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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-------
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
_______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________ to________________
Commission file number: 0-8176
Southwest Water Company
(Exact name of registrant as specified in its charter)
Delaware 95-1840947
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605
(Address of principal executive offices) (Zip Code)
(626) 915-1551
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
-
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. On November 12, 1999, there
were 6,438,888 common shares outstanding.
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information: Page No.
- ------- ---------------------- --------
<S> <C> <C>
Item 1. Financial Statements:
Condensed Consolidated Statements of Income -
Three and Nine months Ended September 30, 1999 and 1998 1
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-12
Part II. Other Information:
- -------- -----------------
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
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Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- -----------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
Operating Revenues $22,911 $19,960 $59,014 $54,238
Operating Expenses:
Direct operating expenses 16,823 14,148 43,397 39,575
Selling, general and administrative 2,849 2,724 8,628 8,369
- -----------------------------------------------------------------------------------------------------------------------
19,672 16,872 52,025 47,944
Operating Income 3,239 3,088 6,989 6,294
Other Income (Expense):
Interest expense (722) (715) (2,228) (2,299)
Interest income 16 30 52 68
Gain on sale of land (Note 6) 2,747 0 2,747 0
Other 231 10 483 197
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2,272 (675) 1,054 (2,034)
Income Before Income Taxes 5,511 2,413 8,043 4,260
Provision for income taxes 2,204 965 3,217 1,704
- -----------------------------------------------------------------------------------------------------------------------
Net Income 3,307 1,448 4,826 2,556
Dividends on preferred shares 7 7 21 21
- -----------------------------------------------------------------------------------------------------------------------
Net Income Available for Common Shares $ 3,300 $ 1,441 $ 4,805 $ 2,535
- -----------------------------------------------------------------------------------------------------------------------
Earnings per Common Share (Note 7):
Basic $ 0.51 $ 0.23 $ 0.75 $ 0.40
Diluted $ 0.49 $ 0.22 $ 0.73 $ 0.39
- -----------------------------------------------------------------------------------------------------------------------
Cash Dividends per Common Share (Note 7) $ 0.05 $ 0.05 $ 0.16 $ 0.15
- -----------------------------------------------------------------------------------------------------------------------
Weighted Average Outstanding Common Shares (Note 7):
Basic 6,418 6,312 6,393 6,297
Diluted 6,729 6,441 6,621 6,441
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
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ASSETS 1999 1998
- ------------------------------------------------------------------------------------------------------------------
(unaudited)
(in thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 238 $ 394
Customers' accounts receivable, net 11,380 8,630
Other current assets 7,184 2,586
- ------------------------------------------------------------------------------------------------------------------
18,802 11,610
Property, Plant and Equipment:
Utility property, plant and equipment -- at cost 150,419 144,690
Contract operations property, plant and equipment -- at cost 5,361 4,678
- ------------------------------------------------------------------------------------------------------------------
155,780 149,368
Less accumulated depreciation and amortization 43,389 40,130
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112,391 109,238
Other Assets 8,291 9,079
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$139,484 $129,927
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current portion of bank notes payable and long-term debt $ 1,524 $ 1,679
Accounts payable 3,063 2,782
Other current liabilities 11,320 9,827
- ------------------------------------------------------------------------------------------------------------------
15,907 14,288
Other Liabilities and Deferred Credits:
Long-term debt 28,900 28,900
Bank notes payable 3,333 4,500
Advances for construction 8,315 8,049
Contributions in aid of construction 33,251 31,706
Deferred income taxes 4,943 4,430
Other liabilities and deferred credits 5,175 2,911
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities and Deferred Credits 99,824 94,784
Stockholders' Equity
Cumulative preferred stock 517 517
Common stock 43 42
Paid-in capital 30,861 30,127
Retained earnings 8,239 4,457
- ------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 39,660 35,143
- ------------------------------------------------------------------------------------------------------------------
$139,484 $129,927
==================================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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<TABLE>
<CAPTION>
Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
--------------------------------------------------------------------------------------------------
1999 1998
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(in thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 4,826 $ 2,556
Adjustments to reconcile net income to
net cash provided by operating activities 980 $ 3,999
--------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,806 6,555
--------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Additions to property, plant and equipment (5,308) (5,936)
Gross proceeds from sale of land 4,000 0
Net proceeds from sale of land transferred to accommodator (Note 6) (3,883) 0
Other investments, net 125 0
--------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,066) (5,936)
--------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Contributions in aid of construction and advances for construction 1,020 1,597
Net proceeds from dividend reinvestment plan,
employee stock purchase plan, and stock option plans 735 349
Net repayment of bank notes payable (1,322) (1,927)
Dividends paid (1,044) (923)
Payments on advances for construction (285) (154)
--------------------------------------------------------------------------------------------------
Net cash used in financing activities (896) (1,058)
--------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (156) (439)
Cash and cash equivalents at beginning of period 394 1,237
--------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 238 $ 798
==================================================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 2,009 $ 2,037
Income taxes $ 1,490 $ 845
Depreciation and amortization $ 3,345 $ 3,307
Non-cash contributions in aid of construction
conveyed to Company by developers $ 1,624 $ 1,775
See accompanying notes to condensed consolidated financial
statements.
