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 June 30, 2001
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
-------------------------------
[LOGO] 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 August 1, 2001, there
were 8,626,166 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 Six Months Ended June 30, 2001 and 2000 1
Condensed Consolidated Balance Sheets -
June 30, 2001 and December 31, 2000 2
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2001 and 2000 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
Part II. Other Information:
- ------- -----------------
Item 1. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
- ---------------------------------------------------------------------------------------- ------------------------------------
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------- ------------------------------------
(in thousands except per share data) (in thousands except per share data)
Operating Revenues $27,838 $26,619 $51,053 $47,176
Operating Expenses:
Direct operating expenses 20,787 19,621 38,547 35,631
Selling, general and administrative expenses 4,109 3,472 7,688 6,645
- ---------------------------------------------------------------------------------------- -----------------------------------
24,896 23,093 46,235 42,276
Operating Income 2,942 3,526 4,818 4,900
Other Income (Expense):
Interest expense (795) (973) (1,787) (1,761)
Interest income 13 21 32 103
Other income (expense) 563 (69) 523 (20)
- ---------------------------------------------------------------------------------------- -----------------------------------
(219) (1,021) (1,232) (1,678)
Income Before Income Taxes 2,723 2,505 3,586 3,222
Provision for income taxes 1,035 1,002 1,362 1,289
- ---------------------------------------------------------------------------------------- -----------------------------------
Net income 1,688 1,503 2,224 1,933
Dividends on preferred shares 7 7 14 14
- ---------------------------------------------------------------------------------------- -----------------------------------
Net Income Available for Common Shares $ 1,681 $ 1,496 $ 2,210 $ 1,919
======================================================================================== ==================================
Earnings per Common Share (Note 3):
Basic $ 0.20 $ 0.18 $ 0.26 $ 0.24
Diluted $ 0.19 $ 0.18 $ 0.25 $ 0.23
======================================================================================== ==================================
Cash Dividends per Common Share (Note 3) $ 0.06 $ 0.06 $ 0.12 $ 0.12
======================================================================================== ==================================
Weighted Average Outstanding Common Shares (Note 3):
Basic 8,610 8,101 8,574 8,092
Diluted 9,022 8,428 8,986 8,434
======================================================================================== ==================================
See accompanying notes to condensed consolidated financial statements.
1
Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
- --------------------------------------------------------------------------------------------------------------------
ASSETS 2001 2000
- --------------------------------------------------------------------------------------------------------------------
(unaudited)
(in thousands)
Current Assets:
Cash and cash equivalents $ 572 $ 1,379
Customers' accounts receivable, net 22,418 17,830
Other current assets 9,828 7,597
- --------------------------------------------------------------------------------------------------------------------
32,818 26,806
Property, Plant and Equipment:
Utility property, plant and equipment - at cost 212,720 206,100
Contract operations property, plant and equipment - at cost 10,433 8,394
- --------------------------------------------------------------------------------------------------------------------
223,153 214,494
Less accumulated depreciation and amortization 59,234 56,651
- --------------------------------------------------------------------------------------------------------------------
163,919 157,843
Other Assets 11,315 12,003
- --------------------------------------------------------------------------------------------------------------------
$208,052 $196,652
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current portion of long-term debt and bank notes payable $ 4,477 $ 5,166
Accounts payable 6,065 5,983
Other current liabilities 16,510 14,438
- --------------------------------------------------------------------------------------------------------------------
27,052 25,587
Other Liabilities and Deferred Credits:
Long-term debt 27,100 27,100
Bank notes payable 24,200 19,251
Advances for construction 7,707 7,891
Contributions in aid of construction 52,628 50,644
Deferred income taxes 8,652 6,988
Other liabilities and deferred credits 10,373 10,580
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities and Deferred Credits 157,712 148,041
Stockholders' Equity:
Cumulative preferred stock 514 514
Common stock 86 86
Paid-in capital 36,050 35,568
Retained earnings 13,690 12,443
- --------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 50,340 48,611
- --------------------------------------------------------------------------------------------------------------------
$208,052 $196,652
====================================================================================================================
See accompanying notes to condensed consolidated financial statements.
