UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-------
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
_____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________ to________________
Commission file number: 0-8176
Southwest Water Company
(Exact name of registrant as specified in its charter)
Delaware 95-1840947
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605
(Address of principal executive offices) (Zip Code)
(626) 915-1551
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
-
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. On November 10, 2000, there
were 6,821,118 common shares outstanding.
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
- ------- ---------------------- --------
Item 1. Financial Statements:
Condensed Consolidated Statements of Income -
Three and Nine months Ended September 30, 2000 and 1999 1
Condensed Consolidated Balance Sheets -
As of September 30, 2000 and December 31, 1999 2
Condensed Consolidated Statements of Cash Flows -
Nine months Ended September 30, 2000 and 1999 3
Notes to Condensed Consolidated Financial Statements 4 - 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6 - 10
Part II. Other Information:
- -------- ------------------
Item 1. Legal Proceedings 10-11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
- -------------------------------------------------------------------------------------- -----------------------------
2000 1999 2000 1999
- -------------------------------------------------------------------------------------- -----------------------------
(in thousands except per share data)
Operating Revenues $ 31,080 $ 22,911 $ 78,256 $ 59,014
Operating Expenses:
Direct operating expenses 23,318 16,823 59,012 43,397
Selling, general and administrative 3,158 2,849 9,740 8,628
- --------------------------------------------------------------------------------------- -----------------------------
26,476 19,672 68,752 52,025
Operating Income 4,604 3,239 9,504 6,989
Other Income (Expense):
Interest expense (1,023) (722) (2,784) (2,228)
Interest income 190 16 293 52
One-time gain on sale of former office property 0 2,747 0 2,747
Other (218) 231 (238) 483
- --------------------------------------------------------------------------------------- -----------------------------
(1,051) 2,272 (2,729) 1,054
Income Before Income Taxes 3,553 5,511 6,775 8,043
Provision for income taxes 1,421 2,204 2,710 3,217
- --------------------------------------------------------------------------------------- -----------------------------
Net Income 2,132 3,307 4,065 4,826
Dividends on preferred shares 7 7 21 21
- --------------------------------------------------------------------------------------- -----------------------------
Net Income Available for Common Shares $ 2,125 $ 3,300 $ 4,044 $ 4,805
======================================================================================= =============================
Earnings per Common Share (Note 4):
Basic $ 0.33 $ 0.51 $ 0.62 $ 0.75
Diluted $ 0.31 $ 0.49 $ 0.60 $ 0.73
======================================================================================= =============================
Cash Dividends per Common Share (Note 4) $ 0.07 $ 0.05 $ 0.19 $ 0.16
======================================================================================= =============================
Weighted Average Outstanding Common Shares (Note 4):
Basic 6,481 6,418 6,479 6,393
Diluted 6,742 6,729 6,750 6,621
======================================================================================= =============================
See accompanying notes to condensed consolidated financial statements.
1
Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
- ----------------------------------------------------------------------------------------------------------------
ASSETS 2000 1999
- ----------------------------------------------------------------------------------------------------------------
(unaudited)
(in thousands)
Current Assets:
Cash and cash equivalents $ 533 $ 4,146
Customers' accounts receivable, net 20,823 10,465
Other current assets 5,715 3,700
- ----------------------------------------------------------------------------------------------------------------
27,071 18,311
Property, Plant and Equipment:
Utility property, plant and equipment -- at cost 167,099 152,624
Contract operations property, plant and equipment -- at cost 6,850 5,654
- ----------------------------------------------------------------------------------------------------------------
173,949 158,278
Less accumulated depreciation and amortization 48,606 44,581
- ----------------------------------------------------------------------------------------------------------------
125,343 113,697
Other Assets 16,972 10,942
- ----------------------------------------------------------------------------------------------------------------
$ 169,386 $ 142,950
================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current portion of long-term debt and bank notes payable $ 2,697 $ 2,039
Accounts payable 3,175 2,081
Other current liabilities 15,063 12,486
- ----------------------------------------------------------------------------------------------------------------
20,935 16,606
Other Liabilities and Deferred Credits:
Long-term debt 28,000 28,000
Bank notes payable 17,700 5,454
Advances for construction 8,095 7,930
Contributions in aid of construction 36,658 34,519
Deferred income taxes 6,590 6,146
Other liabilities and deferred credits 7,756 3,818
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities and Deferred Credits 125,734 102,473
Stockholders' Equity
Cumulative preferred stock 514 517
Common stock 65 64
Paid-in capital 31,445 31,080
Retained earnings 11,628 8,816
- ----------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 43,652 40,477
- ----------------------------------------------------------------------------------------------------------------
$ 169,386 $ 142,950
================================================================================================================
See accompanying notes to condensed consolidated financial statements.
