EXHIBIT 13.1
Southwest Water Company And Subsidiaries
SELECTED FINANCIAL DATA
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Years Ended December 31,
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(Not covered by Independent Auditors' Report)
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1994 1993 1992 1991 1990
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Summary Of Operations
Operating revenues $50,932,000 $48,218,000 $44,482,000 $38,802,000 $41,089,000
Operating income $ 3,849,000 $ 3,421,000 $ 5,305,000 $ 996,000 $ 5,251,000
Litigation settlements $ -- $(1,437,000) $ -- $ -- $ --
Gain on condemnation and sale of land $ -- $ 67,000 $ -- $ 274,000 $ 1,265,000
Gain on settlement of estate with
related party $ -- $ -- $ -- $ 450,000 $ --
Net income $ 1,057,000 $ 127,000 $ 2,300,000 $ 206,000 $ 3,310,000
Net income available for common shares $ 1,029,000 $ 99,000 $ 2,271,000 $ 176,000 $ 3,280,000
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Common Share Data*
Primary earnings per share $ .43 $ .04 $ .97 $ .08 $ 1.44
Fully diluted earnings per share $ .42 $ .04 $ .95 $ .08 $ 1.40
Cash dividends per share $ .40 $ .665 $ .92 $ .91 $ .90
Weighted-average outstanding shares
and equivalent shares:
Primary 2,404,000 2,370,000 2,331,000 2,298,000 2,273,000
Fully diluted 2,460,000 2,430,000 2,398,000 2,367,000 2,347,000
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Statistical Data
Working capital (deficit) $(2,271,000) $ 1,161,000 $ 6,765,000 $(1,549,000) $ 2,099,000
Current ratio .8 1.1 1.8 .9 1.2
Capital additions $ 8,684,000 $ 7,133,000 $ 4,914,000 $ 4,485,000 $ 5,791,000
Property, plant and equipment, net $72,136,000 $67,076,000 $63,506,000 $61,574,000 $61,081,000
Total assets $86,834,000 $85,848,000 $83,672,000 $75,924,000 $76,768,000
Long-term debt $20,500,000 $21,550,000 $22,455,000 $13,375,000 $14,913,000
Stockholders' equity $28,532,000 $28,176,000 $29,153,000 $28,558,000 $30,066,000
Return on average common equity 3.7% .4% 8.0% .6% 11.4%
Number of customers 174,500 171,600 161,100 167,300 151,100
=================================================================================================================================
* Primary earnings per share are calculated using the weighted-average number of
shares and dilutive common equivalent shares outstanding during each year
after recognition of dividend requirements on preferred shares. Common
equivalent shares arise from stock options. Fully diluted earnings per share
were computed based upon the average number of common shares and dilutive
common equivalent shares outstanding, assuming the 9 1/2% convertible
subordinated debentures were converted at the beginning of the year and the
related interest for the year, net of income taxes, was eliminated. Factors
which materially affect the comparability of year-to-year data are discussed
under The Year In Review, Management's Discussion And Analysis and Notes To
Consolidated Financial Statements.
8
Southwest Water Company And Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1994, the Company had cash and cash equivalent balances totaling
approximately $828,000 and unused lines of credit from commercial banks of
$8,050,000. In January 1995, the Company increased one of its lines of credit by
$2,000,000. In 1994, the Company borrowed $1,850,000 on its lines of credit to
meet construction, operating and litigation settlement requirements. Additional
borrowing is anticipated during 1995 to meet construction, operating and debt
service requirements.
The Company has additional borrowing capacity under its first Mortgage Bond
Indentures of approximately $20,195,000. The amount of additional borrowings
available to the Company under the indentures and lines of credit is limited by
certain financial covenants that restrict additional borrowings at December 31,
1994, to a maximum of approximately $12,986,000.
The Company also has a dividend reinvestment plan and an employee stock purchase
plan. Net proceeds from common shares issued under these plans approximated
$274,000 for the year ended December 31, 1994.
The Company's liquidity and capital resources are influenced primarily by
construction expenditures at Suburban Water Systems (Suburban) for the
replacement and renovation of existing water utility facilities and construction
expenditures for new water and wastewater utility facilities at New Mexico
Utilities, Inc. (New Mexico). Additionally, liquidity is influenced by the
Company's continuing investment in its service business, ECO Resources, Inc.
(ECO). The Company's additions to property, plant and equipment approximated
$8,684,000 for the year ended December 31, 1994. Approximately $2,231,000 of the
total additions were received by the Company's utilities through developer
contributions.
The Company and its subsidiaries will continue their construction programs, with
1995 capital expenditures estimated at $13,000,000, of which approximately
$4,000,000 is estimated to be in the form of developer contributions. Higher
capital expenditures in New Mexico relating to the rapid growth in New Mexico's
service area account for the majority of the increase in 1995 versus 1994
capital expenditures. Because these estimates are subject to management's
ongoing review, actual expenditures may vary. These construction expenditures,
as well as the Company's ongoing investment in its service business, affect the
Company's liquidity.
The amount and timing of future long-term financings will depend on various
factors discussed earlier, 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 AFFAIRS AND INFLATION
Effective January 1, 1994, the Public Utilities Commission of the State of
California (CPUC) granted Suburban two annual "step" adjustments for its San
Jose Hills and Whittier/La Mirada District customers, yielding additional annual
revenues of $642,000. Suburban is currently authorized an 11% return on common
equity. This authorized rate of return is moderately favorable in comparison to
rates currently granted to other water utilities by the CPUC. Suburban did not
file for a general rate increase in 1994.
Suburban anticipates filing a general rate increase application with the CPUC in
July 1995. The general rate increase, if filed and approved, would be effective
early in 1996. Suburban expects to file a joint general rate application
covering both of its service districts based upon recent suggestions by the
CPUC. New Mexico anticipates filing a general sewer rate increase application
with the New Mexico Public Utility Commission (NMPUC) in May 1995, with new
rates effective early in 1996.
In 1993, Suburban elected to record production cost balancing accounts due to
increased variability in the costs of water. Effective in November 1993,
Suburban requested and was granted a reduction in rates, which resulted in a
decrease in 1994 revenues of approximately $957,000 from customers in its San
Jose Hills District. This revenue rate reduction, coupled with lower water
costs, does not affect earnings due to recording of production cost balancing
accounts.
From 1989 through 1993, the Company recorded pretax gains on four land
transactions which aggregated $1,816,000. On January 7, 1994, the CPUC ruled on
the 1989 sale and allowed Suburban to retain $210,000 in income, in accordance
with CPUC accounting regulations, as opposed to distributing it to ratepayers in
the form of water rate reductions. However, a more recent CPUC decision
involving an unrelated water company required that its gain on the sale of land
be split equally between the ratepayers and the stockholders. Suburban's
remaining transactions (with pretax gains of $1,606,000) are subject to CPUC
review; however, management believes these gains belong to the stockholders.
