1999.
SCW was named as a defendant, along with the City of Pomona, California
and Xerox Corporation in the matter styled Adejare, et al. v. Southern
California Water Company, et al., filed on July 22, 1999 in Los Angeles Superior
Court which seeks recovery for wrongful death, battery and fraudulent
concealment (the "Adejare 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.
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In December 1997 SCW was named a defendant in the matter of Nathaniel
Allen, Jr., et al. v. Aerojet-General Corporation, et al which was filed in
Sacramento Superior Court. The complaint makes claims based on wrongful death,
personal injury, property damage as a result of nuisance and trespass, medical
monitoring, and diminution of property values (the "Allen Matter"). 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 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 March 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 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.
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, 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.
33
<PAGE> 36
On June 10, 1999, the CPUC issued an interim order which established that
the CPUC has jurisdiction to conduct the investigation regulation in matters
related to water quality over those water utilities subject to its authority. A
final decision in the OII is anticipated by the end of 1999. SCW is unable to
predict what the final order will find or what, if any, additional hearings or
investigations may be required as a result of finding in the OII.
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 September 30, 1999, earned surplus amounted to $62,403,000, 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 September 30, 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 SCW and for investment purposes by
participants.
On October 21, 1999, Registrant filed with the SEC to increase, to
500,000, the number of authorized but unissued Common Shares reserved for
issuance under the Common Share Purchase and Dividend Reinvestment Plan.
Issuance of common shares under this program is effective November 1, 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No item was submitted during the third quarter of the fiscal year covered
by this report to vote of security holders through the solicitation of proxies
or otherwise.
ITEM 5. OTHER INFORMATION
On October 25, 1999, the Board of Directors of Registrant declared a
regular quarterly dividend of $0.32 per common share. The dividend will be paid
December 1, 1999 to shareholders of record as of the close of business on
November 8, 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.
34
<PAGE> 37
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: October 29, 1999
35
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS AND INCOME STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS FILED
HEREWITH.
</LEGEND>
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<NAME> SOUTHERN CALIFORNIA WATER COMPANY
<MULTIPLIER> 1,000
<S> <C>
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