2
Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
- ---------------------------------------------------------------------------------------------------------------
2000 1999
- ---------------------------------------------------------------------------------------------------------------
(in thousands)
Cash Flows From Operating Activities:
Net Income $ 4,065 $ 4,826
Adjustments to reconcile net income to
net cash provided by (used in) operating activities (2,196) 980
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,869 5,806
- ---------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Additions to property, plant and equipment (13,612) (5,308)
Other investments, net (5,716) 125
Gross proceeds from sale of land 0 4,000
Net proceeds from sale of land trasferred to accomodator 0 (3,883)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (19,328) (5,066)
- ---------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net proceeds (repayments) on bank notes payable 12,904 (1,322)
Contributions in aid of construction and advances for construction 1,203 1,020
Net proceeds from dividend reinvestment plan,
employee stock purchase plan, and stock option plans 758 735
Advances for construction 325 0
Dividends paid (1,184) (1,044)
Payments on advances for construction (160) (285)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in financing activities 13,846 (896)
- ---------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (3,613) (156)
Cash and cash equivalents at beginning of period 4,146 394
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 533 $ 238
===============================================================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 2,582 $ 2,009
Income taxes $ 867 $ 1,490
Depreciation and amortization $ 3,775 $ 3,345
Non-cash contributions in aid of construction
conveyed to Company by developers $ 1,517 $ 1,624
See accompanying notes to condensed consolidated financial statements.
3
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
1. Southwest Water Company (the Company or Registrant), together with its
subsidiaries, provides a broad range of utility and utility management
services. The Company serves more than one million people in 29 states from
coast to coast. Through its wholly owned subsidiary, ECO Resources, Inc.
(ECO), the Company operates and manages water and wastewater treatment
facilities owned by cities, municipal utility districts and private
entities. Nationwide, the Company provides utility submetering, billing and
collection services through its 80 percent-owned subsidiary, Master Tek
International, Inc. (Master Tek). The Company owns and operates water and
wastewater utilities through two wholly owned subsidiaries, Suburban Water
Systems (Suburban) and New Mexico Utilities, Inc. (NMUI). In 1996, the
Company acquired a 49 percent interest in Windermere Utility Company
(Windermere) located near Austin, Texas, and in October 2000, the Company
closed the purchase agreement for an 80 percent interest ownership in
Windermere, as well as 100 percent ownership of Hornsby Bend Utility
Company (Hornsby), an adjacent water utility. (See Note 5 to the condensed
consolidated financial statements.) The unaudited condensed consolidated
financial statements reflect all adjustments, which, in the opinion of
management, are necessary to present fairly the financial position of the
Company as of September 30, 2000, and the Company's results of operations
for the three and nine months ended September 30, 2000. All such
adjustments are of a normal recurring nature. Certain reclassifications
have been made to the 1999 financial statements to conform to the 2000
presentation.
2. 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 the rules and
regulations of the Securities and Exchange Commission. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and related notes contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 (the 1999 Annual
Report).
