<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
<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 September 30, 2000 the number of Common Shares outstanding, No Par Value
with Stated Value of $2.50, of American States Water Company was 10,078,038 all
of which are listed on the New York Stock Exchange.
As of September 30, 2000, all of the 100 outstanding Common Shares of Southern
California Water Company are owned by American States Water Company.
<PAGE> 2
AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1: Financial Statements 1
Consolidated Balance Sheets of American States Water Company as of
September 30, 2000 and December 31, 1999 2 - 3
Consolidated Statements of Income of American States Water Company for
the Three Months Ended September 30, 2000 and September 30, 1999 4
Consolidated Statements of Income of American States Water Company for
the Nine Months Ended September 30, 2000 and September 30, 1999 5
Consolidated Statements of Income of American States Water Company for
the Twelve Months Ended September 30, 2000 and September 30, 1999 6
Consolidated Statements of Cash Flow of American States Water Company for
The Nine Months Ended September 30, 2000 and September 30, 1999 7
Consolidated Balance Sheets of Southern California Water Company as of
September 30, 2000 and December 31, 1999 8 - 9
Consolidated Statements of Income of Southern California Water Company for
the Three Months Ended September 30, 2000 and September 30, 1999 10
Consolidated Statements of Income of Southern California Water Company for
the Nine Months Ended September 30, 2000 and September 30, 1999 11
Consolidated Statements of Income of Southern California Water Company for
the Twelve Months Ended September 30, 2000 and September 30, 1999 12
Consolidated Statements of Cash Flow of Southern California Water Company for
the Nine Months Ended September 30, 2000 and September 30, 1999 13
Notes to Financial Statements 14 - 16
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operation 17 - 32
Item 3: Quantitative and Qualitative Disclosures About Market Risks 32
PART II OTHER INFORMATION
Item 1: Legal Proceedings 32 - 35
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
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Item 5: Other Information 35
Item 6: Exhibits and Reports on Form 8-K 35 35
</TABLE>
ii
<PAGE> 4
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> 5
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ -----------
(Unaudited)
UTILITY PLANT, at cost (in thousands)
<S> <C> <C>
Water ........................................... $ 548,857 $ 532,007
Electric ........................................ 36,532 36,349
--------- ---------
585,389 568,356
Less - Accumulated depreciation ................. (163,076) (151,733)
--------- ---------
422,313 416,623
Construction work in progress ................... 48,700 32,972
--------- ---------
471,013 449,595
--------- ---------
OTHER PROPERTY AND INVESTMENTS .................... 11,418 10,583
--------- ---------
CURRENT ASSETS
Cash and cash equivalents ....................... 4,205 2,189
Accounts receivable -
Customers, less reserves of $783
in 2000 and $487 in 1999 .................... 12,365 10,135
Other ......................................... 4,880 4,347
Unbilled revenue ................................ 14,160 11,345
Materials and supplies, at average cost ......... 1,268 1,153
Supply cost balancing accounts .................. 8,072 4,774
Prepayments and other ........................... 4,483 4,851
Accumulated deferred income taxes - net ......... 5,048 5,546
--------- ---------
54,481 44,340
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets ................... 18,440 19,941
Other deferred charges .......................... 10,819 8,722
--------- ---------
29,259 28,663
--------- ---------
$ 566,171 $ 533,181
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 6
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
(Unaudited)
(in thousands)
<S> <C> <C>
CAPITALIZATION
Common shareholders' equity ..................... $ 192,917 $ 158,846
Preferred shares ................................ 1,600 1,600
Preferred shares subject to mandatory
redemption requirements ....................... 360 360
Long-term debt .................................. 167,163 167,363
--------- ---------
362,040 328,169
--------- ---------
CURRENT LIABILITIES
Notes payable to banks .......................... 14,000 21,000
Long-term debt and preferred shares
due within one year ........................... 260 340
Accounts payable ................................ 13,200 13,777
Taxes payable ................................... 8,098 5,432
Accrued interest ................................ 3,387 1,584
Other accrued liabilities ....................... 13,369 12,832
--------- ---------
52,314 54,965
--------- ---------
OTHER CREDITS
Advances for construction ....................... 57,924 57,485
Contributions in aid of construction ............ 39,302 38,895
Accumulated deferred income taxes - net ......... 49,412 48,302
Unamortized investment tax credits .............. 2,996 3,064
Regulatory tax-related liability ................ 1,828 1,861
Other ........................................... 355 440
--------- ---------
151,817 150,047
--------- ---------
$ 566,171 $ 533,181
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 7
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
--------- ---------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ......................................... $ 51,510 $ 48,250
Electric ...................................... 3,493 3,240
Other ......................................... 245 107
--------- ---------
55,248 51,597
--------- ---------
OPERATING EXPENSES
Water purchased ............................... 13,594 12,628
Power purchased for pumping ................... 2,509 2,127
Power purchased for resale .................... 3,213 1,629
Groundwater production assessment ............. 1,524 1,832
Supply cost balancing accounts ................ (1,865) (332)
Other operating expenses ...................... 4,322 3,783
Administrative and general expenses ........... 6,210 6,792
Depreciation .................................. 3,666 3,380
Maintenance ................................... 2,226 2,064
Taxes on income ............................... 6,291 5,705
Other taxes ................................... 1,767 1,723
--------- ---------
43,457 41,331
--------- ---------
Operating income .............................. 11,791 10,266
OTHER INCOME/(LOSS) ............................... 108 150
--------- ---------
Income before interest charges ................ 11,899 10,416
INTEREST CHARGES .................................. 3,681 3,726
--------- ---------
NET INCOME ........................................ 8,218 6,690
DIVIDENDS ON PREFERRED SHARES ..................... (22) (22)
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ........ $ 8,196 $ 6,668
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ..... 9,516 8,958
========= =========
Basic Earnings Per Common Share ................... $ 0.86 $ 0.74
========= =========
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES ......... 9,562 N/A
========= =========
Diluted earnings per share ........................ $ 0.86 N/A
========= =========
Dividends Declared Per Common Share ............... $ 0.32 $ 0.32
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 8
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
--------- ---------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ......................................... $ 128,185 $ 119,673
Electric ...................................... 10,660 9,931
Other ......................................... 580 241
--------- ---------
139,425 129,845
--------- ---------
OPERATING EXPENSES
Water purchased ............................... 32,472 26,946
Power purchased for pumping ................... 5,559 5,140
Power purchased for resale .................... 6,792 5,150
Groundwater production assessment ............. 5,797 5,520
Supply cost balancing accounts ................ (3,299) (453)
Other operating expenses ...................... 12,553 11,170
Administrative and general expenses ........... 18,122 20,544
Depreciation .................................. 11,275 10,270
Maintenance ................................... 7,371 5,874
Taxes on income ............................... 12,004 11,395
Other taxes ................................... 5,260 4,918
--------- ---------
113,906 106,474
--------- ---------
Operating income .............................. 25,519 23,371
OTHER INCOME/(LOSS) ............................... 67 409
--------- ---------
Income before interest charges ................ 25,586 23,780
INTEREST CHARGES .................................. 10,553 9,707
--------- ---------
NET INCOME ........................................ 15,033 14,073
DIVIDENDS ON PREFERRED SHARES ..................... (64) (66)
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ........ $ 14,969 $ 14,007
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ..... 9,145 8,958
========= =========
Basic Earnings Per Common Share ................... $ 1.64 $ 1.56
========= =========
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES ......... 9,171 N/A
========= =========
Diluted earnings per share ........................ $ 1.63 N/A
========= =========
Dividends Declared Per Common Share ............... $ 0.96 $ 0.96
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 9
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
--------- ---------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ......................................... $ 168,205 $ 152,355
Electric ...................................... 14,066 13,301
Other ......................................... 730 290
--------- ---------
183,001 165,946
--------- ---------
OPERATING EXPENSES
Water purchased ............................... 41,669 33,251
Power purchased for pumping ................... 7,812 7,245
Power purchased for resale .................... 8,761 6,399
Groundwater production assessment ............. 7,447 7,545
Supply cost balancing accounts ................ (3,318) 630
Other operating expenses ...................... 16,977 14,762
Administrative and general expenses ........... 26,179 26,635
Depreciation .................................. 14,655 13,219
Maintenance ................................... 11,296 7,753
Taxes on income ............................... 13,954 13,041
Other taxes ................................... 6,906 6,436
--------- ---------
152,338 136,916
--------- ---------
Operating income .............................. 30,663 29,030
OTHER INCOME/(LOSS) ............................... 189 1,257
--------- ---------
Income before interest charges ................ 30,852 30,287
INTEREST CHARGES .................................. 13,790 12,576
--------- ---------
NET INCOME ........................................ 17,062 17,711
DIVIDENDS ON PREFERRED SHARES ..................... (86) (88)
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ........ $ 16,976 $ 17,623
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ..... 9,098 8,958
========= =========
Basic Earnings Per Common Share ................... $ 1.87 $ 1.97
========= =========
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES ......... 9,117 N/A
========= =========
Diluted earnings per share ........................ $ 1.86 N/A
========= =========
Dividends Declared Per Common Share ............... $ 1.28 $ 1.275
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 10
AMERICAN STATES WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM -
Operating Activities:
Net income ............................................ $ 15,033 $ 14,073
Adjustments for non-cash items:
Depreciation and amortization .......................... 11,856 10,667
Deferred income taxes and
investment tax credits ............................. 3,008 1,701
Other - net .......................................... (1,220) (2,308)
Changes in assets and liabilities:
Accounts receivable .................................. (2,230) (3,295)
Prepayments .......................................... 368 796
Supply cost balancing accounts ....................... (3,298) (454)
