<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 11, 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 August 11, 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
June 30, 1999 and December, 1998 2 - 3
Consolidated Statements of Income of American States Water Company for
the Three Months Ended June 30, 1999 and June 30, 1998 4
Consolidated Statements of Income of American States Water Company for
the Six Months Ended June 30, 1999 and June 30, 1998 5
Consolidated Statements of Income of American States Water Company for
the Twelve Months Ended June 30, 1999 and June 30, 1998 6
Consolidated Statements of Cash Flow of American States Water Company for
the Six Months Ended June 30, 1999 and June 30, 1998 7
Consolidated Balance Sheets of Southern California Water Company as of
June 30, 1999 and December 31, 1998 8 - 9
Consolidated Statements of Income of Southern California Water Company for
the Three Months Ended June 30, 1999 and June 30, 1998 10
Consolidated Statements of Income of Southern California Water Company for
the Six Months Ended June 30, 1999 and June 30, 1998 11
Consolidated Statements of Income of Southern California Water Company for
the Twelve Months Ended June 30, 1999 and June 30, 1998 12
Consolidated Statements of Cash Flow of Southern California Water Company for
the Six Months Ended June 30, 1999 and June 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 31
PART II OTHER INFORMATION
Item 1: Legal Proceedings 31 - 34
Item 2: Changes in Securities 35
Item 3: Defaults Upon Senior Securities 35
Item 4: Submission of Matters to a Vote of Security Holders 35
Item 5: Other Information 35
Item 6: Exhibits and Reports on Form 8-K 35
</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>
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
(Unaudited)
(in thousands)
<S> <C> <C>
UTILITY PLANT, at cost
Water ...................................... $ 496,803 $ 482,989
Electric ................................... 35,171 35,171
--------- ---------
531,974 518,160
Less - Accumulated depreciation ............ (145,325) (138,423)
--------- ---------
386,649 379,737
Construction work in progress .............. 45,219 35,016
--------- ---------
431,868 414,753
--------- ---------
OTHER PROPERTY AND INVESTMENTS ............... 785 1,077
--------- ---------
CURRENT ASSETS
Cash and cash equivalents .................. 1,668 620
Accounts receivable -
Customers, less reserves of $528
in 1999 and $403 in 1998 ............... 9,269 7,626
Other .................................... 6,063 5,301
Unbilled revenue ........................... 11,122 9,303
Materials and supplies, at average cost .... 1,163 994
Supply cost balancing accounts ............. 4,422 4,300
Prepayments and other ...................... 5,542 5,988
Accumulated deferred income taxes - net .... 5,874 5,156
--------- ---------
45,123 39,288
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets .............. 20,831 21,506
Other deferred charges ..................... 9,008 8,047
--------- ---------
29,839 29,553
--------- ---------
$ 507,615 $ 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>
JUNE 30, DECEMBER 31,
1999 1998
-------- --------
(Unaudited)
(in thousands)
<S> <C> <C>
CAPITALIZATION
Common shareholders' equity .................... $155,911 $154,299
Preferred shares ............................... 1,600 1,600
Preferred shares subject to mandatory
redemption requirements ...................... 400 400
Long-term debt ................................. 160,529 120,809
-------- --------
318,440 277,108
-------- --------
CURRENT LIABILITIES
Notes payable to banks ......................... 6,000 38,000
Long-term debt and preferred shares
due within one year .......................... 510 260
Accounts payable ............................... 14,252 10,218
Taxes payable .................................. 7,443 5,900
Accrued interest ............................... 1,575 1,405
Other accrued liabilities ...................... 10,947 7,985
-------- --------
40,727 63,768
-------- --------
OTHER CREDITS
Advances for construction ...................... 56,484 54,743
Contributions in aid of construction ........... 38,630 36,530
Accumulated deferred income taxes - net ........ 47,783 46,902
Unamortized investment tax credits ............. 3,110 3,155
Regulatory tax-related liability ............... 1,884 1,906
Other .......................................... 557 559
-------- --------
148,448 143,795
-------- --------
$507,615 $484,671
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
-------- --------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ........................................ $ 39,298 $ 32,148
Electric ..................................... 2,818 2,853
-------- --------
42,116 35,001
-------- --------
OPERATING EXPENSES
Water purchased .............................. 7,370 8,157
Power purchased for pumping .................. 1,571 1,318
Power purchased for resale ................... 2,330 1,057
Groundwater production assessment ............ 1,978 2,128
Supply cost balancing accounts ............... 353 (921)
Other operating expenses ..................... 3,849 3,765
Administrative and general expenses .......... 7,368 5,383
Depreciation ................................. 3,380 2,975
Maintenance .................................. 1,672 1,826
Taxes on income .............................. 3,423 2,275
Other taxes .................................. 1,571 1,452
-------- --------
34,865 29,415
-------- --------
Operating income ............................. 7,251 5,586
OTHER INCOME/(LOSS) .............................. 160 (12)
-------- --------
Income before interest charges ............... 7,411 5,574
INTEREST CHARGES ................................. 3,005 2,807
-------- --------
NET INCOME ....................................... 4,406 2,767
DIVIDENDS ON PREFERRED SHARES .................... (22) (23)
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ....... $ 4,384 $ 2,744
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .... 8,958 8,958
======== ========
Basic Earnings Per Common Share .................. $ 0.49 $ 0.31
======== ========
Dividends Declared Per Common Share .............. $ 0.320 $ 0.315
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
-------- --------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ........................................ $ 71,557 $ 58,314
Electric ..................................... 6,691 6,642
-------- --------
78,248 64,956
-------- --------
OPERATING EXPENSES
Water purchased .............................. 14,318 13,425
Power purchased for pumping .................. 3,013 2,624
Power purchased for resale ................... 3,521 2,444
Groundwater production assessment ............ 3,688 3,608
Supply cost balancing accounts ............... (121) (1,237)
Other operating expenses ..................... 7,387 7,026
Administrative and general expenses .......... 13,752 10,746
Depreciation ................................. 6,890 5,949
Maintenance .................................. 3,810 3,662
Taxes on income .............................. 5,690 3,744
Other taxes .................................. 3,195 2,997
-------- --------
65,143 54,988
-------- --------
Operating income ............................. 13,105 9,968
OTHER INCOME ..................................... 259 131
-------- --------
Income before interest charges ............... 13,364 10,099
INTEREST CHARGES ................................. 5,981 5,489
-------- --------
NET INCOME ....................................... 7,383 4,610
DIVIDENDS ON PREFERRED SHARES .................... (44) (46)
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ....... $ 7,339 $ 4,564
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .... 8,958 8,958
======== ========
Basic Earnings Per Common Share .................. $ 0.82 $ 0.51
======== ========
Dividends Declared Per Common Share .............. $ 0.640 $ 0.630
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 8
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30,
------------------------
1999 1998
--------- ---------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ........................................ $ 148,102 $ 133,819
Electric ..................................... 13,250 13,342
--------- ---------
161,352 147,161
--------- ---------
OPERATING EXPENSES
Water purchased .............................. 31,726 34,146
Power purchased for pumping .................. 7,397 7,171
Power purchased for resale ................... 6,091 5,337
Groundwater production assessment ............ 7,647 6,874
Supply cost balancing accounts ............... 1,144 (1,105)
Other operating expenses ..................... 14,820 13,298
Administrative and general expenses .......... 24,992 22,104
Depreciation ................................. 13,479 11,423