Accordingly, no provision for any liability has been recorded in the
accompanying consolidated financial statements.
9
Southwest Water Company And Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
The rates and operations of the Company's utilities are regulated primarily by
the CPUC and the NMPUC. The rates are intended to provide a reasonable return on
common equity. The Company's expected future construction expenditures and
increased direct operating expenses will require periodic requests for rate
increases.
The operations of ECO are not regulated. ECO's long-term water and wastewater
service contracts typically include annual inflation adjustments that
approximate inflation rates. Contracts with municipal utility districts, which
are usually shorter term contracts, do not generally include inflation
adjustments.
ENVIRONMENTAL AFFAIRS
The Company's operations are subject to water and wastewater pollution
prevention standards and water and wastewater quality regulations of the United
States Environmental Protection Agency (EPA) and various state regulatory
agencies. The EPA and state regulatory agencies continue to promulgate new
regulations mandated by the Federal Water Pollution Control Act, the Safe
Drinking Water Act, and the Resource Conservation and Recovery Act. To date, the
Company has not experienced any material adverse effects upon its operations
resulting from compliance with governmental regulations. Costs associated with
the testing of the Company's water supplies have, however, 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, if any,
will be recoverable through increased rates and contract revenues.
In May 1993, the Financial Accounting Standards Board issued release No. 93-5,
"Accounting for Environmental Liabilities," which clarifies certain matters
regarding the recognition and measurement of loss contingencies. The Securities
and Exchange Commission, in June 1993, released Staff Accounting Bulletin
No. 92, "Accounting and Disclosures Relating to Loss Contingencies" (SAB92),
which provides guidance with respect to accounting and disclosures relating to
loss contingencies (e.g., product or environmental liabilities). SAB92 is
effective for periods beginning after December 15, 1993. The Company has not
experienced any material adverse impact on the results of operations relating to
the adoption of these new accounting pronouncements.
RESULTS OF OPERATIONS
Year Ended December 31, 1994,
Versus Year Ended December 31, 1993
Fully diluted earnings per common share increased from $.04 per share in 1993 to
$.42 per share in 1994. Results for 1993 include nonrecurring, pretax charges of
$2,259,000, or $.57 per fully diluted share, resulting from settlement and
defense costs of litigation associated with a 1990 chlorine gas leak, and
$250,000, or $.06 per fully diluted share, related to a loss on the liquidation
of certain collateral associated with a note receivable from a former
subsidiary.
Operating income increased $428,000 in 1994 compared to 1993, and, as a
percentage of operating revenues, increased from 7% in 1993 to 8% in 1994.
Utility operating income increased $1,162,000 in 1994 as compared to 1993.
Expenses relating to litigation defense costs decreased approximately $695,000
in 1994, resulting in higher utility operating income. Additionally, Suburban
experienced the positive effects of an increase in customer water consumption
resulting from warmer and drier weather in 1994 as compared to 1993. New Mexico
experienced higher customer water consumption due to an increase in the number
of customers. ECO experienced an increased operating loss during 1994 as
compared to 1993 due primarily to higher contract operating costs, lower gross
profit margins on Texas contracts and increased expenses associated with
expanded sales and marketing efforts.
Operating revenues increased $2,714,000, or 6%, during 1994 over 1993. Water
utility operating revenues increased by $808,000. Suburban's customers increased
water consumption by approximately 2% during 1994 as compared with 1993,
representing an increase of approximately $642,000. Suburban also experienced
the effects of two "step" rate revenue increases and one offset rate reduction
in revenues, as discussed earlier, which resulted in a net $315,000 decrease in
revenues. Higher sewer collection revenues from New Mexico's industrial
customers, attributable mainly to higher volume, as well as a 6% increase in
customer water consumption related to new customers, led to an increase in New
Mexico's revenues of $481,000.
10
ECO's revenues increased a net $1,906,000 during 1994 as compared to 1993.
Approximately $2,042,000 is the result of a greater volume of billable service
revenue, including approximately $1,000,000 of material revenues, primarily on
Texas contracts. Material revenues represent amounts billed by ECO to customers
for the purchase of materials used at the customers' facilities. In 1993, the
majority of these Texas customers directly paid the suppliers for these material
purchases. In addition, ECO recorded a net decrease in 1994 revenues of
$136,000, resulting from lost contracts, which was largely offset by an increase
in revenues from new contracts.
Direct operating expenses increased $2,857,000, or 8%, in 1994 as compared to
1993. As a percentage of operating revenues, these expenses increased from 75%
in 1993 to 76% in 1994. Water utility direct operating expenses increased
$463,000 during 1994 as compared to 1993. Although Suburban's water production
increased slightly over the same period in 1993, changes in the sources of water
and the recording of the production cost balancing accounts resulted in a net
decrease of $397,000 in water, power and gas expenses. New Mexico experienced
higher sewer collection costs of $314,000 related directly to the corresponding
increase in volume. Increases in payroll and associated benefits, water
treatment and lab services, depreciation and other expenses at Suburban and New
Mexico also contributed to a net increase in direct operating expenses of
approximately $546,000.
ECO's direct operating expenses increased approximately $2,394,000 in 1994. Of
this increase, approximately $1,615,000 is the result of a greater volume of
billable service revenues. As discussed earlier, operating expenses increased in
1994, resulting from the direct purchase of materials from suppliers for Texas
contract customers. In 1993, Texas contract customers directly paid the
suppliers for these material purchases. Expenses for salaries, wages and
associated benefits also increased in anticipation of revenue growth in Texas.
In addition, during 1994 the mix of contracts changed. The new contracts entered
into in 1994 earned lower gross profit margins than similar contracts in 1993
due to competitive pressures and contract start-up costs.
Selling, general and administrative expenses decreased $571,000, or 6%, during
1994 as compared to 1993. As a percentage of operating revenues, these expenses
were 18% in 1993 and 16% in 1994.
The general and administrative expenses of the Company's water utilities
decreased $817,000 during 1994, due primarily to decreases in litigation defense
expenses of $695,000.
ECO's selling, general and administrative expenses increased $264,000 during
1994. Sales and marketing expenses increased in Texas and California due to
expanded sales and marketing activity in the pursuit of new contracts in these
areas.
General and administrative expenses of the parent holding company decreased by
approximately $18,000. The parent holding company recorded a $250,000 loss in
1993 on the liquidation of certain collateral associated with a note receivable,
as previously discussed. This amount was offset by higher payroll, legal,
insurance and other general and administrative expenses in 1994.
Interest expense increased $109,000 due to the Company maintaining higher line
of credit balances in 1994 and due to lower amounts of interest capitalized on
capital additions in 1994 as compared to 1993. Interest income decreased
$101,000 during 1994 as compared to 1993 due to reduced Company investments in
interest-bearing deposits and U.S. Government securities.