Accounts payable ..................................... (577) 3,281
Taxes payable ........................................ 2,666 3,257
Unbilled revenue ..................................... (2,815) (3,821)
Other ................................................ 1,692 5,383
-------- --------
Net Cash Provided .................................. 24,483 29,280
-------- --------
Investing Activities:
Construction expenditures ............................... (33,275) (32,646)
-------- --------
Net Cash Used ..................................... (33,275) (32,646)
-------- --------
Financing Activities:
Issuance of securities ................................. 28,057 39,968
Receipt of advances and contributions .................. 1,866 3,564
Repayments of long-term debt, net of
redemption of preferred shares ....................... (280) (309)
Refunds on advances for construction .................. (2,817) (1,333)
Changes in notes payable to banks ...................... (7,000) (27,000)
Common and preferred dividends paid .................... (9,018) (8,665)
-------- --------
Net Cash Provided ................................. 10,808 6,225
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents ..... 2,016 2,859
Cash and Cash Equivalents, Beginning of period ........... 2,189 620
-------- --------
Cash and Cash Equivalents, End of period ................. $ 4,205 $ 3,479
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 11
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
UTILITY PLANT, at cost (in thousands)
Water ............................................... $ 548,857 $ 532,007
Electric ............................................ 36,532 36,349
--------- ---------
585,389 568,356
Less - Accumulated depreciation ..................... (163,076) (151,733)
--------- ---------
422,313 416,623
Construction work in progress ....................... 48,700 32,972
--------- ---------
471,013 449,595
--------- ---------
OTHER PROPERTY AND INVESTMENTS ........................ 9,811 10,233
--------- ---------
CURRENT ASSETS
Cash and cash equivalents ........................... 3,437 2,020
Accounts receivable -
Customers, less reserves of $783
in 2000 and $487 in 1999 ........................ 12,368 10,135
Other ............................................. 4,790 4,275
Intercompany receivable ............................. -- --
Unbilled revenue .................................... 14,160 11,345
Materials and supplies, at average cost ............. 1,268 1,153
Supply cost balancing accounts ...................... 8,072 4,774
Prepayments and other ............................... 4,483 4,851
Accumulated deferred income taxes - net ............. 5,068 5,573
--------- ---------
53,646 44,126
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets ....................... 18,440 19,941
Other deferred charges .............................. 10,694 8,599
--------- ---------
29,134 28,540
--------- ---------
$ 563,604 $ 532,494
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 12
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(Unaudited)
(in thousands)
<S> <C> <C>
CAPITALIZATION
Common shareholders' equity .................... $165,289 $160,023
Long-term debt ................................. 167,163 167,363
-------- --------
332,452 327,386
-------- --------
CURRENT LIABILITIES
Notes payable to banks ......................... 14,000 21,000
Long-term debt and preferred shares
due within one year .......................... 260 340
Accounts payable ............................... 12,940 13,619
Intercompany payable ........................... 27,261 --
Taxes payable .................................. 8,258 5,700
Accrued interest ............................... 3,387 1,584
Other accrued liabilities ...................... 13,232 12,818
-------- --------
79,338 55,061
-------- --------
OTHER CREDITS
Advances for construction ...................... 57,924 57,485
Contributions in aid of construction ........... 39,302 38,895
Accumulated deferred income taxes - net ........ 49,412 48,302
Unamortized investment tax credits ............. 2,996 3,064
Regulatory tax-related liability ............... 1,828 1,861
Other .......................................... 352 440
-------- --------
151,814 150,047
-------- --------
$563,604 $532,494
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 13
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
-------- --------
($ in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ........................................ $ 51,509 $ 48,250
Electric ..................................... 3,493 3,240
-------- --------
55,002 51,490
-------- --------
OPERATING EXPENSES
Water purchased .............................. 13,594 12,628
Power purchased for pumping .................. 2,508 2,127
Power purchased for resale ................... 3,213 1,629
Groundwater production assessment ............ 1,524 1,832
Supply cost balancing accounts ............... (1,865) (332)
Other operating expenses ..................... 4,235 3,758
Administrative and general expenses .......... 6,224 6,639
Depreciation ................................. 3,666 3,380
Maintenance .................................. 2,216 2,064
Taxes on income .............................. 6,225 5,728
Other taxes .................................. 1,765 1,723
-------- --------
43,305 41,176
-------- --------
Operating income ............................. 11,697 10,314
OTHER INCOME/(LOSS) .............................. (51) 149
-------- --------
Income before interest charges ............... 11,646 10,463
INTEREST CHARGES ................................. 3,681 3,725
-------- --------
NET INCOME ....................................... 7,965 6,738
DIVIDENDS ON PREFERRED SHARES .................... -- --
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ....... $ 7,965 $ 6,738
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .... 100 100
======== ========
Basic Earnings Per Common Share .................. $ 79,650 $ 67,380
======== ========
Dividends Declared Per Common Share .............. $ 33,000 $ 29,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE> 14
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
-------- --------
($ in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ........................................ $128,185 $119,673
Electric ..................................... 10,660 9,931
-------- --------
138,845 129,604
-------- --------
OPERATING EXPENSES
Water purchased .............................. 32,472 26,946
Power purchased for pumping .................. 5,559 5,140
Power purchased for resale ................... 6,792 5,150
Groundwater production assessment ............ 5,797 5,520
Supply cost balancing accounts ............... (3,299) (453)
Other operating expenses ..................... 12,325 11,122
Administrative and general expenses .......... 17,815 20,235
Depreciation ................................. 11,275 10,136
Maintenance .................................. 7,348 5,872
Taxes on income .............................. 11,997 11,472
Other taxes .................................. 5,254 4,916
-------- --------
113,335 106,056
-------- --------
Operating income ............................. 25,510 23,548
OTHER INCOME/(LOSS) .............................. (92) 385
-------- --------
Income before interest charges ............... 25,418 23,933
INTEREST CHARGES ................................. 10,553 9,707
-------- --------
NET INCOME ....................................... 14,865 14,226
DIVIDENDS ON PREFERRED SHARES .................... -- --
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ....... $ 14,865 $ 14,226
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .... 100 100
======== ========
Basic Earnings Per Common Share .................. $148,650 $142,260
======== ========
Dividends Declared Per Common Share .............. $ 96,000 $ 90,400
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE> 15
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
-------- --------
($ in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ........................................ $168,205 $152,355
Electric ..................................... 14,066 13,301
-------- --------
182,271 165,656
-------- --------
OPERATING EXPENSES
Water purchased .............................. 41,669 33,251
Power purchased for pumping .................. 7,812 7,245
Power purchased for resale ................... 8,761 6,399
Groundwater production assessment ............ 7,447 7,545
Supply cost balancing accounts ............... (3,318) 630
Other operating expenses ..................... 16,679 14,694
Administrative and general expenses .......... 25,657 26,224
Depreciation ................................. 14,655 12,952
Maintenance .................................. 11,270 7,750
Taxes on income .............................. 13,998 13,301
Other taxes .................................. 6,901 6,434
-------- --------
151,531 136,425
-------- --------
Operating income ............................. 30,740 29,231
OTHER INCOME ..................................... 31 1,589
-------- --------
Income before interest charges ............... 30,771 30,820
INTEREST CHARGES ................................. 13,790 12,576
-------- --------
NET INCOME ....................................... 16,981 18,244
DIVIDENDS ON PREFERRED SHARES .................... -- --
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ....... $ 16,981 $ 18,244
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .... 100 100
======== ========
Basic Earnings Per Common Share .................. $169,810 $182,440
======== ========
Dividends Declared Per Common Share .............. $126,000 $118,837
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE> 16
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM
Operating Activities:
Net income ............................................ $ 14,865 $ 14,226
Adjustments for non-cash items:
Depreciation and amortization .......................... 11,856 10,533
Deferred income taxes and
investment tax credits ............................. 3,015 1,696
Other - net .......................................... 36 (2,563)
Changes in assets and liabilities:
Accounts receivable .................................. (2,233) (3,186)
Prepayments .......................................... 368 796
Supply cost balancing accounts ....................... (3,298) (454)
Accounts payable ..................................... (675) 5,238
Intercompany Payable ................................. 27,257 --
Taxes payable ........................................ 2,558 3,265
Unbilled revenue ..................................... (2,815) (3,821)
Other ................................................ 1,588 3,400
-------- --------
Net Cash Provided .................................. 52,522 29,130
-------- --------
Investing Activities:
Construction expenditures ............................... (33,274) (32,511)
-------- --------
Net Cash Used ..................................... (33,274) (32,511)
-------- --------
Financing Activities:
Issuance of securities ................................. -- 39,968
Receipt of advances and contributions .................. 1,866 3,564
Repayments of long-term debt, net of
redemption of preferred shares ....................... (280) (310)
Refunds on advances for construction .................. (2,817) (1,333)
Changes in notes payable to banks ...................... (7,000) (27,000)
Common and preferred dividends paid .................... (9,600) (9,040)
-------- --------
Net Cash Provided (Used) .......................... (17,831) 5,849
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents ..... 1,417 2,468
Cash and Cash Equivalents, Beginning of period ........... 2,020 524
-------- --------
Cash and Cash Equivalents, End of period ................. $ 3,437 $ 2,992
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE> 17
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 1999 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. Under the American States
Water Company 2000 Stock Incentive Plan, stock options representing
45,657 common shares were granted to certain eligible employees on May
1, 2000 and, thus, diluted earnings per share is also shown.
