SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001For the Quarterly Period Ended March 31, 2002
COMMISSION REGISTRANT AND STATE OF INCORPORATIONCommission Registrant and State of Incorporation IRS EMPLOYER FILE NO. ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO. ---------------------- ------------------------------------- ------------------Employer File No. Address and Telephone Number Identification No. 333-47647 American States Water Company 95-4676679 (A
(A California Corporation)
630 East Foothill Boulevard
San Dimas, California 91773-9016
909-394-360095-4676679 000-01121 Southern California Water Company 95-1243678 (A
(A California Corporation)
630 East Foothill Boulevard
San Dimas, California 91773-9016
909-394-360095-1243678 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 [ ]
American States Water Company Yesx NooSouthern California Water Company Yesx NooAPPLICABLE ONLY TO CORPORATE ISSUERS:
As of
November 5, 2001,May 8, 2002, the number of Common Shares outstanding, No Par Value with Stated Value of $2.50, of American States Water Company was10,079,62910,085,991 all of which are listed on the New York Stock Exchange.As of
November 5, 2001,May 8, 2002, all of the 110 outstanding Common Shares of Southern California Water Company are owned by American States Water Company.TABLE OF CONTENTSAMERICAN STATES WATER COMPANY
AND
and
SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-QINDEX
PAGE NO. --------PARTPage No. Part I FINANCIAL INFORMATIONFinancial Information Item 1: Financial Statements.............................................................Statements1 Consolidated Balance Sheets of American States Water Company as of September 30, 2001March 31, 2002 and December 31,2000.........................................20012-3 Consolidated Statements of Income of American States Water Company for the Three Months Ended September 30,March 31, 2002 and March 31, 2001and September 30, 2000.....................4 Consolidated Statements of Income of American States Water Company for the Nine Months Ended September 30, 2001 and September 30, 2000...................... 5Consolidated Statements of Income of American States Water Company for the Twelve Months Ended September 30,March 31, 2002 and March 31, 2001and September 30, 2000.................... 65 Consolidated Statements of Cash Flow of American States Water Company for the NineThree Months EndedSeptember 30,March 31, 2002 and March 31, 2001and September 30, 2000...................... 76 Consolidated Balance Sheets of Southern California Water Company as of September 30, 2001March 31, 2002 and December 31,2000......................................... 8-920017-8 Consolidated Statements of Income of Southern California Water Company for the Three Months Ended September 30,March 31, 2002 and March 31, 2001and September 30, 2000................. 10 Consolidated Statements of Income of Southern California Water Company for the Nine Months Ended September 30, 2001 and September 30, 2000...................... 119 Consolidated Statements of Income of Southern California Water Company for the Twelve Months Ended September 30,March 31, 2002 and March 31, 2001and September 30, 2000.................... 1210 Consolidated Statements of Cash Flow of Southern California Water Company for the NineThree Months EndedSeptember 30,March 31, 2002 and March 31, 2001and September 30, 2000.................. 1311 Notes to Financial Statements.................................................... 14-17Statements12-15 Item 2: Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operation..................................................................... 18-36Operation16-39 Item 3: Quantitative and Qualitative Disclosures About Market Risks...................... 36 PARTRisks39 Part II OTHER INFORMATIONOther Information Item 1: Legal Proceedings................................................................ 36-40Proceedings39-42 Item 2: Changes in Securities............................................................ 40Securities42 Item 3: Defaults Upon Senior Securities.................................................. 41Securities42 Item 4: Submission of Matters to a Vote of Security Holders.............................. 41Holders42-43 Item 5: Other Information................................................................ 41Information43 Item 6: Exhibits and Reports on Form 8-K................................................. 418-K 43i
PART I
ITEMItem 1.
FINANCIAL STATEMENTSFinancial StatementsGeneral
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"“AWR”) and Southern California Water Company (hereinafter"SCW"“SCW”). For more information, please see Note 1 to theNotes to Financial Statementsand the heading entitledGeneralinItem 2- Management's— Management’s Discussion and Analysis of Financial Condition and Results of Operation.References in this report to"Registrant"“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
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS(UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 2001 2000 --------- --------- (in thousands)UTILITY PLANT, at cost Water .......................................................... $ 625,654 $ 608,032 Electric ....................................................... 37,952 37,630 --------- --------- 663,606 645,662 Less - Accumulated depreciation ................................ (186,970) (173,367) --------- --------- 476,636 472,295 Construction work in progress .................................. 53,043 36,801 --------- --------- 529,679 509,096 --------- --------- OTHER PROPERTY AND INVESTMENTS ................................... 24,710 25,222 --------- --------- CURRENT ASSETS Cash and cash equivalents ...................................... 7,931 5,808 Accounts receivable - Customers, less reserves of $862 in 2001 and $510 in 2000 .... 13,827 10,481 Other ........................................................ 4,695 5,233 Unbilled revenue ............................................... 15,127 11,363 Materials and supplies, at average cost ........................ 1,295 1,116 Supply cost balancing accounts ................................. 22,625 11,145 Prepayments and other .......................................... 3,193 4,085 Accumulated deferred income taxes - net ........................ -- 3,249 --------- --------- 68,693 52,480 --------- --------- DEFERRED CHARGES Regulatory tax-related assets .................................. 16,272 17,705 Other deferred charges ......................................... 14,730 12,143 --------- --------- 31,002 29,848 --------- --------- TOTAL ASSETS ......................................... $ 654,084 $ 616,646 ========= =========
(Unaudited)
March 31, December 31, 2002 2001 (in thousands) UTILITY PLANT, at cost Water $ 649,239 $ 645,185 Electric 38,525 38,525 687,764 683,710 Less — Accumulated depreciation (195,580 ) (190,656 ) 492,184 493,054 Construction work in progress 51,000 46,788 543,184 539,842 OTHER PROPERTY AND INVESTMENTS 24,284 24,104 CURRENT ASSETS Cash and cash equivalents 12,452 30,496 Accounts receivable - Customers, less reserves of $864 in 2002 and $972 in 2001 9,672 10,557 Other 5,231 5,306 Unbilled revenue 11,345 12,141 Materials and supplies, at average cost 1,060 970 Supply cost balancing accounts 28,152 25,826 Prepayments and other 2,128 2,493 Accumulated deferred income taxes — net — — 70,040 87,789 DEFERRED CHARGES Regulatory tax-related assets 15,330 15,843 Other deferred charges 17,280 16,186 32,610 32,029 TOTAL ASSETS $ 670,118 $ 683,764 The accompanying notes are an integral part of these financial statements.
2
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES(UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 2001 2000 -------- -------- (in thousands)CAPITALIZATION Common shareholders' equity ..................... $200,465 $192,723 Preferred shares ................................ 1,600 1,600 Preferred shares subject to mandatory redemption requirements ....................... 320 320 Long-term debt .................................. 195,994 176,452 -------- -------- 398,379 371,095 -------- -------- CURRENT LIABILITIES Notes payable to banks .......................... 38,000 45,000 Long-term debt and preferred shares due within one year ........................... 735 735 Accounts payable ................................ 18,272 11,857 Taxes payable ................................... 9,010 5,585 Accrued interest ................................ 4,057 1,783 Other accrued liabilities ....................... 16,822 15,257 -------- -------- 86,896 80,217 -------- -------- OTHER CREDITS Advances for construction ....................... 68,320 69,230 Contributions in aid of construction ............ 41,384 39,670 Accumulated deferred income taxes - net ......... 52,294 51,131 Unamortized investment tax credits .............. 3,080 3,156 Regulatory tax-related liability ................ 1,784 1,817 Other ........................................... 1,947 330 -------- -------- 168,809 165,334 -------- -------- TOTAL CAPITALIZATION AND LIABILITIES .... $654,084 $616,646 ======== ========
(Unaudited)
March 31, December 31, 2002 2001 (in thousands) CAPITALIZATION Common shareholders’ equity $ 200,551 $ 199,982 Preferred shares 1,600 1,600 Preferred shares subject to mandatory redemption requirements 280 280 Long-term debt 245,505 245,692 447,936 447,554 CURRENT LIABILITIES Notes payable to banks — 20,000 Long-term debt and preferred shares due within one year 800 800 Accounts payable 14,514 13,931 Taxes payable 4,339 5,389 Accrued interest 5,101 1,945 Other accrued liabilities 21,600 21,571 46,354 63,636 OTHER CREDITS Advances for construction 70,161 69,436 Contributions in aid of construction 44,000 43,723 Accumulated deferred income taxes — net 55,699 53,444 Unamortized investment tax credits 2,860 2,882 Regulatory tax-related liability 1,761 1,773 Other 1,347 1,316 175,828 172,574 TOTAL CAPITALIZATION AND LIABILITIES $ 670,118 $ 683,764 The accompanying notes are an integral part of these financial statements.
3
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDEDSEPTEMBER 30,MARCH 31, 2002 AND 2001AND 2000 (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, ------------------------- 2001 2000 -------- -------- (in thousands, except per share amounts)OPERATING REVENUES Water ........................................ $ 55,412 $ 51,510 Electric ..................................... 3,807 3,493 Other ........................................ 191 245 -------- -------- 59,410 55,248 -------- -------- OPERATING EXPENSES Water purchased .............................. 12,791 13,594 Power purchased for pumping .................. 3,367 2,509 Power purchased for resale ................... 4,758 3,213 Groundwater production assessment ............ 1,697 1,524 Supply cost balancing accounts ............... (2,920) (1,865) Other operating expenses ..................... 4,398 4,322 Administrative and general expenses .......... 6,956 6,210 Depreciation ................................. 4,486 3,666 Maintenance .................................. 1,767 2,226 Taxes on income .............................. 6,739 6,291 Other taxes .................................. 1,999 1,767 -------- -------- 46,038 43,457 -------- -------- Operating income ............................. 13,372 11,791 OTHER INCOME/(LOSS) .............................. (53) 108 -------- -------- Income before interest charges ............... 13,319 11,899 INTEREST CHARGES ................................. 3,865 3,681 -------- -------- NET INCOME ....................................... 9,454 8,218 DIVIDENDS ON PREFERRED SHARES .................... (21) (22) -------- -------- EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ....... $ 9,433 $ 8,196 ======== ======== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .... 10,080 9,516 Basic Earnings Per Common Share .................. $ 0.94 $ 0.86 WEIGHTED AVERAGE NUMBER OF DILUTED SHARES ........ 10,171 9,562 Fully Diluted Earnings Per Share ................. $ 0.93 $ 0.86 Dividends Declared Per Common Share .............. $ 0.325 $ 0.32
(Unaudited)
Three Months Ended March 31, 2002 2001 (in thousands, except per share amounts) OPERATING REVENUES Water $ 39,091 $ 36,145 Electric 5,206 3,957 Other 188 189 44,485 40,291 OPERATING EXPENSES Water purchased 7,572 6,492 Power purchased for pumping 1,975 1,530 Power purchased for resale 4,816 7,733 Groundwater production assessment 1,795 1,473 Supply cost balancing accounts (2,326 ) (6,267 ) Other operating expenses 3,776 4,128 Administrative and general expenses 7,564 6,580 Depreciation 4,568 4,484 Maintenance 1,892 2,213 Taxes on income 3,013 2,713 Other taxes 1,922 1,989 36,567 33,068 Operating income 7,918 7,223 OTHER INCOME/(LOSS) 256 (186 ) Income before interest charges 8,174 7,037 INTEREST CHARGES 4,367 3,920 NET INCOME 3,807 3,117 DIVIDENDS ON PREFERRED SHARES (21 ) (21 ) EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 3,786 $ 3,096 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 10,080 10,080 Basic Earnings Per Common Share $ 0.38 $ 0.31 WEIGHTED AVERAGE NUMBER OF DILUTED SHARES 10,171 10,171 Fully Diluted Earnings Per Share $ 0.37 $ 0.30 Dividends Declared Per Common Share $ 0.325 $ 0.325 The accompanying notes are an integral part of these financial statements.
4
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THENINETWELVE MONTHS
ENDEDSEPTEMBER 30,MARCH 31, 2002 AND 2001AND 2000 (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 2001 2000 --------- --------- (in thousands, except per share amounts)OPERATING REVENUES Water ........................................ $ 138,052 $ 128,185 Electric ..................................... 10,940 10,660 Other ........................................ 579 580 --------- --------- 149,571 139,425 --------- --------- OPERATING EXPENSES Water purchased .............................. 29,941 32,472 Power purchased for pumping .................. 6,793 5,559 Power purchased for resale ................... 15,106 6,792 Groundwater production assessment ............ 5,124 5,797 Supply cost balancing accounts ............... (11,480) (3,299) Other operating expenses ..................... 13,034 12,553 Administrative and general expenses .......... 22,474 18,122 Depreciation ................................. 13,463 11,275 Maintenance .................................. 6,066 7,371 Taxes on income .............................. 13,577 12,004 Other taxes .................................. 5,865 5,260 --------- --------- 119,963 113,906 --------- --------- Operating income ............................. 29,608 25,519 OTHER INCOME/(LOSS) .............................. (223) 67 --------- --------- Income before interest charges ............... 29,385 25,586 INTEREST CHARGES ................................. 11,761 10,553 --------- --------- NET INCOME ....................................... 17,624 15,033 DIVIDENDS ON PREFERRED SHARES .................... (63) (64) --------- --------- EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ....... $ 17,561 $ 14,969 ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .... 10,080 9,145 Basic Earnings Per Common Share .................. $ 1.74 $ 1.64 WEIGHTED AVERAGE NUMBER OF DILUTED SHARES ........ 10,171 9,171 Fully Diluted Earnings Per Share ................. $ 1.73 $ 1.63 Dividends Declared Per Common Share .............. $ 0.975 $ 0.96
(Unaudited)
Twelve Months Ended March 31, 2002 2001 (in thousands, except per share amounts) OPERATING REVENUES Water $ 184,420 $ 170,353 Electric 16,500 14,312 Other 789 837 201,709 185,502 OPERATING EXPENSES Water purchased 38,689 40,529 Power purchased for pumping 10,037 7,579 Power purchased for resale 16,745 16,422 Groundwater production assessment 7,169 6,710 Supply cost balancing accounts (10,740 ) (11,572 ) Other operating expenses 16,810 16,986 Administrative and general expenses 36,093 26,805 Depreciation 18,036 16,021 Maintenance 8,319 9,937 Taxes on income 15,679 15,428 Other taxes 7,485 7,330 164,322 152,175 Operating income 37,387 33,327 OTHER INCOME/(LOSS) (69 ) (298 ) Income before interest charges 37,318 33,029 INTEREST CHARGES 16,182 14,721 NET INCOME 21,136 18,308 DIVIDENDS ON PREFERRED SHARES (83 ) (85 ) EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 21,053 $ 18,223 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 10,080 9,658 Basic Earnings Per Common Share $ 2.09 $ 1.89 WEIGHTED AVERAGE NUMBER OF DILUTED SHARES 10,171 9,711 Fully Diluted Earnings Per Share $ 2.07 $ 1.88 Dividends Declared Per Common Share $ 1.30 $ 1.29 The accompanying notes are an integral part of these financial statements.
5
AMERICAN STATES WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTSOF INCOME
FOR THETWELVETHREE MONTHS ENDEDSEPTEMBER 30,MARCH 31, 2002 AND 2001AND 2000 (UNAUDITED)
TWELVE MONTHS ENDED SEPTEMBER 30, --------------------------- 2001 2000 --------- --------- (in thousands, except per share amounts) OPERATING REVENUESWater ........................................ $ 178,662 $ 168,205 Electric ..................................... 14,645 14,066 Other ........................................ 799 730 --------- --------- 194,106 183,001 --------- --------- OPERATING EXPENSES Water purchased .............................. 39,061 41,669 Power purchased for pumping .................. 8,744 7,812 Power purchased for resale ................... 18,977 8,761 Groundwater production assessment ............ 6,816 7,447 Supply cost balancing accounts ............... (14,553) (3,318) Other operating expenses ..................... 17,227 16,977 Administrative and general expenses .......... 30,489 26,179 Depreciation ................................. 17,528 14,655 Maintenance .................................. 8,975 11,296 Taxes on income .............................. 16,700 13,954 Other taxes .................................. 7,747 6,906 --------- --------- 157,711 152,338 --------- --------- Operating income ............................. 36,395 30,663 OTHER INCOME/(LOSS) .............................. (389) 189 --------- --------- Income before interest charges ............... 36,006 30,852 INTEREST CHARGES ................................. 15,330 13,790 --------- --------- NET INCOME ....................................... 20,676 17,062 DIVIDENDS ON PREFERRED SHARES .................... (84) (86) --------- --------- EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ....... $ 20,592 $ 16,976 ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .... 10,080 9,098 Basic Earnings Per Common Share .................. $ 2.04 $ 1.87 WEIGHTED AVERAGE NUMBER OF DILUTED SHARES ........ 10,160 9,117 Fully Diluted Earnings Per Share ................. $ 2.03 $ 1.86 Dividends Declared Per Common Share .............. $ 1.30 $ 1.28
(Unaudited)
Three Months Ended March 31, 2002 2001 (in thousands) CASH FLOWS FROM - Operating Activities: Net income $ 3,807 $ 3,117 Adjustments for non-cash items: Depreciation and amortization 4,568 4,484 Deferred income taxes and investment tax credits 2,286 3,730 Other — net (70 ) (776 ) Changes in assets and liabilities: Accounts receivable 885 2,440 Prepayments 365 349 Supply cost balancing accounts (2,326 ) (6,267 ) Accounts payable 583 (1,169 ) Taxes payable (1,050 ) (2,374 ) Unbilled revenue 796 1,565 Other 3,211 1,530 Net Cash Provided 13,055 6,629 Investing Activities: Construction expenditures (8,159 ) (11,236 ) Net Cash Used (8,159 ) (11,236 ) Financing Activities: Issuance of securities 58 20,000 Receipt of advances and contributions 974 368 Repayments of long-term debt, net of redemption of preferred shares (227 ) (158 ) Refunds on advances for construction (449 ) (442 ) Changes in notes payable to banks (20,000 ) (10,000 ) Common and preferred dividends paid (3,296 ) (3,296 ) Net Cash Provided (22,940 ) 6,472 Net Increase (Decrease) in Cash and Cash Equivalents (18,044 ) 1,865 Cash and Cash Equivalents, Beginning of period 30,496 5,808 Cash and Cash Equivalents, End of period $ 12,452 $ 7,673 The accompanying notes are an integral part of these financial statements.
6
AMERICAN STATESSOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATEDCASH FLOW STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)BALANCE SHEETS
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2001 2000 -------- -------- (in thousands)CASH FLOWS FROM - Operating Activities: Net income ........................................... $ 17,624 $ 15,033 Adjustments for non-cash items: Depreciation and amortization ........................ 13,463 11,856 Deferred income taxes and investment tax credits ..... 5,736 3,008 Other - net .......................................... (1,116) (1,220) Changes in assets and liabilities: Accounts receivable .................................. (3,346) (2,230) Prepayments .......................................... 892 368 Supply cost balancing accounts ....................... (11,480) (3,298) Accounts payable ..................................... 6,415 (577) Taxes payable ........................................ 3,425 2,666 Unbilled revenue ..................................... (3,576) (2,815) Other ................................................ 5,753 1,692 -------- -------- Net Cash Provided .................................. 33,790 24,483 -------- -------- Investing Activities: Construction expenditures ............................... (33,799) (33,275) -------- -------- Net Cash Used ..................................... (33,799) (33,275) -------- -------- Financing Activities: Issuance of securities ................................. 20,000 28,057 Receipt of advances and contributions .................. 3,934 1,866 Repayments of long-term debt, net of redemption of preferred shares ....................... (449) (280) Refunds on advances for construction .................. (4,463) (2,817) Changes in notes payable to banks ...................... (7,000) (7,000) Common and preferred dividends paid .................... (9,890) (9,018) -------- -------- Net Cash Provided ................................. 2,132 10,808 -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents ..... 2,123 2,016 Cash and Cash Equivalents, Beginning of period ........... 5,808 2,189 -------- -------- Cash and Cash Equivalents, End of period ................. $ 7,931 $ 4,205 ======== ========
ASSETS
(Unaudited)
March 31, December 31, 2002 2001 (in thousands) UTILITY PLANT, at cost Water $ 612,042 $ 607,988 Electric 38,525 38,525 650,567 646,513 Less — Accumulated depreciation (186,065 ) (181,371 ) 464,502 465,142 Construction work in progress 50,124 46,042 514,626 511,184 OTHER PROPERTY AND INVESTMENTS 9,635 9,446 CURRENT ASSETS Cash and cash equivalents 7,579 26,079 Accounts receivable - Customers, less reserves of $836 in 2002, and $951 in 2001 9,132 10,228 Other 5,092 5,202 Intercompany receivable 19,661 — Unbilled revenue 11,139 11,940 Materials and supplies, at average cost 973 883 Supply cost balancing accounts 28,152 25,826 Prepayments and other 1,991 2,310 Accumulated deferred income taxes — net — — 83,719 82,468 DEFERRED CHARGES Regulatory tax-related assets 15,330 15,843 Other deferred charges 16,539 15,433 31,869 31,276 TOTAL ASSETS $ 639,849 $ 634,374 The accompanying notes are an integral part of these financial statements.