Maintenance .................................. 7,459 7,165
Taxes on income .............................. 12,075 10,271
Other taxes .................................. 6,322 6,162
--------- ---------
133,152 122,846
--------- ---------
Operating income ............................. 28,200 24,315
OTHER INCOME ..................................... 897 629
--------- ---------
Income before interest charges ............... 29,097 24,944
INTEREST CHARGES ................................. 11,700 10,667
--------- ---------
NET INCOME ....................................... 17,397 14,277
DIVIDENDS ON PREFERRED SHARES .................... (89) (92)
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ....... $ 17,308 $ 14,185
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .... 8,958 8,958
========= =========
Basic Earnings Per Common Share .................. $ 1.93 $ 1.58
========= =========
Dividends Declared Per Common Share .............. $ 1.27 $ 1.250
========= =========
</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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM Operating Activities:
Net income ...................................... $ 7,383 $ 4,610
Adjustments for non-cash items:
Depreciation and amortization .................... 7,018 6,324
Deferred income taxes and
investment tax credits ....................... 771 3,028
Other - net .................................... (2,361) 1,314
Changes in assets and liabilities:
Accounts receivable ............................ (1,643) 859
Prepayments .................................... 446 2,935
Supply cost balancing accounts ................. (122) (1,241)
Accounts payable ............................... 4,034 230
Taxes payable .................................. 1,543 (3,232)
Unbilled revenue ............................... (1,819) (207)
Other .......................................... 2,198 32
-------- --------
Net Cash Provided ............................ 17,448 14,652
-------- --------
Investing Activities:
Construction expenditures ......................... (21,130) (19,137)
-------- --------
Net Cash Used ............................... (21,130) (19,137)
-------- --------
Financing Activities:
Issuance of securities ........................... -- 14,999
Receipt of advances and contributions ............ 3,263 1,844
Proceeds from long-term debt, net of
redemption of preferred shares ................. 39,970 486
Refunds on advances ............................. (727) (1,871)
Repayments of notes payable to banks ............ (32,000) (8,000)
Common and preferred dividends paid .............. (5,776) (5,688)
-------- --------
Net Cash Provided ........................... 4,730 1,770
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 1,048 (2,715)
Cash and Cash Equivalents, Beginning of period ..... 620 4,186
-------- --------
Cash and Cash Equivalents, End of period ........... $ 1,668 $ 1,471
======== ========
</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>
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
(Unaudited)
(in thousands)
<S> <C> <C>
UTILITY PLANT, at cost
Water ...................................... $ 496,803 $ 482,989
Electric ................................... 35,171 35,171
--------- ---------
531,974 518,160
Less - Accumulated depreciation ............ (145,325) (138,423)
--------- ---------
386,649 379,737
Construction work in progress .............. 45,219 35,016
--------- ---------
431,868 414,753
--------- ---------
OTHER PROPERTY AND INVESTMENTS ............... 786 763
--------- ---------
CURRENT ASSETS
Cash and cash equivalents .................. 1,233 524
Accounts receivable -
Customers, less reserves of $525
in 1999 and $403 in 1998 ............... 8,848 7,498
Other .................................... 6,029 5,376
Unbilled revenue ........................... 11,122 9,303
Materials and supplies, at average cost .... 1,163 994
Supply cost balancing accounts ............. 4,422 4,300
Prepayments and other ...................... 5,542 5,988
Accumulated deferred income taxes - net .... 5,895 5,173
--------- ---------
44,254 39,156
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets .............. 20,831 21,506
Other deferred charges ..................... 8,890 7,997
--------- ---------
29,721 29,503
--------- ---------
$ 506,629 $ 484,175
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 11
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- -----------
(Unaudited)
(in thousands)
<S> <C> <C>
CAPITALIZATION
Common shareholders' equity .................. $157,074 $155,721
Long-term debt ............................... 160,529 120,809
-------- --------
317,603 276,530
-------- --------
CURRENT LIABILITIES
Notes payable to banks ....................... 6,000 38,000
Long-term debt and preferred shares
due within one year ........................ 510 260
Accounts payable ............................. 13,770 10,054
Taxes payable ................................ 7,776 6,147
Accrued interest ............................. 1,575 1,405
Other accrued liabilities .................... 10,947 7,984
-------- --------
40,578 63,850
-------- --------
OTHER CREDITS
Advances for construction .................... 56,484 54,744
Contributions in aid of construction ......... 38,630 36,530
Accumulated deferred income taxes - net ...... 47,783 46,902
Unamortized investment tax credits ........... 1,884 3,155
Regulatory tax-related liability ............. 3,110 1,906
Other ........................................ 557 558
-------- --------
148,448 143,795
-------- --------
$506,629 $484,175
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 12
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------
1999 1998
-------- --------
($ in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ......................................... $ 39,210 $ 32,148
Electric ...................................... 2,818 2,853
-------- --------
42,028 35,001
-------- --------
OPERATING EXPENSES
Water purchased ............................... 7,370 8,157
Power purchased for pumping ................... 1,571 1,318
Power purchased for resale .................... 2,330 1,057
Groundwater production assessment ............. 1,978 2,128
Supply cost balancing accounts ................ 353 (921)
Other operating expenses ...................... 3,836 3,765
Administrative and general expenses ........... 7,274 5,383
Depreciation .................................. 3,380 2,975
Maintenance ................................... 1,671 1,826
Taxes on income ............................... 3,428 2,275
Other taxes ................................... 1,570 1,452
-------- --------
34,761 29,415
-------- --------
Operating income .............................. 7,267 5,586
OTHER INCOME/(LOSS) ............................... 137 (12)
-------- --------
Income before interest charges ................ 7,404 5,574
INTEREST CHARGES .................................. 3,006 2,807
-------- --------
NET INCOME ........................................ 4,398 2,767
DIVIDENDS ON PREFERRED SHARES ..................... -- (23)
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ........ $ 4,398 $ 2,744
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ..... 100 100
======== ========
Basic Earnings Per Common Share ................... $ 43,980 $ 27,440
======== ========
Dividends Declared Per Common Share ............... $ 30,500 $ 28,217
======== ========
</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 SIX MONTHS
ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
-------- --------
($ in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ........................................ $ 71,423 $ 58,314
Electric ..................................... 6,691 6,642
-------- --------
78,114 64,956
-------- --------
OPERATING EXPENSES
Water purchased .............................. 14,318 13,425
Power purchased for pumping .................. 3,013 2,624
Power purchased for resale ................... 3,521 2,444
Groundwater production assessment ............ 3,688 3,608
Supply cost balancing accounts ............... (121) (1,237)
Other operating expenses ..................... 7,364 7,026
Administrative and general expenses .......... 13,596 10,746
Depreciation ................................. 6,756 5,949
Maintenance .................................. 3,808 3,662
Taxes on income .............................. 5,744 3,744
Other taxes .................................. 3,193 2,997
-------- --------
64,880 54,988
-------- --------
Operating income ............................. 13,234 9,968
OTHER INCOME ..................................... 236 131
-------- --------
Income before interest charges ............... 13,470 10,099
INTEREST CHARGES ................................. 5,982 5,489
-------- --------