Year Ended December 31, 1993,
Versus Year Ended December 31, 1992
Fully diluted earnings per common share decreased from $.95 in 1992 to $.04 in
1993. Results for the year include a nonrecurring, pretax charge of $1,437,000,
or $.36 per fully diluted share, relating to out-of-court settlements of two
legal actions arising from a chlorine gas leak that occurred in October 1990 at
a Suburban water facility. Total charges to 1993 operating results associated
with this incident, including defense costs, were $2,259,000, or $.57 per fully
diluted share. A third action was settled earlier in 1993 for a nominal amount.
Results also include a separate pretax charge of $250,000, or $.06 per fully
diluted share, related to a loss on the liquidation of certain collateral
associated with a note receivable from a former subsidiary. During 1993,
Suburban elected to record production cost balancing accounts due to increased
variability in the costs of water. The effect of this change in accounting
estimates in 1993 was to reduce pretax income by $957,000, or $.24 per fully
diluted share.
11
Southwest Water Company And Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating income decreased $1,884,000 in 1993 compared with 1992, and, as a
percentage of operating revenues, decreased from 12% in 1992 to 7% in 1993.
Water utility operating income decreased during 1993 as compared with 1992,
primarily as a result of the provision for production cost balancing accounts,
in spite of the positive effects of water rate increases and a minor increase in
customer water consumption. In addition, Suburban's operating income reflects
the effects of lower authorized rates of return granted by the CPUC as well as
increases in various other expenses. The Company's service business experienced
an operating loss in 1993 due primarily to higher expenses associated with the
upgrading of equipment, management and staff personnel.
Operating revenues increased $3,736,000, or 8%, in 1993. Water utility operating
revenues increased by $2,302,000, or 9%, in 1993. Increased water rates for
Suburban resulted in higher revenues of approximately $1,431,000 in 1993 as
compared with 1992. Suburban's customers increased water consumption by
approximately 3% in 1993 as compared with 1992, representing an additional
increase in revenues of approximately $491,000. Revenues of the Company's
service business increased $1,434,000, or 8%, during 1993. Additional billings
in Texas and three new operating contracts in Mississippi contributed to the
increase. These increases offset the loss of an operating contract in
California.
Direct operating expenses increased $4,295,000, or 14%, in 1993. Water utility
direct operating expenses increased $2,101,000 during 1993 as compared to 1992.
Suburban's purchased water and power costs increased a net $611,000. Suburban's
production cost balancing expense accounts reflected an increase of $957,000 in
1993. In the first six months of 1993, purchased water expenses increased
$185,000 over 1992 levels due to the purchase in 1992 of supplemental water at
favorable prices. However, in the last six months of 1993, Suburban reduced its
cost of water by $678,000 by pumping more water from one of its primary well
fields and using a new water transmission pipeline rather than purchasing the
water from other higher cost sources. Suburban's power costs increased $147,000
in 1993 as compared to 1992. Increased depreciation expense of $583,000 was due
to higher depreciation rates granted by the CPUC, as well as increased capital
expenditures. Increases of $907,000 in payroll and other expenses also
contributed to the increase in expenses.
The direct operating expenses of the Company's service business increased
approximately $2,194,000, or 14%, in 1993. Higher expenses associated with the
addition of new operating contracts in Mississippi, as well as higher expenses
associated with the upgrading of equipment and personnel, contributed to the
increase.
Selling, general and administrative expenses increased $1,325,000, or 18%,
during 1993. As a percentage of operating revenues, these expenses increased
from 17% in 1992 to 18% in 1993.
The general and administrative expenses of the Company's water utilities
increased $883,000 during 1993. Payroll, legal and rent expenses increased while
higher capitalized overhead applied to construction in progress reduced general
and administrative expenses.
The selling, general and administrative expenses of the Company's service
business decreased $5,000 during 1993. Increased legal expenses were offset by
decreases in other general and administrative expenses.
General and administrative expenses of the parent holding company increased by
approximately $447,000 during 1993. Higher payroll and employee benefit expenses
in 1993 were offset by a nonrecurring severance expense recorded in 1992. Also
included in general and administrative expenses is a nonrecurring, pretax charge
of $250,000 related to a loss on a note receivable, as discussed earlier.
Interest income decreased $236,000 in 1993 due to the reduced Company
investments in interest-bearing deposits and U.S. Government securities, as well
as the generally lower rates of return available on invested funds.
12
Southwest Water Company And Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
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For the Years Ended December 31,
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1994 1993 1992
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Operating Revenues $50,932,000 $48,218,000 $44,482,000
Operating Expenses:
Direct operating expenses 38,818,000 35,961,000 31,666,000
Selling, general and administrative 8,265,000 8,836,000 7,511,000
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47,083,000 44,797,000 39,177,000
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Operating Income 3,849,000 3,421,000 5,305,000
Other Income (Expense):
Interest expense (2,220,000) (2,111,000) (2,130,000)
Interest income 81,000 182,000 418,000
Litigation settlements (Note 12) -- (1,437,000) --
Gain on sale of land (Note 13) -- 67,000 --
Other 62,000 5,000 92,000
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(2,077,000) (3,294,000) (1,620,000)
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Income Before Income Taxes 1,772,000 127,000 3,685,000
Provision for income taxes (Note 7) 715,000 -- 1,385,000
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Net Income 1,057,000 127,000 2,300,000
Dividends On Preferred Shares (Note 9) 28,000 28,000 29,000
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Net Income Available For Common Shares $ 1,029,000 $ 99,000 $ 2,271,000
============================================================================================
Earnings Per Common Share (Note 8):
Primary $ .43 $ .04 $ .97
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Fully diluted $ .42 $ .04 $ .95
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Cash Dividends Per Common Share $ .40 $ .665 $ .92
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Weighted-Average Outstanding Common
And Common Equivalent Shares:
Primary 2,404,000 2,370,000 2,331,000
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Fully diluted 2,460,000 2,430,000 2,398,000
============================================================================================
See accompanying notes to consolidated financial statements.
13
Southwest Water Company And Subsidiaries
CONSOLIDATED BALANCE SHEETS
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December 31,
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1994 1993
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ASSETS
Current Assets:
Cash and cash equivalents $ 828,000 $ 2,979,000
U.S. Government securities -- 1,503,000
Customers' accounts receivable 6,021,000 5,822,000
Other current assets 2,011,000 2,123,000
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8,860,000 12,427,000
Property, Plant And Equipment:
Utility property, plant and equipment -- at cost (Note 3) 96,179,000 90,093,000
Non-utility property, plant and equipment -- at cost 5,923,000 5,511,000
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102,102,000 95,604,000
Less accumulated depreciation and amortization 29,966,000 28,528,000
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72,136,000 67,076,000
Other Assets 5,838,000 6,345,000
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$ 86,834,000 $85,848,000
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and bank notes payable (Notes 4 and 6) $ 3,491,000 $ 1,500,000
Accounts payable 1,185,000 3,479,000
Other current liabilities (Note 5) 6,455,000 6,287,000
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11,131,000 11,266,000
Other Liabilities And Deferred Credits:
Long-term debt (Note 6) 20,500,000 21,550,000
Advances for construction 9,151,000 9,641,000
Contributions in aid of construction 10,683,000 8,967,000
Deferred income taxes (Note 7) 3,260,000 2,992,000
Other liabilities and deferred credits 3,577,000 3,256,000
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Total Liabilities And Deferred Credits 58,302,000 57,672,000
Commitments And Contingencies (Note 13)
Stockholders' Equity (Notes 8, 9 and 10):
Cumulative preferred stock 530,000 542,000
Common stock 24,000 24,000
Paid-in capital 17,241,000 16,981,000
Retained earnings 10,820,000 10,753,000
Unamortized value of restricted stock issued (83,000) (124,000)
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Total Stockholders' Equity 28,532,000 28,176,000
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$ 86,834,000 $85,848,000
==============================================================================================================
See accompanying notes to consolidated financial statements.