4. On April 22, 1999, the CPUC issued an order denying SCW's application
seeking approval of its recovery through rates of costs associated with
its participation in the Coastal Aqueduct Extension of the State Water
Project (SWP). SCW's participation in the SWP commits it to a 40-year
entitlement with a value of approximately $9.5 million. SCW's investment
in SWP is currently included in Other Property and Investments. The
remaining balance of the related liability of approximately $7 million
is recorded as other long-term debt. SCW intends to recover its
investment in SWP through contributions from developers on a per-lot or
other basis, and, 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 section entitled
"Rates and Regulation" for more information.
5. On June 22, 2000, the CPUC approved the implementation of new rates for
four water ratemaking districts in SCW's Region III and combining tariff
schedules into regional rates for the customer service areas that make
up SCW's Region III, to be effective June 27, 2000. In March 2000, SCW
filed applications to increase rates for all of the ratemaking districts
in SCW's Region I as well as to combine those tariff schedules into
regional rates. 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> 18
7. AWR has two principal business units: a water and electric distribution
unit, through its SCW subsidiary, and a non-regulated activity unit
through the American States Utility Services (ASUS) subsidiary. All
activities currently are geographically located within California,
except for one contract providing customer service and billing services
to a utility located in Arizona. SCW is a regulated utility, which
operates both water and electric systems. AWR 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. Region I incorporates
service areas in northern and central California; Region II contains
service areas throughout Los Angeles; Region III encompasses water
operations in eastern Los Angles County, Orange County, San Bernardino
County and Imperial County. SCW also provides electric service to the
City of Big Bear Lake and surrounding areas. Included in the amounts set
forth, certain assets, revenues and expenses have been allocated. The
identifiable assets are net of respective accumulated provisions for
depreciation.
<TABLE>
<CAPTION>
(dollars in thousands) For The Three Months Ended September 30, 2000
---------------------------------------------------------------------------------------------------------------
Water
--------------------------------------- Total
Region I Region II Region III Electric SCW
-------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 8,755 $ 21,164 $ 21,590 $ 3,493 $ 55,002
Operating income before income taxes 2,777 5,628 8,300 1,217 $ 17,922
Identifiable assets 113,509 149,301 182,114 26,089 $471,013
Depreciation expense 732 1,200 1,384 350 $ 3,666
Capital additions $ 2,520 $ 6,199 $ 2,495 $ 624 $ 11,838
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Three Months Ended September 30,1999
---------------------------------------------------------------------------------------------------------------
Water
--------------------------------------- Total
Region I Region II Region III Electric SCW
-------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 8,403 $ 19,913 $ 19,936 $ 3,240 $ 51,492
Operating income before income taxes 2,874 5,246 6,911 1,011 $ 16,042
Identifiable assets 105,510 135,086 174,564 25,407 $440,567
Depreciation expense 684 1,011 1,349 336 $ 3,380
Capital additions $ 3,863 $ 5,252 $ 3,560 $ 578 $ 13,253
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Nine months Ended September 30, 2000
---------------------------------------------------------------------------------------------------------------
Water
--------------------------------------- Total
Region I Region II Region III Electric SCW
-------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 21,746 $ 56,486 $ 49,953 $ 10,660 $138,845
Operating income before income taxes 5,810 13,279 15,072 3,346 $ 37,507
Identifiable assets 113,509 149,301 182,114 26,089 $471,013
Depreciation expense 2,194 3,601 4,429 1,051 $ 11,275
Capital additions $ 8,284 $ 14,069 $ 8,844 $ 1,536 $ 32,733
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Nine months Ended September 30, 1999
---------------------------------------------------------------------------------------------------------------
Water
--------------------------------------- Total
Region I Region II Region III Electric SCW
-------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 20,531 $ 52,584 $ 46,558 $ 9,931 $129,604
Operating income before income taxes 5,200 13,016 13,494 3,310 $ 35,020
Identifiable assets 105,510 135,086 174,564 25,407 $440,567
Depreciation expense 2,052 3,030 4,046 1,008 $ 10,136
Capital additions $ 9,621 $ 15,709 $ 9,961 $ 1,535 $ 36,826
</TABLE>
15
<PAGE> 19
<TABLE>
<CAPTION>
(dollars in thousands) For The Twelve Months Ended September 30, 2000
---------------------------------------------------------------------------------------------------------------
Water
--------------------------------------- Total
Region I Region II Region III Electric SCW
-------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 28,437 $ 74,676 $ 65,091 $ 14,067 $182,271
Operating income before income taxes 7,177 16,104 17,600 3,857 $ 44,738
Identifiable assets 113,509 149,301 182,114 26,089 $471,013
Depreciation expense 2,878 4,612 5,778 1,387 $ 14,655
Capital additions $ 11,629 $ 20,286 $ 13,396 $ 2,173 $ 47,484
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) For The Twelve Months Ended September 30, 1999
---------------------------------------------------------------------------------------------------------------
Water
--------------------------------------- Total
Region I Region II Region III Electric SCW
-------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 26,485 $ 66,710 $ 59,160 $ 13,301 $165,656
Operating income before income taxes 6,623 15,099 16,361 4,449 $ 42,532
Identifiable assets 105,510 135,086 174,564 25,407 $440,567
Depreciation expense 2,691 3,873 5,058 1,330 $ 12,952
Capital additions $ 12,097 $ 20,029 $ 14,870 $ 1,966 $ 48,962
-------- -------- -------- -------- --------
</TABLE>
8. On March 10, 2000, Registrant entered into an agreement to acquire the
common stock of Chaparral City Water Company, a privately operated water
company serving approximately 10,000 customers in the town of Fountain
Hills, Arizona and portions of Scottsdale, Arizona for an aggregate
value of $31.2 million, including assumption of approximately $12
million in debt. The acquisition will be temporarily funded with a
combination of common equity and short-term debt. The transaction closed
on October 10, 2000.
16
<PAGE> 20
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. As of September 30, 2000, ASUS provided billing and other customer
service functions to approximately 90,000 customers. Neither AWR nor ASUS are
regulated by the CPUC.
SCW is organized into three regions and one electric customer service
area (CSA) operating within 75 communities in 10 counties in the State of
California and provides water service in 21 CSAs. Region I incorporates 7 CSAs
in northern and central California; Region II has 4 CSAs located in Los Angeles;
Region III incorporates 10 water CSA's.