NET INCOME ....................................... 7,488 4,610
DIVIDENDS ON PREFERRED SHARES .................... -- (46)
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ....... $ 7,488 $ 4,564
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .... 100 100
======== ========
Basic Earnings Per Common Share .................. $ 74,880 $ 45,640
======== ========
Dividends Declared Per Common Share .............. $ 61,400 $ 56,433
======== ========
</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 JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30,
------------------------
1999 1998
--------- ---------
($ in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ....................................... $ 147,902 $ 133,819
Electric .................................... 13,250 13,342
--------- ---------
161,152 147,161
--------- ---------
OPERATING EXPENSES
Water purchased ............................. 31,726 34,146
Power purchased for pumping ................. 7,397 7,171
Power purchased for resale .................. 6,091 5,337
Groundwater production assessment ........... 7,647 6,874
Supply cost balancing accounts .............. 1,144 (1,105)
Other operating expenses .................... 14,773 13,298
Administrative and general expenses ......... 24,733 22,104
Depreciation ................................ 13,077 11,423
Maintenance ................................. 7,456 7,165
Taxes on income ............................. 12,359 10,271
Other taxes ................................. 6,320 6,162
--------- ---------
132,723 122,846
--------- ---------
Operating income ............................ 28,429 24,315
OTHER INCOME .................................... 1,335 629
--------- ---------
Income before interest charges .............. 29,764 24,944
INTEREST CHARGES ................................ 11,700 10,667
--------- ---------
NET INCOME ...................................... 18,064 14,277
DIVIDENDS ON PREFERRED SHARES ................... 0 (92)
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ...... $ 18,064 $ 14,185
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ... 100 100
========= =========
Basic Earnings Per Common Share ................. $ 180,640 $ 141,850
========= =========
Dividends Declared Per Common Share ............. $ 120,287 $ 112,419
========= =========
</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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM Operating Activities:
Net income ...................................... $ 7,488 $ 4,610
Adjustments for non-cash items:
Depreciation and amortization .................... 7,017 6,324
Deferred income taxes and
investment tax credits ....................... 768 3,028
Other - net .................................... (2,619) 1,314
Changes in assets and liabilities:
Accounts receivable ............................ (1,350) 859
Prepayments .................................... 446 2,935
Supply cost balancing accounts ................. (122) (1,241)
Accounts payable ............................... 3,716 230
Taxes payable .................................. 1,601 (3,232)
Unbilled revenue ............................... (1,819) (207)
Other .......................................... 2,345 32
-------- --------
Net Cash Provided ............................ 17,471 14,652
-------- --------
Investing Activities:
Construction expenditures ......................... (21,129) (19,137)
-------- --------
Net Cash Used ............................... (21,129) (19,137)
-------- --------
Financing Activities:
Issuance of securities ........................... -- 14,999
Receipt of advances and contributions ............ 3,263 1,844
Proceeds from long-term debt, net of
redemption of preferred shares ................. 39,971 486
Refunds on advances ............................. (727) (1,871)
Repayments of notes payable to banks ............. (32,000) (8,000)
Common and preferred dividends paid .............. (6,140) (5,688)
-------- --------
Net Cash Provided ........................... 4,367 1,770
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 709 (2,715)
Cash and Cash Equivalents, Beginning of period ..... 524 4,186
-------- --------
Cash and Cash Equivalents, End of period ........... $ 1,233 $ 1,471
======== ========
</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 $3.1 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 June 30, 1999
- ------------------------------------------ --------------------------------------------------------------------
Water Electric
---------------------------------------------------
Region I Region II Region III
-------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Operating revenues $6,808 $17,795 $14,605 $2,820
Operating income before income taxes 1,508 4,855 3,667 665
Identifiable assets 103,075 131,022 172,537 25,234
Depreciation expense 684 1,011 1,348 337
Capital additions 2,036 6,149 4,009 486
-------------- --------------- ---------------- --------------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Three Months Ended June 30, 1998
- ------------------------------------------ --------------------------------------------------------------------
Water Electric
---------------------------------------------------
Region I Region II Region III
-------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Operating revenues $5,897 $13,964 $12,285 $2,855
Operating income before income taxes 1,585 2,910 2,584 782
Identifiable assets 92,663 116,389 163,141 25,376
Depreciation expense 639 843 1,230 263
Capital additions 5,220 3,478 3,172 505
-------------- --------------- ---------------- --------------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Six Months Ended June 30, 1999
- ------------------------------------------ --------------------------------------------------------------------
Water Electric
---------------------------------------------------
Region I Region II Region III
-------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Operating revenues $12,130 $32,667 $26,621 $6,696
Operating income before income taxes 2,326 7,770 6,584 2,298
Identifiable assets 103,075 131,022 172,537 25,234
Depreciation expense 1,368 2,020 2,696 672
Capital additions 5,710 10,457 6,401 958
-------------- --------------- ---------------- --------------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Six Months Ended June 30, 1998
- ------------------------------------------ --------------------------------------------------------------------
Water Electric
---------------------------------------------------
Region I Region II Region III
-------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Operating revenues $10,535 $26,081 $21,693 $6,647
Operating income before income taxes 2,341 5,415 3,861 2,095
Identifiable assets 92,663 116,389 163,141 25,376
Depreciation expense 1,278 1,686 2,459 526
Capital additions 7,746 5,914 7,089 887
-------------- --------------- ---------------- --------------
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
(dollars in thousands) For The Twelve Months Ended June 30, 1999
- ------------------------------------------ --------------------------------------------------------------------
Water Electric
---------------------------------------------------
Region I Region II Region III
-------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Operating revenues $26,523 $63,858 $57,510 $13,261
Operating income before income taxes 6,784 14,088 15,866 4,050
Identifiable assets 103,075 131,022 172,537 25,234
Depreciation expense 2,646 3,705 4,938 1,788
Capital additions 11,283 27,601 6,493 1,798
-------------- --------------- ---------------- --------------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Twelve Months Ended June 30, 1998
- ------------------------------------------ --------------------------------------------------------------------
Water Electric
---------------------------------------------------
Region I Region II Region III
-------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Operating revenues $23,708 $58,449 $51,651 $13,353
Operating income before income taxes 6,170 12,328 11,591 4,497
Identifiable assets 92,663 116,389 163,141 25,376
Depreciation expense 2,434 3,203 4,758 1,028
Capital additions 12,786 20,233 10,430 2,083
-------------- --------------- ---------------- --------------
</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 243,297 water customers and 20,933 electric
customers at June 30, 1999, or a total of 264,230 customers, compared with
262,713 total customers at June 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 86.5%, 89.9% and 90.5% of total water revenues for the three, six
and twelve months ended June 30, 1999, respectively as compared to 86.7%, 91.8%
and 92.2% for the three, six and twelve months ended June 30, 1998,
respectively.
