Southwest Water Company and Subsidiaries EXHIBIT 13.1
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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1995 1994 1993 1992 1991
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Summary Of Operations
Operating revenues $ 56,807,000 $ 50,932,000 $48,218,000 $ 44,482,000 $38,802,000
Operating income $ 4,432,000 $ 3,849,000 $ 3,421,000 $ 5,305,000 $ 996,000
Gain on condemnation and sale of land $ 84,000 $ -- $ 67,000 $ -- $ 274,000
Litigation settlements $ -- $ -- $(1,437,000) $ -- $ --
Gain on settlement of estate with
related party $ -- $ -- $ -- $ -- $ 450,000
Net income $ 1,439,000 $ 1,057,000 $ 127,000 $ 2,300,000 $ 206,000
Net income available for common shares $ 1,412,000 $ 1,029,000 $ 99,000 $ 2,271,000 $ 176,000
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Common Share Data(1)
Primary earnings per share $ .55 $ .41 $ .04 $ .93 $ .07
Fully diluted earnings per share $ .55 $ .40 $ .04 $ .91 $ .07
Cash dividends per share $ .38 $ .38 $ .63 $ .88 $ .87
Weighted-average outstanding shares
and equivalent shares:
Primary 2,561,000 2,524,000 2,490,000 2,448,000 2,414,000
Fully diluted 2,562,000 2,581,000 2,490,000 2,515,000 2,414,000
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Statistical Data
Working capital (deficit) $ (7,266,000) $ (1,951,000) $ 1,161,000 $ 6,765,000 $(1,549,000)
Capital additions $ 11,866,000 $ 8,684,000 $ 7,133,000 $ 4,914,000 $ 4,485,000
Property, plant and equipment, net $ 80,267,000 $ 72,136,000 $67,076,000 $ 63,506,000 $61,574,000
Total assets $ 97,456,000 $ 86,834,000 $85,848,000 $ 83,672,000 $75,924,000
Long-term debt $ 19,600,000 $ 20,500,000 $21,550,000 $ 22,455,000 $13,375,000
Stockholders' equity $ 29,246,000 $ 28,532,000 $28,176,000 $ 29,153,000 $28,558,000
Return on average common equity 5.0% 3.7% .4% 8.0% .6%
Number of customers 194,800 174,500 171,600 161,100 167,300
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(1) Primary and fully diluted earnings per share, cash dividends per share and
weighted-average outstanding shares have been restated to reflect a 5%
stock dividend on January 2, 1996.
8
Southwest Water Company and Subsidiaries
management's discussion and analysis of
financial condition and results of operations
liquidity and capital resources
Liquidity and capital resources of Southwest Water Company (the Company) are
influenced primarily by construction expenditures at Suburban Water Systems
(Suburban) for the replacement and renovation of existing water utility
facilities and by construction expenditures for new water and wastewater utility
facilities at New Mexico Utilities, Inc. (NMUI). To a lesser extent, liquidity
is influenced by the Company's continuing investment in ECO Resources, Inc.
(ECO).
At December 31, 1995, the Company had cash and cash equivalent balances totaling
approximately $784,000 and unused lines of credit from three commercial banks of
$6,325,000. During 1995, the Company increased its lines of credit capacity by
$4,000,000 to a total of $14,500,000, and borrowed a net $5,725,000 on its lines
of credit primarily to meet construction requirements. Additional short-term
borrowing is anticipated during 1996 to meet construction requirements. The
three lines of credit expire at various dates in 1996, and the Company
anticipates renewing these lines in the normal course of business.
Accounts receivable of the Company increased by $1,764,000 in 1995, primarily
due to higher operating revenues at ECO. In addition, accounts payable increased
by $1,084,000, which reflects higher operating cost levels at ECO, as well as
ongoing construction projects at Suburban and NMUI.
The Company's additions to property, plant and equipment were $11,866,000 during
1995, representing an increase of $3,182,000 over the same period in 1994. This
increase relates primarily to utility plant additions at NMUI due to increased
residential and commercial construction in NMUI's service area. Of the total
additions, $2,395,000 was received by the Company's utilities through developer
contributions in aid of construction. The Company anticipates continuing its
construction programs at the current level during the next year.