7
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETSASSETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 2001 2000 --------- --------- (in thousands)UTILITY PLANT, at cost Water ........................................................... $ 588,457 $ 570,836 Electric ........................................................ 37,952 37,630 --------- --------- 626,409 608,466 Less - Accumulated depreciation ................................. (177,915) (165,002) --------- --------- 448,494 443,464 Construction work in progress ................................... 52,376 36,605 --------- --------- 500,870 480,069 --------- --------- OTHER PROPERTY AND INVESTMENTS .................................... 9,513 9,711 --------- --------- CURRENT ASSETS Cash and cash equivalents ....................................... 3,417 1,545 Accounts receivable - Customers, less reserves of $846 in 2001, and $498 in 2000 .... 13,142 10,071 Other ......................................................... 4,580 5,097 Intercompany receivable ......................................... 488 376 Unbilled revenue ................................................ 14,847 11,363 Materials and supplies, at average cost ......................... 1,209 1,039 Supply cost balancing accounts .................................. 22,625 11,145 Prepayments and other ........................................... 3,089 3,756 Accumulated deferred income taxes - net ......................... -- 3,256 --------- --------- 63,397 47,648 --------- --------- DEFERRED CHARGES Regulatory tax-related assets ................................... 16,272 17,705 Other deferred charges .......................................... 13,905 11,396 --------- --------- 30,177 29,101 --------- --------- TOTAL ASSETS ............................................ $ 603,957 $ 566,529 ========= =========
CAPITALIZATION AND LIABILITIES
(Unaudited)
March 31, December 31, 2002 2001 (in thousands) CAPITALIZATION Common shareholders’ equity $ 196,821 $ 196,107 Long-term debt 236,751 236,804 433,572 432,911 CURRENT LIABILITIES Notes payable to banks — — Long-term debt and preferred shares due within one year 300 300 Accounts payable 13,132 13,548 Intercompany payable — 26 Taxes payable 4,714 5,599 Accrued interest 4,942 1,877 Other accrued liabilities 21,321 21,320 44,409 42,670 OTHER CREDITS Advances for construction 59,295 58,570 Contributions in aid of construction 43,765 43,493 Accumulated deferred income taxes — net 54,187 52,075 Unamortized investment tax credits 2,860 2,882 Regulatory tax-related liability 1,761 1,773 Other — — 161,868 158,793 TOTAL CAPITALIZATION AND LIABILITIES $ 639,849 $ 634,374 The accompanying notes are an integral part of these financial statements.
8
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATEDBALANCE SHEETS CAPITALIZATIONSTATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 2002 ANDLIABILITIES (UNAUDITED)2001
SEPTEMBER 30, DECEMBER 31, 2001 2000 -------- -------- (in thousands)CAPITALIZATION Common shareholders' equity ................................. $196,594 $164,808 Long-term debt .............................................. 186,851 167,062 -------- -------- 383,445 331,870 -------- -------- CURRENT LIABILITIES Notes payable to banks ...................................... 18,000 45,000 Long-term debt and preferred shares due within one year ..... 275 275 Accounts payable ............................................ 17,884 11,203 Intercompany payable ........................................ -- 4,746 Taxes payable ............................................... 9,129 5,675 Accrued interest ............................................ 3,862 1,722 Other accrued liabilities ................................... 16,600 13,512 -------- -------- 65,750 82,133 -------- -------- OTHER CREDITS Advances for construction ................................... 57,705 58,195 Contributions in aid of construction ........................ 41,160 39,642 Accumulated deferred income taxes - net ..................... 50,761 49,569 Unamortized investment tax credits .......................... 2,905 2,973 Regulatory tax-related liability ............................ 1,784 1,817 Other ....................................................... 447 330 -------- -------- 154,762 152,526 -------- -------- TOTAL CAPITALIZATION AND LIABILITIES ................ $603,957 $566,529 ======== ========
(Unaudited)
Three Months Ended March 31, 2002 2001 ($ in thousands, except per share amounts) OPERATING REVENUES Water $ 37,734 $ 34,805 Electric 5,206 3,957 42,940 38,762 OPERATING EXPENSES Water purchased 7,415 6,348 Power purchased for pumping 1,904 1,473 Power purchased for resale 4,816 7,733 Groundwater production assessment 1,795 1,473 Supply cost balancing accounts (2,326 ) (6,267 ) Other operating expenses 3,542 3,898 Administrative and general expenses 6,828 6,314 Depreciation 4,341 4,173 Maintenance 1,822 2,147 Taxes on income 3,150 2,592 Other taxes 1,802 1,897 35,089 31,781 Operating income 7,851 6,981 OTHER INCOME/(LOSS) 263 (209 ) Income before interest charges 8,114 6,772 INTEREST CHARGES 4,100 3,844 NET INCOME 4,014 2,928 DIVIDENDS ON PREFERRED SHARES — — EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 4,014 $ 2,928 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 110 100 Basic Earnings Per Common Share $ 36,491 $ 29,280 Dividends Declared Per Common Share $ 30,000 $ 33,000 The accompanying notes are an integral part of these financial statements.
9
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THETHREETWELVE MONTHS
ENDEDSEPTEMBER 30,MARCH 31, 2002 AND 2001AND 2000 (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, ------------------------- 2001 2000 -------- -------- ($ in thousands, except per share amounts)OPERATING REVENUES Water .......................................... $ 53,674 $ 51,509 Electric ....................................... 3,807 3,493 -------- -------- 57,481 55,002 -------- -------- OPERATING EXPENSES Water purchased ................................ 12,620 13,594 Power purchased for pumping .................... 3,222 2,508 Power purchased for resale ..................... 4,758 3,213 Groundwater production assessment .............. 1,697 1,524 Supply cost balancing accounts ................. (2,920) (1,865) Other operating expenses ....................... 4,105 4,235 Administrative and general expenses ............ 6,679 6,224 Depreciation ................................... 4,176 3,666 Maintenance .................................... 1,730 2,216 Taxes on income ................................ 6,664 6,225 Other taxes .................................... 1,886 1,765 -------- -------- 44,617 43,305 -------- -------- Operating income ............................... 12,864 11,697 OTHER INCOME/(LOSS) ................................ (81) (51) -------- -------- Income before interest charges ................. 12,783 11,646 INTEREST CHARGES ................................... 3,513 3,681 -------- -------- NET INCOME ......................................... 9,270 7,965 DIVIDENDS ON PREFERRED SHARES ...................... -- -- -------- -------- EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ......... $ 9,270 $ 7,965 ======== ======== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ...... 110 100 Basic Earnings Per Common Share .................... $ 84,273 $ 79,650 Dividends Declared Per Common Share ................ $ 33,000 $ 33,000
(Unaudited)
Twelve Months Ended March 31, 2002 2001 ($ in thousands, except per share amounts) OPERATING REVENUES Water $ 178,133 $ 167,747 Electric 16,500 14,312 194,633 182,059 OPERATING EXPENSES Water purchased 38,179 40,242 Power purchased for pumping 9,601 7,454 Power purchased for resale 16,746 16,422 Groundwater production assessment 7,169 6,710 Supply cost balancing accounts (10,740 ) (11,572 ) Other operating expenses 15,754 16,372 Administrative and general expenses 34,444 26,081 Depreciation 16,877 15,457 Maintenance 8,087 9,785 Taxes on income 15,624 15,043 Other taxes 6,993 7,137 158,734 149,131 Operating income 35,899 32,928 OTHER INCOME (151 ) (362 ) Income before interest charges 35,748 32,566 INTEREST CHARGES 14,833 14,874 NET INCOME 20,915 17,692 DIVIDENDS ON PREFERRED SHARES — — EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 20,915 $ 17,692 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 110 100 Basic Earnings Per Common Share $ 190,136 $ 176,920 Dividends Declared Per Common Share $ 123,000 $ 130,000 The accompanying notes are an integral part of these financial statements.
10
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTSOF INCOME
FOR THENINETHREE MONTHS ENDEDSEPTEMBER 30,MARCH 31, 2002 AND 2001AND 2000 (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 2001 2000 --------- --------- ($ in thousands, except per share amounts)OPERATING REVENUES Water ........................................... $ 133,313 $ 128,185 Electric ........................................ 10,940 10,660 --------- --------- 144,253 138,845 --------- --------- OPERATING EXPENSES Water purchased ................................. 29,616 32,472 Power purchased for pumping ..................... 6,509 5,559 Power purchased for resale ...................... 15,106 6,792 Groundwater production assessment ............... 5,124 5,797 Supply cost balancing accounts .................. (11,480) (3,299) Other operating expenses ........................ 12,226 12,325 Administrative and general expenses ............. 21,642 17,815 Depreciation .................................... 12,532 11,275 Maintenance ..................................... 5,910 7,348 Taxes on income ................................. 13,243 11,997 Other taxes ..................................... 5,575 5,254 --------- --------- 116,003 113,335 --------- --------- Operating income ................................ 28,250 25,510 OTHER INCOME/(LOSS) ................................. (303) (92) --------- --------- Income before interest charges .................. 27,947 25,418 INTEREST CHARGES .................................... 10,936 10,553 --------- --------- NET INCOME .......................................... 17,011 14,865 DIVIDENDS ON PREFERRED SHARES ....................... -- -- --------- --------- EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS .......... $ 17,011 $ 14,865 ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ....... 106 100 Basic Earnings Per Common Share ..................... $ 160,481 $ 148,650 Dividends Declared Per Common Share ................. $ 96,509 $ 96,000
(Unaudited)
Three Months Ended March 31, 2002 2001 (in thousands) CASH FLOWS FROM - Operating Activities: Net income $ 4,014 $ 2,928 Adjustments for non-cash items: Depreciation and amortization 4,341 4,173 Deferred income taxes an investment tax credits 2,591 3,745 Other — net (572 ) (768 ) Changes in assets and liabilities: Accounts receivable 1,096 2,514 Prepayments 319 300 Supply cost balancing accounts (2,326 ) (6,267 ) Accounts payable (416 ) (805 ) Intercompany Payable (19,687 ) (4,739 ) Taxes payable 3,065 (2,426 ) Unbilled revenue 801 1,564 Other (824 ) 1,733 Net Cash Provided (7,598 ) 1,952 Investing Activities: Construction expenditures (8,029 ) (11,106 ) Net Cash Used (8,029 ) (11,106 ) Financing Activities: Issuance of securities — 45,000 Receipt of advances and contributions 969 368 Repayments of long-term debt, net of redemption of preferred shares (93 ) (35 ) Refunds on advances for construction (449 ) (442 ) Changes in notes payable to banks — (31,000 ) Common and preferred dividends paid (3,300 ) (3,300 ) Net Cash Provided (Used) (2,873 ) 10,591 Net Increase (Decrease) in Cash and Cash Equivalents (18,500 ) 1,437 Cash and Cash Equivalents, Beginning of period 26,079 1,545 Cash and Cash Equivalents, End of period $ 7,579 $ 2,982 The accompanying notes are an integral part of these financial statements.
11
AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANYCONSOLIDATED STATEMENTS OF INCOME FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
TWELVE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2001 2000 --------- --------- ($ in thousands, except per share amounts)OPERATING REVENUES Water ........................................... $ 172,658 $ 168,205 Electric ........................................ 14,645 14,066 --------- --------- 187,303 182,271 --------- --------- OPERATING EXPENSES Water purchased ................................. 38,594 41,669 Power purchased for pumping ..................... 8,393 7,812 Power purchased for resale ...................... 18,977 8,761 Groundwater production assessment ............... 6,816 7,447 Supply cost balancing accounts .................. (14,553) (3,318) Other operating expenses ........................ 16,205 16,679 Administrative and general expenses ............. 29,375 25,657 Depreciation .................................... 16,343 14,655 Maintenance ..................................... 8,753 11,270 Taxes on income ................................. 16,127 13,998 Other taxes ..................................... 7,358 6,901 --------- --------- 152,388 151,531 --------- --------- Operating income ................................ 34,915 30,740 OTHER INCOME ........................................ (351) 31 --------- --------- Income before interest charges .................. 34,564 30,771 INTEREST CHARGES .................................... 14,733 13,790 --------- --------- NET INCOME .......................................... 19,831 16,981 DIVIDENDS ON PREFERRED SHARES ....................... -- -- --------- --------- EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS .......... $ 19,831 $ 16,981 ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ....... 104 100 Basic Earnings Per Common Share ..................... $ 190,683 $ 169,810 Dividends Declared Per Common Share ................. $ 131,359 $ 126,000The accompanying notes are an integral part of these financial statements. 12SOUTHERN CALIFORNIA WATER COMPANY CONSOLIDATED CASH FLOW STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2001 2000 -------- -------- (in thousands)CASH FLOWS FROM - Operating Activities: Net income ........................................... $ 17,011 $ 14,865 Adjustments for non-cash items: Depreciation and amortization ........................ 12,532 11,856 Deferred income taxes an investment tax credits ...... 5,780 3,015 Other - net .......................................... (1,204) 36 Changes in assets and liabilities: Accounts receivable .................................. (3,071) (2,233) Prepayments .......................................... 667 368 Supply cost balancing accounts ....................... (11,480) (3,298) Accounts payable ..................................... 6,681 (675) Intercompany Payable ................................. (4,858) 27,257 Taxes payable ........................................ 3,454 2,558 Unbilled revenue ..................................... (3,484) (2,815) Other ................................................ 5,575 1,588 -------- -------- Net Cash Provided .................................. 27,603 52,522 -------- -------- Investing Activities: Construction expenditures ............................... (33,333) (33,274) -------- -------- Net Cash Used ..................................... (33,333) (33,274) -------- -------- Financing Activities: Issuance of securities ................................. 45,000 -- Receipt of advances and contributions .................. 3,934 1,866 Repayments of long-term debt, net of redemption of preferred shares ....................... (206) (280) Refunds on advances for construction .................. (3,896) (2,817) Changes in notes payable to banks ...................... (27,000) (7,000) Common and preferred dividends paid .................... (10,230) (9,600) -------- -------- Net Cash Provided (Used) .......................... 7,602 (17,831) -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents ..... 1,872 1,417 Cash and Cash Equivalents, Beginning of period ........... 1,545 2,020 -------- -------- Cash and Cash Equivalents, End of period ................. $ 3,417 $ 3,437 ======== ========The accompanying notes are an integral part of these financial statements. 13AMERICAN STATES WATER COMPANY AND SOUTHERN CALIFORNIA WATER COMPANYNOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Unaudited)American States Water Company (AWR), incorporated in 1998, is the parent company of Southern California Water Company (SCW), American States Utility Services, Inc. (ASUS) and Chaparral City Water Company (CCWC). More than 90% of
AWR'sAWR’s assets consist of the common stock of Southern California Water Company. 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.1.
1. For a summary of significant accounting policies and other information relating to these interim financial statements, reference is made to pages 37 through 46 of the Form 10-K, incorporated in the 2000 Annual Report to Shareholders of AWR, under the caption "Notes to Financial Statements." 2. 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 stock options representing an additional 45,657 common shares were granted on January 2, 2001. As a result, fully diluted earnings per share amounts are shown. 3. On April 22, 1999, the California Public Utilities Commission (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, or sale of its 500 acre-foot entitlement in SWP. In October 2001, SCW entered into an agreement with a developer, which obligates the developer to make payments to SCW in exchange for SCW's reservation and dedication of up to 350 acre-feet per year of the SWP entitlement. SCW believes that its full investment and on-going costs associated with its ownership will be fully recovered. 4. New water rates with an annual increase of approximately $2.5 million for seven ratemaking districts in SCW's Region I were implemented in January 2001. SCW's application to combine the seven ratemaking customer service areas (CSAs) into one regional rate was, however, denied by the CPUC. Step increases of approximately $1.7 million for CSAs in SCW's Region III were also effective in January 2001. An attrition increase of approximately $2.8 million for Region II was in effect from February 2001. There are no active regulatory proceedings affecting CCWC or its operations. 5. 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. Recoveries or refunds of such over/under collections are recorded in income when received from 14customers and charged to balancing accounts when such costs are incurred. The balancing accounts are reversed when such costs are recovered through rate adjustments. As previously disclosed in Registrant's Form 10-K for the year ended December 31, 2000, SCW, like other California utilities, has experienced rapid increases in the price of electric energy. As of September 30, 2001, SCW had an aggregate under-collection of $22.6 million in its water and electric balancing accounts. Of this total amount, approximately $19.9 million is related to purchased power costs at SCW's Bear Valley Electric customer service area (BVE). This is a result of the differences between wholesale purchased power costs, which have averaged approximately $0.15 per kilowatt-hour during the first nine months of this year, and the $0.024 per kilowatt-hour (KWh) currently authorized in rates for collection of purchased power costs from customers. On May 24, 2001, the CPUC approved SCW's Advice Letter filed in May 2000 for recovery over a five-year period of approximately $2.4 million in under-collected power costs, which resulted in an overall rate increase of 12.5% for customers of BVE, and imposed a condition of conducting a subsequent audit on the electric balancing account. SCW filed a second Advice Letter on April 9, 2001 for recovery over a five-year period of an additional under-collection of $8.7 million. On August 23, 2001, the CPUC approved the Advice Letter, which resulted in an additional rate increase of 14.8% to BVE's customers. On August 17, 2001, SCW filed an application with the CPUC to seek recovery of $0.095 per KWh for electric energy purchased pursuant to a five-year, fixed cost contract with Mirant Americas Energy Marketing, LP. (Mirant). The application, if approved, will result in an additional rate increase of approximately 50%. Registrant believes that the recovery of this amount is probable but is unable to predict when, or if, the CPUC will authorize recovery of all or any of these expenses. SCW will continue to file additional Advice Letters to recover the differences between actual wholesale power costs and the amounts currently recovered through rates. Registrant also believes that timely actions by the CPUC to authorize SCW to recover past and future power costs are necessary to avoid any material adverse effect on SCW's financial condition. In March 2001, the CPUC approved SCW's first filing for recovery of increased costs of electric power incurred to pump water for its water customers. In April 2001, SCW filed additional Advice Letters by ratemaking areas to increase water rates by approximately $2.3 million company-wide to cover additional electric base rate increases, authorized recently by the CPUC for the Southern California Edison Company and the Pacific Gas and Electric Company. On October 25, 2001, the CPUC approved an increase of $297,000 in rates for SCW's Claremont CSA to collect the electric base rate increases. The remaining Advice Letters are scheduled to be on Commission's agenda on November 8, 2001. See the sections entitled "Liquidity and Capital Resources," "Electric Energy Situation in California," and "Regulatory Matters" for information on actions being taken by SCW to recover these costs. CCWC, subject to regulation by the Arizona Corporation Commission (ACC), does not maintain balancing accounts and increases in costs are normally recovered through general rate case applications. 6. On October 2000, AWR completed the acquisition of the common stock of CCWC for an aggregate value of $31.2 million, including assumption of approximately $12 million in debt. As of September 30, 2001, Registrant has $12,815,000 in goodwill included in Other Property and Investments. The amount represents the difference between the purchase price of the common equity of CCWC and CCWC's book equity at the time of closing and is being amortized over a period of 40 years. Amortization will cease on January 1, 2002 pursuant to SFAS No. 142. 7. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 eliminates 15the pooling-of-interests method of accounting, effective September 30, 2001. After that, all business combinations will be recorded under the purchased method of accounting (record goodwill for excess of costs over the net assets acquired). SFAS No. 142 requires that companies cease amortizing goodwill, effective January 1, 2002. Goodwill initially recognized after September 30, 2001, will not be amortized. Goodwill on the balance sheet at September 30, 2001 will be amortized until January 1, 2002. Under SFAS No. 142, goodwill will be tested for impairment using a fair-value approach when events or circumstances occur indicating that impairment might exist. A benchmark assessment for goodwill is also required within six months of the date of adoption of SFAS No. 142. Registrant is assessing the impact on future financial reporting related to both past and future transactions, but believes that adoption of this statement will not have a significant impact on its financial position or results of operation. 8. AWR has three principal business units: water and electric distribution units, through its SCW subsidiary, a water service utility operation conducted through its Chaparral City Water Company (CCWC) unit, and a non-regulated activity unit through the American States Utilities Services, Inc. (ASUS) subsidiary. All activities of SCW currently are geographically located within California. All activities of CCWC are located in the state of Arizona. Both SCW and CCWC are regulated utilities. 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 water and electric operating segments, CCWC, and non-regulated businesses, consisting of ASUS and AWR corporate expenses. 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.