RESULTS OF OPERATION
Basic earnings per common share for the three months ended
June 30, 1999 increased by 58.1% to $0.49 per share as compared to $0.31 per
share for the comparable period last year. Basic earnings per common share for
the six months ended June 30, 1999 increased by 60.8% to $0.82 per share as
compared to $0.51 per share for the comparable period last year. Basic earnings
for the twelve months ended June 30, 1999 increased by 22.2% to $1.93 per share
as compared to $1.58 per share for the twelve months ended June 30, 1998. The
increase in the recorded results primarily reflects higher revenues during the
first two quarters of 1999 as is more fully discussed below.
As compared to last year, water sales volumes for the three,
six and twelve months ended June 30, 1999 increased by 18.5%, 17.3% and 6.2% as
compared to last year due primarily to the much drier and warmer weather
conditions throughout Southern California this year. Water operating revenues
for the three, six and twelve months ended June 30, 1999 increased by 22.2%,
22.7%, and 10.7%, respectively, from the same periods ended June 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 June 30, 1999, kilowatt-hour
sales of electricity decreased slightly by 1.5% as compared to the same period
ended June 30, 1998 and, as a result, electric operating revenues for the
quarter ended June 30, 1999 decreased by 1.2%. Kilowatt-hour sales increased by
3.6% and 2.1%, respectively, for the six and twelve months ended June 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 six and
twelve month periods ending June 30, 1999 increased only by 0.7% and decreased
slightly by 0.7%, respectively, over the comparable periods last year due to the
fact that the increases in kilowatt-hour sales were mainly contributed by
industrial power users, billed at relatively lower rates.
Purchased water costs decreased by 9.6% for the three months
ended June 30, 1999 as compared to the same period ending in 1998 due to a
refund of $1.4 million received by SCW in April 1999 from the Water
Replenishment District of Southern California (WRD), offset by a 9.4% increase
in volumes purchased due to higher sales volumes. For the six months ended June
30, 1999, purchased water costs increased by 6.7% as compared to the same period
last year, reflecting a 14.0% increase in volumes purchased, partially offset by
the above mentioned WRD refund. As compared to the twelve months ended June 30,
1998, purchased water costs decreased by 7.1% due to an additional WRD refund of
$1.4 million received in December 1998. The twelve-month comparison is also
affected by reimbursements from potentially responsible parties related to
contamination in SCW's Culver City CSA of approximately $2,143,000 received
during the twelve months ended June 30, 1998 compared with reimbursements of
$1,145,000 received during the period ended June 30, 1999. See the section
entitled "Environmental Matters - Matters Related to Culver City System."
18
<PAGE> 21
Cost of power purchased for pumping increased by 19.2%,
14.8% and 3.2%, respectively, for the three, six and twelve months ended June
30, 1999 as compared to the same periods ended June 30, 1998 due to an increase
in pumped groundwater in SCW's water supply mix due to the increased sales
volumes.
As compared to the three, six and twelve months ended June
30, 1998, the cost of power purchased for resale increased by 120.4%, 44.1% and
14.1%, respectively, for the three, six and twelve months ended June 30, 1999
due primarily to additional accruals for energy demand charges from Registrant's
energy supplier in the second quarter of 1999.
Groundwater production assessments are 7.0% lower for the
three months ended June 30, 1999 due primarily to a one-time reclassification
from this category to purchased water during the second quarter of 1999. For the
six and twelve months ended June 30, 1999, groundwater production assessments
increased by 2.2% and 11.2%, respectively, reflecting increased volumes of
pumped water in SCW's total water supply and additional assessments particularly
associated with increased pumping in SCW's Metropolitan and Orange County
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. Recovery of previously
under-collected supply cost was higher for the three, six and twelve months
ended June 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 increased by 2.2%, 5.1% and 11.4%,
respectively, for the three, six and twelve months ended June 30, 1999 as
compared to the same periods ended June 30, 1998 reflecting increased costs for
water treatment, and higher amounts accrued for uncollectible accounts as a
result of increased revenues. The twelve-month comparison was also affected by
increased construction work being performed during the last six months of 1997
which increased labor amounts capitalized, which otherwise would have been
charged to this category. In addition, reversals in late 1997 of costs
associated with recovery of water quality expenditures through the CPUC's
memorandum account mechanism also contributed to the increase. There were no
such reversals of similar magnitude for the twelve months ended June 30, 1999.
Administrative and general expenses increased by 36.9%,
28.0% and 13.1% for the three, six and twelve months ended June 30, 1999 as
compared to the same periods ended June 30, 1998. This increase is due
principally to an increase in costs associated with the terminated acquisition
of Dominguez Services Corp., increased employee benefit costs, and additional
amounts reserved for certain legal proceedings. See the section entitled "Legal
Proceedings" for more information.
Depreciation expense increased by 13.6%, 15.8% and 18.0%,
respectively, for the three, six and twelve months ended June 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 is reflected in the twelve months
ended June 30, 1999. There were no similar amortization costs for the twelve
months ended June 30, 1998.
As compared to the three months ended June 30, 1998,
maintenance expense decreased by 8.4% during the second quarter of 1999 due to a
temporary shift from maintenance to capital projects.
19
<PAGE> 22
Maintenance expense increased by 4.0% and 4.1% for the six and twelve months
ended June 30, 1999 as compared to the six and twelve months ended June 30,
1998, respectively, reflecting the effects of the wet weather conditions
experienced earlier in 1998 which hindered maintenance activities. SCW
anticipates that maintenance expenses will increase during the remaining six
months of 1999.
Taxes on income increased by 50.5%, 52.0% and 17.6% for the
three, six and twelve months ended June 30, 1999 as compared to the three and
twelve months ended June 30, 1998 as a result of higher pre-tax income.