The Company has initiated negotiations with investment bankers and anticipates
obtaining long-term financing during 1996. Proceeds from this financing would be
used to repay short-term debt and fund ongoing construction requirements. The
Company has remaining borrowing capacity under its First Mortgage Bond
Indentures of $26,592,000. 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, 1995 to a maximum
of $13,323,000.
The amount and timing of future long-term financings will depend on various
factors including the timeliness and adequacy of rate increases, the
availability of capital, and the Company's ability to meet interest and fixed
charge coverage requirements. Regulatory approval is required for any long-term
financing agreement. If the Company were unable to renew its existing lines of
credit or obtain additional long-term financing, capital spending would be
reduced or delayed until new financing arrangements were secured.
regulatory affairs and inflation
The rates and operations of the Company's utilities are regulated by the
California Public Utilities Commission (CPUC) and the New Mexico Public Utility
Commission (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.
9
Southwest Water Company and Subsidiaries
management's discussion and analysis of
financial condition and results of operations
In January 1996, Suburban and the CPUC staff negotiated a proposed rate increase
of 4.25% ($1.1 million), effective in the second quarter of 1996, with two
additional increases for inflation in 1997 and 1998. Upon final CPUC approval,
Suburban would be authorized to earn a 10% return on common equity. In December
1995, NMUI was granted an 8% general sewer rate increase by the NMPUC, effective
January 1996, which will result in additional annual revenues of $124,000.
Effective January 1, 1995, the CPUC granted Suburban a step rate increase for
its Whittier/La Mirada District customers, yielding additional authorized annual
revenues of $286,000.
From 1989 through 1995, Suburban recorded pretax gains on five land transactions
which aggregated $1,900,000. In 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. The Water Utility Infrastructure Improvement Act of
1995 was passed by the California Assembly and Senate and signed by the governor
on August 10, 1995. This law provides that water utilities selling real property
that is no longer necessary or useful may invest the net proceeds in utility
plant. Any net proceeds (and the interest thereon) not invested in an eight-year
period shall be allocated to ratepayers. While Suburban's remaining transactions
from the 1989-1995 period are subject to CPUC review, the proceeds were invested
in utility plant, and, therefore, management believes these gains should not
affect water rates. No regulatory liability has been recorded in the
accompanying consolidated financial statements.
The California legislature has held hearings discussing the CPUC's organization
and operation. Among other options, the CPUC has proposed consideration of
performance-based ratemaking, which provides incentives for utilities to operate
more efficiently and improve productivity, and is intended to reduce regulatory
burden and promote efficiency among utilities. Both ratepayers and stockholders
would likely benefit from improved productivity as applications for rate case
increases would be conducted less frequently.
Legislative and CPUC developments are closely monitored by the Company and by
the various water industry associations in which the Company actively
participates. Whether such legislative or CPUC developments will be enacted, or,
if enacted, what the terms of such developments would be, is not known by the
Company. Therefore, management cannot predict the impact of final legislative or
CPUC developments on the Company's financial condition or results of operations.
The operations of ECO are not regulated. ECO's long-term water and wastewater
service contracts typically include annual inflation adjustments. Most contracts
with municipal utility districts are short-term contracts and 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 operations revenues.
10
results of operations
Year Ended December 31, 1995,
Versus Year Ended December 31, 1994
Fully diluted earnings per common share (adjusted for the 5% stock dividend on
January 2, 1996) were $.55 in 1995 compared to $.40 in 1994. Results for 1995
include a net gain of $50,000, or $.02 per fully diluted share, from the sale of
surplus land.
Operating income increased $583,000, and, as a percentage of operating revenues,
was 8% in 1995 and 1994. Utility operating income increased $484,000, due
primarily to a significant increase in NMUI's customer base. ECO experienced a
decreased operating loss of $236,000, due primarily to improved gross profit
margins on billable and project services and operating profits recorded on new
contracts. Parent company expenses increased $137,000, primarily due to higher
consulting and outside services expenses.