14
Southwest Water Company And Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
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For the Years Ended December 31, 1992, 1993 and 1994
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Common Stock
----------------------------
Number Paid-in Retained
of Shares Amount Capital Earnings
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Balance at December 31, 1991 2,309,000 $23,000 $16,056,000 $12,104,000
Dividend reinvestment and
employee stock purchase plans 32,000 403,000
Conversion of $15,000 face amount of 9 1/2%
convertible subordinated debentures 6,000 15,000
Restricted stock 2,000 28,000
Net income 2,300,000
Cash dividends declared (2,176,000)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 2,349,000 23,000 16,502,000 12,228,000
Dividend reinvestment and
employee stock purchase plans 31,000 1,000 474,000
Conversion of $5,000 face amount of 9 1/2%
convertible subordinated debentures 2,000 5,000
Net income 127,000
Cash dividends declared (1,602,000)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 2,382,000 24,000 16,981,000 10,753,000
Dividend reinvestment and
employee stock purchase plans 30,000 279,000
Conversion of $9,000 face amount of 9 1/2%
convertible subordinated debentures 4,000 9,000
Restricted stock cancellation (2,000) (28,000)
Net income 1,057,000
Cash dividends declared (990,000)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 2,414,000 $24,000 $17,241,000 $10,820,000
====================================================================================================================================
See accompanying notes to consolidated financial statements.
15
Southwest Water Company And Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
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For the Years Ended December 31,
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1994 1993 1992
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Cash flows from operating activities:
Net income $ 1,057,000 $ 127,000 $ 2,300,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 3,605,000 3,586,000 2,877,000
Deferred income taxes 268,000 110,000 (116,000)
Gain on sale of land -- (67,000) --
Changes in assets and liabilities:
Customers' accounts receivable (199,000) (292,000) (1,200,000)
Other current assets 112,000 (817,000) (69,000)
Accounts payable (2,294,000) 1,859,000 238,000
Other current liabilities 168,000 1,153,000 (284,000)
Other, net 849,000 (678,000) 764,000
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Total adjustments 2,509,000 4,854,000 2,210,000
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Net cash provided by operating activities 3,566,000 4,981,000 4,510,000
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Cash flows from investing activities:
Additions to property, plant and equipment (8,684,000) (7,133,000) (4,914,000)
Net redemption of (investment in) U.S. Government securities 1,503,000 3,959,000 (5,462,000)
Proceeds from sale of land -- 70,000 --
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Net cash used in investing activities (7,181,000) (3,104,000) (10,376,000)
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Cash flows from financing activities:
Net borrowings (repayment) of short-term debt 1,850,000 600,000 (2,100,000)
Contributions in aid of construction, net 1,716,000 105,000 621,000
Net proceeds from dividend reinvestment and employee stock purchase plans 274,000 465,000 403,000
Additions to advances for construction 208,000 971,000 458,000
Dividends paid (986,000) (1,981,000) (2,050,000)
Payments on long-term debt (900,000) (900,000) (1,538,000)
Payments on advances for construction (698,000) (658,000) (419,000)
Net proceeds from issuance of First Mortgage Bonds -- -- 9,416,000
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Net cash provided by (used in) financing activities 1,464,000 (1,398,000) 4,791,000
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Net increase (decrease) in cash and cash equivalents (2,151,000) 479,000 (1,075,000)
Cash and cash equivalents at beginning of year 2,979,000 2,500,000 3,575,000
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Cash and cash equivalents at end of year $ 828,000 $ 2,979,000 $ 2,500,000
===================================================================================================================================
Supplemental Disclosure of cash flow information:
Cash paid during the year for:
Interest $ 2,200,000 $ 2,148,000 $ 1,811,000
Income taxes $ 725,000 $ 799,000 $ 1,369,000
===================================================================================================================================
See accompanying notes to consolidated financial statements.
16
Southwest Water Company And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Significant Accounting Policies
Description Of Business: Southwest Water Company (the Company) and its
subsidiaries operate in the water and wastewater services industry.
Principles Of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. The principal
subsidiaries are Suburban Water Systems (Suburban), New Mexico Utilities,
Inc. (New Mexico) and ECO Resources, Inc. (ECO). All significant intercompany
transactions have been eliminated.
Regulation: The consolidated financial statements are presented in accordance
with generally accepted accounting principles. Suburban and New Mexico
conform to the Uniform System of Accounts prescribed or authorized by the
California Public Utilities Commission (CPUC) and the New Mexico Public
Utility Commission (NMPUC), respectively.
Recognition Of Revenues: Water utility revenues include amounts billed to
customers and an amount of unbilled revenue representing amounts to be billed
for both the fixed portion of the customers' bills and estimated usage from
the last meter-reading date to the end of the accounting period. Service
business revenues are recognized as the related services are performed.
Cash And Cash Equivalents: The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. At December 31, 1994 and 1993, cash and cash equivalents
included money market investments and certificates of deposit.
U.S. Government Securities: The Company adopted Statement of Financial
Accounting Standard No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115) in the fourth quarter of 1993. At December 31,
1994, the Company had no investments in U.S. Government securities. At
December 31, 1993, the Company had certain investments in U.S. Government
securities that were recorded at amortized cost plus accrued interest that
approximated market.
Property, Plant And Equipment: The cost of additions to utility plant is
capitalized in the appropriate plant accounts. Cost includes labor, material,
interest ($56,000, $86,000 and $19,000 in 1994, 1993 and 1992, respectively)
and other direct and indirect charges. The cost of utility plant retired or
otherwise disposed of, including removal costs and excluding salvage, is
charged to accumulated depreciation. Depreciation on utility plant is
recorded primarily on the straight-line remaining life basis and was
equivalent to 3.3% of average gross depreciable plant at December 31, 1994,
3.4% at December 31, 1993, and 2.7% at December 31, 1992. Expenditures that
materially increase utility plant lives are capitalized, while the costs of
maintenance and repairs are charged to expense as incurred. Non-utility
property, plant and equipment is depreciated on the straight-line method over
the estimated useful lives of five to 30 years.