Other taxes increased by 8.2%, 6.6% and 2.6%, respectively,
for the three, six and twelve months ended June 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 June 30, 1998, other
income for the three and six months ended June 30, 1999 increased due to reduced
expenditures related to SCW's non-regulated joint-venture which was terminated
in December 1998. As compared to the twelve months ended June 30, 1998, other
income increased by 42.6% in the comparable period ended June 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 7.1%, 9.0% and 9.7% for the
three, six and twelve months ended June 30, 1999 as compared to the three, six
and twelve months ended June 30, 1998, respectively. The increases are due to
$40 million in additional long-term debt issued in January, 1999, partially
offset by the retirement of $10 million of 10.10% note in December, 1998. The
six-month and twelve-month comparisons are 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 June 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 June
30, 1999. As of that date, Registrant had a total of $6 million in borrowing
outstanding 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
20
<PAGE> 23
on the priority of leaks detected, fire protection enhancement and a reflection
of the underlying replacement schedule. In addition, SCW upgrades its electric
and water supply facilities in accordance with industry standards, local
requirements and CPUC requirements. SCW's Board of Directors has approved
anticipated net capital expenditures of approximately $42.1 million for 1999.
Neither AWR nor ASUS have any material capital expenditures.
WATER SUPPLY
For the three months ended June 30, 1999, SCW supplied a
total of 21,224,000 ccf of water as compared to 18,749,000 ccf for the three
months ended June 30, 1998. Of the total 21,224,000 ccf of water supplied during
the second quarter of 1999, approximately 60.4% came from pumped sources and
38.0% was purchased from others, principally the Metropolitan Water District of
Southern California (MWD) and its member agencies. The remaining 1.6% of total
supply came from the United States Bureau of Reclamation (the "Bureau) under a
no-cost contract. For the three months ended June 30, 1998, 60.6%, 39.3% and
0.1% was supplied from pumped sources, purchased from MWD and the Bureau,
respectively.
For the six months ended June 30, 1999, SCW supplied a total
of 37,289,000 ccf of water, 61.2% of which came from pumped sources, 37.9% was
purchased and the remaining amount was supplied by the Bureau. During the six
months ended June 30, 1998, SCW produced 32,635,000 ccf of water. Of this amount
61.9% came from pumped sources, 38.0% was purchased and the remainder was
provided by the Bureau.
During the twelve months ended June 30, 1999, SCW supplied
83,031,000 ccf of water as compared to 78,581,000 ccf supplied during the twelve
months ended June 30, 1998. During the twelve month period ended June 30, 1999,
pumped sources provided 60.6% of total supply, 38.9% was purchased from MWD and
the remaining 0.5% was supplied by the Bureau. For the twelve months ended June
30, 1998, 56.8%, 41.4% and 1.8%, respectively, was supplied from pumped sources,
purchased from MWD and the Bureau.
The MWD is a water district organized under the laws of the
State of California for the purpose of delivering imported water to areas within
its jurisdiction. SCW has 52 connections to the water distribution facilities of
MWD and other municipal water agencies. MWD imports water from two principal
sources: the Colorado River and the State Water Project (SWP). Available water
supplies from the Colorado River and the SWP have historically been sufficient
to meet most of MWD's requirements and MWD's supplies from these sources are
anticipated to continue to remain adequate through 1999. MWD's import of water
from the Colorado River is expected to decrease in future years due to the
requirements of the Central Arizona Project in the State of Arizona. In
response, MWD has taken a number of steps to construct additional storage
capacity and increase available water supplies, including effecting transfers of
water rights from other sources.
The outlook for water supply in 1999 remains favorable. 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. California's northern
reservoirs remain near full capacity. Although rainfall in Southern California
is about one-half of normal level, in
21
<PAGE> 24
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
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
22
<PAGE> 25
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 the end of August 1999, the EPA is scheduled to propose
regulations requiring disinfection of certain groundwater systems and provide
guidance on determining which systems must provide disinfection facilities. The
EPA may utilize the cost/benefit analysis provided in the 1996 SDWA amendments
to establish such regulations. It is anticipated that the regulations will apply
to several of SCW's systems using groundwater supplies. While no assurance can
be given as to the nature and cost of any additional compliance measures, if
any, Registrant does not believe that such regulations will impose significant
compliance costs, since SCW already currently engages in disinfection of its
groundwater systems.
Regulation of Radon and Arsenic
Registrant will be subject to new regulations regarding radon
and arsenic. EPA must propose an arsenic rule by January 1, 2000 and adopt a
rule one year later. The EPA originally had 180 days after enactment of the 1996
SDWA amendments to develop a plan to study ways to reduce arsenic health risk
uncertainties and was authorized to enter into cooperative agreements to carry
out the study. It is anticipated that the completed study will be available for
review in 1999. Depending on the MCL eventually established for arsenic,
compliance could cause Registrant to implement costly well-head treatment
remedies such as ion exchange or, alternatively, to purchase additional and more
expensive water supplies already in compliance, for blending with well sources.
The EPA has withdrawn its proposed radon rule and has arranged
for the National Academy of Sciences to conduct a risk assessment and a study of
risk-reduction benefits associated with various mitigation measures. The
National Academy of Sciences has completed its study and has agreed with much of
EPA's original findings but has slightly reduced the ingestion risk initially
assumed by EPA. The EPA is expected to establish an MCL based on the findings of
the National Academy of Sciences' risk assessment report and to set an
alternative MCL, based on potential mitigation measures for overall radon
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reduction, by the end of August 1999. Although Registrant is unable to predict
the standard for radon, Registrant itself is currently conducting studies to
determine the best treatment for affected wells.
Voluntary Efforts to Exceed Surface Water Treatment Standards
SCW is a voluntary member of the EPA's "Partnership for Safe
Water", a national program designed to further protect the public from diseases
caused by cryptosporidium and other microscopic organisms. As a volunteer in the
program, SCW commits to exceed current regulations governing surface water
treatment to ensure that its surface treatment facilities are performing as
efficiently as possible.
Fluoridation of Water Supplies
Registrant is subject to State of California Assembly Bill 733
which requires fluoridation of water supplies for public water systems serving
more than 10,000 service connections. Although the bill requires affected
systems to install treatment facilities only when public funds have been made
available to cover capital and operating costs, the bill requires the CPUC to
authorize cost recovery through rates should public funds for operation of the
facilities, once installed, become unavailable in future years.
Matters Relating to Arden-Cordova System
In January, 1997, SCW was notified that ammonium perchlorate
in amounts above the state-determined action level had been detected in three of
its 27 wells serving its Arden-Cordova system. Aerojet-General Corporation has,
in the past, used ammonium perchlorate in their processing as an oxidizer of
rocket fuels. SCW took the three wells detected with ammonium perchlorate out of
service at that time. Although neither the EPA nor the DOHS has established a
drinking water standard for ammonium perchlorate, DOHS has established an action
level of 18 parts per billion (ppb) which required SCW to notify customers in
its Arden-Cordova customer service area of detection of ammonium perchlorate in
amounts in excess of this action level. In April, 1997, SCW found ammonium
perchlorate in three additional wells and, at that time, removed those wells
from service until it was determined that the levels were below the
state-determined action level. Those wells were returned to service. SCW
periodically monitors these wells to determine that levels of perchlorate are
below the action level currently in effect.