</TABLE>
3
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SOUTHWEST WATER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
1. Southwest Water Company ("the Company" or "Registrant") is engaged in the
water management business, providing water and wastewater services to
nearly three-quarters of a million people located throughout California,
Texas, New Mexico and Mississippi. Through it's wholly owned subsidiary,
ECO Resources, Inc. ("ECO"), the Company operates and manages water and
wastewater treatment facilities owned by cities, municipal utility
districts and private entities. The Company conducts regulated water
utility operations through two wholly owned subsidiaries, Suburban Water
Systems ("Suburban") and New Mexico Utilities, Inc. ("NMUI"). The unaudited
condensed consolidated financial statements reflect all adjustments, which,
in the opinion of management, are necessary to present fairly the financial
position of the Company as of September 30, 1999, and the Company's results
of operations for the three and nine months ended September 30, 1999. All
such adjustments are of a normal recurring nature. Certain
reclassifications have been made to the 1998 financial statements to
conform to the 1999 presentation.
2. Certain information and footnote disclosures normally included in financial
statements, prepared in accordance with generally accepted accounting
principles ("GAAP"), have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and related notes contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 ("the 1998 Annual
Report").
3. The water services industry is seasonal, and as such, the results of
operations for the nine months ended September 30, 1999 do not necessarily
indicate the results to be expected for the full year. Rainfall and weather
conditions affect utility operations, with most water consumption occurring
during the second and third quarters of each year when weather tends to be
hot and dry. The first and fourth quarters of each year are normally the
lowest in terms of average customer water usage for the Company's water
utilities. The Company's contract operations business is also seasonal in
nature and may be affected by adverse weather conditions. For example,
heavy rainfall during a quarter could hamper the Company's ability to
perform billable work such as pipeline maintenance, manhole rehabilitation
and other outdoor services.
4. The Company records earnings per share ("EPS") by computing basic EPS and
diluted EPS in accordance with GAAP. Basic EPS measures the performance of
the Company during the reporting period by dividing net income available to
common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted EPS measures the performance of the
Company during the reporting period after giving effect to all potentially
dilutive common shares that would have been outstanding if such shares had
been issued. The dilutive effect of outstanding stock options is reflected
in diluted EPS by application of the treasury method of accounting.
5. Beginning in 2001, the Company is subject to SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivatives. Currently, the Company
does not have any derivative instruments that require disclosure under SFAS
No. 133, and SFAS No. 133 is not expected to have any effect on the
Company's financial position or results of operations.
6. In September 1999, the Company recognized a gain on the sale of a parcel of
surplus land by Suburban. Suburban sold the land for $4,000,000 and
recorded a pretax gain of $2,747,000. The transaction involved
approximately 11.4 acres of vacant land in La Puente, California, formerly
the site of Suburban's main office and equipment yard. The sale of land,
net of tax, added $1,648,000 to net income, or $.25 per diluted common
share. For Federal income tax purposes, Suburban has elected to treat the
sale of the land as an Internal Revenue Service Code Section 1031 Like-Kind
4
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Exchange. Net proceeds from the sale were transferred to an accommodator
serving as the intermediary in this transaction. The net proceeds must be
reinvested in like-kind property by March 8, 2000. If the proceeds are not
reinvested in like-kind property by that date, the gain will be recognized
as other income and will become taxable as ordinary income.
7. In August 1999, a 3-for-2 stock split in the form of a stock dividend was
declared by the Company's Board of Directors, and was paid on October 20,
1999 to stockholders of record as of October 1, 1999. Earnings per common
share, cash dividends per common share and weighted-average outstanding
common shares reflect this 3-for 2 stock split, paid in the form of a stock
dividend to stockholders of record on October 1, 1999.