3. There is seasonality to the water utility and utility management industry;
thus, the results of operations for the nine months ended September 30,
2000 do not necessarily indicate the results to be expected for the full
year. Rainfall and weather conditions affect utility operations, with most
water consumption occurring during the third quarter of each year when
weather tends to be hot and dry. Drought conditions would have the effect
of lowering revenue due to conservation efforts. The Company's contract
operations business can also be seasonal in nature. Heavy rainfall hampers
the Company's ability to perform billable work such as pipeline
maintenance, manhole rehabilitation and other outdoor services. Moderate
rainfall may create additional opportunities for billable work outside the
scope of existing contracts. Drought conditions would not necessarily
affect the Company's opportunities for additional billable work.
4. The Company records earnings per share (EPS) by computing basic EPS and
diluted EPS in accordance with generally accepted accounting principles.
Basic EPS is used to measure the performance of the Company over the
reporting period by dividing net income available to common stockholders by
the weighted average number of common shares outstanding during the period.
Diluted EPS is used to measure the performance of the Company over the
reporting period after giving effect to all dilutive potential common
shares that would have been outstanding if the dilutive common shares had
been issued. Stock options give rise to dilutive common shares.
5. In 1996, the Company acquired a 49 percent interest in Windermere, a
regulated water utility located near Austin, Texas. During October 2000,
the Company reached an agreement with the majority shareholder and
purchased 80 percent of the utility from the majority shareholder. The
former majority shareholder retains a 20 percent interest in Windermere.
The purchase agreement provides that the Company has the right to acquire
the remaining 20 percent of ownership after five years at a price based
upon the performance of the Company Stock. The Company also purchased
Hornsby, a water and wastewater utility, also located near Austin, Texas.
The
4
purchases were made for a total purchase price of $4,000,000 in common
stock. The Company also entered into a consulting agreement with the owner
of the remaining 20 percent of Windermere to provide certain services to
the Company. Windermere and Hornsby currently provide water and wastewater
services to nearly 4,500 customers.
6. In April 2000 the Company purchased 80 percent of the outstanding shares of
Master Tek, a nationwide provider of utility submetering, billing and
collection services, for a purchase price of $4,000,000. The purchase price
consisted of a $2,000,000 cash payment upon closing and a 10-year,
$2,000,000 promissory note. The purchase agreement provides that the
Company has the right to acquire the remaining 20 percent ownership over
the next 10 years for a price based on a formula related to the financial
performance of Master Tek. In addition, the Company entered into an
employment agreement, a consulting agreement and a non-compete agreement
with the owner of the remaining 20 percent of Master Tek as is customary in
transactions of this type. Submetering involves the installation of
electronic equipment in apartments, condominiums, mobile home parks and
other multi-family dwellings to allow the monitoring of water, gas and
electricity consumption for each individual residential unit. Master Tek
serves more than 200,000 dwelling units in 29 states and, in 1999,
generated revenues of more than $5,000,000.
7. Suburban purchased the City of West Covina's water distribution system and
facilities (West Covina System) for approximately $9.4 million. On February
25, 2000, Suburban assumed ownership and operation of the water system. The
transaction added approximately 7,000 connections to Suburban's customer
base, an increase of approximately 11 percent. The purchase of the West
Covina System was funded in part by the reinvestment of approximately
$3,900,000 of proceeds from the sale of surplus land. The remaining funds
for the purchase were obtained from line of credit borrowing.
8. The Company has two reportable segments as defined under the requirements
of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." There was no change in the basis of segmentation or in the
basis of measurement of segment profit or loss from the information
reported in the 1999 Annual Report. The following table sets forth required
disclosure about the Company's reportable segments as required by SFAS No.
131.