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 three of its wells in its Arden-Cordova system. Each of the
wells has been removed from service. NDMA is an additional by-product from the
production of rocket fuel and it is believed that such contamination is related
to the activities of Aerojet-General Corporation. Aerojet-General Corporation
has reimbursed SCW for constructing a pipeline to interconnect with the City of
Folsom water system to provide an alternative source(s) of water supply in SCW's
Arden-Cordova customer service area as well as reimburse SCW for costs
associated with the drilling and equipping of two new wells.
SCW and Aerojet-General Corporation are in negotiations on
other matters related to procedures to address cleanup of the contaminated
wells, costs associated with the cleanup, increased costs of purchased water as
compared to pumped sources and costs associated with developing new sources of
groundwater supply. SCW and Aerojet-General Corporation 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 consummated favorably to SCW, the reimbursement from
Aerojet-General reduces SCW's utility plant and costs of purchased water. SCW
remains vigilant in its efforts to assure a safe water supply is
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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.
Matters Relating to Culver City System
The compound, methyl tertiary butyl ether (MTBE), has been
detected in the Charnock Basin, located in the city of Santa Monica and within
SCW's Culver City customer service area. MTBE is an oxygenate used in
reformulated fuels. At the request of the Regional Water Quality Control Board,
the City of Santa Monica and the California Environmental Protection Agency, SCW
removed two of its wells in the Culver City system from service in October, 1996
to help in efforts to avoid further spread of the MTBE contamination plume.
Neither of these wells has been found to be contaminated with MTBE. SCW is
purchasing water from the MWD at an increased cost to replace the water supply
formerly pumped from the two wells removed from service.
Several studies are under way to determine the possible
sources and causes of the MTBE contamination. The federal EPA is pursuing an
enforcement effort to reach a settlement with the potentially responsible
parties on matters relating to the cleanup of the contamination. Registrant is
unable to predict the outcome of the EPA's enforcement efforts. Pursuant to an
agreement with SCW, two of the potentially responsible parties have reimbursed
SCW's legal and consulting costs related to this matter as well as for increased
costs incurred by SCW in purchasing replacement water. SCW and such parties have
negotiated a month-to-month extension of this agreement which is anticipated to
remain effective until the underlying groundwater basin contamination is
remediated. 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.
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
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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. SCW and CPUC Staff are in the final stages
of a settlement on all issues in these cases 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. 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 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 $3.1
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.
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Because Registrant is dependent upon the proper functioning of these computer
systems and other equipment containing date sensitive technology, a failure of
these systems could have a material and adverse affect on Registrant resulting
in business interruption or shutdown, financial loss, regulatory citations and
legal liability.
Registrant has been actively assessing its Y2K readiness since
early 1997 and has inventoried its significant computer hardware and software
programs. Since Registrant is dependent upon its management information and
customer service systems, upgrades to these systems have been a priority.
Registrant has, since 1995, been in the process of replacing and/or upgrading as
necessary its core business information and operating systems with newer
technologies, all of which are intended to be Y2K ready. All major upgrades to
these systems are completed and were operational at year-end 1998. Costs
associated with the implementation and upgrade of major management information
and customer service software systems, as well as upgrades to mainframe hardware
systems, have been approved by the CPUC and are being recovered through rates.
In addition to work being done on its internal systems,
Registrant has sought compliance certification from external vendors and service
providers. Testing on Registrant's interface with financial and other
institutions with which it does business is being conducted to ensure Y2K
readiness. In order to more fully address Y2K readiness of its field equipment,
major vendors and service providers, Registrant engaged the services of a
nationally-recognized business consulting firm and has completed its written
plan to address the Y2K issue. Registrant has established a Year 2000 Task Force
consisting of senior management and operating personnel which will complete the
inventory of computer systems and other devices with embedded technology, as
well as other considerations potentially not revealed in preliminary internal
analyses.
Registrant's general process for addressing the Y2K issue is
(i) to inventory all systems that may have a potential Y2K impact, (ii) to
determine the materiality of these non-Y2K ready systems, (iii) to replace and
test, correct and test, or prepare for the failure of material items that have
been determined to be non-Y2K ready, and (iv) to prepare contingency plans.
Some, less critical systems may not be fully Y2K ready, but are not anticipated
to materially affect Registrant's operations.
Registrant is significantly dependent on third party
suppliers, such as energy and telecommunication companies and wholesale water
suppliers. In order to conduct its business, Registrant has initiated due
diligence with certain of its major service providers to address their Y2K
readiness. In the event that such suppliers might be adversely affected by Y2K,
Registrant is preparing its contingency plan which will likely include, among
other things, increased staffing during critical periods, manual back-up for
automated systems and the use of portable generators capable of providing power
during a black-out. Registrant does not have, and may never fully have,
sufficient information about the Y2K exposure or remediation plans of these
third parties to adequately predict the risks posed by them to Registrant. If
the third parties have Y2K problems that are not remedied, resulting problems
could include loss of utility services and disruption of water supplies.
To date, there have been no significant costs associated with
Y2K readiness that have not been approved by the CPUC for recovery through
rates. Registrant estimates that it may incur up to $800,000 in expense
depending on the results of on-going tests, to address Y2K readiness. Registrant
believes that the future costs, which are prudently incurred, will also be
allowed for recovery through rates. The CPUC has notified all utilities under
its jurisdiction, including SCW, that it will review their Y2K preparations. SCW
has submitted its Y2K contingency plan to the CPUC in accordance with its
direction.
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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:
o a suit filed on April 24, 1997 alleging personal injury and
property damage as a result of the sale of water from wells
located in an area of the San Gabriel Valley that has been
designated a federal superfund site
o a suit filed on November 3, 1997 alleging personal injury and
property damage as a result of the sale of water; few of our
systems are located in the geographical area covered by this
suit
o a suit filed on January 8, 1998 alleging personal injury and
property damage as a result of the delivery of contaminated
water in SCW's Arden-Cordova service area
o a suit filed on February 2, 1998 alleging personal injury and
property damage as a result of the sale of water from wells
located in an area of the San Gabriel Valley that has been
designated a superfund site
o a suit filed on February 4, 1998 alleging personal injury and
property damage as a result of the sale of water from wells
located in an area of the San Gabriel Valley that has been
designated a superfund site
o a suit filed in April 1998 alleging personal injury and
property damage as a result of the delivery of contaminated
water in SCW's Arden-Cordova service area
o three suits filed on July 30, 1998 alleging personal injury
and property damage as a result of the sale of water from
wells located in an area of the San Gabriel Valley that has
been designated a superfund site
o a suit filed on December 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
o a suit filed in July 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
In March 1998, the CPUC issued an order instituting investigation (the
"OII") as a result of these types of suits being filed against water utilities
in California. The CPUC is seeking to determine:
o whether existing standards and policies regarding drinking
water quality adequately protect the public health
o whether water utilities are following existing standards
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The lawsuits have been stayed pending the outcome of the OII and, in
the case of those lawsuits related to the San Gabriel Valley, a hearing to be
held on August 23, 1999 before the First District Court of Appeals. We
anticipate that the CPUC will issue a decision in the OII on or about September
30, 1999. We are unable to predict the nature of the Court's actions, the CPUC's
final decision or the outcome of the lawsuits. An adverse outcome in this type
of litigation is, however, likely to be material.