Operating revenues increased $5,875,000 or 12%. Water utility operating revenues
increased $978,000. Water consumption by Suburban customers decreased slightly,
resulting in decreased revenues of $79,000. This decrease was offset by the
benefits of a step rate increase which resulted in additional revenues of
$328,000. NMUI added 624 new water customers in 1995, which resulted in a 19%
increase in water consumption, representing an increase in water revenues of
$350,000. Higher sewer collection volume at NMUI led to an increase in revenues
of $379,000. ECO's revenues increased $4,897,000, primarily as a result of
revenues from new contracts and increased billable work in Texas.
Direct operating expenses increased $4,553,000 or 12%. As a percentage of
operating revenues, these expenses were 76% in 1995 and 1994. Water utility
direct operating expenses increased $178,000. NMUI recorded higher sewer
collection expenses, primarily related to the increase in sewer collection
volume. ECO's direct operating expenses increased $4,375,000, resulting
primarily from the addition of new contracts in Texas, New Mexico and
California, and higher expenses associated with increased billable work in
Texas.
Selling, general and administrative expenses increased $739,000. As a percentage
of operating revenues, these expenses remained constant at 16% in 1995 and 1994.
Water utility general and administrative expenses increased $316,000, primarily
due to higher payroll and associated payroll benefits. ECO's selling, general
and administrative expenses increased $286,000, primarily due to expanded sales
and marketing activity. As discussed above, general and administrative expenses
of the parent company increased $137,000.
Year Ended December 31, 1994,
Versus Year Ended December 31, 1993
Fully diluted earnings per common share (adjusted for the 5% stock dividend on
January 2, 1996) were $.40 in 1994 compared to $.04 in 1993. Results for 1993
include nonrecurring, pretax charges of $2,259,000, or $.54 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.
11
Southwest Water Company and Subsidiaries
management's discussion and analysis of
financial condition and results of operations
Operating income increased $428,000 in 1994, and, as a percentage of operating
revenues, increased from 7% in 1993 to 8% in 1994. Water utility operating
income increased $1,162,000 due to decreased expenses related to litigation
defense costs. Additionally, NMUI experienced an increase in the number of water
and sewer customers. ECO experienced an increased operating loss due to higher
contract operating costs, lower gross profit margins on Texas contracts, and
expanded sales and marketing expenses.
Operating revenues increased $2,714,000 or 6%. Water utility operating revenues
increased by $808,000. A moderate increase of water consumption by Suburban
customers resulted in increased revenues of $642,000. Suburban also experienced
the effects of two step rate increases and one offset rate reduction, resulting
in a net $315,000 decrease in revenues. Higher sewer collection volume at NMUI,
as well as a 6% increase in customer water consumption related to new customers,
led to an increase in revenues of $481,000. ECO's revenues increased $1,906,000,
primarily as the result of a greater volume of billable service revenue,
including approximately $1,000,000 of revenues for amounts billed to customers
for the purchase of materials used at the customers' facilities.
Direct operating expenses increased $2,857,000 or 8%. 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. NMUI recorded higher
sewer collection expenses related directly to the corresponding increase in
volume. Additionally, increases in payroll and associated benefits, water
treatment and lab services, and depreciation were incurred at Suburban and NMUI.
ECO's direct operating expenses increased $2,394,000, resulting primarily from a
greater volume of billable service revenues and direct purchase of materials.
Payroll and associated benefits increased in anticipation of revenue growth in
Texas. In addition, 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%. As a
percentage of operating revenues, these expenses decreased from 18% in 1993 to
16% in 1994. Water utility general and administrative expenses decreased
$817,000, due primarily to decreases in litigation defense expenses of $695,000.
ECO's selling, general and administrative expenses increased $264,000 due to
expanded sales and marketing activity in Texas and California. As mentioned
above, the parent company recorded a $250,000 loss in 1993 on the liquidation of
certain collateral associated with a note receivable. In 1994 no similar loss
was recorded; however, higher payroll, legal and insurance expenses were
incurred.