Other Assets: Included in other assets are deferred debt expenses that are
being amortized over the lives of the related debt issues. Additionally,
other assets include purchased contracts that are amortized using the
straight-line method over the estimated lives of the contracts, not to exceed
12 years. Also included are regulatory assets representing amounts that will
be recovered from utility customers through rate adjustments authorized by
the CPUC and NMPUC.
Income Taxes: In 1993, the Company adopted Statement of Financial Accounting
Standard No. 109 "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires
an asset and liability approach to accounting for income taxes. Accordingly,
additional deferred income taxes were provided for temporary differences not
previously recognized, including items previously accounted for using the
flow-through method. These additional deferred taxes provided by Suburban and
New Mexico were offset by the recording of regulatory assets and regulatory
liabilities in accordance with current ratemaking practices of the CPUC and
NMPUC. The regulatory assets and liabilities will be recovered from or
refunded to utility customers through rate adjustments when such taxes become
payable or refundable.
Contributions in aid of construction and advances for construction are
taxable for Federal and state purposes when received, and deferred income tax
assets are recorded for financial reporting purposes. The income taxes are
recovered for contributions in aid of construction by amortizing the related
assets over a 20-year period. Income taxes are recovered for advances for
construction over a 40-year period. Deferred income taxes are also recorded
for differences between Federal and book depreciation. Unamortized investment
tax credits, included in other liabilities and deferred credits, have been
deferred and are amortized against Federal income taxes over the estimated
productive lives of the related assets as allowed by the CPUC and the NMPUC.
Production Cost Balancing Accounts: During 1993, Suburban elected to record
production cost balancing accounts due to increased variability in the costs
of water. As permitted by the CPUC, Suburban records the difference between
actual and CPUC-adopted production costs in balancing accounts in the income
statement, with a corresponding liability or asset on the balance sheet,
until the differences are refunded to or recovered from utility customers
through CPUC-authorized rate adjustments. The production cost balancing
accounts include such items as purchased water, production assessments and
power costs. The effect of this change in accounting estimates in 1993 was to
reduce pretax income by $957,000, or $.24 per fully diluted share.
17
Southwest Water Company And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advances For Construction: Advances for construction are primarily for water
pipeline extensions. Advance contracts issued prior to July 1982 are
refundable to the depositor at 22% of the revenue received from such
installations over a 20-year period. Advance contracts issued after June 1982
are refundable to the depositor at a rate of 2.5% each year over a 40-year
period.
Contributions In Aid Of Construction: Contributions in aid of construction
are contributions in cash, services or property from developers, governmental
agencies, municipalities or individuals for the purpose of constructing
utility plant. Book depreciation applicable to such plant is charged to the
contributions in aid of construction account rather than to depreciation
expense. The charges continue until the cost applicable to such properties
has been fully depreciated or the asset retired.
Other Liabilities And Deferred Credits: Other liabilities and deferred
credits include unamortized investment tax credits recorded by Suburban and
New Mexico as required by the CPUC and the NMPUC. Also included is the
deferred revenue component of contributions in aid of construction for New
Mexico, recorded under the policy prescribed by the NMPUC. Other liabilities
and deferred credits also include regulatory liabilities representing amounts
that will be refunded to utility customers through rate adjustments
authorized by the CPUC and the NMPUC. Also included are deposits received by
New Mexico for contributions in aid of construction related to major capital
improvement projects that will be built under New Mexico's master plan.
Reclassifications: Certain reclassifications have been made to the 1993 and
1992 consolidated financial statements to conform with the 1994 presentation.
NOTE 2. Acquisition And Disposition Of Businesses
ECO purchased from an unrelated party all of the common stock of Southern
Municipal Services, Inc. (SMS) for $200,000 in cash on August 31, 1993, and
$75,000 paid in August 1994 upon the attainment of certain contract goals by
the former owner of SMS. SMS provided contract operations and maintenance
services for municipal utility districts in the Houston, Texas, area. The
transaction was accounted for under the purchase method. Goodwill of $275,000
was recorded on the transaction and is being amortized over 10 years on a
straight-line basis. The operations of SMS have been included in the
Company's consolidated financial statements effective September 1, 1993.
In 1993, the Company recorded a nonrecurring, pretax charge of $250,000, or
$.06 per fully diluted share, related to a loss on the liquidation of certain
collateral associated with a note receivable from a former subsidiary.
NOTE 3. Utility Property, Plant And Equipment
The components of utility property, plant and equipment at December 31, 1994
and 1993, are as follows:
----------------------------------------------------------------------
1994 1993
----------------------------------------------------------------------
Land and land rights $ 494,000 $ 493,000
Source of supply 9,330,000 9,117,000
Pumping and purification 7,797,000 7,647,000
Transmission and distribution 70,553,000 64,928,000
General (including intangibles) 6,556,000 6,455,000
Construction work in progress 1,449,000 1,453,000
----------------------------------------------------------------------
$96,179,000 $90,093,000
======================================================================
At December 31, 1994, substantially all of the Company's gross utility plant
is pledged as collateral for the First Mortgage Bonds issued by the Company.
Included in 1994 and 1993 general utility plant is $698,000 of investments in
two not-for-profit mutual water companies. The investments are recorded at
cost and entitle the Company to certain water rights. The Company's
investment in one of these mutual water companies is approximately 32%. The
Company does not exercise significant operating and financial control over
this mutual water company. The Company purchased water for its operations
from these mutual water companies at a cost of approximately $1,050,000,
$1,515,000 and $1,289,000 in 1994, 1993 and 1992, respectively.
NOTE 4. Lines Of Credit
At December 31, 1994, the Company had three revolving lines of credit
totaling $10,500,000 that expire on various dates through 1995. In January
1995, the Company increased one of its lines of credit by $2,000,000.
Interest charged on borrowings under the lines of credit is at the banks'
prime rates or prime rate plus one-half percent. On two of its lines of
credit, the Company may select a fixed interest rate, provided the Company
agrees to borrow the funds for a fixed minimum period. Borrowings are
unsecured. One of the lines of credit requires a commitment fee of one half
percent per year of the unused portion of the available line of credit,
calculated and payable on a quarterly basis. All of the lines of credit contain
certain financial restrictions. The Company expects to renew and update these
lines of credit in the normal course of business.