8. In August 1999, the Board of Directors of the Company adopted a resolution
that will terminate the Utility Employees Retirement Plan ("UERP"), freeze
the assets of the plan and cease all benefit accruals as of December 30,
1999. Pending favorable determination from the Internal Revenue Service,
the Company anticipates distribution of the UERP assets to vested
participants in 2000. The Company does not expect the termination to
adversely affect its financial position or results of operations. The
Company may be required to pay certain excise taxes on any amounts
currently held by the UERP and not ultimately distributed to the vested
participants; however, the Company does not anticipate that this amount
will be significant.
9. As discussed in the 1998 Annual Report, the Company owns a 49% interest in
Windermere Utility Company ("Windermere") and in October 1999, the Company
extended the Right of First Refusal Agreement and the Call Purchase
Agreement ("the Agreements") with the majority shareholder to December 31,
1999. The Agreements permit the majority shareholder to acquire the
Company's interest in Windermere at an agreed-upon price. If the majority
shareholder does not exercise his option, then the Company has the right to
acquire 100% of Windermere.
10. As discussed in the 1998 Annual Report, in August 1998, Suburban was
granted an Exclusive Negotiation Agreement ("negotiation agreement") by the
City of West Covina ("West Covina"). During August 1999, Suburban and West
Covina signed a letter of intent which, as amended, provides for Suburban
to acquire West Covina's water distribution system and facilities for
$11,500,000. The purchase of West Covina's water system would add
approximately 7,000 water connections to Suburban's current customer base,
an increase of approximately 11-percent. Since customer approval is a
statutory condition for the sale to be completed, West Covina has mailed
ballots to the effected customers. The results of the vote will be
determined in December 1999. A positive customer vote for the sale would
allow the City Council and Suburban to complete negotiations; however,
while West Covina and the Company are working toward a successful
completion of this acquisition, there can be no assurance that the
acquisition will occur.
11. As discussed in the 1998 Annual Report, the City of Albuquerque
("Albuquerque") initiated an action in eminent domain to acquire the
operations of NMUI. At present, discussions are ongoing; however, there is
no assurance that these discussions will lead to a settlement of the legal
action.
5
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12. As discussed in the 1998 Annual Report, the Company has two reportable
segments as defined under the requirements of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The basis of
segmentation and basis of measurement of the segment profit or loss are the
same as the information reported in the 1998 Annual Report. The following
table sets forth disclosure about the Company's reportable segments as
required by SFAS No. 131.
<TABLE>
<CAPTION>
Total Total
Non Segment Consolidated
For the Nine months Ended, Regulated Regulated Information Other Information
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
September 30, 1999
------------------
Revenues from external customers $ 30,373 $ 28,641 $ 59,014 $ 0 $ 59,014
Segment operating profit 1,002 8,787 9,789 (2,800) 6,989
Segment assets 12,088 122,107 134,195 5,289 139,484
September 30, 1998
------------------
Revenues from external customers $ 27,498 $ 26,740 $ 54,238 $ 0 $ 54,238
Segment operating profit 635 8,127 8,762 (2,468) 6,294
Segment assets 9,944 113,902 123,846 4,664 128,510
</TABLE>
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity and capital resources of the Company are influenced primarily by
construction expenditures at Suburban and NMUI for the addition, replacement and
renovation of water utility facilities. The Company's cash needs may also be
influenced by costs related to acquisition of new business opportunities.
At September 30, 1999, the Company had cash and cash-equivalent balances
totaling $238,000. The Company has three separate unsecured lines of credit from
three commercial banks with total line of credit capacity of $20,000,000. Two of
the lines expire in 2001, and the remaining line expires in 2000. The Company
expects to renew expiring lines of credit in the normal course of business. At
September 30, 1999, outstanding borrowing was $3,957,000 and the unused
borrowing capacity was $16,043,000. During the first nine months of 1999, the
Company repaid $1,322,000 on its lines of credit. As of September 30, 1999, the
Company was in compliance with all applicable financial covenants of the line of
credit agreements. Under two of the line of credit agreements, interest is
charged at each bank's prime rate less 1/4 percent. The Company may also borrow
at an interest rate that is lower than this rate; however, the amount borrowed
must remain outstanding for a fixed period of time. Interest charged under the
third line of credit is lower than the bank's prime rate and contains no
restrictions as to minimum borrowing or borrowing for a fixed period of time.