(dollarsinthousands) Forthe 2001 Annual Report to Shareholders of AWR, under the caption “Notes to Financial Statements.”2. 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 45,435 common shares were granted to certain eligible employees on May 1, 2000, and stock options representing an additional 45,657 common shares were granted on January 2, 2001. As a result, fully diluted earnings per share amounts are shown. 3. New water rates with an annual increase of approximately $321,600 for four of seven ratemaking districts in SCW’s Region I were implemented in January 2002. SCW is planning to submit a Notice of Intent to file an application for the customer service areas in SCW’s Region III in the third quarter of 2002 for new water rates effective July of 2003, if approved by the CPUC. There are no active regulatory proceedings affecting CCWC or its operations. 4. As permitted by the CPUC, SCW has maintained water and electric supply balancing accounts to account for under-collections and over-collections of revenues designed to recover such costs. Costs have been recorded in income and charged to balancing accounts when such costs were incurred. The Three Months Ended Septemberbalancing accounts were reversed when such costs were recovered through rate adjustments or through refunds of previously incurred costs. SCW accrued interest on its supply cost balancing accounts at the rate prevailing for 90-day commercial paper. CCWC does not maintain a supply cost balancing account.Water Balancing Account —On November 29, 2001, the CPUC ordered water utilities with existing water supply balancing accounts to cease booking amounts to such accounts. In its place, water utilities are now required to establish a memorandum account that works in a manner similar to the balancing account. As a result, the income statements of SCW will no longer include entries reflecting differences between actual unit water supply costs included in rates and actual water supply costs. SCW will not be entitled to recover any deferred costs for providing water service unless it is within its general rate case cycle and is earning less than its authorized rate of return on a weather normalized basis. As a result, any changes in water supply costs as well as any future authorized revenue increases for supply expenses may directly impact earnings. SCW may not be able to recover the under-collection of supply costs if it is earning a 12
rate of return in excess of that allowed. SCW had a net under-collection position of $3.3 million in its water supply balancing account at March 31, 2002 principally related to pre-November 29, 2001 activities. Of this amount, approximately $1 million is currently included in rates. SCW anticipates recovering the remaining amount as part of a general rate case filing planned for the third quarter of 2002. Electric Balancing Account —Electric power costs incurred by SCW’s Bear Valley Electric division continue to be charged to a balancing account. The amount of the under-collection in the electric balancing account has increased to $24.8 million at March 31, 2002. This is a result of the cumulative differences between wholesale purchased power costs and the $24 per megawatt hour (MWh) currently authorized in rates for collection of purchased power costs from customers. The CPUC has approved two of SCW’s Advice Letters for recovery, over a five-year period, of approximately $11.1 million in aggregate in under-collected power costs. In approving the $0.022 per kilowatt-hour surcharge, which resulted in an overall rate increase of 29% for customers of BVE, the CPUC also imposed a condition of conducting a subsequent audit on the electric balancing account. The audit was completed and submitted to the CPUC in October of 2001. On August 17, 2001, SCW filed an application with the CPUC seeking recovery of an average cost of $87 per MWh for electric energy purchased pursuant to power purchase contracts with Mirant Americas Energy Marketing, LP and Pinnacle West Capital. On February 8, 2002, a settlement agreement among SCW, all intervening parties and the Office of Ratepayer Advocates (“ORA”) was filed with the CPUC that will permit SCW to recover $77 per MWh of purchased power costs through rates. SCW will only be allowed to include up to a weighted annual energy purchase cost of $77 per MWh each year for 10 years in its balancing account. To the extent SCW’s actual average annual weighted cost for purchased power is less than $77 per MWh, the differential will recover amounts included in the electric supply balancing account. Conversely, to the extent that actual average annual weighted costs for power purchased exceed the $77 per MWh amount, SCW will not be able to include these amounts in its balancing account and such amounts will be expensed against income. SCW has established approximately $8.2 million in reserves as of March 31, 2002 against potential non-recovery of electric power costs. In addition, the settlement extended the previously approved surcharges for an additional five years to allow SCW an opportunity to collect amounts remaining in its electric cost balancing account. Based on estimates, management believes that continuation of the $0.022 per kilowatt-hour surcharge will allow for full recovery of amounts included in the electric balancing account. A final decision in this matter is expected during the second quarter of 2002. Management believes the CPUC will support the settlement agreement, but is unable to predict when or if the CPUC will authorize recovery of any or all of the costs agreed to in the settlement. Registrant also believes that timely actions by the CPUC to authorize SCW to recover past and future power costs are necessary to avoid any material adverse effect on SCW’s financial condition. See the sections entitled“Liquidity and Capital Resources,”“Electric Energy Situation in California,” and“Regulatory Matters” included in Part I, Item 2 in Managements Discussion and Analysis of Financial Condition and Results of Operation for information on actions being taken by SCW to recover these costs. CCWC, subject to regulation by the Arizona Corporation Commission (ACC), does not maintain balancing accounts and increases in costs are normally recovered through general rate case applications. 5. On October 2000, AWR completed the acquisition of the common stock of CCWC for an aggregate value of $31.2 million, including assumption of approximately $12 million in debt. As of March 31, 2002, Registrant has $12,276,000 in goodwill included in Other Property and Investments. The amount represents the difference between the purchase price of the common equity of CCWC and CCWC’s book equity at the time of closing and was being amortized over a period of 40 years. Registrant ceased amortization on December 31, 2001 pursuant to FASB No. 142, Goodwill and 13
Other Intangible Assets, as discussed in Note 7. In 2001, $331,073 was amortized against the goodwill. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 eliminates the pooling-of-interests method of accounting, effective June 30, 2001. After that, all business combinations will be recorded under the purchased method of accounting (record goodwill for excess of costs over the net assets acquired). SFAS No. 142 requires that companies cease amortizing goodwill, effective January 1, 2002. Goodwill initially recognized after June 30, 2001 ------------------------------------------------------------------------------------------------ SCW -------------------- CCWC Non- Consolidated Water Electric Water Regulated AWR ---------- --------- ------ --------- ------------Operating revenues $53,674 $ 3,807 $1,738 $191 $59,410 Operating income before income taxes 19,064 464 611 (28) 20,111 Identifiable assets 473,698 27,172 28,809 -- 529,679 Depreciation expense 3,814 362 310 -- 4,486 Capital additions $10,850 $820 $254 -- $11,924
(dollars in thousands) For The Three Months Ended September 30, 2000 ------------------------------------------------------------------------------------------------ SCW -------------------- CCWC Non- Consolidated Water Electric Water Regulated AWR ---------- --------- ------ --------- ------------Operating revenues $51,509 $3,493 N/A $246 $55,248 Operating income before income N/A taxes 16,705 1,217 160 18,082 Identifiable assets 444,924 26,089 N/A -- 471,013 Depreciation expense 3,316 350 N/A -- 3,666 Capital additions $11,214 $624 N/A -- $11,838
(dollars in thousands) For The Nine Months Ended Septemberwill not be amortized. Goodwill on the balance sheet at June 30, 2001------------------------------------------------------------------------------------------------will be amortized until January 1, 2002. Under SFAS No. 142, goodwill will be tested for impairment using a fair-value approach when events or circumstances occur indicating that impairment might exist. A benchmark assessment for goodwill is also required within six months of the date of adoption of SFAS No. 142. Registrant has determined that goodwill, $12,285,000 at December 31, 2001, associated with its acquisition of CCWC was not impaired and effective January 1, 2002 has ceased amortizing this goodwill. Registrant believes that it will be subject to the provisions of FASB No. 143 and is currently analyzing the impact that implementation of FASB No. 143, Accounting for Asset Retirement Obligations, might have on its future financial statement presentation. The new rule requires businesses to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. FASB No. 143 is effective for fiscal years beginning after June 15, 2002.6. AWR has three principal business units: water and electric distribution units, through its SCW --------------------subsidiary, a water service utility operation conducted through its Chaparral City Water Company (CCWC) unit, and a non-regulated activity unit through the American States Utilities Services, Inc. (ASUS) subsidiary. All activities of SCW currently are geographically located within California. All activities of CCWCNon- Consolidated Water Electric Water Regulatedare located in the state of Arizona. Both SCW and CCWC are regulated utilities. On a stand-alone basis, AWR---------- --------- ------ --------- ------------Operatinghas no material assets other than its investments in its subsidiaries. The tables below set forth information relating to SCW’s water and electric operating segments, CCWC, and non-regulated businesses, consisting of ASUS and AWR corporate expenses. Included in the amounts set forth, certain assets, revenues$133,313 $10,940 $4,739 $579 $149,571 Operating income before income taxes 40,715 778 1,624 68 43,185 Identifiableand expenses have been allocated. The identifiable assets473,698 27,172 28,809 -- 529,679 Depreciation expense 11,448 1,084 931 -- 13,463 Capital additions $33,040 $1,882 $471 -- $35,393are net of respective accumulated provisions for depreciation.16
(dollars in thousands) For The Nine Months Ended September 30, 2000 ------------------------------------------------------------------------------------------------ SCW -------------------- CCWC Non- Consolidated Water Electric Water Regulated AWR ---------- --------- ------ --------- ------------Operating revenues $128,185 $10,660 N/A $580 $139,425 Operating income before income N/A taxes 34,161 3,346 16 37,523 Identifiable assets 444,924 26,089 N/A -- 471,013 Depreciation expense 10,224 1,051 N/A -- 11,275 Capital additions $31,197 $1,536 N/A -- $32,733
(dollars in thousands) For The Twelve Months Ended September 30, 2001 -------------------------------------------------------------------------------------------------- SCW -------------------- CCWC Non- Consolidated Water Electric Water Regulated AWR ---------- --------- ------ --------- ------------Operating revenues $172,658 $14,645 $6,004 $799 $194,106 Operating income before income taxes 49,090 1,952 1,923 130 53,095 Identifiable assets 473,698 27,172 28,809 -- 529,679 Depreciation expense 14,909 1,434 1,185 -- 17,528 Capital additions $45,325 $2,650 $667 -- $48,642
(dollars in thousands) For The Twelve Months Ended September 30, 2000 -------------------------------------------------------------------------------------------------- SCW -------------------- CCWC Non- Consolidated Water Electric Water Regulated AWR ---------- --------- ------ --------- ------------Operating revenues $168,205 $14,066 N/A $730 $183,001 Operating income before income N/A taxes 40,881 3,857 (121) 44,617 Identifiable assets 444,924 26,089 N/A -- 471,013 Depreciation expense 13,268 1,387 N/A -- 14,655 Capital additions $45,311 $2,173 N/A -- $47,48417ITEM
For The Three Months Ended March 31, 2002 SCW CCWC Non- Consolidated Water Electric Water Regulated AWR (dollars in thousands) Operating revenues $ 37,734 $ 5,206 $ 1,357 $ 188 $ 44,485 Operating income before income taxes 10,181 820 320 (390 ) 10,931 Identifiable assets 487,454 27,172 28,558 — 543,184 Depreciation expense 3,979 362 227 — 4,568 Capital additions $ 16,296 $ 1,653 $ 130 — $ 18,079 14
For The Three Months Ended March 31, 2001 SCW CCWC Non- Consolidated Water Electric Water Regulated AWR (dollars in thousands) Operating revenues $ 34,805 $ 3,957 $ 1,340 $ 189 $ 40,291 Operating income before income taxes 8,306 1,267 318 45 9,936 Identifiable assets 460,321 26,681 28,928 — 515,930 Depreciation expense 3,812 361 311 — 4,484 Capital additions $ 11,032 $ 565 $ 130 — $ 11,727 For The Twelve Months Ended March 31, 2002 SCW CCWC Non- Consolidated Water Electric Water Regulated AWR (dollars in thousands) Operating revenues $ 178,134 $ 16,499 $ 6,287 $ 789 $ 201,709 Operating income before income taxes 55,911 (4,388 ) 1,918 (375 ) 53,066 Identifiable assets 487,454 27,172 28,558 — 543,184 Depreciation expense 15,494 1,383 1,159 — 18,036 Capital additions $ 44,546 $ 2,072 $ 549 — $ 47,167 For The Twelve Months Ended March 31, 2001 SCW CCWC Non- Consolidated Water Electric Water Regulated AWR (dollars in thousands) Operating revenues $ 167,747 $ 14,312 $ 2,606 $ 837 $ 185,502 Operating income before income taxes 43,600 4,371 615 169 48,755 Identifiable assets 460,321 26,681 28,928 — 515,930 Depreciation expense 14,048 1,409 564 — 16,021 Capital additions $ 44,625 $ 2,291 $ 327 — $ 47,243 15
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION FORWARD-LOOKING INFORMATIONManagement’s Discussion and Analysis of Financial Condition and Results of OperationForward-Looking Information
Certain matters discussed in this report (including the documents incorporated herein by reference) are forward-looking statements intended to qualify for the
"safe harbor"“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 Registrant"believes," "anticipates," "expects"“believes,” “anticipates,” “expects” or words of similar import. Similarly, statements that describeRegistrant'sRegistrant’s future plans, objectives, estimates or goals are also forward-looking statements. Such statements address future events and conditions concerning capital expenditures, earnings, litigation, rates, water quality and other regulatory matters, adequacy of water supplies, the California energy crisis, liquidity and capital resources, opportunities related to operations and maintenance of water systems owned by governmental entities and other utilities and providing related services, 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 water and energy supply cost; future climatic conditions; litigation developments; and legislative, regulatory and other circumstances affecting anticipated revenues and costs. See the section entitled"Risk Factors"“Risk Factors” for more information.GENERALGeneral
American States Water Company (AWR), incorporated in 1998, is engaged in the business of holding, for investment, the stock primarily of utility companies.
AWR's primaryAWR’s principal investment is the stock of Southern California Water Company (SCW). SCW is a California 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 theCaliforniaPublic Utilities Commission of the State of California (CPUC) and was incorporated on December 31,1929 under the laws of the State of California.1929. SCW is organized into three water service 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 21CSAs.customer service areas. Region I incorporates 7CSAscustomer service areas in northern and central California; Region II has 4CSAscustomer service areas located in LosAngeles;Angeles County; Region III incorporates 10 waterCSA's.customer service areas in eastern Los Angeles County, and in Orange, San Bernardino and Imperial counties. SCW also provides electric service to the City of Big Bear Lake and surrounding areas in San BernardinoCounty. See the section entitled "Electric Energy Situation in California" for more information.County through its Bear Valley electric service division.SCW served
246,396247,499 water customers and21,66521,900 electric customers atSeptember 30, 2001,March 31, 2002, or a total of268,061269,399 customers, compared with266,318266,927 total customers atSeptember 30, 2000. SCW'sMarch 31, 2001.SCW’s utility operations exhibit seasonal trends. Although
SCW'sSCW’s water utility operations have a diversified customer base, revenues derived from commercial and residential water customers accounted for approximately87.1%, 89.0%94.7% and91.1%90.8% of total water revenues for the threenineand twelve months endedSeptember 30, 2001,March 31, 2002, respectively, as compared to87.1%, 89.3%97.2% and90.7%91.5% for the threenineand twelve months endedSeptember 30, 2000,March 31, 2001, respectively.AWR also owns two other subsidiaries. American States Utility Services, Inc. (ASUS) contracts to lease, operate and maintain water and wastewater systems owned by others and to provide related services, such as billing and meter reading, to approximately 90,000 accounts. Chaparral City Water Company (CCWC) is an Arizona public utility company serving
11,43811,625 customers as ofSeptember 30, 2001March 31, 2002 in the town of Fountain Hills, Arizona and a portion of the City of Scottsdale, Arizona. The Arizona Corporation Commission (ACC) regulates CCWC.AWR completed the acquisition of the common stock of CCWC on 18October 10, 2000 for an aggregate value of $31.2 million, including assumption of approximately $12 million in debt.16
Neither AWR nor ASUS is regulated by either the CPUC or the ACC.
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 satisfactionResults 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. A proposed decision issued on October 5, 2001 by the Administrative Law Judge assigned to the case denied the transaction on the basis that it was not in the public interest. The final CPUC decision is anticipated in the fourth quarter of 2001. SCW intends to vigorously oppose the proposed decision. RESULTS OF OPERATIONOperationBasic earnings per common share for the three months ended
September 30, 2001March 31, 2002 increased by9.3%22.6% to$0.94$0.38 per share as compared to$0.86$0.31 per share for the comparable periodlast year. Basic earnings for the nine months ended September 30, 2001 increased by 6.1% to $1.74 per share from $1.64 per share for the same period oflast year. As compared to the twelve months endedSeptember 30, 2000,March 31, 2001, basic earnings increased by10.7%10.6% to$2.07$2.09 per share from$1.87$1.89 per share. The increases in the recorded results primarily reflect the impact of various rate increases authorized by theCPUCPublic Utilities Commission of the State of California (CPUC) for SCW, additional revenues generated by CCWC,since the acquisition and various reasons as discussed belowimprovement in operating margins and, to some extentRegistrant'sRegistrant’s Cash Preservation Plan (CPP).as discussed below.Fully diluted earnings
per sharefor the threenineand twelve months endedSeptember 30, 2001 are $0.93, $1.73March 31, 2002 were $0.37 and$2.06$2.07 per share, respectively, as compared to$0.86, $1.63$0.30 and$1.86$1.88 per share for the comparable periods of2000. See2001. For further information, see the section entitled"Liquidity“Liquidity and CapitalResources" for more information.Resources” included in Part I, Item 2 in Management’s Discussion and Analysis of Financial Condition and Results of Operation.As compared to the
same periodsthree months endedSeptember 30, 2000,March 31, 2001, revenues from wateroperating revenuesoperations increased by7.6%, 7.7% and 6.2%8.2% for thethree, nine and twelve monthssame period endedSeptember 30, 2001, respectively,March 31, 2002 due tothea 3.7% increase in sales and various increases in rates authorized by theCPUC, and additional revenues generated by CCWC. New ratesCPUC. Step increases in the customer service areas that compriseSCW'sSCW’s Region I were effective January2, 2001. Attrition1, 2002. The comparison is also affected by the fact that attrition increases forSCW's Metropolitanthe customer serviceareaareas that comprise SCW’s Region II were not effective until January 27, 2001 andsteprate increases to recover increased electric power costs incurred forSCW's Region IIIpumping of water were also not in effectinuntil after the first quarter of 2001.TheFor the twelve months ended March 31, 2002, revenues from water operations increased by 8.3% over the twelve months ended March 31, 2001 reflecting various rate increases effective at several of SCW’s customer service areas as well as an additional $3.7 million in revenues generated byrate increases wereCCWC. Revenue growth was partially offset by a 1.8% reductionof 4.5%, 4.5% and 4.7%in water salesrespectively, for the three, nine and twelve months ended September 30, 2001to customers of SCW due to relatively mild weatherthis year.in 2001. See the section entitled"Regulatory Matters"“Regulatory Matters” included in Part I, Item 2 in Managements Discussion and Analysis of Financial Condition and Results of Operation for more information.Electric revenuesRevenues from electric operations increased by
9.0%31.6% and2.6% and 4.1%15.3%, respectively, for the threenineand twelve months endedSeptember 30, 2001March 31, 2002 as compared to the same periods endedSeptember 30, 2000.March 31, 2001. The increasesreflectedreflect a rate increase of 12.5% effective May 24, 2001 and an additional 14.8% increase effective August 23, 2001 authorized by the CPUC to recover previous under-collected energy costs.The three-month and nine-monthFor the three months ended March 31, 2002, the increases in electric revenueswerealso reflect a 4.2% increase in sales due to higher utilization of snow making machines at ski resorts in the area during the first quarter this year. The twelve-month increase in revenues from electric operations was partially offset by a decrease of5% and 3%3.8% in usagerespectively,for thethree and ninetwelve months endedSeptember 30, 2001. The decreases in sales wereMarch 31, 2002 due to energy conservation efforts by all classes of customersand more winter snows experiencedinSCW's service area during the first quarter of this year, which decreased the use of snow making machines at ski resorts in the area.2001. See the section entitled"Regulatory Matters"“Regulatory Matters”and"Electric“Electric Energy Situation inCalifornia"California”included in Part I, Item 2 in Managements Discussion and Analysis of Financial Condition and Results of Operation for more information.Purchased water costs
decreasedincreased by5.9%, 7.8% and 6.3%, respectively,16.6% for the threenine and twelvemonths endedSeptember 30, 2001March 31, 2002 as compared to the sameperiodsperiod ending in20002001 due to both an increase in the volume of purchased water and increased costs resulting from the amortization of leased water rights in the period. For the current quarter, additional purchased water was necessary to replace supply lost due wells being removed from services as a result of water quality issues and mechanical problems, particularly in SCW’s Orange County and San Dimas customer service areas. As compared to the twelve months ended March 2001, purchased water costs decreased by 4.5% reflecting a decrease in purchased water volume resulting from both lower sales and less purchased water inRegistrant'sRegistrant’s supplymix. 19mix, as well as refunds received from 17
Registrant’s wholesale water suppliers in December 2001 of approximately $770,000. There was no similar refund in the twelve months ended March 2001.