12
Southwest Water Company and Subsidiaries
consolidated statements of income
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For the Years Ended December 31,
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1995 1994 1993
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Operating Revenues $ 56,807,000 $ 50,932,000 $48,218,000
Operating Expenses:
Direct operating expenses 43,371,000 38,818,000 35,961,000
Selling, general and administrative 9,004,000 8,265,000 8,836,000
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52,375,000 47,083,000 44,797,000
Operating Income 4,432,000 3,849,000 3,421,000
Other Income (Expense):
Interest expense (2,308,000) (2,220,000) (2,111,000)
Interest income 76,000 81,000 182,000
Gain on sale of land (Note 13) 84,000 -- 67,000
Litigation settlements (Note 12) -- -- (1,437,000)
Other 76,000 62,000 5,000
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(2,072,000) (2,077,000) (3,294,000)
Income Before Income Taxes 2,360,000 1,772,000 127,000
Provision for income taxes (Note 7) 921,000 715,000 --
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Net Income 1,439,000 1,057,000 127,000
Dividends on Preferred Shares (Note 9) 27,000 28,000 28,000
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Net Income Available for Common Shares $ 1,412,000 $ 1,029,000 $ 99,000
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Earnings per Common Share (Notes 8 and 9):
Primary $ .55 $ .41 $ .04
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Fully diluted $ .55 $ .40 $ .04
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Cash Dividends per Common Share (Note 9) $ .38 $ .38 $ .63
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Weighted-Average Outstanding Common
and Common Equivalent Shares (Notes 8 and 9):
Primary 2,561,000 2,524,000 2,490,000
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Fully diluted 2,562,000 2,581,000 2,490,000
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See accompanying notes to consolidated financial statements.
13
Southwest Water Company and Subsidiaries
consolidated balance sheets
December 31,
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1995 1994
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assets
Current Assets:
Cash and cash equivalents $ 784,000 $ 828,000
Customers' accounts receivable 7,785,000 6,021,000
Other current assets 2,528,000 2,011,000
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11,097,000 8,860,000
Property, Plant and Equipment:
Utility property, plant and equipment-- at cost (Note 3) 106,280,000 96,179,000
Contract operations property, plant and equipment-- at cost 6,273,000 5,923,000
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112,553,000 102,102,000
Less accumulated depreciation and amortization 32,286,000 29,966,000
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80,267,000 72,136,000
Other Assets 6,092,000 5,838,000
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$ 97,456,000 $ 86,834,000
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liabilities and stockholders' equity
Current Liabilities:
Current portion of long-term debt and bank notes payable (Notes 4 and 6) $ 9,075,000 $ 3,491,000
Accounts payable 2,269,000 1,185,000
Other current liabilities (Note 5) 7,019,000 6,135,000
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18,363,000 10,811,000
Other Liabilities and Deferred Credits:
Long-term debt (Note 6) 19,600,000 20,500,000
Advances for construction 8,200,000 8,804,000
Contributions in aid of construction 16,380,000 12,282,000
Deferred income taxes (Note 7) 3,238,000 3,260,000
Other liabilities and deferred credits 2,429,000 2,645,000
=================================================================================================================================
Total Liabilities and Deferred Credits 68,210,000 58,302,000
Commitments and Contingencies (Note 13)
Stockholders' Equity (Notes 8, 9 and 10):
Cumulative preferred stock 519,000 530,000
Common stock 26,000 24,000
Paid-in capital 18,715,000 17,241,000
Retained earnings 10,045,000 10,820,000
Unamortized value of restricted stock issued (59,000) (83,000)
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Total Stockholders' Equity 29,246,000 28,532,000
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$ 97,456,000 $ 86,834,000
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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, 1993, 1994 and 1995
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Common Stock
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Number Paid-in Retained
of Shares Amount Capital Earnings
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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 91/2%
convertible subordinated debentures 2,000 5,000
Net income 127,000
Cash dividends declared (1,602,000)
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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 91/2%
convertible subordinated debentures 4,000 9,000
Restricted stock cancellation (2,000) (28,000)
Net income 1,057,000
Cash dividends declared (990,000)
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Balance at December 31, 1994 2,414,000 24,000 17,241,000 10,820,000
Dividend reinvestment and
employee stock purchase plans 27,000 1,000 234,000
Conversion of $30,000 face amount of 91/2%
convertible subordinated debentures 12,000 30,000
5% stock dividend 123,000 1,000 1,210,000 (1,211,000)
Net income 1,439,000
Cash dividends declared (1,003,000)
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Balance at December 31, 1995 2,576,000 $ 26,000 $ 18,715,000 $ 10,045,000