2
Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
- ---------------------------------------------------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 2,223 $ 1,933
Adjustments to reconcile net income to net cash
provided by (used in) operating activities (645) (1,008)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,578 925
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Additions to property, plant and equipment (8,539) (11,891)
Other investments, net - (2,524)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,539) (14,415)
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net proceeds on bank notes payable 4,913 9,931
Contributions in aid of construction and advances for construction 1,914 803
Net proceeds from dividend reinvestment plan,
employee stock purchase plan and stock option plans 481 355
Advances for construction 14 141
Dividends paid (970) (789)
Payments on advances (198) (143)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 6,154 10,298
- ---------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (807) (3,192)
Cash and cash equivalents at beginning of period 1,379 4,146
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 572 $ 954
=====================================================================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,690 $ 1,764
Income taxes $ 40 $ 27
Depreciation and amortization $ 2,981 $ 2,382
Non-cash contributions in aid of construction
conveyed to the Company by developers $ 775 $ 1,108
See accompanying notes to condensed consolidated financial statements.
3
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited)
1. Southwest Water Company (Southwest Water, the Company, or "we", "us" or
"our") was incorporated in California in 1954 and reincorporated in
Delaware in 1988. Southwest Water is a publicly traded holding company. All
business operations are conducted through our subsidiaries which provide a
broad range of services including water production and distribution,
wastewater collection and treatment and utility submetering. We own rate
regulated public water utilities. State regulatory agencies oversee the
operations of our utilities as well as establish the rates that we can
charge for our services. We also operate and manage water and wastewater
treatment facilities which are owned by cities, public agencies, municipal
utility districts and private companies under contract. These facilities
are also subject to regulatory oversight; however, the pricing of our
services is not subject to regulation. We serve more than one
million people in 29 states nationwide.
Through our wholly owned subsidiary, ECO Resources, Inc. (ECO), we operate
and manage water and wastewater treatment facilities owned by cities,
public agencies, municipal utility districts and private entities.
Nationwide, we provide utility submetering and billing and collection
services through our 80%-owned subsidiary, Master Tek International, Inc.
(MTI). We own and operate water and wastewater utilities through four
subsidiaries. Suburban Water Systems (Suburban), New Mexico Utilities, Inc.
(NMUI) and Hornsby Bend Utility Company (Hornsby) are wholly owned and we
also own 80% of Windermere Utility Company (Windermere).
The unaudited condensed consolidated financial statements reflect all
adjustments which, in our opinion, are necessary to present fairly the
financial position of Southwest Water as of June 30, 2001, and our results
of operations for the six months ended June 30, 2001. These adjustments are
of a normal recurring nature. Certain reclassifications have been made to
the 2000 financial statements to conform to the 2001 presentation.
2. Certain information and footnote disclosures normally included in our
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission (the SEC). Our condensed consolidated financial
statements should be read in conjunction with the financial statements and
related notes contained in our Annual Report on Form 10-K for the year
ended December 31, 2000 (the 2000 Annual Report). Except as otherwise
disclosed in Note 6, we are not aware of any new accounting standards that
would have a material impact on our financial position, results of
operations or cash flows.
3. We record earnings per share (EPS) by computing basic EPS and diluted EPS
in accordance with accounting principles generally accepted in the United
States of America. Basic EPS measures our Company's performance 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 measures our Company's performance over the reporting period
after giving effect to all potentially dilutive common shares that would
have been outstanding if the dilutive common shares had been issued. Stock
options, convertible debentures and warrants give rise to potentially
dilutive common shares.
4. On July 20, 2001, we issued $20,000,000 of 6.85% fixed rate convertible
subordinate debentures due July 1, 2021, and we received proceeds from the
sale of $19,200,000 after the underwriting discounts and commissions. We
expect the final net proceeds from the sale of these debentures to be
approximately $18,950,000 after deducting the remaining estimated expenses
of the offering. We used the net proceeds from the sale of these debentures
to reduce borrowings on our revolving lines of credit and for working
capital.