Cost of power purchased for pumping increased by
34.2%, 22.2%29.1% and11.9%32.4% for the threenineand twelve months endedSeptember 30, 2001,March 31, 2002, respectively, due to the rate increases implemented in the first quarter of 2001 bySCW'sSCW’s energy suppliers,pursuant to CPUC decisions,andincreasedincreases in the volume of water sold from pumpedwater in SCW's supply mix. On March 27,sources. In 2001, the CPUC approvedSCW'sSCW’s Advice Letters to increase revenues by approximately$762,000$1.4 million annually to recover the costs of purchased power for certain of its water ratemaking districts.Another Advice Letter to increase water rates by approximately $2.3 million annually to recover additional electric power increases was filed in April 2001,For further information, see the sections entitled“Regulatory Matters” andis pending CPUC approval. See the section entitled "Regulatory Matters" and "Electric“Electric Energy Situation inCalifornia"California” included in Part I, Item 2 in Managements Discussion and Analysis of Financial Condition and Results of Operation. The twelve-month comparison was also impacted by the inclusion of approximately $311,000 in costs formore information. As comparedpower purchased tothe three, nine and twelve months ended September 30, 2000, costspump water at Registrant’s CCWC unit.Costs of power purchased for resale to customers in
SCW'sSCW’s Bear Valley Electriccustomer service area increaseddivision for the three months ended March 31, 2002 decreased by48.1%, 122.4% and 116.6%, respectively,44.9% due primarily to significantincreasesreductions in wholesale market prices for energy in the State of California.ForAs compared to thenineaverage cost of approximately $0.20 per kilowatt-hour for the three months ended March 31, 2001, costs for the three months ended March 31, 2002 averaged approximately $0.12 per Kwh. As compared to the twelve months ended March 31, 2001, costs of power purchased for resale increased by 2% reflecting lower sales andtwelve month comparisons, the increases were partially offset bya one-time sale of energy on the spot market that resulted in a $644,000 gain in April 2001. The sale of excess energy on the spot market resulted from a one-month overlap of energy purchase agreements.Effectively all of the increase in electric power costs has been included in the electric supply cost balancing account that, as described below, partially insulates earnings from the effects of the significantly increased power costs, unless recovery of these costs is disallowed. The CPUC approved an overall rate increases on May 24, 2001 and August 23, 2001, respectively, to recover approximately $11.1 million in the aggregate in under-collected power costs incurred prior to March 31, 2001 over a five-year period. An application to increase electric rates by approximately $8.7 million annually were filed with the CPUC on August 17, 2001 to recover the $95 per megawatt contract with Mirant Americas Energy Marketing, LP. SCW intends to continue to file additional Advice Letters to recover the differences between actual wholesale power costs and the costs recovered through previously approved rates. Due to the nature of the regulatory process, there is a risk of disallowance of full recovery of costs or additional delays in the recovery of costs during any period in which there has been a substantial escalation in costs. SeeFor further information, see the sections entitled"Liquidity“Liquidity and CapitalResources"Resources”,"Regulatory Matters"“Regulatory Matters” and"Electric“Electric Energy Situation inCalifornia" for more information.California” included in Part I, Item 2 in Managements Discussion and Analysis of Financial Condition and Results of Operation.Groundwater production assessments for the three months and twelve months ended
September 30, 2001March 31, 2002 increased by11.4%21.9% and 6.8%, respectively as compared to the same period in20002001 reflectinganincreased sales volumes provided from pumped water sources, increased groundwater production assessments, and a one-time adjustment made in thethirdfirst quarter of20002002 topreviously over-accrued groundwater production assessments; there was no such adjustment inaccount for a retroactive billing by water purveyors for rate increases effective July of 2001.For the nine and twelve months ended September 30, 2001, groundwater production assessments decreased by 11.6% and 8.5%, respectively, as compared to the same periods in 2000. The decreases incurred principally in SCW's San Gabriel and San Dimas customer service areas due to lower administrative assessments levied against production for the water year ended June 30, 2001.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. The negative entries for
the three, nine2001 andtwelve months ended September 30, 20012002 primarily reflect untimely-recovery of electric power costs discussed previously. AtSeptember 30, 2001,March 31, 2002, Registrant had a net under-collected position of$22.6$28.1 million in both its water and electric balancing accounts primarily due to the increases in energy costs.SeeFor further information, see the sections entitled"Liquidity“Accounting for Supply Costs”, “Liquidity and CapitalResources"Resources”,"Regulatory Matters"“Regulatory Matters” and"Electric“Electric Energy Situation inCalifornia" for more information.California” included in Part I, Item 2 in Managements Discussion and Analysis of Financial Condition and Results of Operation.Other operating expenses
increaseddecreased by1.8%8.5% and 1%,3.8% and 1.5%respectively for the threenineand twelve months endedSeptember 30, 2001, respectively,March 31, 2002 as compared to the same periods of last year. Theincreasesdecreases were primarily due to the effects of the CPP at SCW that reduced or deferred a number of expense items and a decrease in the accrual for bad debt during the first quarter of 2002. The twelve-month comparison reflected additional costs related to the inclusion of CCWC.20Administrative and general expenses increased by
12.0%, 24.0% and 16.5%, respectively,15.0% for the threeninemonths ended March 31, 2002 reflecting an increase in the accrual for pension plan expense, an accrual for payroll expense deferred pursuant to the CPP implementation, and outside service expenses at Registrant’s ASUS unit. As compared to the twelve months endedSeptember 30,March 31, 2001,as comparedthe administrative and general expense increased by 34.7% primarily due to thesame periods ended September 30, 2000 reflecting (i) additionalaccrual of $8.3 million in reserves established for potential non-18
recovery of electric power costs
and reserves associated with SCW'sincurred to serve customers at SCW’s Bear Valley Electric customer service area,in responseand additional costs from CCWC. The reserves were established tothe energy situation in California, including possible disallowances of past costs includedoffset future impacts to earnings in thebalancing account as well as an adverse settlement with SCW's energy provider, (ii)event that SCW was unable to fully recover all of its purchased power costs through rates. The twelve-month comparison also reflected increased reserves for self-insuredworker'sworkers compensationliabilities,liabilities. For further information, see the sections entitled“Regulatory Matters” and(iii) additional costs from CCWC.“Electric Energy Situation in California”in Part I, Item 2 in Management’s Discussion and Analysis of Financial Condition and Results of Operation.Depreciation expense increased by
22.4%, 19.4% and 19.6%, respectively,1.9% for the threenine and twelvemonths endedSeptember 30, 2001March 31, 2002 reflecting, among other things, the effects of recording approximately$40.1$50 million innet plantcapital additions at SCW during2000,2001, depreciation on which began in January 2002. The comparison between the two quarters is impacted by the elimination, effective January 1, 2002, of amortization of the goodwill recorded in Registrant’s acquisition of CCWC. For further information, see Notes 6 and 7 of theNotes to Financial Statementsincluded in Part I, Item 1 in Financial Statements. Depreciation expense increased by 12.6% for the twelve months ended March 31, 2002 as compared to the twelve months ended March 31, 2001anddue to plant additions, additional depreciation associated withCCWC's plant. In addition,utility plant at Registrant’s CCWC’s unit, and amortization of goodwillwhich represents the difference between the purchase price of the common equity of CCWC and CCWC's book equity at the time of closing, began October 2000. Amortization of this goodwill will cease effective January 1, 2002. However, pursuant to FASB No. 142, Registrant will conduct an annual impairment test. Management believes that adoption of this statement will not have a significant impact on its financial position or results of operation.as discussed previously.As compared to the three
nineand twelve months endedSeptember 30, 2000,March 31, 2001, maintenance expense decreased by20.6%, 17.7%14.5% and20.5%16.3%, respectively, due primarily to the implementation ofRegistrant'sRegistrant’s CPP in April 2001.Registrant anticipates theThe CPP was implemented to control costs and temporarily limit capital and maintenance expendituresatprincipally to those projects that were believed necessary to meet public safety and health requirements or otherwise provide for continued service pending CPUC approval of rate increases that would permit SCWwillto begin recovery of power costs incurred during California energy crisis. The CPP impacted both the electric and water businesses of SCW. The CPP is expected to remain in effect until SCW receives approval to increasesignificantly in the fourth quarter of 2001 as comparedelectric rates pursuant to thefourth quarterterms of2000. Seethe settlement agreement with us. For further information, see the sectionsentitled "Liquidity and Capital Resources", "Electric“Electric Energy Situation inCalifornia"California” and"Regulatory Matters" for more information.“Regulatory Matters” included in Part I, Item 2 in Managements Discussion and Analysis of Financial Condition and Results of Operation.Taxes on income increased by
7.1%, 13.1%11.1% and19.7%1.6%, respectively, as compared to the threenineand twelve months endedSeptember 30, 2000,March 31, 2001, due to an increase in pre-tax operating income of12.8%, 16.5%13% and22.5%4.8%, respectively, for the comparable periods endedSeptember 30, 2001,March 31, 2002, offset partially byalower effective taxrate.rates.Other taxes decreased by 3.4% for the three months ended March 31, 2002 reflecting decreases in property assessment values at SCW and lower payroll taxes due to company-wide hiring freeze pursuant to CPP. As compared to the twelve months ended March 31, 2001, other taxes increased by
13.1%, 11.5%2.1% due to additional property and12.2%payroll taxes at CCWC, partially offset by the decreases in property taxes and payroll taxes at SCW unit as discussed.As compared to the three months and twelve months ended March 31, 2001, respectively, the change in Other income for the same periods ended March 31, 2002 was due principally to the sale of a parcel of non-operating property in SCW’s Metropolitan customer service area. The twelve-month comparison was also impacted by the write-off of expenses associated with the termination of the acquisition of Peerless Water Company in the fourth quarter of 2001.
Interest expense increased by 11.4% and 9.9%, respectively, for the three
nineand twelve months endedSeptember 30, 2001, respectively,March 31, 2002 as compared to the same periodslast year reflecting principally increased property taxes dueended March 31, 2001. The three-month comparison is significantly impacted by the issuance of $50 million in long-term debt by SCW in December 2001, partially offset by a reduction in short-term borrowing. As compared tohigher property valuation assessments, and additional property and payroll taxes at CCWC. The loss recorded in other income forthethree, nine andtwelve months endedSeptember 30,March 31, 2001,was due principally totheeffects of recording amortization and interest expenses, starting January 2000, on SCW's 500 acre-foot entitlement in the State Water Project, and higher expenses associated with increased non-regulated activities. SCW anticipates signing an agreement during the fourth quarter of 2001 that will shift responsibility for payment of costs related to 350 acre-feet of its entitlement to a non-related third party. Interest expense increased by 5%, 11.4% and 11.2%, respectively, for the three, nine and twelve months ended September 30, 2001 as compared to the three, nine and twelve months ended September 30, 2000 due toincreases reflected (i) short-term borrowingincurred by AWR to fund the acquisition of CCWC,in 2001, (ii) the issuance19
of $20 million in long-term debt by SCW in January 2001, (iii) the issuance of $50 million in long-term debt by SCW in December 2001, and (iii) the inclusion of long-term debt at
Registrant'sRegistrant’s CCWC unit.LIQUIDITY AND CAPITAL RESOURCESAccounting for Supply Costs
As permitted by the CPUC, SCW has maintained water and electric supply balancing accounts to account for under-collections and over-collections of revenues designed to recover such costs. Costs have been recorded in income and charged to balancing accounts when such costs were incurred. The balancing accounts were reversed when such costs were recovered through rate adjustments or through refunds of previously incurred costs. SCW accrued interest on its supply cost balancing accounts at the rate prevailing for 90-day commercial paper. CCWC does not maintain a supply cost balancing account.
On November 29, 2001, the CPUC ordered water utilities with existing water supply balancing accounts to cease booking amounts to such accounts. In its place, water utilities are now required to establish a memorandum account that works in a manner similar to the balancing account. As a result, the income statements of SCW will no longer include entries reflecting differences between actual unit water supply costs included in rates and actual water supply costs. SCW will not be entitled to recover any deferred costs for providing water service unless it is within its general rate case cycle and is earning less than its authorized rate of return on a weather normalized basis. As a result, any changes in water supply costs as well as any future authorized revenue increases for supply expenses may directly impact earnings. SCW may not be able to recover the under-collection of supply costs if it is earning a rate of return in excess of that allowed. SCW had a net under-collection position of $3.3 million in its water supply balancing account at March 31, 2002 related to pre-November 29, 2001 activities. Of this amount, approximately $1 million is currently included in rates. SCW anticipates recovering the remaining amount as part of a rate case filing planned for the third quarter of 2002.
Electric power costs incurred by SCW’s Bear Valley Electric division will continue to be charged to a balancing account. Resulting from the unanticipated and dramatic increases in electricity prices since the fourth quarter of 2000, the amount of the under-collection in the electric balancing account has increased from $2.8 million at December 31, 1999, to $8.6 million at December 31, 2000, to $22.4 million at December 31, 2001, and $24.8 million at March 31, 2002. Due to the nature of the regulatory process, there is a risk of disallowance of full recovery of costs or additional delays in the recovery of costs during any period in which there has been a substantial run-up of costs. For further information, see the sections entitled“Regulatory Matters” and“Electric Energy Situation in California” included in Part I, Item 2 in Managements Discussion and Analysis of Financial Condition and Results of Operation.
Liquidity and Capital Resources
AWR
AWR funds its operating expenses and pays dividends on its outstanding Common and Preferred Shares primarily through dividends from its subsidiaries, principally SCW. AWR has a Registration Statement on file with the Securities and Exchange Commission (SEC) for issuance, from time to time,
21of up to $60 million in Common Shares, Preferred Shares and/or debt securities. On August 16, 2000, AWR issued 1,107,000 Common Shares at $26.125 per share under this Registration Statement. Net proceeds from the offering have been used to fund a portion of the purchase price of CCWC and to invest in additional shares of SCW.As ofSeptember 30, 2001,March 31, 2002, approximately$31,074,000$31.1 million remained for issuance under this Registration Statement. During 2001, AWR maintained a $25 million credit facility, $20 million of which was outstanding at December 31, 2001. This credit facility expired on January 2, 2002 although AWR expects to enter into a new credit facility in the amount of $75 million during the second quarter of 2002. On April 19, 2002, AWR completed theacquisitionredemption ofthe common stockall ofCCWC on October 10, 2000 for an aggregate valueits outstanding 4%, 4-1/4% and 5% series of$31.2 million, including assumption of approximately $12 million in debt. AWR maintains a credit facility with a $25 million aggregate borrowing capacity. At September 30, 2001, $20 million was outstanding under this facility.preferred shares.20
SCW
SCW funds the majority of its operating expenses, payments on its debt, and dividends on its outstanding Common Shares through internal sources. Internal sources of cash flow are provided primarily by retention of a portion of earnings, amortization of deferred charges and depreciation expense. Internal cash generation is influenced by factors such as weather patterns, environmental regulation, litigation, changes in supply costs, and timing of rate relief.
SeeFor further information, see the sections entitled"Risk Factors"“Risk Factors” and"Electric“Electric Energy Situation inCalifornia"California” included in Part I, Item 2 in Management’s Discussion and Analysis of Financial Condition and Results of Operation.SCW also relies on external sources, including equity investments from AWR, long-term debt, contributions-in-aid-of-construction, advances for
more information.construction and install-and-convey advances, to fund the majority of its construction expenditures. In January 2001, SCW issued $20 million of long-term debt in a public offering with the proceeds used to reduce then outstanding bank borrowing. On March 30, 2001, AWR made an additional $25 million equity investment in SCW. On November 14, 2001, SCW filed a Registration Statement with the SEC for issuance, from time to time, of up to $100 million in debt securities. In December 2001, SCW issued $50 million of long-term debt under this Registration Statement that initially reduced bank borrowing incurred to fund capital expenditures and power purchase costs.Because of the seasonal nature of its water and electric operations, SCW utilizes its short-term borrowing capacity to finance current operating expenses, including expenses for purchased power distributed through its Bear Valley Electric customer service area. SCW has
experienced increased costs for electric energy, particularly duringshort-term revolving credit lines totaling an aggregate of $47 million, none of which was outstanding at March 31, 2002. Of thefourth quarter of 2000,aggregate amount, $13 million expires in May 2002, $10 million expires in July 2002 andcontinuing throughout 2001. At December 31, 2000,$24 million expires in August 2002. SCWhad under-collected its electric power costs by approximately $8.6 million. During the three quarters of 2001, SCW incurred $11.3 million more in purchased power costs than it was authorized to recover in current rates. SCW also has an additional $2.7 million of under-collected supply costs in its water business. CPUC approval has been obtained to increase electric rates to recover $11.1 million in under-collected electric power costs over a five-year period. CPUC approval has also been obtained to recover approximately $1,059,000 annually of costs for purchased power for its water ratemaking districts. Applications are pending before the CPUC for additional rate increases to recover under-collected and increased power costs from SCW's electric and water customers. See the sections entitled "Electric Energy Situation in California" and "Regulatory Matters". SCW's under-collected position for purchased power relative to its Bear Valley Electric Service division could reach approximately $23 million by the end of 2001 if the CPUCdoes nottimely authorize recovery of costs associated with theintend to enter into any newpower purchase agreement. Registrant believes that timely regulatory approval of these applications by the CPUC is necessary to avoid any material adverse impact on SCW's liquidity and financial condition. Registrant implemented a Cash Preservation Plan (CPP)short-term revolving credit lines inApril 2001 to control costs and temporarily to limit capital and maintenance expenditures principally to those projects that are believed necessary to meet public safety and health requirements or otherwise provide for continued service pending CPUC approval of rate increases that will permit SCW to begin recovery of power costs incurred during California's energy crisis. The CPP impacts both the electric and water businesses of SCW. Management anticipates that the CPP, through deferral of capital expenditures alone, could reduce cash expenditures through April 2002 by as much as $20 million. See the sections entitled "Electric Energy Situation in California" and "Regulatory Matters" for more information. The aggregate short-term borrowing capacity available to SCW under its three bank lines of credit was $60 million as of September 30, 2001, of which a total of $18 million was then outstanding. SCW routinely employs short-term bank borrowing as an interim-financing source. 22SCW also relies on external sources, including equity investments from AWR, long-term debt, contributions-in-aid-of-construction, advances for construction and install-and-convey advances, to fund the majority of its construction expenditures. In January 2001, SCW issued the remaining $20 million of long-term debt under a Registration Statement filed in 1998 with the proceeds used to reduce then outstanding bank borrowing. SCW anticipates filing, before year-end 2001, a Registration Statement with the SEC for issuance, from time to time, of up to $100 million in debt securities. The net proceeds from the sale of these securities will be used for general public utility purposes as authorized by the CPUC. On March 30, 2001, AWR purchased an additional $25 million equity investment in SCW.2002.CCWC
CCWC funds the majority of its operating expenses, payments on its debt and dividends, if any, through internal sources. CCWC also relies on external sources, including long-term debt, contributions-in-aid-of-construction, advances for construction and install-and-convey advances, to fund the majority of its construction expenditures.