Two of the lines of credit require a $6,000 annual fee, each and one line of
credit requires no annual fee.
In addition to its lines of credit, the Company has existing borrowing capacity
under its First Mortgage Bond Indentures. Under these indentures, the Company
has remaining borrowing capacity of approximately $47,668,000. However, the
amount of additional borrowing available to the Company under its current lines
of credit is limited by financial covenants that restricted additional borrowing
at September 30, 1999 to the unused credit line amount.
During the first nine months of 1999, the Company's additions to property, plant
and equipment were $6,932,000, representing a decrease of $779,000 from the same
period in 1998. Developers made contributions in aid of construction ("CIAC"),
and advances totaling $2,644,000, of which $1,020,000 was received in cash.
Company-financed capital additions were $4,288,000, which was funded primarily
by cash flow from operations. For 1999, the Company estimates that its capital
additions will be approximately $8,500,000 and that cash flow from operations
and CIAC will fund these additions. Line of credit borrowing is also available
to meet construction requirements if needed.
The Company anticipates that its available line of credit borrowing capacity and
the cash flow generated from operations will be sufficient to fund its
activities during the next 12 months. If additional cash were needed, the
Company would consider alternative sources, including long-term financing. The
amount and timing of any future long-term financing would depend on various
factors, including the timeliness and adequacy of rate increases, the
availability of capital, and the Company's ability to meet interest and fixed
charge coverage requirements. Regulatory approval is required for any long-term
financing by Suburban or NMUI. If the Company were unable to renew its existing
lines of credit or unable to obtain additional long-term financing, capital
spending would be reduced or delayed until new financing arrangements were
secured. Such financing arrangements could include seeking equity financing
through a private placement or a public offering. Similarly, if the Company
needed additional cash to fund an acquisition, financing arrangements could
include long-term borrowing or equity financing.
As described in Note 6 of the notes to the condensed consolidated financial
statements, net proceeds related to a sale of surplus utility land, are being
held by an accommodator serving as intermediary for the Company's Internal
Revenue Service Code Section 1031 Like-Kind Exchange transaction. The Company
anticipates that the proceeds from the sale will be reinvested by March 8, 2000
and could be used to assist in the purchase of the City of West Covina's water
system (as mentioned in Note 10 to the condensed consolidated financial
statements) or invested in other utility property. The remaining funds
7
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for the purchase of West Covina's water system could come from line of credit
borrowing or long-term financing.
REGULATORY AFFAIRS:
Regulation:
ECO's pricing is not subject to regulation by a public utilities commission.
Most contracts with municipal utility districts ("MUDs") are short-term
contracts and do not generally include inflation adjustments. Changes in prices
are negotiated on a contract-by-contract basis. ECO's operations and maintenance
contracts ("O&Ms") are generally longer-term water and wastewater service
contracts, primarily with cities, and typically include inflation adjustments.
The California Public Utilities Commission ("CPUC") and the New Mexico Public
Regulation Commission ("NMPRC"), regulate the rates and operations of Suburban
and NMUI, respectively. The rates allowed are intended to provide the utilities
an opportunity to recover costs and earn a reasonable return on common equity.
Although the Company is not currently seeking any rate increase, future
construction expenditures and increased operating expenses may require periodic
requests for rate increases in the future.
Regulatory Developments:
Legislative and CPUC developments are closely monitored by the Company and by
the various water industry associations in which the Company actively
participates. Whether legislative, CPUC or NMPRC changes will be enacted, or, if
enacted, what the terms of any changes would be, are not known by the Company.
Therefore, management cannot predict the impact, if any, of final legislative
changes, CPUC-developments or NMPRC changes on the Company's financial position
or results of operations.
ENVIRONMENTAL AFFAIRS:
As a contract operator, ECO does not own any of the water sources, water
production facilities, or water distribution systems that it operates for its
clients, nor does ECO own any of the wastewater collection systems or wastewater
treatment facilities that it operates. Although not the owner, ECO is
responsible for operating these water and wastewater facilities in compliance
with all federal, state and local health standards and regulations.