A summary of borrowings on the lines of credit is presented below:
----------------------------------------------------------------------
1994 1993
----------------------------------------------------------------------
Notes payable to banks
at December 31 $2,450,000 $ 600,000
Weighted-average interest
rate at December 31 7.6% 4.9%
Maximum amount of borrowings
outstanding at any month-end $3,750,000 $1,500,000
Average borrowings $2,758,000 $ 228,000
Weighted-average interest rate 6.1% 4.9%
======================================================================
18
NOTE 5. Other Current Liabilities
Included in other current liabilities at December 31, 1994 and 1993, are the
following:
---------------------------------------------------------------------------
1994 1993
---------------------------------------------------------------------------
Accrued salaries, wages and benefits $1,425,000 $1,610,000
Purchased water 1,093,000 486,000
Production cost balancing accounts 731,000 957,000
Franchise and other taxes 650,000 551,000
Accrued interest payable 570,000 578,000
Current portion of advances
for construction 449,000 623,000
Accrued dividends payable 249,000 245,000
Other 1,288,000 1,237,000
---------------------------------------------------------------------------
$6,455,000 $6,287,000
===========================================================================
NOTE 6. Long-Term Debt
The long-term debt outstanding at December 31, 1994 and 1993, is summarized
as follows:
---------------------------------------------------------------------------
1994 1993
---------------------------------------------------------------------------
Suburban First Mortgage Bond,
Series A, due 2006, at 8.93%
interest rate, with semiannual
interest payments $11,400,000 $12,300,000
Suburban First Mortgage Bond,
Series B, due 2022, at 9.09%
interest rate, with semiannual
interest payments 8,000,000 8,000,000
New Mexico First Mortgage Bond,
Series A, due 2002, at 8.86%
interest rate, with semiannual
interest payments 2,000,000 2,000,000
Convertible subordinated
debentures, due August 1995,
at 9.50% interest rate, with
interest payable semiannually 141,000 150,000
---------------------------------------------------------------------------
21,541,000 22,450,000
Less current maturities 1,041,000 900,000
---------------------------------------------------------------------------
Long-term debt $20,500,000 $21,550,000
===========================================================================
Suburban's First Mortgage Bond, Series A, requires annual sinking fund payments
of $900,000. The bond is nonrefundable and not redeemable prior to 2000.
Subsequent to 2000, the bond is redeemable at the option of the Company at a
price of par plus a call premium. Suburban's First Mortgage Bond, Series B, and
New Mexico's First Mortgage Bond, Series A, do not require annual sinking fund
payments. These bonds are nonrefundable and are redeemable at any time by the
Company at a price of par plus a call premium. Additional mortgage bonds may be
issued, subject to the provisions of the indentures. Each indenture limits the
amount of cash and property dividends that Suburban and New Mexico may pay to
the Company. At December 31, 1994, the unrestricted retained earnings of these
subsidiaries aggregated $6,100,000.
The 9.50% convertible subordinated debentures currently are convertible into
common stock at the rate of one share for each $2.55 principal amount of such
debentures. At December 31, 1994 and 1993, there were 55,000 and 59,000
common shares reserved for such conversion, respectively.
Aggregate annual maturities and sinking fund requirements of all long-term
debt for the five years ending December 31, 1999, are as follows: 1995 -
$1,041,000; 1996 - $900,000; 1997 - $900,000; 1998 - $900,000; and 1999 -
$900,000.
NOTE 7. Income Taxes
The Company adopted SFAS 109 during the first quarter of 1993. In connection
with the adoption of SFAS 109, the Company recorded additional deferred
income taxes. The increased deferred income taxes recorded by Suburban and
New Mexico were offset by the recording of regulatory assets and regulatory
liabilities. At December 31, 1994 and 1993, regulatory assets of $1,249,000
and $1,241,000, respectively, were recorded. Regulatory liabilities of
$687,000 and $651,000 were also recorded at December 31, 1994 and 1993,
respectively. The adoption of SFAS 109 had a minimal impact on current income
tax expense.
The components of the current and deferred income tax provisions are as
follows:
---------------------------------------------------------------------------
1994 1993 1992
---------------------------------------------------------------------------
Current tax expense:
Federal $ 395,000 $ 278,000 $1,250,000
State 73,000 252,000 300,000
---------------------------------------------------------------------------
468,000 530,000 1,550,000
---------------------------------------------------------------------------
Deferred income taxes (benefits):
Litigation settlement 570,000 (570,000) --
Depreciation 261,000 1,606,000 364,000
Production cost
balancing accounts 89,000 (379,000) --
Pension expense 65,000 83,000 (71,000)
Contributions in aid
of construction
and advances
for construction (539,000) (40,000) (387,000)
Gains on condemnation
of land (65,000) (18,000) (7,000)
Other reserves (42,000) 165,000 (72,000)
Investment tax credits (37,000) (596,000) --
Deferred debt expenses (9,000) (62,000) (8,000)
Other, net (25,000) (79,000) 65,000
---------------------------------------------------------------------------
268,000 110,000 (116,000)
---------------------------------------------------------------------------
Change in regulatory assets and
regulatory liabilities, net 28,000 (591,000) --
Investment tax credit
amortization (49,000) (49,000) (49,000)
---------------------------------------------------------------------------
$ 715,000 $ -- $1,385,000
---------------------------------------------------------------------------
19
Southwest Water Company And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is as follows:
----------------------------------------------------------------------
1994 1993 1992
----------------------------------------------------------------------
Provision computed
at statutory rates 34 % 34 % 34 %
Depreciation 4 % 60 % -- %
Amortization of goodwill 2 % 20 % -- %
State income taxes,
net of Federal tax benefit 2 % (64)% 6 %
Investment tax credits (3)% (38)% (1)%
Other, net 1 % (12)% (1)%
----------------------------------------------------------------------
40 % -- % 38 %
----------------------------------------------------------------------
Net deferred income tax liabilities consist of the following at December 31,
1994 and 1993:
---------------------------------------------------------------------
1994 1993
---------------------------------------------------------------------
Deferred income tax assets:
Contributions in aid of
construction and advances
for construction $ 2,245,000 $ 1,706,000
Investment tax credits 633,000 596,000
Production cost
balancing accounts 290,000 379,000
Other reserves 137,000 95,000
Pension expense 60,000 125,000
Litigation settlement -- 570,000
Other 218,000 167,000
---------------------------------------------------------------------
3,583,000 3,638,000
---------------------------------------------------------------------
Deferred income tax liabilities:
Depreciation (5,577,000) (5,334,000)
Gains on condemnation of land (938,000) (985,000)
Deferred debt expenses (131,000) (140,000)
Other (197,000) (171,000)
---------------------------------------------------------------------
(6,843,000) (6,630,000)
---------------------------------------------------------------------
Net deferred income taxes $(3,260,000) $(2,992,000)
---------------------------------------------------------------------
Management reviews annually the recoverability of deferred income tax assets
and has determined that no valuation allowances were necessary at December
31, 1994 or 1993.
NOTE 8. Earnings Per Share
Primary earnings per share are calculated using the weighted-average number
of shares and dilutive common equivalent shares outstanding during each year
after recognition of dividend requirements on preferred shares. Common
equivalent shares arise from stock options. Fully diluted earnings per share
were computed based upon the average number of common shares and dilutive
common equivalent shares outstanding, assuming the 9.50% convertible
subordinated debentures were converted at the beginning of the year and the
related interest for the year, net of income taxes, was eliminated.