ASUS
ASUS funds its operating expenses primarily through contractual management fees.
ELECTRIC ENERGY SITUATION IN CALIFORNIAContractual Obligations and Other Commitments
In addition to contractual maturities, Registrant has certain debt instruments that contain annual sinking fund or other principal payments. Registrant believes that it will be able to refinance debt instruments at their maturity through public issuance, or private placement, of debt or equity. Annual principal payments are generally made from cash flow from operations.
The following table reflects Registrant’s contractual obligations and commitments to make future payments pursuant to contracts as of March 31, 2002. All obligations and commitments are obligations and commitments of SCW unless otherwise noted.
21
Payments/Commitments Due by Period (1) Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years ($ in thousands) Notes/Debentures(2) $ 185,600 — $ 12,500 — $ 173,100 Private Placement Notes(3) 28,000 — — — 28,000 Tax-Exempt Obligations(4) 20,820 87 285 218 20,230 Other Debt Instruments(5) 2,591 174 584 451 1,382 Preferred Shares (6) 1,920 1,920 — — — Other Commitments (7) 50,658 — — — — Chaparral City Water Company (8) 9,254 499 1,684 620 6,451 TOTAL $ 298,843 $ 2,680 $ 15,053 $ 1,289 $ 229,163
(1) Excludes interest, dividends, commitment and facility fees. (2) The Notes and Debentures are issued under an Indenture dated as of September 1, 1993. The Notes and Debentures do not contain any financial covenants that Registrant believes to be material or cross default provisions. (3) The private placement notes are issued pursuant to the terms of Note Agreements with substantially similar terms. The Note Agreements contain restrictions on the payment of dividends, minimum interest coverage requirements, maximum debt to capitalization ratio and a negative pledge. Pursuant to the Note Agreements, SCW must maintain a minimum interest coverage ratio of two times interest expense. SCW does not currently have any outstanding mortgages or other encumbrances on its properties. For further information of the dividend restrictions, see discussion included in Part II, Item 2 in Changes in Securities. (4) Consists of obligations under a loan agreement supporting $8 million in debt issued by the California Pollution Control Financing Authority, $6 million in obligations supporting $6 million in certificates of participation issued by the Three Valleys Municipal Water District and $7 million of obligations incurred by SCW with respect to its 500 acre foot entitlement to water from the State Water Project. Except as described below, these obligations do not contain any financial covenants believed to be material to Registrant or any cross default provisions. SCW’s obligations with respect to the certificates of participation issued by the Three Valleys Municipal Water District are supported by a letter of credit issued by Bank of America. SCW has reimbursement obligations to Bank of America that incorporate by reference SCW’s obligations to Bank of America under its short-term revolving credit line with Bank of America discussed below in paragraph (7). The letter of credit expires on November 15, 2003. The letter of credit may be drawn if SCW has not obtained a replacement letter of credit prior to the expiration of this letter of credit. SCW has entered into an agreement with a developer for 350 acre-feet of its entitlement to water from the State Water Project. For further information, see the section entitled“Regulatory Matters—Disallowance of Costs”included in Part I, Item 2 in Management’s Discussion and Analysis of Financial Condition and Results of Operation. (5) Consists of $1.6 million outstanding under a fixed rate obligation incurred to fund construction of water storage and delivery facilities with the Three Valleys Municipal Water District, $0.6 million outstanding under a variable rate obligation incurred to fund construction of water delivery facilities with the Three Valleys Municipal Water District and an aggregate of $0.4 million outstanding under capital lease obligations. These obligations do not contain any financial covenants believed to be material to Registrant or any cross default provisions. (6) AWR has redeemed all of its outstanding series of Preferred Shares in April of 2002. 22
(7) Other commitments consists of (i) $47 million available for borrowing by SCW at March 31, 2002 under short-term revolving credit loans, $13 million expiring in May 2002, $10 million expiring in July 2002 and $24 million expiring in August 2002, (ii) a $2,513,813 irrevocable letter of credit that expires on April 30, 2002 for its self-insured workers compensation plan, (iii) an amount of $296,000 with respect to a $6,296,000 irrevocable letter of credit issued by Bank of America to support the certificates of participation of Three Valleys Municipal Water District (the other $6,000,000 is reflected under tax-exempt obligations) that expires on November 15, 2003, (iv) an irrevocable letter of credit in the amount of $250,000 that expires on October 1, 2002 for the deductible in Registrant’s business automobile insurance policy (v) an irrevocable letter of credit that expires March 31, 2005 for its energy scheduling agreement with Automated Power Exchange; the amount of the credit is $585,000 for the months from November to March, and $270,000 to cover the months from April to October, and (vi) outstanding performance bonds of $13,250 to secure performance under franchise agreements with governmental agencies. The credit agreement with and the reimbursement obligations to Bank of America contain limitation on indebtedness and a negative pledge. None of other obligations contain any financial covenants believed to be material to Registrant or any cross default provisions. (8) Consists of $8.1 million of obligations under a loan agreement supporting Industrial Development Revenue Bonds due in 2006 and a $1.1 million repayment obligation to the United States Bureau of Reclamation. The loan agreement contains provisions that establishes a maximum of 65% debt in the capital structure, limits cash distributions when the percentage of debt in the capital structure exceeds 55% and requires a debt service coverage ratio of two times. The Bureau of Reclamation obligation does not contain any financial covenants believed to be material to Registrant or any cross default provisions. Under the terms of its power purchase contracts with Mirant Americas Energy Marketing, LP and Pinnacle West Capital Corporation, SCW is required to post security, at the request of the seller, if SCW is in default under the terms of the contract and the future value of the contract is greater than the future value of contracts of a similar term on the date of default. SCW will be in default under the terms of these contracts if its debt is rated less than BBB- by Standard & Poor’s Ratings Service (“S&P”) or Fitch, Inc. (“Fitch”) or less than Baa3 by Moody’s Investor Services, Inc (“Moody’s”). SCW currently has a rating of A+ by S & P and A2 by Moody’s. Fitch does not rate SCW.
S&P debt ratings range from AAA (highest rating possible) to D (obligation is in default). Moody’s debt ratings range from Aaa (best quality) to C (lowest quality). Securities ratings are not recommendations to buy, sell or hold a security and is subject to change or withdrawal at any time by the rating agency.
Electric Energy Situation in California
Background Information
The electric energy environment in California has changed as a result of the December 1995 CPUC decision on restructuring of
California'sCalifornia’s electric utility industry and state legislation passed in 1996. On September 23, 1996, the State of California enacted legislationCalifornia Assembly Bill 1890 as amended by California Senate Bill 477,to provide a transition to a competitive market structure, which was expected to provide competition and customer choice, beginning January 1, 1998, with all consumers ultimately participating by 2002.SCW'sSCW’s Bear Valley electric customer service area was exempted by the CPUC from compliance with most of the provisions of the CPUC order and the state legislation.On January 17, 2001, the Governor of the State of California proclaimed a state of emergency in California due to shortages of electricity available to certain of
California'sCalifornia’s utilities (resulting in blackouts), the unanticipated and dramatic increases in electricity prices and the insufficiency of electricity available from certain ofCalifornia'sCalifornia’s utilities to prevent disruption of electric service in23
California. The Federal Energy Regulatory Commission (“FERC”) also implemented a number of changes to the tariff for the California Independent Operator System (“Cal ISO”) beginning in December 15, 2000 in an attempt to stabilize the market. The reasons for the high cost of energy are under investigation but are reported to include, among other things, limited supply caused by a lack of investment in new power plants to meet growth in demand, planned and unplanned outages of power plants, decreased availability of hydroelectric power from the Pacific Northwest due to lower than usual precipitation and higher demand for electricity in the region, transmission line constraints, increased prices for natural gas, the fuel used in many of the power plants serving the region, and
an uncertaina dysfunctional power market.Recently, legislation has been enacted and executive orders issued, designed to encourage and accelerate the construction of additional power plants and the re-powering and updating of existing power plants to increase the supply of electricitySpot market prices dropped dramatically in the
State.summer of 2001 and continue to remain low. A number ofinvestigations have also been institutedfactors could, however, result in a substantial increase in spot market prices and the prices of long term contracts for power and capacity. The mitigation measures taken by FERC expire on September 30, 2002 despite the fact that there continues to be insufficient generation resources in California and throughout the West, transmission line constraints, constraints on natural gas pipeline capacity and a dysfunctional power market. In addition, the Cal ISO has proposed a number of market reforms, such astothecausesimposition of an available capacity obligation (“ACAP”) on all load-serving entities. The purpose of theCalifornia energy situation and numerous pieces of legislationACAP obligation is to ensure that all load-serving entities havebeen introduced at the California Legislaturesufficient power resources todeal with different aspectsmeet their maximum possible load. If an ACAP obligation of thesituation.type proposed by Cal ISO is adopted, SCW could be required to procure substantial additional power and capacity. Thelong-termcost of procuring this additional power and capacity could have a material adverse impactof these legislative initiativesonSCW's Bear Valley Electric (BVE) customer service area is difficult to predict. For the short-term, however, management expects energy costs to remain high and to continue to be volatile. On July 25, 2001, the Federal Energy Regulatory Commission (FERC) established the scope and methodology for calculating refunds related to transactions in the spot markets operated by the California Independent System Operator Corporation (Cal-ISO) and the California Power Exchange Corporation (Cal-PX) during the period October 2, 2000 through June 20, 2001, and ordered evidentiary hearings for the purpose of determining the amount of such refunds.SCW if SCW is not permitted to recover the costs of procuring this additional power and capacity from its ratepayers on aparty to these proceedings, but has not 23been a direct participant in either the Cal-ISO or Cal-PX markets. SCW does not believe that these proceedings or any other proceedings currently pending before FERC will result in any reduction in SCW's under-collected power costs in the near term, if at all.timely basis.Power Supply Arrangements
All electric energy sold by SCW to customers in its BVE customer service area is purchased from others. Historically, SCW purchased electric energy from the Southern California Edison
(SCE)unit of Edison International. However, in order to keep electric power costs as low as possible, SCW entered into an energy brokerage contract with Sempra EnergyCorporation (Sempra).Corporation. SCW purchased electric energy for its BVE customer service area from Sempra during the period beginning March 26, 1996 through April 30, 1999.In May 1999, SCW
changed energy brokers toentered into a one-year block forward purchase contract with Illinova Energy Partners(Illinova) beginning May 1, 1999 through April 30, 2000, and with Dynegy Power Marketing, Inc. (Dynegy) since May 1, 2000, when Dynegy acquired Illinova.for 12 megawatts (MWs) of power at a price of $28.00 per MW hour (MWh). In May 2000, SCW entered into a one-year, block forward purchase contract with Dynegy Power Marketing, Inc. (DYPM) for 12megawatts (MW's)MWs of electric energy for its BVE customer service area at a price of $35.50 perMW hour (MWh).MWh. This contract expired April 30, 2001.SCW entered into a five-year, block forward purchase contract with Mirant Americas Energy Marketing LP
(Mirant)(“Mirant”) to supply its BVE customer service area with 15MW'sMWs of electric energy at a price of $95 per MWh beginning April 1, 2001 through December 31, 2006. On December 20, 2001, SCWalso finalizedfiled a complaint with FERC seeking to reduce the amount charged by Mirant under the terms of this contract due to the dysfunctional power market. In accordance with the April 11, 2002 order issued by the FERC in Docket Mo. EL02-26 et.al., SCW and Mirant have agreed to enter into mediation of the dispute pursuant to Section 34.1 and Exhibit D of the Western Systems Power Pool Agreement. Although SCW is seeking to reformulate its contract with Mirant through the mediation process, management is presently unable to predict what changes in the contract, if any, will be agreed to by the parties.In June 2001, SCW executed an agreement with Pinnacle West Capital
Corporation on June 14, 2001for an additional 8MW'sMWs of electric energy to meetBVE'sBVE’s peak winter demands. The contract provides for pricing of $75 per MWh from November 1, 2001 to March 31, 2002, $48 per MWh from November 1, 2002 to March 31,24
2003, and $36 per MWh from November 1, 2003 to March 31, 2004. The average minimum load at
SCW'sSCW’s Bear Valley Electric customer service area has been approximately 12MW's.MWs. The average winter load has been 18MW'sMWs with a winter peak of 38MW'sMWs when the snowmaking machines at the ski resorts are operating. Under the terms of a contract withDynegyDYPM that expires on April 30, 2002,DynegyDYPM has agreed toprocureprovide electric energyforto SCW in excess of the amounts it has purchased under the forward block purchase contracts previously described, to sell excess energy purchased by SCW under the terms of these contracts, if requested by SCW, and to act as scheduling coordinator for SCW. However, SCW has entered into a separate agreement to have Automated Power Exchange, Inc. act as its scheduling coordinator and will not utilize the services of DYPM. SCW has withheld payment on approximately $3.4 million invoiced byDynegyDYPM for the period December 20, 2000 through February 20, 2001, pending resolution of certain disputes.MostIn April 2002, DYPM billed SCW an additional $2.1 million. Based on the lack ofthisinformation supporting the additional billings, SCW will require such information prior to paying the requested amounts. Based on information presently available to it, Registrant believes the amountis includedin dispute may increase due to theelectric supply cost balancing account.additional amounts billed by DYPM.Transmission Constraints
Demand for energy in
SCW'sSCW’s Bear Valley Electric customer service area generally has been increasing. However, the ability of SCW to deliver purchased power to these customers is limited by the ability of the transmission facilities owned by Southern California Edison Company("Edison")to transmit this power.See section entitled "Legal Proceedings"For further information, see Legal Proceedings in Part II for a discussion of litigation between Edison and SCW regardingEdison'sEdison’s obligations to upgrade these transmission facilities. In order to meet these increasing energy demands, SCW is consideringin addition totherenegotiated block forward purchaseconstruction ofelectric energy,anumber of options including (i) the purchase of electric energy from on-site generation facilities installed by a third party, (ii) the use of portable generation, and (iii) the installation of generationgas-fueled generator facility owned byRegistrant. Each of these options is expectedSCW. An Advice Letter was filed to seek the CPUC’s authorization. If approved, it will result in further increases in electric energy prices for customers ofSCW'sSCW’s BVE customer service area.WATER SUPPLYFor more information, see the section entitled“Rate Matters—Changes in Rates” included in Part I, Item 2 in Managements Discussion and Analysis of Financial Condition and Results of Operation.Construction Program
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 2002. Approved capital expenditures may be limited pending final CPUC approval of the settlement agreement regarding recovery of electric power costs at SCW’s Bear Valley electric division. For further information, see the section entitled“Rate Matters-Changes in Rates” included in Part I, Item 2 in Management’s Discussion and Analysis of Financial Condition and Results of Operation.
CCWC has a net capital budget of $1.4 million for 2002. AWR and ASUS have no material capital commitments. However, ASUS actively seeks opportunities to own, lease or operate water and wastewater systems for governmental entities, which may involve significant capital commitments.
Regulatory Matters
Rate Regulation
SCW is subject to regulation by the CPUC, which has broad powers with respect to service and facilities, rates, classifications of accounts, valuation of properties, the purchase, disposition and mortgaging of properties necessary or useful in rendering public utility service, the issuance of securities,
25
the granting of certificates of public convenience and necessity as to the extension of services and facilities and various other matters. CCWC is subject to regulation by the ACC.
Rates that SCW and CCWC are authorized to charge are determined by the CPUC and the ACC, respectively, in general rate cases and are derived using rate base, cost of service and cost of capital, as projected for a future test year in California and using an historical test year, as adjusted in Arizona. Rates charged to customers vary according to customer class and rate jurisdiction and are generally set at levels allowing for all prudently incurred costs, including a return on rate base sufficient to pay principal and interest on debt securities, preferred stock distributions and a reasonable rate of return on equity. Rate base generally consists of the original cost of utility plant in service, plus certain other assets, such as working capital and inventory, less accumulated depreciation on utility plant in service, deferred income tax liabilities and certain other deductions. Adjustments for purchased water and power are permitted in California, to a certain extent, but generally not Arizona. For further information, see the section entitled“Accounting for Supply Costs”included in Part I, Item 2 in Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Neither AWR nor ASUS are regulated by the CPUC. The CPUC does, however, regulate certain transactions between SCW and its affiliates. The ACC also regulates certain transactions between CCWC and its affiliates.
The 22 customer service areas of SCW are grouped into 9 water districts and 1 electric district for ratemaking purposes. Water rates vary among the 9 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: (i) general rate case increases (GRC’s), (ii) offsets for certain expense increases including but not limited to supply cost offset and balancing account amortization, and (iii) advice letter filings related to certain plant additions and other operating cost increases. 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 and advice letter filings typically have a two to four month regulatory lag.
Changes in Rates
New water rates with an annual increase of approximately $321,600 for four of the seven ratemaking districts in SCW’s Region I were implemented in January 2002. SCW is planning to submit a Notice of Intent to file a GRC for the customer service areas in SCW’s Region III in the third quarter of 2002 for new water rates effective July of 2003, if approved by the CPUC.
An Advice Letter filed by SCW on November 13, 2001 requests the authority to increase rates in its Metropolitan district by $3.1 million annually to offset an increase in rate base due to its infrastructure replacement program and offset increased costs by using a price index. SCW has filed a motion to amend a prior decision to clarify certain contradictory paragraphs in that order that would allow for the requested increase. Management is unable to predict when or if the CPUC will authorize recovery of any or all of the increases filed by SCW.
As of Mach 31, 2002, SCW had accrued approximately $24.8 million in under-collected purchased power costs included in the electric balancing account. In May 2000, SCW filed an Advice Letter with the CPUC for recovery over a five-year period of approximately $2.4 million in under-collected power costs and removal of a negative amortization authorized by the CPUC in 1997. The CPUC issued a final order on May 24, 2001 authorizing an overall rate increase of 12.5%, with a condition of conducting a subsequent audit on the expenses included in the electric balancing account. The audit has been conducted and provided to the CPUC.
26
On August 23, 2001, the CPUC also approved a second Advice Letter filed by SCW on April 9, 2001 seeking recovery, over five years, of an additional under-collection of $8.7 million for energy costs. Rates in SCW’s BVE customer service area have increased by approximately 14.8% as a result.
On May 11, 2001, SCW filed with the CPUC for an additional increase in electric rates to recover energy costs under the purchase agreement with Mirant Marketing. SCW subsequently withdrew the Advice Letter and filed an application on August 17, 2001 with the CPUC, along with a motion requesting immediate recovery of these costs, subject to refund after completion of the review process. The CPUC rejected SCW’s motion for immediate recovery.