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 CSA was purchased under an energy
brokerage contract with Sempra Energy Corporation from March 26, 1996 to
17
<PAGE> 21
May 1, 1999, then with Illinova Energy Partners (Illinova) from May 1, 1999 to
April 30, 2000, and with Dynegy Energy Services (Dynegy) since May 1, 2000 as a
result of the merger of Dynegy and Illinova.
SCW served 244,985 water customers and 21,333 electric customers at
September 30, 2000, or a total of 266,318 customers, compared with 264,708 total
customers at September 30, 1999.
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 87.1%,
89.3% and 90.7% of total water revenues for the three, nine and twelve months
ended September 30, 2000, respectively as compared to 86.6%, 88.7% and 90.9% for
the three, nine and twelve months ended September 30, 1999, respectively.
ACQUISITION OF PEERLESS WATER CO.
In December 1999, Registrant agreed to acquire Peerless Water Co., a
privately owned water company in Bellflower, California, subject to satisfaction
of certain conditions, including CPUC approval. The number of Common Shares to
be issued will be determined at the closing, but will in no event be greater
than 131,036 shares nor less than 107,538 shares. The transaction, if approved
by the CPUC, is anticipated to close before the second quarter of 2001.
ACQUISITION OF CHAPARRAL CITY WATER COMPANY
On March 10, 2000, Registrant entered into an agreement to acquire the
common stock of Chaparral City Water Company, a privately operated water company
serving approximately 10,000 customers in the town of Fountain Hills, Arizona
and portions of Scottsdale, Arizona for an aggregate value of $31.2 million,
including assumption of approximately $12 million in debt. The acquisition will
be temporarily funded with a combination of common equity and short-term debt.
The transaction closed on October 10, 2000. See Notes to Financial Statements
for more information.
RESULTS OF OPERATION
Basic earnings per common share for the three months ended September 30,
2000 increased by 16.2% to $0.86 per share as compared to $0.74 per share for
the comparable period last year. Basic per common share for the nine months
ended September 30, 2000 increased by 5.1% to $1.64 per share as compared to
$1.56 per share for the comparable period last year. The increase in the
recorded results primarily reflects higher revenues during 2000 as is more fully
discussed below. Basic earnings for the twelve months ended September 30, 2000
decreased by 5.1% to $1.87 per share as compared to $1.97 per share for the
twelve months ended September 30, 1999 reflecting various reasons as discussed
below. Fully diluted earnings per share for the three, nine and twelve months
ended September 30, 2000 are $0.86, $1.63 and $1.86 per share, respectively.
Registrant had no dilutive securities outstanding in the same periods of 1999
and, accordingly, diluted earnings per share are not applicable for those
periods.
Water sales for the three, nine and twelve months ended September 30,
2000 were 5.0%, 5.9%, and 6.4% higher than the same periods of last year,
respectively. As compared to the same periods ended September 30, 1999, water
operating revenues increased by 6.8%, 7.1% and 10.4% for the three, nine and
twelve months ended September 30, 2000, respectively, due to the increased water
sales and increases in rates authorized by the CPUC. New rates in four customer
service areas and implementation of regional rates in the customer service areas
that comprise SCW's Region III were effective June 27, 2000. Additional
increases in revenues for the twelve months ended September 30, 2000 reflected
the general rate case (GRC) increase for Registrant's Metropolitan customer
service area effective January 1, 1999. See the section entitled "Rates and
Regulation" for more information.
18
<PAGE> 22
Kilowatt-hour sales of electricity increased by 8.6%, 5.8% and 4.6%,
respectively, for the three, nine and twelve months ended September 30, 2000 as
compared to the same periods ended September 30, 1999 due principally to an
increase in sales to commercial customers. As a result of increased sales,
electric operating revenues for the three, nine and twelve months ended
September 30, 2000 increased by 7.8%, 7.3% and 5.8%, respectively.
Other revenues increased by more than 100% for the three, nine and
twelve months ended September 30, 2000 due to new ASUS service contracts and
increased activities with existing contracts.
Purchased water costs increased by 7.6% for the three months ended
September 30, 2000 as compared to the same period ending in 1999 reflecting an
increase of 13.0% in purchased water volume resulting from higher sales. As
compared to the nine months and twelve months ended September 30, 1999,
purchased water costs increased by 20.5% and 25.3%, respectively, reflecting
increases of 14.6% and 15%, respectively, in purchased water, and a total of
$1.6 million and $3.1 million, respectively, in refunds from the Water
Replenishment District of Southern California (WRD) received during the nine and
twelve months ended September 30, 1999. There were no similar refunds received
during the same periods ended September 30, 2000. The nine-month and
twelve-month comparisons were also affected by a decline in the receipt of
reimbursements from potentially responsible parties related to contamination in
SCW's Culver City CSA. Registrant received approximately $572,500 and $858,700
during the nine and twelve months ended September 30, 1999, respectively, as
compared to reimbursements of $197,800 received during the same periods ended
September 30, 2000. See the section entitled "Environmental Matters - Matters
Related to Culver City System."
Cost of power purchased for pumping increased by 18.0%, 8.2% and 7.8%
for the three, nine and twelve months ended September 30, 2000, respectively,
due to increased volume in groundwater pumping. Additional increases for the
quarter ending September 2000 was due to timing differences in billings from
Registrant's energy supplier.
As compared to the three, nine and twelve months ended September 30,
1999, the cost of power purchased for resale increased by 97.2%, 31.9% and 36.9%
respectively due primarily to significant increases in energy costs during 2000
summer months in particular, and higher demand charges from Registrant's energy
supplier.
Groundwater production assessment for the three months ended September
30, 2000 decreased by 16.8% as compared to the same period in 1999 primarily due
to a reduction in the groundwater production assessment rate by the WRD
effective July 2000 in SCW's Metropolitan CSA. As compared to the nine months
ended September 30, 1999, the groundwater production assessment was 5% higher
reflecting increased volumes in groundwater pumping.
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-collected position in both its water and electric balancing accounts.
A net under-collection of balancing accounts for the three, nine and twelve
months ended September 30, 2000 reflects previously discussed increase in energy
costs and demand charges, and excess pumping penalty accruals. As compared to
the twelve months ended September 30, 1999, the effect of increased energy
demand charges for the twelve months ended September 2000 was partially offset
by new rates effective January 1999 authorized to implement new supply costs and
to increase collection of previously under-collected costs. The WRD refunds for
the periods ending September 1999 as discussed previously also helped to
decrease previously under-collected supply costs in 1999.
19
<PAGE> 23
Other operating expenses increased by 14.2%, 12.4% and 15.0% for the
three, nine and twelve months ended September 30, 2000, respectively, as
compared to the same periods of last year. The increases were due to increased
costs for water treatment, increased accruals for uncollectible accounts
resulting from the increased revenues and increases in labor and billing costs
due to additional billing and customer service contracts obtained by ASUS.
Administrative and general expenses decreased by 8.6%, 11.8% and 1.7%
for the three, nine and nine months ended September 30, 2000, respectively, as
compared to the same period ended September 30, 1999 due primarily to reduced
reserves for litigation booked in 2000 and a reduction in pension expenses. See
the section entitled "Legal Proceedings" for more information.
Depreciation expense increased by 8.5%, 9.8% and 10.9%, respectively,
for the three, nine and twelve months ended September 30, 2000 reflecting, among
other things, the effects of recording approximately $52 million in net plant
additions during 1999, depreciation on which began in January 2000. In addition,
amortization of start-up and organizational costs associated with the formation
of AWR was reflected in the twelve months ended September 30, 1999. There were
no similar amortization costs for the twelve months ended September 30, 2000.
As compared to the three, nine and twelve months ended September 30,
1999, maintenance expense increased by 7.8%, 25.5% and 45.7%, respectively, due
to increased maintenance on Registrant's water supply sources and maintenance of
water mains. The comparisons are also largely affected by the timing
differences. Registrant incurred significant maintenance expense in the fourth
quarter of 1999 as Registrant focused on capital projects during the first part
of 1999.
Taxes on income increased by 10.3%, 5.3% and 7.0% for the three, nine
and twelve months ended September 30, 2000, respectively, as compared to the
three, nine and twelve months ended September 30, 1999 due to a higher effective
tax rate resulting from the turn-around of depreciation-related temporary
differences, the benefits of which were previously flowed-through for
rate-making purposes. The comparisons were also affected by higher pre-tax
income.
Other taxes increased by 2.6%, 6.9% and 7.3%, respectively, for the
three, nine and twelve months ended September 30, 2000, respectively, as
compared to the same periods last year reflecting increased franchise fee
payments resulting from higher revenues, increased property taxes due to higher
property valuation assessments, and increased payroll taxes due to higher labor
and labor-related costs.