The CPUC has authorized a memorandum account for legal expenses
incurred by water utilities, including SCW, in the water quality lawsuits. Under
the memorandum account procedure, SCW may recover litigation costs from
ratepayers to the extent authorized by the CPUC. The CPUC has not yet authorized
SCW to recover any of its litigation costs.
Environmental Regulation
SCW is subject to increasingly stringent environmental regulations
that will result in increasing capital and operating costs. These regulations
include:
o the 1996 amendments to the Safe Drinking Water Act that
require increased testing and treatment of water to reduce
specified contaminants to minimum containment levels
o interim regulations expected to be adopted before the end of
2000 requiring increased surface-water treatment to decrease
the risk of microbial contamination; these regulations will
affect SCW's five surface water treatment plants
o additional regulation of disinfection/disinfection byproducts
expected to be adopted before the end of 2002; these
regulations will potentially affect two of SCW's systems
o 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
o potential regulation of radon and arsenic
o 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:
o by filing for a general rate increase
o by filing for recovery of certain expenses
o by filing an "advice letter" for certain plant additions,
thereby increasing rate base
In addition, SCW recovers certain supply costs through a balancing
account mechanism. Supply costs include the cost of purchased water and power
and groundwater production assessments. The balancing account mechanism is
intended to insulate SCW's earnings from changes in supply costs that
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are beyond SCW's control. The balancing account is not, however, designed to
insulate SCW's earnings against changes in supply mix. As a result, SCW may not
recover increased costs due to increased use of purchased water through the
balancing account mechanism. In addition, balancing account adjustments, if
authorized by the CPUC, may result in either increases or decreases in revenues
attributable to supply costs incurred in prior periods, depending upon whether
there has been an undercollection or overcollection of supply costs.
There are also a number of matters pending before the CPUC that may
affect our future financial results. These matters include:
o applications filed by SCW to increase rates in four of its 16
rate-making jurisdictions; a final decision is not expected
until near year-end 1999 although a tentative settlement has
been worked out
o an application filed to consolidate the rate-making
jurisdictions located in SCW's Region III area into a single
tariff
o the OII
o new guidelines under consideration by the CPUC for the
acquisition and merger of water utilities and for
privatization transactions
Adequacy of Water Supplies
The adequacy of water supplies varies from year to year depending upon
a variety of factors, including
o rainfall
o the amount of water stored in reservoirs
o the amount used by our customers and others
o water quality, and
o legal limitations on use.
As a result of heavier than normal rainfall in the winter of 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:
o they adversely affect supply mix by causing us to rely on more
expensive purchased water
o they adversely affect operating costs
o they may result in an increase in capital expenditures for
building pipelines to connect to alternative sources of
supplies and reservoirs and other facilities to conserve or
reclaim water
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We may be able to recover increased operating and construction costs
for our regulated systems through the ratemaking process. We may also be able to
recover certain of these costs under the terms of our contractual agreements
with municipalities.
In certain circumstances, we may recover these costs from third parties
that may be responsible, or potentially responsible, for groundwater
contamination. We are currently completing negotiations with Aerojet General
Corporation regarding costs associated with the cleanup of the groundwater
supply for our Arden-Cordova System and for the increased costs of purchasing
water and developing new sources of groundwater supply. We are also negotiating
with two potentially responsible parties on matters relating to the clean-up and
purchase of replacement water in the Charnock Basin located in the cities of
Santa Monica and Culver City. These two potentially responsible parties have
previously reimbursed us for replacement water and certain legal and consulting
expenses. The Charnock Basin is in SCW's service territory.
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.
On April 24, 1997, a complaint in multiple counts seeking
recovery for negligence, wrongful death, strict liability, trespass, public
nuisance, private nuisance, negligence per se, strict liability for
ultrahazardous activities and fraudulent concealment was filed in Los Angeles
Superior Court on behalf of approximately 145 plaintiffs (the "Adler Matter").
After preliminary Demurrers and Motions to Strike, these same plaintiffs filed a
First Amended Complaint on or about October 16, 1997 seeking recovery on
essentially the same theories. Plaintiffs allege SCW has provided and continues
to provide them with allegedly contaminated water from wells located in an area
of the San Gabriel Valley that has been designated a federal environmental
superfund site, and that the maintenance of this contaminated well water has
resulted in contamination of the soil, subsurface soil, and surrounding air,
with trichloroethylene (TCE), perchloroethene (PCE), carbon tetrachloride and
other solvents. Plaintiffs further allege that SCW's actions have caused, and
continue to cause, injuries to the plaintiffs. Plaintiffs seek damages,
including general, special, and punitive damages, according to proof at trial,
as well as attorney's fees on certain causes of action, costs of suit, and other
unspecified relief.
On June 24, 1998, the judge assigned to the Adler Matter,
acting on the Court's own motion, issued a stay of all proceedings in the Adler
matter pending the outcome of the CPUC's Order Instituting Investigation (OII)
proceeding described below. Plaintiffs in the Adler matter petitioned the Second
District Court of Appeal for a Writ of Mandamus to have the stay lifted. Prior
to hearings before the Appellate Court, the Court advised all parties of a
potential conflict of interest due to the fact that two clerical staff members
of the Court were plaintiffs in one of the consolidated cases, Santamaria v.
Suburban Water Systems. As a result, the Adler matter and all the consolidated
cases were transferred to the First District Court of Appeal in San Francisco.
The Writ of Mandamus was heard by the First District Appellate Court on April
19, 1999.
SCW was served on November 3, 1997 as Doe 1 in the matter of
Santamaria v. Suburban Water Systems which was filed in Los Angeles Superior
Court (the "Santamaria Matter"). On August 27, 1998, the judge assigned to the
Santamaria Matter sustained SCW's demurrer without leave to amend and dismissed
the action against SCW. Plaintiff's filed a Notice of Appeal with the Second
District Court of
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Appeals and this matter was consolidated with the Adler and other cases. A
conflict of interest arose as was mentioned previously. As a result, the Notice
of Appeal was transferred to the First District Court of Appeal. The Santamaria
matter heard by the First District Appellate Court on April 19, 1999, along with
the other cases. Registrant is unable to predict at this time what actions the
Court may take or what rulings the Court may make with regard to these matters.