On February 8, 2002, a settlement agreement among SCW, all intervening parties and the Office of Ratepayer Advocates (ORA) was filed with the CPUC that will permit SCW to recover $77 per MWh of purchased power costs through rates. SCW will be allowed to include its actual purchased power costs up to an average annual weighted cost of $77 per MWh each year for 10 years in its balancing account. To the extent SCW’s actual average annual weighted cost for purchased power is less than $77 per MWh, the differential will offset amounts included in the electric supply balancing account. Conversely, to the extent that actual average annual weighted costs for power purchased exceed the $77 per MWh amount, SCW will not be able to include these amounts in its balancing account and such amounts will be expensed against income. SCW has established approximately $8.3 million in reserves as of March 31, 2002 against potential non-recovery of electric power costs. In addition, the settlement extended the previously approved surcharges for an additional five years to allow SCW an opportunity to collect amounts remaining in its electric cost balancing account. Management believes that the settlement will allow for full recovery of amounts included in the balancing account. The proposed settlement also requires SCW to pursue its complaint filed with FERC in which SCW has requested FERC to reduce the prices in its power purchase contract with Mirant due to the dysfunctional power market that existed at the time the agreement was signed. In accordance with the April 11, 2002 issued by the FERC in Docket Mo. EL02-26 et.al., SCW and Mirant have agreed to enter into mediation of the dispute. Although SCW is seeking to reformulate its contract with Mirant through the mediation process, management is presently unable to predict what changes in the contract, if any, will be agreed to by the parties. Management believes the CPUC will support the settlement agreement, but is unable to predict when or if the CPUC will authorize recovery of any or all of the costs agreed to in the settlement. For further information, see the sections entitled“Liquidity and Capital Resources” and“Electric Energy Situation in California” included in Part I, Item 2 in Managements Discussion and Analysis of Financial Condition and Results of Operation.
In March 2001, the CPUC approved SCW’s Advice Letters to increase costs of purchased power incurred to pump water for its water customers by $761,351 included in base water rates for each of its ratemaking districts. In April 2001, SCW filed additional Advice Letters by ratemaking areas to increase water rates by approximately $2.3 million company-wide to recover additional electric base rate increases, authorized recently by the CPUC for the Southern California Edison Company and the Pacific Gas and Electric Company. The CPUC approved in the fourth quarter of 2001 increases of approximately $672,900 in base water rates. For further information, see the section“Electric Energy Situation in California”included in Part I, Item 2 in Managements Discussion and Analysis of Financial Condition and Results of Operation. The remaining Advice Letters filed by SCW to recover increased power costs used for pumping were rejected by the CPUC due to the change in procedures for collections of water supply costs on November 29, 2001. See the section entitled“Accounting for Supply Costs” included in Part I, Item 2 in Managements Discussion and Analysis of Financial Condition and Results of Operation.
In April 2002, SCW filed an Application to seek the CPUC’s authorization to construct an 8.4 MW natural gas-fueled generator facility on a portion of its BVE property in the City of Big Bear Lake. The construction of this generator is to ensure the reliability of service, eliminate transmission
27
constraints and meet increasing demand in the areas. Total capital cost of the generator facility is estimated to be approximately $13 million, which, if approved by the CPUC, will generate an annual revenue increase of about $2.4 million. Management is unable to predict when or if the CPUC will approve the Application.
Disallowance of Costs
In 1993, the CPUC disallowed $1.6 million of costs incurred in construction of a water treatment facility in SCW’s Clearlake customer service area and Registrant wrote off the disallowed amount at that time. Based on new water quality standards, in 2000, SCW re-applied to the CPUC for inclusion of the disallowed amount in rate base. A draft decision issued on March 30, 2001 by the CPUC allows SCW to include $500,000 of the $1.6 million in the regulated rate base, although an alternate draft decision issued by one of the CPUC Commissioners proposed to deny the relief sought by SCW in its application. An Administrative Law Judge subsequently reopened the proceeding in August 2001 requiring additional information. A final order is not anticipated until the fourth quarter of 2002.
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 500 acre-foot 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. In October 2001, SCW entered into an agreement with a developer, which obligates the developer to make payments to SCW in exchange for SCW’s reservation and dedication of up to 350 acre-feet per year of the SWP entitlement for a five-year period. SCW intends to recover its remaining investment from other developers or through a sale of its remaining entitlement. SCW believes that its full investment and on-going costs associated with its ownership will be recovered.
Other Regulatory Matters
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 transaction, however, was denied by the CPUC on November 29, 2001. As a result, the acquisition agreement with Peerless Water Co. has been terminated.
There are no active regulatory proceedings affecting CCWC or its operations.
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.
28
The 1996 SDWA amendments allow the EPA 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 costs for each such MCL.
SCW and CCWC currently test their wells and water systems according to requirements listed in the SDWA. Water from wells found to contain levels of contaminants above the established MCL’s is treated to reduce contaminants to acceptable levels before it is delivered to customers or the wells are shut down. 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. The CPUC and ACC ratemaking processes provide SCW and CCWC with the opportunity to recover prudently incurred capital and operating costs associated with water quality. Management believes that such incurred and expected future costs will be authorized for recovery by the CPUC and ACC, as appropriate.
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 EPAs 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 (LT1ESWTR) in the Federal Register. The final Long-Term 1 Enhanced Surface Water Treatment Rule was published in the January 14th Federal Register and applies to all public water systems that use surface water or ground water under the direct influence of surface water (GWUDI) and serve fewer than 10,000 persons. This proposed rule will apply to each of SCW’s five surface water treatment plants and the CCWC’s surface water treatment plant. It basically extends the requirements of the ESWTR to systems serving less than 10,000 persons and will require some systems to institute changes to the return of recycled filter backwash flows within the treatment process to reduce the effects of recycled water on compromising microbial control. Registrant is presently unable to predict the ultimate impact of the LT1ESWTR, but it is anticipated that all plants will achieve compliance within the three year to five-year time frames identified by EPA.
Regulation of Disinfectant/Disinfection By-Products
SCW and CCWC are also subject to regulations concerning disinfectant/disinfection by-products (DBP’s). Stage I of the regulations were effective in November 1998 with full compliance required for systems serving 10,000 or more persons by 2002 and for systems serving fewer than 10,000 persons by 2004. 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 to achieve compliance and a third SCW plant will require treatment modifications in order to comply with this rule by 2004. SCW is conducting studies to determine the best treatment methods to comply with this rule.
29
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 DBP’s 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 in 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 systems 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 2002. While no assurance can be given as to the nature and cost of any additional compliance measures, if any, SCW and CCWC do not believe that such regulations will impose significant compliance costs, since they already currently engage in disinfection of their groundwater systems.
Regulation of Radon and Arsenic
The regulation on arsenic was published in January 2001 with a new federal standard of 10 parts per billion (ppb). Compliance with an MCL of 10 ppb will require implementation of wellhead treatment remedies for eight affected wells in SCW’s system and three wells in CCWC’s system. However, the EPA subsequently withdrew the pending arsenic standard for a sixty-day review to seek independent reviews of both the science behind the standard and of the cost estimates to communities of implementing the rule. On October 31, 2001, EPA announced that the arsenic standard in drinking water would be 10 parts per ppb. The effective date for utilities to comply with the standard will be January 2006. In California, the Office of Environmental Health Hazard Assessment is currently preparing a Public Health Goal for arsenic that may result in California adopting a lower MCL for arsenic. It is not clear what will happen between now and the current effective date of the arsenic regulation. No further actions by EPA would simply make this regulation become effective as of that date.
The EPA has proposed new radon regulations following a National Academy of Sciences risk assessment and study of risk-reduction benefits associated with various mitigation measures. The National Academy of Sciences study is in agreement with much of EPAs 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 has been delayed and most likely will not be published until late 2002. SCW and CCWC currently monitor their wells for radon in order to determine the best treatment appropriate for affected wells.
Voluntary Efforts to Exceed Minimum Surface Water Treatment Requirements
SCW is a voluntary member of the EPAs 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.
30
Fluoridation of Water Supplies
SCW 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.
Ammonium Perchlorate Action Level Activities
The California Department of Health Services (DOHS) recently reduced the action level for ammonium perchlorate. Although neither the EPA nor the DOHS have established a drinking water standard for ammonium perchlorate. In January 1997 DOHS established an action level of 18 parts per billion (ppb). Action levels are advisory in nature and are not enacted into law. In January 2002, SCW was informed that DOHS has reduced the action level from 18 ppb to a level of 4 ppb, based upon new reference dosage for health risk information from EPA. SCW has removed eight wells from service in four separate systems since they contained ammonium perchlorate in amounts in excess of this reduced action level. On March 8, 2002, the California Office of Environmental Health Hazard Assessment (OEHHA) published a draft Public Health Goal for perchlorate at 6 ppb. This is the first step to establishment of an MCL in California. SCW is continuing to periodically monitor all its wells to determine that levels of perchlorate are below the action level currently in effect.
Matters Relating to SCW’s 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 wells serving its Rancho-Cordova system. Aerojet-General Corp. has, in the past, used ammonium perchlorate in oxidizing rocket fuels. SCW took the three wells detected with ammonium perchlorate in excess of the 1997 action levels out of service. 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 ammonium perchlorate are below the action level currently in effect. In January 2002, SCW was informed that DOHS was reducing the action level from 18 ppb to 4 ppb and subsequently removed three wells from service since they contained ammonium perchlorate in amounts in excess of this reduced action level.
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 Rancho-Cordova system. The wells have been removed from service. An additional well was also removed from service in September 1999 due to the contamination and another well was removed from service in January 2002. The DOHS established an initial action level of 2 parts per trillion (ppt). In February 2002, DOHS increased the action level to 10 ppt. Management is investigating the impact, if any, that the increase in the action level may have on its abilities to put certain wells back into service. NDMA is an additional by-product from the production of rocket fuel and it is believed that such contamination is related to the activities of Aerojet. Aerojet has reimbursed SCW for constructing a pipeline to interconnect with the City of Folsom water system to provide an alternative source of water supply in SCW’s Rancho-Cordova customer service area and has reimbursed SCW for costs associated with the drilling and equipping of two new wells. As of March 31, 2002, Aerojet had previously reimbursed SCW $4.5 million of the approximately $18 million in costs SCW has incurred. The remainder of the costs is subject to further reimbursement, including interest. Reimbursements received from Aerojet will reduce SCW’s utility plant and costs of purchased water.
31
For further information regarding litigation related to contamination of ground water in Sacramento County, see the section entitled“Other Water Quality Litigation” included in Part II, Item 1 in Legal Proceedings.
Matters Relating to SCW’s 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 Metropolitan Water District of Southern California (MWD) at an increased cost to replace the water supply formerly pumped from the two wells removed from service.
On September 22, 1999, the U.S. EPA and the Los Angeles Regional Water Quality Control Board ordered Shell Oil Company, Shell Oil Products Company and Equilon Enterprises LLC to provide replacement drinking water to both SCW and the City of Santa Monica due to MTBE contamination of the Charnock 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. SCW is unable to predict the outcome of the EPAs enforcement efforts.
On April 25, 2001, Registrant filed a lawsuit against all the potentially responsible parties, who stored, transported and dispensed gasoline containing methyl tertiary butyl ether (MTBE) in underground storage tanks, pipelines or other related infrastructure. MTBE polluted and contaminated water existed in areas of the basin from which SCW has pumped water through its Charnock Well Field. As a result, SCW ceased operation of its Charnock Well Field in October 1996. In March 2002, Registrant has reached an agreement in this matter with the City of Santa Monica that assigns the prosecution of litigation against the potentially responsible parties to the City of Santa Monica, California (Santa Monica). As part of the agreement executed on March 19, 2002 and in exchange for an assignment payment, SCW granted its water rights in the Charnock Basin to Santa Monica and Santa Monica took over the prosecution against the potentially responsible parties. For further information, see section entitled“Other Water Quality Litigation” included in Part II, Item 1 in Legal Proceedings.
Matters Relating to SCW’s 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 MWD to provide for additional supply in the event the third well experiences 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 DOHS 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.
32
Security Issues
Since the tragic events of September 11, 2001, water utilities, including Registrant, have been advised to increase security at key facilities in order to avoid contamination of water supplies and other disruptions of service. Registrant has implemented a number of steps to address this concern, including the engagement of a security firm to develop further protection measures and an ongoing review of new industry and regulatory agency security measures. Although Registrant has not experienced any material increase in costs related to these measures, management is unable to predict what, if any, additional measures will be implemented and what such measures may cost. Registrant intends to seek recovery of any such costs from the CPUC and the ACC. Management is unable to predict if these regulatory bodies will authorize recovery of any or all of these costs.
Water Supply
SCW’s Water Supply
For the three months ended
September 30, 2001,March 31, 2002, SCW supplied a total of26,962,00017,212,000 ccf of water as compared to27,829,00015,588,000 ccf for the three months endedSeptember 30, 2000.March 31, 2001. Of the total26,962,00017,212,000 ccf of water supplied during thethirdfirst quarter of2001,2002, approximately53.8%62.5% came from pumped sources and43.6%37.5% was purchased from others, principally the Metropolitan Water District of Southern California (MWD) and its member agencies. The remaining2.6%1% of total supply came from the United States Bureau24of Reclamation (the Bureau). For the three months ended September 30, 2000, 51.6%, 46.2%March 31, 2001, 64.1% and2.2%35.9% was supplied from pumped sources and purchased from MWD,and the Bureau,respectively.For the nine months ended September 30, 2001, SCW supplied a total of 65,384,000 ccf of water, 58.2% of which came from pumped sources, 40.0% was purchased and the remaining amount was supplied by the Bureau. During the nine months ended September 30, 2000, SCW produced 68,325,000 ccf of water. Of this amount 55.3% came from pumped sources, 43.0% was purchased and the remainder was provided by the Bureau.During the twelve months ended
September 30, 2001,March 31, 2002, SCW supplied84,538,00085,727,000 ccf of water as compared to89,289,00086,375,000 ccf supplied during the twelve months endedSeptember 30, 2000.March 31, 2001. During the twelve months endedSeptember 30, 2001,March 31, 2002, pumped sources provided57.9%58.3% of total supply,40.0%39.8% was purchased from MWD and its member agencies. The remaining2.1%1.9% of total supply came from the United States Bureau of Reclamation (the Bureau) under a no-cost contract. For the twelve months endedSeptember 30, 2000, 55.9%March 31, 2001, 56.1%,42.6%41.9% and1.5%2.0%, respectively, was supplied from pumped sources, purchased from MWD and the Bureau.The MWD is a water district organized under the laws of the State of California for the purpose of delivering imported water to areas within its jurisdiction. Registrant has 57 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'sMWD’s requirements andMWD'sMWD’s supplies from these sources are anticipated to remain adequate through2001. MWD's2002. 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 (CAP). 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'sRegistrant’s water supply and revenues are significantly affected, both in the short-run and the long run, by changes in meteorological conditions.