4
5. In July 2001, we entered into letters of intent to acquire two separate
contract operations businesses that we believe will expand our market share
in the southern United States. If consummated, the consideration for these
acquisitions will consist of a combination of cash, Southwest Water common
stock and promissory notes to the sellers. We cannot assure you that these
transactions will be successfully completed.
6. Effective January 2002, we are subject to Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. Under the
provisions of SFAS No. 142, goodwill is no longer subject to amortization
over its estimated useful life. Instead, goodwill is assessed for
impairment on an annual basis (or more frequently if circumstances indicate
a possible impairment) by means of a fair-value-based test. SFAS No. 142
requires that existing goodwill as of June 30, 2001 continue to be
amortized through the end of the current calendar year, after which no
further amortization of goodwill will be permitted. Goodwill incurred
subsequent to June 30, 2001 will not be amortized over a fixed period, but
rather, periodically assessed for impairment. Presently, we believe there
is no impairment of our existing goodwill, and that the implementation of
SFAS No. 142 will not have a material adverse effect on our future results
of operations. As of June 30, 2001, we had approximately $3,100,000 of
unamortized goodwill.
7. We have two reportable segments as defined under the requirements of SFAS
No. 131, Disclosures about Segments of an Enterprise and Related
Information. We have not changed the basis of segmentation or the basis of
measurement of segment profit or loss from the information reported in our
2000 Annual Report.
The following table sets forth disclosure about our reportable segments as
required by SFAS No. 131.
Total Total
Non- Segment Consolidated
Regulated Regulated Information Other Information
--------- --------- -------------- -------- ------------
(in thousands)
Six Months Ended June 30, 2001
- ------------------------------
Revenues from external customers $29,207 $ 21,846 $ 51,053 $ 0 $ 51,053
Segment operating profit 868 6,039 6,907 (2,089) 4,818
As of June 30, 2001
- -------------------
Segment assets $35,159 $170,298 $205,457 $ 2,595 $208,052
Six Months Ended June 30, 2000
- ------------------------------
Revenues from external customers $27,501 $ 19,675 $ 47,176 $ 0 $ 47,146
Segment operating profit 1,346 5,635 6,981 (2,081) 4,900
As of June 30, 2000
- -------------------
Segment assets $25,435 $131,048 $156,483 $ 9,569 $166,052
5
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Our liquidity, capital resources and cash flows from operations are
influenced primarily by construction expenditures at Suburban, NMUI, Windermere
and Hornsby for the addition, replacement and renovation of water and wastewater
utility facilities. Our capital resources are also influenced by investments in
new business opportunities, including the acquisition of companies, funding of
projects and acquisition of contracts. As fully described in our 2000 Annual
Report, ECO financed and built a reverse-osmosis water treatment plant. In
connection with this project, ECO recorded a receivable in the amount of
approximately $6,000,000 for the work done and expects to receive payment for
the full amount in the fourth quarter of 2001.
As of June 30, 2001, we had cash and cash-equivalent balances totaling
$572,000 and aggregate lines of credit totaling $30,000,000 consisting of three
separate unsecured lines of credit from three commercial banks which expire in
2002. As of June 30, 2001, we had $27,633,000 outstanding on these lines of
credit. On July 20, 2001, we received the net proceeds from our 20-year fixed
rate convertible subordinate debenture offering. A portion of the proceeds was
used to reduce the outstanding balances on our bank lines of credit to
approximately $8,700,000 as of August 1, 2001. As part of the debenture
offering, our aggregate borrowing capacity on our bank lines of credit was
reduced to $24,000,000, leaving approximately $15,300,000 borrowing capacity
available after the debenture offering.
We expect to maintain our lines of credit in the normal course of business.