Suburban and NMUI operations fall under the regulatory jurisdiction of the CPUC
and the NMPRC, respectively. The responsibilities of both regulatory agencies
are to ensure an adequate supply of healthful, potable water to residents of
their respective states. The Company's operations are also subject to water and
wastewater pollution prevention standards and water and wastewater quality
regulations of the United States Environmental Protection Agency (the "EPA") and
various state regulatory agencies. Both the EPA and state regulatory agencies
require periodic testing and sampling of water. Costs associated with the
testing of the Company's water supplies have increased and are expected to
increase further as the regulatory agencies adopt additional monitoring
requirements. The Company believes that future incremental costs of complying
with governmental regulations, including capital expenditures, will be
recoverable through increased rates and contract operations revenues. However,
there is no assurance that recovery of such costs will be allowed. To date, the
Company has not experienced any material adverse effects upon its operations
resulting from compliance with governmental regulations.
In March 1998, the CPUC issued an order instituting investigation ("OII")
directed to all Class A and B water utilities in California, including Suburban.
The purpose of the OII is to address a series of questions dealing with the
safety of current drinking water standards and compliance with those standards.
Additional information about the OII is set forth in the 1998 Annual Report.
While the CPUC is actively investigating the issues concerned with water
quality, the Company and Suburban are unable to predict
8
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what actions, if any, will be taken by the CPUC and/or the Department of Health
Services as the result of this investigation, or their impact on the operations
or financial position of the Company and Suburban.
YEAR 2000 ISSUE:
The Year 2000 ("Y2K") issue is the result of software applications using a two-
digit code instead of a four-digit code to identify the year. Such applications
may be unable to interpret dates beyond 1999, which could result in system
failure or other erroneous data in the year 2000 causing serious disruptions in
operations. As discussed in the Company's 1998 Annual Report, the Company began
evaluating the Y2K issue in 1998 and has implemented a five-phase plan to assess
its exposure from potential Y2K-related failures in its internal systems and
those of its significant suppliers, vendors and customers.
The first phase of the plan was to conduct an inventory of all systems and
programs to determine the effect of Y2K issue. The second phase involved
assessment and determination as to how to correct any Y2K issues that were
identified in the first phase of the Company's plan. The third phase of the plan
involved implementation and testing of the corrective measures. The fourth phase
of the plan was to ensure that all significant Y2K issues were properly
corrected and all critical internal systems were made Y2K compliant. The final
phase of the plan is to assess whether the Company's principal suppliers,
vendors and material customers have Y2K issues that could adversely affect the
Company. The first four phases of the plan were completed in 1998 and early
1999, and the Company concluded that its internal critical systems were Y2K
compliant.
The fifth phase of the plan involved the Company contacting principal suppliers
and vendors, all single source suppliers and vendors, and material customers
including local governments and municipal utility districts to assess their
readiness for Y2K. Phase five is ongoing as the Company continues to make
inquiries with respect to Y2K compliance of these other systems; however; the
Company has not received assurances that all of those other systems are Y2K
compliant.
The Company is unable to predict whether there will be a material adverse effect
on the Company's financial position or results of operations, since the final
determination of the Y2K compliance of principal suppliers, vendors and material
customers is not known at this time. The Company has implemented written
contingency plans to provide procedures that will assure the Company's rapid and
effective response to loss of water or wastewater treatment services. The
contingency plans include, but are not limited to, the following provisions:
1) Standby personnel ready to operate systems manually if computer-guided
systems fail;
2) Auxiliary power sources tested at full load prior to January 1, 2000
and able to operate at full capacity if necessary;
3) Backup generators ready and fully fueled;
4) Hand-held radios, cell phones and pagers have been tested and ready for
deployment;
5) Vehicles ready and fully fueled;
6) Back-up of critical documentation, printed hard copies of critical
billing and accounting information;
7) Observation of world events as the transition to 2000 occurs.
The Company does not expect implementation of Y2K compliance measures to exceed
$100,000. The Company relies on relatively low technological equipment and
processes for its water and wastewater treatment operations. If necessary, the
Company has the ability to operate its water and wastewater systems manually
should internal computer systems fail. On January 1, 2000, the Company plans to
have operations personnel on site and available to operate the systems manually
in the event that any internal computer systems fail. However, a long-term loss
of electrical or gas power could have a material adverse effect on the
operations of the Company, the Company's financial position and its results of
operations.
9
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RISK FACTORS
Certain statements contained in this Form 10-Q Report for the period ending
September 30, 1999, are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause actual results, performance or achievements of the Company to be
materially different from any performance or achievements planned, expressed or
implied by such forward-looking statements. Although the Company believes that
its expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations.