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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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1995 1994 1993
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cash flows from operating activities:
Net income $ 1,439,000 $ 1,057,000 $ 127,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,701,000 3,605,000 3,586,000
Deferred income taxes (22,000) 268,000 110,000
Gain on sale of land (84,000) -- (67,000)
Changes in assets and liabilities:
Customers' accounts receivable (1,764,000) (199,000) (292,000)
Other current assets (517,000) 112,000 (817,000)
Accounts payable 1,084,000 (2,294,000) 1,859,000
Other current liabilities 884,000 168,000 1,153,000
Other, net (209,000) 176,000 (1,079,000)
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Total adjustments 3,073,000 1,836,000 4,453,000
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Net cash provided by operating activities 4,512,000 2,893,000 4,580,000
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cash flows from investing activities:
Additions to property, plant and equipment (9,858,000) (6,312,000) (5,777,000)
Proceeds from sale of land 94,000 -- 70,000
Net redemption of U.S. Government securities -- 1,503,000 3,959,000
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Net cash used in investing activities (9,764,000) (4,809,000) (1,748,000)
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cash flows from financing activities:
Net borrowings of short-term debt 5,725,000 1,850,000 600,000
Contributions in aid of construction 1,619,000 225,000 121,000
Net proceeds from dividend reinvestment and employee
stock purchase plans 231,000 274,000 465,000
Dividends paid (999,000) (986,000) (1,981,000)
Payments on long-term debt (900,000) (900,000) (900,000)
Payments on advances for construction (468,000) (698,000) (658,000)
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Net cash provided by (used in) financing activities 5,208,000 (235,000) (2,353,000)
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Net increase (decrease) in cash and cash equivalents (44,000) (2,151,000) 479,000
Cash and cash equivalents at beginning of year 828,000 2,979,000 2,500,000
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Cash and cash equivalents at end of year $ 784,000 $ 828,000 $ 2,979,000
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supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 2,310,000 $ 2,200,000 $ 2,148,000
Income taxes $ 1,092,000 $ 725,000 $ 799,000
Non-cash contributions in aid of construction and advances for
construction conveyed to Company by developers $ 2,008,000 $ 2,372,000 $ 1,356,000
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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 provide water management services through contract and utility
operations.
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.
(NMUI) and ECO Resources, Inc. (ECO). All significant intercompany transactions
have been eliminated.
Regulation: Suburban and NMUI conform to the Uniform System of Accounts
prescribed by the California Public Utilities Commission (CPUC) and the New
Mexico Public Utility Commission (NMPUC), respectively.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. This affects the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period.
Recognition of Revenues: Water utility revenues include amounts billed to
customers and an estimated amount of unbilled revenue for water used to the end
of the accounting period. Revenues from contract operations are recognized as
services are performed.
Cash and Cash Equivalents: The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standard No. 119 "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments." At December 31, 1995, the Company had no
derivative financial instruments, financial instruments with off-balance sheet
risk or financial instruments with concentrations of credit risk.
Property, Plant and Equipment: The cost of additions to utility plant includes
labor, material and interest. Interest of $122,000, $56,000 and $86,000 was
capitalized in 1995, 1994 and 1993, respectively. The cost of utility plant
retired, including net removal costs, is charged to accumulated depreciation.
Depreciation expense on utility plant is recorded using the straight-line
method. Depreciation expense of 3.2%, 3.3% and 3.4% of average gross depreciable
plant was incurred during 1995, 1994 and 1993, respectively. Property, plant and
equipment used in contract operations is depreciated on the straight-line method
over estimated useful lives ranging from five to 30 years.
Other Assets: Included in other assets are regulatory assets representing
amounts that will be recovered from utility customers through rate adjustments
which have been authorized by the CPUC and NMPUC. Also included is land and
associated costs no longer used in utility operations. Additionally, other
assets include deferred debt expenses that are being amortized over the lives of
the related debt issues. Effective January 1, 1996, the Company will be required
to adopt Statement of Financial Accounting Standard No. 121 (SFAS No. 121)
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Under SFAS No. 121, the Company will be required to review for
impairment long-lived assets, including regulatory assets, as well as costs
excluded from rate base by regulators. The Company anticipates that SFAS No. 121
will not have a material impact on the Company's results of operations or
financial condition.