During the first six months of 2001, our outstanding line of credit borrowing
increased $4,913,000, primarily due to additional cash requirements for
additions to utility plant. Each of the line of credit agreements contains
certain financial covenants. As of June 30, 2001, we were in compliance with all
applicable covenants of the line of credit agreements and remained in compliance
subsequent to the issuance of the convertible subordinate debentures.
In addition to our lines of credit, we have existing borrowing capacity under
our First Mortgage Bond Indentures of approximately $52,000,000 as of June 30,
2001. However, our additional borrowing available under our current commercial
lines of credit is limited by financial covenants that restrict additional
borrowing at June 30, 2001 to an amount no greater than to the remaining unused
credit line amount.
During the first six months of 2001, our additions to property, plant and
equipment were $9,314,000, representing an increase from the same period in 2000
of $5,671,000, excluding the purchase of the City of West Covina water
distribution system (West Covina system). The increase was due primarily to the
addition of utility plant at Suburban, NMUI, Windermere and Hornsby, including a
new well at NMUI and a wastewater treatment plant at Windermere among other
projects. Developers made contributions in aid of construction (CIAC) and
advances totaling $2,703,000 during the six months ended June 30, 2001, of which
$1,928,000 was received in cash and $775,000 was received as non-cash
contributions of property. Company-financed capital additions were $6,611,000,
funded primarily by cash flow from operations and borrowing on the lines of
credit. We estimate that our total capital additions in 2001 will be
approximately $13,000,000, primarily for utility plant, and that our cash flow
from operations, borrowings on our lines of credit and CIAC will fund these
additions.
As discussed in our 2000 Annual Report, we assumed a note payable of
approximately $800,000 in connection with our acquisition of Windermere in
October 2000. During May 2001, we paid off the note.
As discussed in Note 5, we have entered into letters of intent to acquire two
separate contract operations businesses. If we successfully complete these
transactions, part of the consideration will consist of approximately $4,000,000
in cash which we will borrow under our existing lines of credit.
We anticipate that our available line of credit borrowing capacity and cash
flows generated from operations will be sufficient to fund our activities during
the next 12 months. If we are unable to renew our existing lines of credit, our
capital spending or acquisitions will be reduced or delayed until new financing
arrangements are secured. Such financing arrangements could include seeking debt
or 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
RECENT ACCOUNTING PRONOUNCEMENTS:
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. SFAS No. 141 specifies that intangible assets
acquired in a purchase method business combination must be recognized and
reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
SFAS No. 142. For intangible assets with definite useful lives, SFAS No. 142
requires amortization over their estimated useful lives to their estimated
residual values, and requires review for impairment in accordance with SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. SFAS No. 141 becomes effective for business
combinations initiated after June 30, 2001. SFAS No. 142 becomes effective for
periods beginning after December 31, 2001.
REGULATORY AFFAIRS:
The California Public Utilities Commission (CPUC), the New Mexico Public
Regulatory Commission (NMPRC) and the Texas Natural Resources Conservation
Commission (TNRCC) regulate the rates and operations of Suburban, NMUI and
Windermere and Hornsby, respectively. The rates allowed are intended to provide
the utilities an opportunity to recover costs and earn a reasonable return on
common equity. As discussed in our 2000 Annual Report, Suburban has been
directed by the CPUC to file a general rate application by March 2002.
Windermere filed for a general rate increase in May 2001 and new rates under the
pending filing became effective June 4, 2001 subject to final regulatory
approval. A date for the hearing has not yet been set by the TNRCC. NMUI and
Hornsby are not currently seeking any rate increase; however, future
construction expenditures and increased operating expenses may result in
periodic requests for rate increases.
Southwest Water closely monitors legislative, CPUC, NMPRC and TNRCC
developments. The various water industry associations in which we actively
participate also monitor these developments. We do not know the future possible
legislative, CPUC, NMPRC or TNRCC changes that will be enacted or the terms of
such changes if enacted. Therefore, we cannot predict the impact, if any, of
future legislative changes, CPUC, NMPRC or TNRCC developments or changes on our
financial position or results of operations.