This Form 10-Q Report for the period ending September 30, 1999, should be read
in conjunction with the Company's 1998 Annual Report for more detailed
descriptions of the risk factors affecting the Company which include, but are
not limited to, expectations regarding new contracts and potential acquisitions,
weather conditions, water quality issues, regulatory changes, Y2K readiness,
legal and other contingencies.
RESULTS OF OPERATIONS:
All earnings per share amounts reflect a 3-for-2 stock split and a 5-for-4 stock
split, paid in the form of stock dividends, to stockholders of record on October
1, 1999, and 1998 respectively.
Three Months Ended September 30, 1999 Compared To Three Months Ended September
30, 1998
Diluted earnings per common share before a gain on a land sale (see Note 6 of
the notes to the condensed consolidated financial statements), net of taxes were
$.25 in 1999 compared to $.22 during the same period in 1998. Diluted earnings
per common share, including the gain on sale of land, net of taxes were $.49 in
1999.
Operating income increased $151,000 or 5%, and, as a percentage of operating
revenues, was 14% in 1999 compared with 15% in 1998. This decrease is primarily
due to lower operating income at the utilities due to increases in the cost of
water purchased. Operating income for contract operations increased $260,000,
due primarily to the addition of new contracts and to an increase in the amount
of project work performed outside the scope of existing contracts. Operating
income at the utilities decreased $84,000. Water consumption increased 4% at
Suburban; however, the use of purchased water at a higher cost negatively
impacted operating income. NMUI experienced a decrease in consumption due to
cooler weather compared to the period in 1998. Parent company expenses increased
$25,000 due primarily to compensation-related expenses.
Operating revenues
Operating revenues increased $2,951,000 or 15% in the third quarter of 1999
compared with the same period in 1998. Contract revenues increased $2,649,000 or
30%, due to the addition of new contracts and increased project work performed
outside the scope of existing contracts. Utility revenues increased $302,000 or
3% due primarily to increased water consumption by Suburban's customers as a
result of the hotter, dryer summer weather.
Direct operating expenses
Direct operating expenses increased $2,675,000 or 19%. As a percentage of
operating revenues, these expenses were 73% in 1999 and 71% in 1998 due
primarily to increases in the cost of water purchased at the utilities. ECO's
direct operating expenses increased $2,374,000 due to the increase in the number
of new contracts and to the increase in project work performed. Utility direct
operating expenses increased $301,000, or 5%, primarily reflecting higher water
costs due to the increase in customer water consumption by Suburban customers.
10
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Selling, general and administrative
Selling, general and administrative expenses for the third quarter of 1999
increased $125,000 or 5% as compared with the same period in 1998. However, as a
percentage of operating revenues, these expenses improved to only 12% in 1999
compared to 14% in 1998. ECO's selling, general and administrative expenses
increased $11,000. General and administrative expenses at the utilities
increased $89,000, primarily as a result of increased compensation-related
expenses. As discussed above, general and administrative expenses of the parent
company increased $25,000.
Other income
Other income increased $221,000 due primarily to extension fees paid to Suburban
in connection with the sale of land not used in utility operations.
Nine Months Ended September 30, 1999 Compared To Nine Months Ended September 30,
1998
Diluted earnings per common share before a gain on a land sale (see Note 6 of
the notes to the condensed consolidated financial statements), net of taxes were
$.48 in 1999 compared to $.39 during the same period in 1998. Diluted earnings
per common share including the gain on sale of land, net of taxes, were $.73 in
1999.
Operating income increased $695,000 or 11%, and, as a percentage of operating
revenues, was 12% in 1999 and 1998. ECO's operating income increased $347,000
due to the addition of new contracts and increases in project work performed
outside the scope of existing contracts. Operating income at the utilities
increased $673,000, due primarily to a 10% increase in water consumption by
Suburban's customers as a result of warmer, dryer weather during the first nine
months of 1999 compared to milder weather in 1998. At NMUI, there was a 4%
increase in water consumption due to warmer, dryer weather, and an increase in
the number of customers. Parent company expenses increased $325,000 due
primarily to self-insured retention reserves and to compensation-related
expenses.