Income Taxes: Deferred income taxes have been provided for the effects of
differences between financial reporting and income tax reporting. The most
significant items are the tax effects of accelerated depreciation and advances
for construction and contributions in aid of construction.
The Company has adopted Statement of Financial Accounting Standard No. 109
"Accounting for Income Taxes." Suburban and NMUI recorded additional deferred
income taxes, as well as corresponding regulatory assets and regulatory
liabilities as permitted by the CPUC and NMPUC. The regulatory assets and
regulatory liabilities will be recovered from or refunded to utility customers
through future rate adjustments.
Unamortized investment tax credits have been deferred and are amortized over the
estimated productive lives of the related assets as allowed by the CPUC and the
NMPUC.
Production Cost Balancing Accounts: Suburban records the difference between
actual water production costs incurred and CPUC-adopted water production costs
in balancing accounts in the income statement with a corresponding liability or
asset on the balance sheet. Under current regulations, the differences recorded
will be refunded to or recovered from utility customers through future
CPUC-authorized rate adjustments.
Advances for Construction and Contributions in Aid of Construction: Advances for
construction represent amounts advanced by developers primarily for water
pipeline extensions. Advance contracts issued after June 1982 are refundable to
the depositor at a rate of 2.5% each year over a 40-year period. Advance
contracts issued prior to July 1982 are refundable over a 20-year period.
Contributions in aid of construction represent contributions in the form of
cash, services or property received from developers, governmental agencies,
municipalities or individuals for the purpose of constructing utility plant.
Depreciation expense related to utility plant additions from contributions in
aid of construction is charged as a reduction to contributions in aid of
construction instead of depreciation expense.
Other Liabilities and Deferred Credits: Other liabilities and deferred credits
include unamortized investment tax credits recorded by Suburban and NMUI as
authorized by the CPUC and the NMPUC. Also included are regulatory liabilities
representing amounts that will be refunded to utility customers through rate
adjustments authorized by the CPUC and the NMPUC.
Reclassifications: Certain reclassifications have been made to the 1994 and 1993
consolidated financial statements to conform with the 1995 presentation.
17
Southwest Water Company and Subsidiaries
notes to consolidated financial statements
note 2. acquisition and disposition
of businesses
In 1993, ECO purchased from an unrelated party all of the common stock of
Southern Municipal Services, Inc. (SMS) for $275,000. SMS provided contract
operations and maintenance services for municipal utility districts. 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 since September 1993.
In 1993, the Company recorded a nonrecurring, pretax charge of $250,000, 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, 1995 and
1994, are as follows:
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1995 1994
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Land and land rights $ 522,000 $ 494,000
Source of supply 9,976,000 9,330,000
Pumping and purification 8,191,000 7,797,000
Transmission and distribution 77,794,000 70,553,000
General (including intangibles) 6,900,000 6,556,000
Construction work in progress 2,897,000 1,449,000
- --------------------------------------------------------------------------------
$ 106,280,000 $ 96,179,000
- ----------------------------------==============================================
At December 31, 1995, substantially all of the Company's utility plant is
pledged as collateral for the First Mortgage Bonds issued by the Company (Note
6).
Included in the general utility plant amounts in 1995 and 1994 is $698,000 for
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%; however,
the Company does not exercise significant operating and financial control over
this mutual water company. The Company purchased water from these mutual water
companies at a cost of approximately $1,511,000, $1,050,000 and $1,515,000 in
1995, 1994 and 1993, respectively.