Total Total
Non- Segment Consolidated
Regulated Regulated Information Other Information
-------------------------------------------------------------------
(in thousands)
Nine months Ended September 30, 2000
- ------------------------------------
Revenues from external customers $ 45,051 $ 33,205 $ 78,256 $ 0 $ 78,256
Segment operating profit 2,734 9,671 12,405 (2,901) 9,504
As of September 30, 2000
- ------------------------
Segment assets 30,191 132,184 162,375 7,011 169,386
Nine months Ended September 30, 1999
- ------------------------------------
Revenues from external customers $ 30,373 $ 28,641 $ 59,014 $ 0 $ 59,014
Segment operating profit 989 8,800 9,789 (2,800) 6,989
As of September 30, 1999
- ------------------------
Segment assets 12,080 122,107 134,195 5,289 139,484
5
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and capital resources of the Company are influenced primarily by
construction expenditures at Suburban and NMUI for the addition, replacement and
renovation of water utility facilities. The Company's capital resources may also
be influenced by investments in new business opportunities including the
acquisition of companies, funding of projects and acquisition of contracts.
At September 30, 2000, the Company had cash and cash-equivalent balances
totaling $533,000 and three separate unsecured lines of credit from three
commercial banks, with total line of credit capacity of $26,000,000. As of July
1, 2000, the line of credit capacity increased from $20,000,000 to $26,000,000
without changing the terms and conditions of the lines. Two of the lines were
renewed and expire in 2002. The remaining line expires in 2001. The Company
expects to maintain all of the lines of credit in the normal course of business.
At September 30, 2000, outstanding borrowing was $19,497,000, and the unused
borrowing capacity was $6,503,000. In the first nine months of 2000, the
Company's outstanding line of credit borrowing increased $12,904,000 primarily
due to additional cash requirements for acquisitions and for additional working
capital to fund construction projects. Each of the line of credit agreements, as
amended, contains certain financial restrictions. As of September 30, 2000, the
Company was in compliance with all applicable financial covenants of the line of
credit agreements.
In addition to its lines of credit, the Company has existing borrowing capacity
under its First Mortgage Bond Indentures. Under these indentures, the Company
has remaining borrowing capacity of approximately $49 million. However, the
amount of additional borrowing available to the Company under its current lines
of credit described above is limited by financial covenants that restrict
additional borrowing at September 30, 2000 to an amount no greater than the
remaining unused credit line amount.
During the first nine months of 2000, the Company's additions to property, plant
and equipment were $15,129,000, representing an increase of $8,197,000 from
1999. Developers made contributions in aid of construction (CIAC), and advances
totaling $3,045,000, of which $1,528,000 was received in cash and $1,517,000 was
received as non-cash contributions of property. Company-financed capital
additions were $12,084,000, funded primarily by cash flow from operations,
borrowing on the lines of credit and the reinvestment of proceeds from the sale
of surplus land. The current year increase was due primarily to the purchase of
the West Covina System. For the remainder of 2000, the Company estimates that
its capital additions will be approximately $3,000,000, and that cash flow from
operations and CIAC will fund these additions. Line of credit borrowing is also
available to meet construction requirements if needed.
The Company anticipates that its available line of credit borrowing capacity and
the cash flow generated from operations will be sufficient to fund its
activities during the next 12 months, including certain new business
investments. If additional cash is needed, the Company will consider alternative
sources, including long-term financing. The amount and timing of any future
long-term financing will depend on various factors, including the timeliness and
adequacy of rate increases, the availability of capital, and the Company's
ability to meet interest and fixed charge coverage requirements. Regulatory
approval is required for any long-term financing by Suburban or NMUI. If the
Company is unable to renew its existing lines of credit or obtain additional
long-term financing, capital spending or acquisitions will be reduced or delayed
until new financing arrangements are secured. Such financing arrangements could
include seeking equity financing through a private placement or a public
offering. Similarly, if additional cash is needed to fund an acquisition,
financing arrangements could include long-term borrowing or equity financing.