ECO's pricing is not subject to regulation by any public regulatory
commissions. Most contracts with municipal utility districts are short-term
contracts and do not generally include inflation adjustments. Changes in prices
are negotiated on a contract-by-contract basis. ECO's operations and maintenance
contracts are generally longer-term water and wastewater service contracts,
primarily with cities, and typically include inflation adjustments.
MTI's pricing is not subject to regulation by any regulatory agencies. Most
contracts with management companies and owners of apartment or condominium
communities are short-term contracts and do not generally include inflation
adjustments. Changes in prices are negotiated on a contract-by-contract basis.
SEASONALITY:
There is seasonality to the water utility and utility management industry;
thus, the results of operations for the six months ended June 30, 2001, 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 could have the effect of lowering revenue due to
anticipated conservation efforts. Our contract operations business can also be
seasonal in nature. Heavy rainfall hampers ECO's ability to perform billable
work such as pipeline maintenance, manhole rehabilitation and other outdoor
services. Conversely, moderate rainfall may create additional opportunities for
billable work outside the scope of existing contracts. Drought conditions would
not necessarily adversely affect ECO's opportunities for additional billable
work.
7
ENVIRONMENTAL AFFAIRS:
Operations of Suburban, NMUI and Windermere and Hornsby fall under the
regulatory jurisdiction of the CPUC, the NMPRC and the TNRCC, respectively. The
primary responsibility of these regulatory agencies is to ensure an adequate
supply of affordable, healthful, potable water to residents of their respective
states. Our operations are also subject to water and wastewater pollution
prevention standards and water and wastewater quality regulations of the
Environmental Protection Agency 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 water supplies have increased and
are expected to increase further as the regulatory agencies adopt additional
monitoring requirements. We believe that future incremental costs of complying
with government regulations, including any capital expenditures, will be
recoverable through increased rates and contract operations revenues. However,
we cannot assure you that recovery of such costs will be allowed. To date, we
have not experienced any material adverse effects upon our financial position or
operations resulting from compliance with government regulations.
As discussed in our 2000 Annual Report, and in Part II, Item 1, Southwest
Water and Suburban have been named in several lawsuits alleging water
contamination in the Main San Gabriel Basin in Southern California. In September
1999, the California 2nd District Court of Appeal ordered that certain of the
lawsuits be dismissed. A three-judge panel ruled that the CPUC has final
regulatory authority in water quality matters. The plaintiffs petitioned the
California Supreme Court for review of this decision and the petition was
granted. The California Supreme Court has not yet set a date for a hearing.
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.
MTI is a utility submetering, billing and collection services company and does
not own or operate any water or other production or treatment facilities.
RISK FACTORS:
Certain statements contained in this Quarterly Report (the June 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 Southwest Water to differ materially
from any performance or achievements planned, expressed or implied by such
forward-looking statements. Although we believe that our expectations are based
on reasonable assumptions within the bounds of our knowledge of our business and
operations, we cannot assure you that actual results will not differ materially
from our expectations.
The June Report should be read in conjunction with our 2000 Annual Report and
with our Form S-3 Registration Statement filed with the SEC on July 16, 2001 for
a more detailed description of the risk factors affecting Southwest Water. These
include, but are not limited to, revenue backlog information, expectations
regarding sales growth and new contracts, potential acquisitions, weather
conditions, changes in business conditions, and legal and other contingencies.
RESULTS OF OPERATIONS:
Three Months Ended June 30, 2001 Compared To Three Months Ended June 30, 2000
Diluted EPS was $.19 for the quarter ended June 30, 2001, an increase of 6%
compared to diluted EPS of $.18 during the same period in 2000 (after adjustment
for a 5-for-4 stock split in the form of a stock dividend on January 1, 2001).