Water year 2001 was California's first dry year following six yearsThe average current water outlook for California is near normal levels with the snow pack at 95% ofwet toaverageconditions. Storage in mostfor April 2002 and statewide precipitation at 70% of normal. While Northern California areas are at 100% or better of normal precipitation levels, Southern California is suffering through a drought with theState's major reservoirs was above averageSouth Coast area at 30%, South Lahontan region at 25%, and thebeginningColorado River-Desert at only 5% ofthenormal. So far this water yearreflecting prior wet conditions. Asthe LA Civic Center has gotten only 21% ofSeptember 30, 2001normal rainfall, whereas last year the LA Civic Center had received 127% of normal.33
Water storage, however, appears to be adequate given statewide
water storage in reservoirs is 66%levels are at 100% of capacitythat is 96% of normalfor this time of year. In Northern California we see the reservoirs filling due to recent precipitation and in Southern California last years abundant rainfall helps current levels to be near or at normal. Reservoirs in South Lahontan are at 105% and South Coast area at 85%. The impacts ofa dry 2001 werelow precipitation in Southern California are minimizedfor most other large water systemsby generally good storage inreservoirs and groundwater basins. Although overall groundwaterreservoirs. Groundwater conditions remain at adequate levels in most ofSCW'sSCW’s operatingareas, certainareas. Certain ofSCW'sSCW’s groundwater supplies have been affected to varying degrees by various forms of contamination and mechanical problems caused by low water table, which, in some cases, have caused increased reliance on purchased water in its supply mix.Likewise the Colorado River was in a surplus (wet) condition in water year 2001.CCWC’s Water Supply
Storage at Lake Powell remains at 90% of average at March 2002. The April-July inflow to Lake Powell is,
forecasthowever, forecasted to be5.6only 3 million acre-feet, which is72%38% of average. TheMay 2001 snow packareas will remain dry until the weather breaks probably in late summer, early fall time frame assuming that theUpper Colorado River basin was 78% of average.El Nino forms a new weather pattern.CCWC obtains its water supply from three operating wells and from Colorado River water delivered by the CAP. The majority of
CCWC'sCCWC’s water supply is obtained from its CAP allocation and well water is used for peaking capacity in excess of treatment plant capability, during treatment plant shutdown, and to keep the well system in optimal operating condition. CCWC has an Assured Water Supply designation, by decision and order of the Arizona Department of Water Resources, providing in part that, subject to its requirements, CCWC currently has a sufficient supply of ground water and CAP water which is physically, continuously and legally available to satisfy current and committed demands of its customers, plus at least two years of predicted demands, for 100 years.25Notwithstanding such a designation,
CCWC'sCCWC’s water supply may be subject to interruption or reduction, in particular owing to interruption or reduction of CAP water. In the event of interruption or reduction of CAP water, CCWC can currently rely on its well water supplies for short-term periods. However, in any event, the quantity of water CCWC supplies to some or all of its customers may be interrupted or curtailed, pursuant to the provisions of its tariffs.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. CCWC is subject to similar regulation by the ACC. 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. New water rates with an annual increase of approximately $2.5 million for seven ratemaking districts in SCW's Region I were implemented in January 2001. SCW's application to combine the seven ratemaking CSAs into one regional rate was, however, denied by the CPUC. Step increases of approximately $1.7 million for CSAs in SCW's Region III were also effective in January 2001. An attrition increase of approximately $2.8 million for Region II was in effect from February 2001. On October 25, 2001, SCW was authorized to collect $488,000 over a two-year period to amortize the under-collection in its San Dimas supply expense balancing account. SCW had an aggregate under-collection of $2.7 million in its water balancing account as of September 30, 2001. As of September 30, 2001, SCW had accrued approximately $19.9 million in under-collected purchased power costs included in the electric balancing account. In May 2000, SCW filed an Advice Letter with the CPUC for recovery over a five-year period of approximately $2.4 million in under-collected power costs and removal of a negative amortization authorized by the CPUC in 1997. The CPUC issued a final order on May 24, 2001 authorizing an overall rate increase of 12.5%, with a condition of conducting a subsequent audit on the expenses included in the electric balancing account. On August 23, 2001, the CPUC also approved a second Advice Letter filed by SCW on April 9, 2001 seeking recovery, over five years, of an additional under-collection of $8.7 million for energy costs. Rates in SCW's BVE customer service area have increased by approximately 14.8% as a result. On May 11, 2001, SCW filed with the CPUC for an additional increase in electric rates to recover energy costs under the purchase agreement with Mirant. SCW subsequently withdrew the Advice Letter and filed an application on August 17, 2001 with the CPUC, along with a motion requesting immediate recovery of these costs, subject to refund after completion of the review process. The CPUC, in the 26process of reviewing the application, rejected SCW's motion for immediate recovery. The application, if approved, will result in an additional electric rate increase of approximately 50%. SCW expects to continue to file additional Advice Letters to recover differences between actual electric power costs and amounts recovered through electric rates. SCW believes that timely regulatory actions to authorize SCW to recover its past and future power costs are necessary to avoid any material adverse effect on SCW's liquidity and financial condition. The schedule agreed to by the parties in this proceeding is abbreviated from the normal time frame in order to address this situation as expeditiously as possible. A final decision in this matter is expected during the second quarter of 2002, although management is unable to predict when or if the CPUC will authorize recovery of any or all of the costs related to the contracts. See the sections entitled "Liquidity and Capital Resources" and "Electric Energy Situation in California" for more information. In March 2001, the CPUC approved SCW's filing for recovery of increased costs of electric power incurred to pump water for its water customers. In April 2001, SCW filed additional Advice Letters by ratemaking areas to increase water rates by approximately $2.3 million company-wide to recover additional electric base rate increases, authorized recently by the CPUC for the Southern California Edison Company and the Pacific Gas and Electric Company. On October 25, 2001, the CPUC approved an increase of $297,000 in rates for SCW's Claremont CSA to collect the electric base rate increases. The remaining Advice Letters are scheduled to be on Commission's agenda on November 8, 2001. CPUC staff has drafted a proposed resolution, also on November 8, 2001 agenda, that would limit SCW's ability to timely recover increased supply costs from its water customers. In essence, SCW would not be entitled to recover any deferred costs unless SCW was earning less than its authorized rate of return or otherwise filed for recovery of deferred supply costs in a general rate case application. SCW intends to vigorously oppose the proposed decision and does not expect that approval of this proposal would have a material impact in its results of operation or liquidity due to the balancing account mechanism. See the section entitled "Electric Energy Situation in California" for more information. 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 wrote off the entire amount. A draft decision issued on March 30, 2001 by the CPUC allows SCW to include $500,000 of the $1.6 million in the regulated rate base. An alternate draft decision issued by one of the CPUC Commissioners proposes to deny the application. An administrative Law Judge subsequently reopened the proceeding in August 2001. A final order is not anticipated until the second quarter of 2002. 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. In October 2001, SCW entered into an agreement with a developer, which obligates the developer to make payments to SCW in exchange for SCW's reservation and dedication of up to 350 acre-feet per year of the SWP entitlement. SCW believes that its full investment and on-going costs associated with its ownership will be fully recovered. On December 26, 2000, SCW filed an Advice Letter with the CPUC, in accordance with a prior CPUC resolution authorizing such a filing, seeking recovery of approximately $1,800,000 in expenses associated with its lawsuits against Aerojet General Corporation and the Department of Water Resources of the State of California. An order, issued April 28, 2001, authorized SCW to recover these costs from customers in SCW's Arden-Cordova customer service area over a six-year period. 27On January 26, 2001, the CPUC Staff, SCW and Peerless Water Co., a privately owned water company in Bellflower, California, signed a Settlement Agreement, which recommends approval of the proposed acquisition by SCW of Peerless. A proposed decision issued on October 5, 2001 by the Administrative Law Judge denied the transaction based on findings that it was not in the public interest. The final CPUC decision is anticipated in the fourth quarter of 2001. SCW intends to vigorously oppose the proposed decision. There are no active regulatory proceedings affecting CCWC or its operations. 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 costs for each such MCL. SCW and CCWC currently test their wells and water systems according to requirements listed in the SDWA. Water from wells found to contain levels of contaminants above the established MCL's 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. AWR is currently unable to predict the ultimate impact that the 1996 SDWA amendments might have on the financial position or results of operation of its regulated utility subsidiaries. The CPUC and ACC ratemaking processes provide SCW and CCWC 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 and ACC, as appropriate. 28Proposed 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 the CCWC's surface water treatment plant. It basically extends the requirements of the ESWTR to systems serving less than 10,000 persons and will require some systems to institute changes to the return of recycled filter backwash flows within the treatment process to reduce the effects of recycled water on compromising microbial control. Registrant is presently unable to predict the ultimate impact of the LT1FBR, but it is anticipated that all five SCW's plants and the CCWC's plant will achieve compliance within the three year to five-year time frames identified by EPA. Regulation of Disinfection/Disinfection By-Products SCW and CCWC are 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 2002. 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. SCW is preparing to conduct studies in Calipatria to determine the best treatment methods to comply with this rule. It is anticipated that the EPA will adopt Stage II rules pertaining to DBP's by year-end 2001. 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 DBP's 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 2002. While no assurance can be given as to the nature and cost of any additional compliance measures, if any, SCW and CCWC do not believe that such regulations will impose significant compliance costs, since they already currently engage in disinfection of their groundwater systems. 29Regulation of Radon and Arsenic The regulation on arsenic was published in January 2001 with a new federal standard of 10 parts per billion (ppb). Compliance with an MCL of 10 ppb will require implementation of wellhead treatment remedies for eight affected wells in SCW's system and three wells in CCWC's system. However, the EPA subsequently withdrew the pending arsenic standard for a sixty-day review to seek independent reviews of both the science behind the standard and of the cost estimates to communities of implementing the rule. On October 31, 2001, EPA announced that the arsenic standard in drinking water will be 10 parts per ppb. The effective date for utilities to comply with the standard will be January 2006. It is still not clear what will happen between now and the current effective date of the arsenic regulation of February 22, 2002. No further actions by EPA would simply make this regulation become effective as of that date. The EPA has proposed new radon regulations following a National Academy of Sciences risk assessment and study of risk-reduction benefits associated with various mitigation measures. The National Academy of Sciences study is in agreement with much of EPA's original findings but has slightly reduced the ingestion risk initially assumed by EPA. EPA established an MCL of 300 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. It is our understanding that the United States Office of Management and Budget has sent the radon rule back to EPA for reconsideration. The final rule was expected to be effective in August 2000, but has been delayed by the new administration. SCW and CCWC currently monitor their wells for radon in order to determine the best treatment appropriate 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 SCW 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 SCW's 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 wells serving its Rancho-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 Rancho-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. 30In 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 Rancho-Cordova system. The wells have been removed from service. Another well was also 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 of water supply in SCW's Rancho-Cordova customer service area and has reimbursed SCW for costs associated with the drilling and equipping of two new wells. As of September 30, 2001, Aerojet-General Corp. has previously reimbursed SCW $4.5 million of the approximately $15 million in costs SCW has incurred. The remainder of the costs is subject to further reimbursement, including interest. Reimbursements received from Aerojet-General Corp. will reduce 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 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. SCW 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 SCW's 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 Metropolitan Water District of Southern California (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 although SCW is unable to predict the outcome of the EPA's enforcement efforts. 31On April 25, 2001, Registrant filed a lawsuit against all the potentially responsible parties for polluting and contaminating water existing in areas of the Sub-Basin from which SCW has pumped water through its Charnock Well Field. Management cannot predict the likely outcome of this proceeding. Matters Relating to SCW's 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 MWD 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 DOHS 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. SECURITY ISSUES Since the tragic events of September 11, 2001, water utilities, including Registrant, have been advised to increase security at key facilities in order to avoid contamination of water supplies and other disruptions of service. Registrant has implemented a number of steps to address this concern, including the engagement of a security firm to develop further protection measures. Although Registrant has not experienced any material increase in costs related to these measures, management is unable to predict what, if any, additional measures will be implemented and what such measures may cost. Registrant will address its concerns regarding recovery of significant costs with the CPUC and the ACC, although management is unable to predict if these regulatory bodies will authorize recovery of any or all of these costs. RISK FACTORSRisk Factor Summary
You should carefully read the risks described below and other information in this Form 10-Q in order to understand certain of the risks of our business.
OUR LIQUIDITY, AND IN CERTAIN CIRCUMSTANCES, EARNINGS, COULD BE ADVERSELY AFFECTED BY THE INCREASE IN ELECTRICITY PRICES IN CALIFORNIA.Our liquidity, and in certain circumstances, earnings, could be adversely affected by increases in electricity prices in California.
Under California law, we are permitted to file for a rate increase to recover electric power costs not being recovered in current rates. Increases in electric power costs generally have no direct impact on profit margins, unless recovery of these costs is disallowed, but do affect cash flows and can therefore impact the amount of our capital resources. Electric power costs
haveincreased substantially in Californiasince April 2000.during the fall of 2000 until the summer of 2001. As ofSeptember 30, 2001,March 31, 2002, SCW had accrued$19.9$24.8 million in unrecovered power costs in itswater andelectric balancingaccountsaccounts. FERC mitigation measures are expected to expire on September 30, 2002. In addition, Cal ISO has proposed a number of market reforms that could require SCW to procure substantial additional power and/or capacity. This could result in an increase in the level and volatility of electric prices in California.We have been funding these power costs from our short-term borrowing facilities. In addition, in April 2001, the Company implemented a Cash Preservation Plan to control costs and temporarily to limit
34
capital and maintenance expenditures. SCW has filed Advice Letters and an application to recover the under-collection of power costs in its water and electric balancing accounts and intends to continue to do so until such time as its actual power costs are being fully recovered in rates. However, due to the nature of the regulatory process, there is a risk of disallowance of full recovery of supply costs during any period in which there has been a substantial run-up in these costs. Any material disallowance of purchased power costs could have a material adverse impact on cash flow and earnings. In addition, we believe that timely action by
32the CPUC to authorize the recovery of these costs is necessary to avoid a material adverse effect on SCW'sSCW’s financial condition. Delays in obtaining regulatory approval or disallowance of recovery of costs could also affectSCW'sSCW’s ability to pay dividends to AWR.AWR'sAWR’s ability to pay dividends on its Common Shares is dependent upon the payment of dividends by SCW.We have reached a settlement with the CPUC Staff and all other intervening parties that would authorize us to include $0.077 per kilowatt-hour (KWh) in rates to recover our electric power costs. If our actual annual costs exceed this amount, we cannot recover the excess and the amount will be expensed against income. If our actual annual energy costs are less that $0.077 per KWh, we can use this difference to collect amounts previously included in the balancing account. We are unable to predict if the CPUC will approve the settlement and, if the settlement is approved, whether or not the CPUC will implement new rates.
The Company has established approximately $8.3 million in reserves for its Bear Valley Electric division for possible
disallowancenon-recovery ofthe recovery of pastpower costs included in the electricity supply cost balancingaccount arising out ofaccounts.Changes in water supply costs, either unit cost change or supply mix change, will directly impact the
California electric crisis as well as amounts currently in dispute with our energy supplier. THE BALANCING ACCOUNT MECHANISM, ALTHOUGH APPLICABLE TO WATER SUPPLY COSTS, DOES NOT INSULATE THE COMPANY'S EARNINGS FROM CHANGES IN WATER SUPPLY MIX. We recoverCompany’s earnings.Prior to November 29, 2001, we recovered certain water supply costs through a balancing account mechanism. Water supply costs include the cost of purchased water and power and groundwater production assessments. The balancing account
iswas not, however, designed to insulateSCW'sSCW’s earnings against changes in supply mix. As a result, SCWmaywas not permitted to recover increased costs due to increased use of purchased water, which is generally more expensive than groundwater, through the balancing account mechanism.SIGNIFICANT CLAIMS HAVE BEEN ASSERTED AGAINST US IN WATER QUALITY LITIGATION.On November 29, 2001, the CPUC ordered SCW
hasto suspend the use of all current water balancing account, and instead started a memorandum account for each offsettable expense of purchased water, purchased power and pump tax for its water service areas. We may recover certain water supply costs based on the memorandum account if we are within our rate case cycle and we are not earning an amount in excess of our authorized rate of return. SCW may not otherwise recover increased costs due to increased unit cost. Additionally, changes in water supply costs compared to the authorized amount, as well as any future authorized offset increases may directly affect our earnings.Significant claims have been asserted against us in water quality litigation.
SCW and others have been sued in
nineteentwenty water quality related lawsuits alleging personal injury and property damage as a result of the delivery of water that was allegedlycontaminated involving multiple plaintiffs and defendants. Sixteencontaminated. Seventeen of the lawsuits involve plaintiffs whoreceivereceived water from the San Gabriel Basin in Los Angeles County. The other lawsuits involve plaintiffs in Sacramento County.On September 1, 1999, the First District Court of Appeal in San Francisco held that the CPUC had preemptive jurisdiction over regulated utilities and ordered dismissal of a series of these lawsuits, including seven of the lawsuits against SCW. On October 1, 1999, one group of plaintiffs appealed this decision to the California Supreme Court, which has accepted the petition. A hearing date before the California Supreme Court is scheduled on November 7, 2001 in Sacramento. The lawsuits not involved in the appeal are currently inactive pending the decision of the California Supreme Court.In March 1998, the CPUC issued an Order Instituting Investigation as a result of water quality lawsuits being filed against water utilities in California. On November 2, 2000, the CPUC issued a final order concluding that the CPUC has jurisdiction to regulate the service of water utilities with respect to the health and safety of that service; that DOHS requirements governing drinking water quality
35
adequately protect the public health and safety; and that regulated water utilities, including SCW, have satisfactorily complied with past and present drinking water quality requirements.
IfOn February 5, 2002, the California Supreme Court
upholds the dismissal of the lawsuits, it is not known whether the plaintiffs will seek recourse through new legislation, or throughruled that water utilities regulated by the CPUC might be sued for damages based on allegations that the utility failed to comply with federal andwhat effect ifstate safe drinking water requirements. As a result, plaintiffs may proceed on their claims against SCW to the extent that these claims are based on violations of federal and state law.SCW is unable to predict the outcome of any of this
may have on us. Iflitigation or theCalifornia Supreme Court permits these lawsuitsextent toproceed, the lawsuitswhich it will betried on the merits. 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 mayable to recover its litigation costs from ratepayers or other third parties.Our operating costs have increased and are expected to
the extent authorized by the CPUC. The CPUC has not yet authorized SCWcontinue torecover anyincrease as a result ofits litigation costs. As of September 30, 2001, SCW had incurred $888,700 in this memorandum account. OUR OPERATING COSTS HAVE INCREASED AND ARE EXPECTED TO CONTINUE TO INCREASE AS A RESULT OF GROUNDWATER CONTAMINATION. 33SCW'sgroundwater contamination.SCW’s operations have been impacted by groundwater contamination in certain of its service territories. We have taken a number of steps to address this contamination, including the removal of wells from service, the construction of water treatment facilities and securing alternatives sources of supply from other areas not affected by the contamination.
In some cases,
wepotentially responsible parties havebeenreimbursed us for ourcosts by potentially responsible parties.costs. In other cases, we have taken legal action against parties that we believe to be potentially responsible for the contamination.Certain government officials have suggested that water producers, such as SCW and CCWC, may have liability under certain environmental statutes if their pumping operations affect the movement of the contamination. SCW has been required to remove certain wells from service because its pumping activities might affect the movement of contamination in other service areas. Currently, neither the Environmental Protection Agency nor any other governmental agency has identified the Company or, to our knowledge, any other water producer, as a potentially responsible party. We cannot assure you, however, that SCW or CCWC will not be identified as a potentially responsible party in the future. Our future results of operations could be adversely affected if either SCW or CCWC is required to pay clean-up costs and is not allowed to recover such costs in rates.
ENVIRONMENTAL REGULATION HAS INCREASED, AND IS EXPECTED TO CONTINUE TO INCREASE, OUR OPERATING COSTS.Environmental regulation has increased, and is expected to continue to increase, our operating costs.
SCW and CCWC are 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 maximum contaminant levels - Approved regulations requiring increased surface-water treatment to decrease the risk of microbial contamination; these regulations will affect SCW's five surface water treatment plants and one CCWC plant - 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 in 2001 requiring disinfection of certain groundwater systems - Currently pending regulation of arsenic and radon -
• The 1996 amendments to the Safe Drinking Water Act that require increased testing and treatment of water to reduce specified contaminants to maximum contaminant levels • Approved regulations requiring increased surface-water treatment to decrease the risk of microbial contamination; these regulations will affect SCW’s five surface water treatment plants and one CCWC plant • 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 requiring disinfection of certain groundwater systems • Currently pending regulation of arsenic and radon • California customer requirements to fluoridate public water systems serving over 10,000 customers 36
Reduction in the action level for ammonium perchlorate to 4 ppb in 2002; we have removed 8 wells from service due to the presence ammonium perchlorate above action levels.SCW and CCWC may be able to recover costs incurred to comply with these regulations through the ratemaking process for their regulated systems. We may also be able to recover certain of these costs under our contractual arrangements with municipalities. In certain circumstances, we may be able to recover costs from parties responsible or potentially responsible for contamination.
THE ADEQUACY OF OUR WATER SUPPLIES DEPENDS UPON A VARIETY OF FACTORS BEYOND OUR CONTROL.The adequacy of our water supplies depends upon a variety of factors beyond our control.
The adequacy of our water supplies varies from year to year depending upon a variety of factors, including:
- Rainfall - The amount of water stored in reservoirs - The amount of water used by our customers and others - Water quality, and 34-
• Rainfall • Availability of Colorado River water • The amount of water stored in reservoirs • The amount of water used by our customers and others • Water quality, and • Legal limitations on use Population growth and increases in the amount of water used have increased limitations on use to prevent over-drafting of groundwater basins. The import of water from the Colorado River, one of
SCW'sSCW’s important sources of supply, is expected to decrease in future years due to the requirements of the Central Arizona Project("CAP"(“CAP”). We have also taken wells out of service due to groundwater contamination.CCWC obtains its water supply from operating wells and from the Colorado River through the CAP.
CCWC'sCCWC’s water supply may be subject to interruption or reduction if there is an interruption or reduction in CAP water.Water shortages may affect us in a variety of ways:
- They adversely affect supply mix by causing us to rely on more expensive purchased water - They adversely affect operating costs -
• They adversely affect supply mix by causing us 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. We may also be able to recover certain of these costs under the terms of our contractual agreements with municipalities. In certain circumstances, we may recover these costs from third parties that may be responsible, or potentially responsible, for groundwater contamination.
OUR EARNINGS ARE GREATLY AFFECTED BY WEATHER DURING DIFFERENT SEASONS.Our earnings are greatly affected by weather during different seasons.
The demand for water and electricity varies by season. Therefore, the results of operations for one period may not indicate results to be expected in another period. For instance, most water consumption occurs during the third quarter of each year when weather tends to be hot and dry. On warm days, use of water by residential and commercial customers may be significantly greater than on cold days because of the increased use of water for outdoor landscaping. Likewise the demand for electricity
37
in our Big Bear service area is greatly affected by winter snows. An increase in winter snows reduces the use of snow making machines at ski resorts in the Big Bear area and, as a result reduces electric revenues.
Variability of weather from normal temperatures or changes in snow or rainfall can materially impact results of operations. As a result, weather has been and will continue to be one of the dominant factors in our financial performance.
OUR BUSINESS IS HEAVILY REGULATED AND, AS A RESULT DECISIONS BY REGULATORY AGENCIES AND CHANGES IN LAWS AND REGULATIONS CAN SIGNIFICANTLY AFFECT OUR BUSINESS.Our business is heavily regulated and, as a result, decisions by regulatory agencies and changes in laws and regulations can significantly affect our business.
Our revenues depend substantially on the rates that we are permitted to charge our customers and our ability to recover our costs in these rates, including the ability to recover the costs of purchased water, groundwater assessments and electric power costs in rates. In April 1999, the CPUC denied our request to recover through rates the costs associated with our participation in the Coastal Aqueduct Extension of the State Water Project. We also have an application pending before the CPUC to include an additional $1.6 million in rate base for a water treatment plant in
SCW'sSCW’s Clearlake service area that was previously disallowed by the CPUC in 1993. In addition, we haveapplicationsan application pending toacquire the Peerless Water Co. and torecoveradditional amounts inourwater and electric balancing accounts. 35current energy costs. We have been adversely affected by electric restructuring in California and the escalation of energy costs attributable thereto. The California Department of Water Resources has attempted to alleviate the crisis by purchasing electricity for Pacific Gas and Electric Company, Southern California Edison Company and San Diego Gas and Electric Company, but does not purchase any electricity for our Bear Valley electric division. FERC has taken certain actions intended to stabilize the energy market in the
West and has ordered evidentiary proceedings forWest. These mitigation measures expire on September 30, 2002. Registrant is unable to predict what impact thepurposeexpiration ofdetermining the amount of refundsthese measures will have on electric prices.Cal ISO expects to propose additional market reforms that may
be duesubstantially increase the costs of SCW. This could have a material adverse impact on SCW if SCW is unable todirect participants in the Cal-ISO and Cal-PX markets. We are not direct participants inrecover thesemarkets. We therefore do not believe that this or anyincreased costs from its ratepayers.SCW has filed a complaint with FERC seeking a reduction of the
other proceedings currently pending before FERC will result, either directly or indirectly,rates inany reduction in SCW'sits power purchase contract with Mirant Marketing to a just and reasonable price. Registrant is unable to predict the outcome of this proceeding. SCW has also filed an Advice Letter with the CPUC seeking to recover the costs of its power supply costs previously incurred and expected to be incurred undercollected power costs inits contracts with Mirant Marketing and Pinnacle West Capital. SCW has reached a settlement regarding thenear term, if at all. OUR BUSINESS REQUIRES SIGNIFICANT CAPITAL EXPENDITURES.recovery of a substantial portion of these costs. This settlement has not yet been approved by the CPUC.Our business requires significant capital expenditures.