6
Regulatory Affairs:
Regulation
ECO has two distinct types of contractual relationships: time and material
contracts primarily with municipal utility districts (MUDs), and fixed fee
operations and maintenance contracts (O&Ms). A MUD is a utility district created
under the rules of the Texas Natural Resource Conservation Commission in order
to provide water, wastewater and drainage services to areas where existing
municipal services are not available. O&M contracts are agreements with cities
and private entities that provide for a specified level of services such as
facility operation and maintenance, meter reading and billing, or management of
the entire water or wastewater system. ECO also performs additional construction
and project work for its MUD and O&M clients. ECO's pricing is not subject to
regulation by any governmental authority. Most contracts with MUDs are short-
term contracts and do not generally include inflation adjustments. Changes in
prices are negotiated on a contract-by-contract basis. ECO's O&M contracts are
generally longer-term water and wastewater service contracts, primarily with
cities, and typically include inflation adjustments. Master Tek's rates are not
currently regulated by any governmental authority.
The California Public Utilities Commission (CPUC) and the New Mexico Public
Regulation Commission (NMPRC) regulate the rates and operations of Suburban and
NMUI, respectively. The rates allowed are intended to provide the utilities an
opportunity to recover costs and earn a reasonable return on common equity.
Although neither utility is currently seeking any rate increase, future
construction expenditures and increased operating expenses may require periodic
requests for rate increases. As discussed in the 1999 Annual Report, the CPUC
has directed Suburban to file a general rate application by July 1, 2001.
Regulatory Developments
The Company closely monitors legislative, CPUC and NMPRC developments. The
various water industry associations in which the Company actively participates
also monitor these developments. The Company does not know the future possible
legislative, CPUC or NMPRC changes that will be enacted or the terms of such
changes if enacted. Therefore, management cannot predict the impact, if any, of
future legislative changes, CPUC or NMPRC developments or changes to the
Company's financial position or results of operations.
Environmental Affairs:
As a contract operator, ECO does not own any of the water sources, water
production facilities or water distribution systems that it operates for its
clients, nor does ECO own any of the wastewater collection systems or wastewater
treatment facilities that it operates for its clients. Although not the owner,
ECO is responsible for operating these water and wastewater facilities in
compliance with all federal, state and local health standards and regulations.
Suburban and NMUI operations fall under the regulatory jurisdiction of the CPUC
and the NMPRC, respectively. The responsibilities of both regulatory agencies
are to ensure an adequate supply of affordable, healthful, and potable water to
residents of their respective states. The Company's operations are also subject
to water and wastewater pollution prevention standards and water and wastewater
quality regulations of the Environmental Protection Agency (EPA) and various
state regulatory agencies. Both the EPA and state regulatory agencies require
periodic testing and sampling of water. Costs associated with the testing of the
Company's water supplies have increased and are expected to increase further as
the regulatory agencies adopt additional monitoring requirements. The Company
believes that future incremental costs of complying with governmental
regulations, including capital expenditures, will be recoverable through
increased rates and contract operations revenues. However, there is no assurance
that recovery of such costs will be allowed. To date, the Company has not
experienced any material adverse effects upon its operations resulting from
compliance with government regulations. In recent years, the Company has been
named in several lawsuits alleging contamination in the Main San Gabriel and
Central Basins (the Main Basins). These matters are discussed more fully in Part
II, Item I, Legal Proceedings.
7
Risk Factors:
Certain statements contained in this Report on Form 10-Q for the quarter ended
September 30, 2000 (the September Report) that are not based on historical fact
are "forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are only projections. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause actual results, performance or achievements of the
Company to be materially different from any performance or achievements planned,
expressed or implied by such forward-looking statements. Although the Company
believes that its expectations are based on reasonable assumptions within the
bounds of its knowledge of its business and operations, there can be no
assurance that actual results will not differ materially from its expectations.
The September Report should be read in conjunction with the Company's 1999
Annual Report for a more detailed description of the risk factors affecting the
Company which include, but are not limited to, expectations regarding new
contracts and potential acquisitions, weather conditions, water quality issues,
regulatory changes, legal and other contingencies.