8
Operating income
Second quarter 2001 operating income decreased $584,000, or 17%, and, as a
percentage of operating revenues, was 11% in 2001 and 13% in 2000. Non-regulated
operating income decreased $917,000. During 2000, ECO had the benefit of a one-
time construction project of a large water treatment plant in El Paso, Texas,
and recognized the related revenue and operating income. There was no comparable
project in 2001. In addition, general and administrative expenses at ECO
increased in 2001 compared to the same period in 2000 as described below.
Operating income at the utilities increased $299,000, due primarily to the
acquisition of Windermere and Hornsby in October 2000. Parent company expenses
decreased $34,000.
Operating revenues
Our operating revenues increased $1,219,000 in the second quarter of 2001
compared with the same period in 2000. Non-regulated revenues increased
$227,000, or 1%, due primarily to a new installation contract at MTI that began
in late 2000 and resulted in additional operating revenues. This increase was
partially offset by a decrease in ECO's revenues due to the benefit in 2000 of a
construction project as described above. The project contributed approximately
$2,100,000 of revenue in the second quarter of 2000. Utility revenues increased
$992,000 or 9%, primarily as a result of the addition of Windermere and Hornsby
customers following the acquisition in October 2000.
Direct operating expenses
During the three months ended June 30, 2001, direct operating expenses
increased $1,229,000, or 6%. As a percentage of operating revenues, these
expenses were 75% in 2001 and 74% in 2000. Non-regulated direct operating
expenses increased $663,000, due primarily to operating expenses associated with
a new installation contract at MTI that began in late 2000. This increase
was partially offset by a reduction in expenses at ECO due to the 2000
construction project described above. The utilities' direct operating expenses
increased $566,000, primarily as a result of the acquisition of Windermere and
Hornsby in October 2000.
Selling, general and administrative expenses
Selling, general and administrative expenses for the second quarter of 2001
increased by $574,000, or 18% compared with the same period in 2000. As a
percentage of operating revenues, these expenses were 15% in 2001 and 13% in
2000. General and administrative expenses of our non-regulated businesses
increased $481,000 due primarily to increased sales expenses from an expanded
marketing effort at ECO, additional lease expenses with respect to
telecommunications equipment and payroll related expenses including workers'
compensation insurance, medical insurance and wages. General and administrative
expenses at the utilities increased $127,000, primarily as a result of the
acquisition of Windermere and Hornsby in October 2000. General and
administrative expenses of the parent company decreased $34,000.
Interest and other expenses
Total interest and other expenses decreased by $802,000 for the quarter ended
June 30, 2001. Interest expense decreased due to generally lower interest rates
on short-term borrowings, and to interest capitalized at Windermere on utility
construction projects, resulting in a net interest reduction of $170,000. Other
income increased $632,000 primarily due to the recognition of deferred lease
income associated with a construction project at ECO as described above.
Six Months Ended June 30, 2001 Compared To Six Months Ended June 30, 2000
Diluted EPS was $.25 for the first six months of 2001, an increase of 9%
compared to diluted EPS of $.23 during the same period in 2000 (after adjustment
for a 5-for-4 stock split in the form of a stock dividend on January 1, 2001).
9
Operating income
Operating income for the six months ended June 30, 2001 decreased $82,000 or
2%, compared to the same period in 2000 and, as a percentage of operating
revenues, was 9% in 2001 and 10% in 2000. Non-regulated operating income
decreased $478,000. During 2000, ECO had the benefit of a one-time construction
project of a large water treatment plant in El Paso, Texas, and recognized the
related revenue and operating income. There was no comparable project in 2001.
In addition, general and administrative expenses at ECO increased in 2001
compared to the same period in 2000 as described below. The decrease in
operating income was partially offset due to the acquisition of MTI in April
2000. Operating income at the utilities increased $404,000, due primarily to the
acquisition of Windermere and Hornsby in October 2000. Parent company expenses
increased $8,000.
Operating revenues
Our operating revenues for the six months ended June 30, 2001 increased
$3,877,000 compared with the same period in 2000. Non-regulated revenues
increased $1,706,000, or 6%, due primarily to the acquisition of MTI in April
2000 and to the commencement of a new installation contract at MTI in late 2000.