Operating revenues
Operating revenues increased $4,776,000 or 9% for the first nine months of 1999
compared with the same period in 1998. Contract revenues increased $2,875,000 or
10%, primarily due to the addition of new contracts and to additional project
work performed outside the scope of existing contracts. Utility revenues
increased $1,901,000 or 7% due primarily to increased water consumption by
Suburban's customers as a result of hot, dry summer weather. NMUI revenues were
higher due to a 4% increase in water consumption and from the addition of new
customers.
Direct operating expenses
Direct operating expenses increased $3,822,000 or 10%. As a percentage of
operating revenues, these expenses were 74% in 1999 and 73% in 1998. Contract
direct operating expenses increased $2,428,000 due to the addition of new
contracts and to additional project work performed outside the scope of existing
contracts. Utility direct operating expenses increased $1,394,000, primarily
reflecting the increase in customer water consumption at both Suburban and NMUI,
and to the increase in the number of NMUI's customers.
Selling, general and administrative
Selling, general and administrative expenses for the first nine months of 1999
increased $259,000 or 3% as compared with the same period in 1998. As a
percentage of operating revenues, these expenses were 15% in both 1999 and 1998.
ECO's selling, general and administrative expenses increased $89,000, primarily
due to increased regional marketing costs associated with new business
development opportunities. General and administrative expenses at the utilities
decreased $155,000, primarily as a
11
<PAGE>
result of decreased compensation-related expenses and legal fees. As discussed
above, general and administrative expenses of the parent company increased
$325,000.
Interest expense and other income
Interest expense decreased $71,000 or 3% as the result of decreases in line of
credit borrowing and due also to lower interest rates in the first nine months
of 1999 compared to 1998. Other income increased $286,000 primarily due to
extension fees paid in connection with the sale of land not used in utility
operations, and to an another gain on sale of land not used in utility
operations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed in the Company's 1998 Annual Report and its quarterly reports on
Form 10-Q for the periods ending March 31, 1999 ("the March Report") and June
30, 1999 ("the June Report"), the Company has been named in several complaints
alleging water contamination. Details of the litigation are described in the
March Report and the June Report. During September 1999, the California 2nd
District Court of Appeal ordered that the lawsuits be dismissed. A three-judge
panel ruled that the CPUC (subject to a review by the state Supreme Court, but
not other state courts) has final regulatory authority in water quality matters.
The plaintiffs in this action have petitioned the California Supreme Court for
review of this decision and the Company has opposed the grant of the review. The
Supreme Court has not yet ruled on the petition. If a review is not granted, the
decision will become final and the Companies will be dismissed from all of the
pending lawsuits alleging the delivery of contaminated water.
The Company and Suburban have requested defense and indemnification from their
liability insurance carriers for these lawsuits. Several of the liability
insurance carriers are currently contributing to the costs of defense of the
lawsuits. Based upon information available at this time, management does not
expect that these actions will have a material adverse effect on the Company's
financial position or results of operations.
As discussed in the 1998 Annual Report, in October 1998 the Company and ECO were
sued in an action entitled Patrick K. Accrocco, et al vs. ECO Resources, Inc.,
et al in the District Court of Fort Bend County, Texas, arising out of a fatal
auto accident. The Company believes that its maximum exposure in this action is
limited to the self-insured retention under its umbrella liability policy. Based
on the information available at this time, management does not expect that this
action will have a material adverse effect on the Company's financial position
or results of operations.
As discussed in the 1998 Annual Report, the City of Albuquerque ("Albuquerque")
initiated an action in eminent domain to acquire the operations of NMUI. The
Company believes that the fair market value of NMUI is substantially in excess
of the amount offered in Albuquerque's complaint. Under New Mexico state law,
there are procedures, which would allow Albuquerque to take possession of NMUI
prior to the resolution of the fair market issue; however, the Company believes
that it has adequate defenses should Albuquerque choose to pursue these
procedures. At present, discussions are ongoing; however, there is no assurance
that these discussions will lead to a settlement of the legal action.
The Company and its subsidiaries are the subjects of certain litigation arising
from the ordinary course of operations. The Company believes the ultimate
resolution of such matters will not materially adversely affect its consolidated
financial position, results of operations or cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits furnished pursuant to Item 601 of Regulation S-K:
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
SOUTHWEST WATER COMPANY
-----------------------
(Registrant)
Dated: November 12, 1999 /s/ PETER J. MOERBEEK
---------------------
Peter J. Moerbeek
Chief Financial Officer
14
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