Results of Operations:
Three Months Ended September 30, 2000 Compared To Three Months Ended September
30, 1999
Diluted earnings per common share were $.31 in 2000, an increase of 24% compared
to $.25 during the same period in 1999. The $.25 for 1999 excludes a one-time
gain on a sale of land recorded in September of 1999. Total EPS for 1999
including the land sale was $.49.
Operating income
Operating income increased $1,365,000 or 42%, and, as a percentage of operating
revenues, was 15% in 2000 and 14% in 1999. ECO's operating income increased
$214,000, due to the addition of new contracts and an increase in the amount of
project work performed outside the scope of existing contracts, primarily in
Texas. The acquisition of Master Tek increased operating income by $686,000.
Operating income at the utilities increased $404,000, due primarily to the
addition of West Covina System customers to Suburban's customer base, following
the acquisition in February 2000. NMUI experienced an increase in water
consumption by its customers and also increased the number of customers it
serves, resulting in a 22% increase in operating income. Parent company expenses
decreased $61,000.
Operating revenues
Operating revenues increased $8,169,000 in the third quarter of 2000 compared
with the same period in 1999. ECO's revenues increased $3,991,000 or 37%, due
primarily to new contracts and to an increase in the amount of project work
performed outside the scope of existing contracts, primarily in Texas. The
acquisition of Master Tek increased operating revenues by $2,017,000. Utility
revenues increased $2,161,000. Suburban's revenues increased 19% due primarily
to the addition of West Covina System customers following the acquisition in
February 2000. West Covina contributed $1,569,000 to operating revenue. NMUI
continued to increase its number of customers contributing to a 17% increase in
water revenue.
Direct operating expenses
Direct operating expenses increased $6,495,000 or 39%. As a percentage of
operating revenues, these expenses were 75% in 2000 and 73% in 1999. ECO's
direct operating expenses increased $3,702,000, primarily as a result of new
contracts and the increase in the amount of project work performed outside the
scope of existing contracts. Master Tek added $900,000 of direct operating
expenses. The utilities' direct operating expenses increased $1,893,000,
increasing 5% as a percent of operating revenue. The increase was primarily due
to Suburban's increased purchases of more expensive water resulting from higher
customer demand, and the addition of West Covina System customers following the
acquisition in February 2000.
8
Selling, general and administrative
Selling, general and administrative expenses for the third quarter of 2000
increased $309,000 as compared with the same period in 1999. As a percentage of
operating revenues, these expenses were 10% in 2000 and 12% in 1999. General and
administrative expenses at ECO increased $15,000. The acquisition of Master Tek
added $491,000 of general and administrative expenses in the third quarter.
General and administrative expenses at the utilities decreased $136,000,
primarily due to decreased employee benefit expenses. General and administrative
expenses of the parent company decreased $61,000.
Interest and Other
Total interest expense increased by $301,000, offset by an increase in interest
income of $174,000. This was primarily due to the increase in interest expense
associated with increases in line of credit borrowing to finance the West Covina
acquisition in February and the April Master Tek acquisition, as well as other
capital spending. In addition, Master Tek recorded $237,000 of acquisition
goodwill amortization.
Nine Months Ended September 30, 2000 Compared To Nine Months Ended September 30,
1999
Diluted earnings per common share were $.60 in 2000, an increase of 25% compared
to $.49 during the same period in 1999. The $.49 for 1999 excludes a one-time
gain on a sale of land recorded in September of 1999. Total EPS for 1999
including the land sale was $.73.
Operating income
Operating income increased $2,515,000 or 36%, and, as a percentage of operating
revenues, was 12% in both 2000 and 1999. ECO's operating income increased
$768,000, due to the addition of new contracts and an increase in the amount of
project work performed outside the scope of existing contracts, primarily in
Texas. The acquisition of Master Tek contributed $977,000 to operating income
for the period. Operating income at the utilities increased $871,000, due
primarily to the addition of West Covina System customers following the
acquisition in February 2000. NMUI experienced an increase in water consumption
by its customers and also increased the number of customers it serves, resulting
in a 10% increase in operating income. Parent company expenses increased
$101,000, due primarily to increases in benefit-related costs, including health
insurance.