This increase was partially offset by a decrease in ECO's revenues due to the
benefit in 2000 of a construction project as described above. The project
contributed approximately $3,400,000 of revenue during the first six months of
2000. Utility revenues increased $2,171,000, or 11%, primarily as a result of
the addition of Windermere and Hornsby customers following the acquisition in
October 2000.
Direct operating expenses
During the six months ended June 30, 2001, direct operating expenses increased
$2,916,000, or 8%. As a percentage of operating revenues, these expenses were
76% in both 2001 and 2000. Non-regulated direct operating expenses increased
$1,295,000, due primarily to the acquisition of MTI in April 2000 and to the
commencement of a new installation contract at MTI in late 2000. This increase
was partially offset by a reduction in expenses at ECO due to the 2000
construction project described above. The utilities' direct operating expenses
increased $1,621,000, primarily as a result of the acquisition of Windermere and
Hornsby in October 2000 and to increases in energy costs and other water volume
related expenses at Suburban.
Selling, general and administrative expenses
Selling, general and administrative expenses for the first six months of 2001
increased by $1,106,000, or 17%, compared with the same period in 2000. As a
percentage of operating revenues, these expenses were 15% in 2001 and 14% in
2000. General and administrative expenses of our non-regulated businesses
increased $952,000 due primarily to the acquisition of MTI in April 2000.
General and administrative expenses also increased at ECO due to increased sales
expenses from an expanded marketing effort, additional lease expenses with
respect to telecommunications equipment and payroll related expenses including
workers' compensation insurance, medical insurance and wages. General and
administrative expenses at the utilities increased $146,000, primarily as a
result of the acquisition of Windermere and Hornsby in October 2000. General and
administrative expenses of the parent company increased $8,000.
Interest and other expenses
Total interest and other expenses decreased by $446,000 for the six months
ended June 30, 2001. Interest expense increased $26,000, reflecting increases in
borrowing partially offset by generally lower interest rates on short-term
borrowings, and interest capitalized at Windermere on utility construction
projects. Interest income at Suburban decreased due to interest income
recognized in 2000 on cash held by an accommodator in connection with the sale
of property formerly used in utility operations. The cash was later used to
purchase the City of West Covina water distribution system. Other income
increased $543,000 primarily due to the recognition of deferred lease income
associated with a construction project at ECO as described above.
10
Item 3: Quantitative and Qualitative Disclosures About Market Risk
We have certain indebtedness that is subject to variable interest rates. As a
result, Southwest Water's interest expense is affected by changes in the general
level of interest rates. Changes in interest rates affect the interest expense
paid on the line of credit borrowings, which is determined based upon an agreed
rate with the banks. Contractually, the highest interest rates charged on the
lines of credit cannot exceed the banks' prime rate plus one-quarter percent.
At the present time, Southwest Water is utilizing the favorable low interest
rates in the current market. In part to mitigate future market interest rate
risk, we completed a $20,000,000, 20-year convertible debenture offering in July
2001 which bears a fixed interest rate of 6.85% per annum. A portion of the
proceeds was used to pay down our variable rate indebtedness.
In the future, Southwest Water may also consider interest rate swaps to
effectively fix interest rates on our line of credit borrowings. Our long-term
bonds were sold with a fixed interest rate, and are not subject to market
fluctuation of interest rates.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As discussed in our 2000 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. In 2000, a
hearing was held and a summary judgment motion is pending in one action. A trial
for a second action is pending and expected to take place in late 2001. The
other two lawsuits remain pending at this date. Southwest Water and ECO intend
to vigorously defend against these claims, and we have requested defense and
indemnification by our insurance carrier. At this time, we do not believe this
matter will have a material adverse effect on our financial position, results of
operations or cash flow.