As compared to the same periods ended September 30, 1999, other income
for the three, nine and twelve months ended September 30, 2000 was 28.0%, 83.6%
and 84.9%, respectively, lower. The decrease was due to the effect of recording
the State Water Project entitlement with a value of approximately $9.5 million,
amortization on which began January 2000. The twelve-month comparison was
affected by the flow-through of tax benefits related to refinancing of long-term
debt in December 1998. There were no similarly flowed-through tax benefits for
the twelve months ended September 2000. See the section entitled "Rates and
Regulation" for more information.
Interest expense increased by 8.7% and 9.7%, respectively, for the nine
and twelve months ended September 30, 2000 as compared to the nine and twelve
months ended September 30, 1999, primarily due to additional short-term
borrowing to finance construction expenditures. The issuance of $40 million in
long-term debt in January 1999 also affected the twelve-month comparison.
20
<PAGE> 24
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. On
August 16, 2000, Registrant issued 1,107,000 Common Shares at $26-1/8 per share
under this Registration Statement. Net proceeds from the offering were
temporarily loaned to SCW. SCW has used these funds to repay borrowings under
its short-term revolving credit lines. Subject to obtaining approval of the
CPUC, the proceeds from the equity offering will be invested in SCW and
Chaparral.
AWR maintains a revolving credit facility with a $25 million aggregate
borrowing capacity. At September 30, 2000, no amount was outstanding under this
facility.
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.
Because of the seasonal nature of its water and electric operations, SCW
utilizes its short-term borrowing capacity to finance current operating
expenses. The aggregate short-term borrowing capacity available to SCW under its
three bank lines of credit was $47 million as of September 30, 2000, of which a
total of $14 million was outstanding. SCW routinely employs short-term bank
borrowing as an interim financing source prior to funding capital expenditures
on a long-term basis.
In 1998, SCW filed a Registration Statement with the SEC for issuance,
from time to time, of up to $60 million in long-term debt. As of September 30,
2000, $20 million was available for issuance.
SCW's construction program is designed to ensure its customers high
quality service. SCW maintains an ongoing distribution main replacement program
throughout its customer service areas, based on the priority of leaks detected,
fire protection enhancement and a reflection of the underlying replacement
schedule. In addition, SCW upgrades its electric and water supply facilities in
accordance with industry standards, local requirements and CPUC requirements.
SCW's Board of Directors has approved anticipated net capital expenditures of
approximately $55.4 million for 2000. Of the amount authorized, $29.9 million
has incurred as of September 30, 2000.
Neither AWR nor ASUS have material capital commitments; however, ASUS
actively seeks opportunities to own, lease or operate municipal water and
wastewater systems, which may involve significant capital commitments.
WATER SUPPLY
For the three months ended September 30, 2000, SCW supplied a total of
27,829,000 ccf of water as compared to 26,886,000 ccf for the three months ended
September 30, 1999. Of the total 27,829,000 ccf of water supplied during the
second quarter of 2000, approximately 51.6% came from pumped sources and 46.2%
was purchased from others, principally the Metropolitan Water District of
Southern California (MWD) and its member agencies. The remaining 2.2% of total
supply came from the United States Bureau of Reclamation (the "Bureau) under a
no-cost contract. For the three months ended September 30, 1999, 54.6%, 42.3%,
and 3.1% was supplied from pumped sources, purchased from MWD and the Bureau,
respectively.
For the nine months ended September 30, 2000, SCW supplied a total of
68,325,000 ccf of water, 55.3% of which came from pumped sources, 43.0% was
purchased and the remaining amount was supplied by the Bureau. During the nine
months ended September 30, 1999, SCW produced 64,363,000 ccf of water.
21
<PAGE> 25
Of this amount 59.7% came from pumped sources, 39.7% was purchased and the
remainder was provided by the Bureau.
During the twelve months ended September 30, 2000, SCW supplied
89,289,000 ccf of water as compared to 83,402,000 ccf supplied during the twelve
months ended September 30, 1999. During the twelve months ended September 30,
2000, pumped sources provided 55.9% of total supply, 42.6% was purchased from
MWD and its member agencies. The remaining 1.6% of total supply came from the
Bureau. For the twelve months ended September 30, 1999, 59.7%, 39.7% and 0.6%,
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. Registrant has 52 connections to the water distribution facilities
of MWD and other municipal water agencies. MWD imports water from two principal
sources: the Colorado River and the State Water Project (SWP). Available water
supplies from the Colorado River and the SWP have historically been sufficient
to meet most of MWD's requirements and MWD's supplies from these sources are
anticipated to remain adequate through 2000. 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 response, MWD has taken a number of steps to
secure additional storage capacity and to increase available water supplies, by
effecting transfers of water rights from other sources.
Registrant's water supply and revenues are significantly affected, both
in the short-run and the long run, by changes in meteorological conditions. The
2000 water year, October 1, 1999 to September 30, 2000 was classified as a near
normal year. The Northern Sierra 8-station index recorded precipitation at 114%
of normal. The statewide weighted average precipitation was 98% of normal. The
eight major reservoirs in California with a capacity of 17,940,000 acre feet
currently hold 11,073,000 acre feet which is 62% of capacity, as compared to 67%
last year at this time. Although overall groundwater conditions remain at
adequate levels in most of SCW's operating areas, certain of SCW's groundwater
supplies have been affected to varying degrees by various forms of contamination
which, in some cases, have caused increased reliance on purchased water in its
supply mix.
REGULATORY MATTERS
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
regulated by the CPUC. The CPUC does, however, regulate certain transactions
between SCW and its non-regulated affiliates.
The 22 customer service areas (CSAs) of SCW are grouped into 16 water
districts and 1 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 a forecast of 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.
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GRC step increase for Metropolitan CSA and General Office Allocation
step increases for Arden-Cordova, Bay Point, Simi Valley and Santa Maria CSAs
were effective beginning January, 2000. Step increase for Ojai became effective
April 23, 2000. Attrition increases for Arden-Cordova and Bay Point CSAs were
also in effect beginning January 2000. Step increase for Ojai became effective
April 2000.
Effective June 27, 2000, SCW was authorized by the CPUC to implement new
increased rates for four water ratemaking districts in SCW's Region III and to
combine tariff schedules into regional rates for the customer service areas that
make up SCW's Region III. Despite the delay, which resulted in a loss of
approximately $1.4 million in revenues for the six months ended June 30, 2000,
the new rates are anticipated to generate approximately $2.5 million in
additional revenues during the third and fourth quarters of 2000.
Applications to increase water rates by approximately $5.8 million for
ratemaking districts in SCW's Region I as well as to combine those tariff
schedules into regional rates were filed in March 2000. A settlement agreement
has been worked out among all parties, which among other things, provides for a
10% returns on equity. The new rates, if authorized in total or in part by the
CPUC, would be effective January 1, 2001.
A CPUC Order authorizing SCW to increase rates by $830,000 per year went
in effect on October 24, 2000 for recovery of capital expenditures associated
with Y2K readiness, not already included in Registrant's water rates. See the
section entitled "Year 2000 Issue" for more information.
In October 2000, the CPUC approved SCW's application to provide water
and wastewater services to a new Hearthside Homes housing development in Orange
County.
On July 6, 2000, the CPUC concluded its Order Instituting Rulemaking on
its own motion to set rules and to provide guidelines for the privatization and
excess capacity as it relates to investor owned water companies, including
Registrant. The CPUC's order establishes a mechanism for sharing gross revenues,
after pass-through of certain expenses, between customers of SCW and
shareholders of Registrant. The order also requires water utilities, including
Registrant, to file an advice letter with the CPUC for approval of services that
utilize, in whole or in part, assets or employees reflected in the utility's
revenue requirements.
Hearings before the CPUC have concluded on SCW's application to include
an additional $1.6 million in rate base for a water treatment facility in SCW's
Clearlake service area. In 1993 the CPUC disallowed the entire $1.6 million and
Registrant reserved the entire amount. SCW's application demonstrated that the
previously disallowed portion of the treatment plant is now fully "use and
useful" and is providing service to customers. A decision on the Company's
application is anticipated before year-end 2000. Recovery of the costs
associated with the plant is included in the general rate increase application
for Region I.