Operating revenues
Operating revenues increased $19,242,000, or 33% in the first nine months of
2000 compared with the same period in 1999. ECO's revenues increased $11,178,000
or 38%, due to new contracts and to an increase in the amount of project work
performed outside the scope of existing contracts, primarily in Texas. The
acquisition of Master Tek increased operating revenue by $3,500,000. Utility
revenues increased $4,564,000. Suburban's revenues increased 17%. The addition
of West Covina System customers, following the acquisition in February 2000
contributed $3,258,000 to operating revenues. NMUI increased its number of
customers contributing to a 9% increase in water revenue.
Direct operating expenses
Direct operating expenses increased $15,615,000 or 36%. As a percentage of
operating revenues, these expenses were 75% in 2000 and 74% in 1999. ECO's
direct operating expenses increased $10,219,000, primarily as a result of new
contracts and the increase in the amount of project work performed outside the
scope of existing contracts, particularly in Texas. The acquisition of Master
Tek added $1,785,000 to direct operating expenses. The utilities' direct
operating expenses increased $3,611,000, and increased 3% as a percentage of
operating revenue. The increase was primarily due to Suburban's increased
purchases of more expensive water resulting from higher customer water demand
and consumption, and the addition of West Covina customers, following the
acquisition in February 2000.
9
Selling, general and administrative
Selling, general and administrative expenses for the first nine months of 2000
increased $1,112,000 as compared with the same period in 1999. As a percentage
of operating revenues, these expenses were 12% in 2000 and 15% in 1999. General
and administrative expenses at ECO increased $131,000 due to increased marketing
costs associated with new contracts. The acquisition of Master Tek added
$798,000 of general and administrative expenses to the period. General and
administrative expenses at the utilities increased $82,000 because of various
departmental costs at both Suburban and NMUI. As discussed above, general and
administrative expenses of the parent company increased $101,000.
Interest and Other
Total interest expense increased by $556,000, offset by an increase in interest
income of $241,000. This was primarily due to the increase in interest expense
associated with increases in line of credit borrowing to finance the West Covina
acquisition in February and the April Master Tek acquisition, as well as other
capital spending. In addition, Master Tek recorded $397,000 of acquisition
goodwill amortization.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
As discussed in the Company's 1999 Annual Report, ECO was named as a defendant
in four lawsuits alleging injury and damages as the result of a sewage spill,
which occurred at an Austin, Texas sewage pumping station operated by ECO. The
case is currently in the discovery stage. No oral depositions have been taken
and there have been no court hearings. The Company and ECO intend to vigorously
defend against these claims and have requested defense and indemnification by
their insurance carrier. At this time, the Company does not believe this matter
will have a material adverse effect on the Company's financial position or
results of operations.
As discussed in the Company's 1999 Annual Report, the Company and Suburban have
been named as defendants in several lawsuits alleging water contamination in the
Main Basins. In September 1999, the California 2nd District Court of Appeal
ordered that the lawsuits be dismissed. The California Supreme Court has agreed
to review this decision. The Company anticipates that the California Supreme
Court will hear oral arguments during 2001. The Company and Suburban have
requested defense and indemnification from their liability insurance carriers
for these lawsuits. Several of the liability insurance carriers are currently
contributing to the costs of defense of the lawsuits. As discussed in the
Company's Form 10-Q Report for the period ending June 30, 2000 (the June
Report), in April 2000, approximately 240 plaintiffs filed two additional
lawsuits similar to those described in this paragraph. Defendants include the
Company, Suburban and other water producers in the Main Basin and a number of
alleged industrial polluters. The Company expects to defend the new actions on
the same basis as the earlier actions. Based upon information available at this
time, management does not expect that these actions will have a material adverse
effect on the Company's financial position or results of operations.