note 4. lines of credit
At December 31, 1995, the Company had three revolving lines of credit totaling
$14,500,000 that expire on various dates through 1996. During 1995, the Company
increased its short-term borrowing capacity by $4,000,000. All borrowings are
unsecured. Interest charged on borrowings under the lines of credit is at the
banks' prime rates. Two of the lines of credit permit borrowing a minimum amount
of $500,000 for a fixed period of time at an interest rate that is lower than
the banks' existing prime rates. All of the lines of credit contain certain
financial restrictions, and one of the lines of credit requires a commitment fee
of 1% per year of the unused portion of the available line of credit, calculated
and payable on a quarterly basis. 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:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Notes payable to banks at December 31 $8,175,000 $2,450,000
Weighted-average interest
rate at December 31 7.6% 7.6%
Maximum amount of borrowings
outstanding at any month-end $8,175,000 $3,750,000
Average borrowings $5,270,000 $2,758,000
Weighted-average interest rate 7.8% 6.1%
- --------------------------------------------------------------------------------
note 5. other current liabilities
Included in other current liabilities at December 31, 1995 and 1994, are the
following:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Accrued salaries, wages and benefits $ 1,682,000 $ 1,425,000
Purchased water 985,000 1,093,000
Current portion of advances
for construction 570,000 449,000
Accrued interest payable 565,000 570,000
Franchise and other taxes 555,000 650,000
Production cost balancing accounts 529,000 731,000
Accrued income taxes payable 313,000 --
Accrued dividends payable 252,000 249,000
Other 1,568,000 968,000
- --------------------------------------------------------------------------------
$ 7,019,000 $ 6,135,000
- ------------------------------------------======================================
note 6. long-term debt
The long-term debt outstanding at December 31, 1995 and 1994, is summarized as
follows:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Suburban First Mortgage Bond,
Series A, due 2006, at 8.93%
interest rate, with
semiannual
interest payments $ 10,500,000 $ 11,400,000
Suburban First Mortgage Bond,
Series B, due 2022, at 9.09%
interest rate, with semiannual
interest payments 8,000,000 8,000,000
NMUI 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 -- 141,000
- --------------------------------------------------------------------------------
20,500,000 21,541,000
Less current maturities 900,000 1,041,000
- --------------------------------------------------------------------------------
Long-term debt $ 19,600,000 $ 20,500,000
- ------------------------------------============================================
18
Southwest Water Company and Subsidiaries
notes to consolidated financial statements
Suburban's First Mortgage Bond, Series A, requires annual sinking fund payments
of $900,000. The bond is nonrefundable and may not be redeemed prior to October
2, 2000. On October 2, 2000 and thereafter, the bond may be redeemed at the
option of the Company at a price of par plus a call premium. Suburban's First
Mortgage Bond, Series B, and NMUI's First Mortgage Bond, Series A, do not
require annual sinking fund payments. These bonds are nonrefundable and may be
redeemed 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. Substantially all of the Company's utility plant is pledged as
collateral for these bonds (Note 3). Each indenture limits the amount of cash
and property dividends that Suburban and NMUI may pay to the Company. At
December 31, 1995 and 1994, the combined indenture limits totaled $7,964,000 and
$6,100,000, respectively.
The 9.50% convertible subordinated debentures matured and were retired on August
15, 1995. Prior to their redemption, the debentures were convertible into common
stock at the rate of one share for each $2.55 of principal. At December 31,
1994, there were 55,000 common shares reserved for the conversion.
Aggregate annual maturities and sinking fund requirements of all long-term debt
for the five years ending December 31, 2000, are $900,000 each year.
note 7. income taxes
The components of the current and deferred income tax provisions are as follows:
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Current tax expense:
Federal $ 803,000 $ 395,000 $ 278,000
State 356,000 73,000 252,000
- --------------------------------------------------------------------------------
1,159,000 468,000 530,000
- --------------------------------------------------------------------------------
Deferred income taxes (benefits):
Depreciation 965,000 261,000 1,606,000
Production cost
balancing accounts 80,000 89,000 (379,000)
Investment tax credits 26,000 (37,000) (596,000)
Contributions in aid
of construction
and advances
for construction (1,148,000) (539,000) (40,000)
Gains on condemnation
of land (56,000) (65,000) (18,000)
Reserves (56,000) (42,000) 165,000
Deferred debt expenses (6,000) (9,000) (62,000)
Litigation settlements -- 570,000 (570,000)
Other, net 173,000 40,000 4,000
(22,000) 268,000 110,000
Change in regulatory assets and
regulatory liabilities, net (167,000) 28,000 (591,000)
Investment tax credit
amortization (49,000) (49,000) (49,000)
- --------------------------------------------------------------------------------
$ 921,000 $ 715,000 $ --