NOTE 9. Stockholders' Equity
The Company is currently authorized to issue 10,000,000 common shares at a
par value of $.01 per share. There were 2,414,061 and 2,382,491 shares
outstanding at December 31, 1994 and 1993, respectively. The Company is also
currently authorized to issue 250,000 preferred shares at a par value of $.01
per share. There were 10,373 1/4 Series A preferred shares outstanding at both
December 31, 1994 and 1993. The holders of Series A shares are entitled to
annual dividends of $2.625 per share. Series A shares are callable by the
Company at a price equal to $52 per share and have a preference in
liquidation of $50. There were 220 and 440 Series D preferred shares
outstanding at December 31, 1994 and 1993, respectively. The holders of
Series D shares were entitled to annual dividends of $2.75 per share. The
Company fully redeemed the Series D shares in January 1995.
The Company has a dividend reinvestment and stock purchase plan that allows
common stockholders the option of receiving their dividends in cash or common
stock at a 5% discount rate. The plan permits optional cash purchases of
stock at current market values to a maximum of $3,000 per quarter. At
December 31, 1994, there were 169,009 common shares reserved for issuance
under this plan. In addition, the Company has an employee qualified stock
purchase plan that allows eligible employees to purchase common stock through
payroll withholding in an amount of up to 10% of their salary (not to exceed
$25,000 per year) at a 10% discount rate. At December 31, 1994, 179,369
common shares were reserved for issuance under this plan.
NOTE 10. Stock Option And Restricted
Stock Plan
During 1988, the stockholders approved a stock option and restricted stock
plan (the Plan). In 1989, the Plan was amended to provide for the grant of
stock appreciation rights. In 1993, the stockholders approved an amendment to
the Plan (the Amendment). The Amendment provides for an increase in the
number of shares reserved for issuance under the Plan from 150,000 to
250,000, and an extension of the period during which the Company may grant
options to purchase the Company's common stock from February 17, 1998, to
February 17, 2003. In addition, the Amendment eliminates any future grants of
stock appreciation rights or issuances of restricted stock under the Plan and
amends certain provisions with respect to the outstanding restricted stock
issued thereunder.
Restricted stock issued to officers prior to the Amendment is held in escrow
until the restrictions lapse. Restricted stock issued prior to October 22,
1991, vests 10 years after grant. Restricted stock issued after October 22,
1991, was subject to repurchase by the Company. Unearned compensation of
$238,000 related to the issuance of 14,750 shares of restricted stock is
being amortized over the vesting period. During 1994, 2,000 shares were
repurchased and cancelled by the
20
Company after the resignation of an officer. During 1993, 3,285 shares of
restricted stock were released from escrow to a former officer of Suburban. In
1994, 1993 and 1992, $13,000, $29,000 and $64,000, respectively, were recorded
as compensation expense. The Plan also allows the Company to grant nonqualified
stock options to officers, certain directors and employees at exercise prices
not less than the fair market value of the Company's common stock on the date of
grant. Generally, options vest over a period of five years and expire 10 years
from the date of grant. Activity for nonqualified stock options issued under the
Plan is as follows:
------------------------------------------------------------------------
Number of Shares Exercise Prices
------------------------------------------------------------------------
Outstanding, December 31, 1992 118,650 $13.25 - $17.75
Cancelled (300) 15.50 --
------------------------------------------------------------------------
Outstanding, December 31, 1993 118,350 13.25 - 17.75
Granted 22,505 9.75 --
Cancelled (29,220) 9.75 - 17.75
------------------------------------------------------------------------
Outstanding, December 31, 1994 111,635 $ 9.75 - $17.75
------------------------------------------------------------------------
At December 31, 1994, there were 118,030 shares available for grant as
options, and 69,170 options were exercisable.
NOTE 11. Employee Benefit Plans
The Company has a noncontributory pension plan under which employees of the
parent company, Suburban and New Mexico who have one or more years of service
and have attained the age of 21 years are qualified to participate. The
Company funds annually the minimum required statutory amount. In January
1994, the Company contributed $516,000 to the pension plan. No contributions
were required in 1993 and 1992. The benefits are based on employees' average
compensation during the highest five consecutive years of the last 10 years
before retirement, and their years of service. The benefit is reduced if a
participant retires early.
Net pension expense for 1994, 1993 and 1992 included the following
components:
--------------------------------------------------------------------
Years Ended December 31, 1994 1993 1992
--------------------------------------------------------------------
Service cost - benefits
earned during the period $548,000 $357,000 $335,000
Interest cost on projected
benefit obligation 555,000 484,000 433,000
Actual return on plan assets 303,000 (750,000) (597,000)
Net amortization and deferral (961,000) 126,000 1,000
--------------------------------------------------------------------
Net pension expense $445,000 $217,000 $172,000
--------------------------------------------------------------------
The funded status at December 31, 1994 and 1993, is reconciled to accrued
expense as follows:
--------------------------------------------------------------------
1994 1993
--------------------------------------------------------------------
Actuarial present value of
benefit obligations:
Accumulated benefit obligation $(4,687,000) $(4,920,000)
Effect of increase in compensation levels (1,855,000) (2,732,000)
--------------------------------------------------------------------
Projected benefit obligation for service
rendered through December 31 (6,542,000) (7,652,000)
Plan assets at fair value 7,121,000 7,180,000
--------------------------------------------------------------------
Plan assets greater (less) than
projected benefit obligation 579,000 (472,000)
Unrecognized net asset at transition date (997,000) (1,121,000)
Unrecognized prior service cost (185,000) --
Unrecognized net loss (gain)
from past experience, different
from that assumed and effects
of changes in assumptions (67,000) 852,000
--------------------------------------------------------------------
Accrued expense $ (670,000) $ (741,000)
--------------------------------------------------------------------
The unrecognized prior service cost results from a change in the Internal
Revenue Service Code which decreased the maximum amount of compensation that
may be recognized for pension plan purposes from $235,840 to $150,000.
Included in accumulated benefit obligation are vested benefits of $4,583,000
and $4,806,000 at December 31, 1994 and 1993, respectively. Approximately 87%
of plan assets are invested in two mutual funds consisting of investments in
stocks, bonds, and money market investments, and a group retirement policy
consisting of a guaranteed insurance contract. The remaining 13% of plan
assets are invested primarily in the Company's common stock. The plan owns
64,064 common shares of the Company, which had a market value of
approximately $545,000 and $625,000 at December 31, 1994 and 1993,
respectively. The plan received dividends on these shares of approximately
$26,000, $53,000 and $56,000 in 1994, 1993 and 1992, respectively.