On April 22, 1999, the CPUC issued an order denying SCW's application
seeking approval of its recovery through rates of costs associated with its
participation in the Coastal Aqueduct Extension of the State Water Project
(SWP). SCW's participation in the SWP commits it to a 40-year entitlement. SCW's
investment of approximately $9.5 million in SWP is currently included in Other
Property and Investments. The remaining balance of the related liability of
approximately $7 million is recorded as other long-term debt. SCW intends to
recover its investment in SWP either through contributions from developers on a
per-lot or other basis, or from the sale of its 500 acre-foot entitlement in
SWP. See the Notes to Financial Statements for more information.
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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 to reduce contaminants to
acceptable levels 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 such contaminants. The EPA has
adopted an Interim ESWTR applicable only to systems serving greater than 10,000
persons. On April 10, 2000, EPA published the proposed Long Term 1 Enhanced
Surface Water Treatment Rule and Filter Backwash Rule (LT1FBR) in the Federal
Register. This proposed rule will apply to each of SCW's five surface water
treatment plants and basically extends the requirements of the ESWTR to systems
serving less than 10,000 persons and will require some systems
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to institute changes to the return of recycle filter backwash flows within the
treatment process to reduce the effects of recycle on compromising microbial
control. Registrant is presently unable to predict the ultimate impact of the
LT1FBR, but it is anticipated that all five plants will achieve compliance
within the three year to five-year time frames identified by EPA.
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 trihalomethane 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. A third SCW plant will require treatment modifications in
order to comply with this rule. The Registrant is preparing to conduct studies
in Calipatria to determine the best treatment methods to comply with this rule.
The EPA must adopt Stage II rules pertaining to DBPs, according to a
negotiated schedule by 2000. The EPA is not allowed to use the new cost/benefit
analysis provided for in the 1996 SDWA amendments for establishing the Stage II
rules applicable to DBPs but may utilize the regulatory negotiating process
provided for in the 1996 SDWA amendments to develop the Stage II rule. The final
rule is expected by 2002.
Ground Water Rule
On May 10, 2000, the EPA published the proposed Ground Water Rule (GWR),
which establishes multiple barriers to protect against bacteria and viruses in
drinking water systems that use ground water. The proposed rule will apply to
all U.S. public water systems that use ground water as a source. The proposed
GWR includes system sanitary surveys conducted by the state to identify
significant deficiencies; hydrogeologic sensitivity assessments for
undisinfected systems, source water microbial monitoring by systems that do not
disinfect and draw from hydrogeologically sensitive aquifer or have detected
fecal indicators within the system's distribution system; corrective action; and
compliance monitoring for systems which disinfect to ensure that they reliably
achieve 4-log (99.99%) inactivation or removal of viruses. The GWR is scheduled
to be issued as a final regulation in November 2000. 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 expects to be subject to new regulations regarding radon and
arsenic. It is anticipated that the EPA will propose a reduction in the federal
standard on arsenic from 50 parts per billion (ppb) to 5 ppb. The proposed
arsenic rule was published in the Federal Register on June 22, 2000. EPA
proposed 5 ppb as the lead regulatory option, but will take comments on 3 ppb
and 10 ppb options as well. Compliance with an MCL of 5 ppb will require
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 final rule is
expected to be published in January 2001. The Registrant is currently conducting
studies to investigate new arsenic treatment systems for affected wells.
The EPA has proposed new radon regulations following a National Academy
of Sciences risk assessment and study of risk-reduction benefits associated with
various mitigation measures. The
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National Academy of Sciences study is in agreement with much of EPA's original
findings but has slightly reduced the ingestion risk initially assumed by EPA.
EPA established an MCL of 300 Pico Curies per liter based on the findings and
has also established an alternative MCL of 4000 Pico Curies per liter, based
upon potential mitigation measures for overall radon reduction. The final rule
was expected to be effective in August 2000, but has been delayed. The
Registrant is currently conducting studies to determine the best treatment for
affected wells.
Voluntary Efforts to Exceed Minimum Surface Water Treatment Requirements
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 minimum operating requirements governing surface water
treatment, optimize surface water treatment plant operations and ensure that its
surface water treatment facilities are performing as efficiently as possible.
Fluoridation of Water Supplies
Registrant is subject to State of California Assembly Bill 733, which
requires fluoridation of water supplies for public water systems serving more
than 10,000 service connections. Although the bill requires affected systems to
install treatment facilities only when public funds have been made available to
cover capital and operating costs, the bill requires the CPUC to authorize cost
recovery through rates should public funds for operation of the facilities, once
installed, become unavailable in future years.
Matters Relating to Arden-Cordova System
In January 1997, SCW was notified that ammonium perchlorate in amounts
above the state-determined action level had been detected in three of its 27
wells serving its Arden-Cordova system. Aerojet-General Corp. has, in the past,
used ammonium perchlorate in their processing as an oxidizer of rocket fuels.
SCW took the three wells detected with ammonium perchlorate out of service at
that time. Although neither the EPA nor the DOHS has established a drinking
water standard for ammonium perchlorate, DOHS has established an action level of
18 parts per billion (ppb) which required SCW to notify customers in its
Arden-Cordova customer service area of detection of ammonium perchlorate in
amounts in excess of this action level. In April 1997, SCW found ammonium
perchlorate in three additional wells and, at that time, removed those wells
from service until it was determined that the levels were below the
state-determined action level. Those wells were returned to service. SCW
periodically monitors these wells to determine that levels of perchlorate are
below the action level currently in effect.
In February 1998, SCW was informed that nitrosodimethylamine (NDMA) had
been detected in amounts in excess of the EPA reference dosage for health risks
in four of its wells in its Arden-Cordova system. The wells have been removed
from service. Another well has also been removed from service in September 1999
due to the contamination. NDMA is an additional by-product from the production
of rocket fuel and it is believed that such contamination is related to the
activities of Aerojet-General Corp. Aerojet-General Corp. has reimbursed SCW for
constructing a pipeline to interconnect with the City of Folsom water system to
provide an alternative source(s) of water supply in SCW's Arden-Cordova customer
service area and has reimbursed SCW for costs associated with the drilling and
equipping of two new wells. As of September 30, 2000, Aerojet-General Corp. has
previously reimbursed Registrant $4.5 million. The remainder of the costs is
subject to further reimbursement, including interest. The reimbursement from
Aerojet-General Corp. reduces SCW's utility plant and costs of purchased water.
On October 25, 1999, SCW filed a lawsuit against the California Regional
Water Quality Control Board (CRWQCB) alleging that the CRWQCB has willfully
allowed portions of the
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Sacramento County Groundwater Basin to be injected with chemical pollution that
is contaminating the underground water supply in SCW's Rancho Cordova customer
service area. In a separate case, also filed on October 25, 1999, SCW sued
Aerojet General Corp. for causing the contamination. On March 22, 2000 Aerojet
General Corp. filed a cross complaint against SCW for negligence and
constituting a public nuisance. Registrant is unable to determine at this time
what, if any, potential liability it may have with respect to the cross
complaint, but intends to vigorously defend itself against these allegations.
Management cannot predict the outcome of these proceedings. See the section
entitled "Legal Proceedings" for more information.
Matters Relating to Culver City System
The compound, methyl tertiary butyl ether (MTBE), an oxygenate used in
reformulated fuels, has been detected in the Charnock Basin, located in the city
of Santa Monica and within SCW's Culver City customer service area. 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.
Pursuant to an agreement with SCW in December 1998, two of the
potentially responsible parties (the Participants) have reimbursed SCW's legal
and consulting costs related to this matter and for increased costs incurred by
SCW in purchasing replacement water. However, a notice of termination from the
Participants to the settlement agreement was received in October 1999 claiming
overpayments for replacement water in excess of SCW's water rights. No
assurances can be given that future negotiations will result in complete
restoration of SCW's water rights or that continued reimbursement of SCW's costs
will be forthcoming.
On September 22, 1999, the U.S. EPA and the Los Angeles Regional Water
Quality Control Board ordered Shell Oil Company, Shell Oil Products Company and
Equilon Enterprises LLC to provide replacement drinking water to both SCW and
the City of Santa Monica due to MTBE contamination of the Charnock Sub-Basin
drinking water. The EPA has ordered Shell Oil to reimburse SCW for water
replacement costs. The agencies are continuing to investigate the causes of MTBE
pollution and intend to ensure that all responsible parties contribute to its
clean up. Registrant is unable to predict the outcome of the EPA's enforcement
efforts.
Matters Relating to Yorba Linda System
The compound, MTBE, has been detected in three wells serving SCW's Yorba
Linda system. Two of the wells are standby wells and the third well has not
shown MTBE above the DOHS secondary standard of 5.0 ppb at this time. SCW has
constructed an interconnection with the Metropolitan Water District of Southern
California to provide for additional supply in the event the third well
experienced levels of detection in excess of the DOHS standard.