As discussed in the Company's 1999 Annual Report, in March 1998, the CPUC issued
an order instituting investigation (OII) directed to all Class A and B water
utilities in California, including Suburban. The purpose of the OII is to
address a series of questions dealing with the safety of current drinking water
standards and compliance with those standards. On October 2, 2000, the CPUC
issued its final decision. It contained three key conclusions; 1) The CPUC has
exercised concurrent jurisdiction with the Department of Health Services (the
DOHS) over the quality of drinking water provided by the regulated water
utilities, 2) the DOHS requirements governing drinking water quality adequately
protect the public health and safety, and 3) regulated water utilities (except
for one utility unrelated to the Company or Suburban) have satisfactorily
complied with past and present drinking water quality requirements. While the
CPUC continues to investigate the issues concerned with water quality, the
Company and Suburban are unable to predict what final actions, if any, will be
taken by the CPUC and/or the DOHS as the result of this investigation, or their
impact on the operations or financial position of the Company and Suburban.
As discussed in the June Report, on June 21, 2000, Suburban entered into a
"Tolling and Standstill Agreement" with Aerojet whereby Aerojet agreed to toll
the running of any statute of limitations with
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respect to any rights, claims or causes of action Suburban may have or wish to
assert against Aerojet as a result of Aerojet's release of contaminants into the
Main Basins. This agreement preserves Suburban's and the Company's rights beyond
the normal statute of limitations period.
As discussed in the Company's 1999 Annual Report, in October 1998 the Company
and ECO were sued in an action in Texas arising out of a fatal auto accident. In
November 2000, the Company reached an out of court settlement with the
plaintiffs. The settlement of the action did not have a material adverse effect
on the Company's financial position or results of operations.
As discussed in the 1999 Annual Report, the City of Albuquerque (Albuquerque)
initiated an action in eminent domain to acquire the operations of NMUI. The
Company believes that the fair market value of NMUI is substantially in excess
of the amount offered in Albuquerque's complaint. Under New Mexico state law,
there are procedures that would allow Albuquerque to take possession prior to
resolution of the fair market value issue; however, the Company believes that it
has adequate defenses should Albuquerque choose to pursue these procedures.
During September 2000, the Albuquerque City Council voted eight to one in favor
of withdrawing the condemnation proceeding. The Company is awaiting a formal
withdrawal of the lawsuit. Until the withdrawal occurs, there is no assurance
that that any settlement of the legal action or any other resolution will be
reached.
The Company and its subsidiaries are the subjects of certain litigation arising
from the ordinary course of operations. The Company believes the ultimate
resolution of such matters will not materially affect its consolidated financial
position, results of operations or cash flow.
Item 4: Submission of Matters to a Vote of Security Holders
None.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits furnished pursuant to Item 601 of Regulation S-K:
10.11B Second Amendment to Credit Agreement dated September 29, 2000
between the Company and Bank of America, N.A., filed herewith.
10.12B Second Amendment to Credit Agreement dated Sept ember 29, 2000
between Suburban Water Systems and Bank of America, N.A., filed
herewith.
10.13D Fourth Amendment to Amended and Restated Credit Agreement dated
September 29, 2000 between the Company and Mellon Bank, N.A.,
filed herewith.
10.14D Fourth Amendment to Credit Agreement dated September 29, 2000
between Suburban Water Systems and Mellon Bank, N.A., filed
herewith.
10.20 Merger Agreement and Plan of Reorganization among Southwest Water
Company, SW Utility Company, RTNT, Inc. Hornsby Bend Utility
Company, Inverness Utility Company, Windermere Utility Company,
Inc., HB Merger Sub, Inc. and IU Merger Sub, Inc. dated October
1, 2000, filed herewith.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
SOUTHWEST WATER COMPANY
(Registrant)
Dated: November 13, 2000 /s/ PETER J. MOERBEEK
-------------------------
Peter J. Moerbeek
Chief Financial Officer
Dated: November 13, 2000 /s/THOMAS C. TEKULVE
-------------------------
Thomas C. Tekulve
Chief Accounting Officer
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