The discount rate and the rate of increase in compensation levels used in
determining the actuarial present value of the projected benefit obligation
(PBO) at December 31, 1994, were 8.5% and 5.5%, respectively. The discount
rate and the rate of increase in compensation levels used to compute the PBO
at December 31, 1993, were 7.25% and 6.0%, respectively. At December 31,
1992, the discount rate and rate of increase in compensation levels were 8.5%
and 6.5%, respectively. The expected long-term rate of return on assets used
in 1994 and 1993 was 7.5%.
21
Southwest Water Company And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1988, the Company established a 401(k) profit sharing plan (ECO 401(k)
Plan) covering employees of its service business. In 1993, the Company
amended the ECO 401(k) Plan to provide for monthly enrollment by employees
after the completion of three months of service, and made other minor
changes. Participants may elect to contribute up to 15% of their salary to
the ECO 401(k) Plan. The Company matches a participant's contribution for an
amount up to 50% of the first 4% of a participant's salary. Company
contributions vest immediately. Company contributions to the ECO 401(k) Plan
were $91,000, $77,000 and $68,000 in 1994, 1993 and 1992, respectively. The
assets of the ECO 401(k) Plan are invested at the discretion of the
individual employees in mutual funds consisting of stocks, bonds and money
market investments.
On January 1, 1994, the Company established a 401(k) plan (the Utility 401(k)
Plan) covering the parent company, Suburban and New Mexico employees. The
Utility 401(k) Plan provides for quarterly enrollment after the completion of
three months of service, and allows participants to contribute up to 15% of
their salary. The Utility 401(k) Plan does not allow Company contributions.
The assets of the Utility 401(k) Plan are invested at the discretion of the
individual employees in mutual funds consisting of stocks, bonds and money
market investments.
Note 12. Litigation Settlements
In January 1994, Suburban reached out-of-court settlements of two legal
actions arising from a chlorine gas leak that occurred in October 1990 at a
Suburban water supply facility. The two actions were settled for an aggregate
cash payment of approximately $1,437,000 paid in January 1994 and are the
last known claims arising out of this incident. The Company recorded in 1993
a nonrecurring charge of $.36 per fully diluted share associated with these
settlements. The plaintiffs sought general damages in excess of $3.7 million
plus unspecified punitive damages. The full impact of this incident on 1993
earnings was $.57 per fully diluted share, which included defense costs of
approximately $822,000 in addition to the $1,437,000 settlement. A third
action was settled earlier in 1993 for a nominal amount.
At the time of the chlorine gas incident, the Company maintained liability
insurance coverage of $20 million. However, the Company's primary and excess
liability insurance carrier declined to defend or indemnify the Company on
the basis of allegedly applicable exclusions in these policies. The Company
believes it is entitled to defense and indemnity under these policies and
filed a lawsuit against the carrier to obtain reimbursement for the full
amount of these settlements, plus associated defense costs. On May 3, 1994,
the insurance carrier was granted a summary judgment dismissing the Company's
action. On May 31, 1994, the Company appealed this judgment, and the appeal
is pending. Suburban is authorized by the CPUC to seek recovery of defense
expenses through future rate proceedings. There is no assurance that recovery
of such costs will be allowed. The Company will not recognize income on these
potential recoveries until amounts, if any, are received.
NOTE 13. Commitments And Contingencies
The Company leases certain equipment and office facilities under operating
leases that expire through 2003. Aggregate rental expense under all operating
leases approximated $1,724,000 in 1994, $1,244,000 in 1993, and $645,000 in
1992. At December 31, 1994, the minimum rental commitments under existing
noncancelable operating leases are as follows: 1995 - $1,826,000; 1996 -
$1,699,000; 1997 - $1,413,000; 1998 - $857,000; 1999 - $500,000; and
thereafter - $1,143,000.
The Company is the subject 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 condition,
results of operations or cash flow.
From 1989 through 1993, the Company recorded pretax gains on four land
transactions that aggregated $1,816,000. On January 7, 1994, the CPUC ruled
on the 1989 sale and allowed Suburban to retain $210,000 in income, in
accordance with CPUC accounting regulations, as opposed to distributing it to
ratepayers in the form of water rate reductions. However, a more recent CPUC
decision involving an unrelated water company required that its gain on the
sale of land be split equally between the ratepayers and the stockholders.
Suburban's remaining transactions (with pretax gains of $1,606,000) are
subject to CPUC review; however, management believes these gains belong to
the stockholders. Accordingly, no provision for any liability has been
recorded in the accompanying consolidated financial statements.
22
Southwest Water Company And Subsidiaries
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Southwest Water Company:
We have audited the accompanying consolidated balance sheets of Southwest
Water Company and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of income, changes in common stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southwest
Water Company and subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
January 23, 1995
23
Southwest Water Company And Subsidiaries
UNAUDITED QUARTERLY FINANCIAL INFORMATION
---------------------------------------------------------------------------------------------------------------
(in thousands except per share amounts)
---------------------------------------------------------------------------------------------------------------
1994 Quarter Ended March June September December
---------------------------------------------------------------------------------------------------------------
Operating revenues $11,102 $12,694 $ 14,533 $12,603
Operating income 262 925 1,623 1,039
Net income (loss) (131) 241 650 297
Net income (loss) available for common shares (138) 234 643 290
Primary earnings (loss) per common share (.06) .10 .27 .12
Fully diluted earnings (loss) per common share (.06) .10 .26 .12
---------------------------------------------------------------------------------------------------------------
1993 Quarter Ended March June September December
---------------------------------------------------------------------------------------------------------------
Operating revenues $ 9,620 $12,644 $13,992 $11,962
Operating income 334 1,485 1,278 324
Net income (loss) (81) 604 499 (895)
Net income (loss) available for common shares (88) 597 492 (902)
Primary earnings (loss) per common share (.04) .25 .21 (.38)
Fully diluted earnings (loss) per common share (.04) .25 .20 (.38)
---------------------------------------------------------------------------------------------------------------
The fluctuations in operating revenues and operating income between quarters
reflect the seasonal nature of the water utility and service business
operations, the nonrecurring charges in the second half of 1993, and the
timing of utility rate relief.
MARKET AND DIVIDEND INFORMATION
The following table sets forth the range of market prices of Southwest Water
Company's Common Shares. Such prices reflect inter-dealer prices without
retail markup, markdown or commissions and may not necessarily represent
actual transactions. The shares are traded on the NASDAQ National Market --
symbol SWWC. The current annual dividend rate is $.40 per share. At December
31, 1994, there were 1,914 stockholders of record.
-----------------------------------------------------------------------------------------------------
1994 1993
-----------------------------------------------------------------------------------------------------
Market Price Range Market Price Range
Dividends High Low Dividends High Low
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1st Quarter $.10 $11 1/4 $8 3/4 $.2325 $18 $14 3/4
2nd Quarter .10 12 1/4 8 1/2 .2325 17 3/4 15 1/4
3rd Quarter .10 11 8 1/4 .10 16 3/4 8 1/2
4th Quarter .10 9 3/4 7 1/2 .10 13 3/4 9 1/4
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