SCW has met with the Regional Water Quality Control Board, the Orange
County Water District, the City of Anaheim, the California Department of Health
Services and three potentially responsible parties (PRP's) to define the extent
of the MTBE contamination plume and assess the contribution from the PRP's. The
PRP's have voluntarily initiated a work plan for regional investigation. While
there have not been significant disruptions to the water supply in Yorba Linda
at this point in time, no assurances can be given that MTBE contamination will
not increase in the future.
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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 Service
customer service area. SCW has, however, taken other measures, that will be
enacted on an emergency basis, to meet load growth and mitigate delays in
approval of the EIR. In addition, third parties willing to construct gas-fired
generating facilities, sufficient to meet the peaking and future capacity needs
of Bear Valley Electric, in exchange for a long-term purchase contract have
approached SCW. Management is unable at this time to predict if such an
arrangement will be economically beneficial to customers or if the generating
facility can meet all environmental requirements.
YEAR 2000 ISSUE
Registrant has no Y2K incidents, business disruptions, failures or legal
proceedings to report. There were no actual or anticipated effects or changes to
Registrant's operating trends or revenue patterns as a result of the transition
from December 1999 to January 2000. SCW formally announced its 100% Y2K Ready
status when it filed its Compliance Report with the CPUC on November 1, 1999.
Registrant has filed its final Compliance Report with the CPUC in March 2000.
Not all Y2K problems were necessarily expected to surface in early 2000.
Registrant does not have, and may never fully have, sufficient information about
the Y2K exposure of third parties to adequately predict the risks posed by them
to Registrant. If the third parties later discover any Y2K problems that are not
remedied, resulting problems could include temporary loss of utility services
and disruption of water supplies.
Costs incurred to address Y2K issues are estimated to be approximately
$5.2 million. A CPUC order authorizing SCW to increase rates by $830,000 per
year went in effect on October 24, 2000 for recovery of investments made in
preparation for Y2K readiness, not already included in Registrant's water rates.
RISK FACTOR SUMMARY
This section (written in plain English to comply with certain SEC
Standards) 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 been sued in fourteen water-quality related lawsuits:
- a suit filed on April 24, 1997 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has
been designated a federal superfund site
- a suit filed on July 29, 1997 alleging personal injury and property
damage as a result of the delivery contaminated of water; few of
our systems are located in the geographical area covered by this
suit
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- a suit filed on December 8, 1997 alleging personal injury and
property damage as a result of the delivery of contaminated water
in SCW's Arden-Cordova service area
- a suit filed on February 2, 1998 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has
been designated a superfund site
- a suit filed on February 4, 1998 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has
been designated a superfund site
- a suit filed in March 2, 1998 alleging personal injury and property
damage as a result of the delivery of contaminated water in SCW's
Arden-Cordova service area
- a suit filed on June 29, 1998 alleging personal injury and property
damage as a result of the delivery of contaminated water from wells
located in an area of the San Gabriel Valley that has been
designated a superfund site
- two suits filed on July 30, 1998 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has
been designated a superfund site
- a suit filed on December 3, 1998 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has
been designated a superfund site
- a suit filed on July 22, 1999 alleging personal injury and property
damage as a result of the delivery of contaminated water from wells
located in an area of the San Gabriel Valley that has been
designated a superfund site
- a suit filed on May 16, 2000 alleging personal injury and property
damage as a result of the delivery of contaminated water in SCW's
Arden-Cordova service area
- a suit filed on April 13, 2000 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has
been designated a superfund site
- a suit filed on August 5, 1999 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has
been designated a superfund site
On September 1, 1999, the First District Court of Appeal in San
Francisco, held that the CPUC had preemptive jurisdiction over regulated public
utilities and ordered dismissal of a series of lawsuits against water utilities,
including seven of the lawsuits against SCW. On October 11, 1999 one group of
plaintiffs appealed the decision to the California Supreme Court, which has
accepted the petition. Management cannot predict the outcome of the proceeding.
In March 1998, the CPUC issued an Order Instituting Investigation (the
OII) as a result of these types of suits being filed against water utilities in
California. The CPUC is seeking to determine:
- whether existing standards and policies regarding drinking water
quality adequately protect the public health
- whether water utilities are in compliance with existing standards
The Administrative Law Judge assigned to the OII has issued a draft
decision finding that water utilities, including SCW, have complied with DOHS
regulation and requirements. SCW is unable to predict whether the draft decision
will be approved in part or in its entirety.
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The CPUC has authorized a memorandum account for legal expenses incurred
by water utilities, including SCW, in the water quality lawsuits. Under the
memorandum account procedure, SCW may recover litigation costs from ratepayers
to the extent authorized by the CPUC. The CPUC has not yet authorized SCW to
recover any of its litigation costs. As of September 30, 2000, Registrant had
incurred $879,500 in the OII-related memorandum account.
Environmental Regulation
SCW is subject to increasingly stringent environmental regulations that
will result in increasing capital and operating costs. These regulations
include:
- the 1996 amendments to the Safe Drinking Water Act that require
increased testing and treatment of water to reduce specified
contaminants to minimum containment levels
- interim regulations expected to be adopted before the end of 2000
requiring increased surface-water treatment to decrease the risk of
microbial contamination; these regulations will affect SCW's five
surface water treatment plants
- additional regulation of disinfection/disinfection byproducts
expected to be adopted before the end of 2002; these regulations
will potentially affect two of SCW's systems
- additional regulations expected to be adopted before the end of
2000 requiring disinfection of certain groundwater systems; these
regulations will potentially impact several of SCW's systems using
groundwater supplies
- potential regulation of radon and arsenic
- new California requirements to fluoridate public water systems
serving over 10,000 customers
SCW may be able to recover costs incurred to comply with these
regulations through the ratemaking process for our regulated systems. We may
also be able to recover certain of these costs under our contractual
arrangements with municipalities. In certain circumstances, we may recover costs
from parties responsible or potentially responsible for contamination.
Rates and Regulation
SCW is subject to regulation by the CPUC. AWR and ASUS are not directly
subject to CPUC regulation. The CPUC may, however, regulate transactions between
SCW and AWR, including the manner in which overhead costs are allocated between
SCW and AWR and the pricing of services rendered by SCW to AWR.
SCW's revenues depend substantially on the rates that it is permitted to
charge its customers. SCW may increase rates in three ways:
- by filing for a general rate increase
- by filing for recovery of certain expenses
- by filing an "advice letter" for certain plant additions, thereby
increasing rate base
In addition, SCW recovers certain supply costs through a balancing
account mechanism. Supply costs include the cost of purchased water and power
and groundwater production assessments. The balancing account mechanism is
intended to insulate SCW's earnings from changes in supply costs that are beyond
SCW's control. The balancing account is not, however, designed to insulate SCW's
earnings
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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:
- the OII
- applications filed by SCW to increase rates and consolidate all of
its Region I rate-making jurisdictions
- an advice letter filed by SCW to recover the previous disallowed
portion of a water treatment facility in SCW's Clearlake service
area.
Adequacy of Water Supplies
The adequacy of water supplies varies from year to year depending upon a
variety of factors, including
- rainfall
- the amount of water stored in reservoirs
- the amount used by our customers and others
- water quality, and
- legal limitations on use.
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 the above factors and may affect us
in several ways:
- they adversely affect supply mix by causing Registrant to rely on
more expensive purchased water
- they adversely affect operating costs
- they may result in an increase in capital expenditures for building
pipelines to connect to alternative sources of supplies and
reservoirs and other facilities to conserve or reclaim water
We may be able to recover increased operating and construction costs for
our regulated systems through the ratemaking process. Registrant 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. As of September 30, 2000, Aerojet General Corp. has previously
reimbursed Registrant approximately $4.5 million for costs associated with the
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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. On October 25, 1999, we sued the California Regional Water Quality
Control Board (CRWQCB) alleging that it has willfully allowed portions of the
Sacramento County Groundwater Basin to be injected with chemical pollution that
is contaminating the underground water supply in our Rancho Cordova customer
service area. In a separate lawsuit, also filed on October 25, 1999, we sued
Aerojet General Corp. for causing the contamination. On March 22, 2000 Aerojet
General Corp. filed a cross complaint against us for negligence and constituting
a public nuisance. We cannot predict the outcome of these lawsuits but we will
defend ourselves against these allegations. 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, have
previously reimbursed us for replacement water and certain legal and consulting
expenses. The Charnock Basin is in our Culver City customer service area.