The utility business is capital intensive. On an annual basis, we spend significant sums for additions to or replacement of property, plant and equipment. During calendar years 2001, 2000
1999and1998,1999, we spent$45,786,000,$50,253,000, $45,982,000, and $51,578,000,and $45,269,000,respectively, for these purposes. Our budgeted capital expenditures for calendar year20012002 for these purposes are approximately$50,400,000. Actual expenditures for 2001 are expected to be lower because of the cash preservation plan adopted by the Company to conserve cash temporarily during the electric energy crisis.$56,774,000.We obtain funds for these capital projects from operations, contributions by developers and others and advances from developers (which must be repaid). We also periodically borrow money or issue equity for these purposes. We maintain bank lines of credit that we can use for these purposes. We cannot assure you that these sources will continue to be adequate or that the
costscost of funds will remain at levels permitting us to remain profitable.ITEM38
Accounting Standard
In June of 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” on the accounting for obligations associated with the retirement of long-lived assets. Registrant believes that it will be subject to the provisions of SFAS No. 143 and is currently analyzing the impact that implementation of FASB No. 143 might have on its future financial statement presentation. The new rule requires businesses to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market RiskRegistrant has no derivative financial instruments, financial instruments with significant off-balance sheet risks or financial instruments with concentrations of credit
risk. The disclosurerisk except for the block-forward purchase power contracts that meet the normal purchase exception rule under FASB 133, “Accounting for Derivative Instruments and Hedging Activities.” Under the terms of its power purchase contracts with Mirant Marketing and Pinnacle West Capital, SCW is required to post security, at the request of the seller, if SCW istherefore, not applicable.in default under the terms of the contract. For further information, see the section entitled“Contractual Obligations and Other Commitments”included in Part I, Item 2 in Management’s Discussion and Analysis of Financial Condition and Results of Operation.PART II
ITEMItem 1.
LEGAL PROCEEDINGSLegal ProceedingsWater Quality-Related Litigation
SCW is a defendant in
nineteentwenty lawsuits involving claims pertaining to water quality.SixteenSeventeen of the lawsuits involve customer service areas located in Los Angeles County in the southern portion of the State ofCalifornia; threeCalifornia that have been filed in Los Angeles Superior Court: Adler v. Southern California Water Company, et al., Case No. BC169892, Santamaria v. Suburban Water Systems, et al., Case No. CIV180894, Georgianna v. Dominguez et al. v. Southern California Water Company, et al., Case No. G021657, Anderson, et al. v. Suburban Water Company, et al., Case No. KC028524, Abarca, et al. v. City of Pomona, et al., Case No. K027795, Celi, et al. v. San Gabriel Valley Water Company, Case No. GC020622, Boswell et al. v. Suburban Water Systems, et al., Case No. KC027318, Demciuc et al. v. Suburban Water Systems, et al., Case No. C028732, Adejare, et al. v. Southern California Water Company, Case No. KC031096, Almelia Brooks, et al. v. Suburban Water System, et al., Case No. KC032915, Lori Alexander, et al. v. Suburban Water Systems, et al., Case No. KC031130, David Arnold, et al. v. City of Pomona, et al., Case No. KC034636, Gilda Ambrose-Dubre, et al. v. City of Pomona, et al., Case No. KC032906, Melissa Garrity Alvarado, et al. v. Suburban Water Systems et al., Case No. KC034953 , Charles Alexander, et al. v. City of Pomona, et al., Case No KC035526, Criner, et al. v. San Gabriel Valley Water Company, et al., Case No. GC021658, and Donerson, et al. v. City of Pomona, et al., Case No. KC035987. The lawsuits filed in Los Angeles County Superior Court are based on the allegations that SCW and the other defendants have provided and continue to provide plaintiffs with contaminated water from wells located in an area of the San Gabriel Valley that has been designated a federal superfund site, that the maintenance of this contaminated well water has resulted in contamination of the soil, subsurface soil and surrounding air with trichloroethylene (TCE),39
perchloroethene (PCE), carbon tetrachloride and other solvents and that plaintiffs have been injured and their property damaged as a result. Three of the lawsuits involve a customer service area located in Sacramento County in northern
California. 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), heldCalifornia thatthe 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 SCWhave beenordered 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 appealed to the California Supreme Court, which has accepted the case. A hearing date before the California Supreme Court on the Hartwell cases is scheduled on November 7, 2001 in Sacramento. Management is unable to predict the 36outcome 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 inLos AngelesSacramento County SuperiorCourt 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 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, 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 ofCourt: Nathaniel Allen, Jr. v. Aerojet-General Corporation, et al., Case No. 97AS06295, Daphne Adams, et al. v. Aerojet-General Corporation, et al.(Case, Case No.10)98AS01025, and Wallace Andrew Pennington et al. v. Aerojet-General Corporation, et al.,which wasCase No. 00AS02622. The lawsuits filed in Sacramento County SuperiorCourt. The complaint makes claimsCourt are based onwrongful death, personal injury, property damage as a result of nuisance and trespass, medical monitoring, and diminution of property values (the Allen Matter). Plaintiffs allegethe allegations that SCW and other defendants have delivered water to plaintiffswhich allegedlythat isor has been in the past,contaminated with a number of chemicals, including, TCE, PCE, carbon tetrachloride, perchlorate, Freon-113, hexavalent chromium and other unnamedchemicals. SCW filed Demurrerschemicals andMotionthat plaintiffs have been injured and their property damaged as a result.On September 1, 1999, the Court of Appeals in San Francisco held that the CPUC had preemptive jurisdiction over regulated public utilities with respect to
Strike inwater quality matters and ordered dismissal of a series of these lawsuits. On October 11, 1999, one group of plaintiffs appealed thismatter on June 5, 1998. A stay of all proceeding in the Allen matter is in effect pending the outcome ofdecision to the California SupremeCourt's proceeding inCourt. On February 4, 2002, theHartwell case. In March 1998, SCW was named a defendant inCalifornia Supreme Court concluded that (i) thematter 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 makesCPUC had preemptive jurisdiction over claims seeking injunctive relief and claims based onnegligence, strict liability, trespass,the theory that a publicnuisance, private nuisance, negligence per se, absolute liability for ultrahazardous activity, fraudulent concealment, violation of California Businessutility regulated by the CPUC provided unsafe drinking water even though it had complied with federal andProfessions 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 proceedings instate drinking water standards, but (ii) theAdams 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 makesCPUC did not have preemptive jurisdiction over damage claims based onnegligence, intentional inflictionallegations ofemotional distress, strict liability, public liability for ultra hazardous activityviolations of federal andfraudulent concealment. Plaintiffs allege that SCW and other defendants knowingly operated and maintained wells, which provided contaminatedstate drinking watertostandards by public utilities regulated by thesurrounding communities. Plaintiffs seek damages, including general, punitiveCPUC. As a result, damage claims based on allegations of violations of federal andexemplary 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, andstate drinking water standards may proceed while the otherunspecified relief. All counsels in the Pennington matter have agreed to a stay in this matter, pending the outcome of the Hartwell case. 37In 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 concealment, conspiracy/fraudulent concealment, battery and unfair business practices on behalf of plaintiffs (the L. 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 December 2000, SCW was named a defendant in the matter of David Arnold, et al. v. City of Pomona, et al. (Case No. 15) that was filed in Los Angeles Superior Court which seeks recovery for negligence, wrongful death, strict products liability, continuing trespass, permanent 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 Arnold 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 May 2001. Management is unable to predict the outcome of this proceeding. In December 2000, SCW was named a defendant in the matter of Gilda Ambrose-Dubre, et al. v. City of Pomona, et al. (Case No. 16) that was filed in Los Angeles Superior Court which seeks recovery for negligence, strict products liability, continuing trespass, permanent trespass, continuing nuisance, permanent nuisance, negligence per se, absolute liability for ultrahazardous activity, fraudulent concealment, civil conspiracy/fraudulent concealment, battery and unfair business practices on behalf of plaintiffs (the Ambrose-Dubre 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 May 2001. Management is unable to predict the outcome of this proceeding. In January 2001, SCW was named a defendant in the matter of Melissa Garrity Alvarado, et al. v. Suburban Water Systems, et al. (Case No. 17) that was filed in Los Angeles Superior Court which seeks recovery for negligence, survival of personal injuries, wrongful death, strict liability, negligence per se, absolute liability for ultrahazardous activity, fraudulent concealment, conspiracy/fraudulent concealment, battery and unfair business practices on behalf of plaintiffs (the Alvarado 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 May 2001. Management is unable to predict the outcome of this proceeding. In March 2001, SCW was named a defendant in the matter of Charles Alexander, et al. v. City of Pomona, et al. (Case No. 18) that was filed in Los Angeles Superior Court which seeks recovery for negligence, wrongful death, strict products liability, continuing trespass, permanent trespass, continuing nuisance, permanent nuisance, negligence per se, absolute liability for ultrahazardous activity, fraudulent concealment, civil conspiracy/fraudulent concealment, battery and unfair business practices on behalf of plaintiffs (the C. Alexander Matter). Plaintiffs seek damages, including general and special damages 38according to proof, punitive and exemplary damages, as well as attorney's fees, costs of suit and other unspecified relief. SCW was served in May 2001. Management is unable to predict the outcome of this proceeding. In May 2001, SCW was named a defendant in the matter of Jennifer V. Williams and Lee Wright, et al. v. City of Pomona, et al. (Case No. 19) that was filed in Los Angeles Superior Court which seeks recovery for negligence, strict products liability, continuing trespass, permanent trespass, continuing nuisance, permanent nuisance, negligence per se, absolute liability for ultrahazardous activity, fraudulent concealment, civil conspiracy/fraudulent concealment, battery and unfair business practices on behalf of plaintiffs (the J. Williams 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. Management is unable to predict the outcome of this proceeding.claims must be dismissed.In light of the breadth of
plaintiffs'plaintiffs claims,in these matters,the lack of factual information regardingplaintiffs'plaintiffs claims and injuries, if any, the impact of the California Supreme Court decision on plaintiffs claims 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. Based upon the information currently available to it, Registrant believestherethat these claims areno merits to these claimswithout merit and intends to vigorously defendagainst them.these claims.SCW is subject to self-insured retention provisions in its applicable insurance policies and has either expensed the self-insured amounts or has reserved against payment of these amounts as appropriate.
SCW'sSCW’s various insurance carriers have, to date, provided reimbursement for costs incurred above the self-insured amounts for defense against theselawsuits. ORDER INSTITUTING INVESTIGATIONlawsuits, subject to a reservation of rights.Order Instituting Investigation (OII)
In March 1998, the CPUC issued an OII to regulated water utilities in the state of California, including SCW. The purpose of the OII was to determine whether existing standards and policies regarding drinking water quality adequately protect the public health and whether those standards and policies were being uniformly complied with by those water utilities. On November 2, 2000, a final decision from the CPUC concluded that the Commission has the jurisdiction to regulate the service of water utilities with respect to the health and safety of that service; that
DOHSthe California Department of Health Services requirements governing drinking water quality adequately protect the public health and safety; and that regulated water utilities, including SCW, have satisfactorily complied with past and present drinking water quality requirements.The CPUC had previously authorized establishment of memorandum accounts to capture expenses related to the OII. 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,December 31, 2001, SCW hadincurredrecorded a net of$888,700$888,800 in this40
memorandum account. Management believes that these expenses will be fully recovered but is unable to predict when, or if, the CPUC will authorize recovery of all or any of the costs.
OTHER LITIGATIONOther Water Quality Litigation
On October 25, 1999, SCW filed a lawsuit against the California Central Valley 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'sSCW’s Rancho Cordova customer service area.ManagementSCW and the CRWQCB have entered into mediation regarding this matter but management cannot predict the likely outcome of thisproceeding.process or the likelihood of a favorable outcome should this matter go to trial.In a separate case, also filed on October 25, 1999, SCW sued
Aerojet General Corp.Aerojet-General Corporation (Aerojet) for causing the contamination of the Sacramento County Groundwater Basin. On March 22, 2000, AerojetGeneral Corp.filed a cross complaint against SCW for negligence and constituting a public nuisance. Registrant39is 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.these proceedings.The CPUC has authorized memorandum accounts to allow for recovery of costs incurred by SCW in prosecuting
these casesthe suits filed against CRWQCB and Aerojet from customers, less any recovery from the defendants or others. As ofSeptember 30, 2001,March 31, 2002, approximately$5,313,500$7,620,000 has been recorded in the memorandum accounts. The CPUC has authorized SCW to increase rates, effective April 28, 2001, for recovery over a six-year period of approximately $1,800,000, in expenses that were incurred on or before August 31, 2000. SCW will continue to file additional Advice Letters to recover the remaining costs. Management believes these costs are recoverable but cannot give assurance that the CPUC will ultimately allow recovery of all or any of the remaining costs through rates.On April 25, 2001, Registrant filed a lawsuit against all the potentially responsible parties, who stored, transported and dispensed gasoline containing methyl tertiary butyl ether (MTBE) in underground storage tanks, pipelines or other related infrastructure.
SaidMTBEpolluted andcontaminated waterexistedexisting in areas of theSub-Basinbasin from which SCW has pumped water through its CharnockWallWell Field. As a result,thereof,SCW ceased operation of its Charnock Well Field in October 1996.Management cannot predictIn March 2002, Registrant has reached an agreement in this matter that assigns thelikely outcomeprosecution ofthis proceeding.litigation against the potentially responsible parties to the City of Santa Monica, California (Santa Monica). As part of the agreement executed on March 19, 2002 and in exchange for an assignment payment, SCW granted its water rights in the Charnock Basin to Santa Monica and Santa Monica prosecutes the case against the potentially responsible parties.Electric Service Litigation
SCW has been, in conjunction with the Southern California Edison (Edison) unit of Edison International, planning to upgrade transmission facilities to 115kv (the 115kv Project) in order to meet increased energy and demand requirements for
SCW'sSCW’s Bear Valley Electric Service area. On December 27, 2000, SCW filed a lawsuit against Edison for declaratory relief and seeking damages for breach of contract as a result of delays in the 115kv Project. Subsequently Edison filed a cross-complaint against SCW for breach of contract, anticipatory breach, and quantummeruit and common counts.meruit. Registrant has discussed various settlement options with Edison regarding this matter. However, management cannot predict the likely outcome ofeither the negotiations or the lawsuits.this matter.41
Other Litigation
Registrant is also subject to ordinary routine litigation incidental to its business. Other than as disclosed above, no legal proceedings are pending, except such incidental litigation, to which Registrant is a party or of which any of its properties is the subject, which are believed to be material.
ITEMItem 2.
CHANGES IN SECURITIESChanges in SecuritiesAs of
September 30, 2001,March 31, 2002, earned surplus amounted to$75,027,000. As of September 30, 2001, there were no retained earnings$75,055,000. Neither AWR nor ASUS is subject to any contractual restriction on its ability to pay dividends. SCW’s maximum ability to pay dividends is restrictedunder any of SCW's debt instruments, asby certain Note Agreements to thepaymentsum of $21 million plus 100% of consolidated net income plus the aggregate net cashdividends on Common Shares.proceeds received from capital stock offerings or other instruments convertible into capital stock. Delays in obtaining approval of the CPUC for recovery of energy costs in rates or disallowance of the recovery of such costs could also affectSCW'sSCW’s ability to pay dividends to AWR.AWR'sAWR’s ability to pay dividends on its Common Shares is dependent upon the payment of dividends from SCW. The ability of AWR, ASUS and SCW to pay dividends is also restricted by its retained earnings, respectively, under California law.CCWC is subject to contractual restrictions on its ability to pay dividends. CCWC’s maximum ability to distribute dividends is limited to maintenance of no more than 55% debt in the capital structure for the quarter immediately preceding the distribution. The ability of CCWC to pay dividends is also restricted by Arizona law. Under restrictions of the Arizona tests, approximately $3.3 million was available to pay dividends to Common Shareholders at March 31, 2002.
There are
493,039492,431 and63,41162,400 Common Shares authorized but un-issued under the DRP and the 401(k) Plan, respectively, atSeptember 30, 2001.March 31, 2002. Shares reserved for the 401(k) Plan are in relation to company matching contributions and for investment purposes by participants. During the first quarter of 2002, 1,619 common shares were issued pursuant to the terms of both the DRP and the 401(k) Plans. There are 250,000 Common Shares reserved for issuance underRegistrant'sRegistrant’s 2000 Stock Incentive Plan. Under the Plan, stock options representing a total of91,64791,092 Common Shares upon exercise were granted to certain eligible employees on May 1, 2000 and January 2, 2001.40ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No items were submitted during the second quarterAll of the
fiscal year covered by this reportseries of Preferred Shares outstanding at March 31, 2002 are redeemable at the option of AWR. On April 5, 2002, Registrant redeemed the 4% and 4% series of $25 Preferred Shares at the redemption price $27.00 and $26.50 per share, respectively, plus accrued and unpaid dividends to the redemption date. Subsequently on April 19, 2002, the 5% Series was redeemed at $25.25 per share plus accrued and unpaid dividends to the redemption date.Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On or about March 22, 2002, common and preferred shareholders of AWR were mailed a Notice of Annual Meeting and a Proxy Statement. Shareholders were requested to vote their shares for the election of
security holders througha slate of four Class II directors to serve for a two-year term expiring at thesolicitationend ofproxiesthe Annual Meeting of Shareholders in 2004, orotherwise. ITEMuntil their successors are chosen and qualified. The table on the next page presents the voting results of the election presented at the Annual Meeting of Shareholders held on April 30, 2002:42
Name “Votes For” “Votes Withheld” Jean E. Auer 855,582 9,777 N.P. Dodge, Jr. 854,075 11,284 Robert F. Kathol 855,194 10,165 Lloyd E. Ross 855,330 10,029 Item 5.
OTHER INFORMATIONOther InformationOn
OctoberApril 30,2001,2002, the Board of Directors of Registrant declared a regular quarterly dividend of $0.325 per common share. The dividend will be paidDecemberJune 1,20012002 to shareholders of record as of the close of business onNovember 6, 2001. In other actions, the Board of Directors declared regular quarterly dividends of $0.25 per share, $0.265625 per shareMay 8, 2002.Item 6. Exhibits and
$0.3125 per shareReports onits 4%, 4-1/4% and 5% Cumulative Preferred Shares, respectively. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K There are no Exhibits during the period covered by the report. Registrant filed aForm 8-Kwith the Securities and Exchange Commission on May 25, 2001, disclosing the CPUC order to increase rates at the Bear Valley Electric customer service area to recover $2.4 million in deferred electric power costs over a five-year period. Included as an exhibit to the form 8-K was the press release issued by Registrant on May 25, 2001 for the announcement. Registrant filed another Form 8-K with the Securities and Exchange Commission on August 24, 2001, which disclosed that the CPUC authorized an increase in rates at the Bear Valley Electric customer service area to recover $8.7 million in deferred electric power costs over a five-year period. Included as an exhibit to the form 8-K was the press release issued by Registrant on August 23, 2001 for the announcement. 41
(a) Exhibits:
10.17 American States Water Company Annual Incentive Plan, as amended April 29, 2002.(1)(2) 10.26 American States Water Company Three-Year Dividend Equivalent Right Certificate.(1)(2) 99 Management’s letter pursuant to Temporary Note 3T to Article 3 of Regulation S-X.(1)
(b) Registrant filed a Form 8-K with the Securities and Exchange Commission on April 30, 2002, disclosing a three-for-two split of Registrant’s common stock payable on June 7, 2002 to holders of record on May 15, 2002. Fractional shares will be paid in cash. As a result of the stock split, the total number of Common Shares outstanding will increase from approximately 10.1 million to approximately 15.2 million.
(1) Filed concurrently herewith (2) Management contract or compensatory arrangement 43
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
AMERICAN STATES WATER COMPANY
and its subsidiary
SOUTHERN CALIFORNIA WATER COMPANYBy: /s/ McClellan Harris III McClellan Harris III
Vice President-Finance,
Chief Financial Officer,
Treasurer and SecretaryBy: /s/ Linda J. Matlick Linda J. Matlick
Controller
Southern California Water CompanyDated:
November 5, 2001 42May 9, 200244