On July 30, 1998, a complaint in multiple counts, styled
Georgianna Dominguez, et al. v. Southern California Water Company, et al., was
filed in Los Angeles Superior Court seeking recovery for negligence, wrongful
death, strict liability, permanent trespass, continuing trespass, public
permanent nuisance, public continuing nuisance, private permanent nuisance,
private continuing nuisance, negligence per se, absolute liability for
ultrahazardous activity and fraudulent concealment on behalf of six plaintiffs
(the "Dominguez Matter"). Plaintiff's seek damages, including general and
special damages according to proof, punitive and exemplary damages, as well as
attorney's fees, costs of suit and other unspecified relief. SCW was served with
the complaint on September 21, 1998.
On October 13, 1998, a complaint in multiple counts was filed
in Los Angeles Superior Court, styled Anderson, et al. v. Suburban Water
Systems, et al., which seeks recovery for negligence, wrongful death, strict
liability, permanent trespass, continuing trespass, continuing nuisance,
permanent nuisance, negligence per se, absolute liability for ultrahazardous
activity, fraudulent concealment, conspiracy/fraudulent concealment, battery and
unfair business practices on behalf of 180 plaintiffs (the "Anderson Matter").
Plaintiff's seek damages, including general and special damages according to
proof, punitive and exemplary damages, as well as attorney's fees, costs of suit
and other unspecified relief. SCW has not yet been served in this matter.
On December 30, 1998, SCW was named as a defendant in a
complaint in multiple counts, styled Abarca, et al. v. City of Pomona, et al.,
filed in Los Angeles Superior Court which seeks recovery for negligence,
wrongful death, strict liability, permanent trespass, continuing trespass,
continuing nuisance, permanent nuisance, negligence per se, absolute liability
for ultrahazardous activity, fraudulent concealment, conspiracy/fraudulent
concealment, battery and unfair business practices on behalf of 383 plaintiffs
(the "Abarca Matter"). Plaintiff's seek damages, including general and special
damages according to proof, punitive and exemplary damages, as well as
attorney's fees, costs of suit and other unspecified relief. SCW was served on
June 18, 1999.
SCW was served on March 19, 1999 as Doe 1 in the matter styled
Celi, et al. v. San Gabriel Valley Water Company, et al., filed in Los Angeles
Superior Court which seeks recovery for negligence, wrongful death, strict
liability, permanent trespass, continuing trespass, public continuing nuisance,
public permanent nuisance, private permanent nuisance, private continuing
nuisance, negligence per se, absolute liability for ultrahazardous activity and
fraudulent concealment (the "Celi Matter"). Plaintiff's seek damages, including
general and special damages according to proof, punitive and exemplary damages,
as well as attorney's fees, costs of suit and other unspecified relief.
SCW was served on March 19, 1999 as Doe 3 in the matter styled
Boswell, et al. v. Suburban Water Systems, et al., filed in Los Angeles Superior
Court which seeks recovery for negligence, wrongful death, strict liability,
permanent trespass, continuing trespass, public continuing nuisance, public
permanent nuisance, private permanent nuisance, private continuing nuisance,
negligence per se, absolute liability for ultrahazardous activity and fraudulent
concealment (the "Boswell Matter"). Plaintiff's seek damages, including general
and special damages according to proof, punitive and exemplary damages, as well
as attorney's fees, costs of suit and other unspecified relief.
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SCW was served on March 19, 1999 as Doe 1 in the matter styled
Demciuc, et al. v. Suburban Water Systems, et al., filed in Los Angeles Superior
Court which seeks recovery for negligence, wrongful death, strict liability,
permanent trespass, continuing trespass, public continuing nuisance, public
permanent nuisance, private permanent nuisance, private continuing nuisance,
negligence per se, absolute liability for ultrahazardous activity and fraudulent
concealment (the "Demciuc Matter"). Plaintiff's seek damages, including general
and special damages according to proof, punitive and exemplary damages, as well
as attorney's fees, costs of suit and other unspecified relief.
SCW was served on March 19, 1999 as Doe 1 in the matter styled
Criner, et al. v. San Gabriel Valley Water Company, et al., filed in Los Angeles
Superior Court which seeks recovery for negligence, wrongful death, strict
liability, permanent trespass, continuing trespass, public continuing nuisance,
public permanent nuisance, private permanent nuisance, private continuing
nuisance, negligence per se, absolute liability for ultrahazardous activity and
fraudulent concealment (the "Criner Matter"). Plaintiff's seek damages,
including general and special damages according to proof, punitive and exemplary
damages, as well as attorney's fees, costs of suit and other unspecified relief.
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 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.
By Stipulation, the Abarca, Adejare, Anderson, Boswell, Celi,
Criner, Domciuc and Dominguez Matters have been "attached" to the Adler Matter,
and the parties have agreed that each of these matter will be bound by actions
taken in the Adler Matter, together the "Consolidated Matters." Parties to the
Stipulation have, however reserved any rights that might be distinct in each of
the consolidated Matters. Thus, the Consolidated Matters are presently under the
same stay order as was issued in the Adler Matter. A hearing is scheduled for
August 23, 1999 to address a motion filed by the plaintiff's requesting that the
stay currently in effect for Consolidated Matters be lifted, that the CPUC does
not, in fact, have jurisdiction over the issues in the consolidated matters and
that each of the matters be allowed to continue. SCW is unable to predict what
action, if any, the Court of Appeals may take in this request.
In January 1998 SCW was named a defendant in the matter of
Nathaniel Allen, Jr., et al. v. Aerojet-General Corporation, et al which was
filed in Sacramento Superior Court. The complaint makes claims based on wrongful
death, personal injury, property damage as a result of nuisance and trespass,
medical monitoring, and diminution of property values (the "Allen Matter").
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 April 1998, SCW was named a defendant in the matter of
Daphne Adams, et al. v. Aerojet General, et al. which was filed in Sacramento
Superior Court (the "Adams Matter"). The complaint makes claims based on
negligence, strict liability, trespass, public nuisance, private nuisance,
33
<PAGE> 36
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.
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 September 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.
34
<PAGE> 37
ITEM 2. CHANGES IN SECURITIES
As of June 30, 1999, earned surplus amounted to $58,580,000,
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 June 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No item was submitted during the second 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 July 23, 1999, the Board of Directors of Registrant
declared a regular quarterly dividend of $0.32 per common share. The dividend
will be paid September 1, 1999 to shareholders of record as of the close of
business on August 9, 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.
35
<PAGE> 38
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: August 11, 1999
36
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND INCOME STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS FILED
HEREWITH.
</LEGEND>
<CIK> 0000092116
<NAME> SOUTHERN CALIFORNIA WATER COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
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44
<EARNINGS-AVAILABLE-FOR-COMM> 7,339
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