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 fourteen lawsuits involving claims pertaining to
water quality. Eleven of the lawsuits involve customer service areas located in
Los Angeles County in the southern portion of the State of California; three of
the lawsuits involve a customer service area located in Sacramento County in
northern California. See the section entitled "Risk Factor Summary" for more
information.
On September 1, 1999, the First District Court of Appeal in San
Francisco, in a published opinion entitled Hartwell Corporation v. The Superior
Court of Ventura County (Hartwell), held that the CPUC had preemptive
jurisdiction over regulated public utilities and ordered dismissal of a series
of lawsuits pertaining to water quality filed against water utilities, including
SCW. Seven lawsuits against SCW have been ordered for dismissal by the state
Court of Appeals -- the Adler (Case No. 1), Santamaria (Case No. 2), Anderson
(Case No. 3), Dominguez (Case No. 4), Celi (Case No. 5), Boswell (Case No. 6),
and Demciuc (Case No. 7) Matters. On October 11, 1999, one group of plaintiffs
has appealed to the California Supreme Court, which has accepted the case.
Management is unable to predict the outcome of this proceeding but, in any
event, does not anticipate a decision prior to the fourth quarter of 2001.
On December 3, 1998, SCW was named as a defendant in a complaint in
multiple counts, styled Abarca, et al. v. City of Pomona, et al. (Case No. 8),
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). Plaintiffs seek damages, including general and special
damages according to proof, punitive and exemplary damages, as well as
attorney's fees, costs of suit and other unspecified relief. SCW was served on
June 18, 1999.
SCW was named as a defendant, along with the City of Pomona, California
and Xerox Corporation in the matter styled Adejare, et al. v. Southern
California Water Company, et al. (Case No. 9), filed on July 22, 1999 in Los
Angeles Superior Court which seeks recovery for wrongful death,
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battery and fraudulent concealment (the Adejare Matter). Plaintiffs 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.
In December 1997 SCW was named a defendant in the matter of Nathaniel
Allen, Jr., et al. v. Aerojet-General Corporation, et al. (Case No. 10), 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. A stay of all
proceeding in the Allen matter is in effect pending the outcome of the
California Supreme Court's proceeding in the Hartwell case.
In March 1998, SCW was named a defendant in the matter of Daphne Adams,
et al. v. Aerojet General, et al. (Case No. 11) that was filed in Sacramento
Superior Court (the Adams Matter). The complaint makes claims based on
negligence, strict liability, trespass, public nuisance, private nuisance,
negligence per se, absolute liability for ultrahazardous activity, fraudulent
concealment, violation of California Business and Professions Code section 17200
et seq., intentional infliction of emotional distress, intentional spoilage of
evidence, negligent destruction of evidence needed for prospective civil
litigation, wrongful death and medical monitoring. Plaintiffs seek damages,
including general, punitive and 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. A
stay of all proceeding in the Adams Matter is in effect pending the outcome of
the California Supreme Court's proceeding in the Hartwell case.
In May 2000, SCW was named a defendant in the matter of Wallace Andrew
Pennington, et al. v. Aerojet General, et al. (Case No. 12) that was filed in
Sacramento Superior Court (the Pennington Matter). The complaint makes claims
based on negligence, intentional infliction of emotional distress, strict
liability, public liability for ultra hazardous activity and fraudulent
concealment. Plaintiffs allege that SCW and other defendants knowingly operated
and maintained wells, which provided contaminated drinking water to the
surrounding communities. Plaintiffs seek damages, including general, punitive
and exemplary damages, as well as attorney's fees, costs of suit, special
damages, according to proof of medical bills and lost wages and lost income as
occasioned by personal injury and plaintiff's inability to pursue employment,
and other unspecified relief. All councils in the Pennington matter have agreed
to a stay in this matter, pending the outcome of the Hartwell case.
In April 2000, SCW was named a defendant in the matter of Almelia
Brooks, et al. v. Suburban Water Sys., et al. (Case No. 13) that was 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 plaintiffs (the Brooks Matter).
Plaintiffs 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 in October 2000. Management is
unable to predict the outcome of this proceeding.
In August 1999, SCW was named a defendant in the matter of Lori
Alexander, et al. v. Suburban Water Sys., et al. (Case No. 14) that was 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
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concealment, conspiracy/fraudulent concealment, battery and unfair business
practices on behalf of plaintiffs (the Alexander Matter). Plaintiffs 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 in October, 2000. Management is unable to
predict the outcome of this proceeding.
In light of the breadth of plaintiffs' claims in these matters, the lack
of factual information regarding plaintiffs' 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 believes there are no merits to these claims and intends to
vigorously defend against them.
ORDER INSTITUTING INVESTIGATION
In March 1998, the CPUC issued an 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 water service 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 regarding matters
related to water quality over those water utilities subject to its authority.
The Administrative Law Judge assigned to the OII has issued a draft decision
finding that water utilities, including SCW, have complied with DOHS regulation
and requirements. On July 7, 2000, the ALJ's draft decision was bifurcated into
two separate draft decisions -- a Second Interim Opinion Resolving Substantive
Water Quality Issues and a Final Opinion Resolving Motions to Compel Discovery
and Motions to Withdraw from Proceeding. SCW is unable to predict whether the
draft decisions will be approved in part or in their entirety by the CPUC. SCW
anticipates a final decision during the fourth quarter of 2000.
OTHER LITIGATION
On October 25, 1999, SCW filed a lawsuit against the California Regional
Water Quality Control Board (CRWQCB) alleging that the CRWQCB has willfully
allowed portions of the Sacramento County Groundwater Basin to be injected with
chemical pollution that is destroying the underground water supply in SCW's
Rancho Cordova customer service area. Management cannot predict the likely
outcome of this proceeding.
In a separate case, also filed on October 25, 1999, SCW sued Aerojet
General Corp. for causing the contamination of the Sacramento County Groundwater
Basin. On March 22, 2000 Aerojet General Corp. filed a cross complaint against
SCW for negligence and constituting a public nuisance. Registrant is unable to
determine at this time what, if any, potential liability it may have with
respect to the cross complaint, but intends to vigorously defend itself against
these allegations. Management cannot predict the likely outcome of this
proceeding.
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The CPUC has authorized memorandum accounts to allow for recovery of
costs incurred by SCW in prosecuting these cases from customers, less any
recovery from the defendants or others. As of September 30, 2000, approximately
$1,534,400 has been recorded in the memorandum accounts. SCW anticipates it will
file for recovery of these costs in accordance with CPUC approved procedures but
is unable to predict if the CPUC will authorize recovery of all or any of such
costs.
Registrant is also subject to ordinary routine litigation incidental to
its business. Other than as disclosed above, no legal proceedings are pending,
except such incidental litigation, to which Registrant is a party or of which
any of its properties is the subject, which are believed to be material.
ITEM 2. CHANGES IN SECURITIES
As of September 30, 2000, earned surplus amounted to $67,529,000, none
of which was restricted as to payment of cash dividends on Registrant's Common
Shares by any terms of Registrant's debt instruments.
On August 16, 2000, Registrant sold 1,107,000 Common Shares, no par
value with a stated value of $2.50 per share in a public offering, priced at
$26-1/8 per share.
As of September 30, 2000, Registrant also issued 6,550 and 6,817 Common
Shares, respectively, under Registrant's Dividend Reinvestment and Common share
Purchase Program (DRP), and Investment Incentive Program (401-k). Authorized but
unissued Common Shares include 493,450, 64,591 and 250,000 Common Shares
reserved for issuance under Registrant's DRP, 401-k and 2000 Stock Incentive
Plan, respectively. Common Shares reserved for the 401-k Plan are in relation to
the matching contributions by SCW and for investment purposes by participants.
Under the 2000 Stock Incentive Plan, stock options representing 45,657 common
shares upon exercise were granted to certain eligible employees on May 1, 2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted during the second quarter of the fiscal year
covered by this report to a vote of security holders through the solicitation of
proxies or otherwise.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27. Schedule UT. (Submitted in electronic format only to the
Securities and Exchange Commission.)
No Reports of Form 8-K were filed during the period covered by this report.
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer and chief financial officer.
AMERICAN STATES WATER COMPANY
and its subsidiary
SOUTHERN CALIFORNIA WATER COMPANY
By: /s/ McClellan Harris III .
-----------------------------------
McClellan Harris III
Vice President - Finance,
Chief Financial Officer,
Treasurer and Secretary
By: /s/ Linda J. Matlick
-----------------------------------
Linda J. Matlick
Controller
Southern California Water Company
Dated: October 31, 2000
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