As discussed in our 2000 Annual Report, Southwest Water and Suburban have been
named as defendants in several lawsuits alleging water contamination in the Main
Basin. In September 1999, the California 2nd District Court of Appeal ordered
that certain of the lawsuits be dismissed. The California Supreme Court has
agreed to review this decision. We anticipate that the California Supreme Court
will hear oral arguments during 2001; however, no date has yet been set.
Southwest Water and Suburban have requested defense and indemnification from our
liability insurance carriers for these lawsuits. Several of the liability
insurance carriers are currently absorbing the costs of defense of the lawsuits.
In April 2000, approximately 240 plaintiffs filed two additional lawsuits
similar to the actions described above. Defendants include Southwest Water,
Suburban and other water producers in the Main Basin and a number of alleged
industrial polluters. We expect to defend the new actions on the same basis as
the earlier actions. Based upon information available at this time, we do not
expect that these actions will have a material adverse effect on our financial
position or results of operations.
As discussed in the 2000 Annual Report, in 1998 the City of Albuquerque
(Albuquerque) initiated an action in eminent domain to acquire the operations of
NMUI. At the time of the original complaint, Southwest Water believed that the
fair market value of NMUI was substantially higher than 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, we believe that it has adequate defenses should
Albuquerque choose to pursue these procedures. In September 2000, the
Albuquerque City Council voted eight-to-one in favor of withdrawing the
condemnation proceeding. We are awaiting a formal withdrawal of the lawsuit.
Until the withdrawal occurs, there is no assurance that any settlement of the
action or any other resolution will be reached.
Southwest Water and its subsidiaries are the subjects of certain litigation
arising from the ordinary course of operations. We believe the ultimate
resolution of such matters will not materially affect our financial position,
results of operations or cash flows.
11
Item 4: Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on May 22, 2001, H. Frederick
Christie and Anton C. Garnier, members of the Board of Directors, were reelected
to the Board; and Peter J. Moerbeek was elected to the Board, by the following
votes:
Mr. Christie; votes for - 7,241,074; and votes abstaining - 82,270.
Mr. Garnier; votes for - 7,114,572; and votes abstaining - 208,772.
Mr. Moerbeek; votes for - 7,247,104; and votes abstaining - 76,240.
No votes were cast against the election of any of these three individuals. The
terms of office of directors Monroe Harris, Donovan D. Huennekens, Maureen
Kindel and Richard G. Newman continued subsequent to the meeting.
The selection of KPMG LLP as our independent auditors for the year ending
December 31, 2001 was ratified by the following vote: votes for - 7,225,146;
votes against - 34,271; and votes abstaining - 63,927.
Item 6: Exhibits and Reports on Form 8-K:
(a) Exhibits furnished pursuant to Item 601 of Regulation S-K:
4.8 Indenture dated as of July 20, 2001 between the Company and Chase
Manhattan Bank and Trust Company, National Association (incorporated
by reference to Exhibit 4 to the Company's Form S-3 Registration
Statement No. 333-63196 filed July 16, 2001 with the Securities and
Exchange Commission).
10.11D Fourth Amendment to Credit Agreement dated July 13, 2001 between
Southwest Water and Bank of America, N.A., filed herewith.
10.12C Third Amendment to Credit Agreement dated July 13, 2001 between
Suburban Water Systems and Bank of America, N.A., filed herewith.
10.13F Sixth Amendment to the Amended and Restated Credit Agreement dated
July 13, 2001 between Southwest Water and Mellon Bank, N.A., filed
herewith.
10.14E Fifth Amendment to Credit Agreement dated July 13, 2001 between
Suburban Water Systems and Mellon Bank, N.A., filed herewith.
(b) Reports on Form 8-K
None.
12
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: August 3, 2001 /s/ PETER J. MOERBEEK
- --------------------- ---------------------
Peter J. Moerbeek
Chief Financial Officer
(Principal Financial Officer)
Dated: August 3, 2001 /s/ THOMAS C. TEKULVE
- --------------------- ---------------------
Thomas C. Tekulve
Vice President Finance
(Principal Accounting Officer)
13