- ---------------------------------===============================================
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Provision computed
at statutory rates 34 % 34% 34 %
Depreciation 3 % 4% 60 %
Amortization of goodwill 1 % 2% 20 %
State income taxes,
net of federal tax benefit 2 % 2% (64)%
Investment tax credits (2)% (3)% (38)%
Other, net 1 % 1% (12)%
- --------------------------------------------------------------------------------
39 % 40% -- %
- ---------------------------------===============================================
Net deferred income taxes consist of the following at December 31, 1995 and
1994:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Deferred income tax assets:
Contributions in aid of
construction and advances
for construction $ 3,393,000 $ 2,245,000
Investment tax credits 607,000 633,000
Production cost
balancing accounts 210,000 290,000
Reserves 193,000 137,000
Other 192,000 278,000
- --------------------------------------------------------------------------------
4,595,000 3,583,000
- --------------------------------------------------------------------------------
Deferred income tax liabilities:
Depreciation (6,542,000) (5,577,000)
Gains on condemnation of land (882,000) (938,000)
Deferred debt expenses (125,000) (131,000)
Other (284,000) (197,000)
- --------------------------------------------------------------------------------
(7,833,000) (6,843,000)
- --------------------------------------------------------------------------------
Net deferred income taxes $ (3,238,000) $ (3,260,000)
- ---------------------------------===============================================
Management regularly reviews the recoverability of deferred income tax assets
and has determined that no valuation allowances were necessary at December 31,
1995 or 1994.
19
Southwest Water Company and Subsidiaries
notes to consolidated financial statements
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. In 1994 and 1993, 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. In 1995, the
9.50% convertible debentures were retired.
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 2,453,386 and 2,414,061 shares outstanding
at December 31, 1995 and 1994, respectively. The Company is also currently
authorized to issue 250,000 preferred shares at a par value of $.01 per share.
There were 10,3731/4 Series A preferred shares outstanding at both December 31,
1995 and 1994. 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 Series D preferred shares outstanding at December 31, 1994. 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.
In December 1995, the Company declared a 5% stock dividend of 122,669 shares to
stockholders of record on January 2, 1996. At December 31, 1995, retained
earnings were charged approximately $1,211,000, which represents the market
value of the shares issued using the closing price of the Company's common stock
on January 2, 1996 ($97/8). A corresponding entry of approximately $1,210,000
was recorded to paid-in capital. The weighted-average outstanding common shares,
the primary and fully diluted earnings per share, as well as cash dividends per
common share, shown in the Company's Consolidated Statements of Income, have
been restated to reflect the 5% stock dividend.
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 from the market value. The plan permits optional cash
purchases of stock at current market values to a maximum of $3,000 per quarter.
At December 31, 1995, 159,638 common shares were reserved for issuance under
this plan.
note 10. stock compensation plans
At December 31, 1995, the Company has two stock-based compensation plans: a
Stock Option Plan and an Employee Stock Purchase Plan. The Company applies APB
Opinion No. 25 "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for these plans. For the restricted stock issued
under the Stock Option Plan, compensation expense of $24,000, $13,000 and
$29,000 was recorded in 1995, 1994 and 1993, respectively. Compensation expense
of approximately $3,300, $5,400 and $9,500 was recorded in 1995, 1994 and 1993,
respectively, for the Company's Employee Stock Purchase Plan.
If compensation cost for the Company's two stock-based compensation plans had
been determined consistent with FASB Statement No. 123 (SFAS No. 123)
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share would have been as follows:
- --------------------------------------------------------------------------------
1995
- --------------------------------------------------------------------------------
Net income available for As reported $ 1,412,000
common shares Pro forma $ 1,403,000
- --------------------------------------------------------------------------------
Primary earnings per share As reported $ 0.55
Pro forma $ 0.55
- --------------------------------------------------------------------------------
Fully diluted earnings per share As reported $ 0.55
Pro forma $ 0.55
- --------------------------------------------------------------------------------
Stock Option Plan (the Plan): In 1988, the stockholders approved the Plan and
reserved 150,000 shares for issuance under the Plan. In 1993, the stockholders
approved an amendment to the Plan (the Amendment), which provided for an
increase of 100,000 shares reserved for issuance under the Plan, and extended
the grant dates to February 17, 2003. In addition, the Amendment eliminated any
future grants of restricted stock and amended certain provisions with respect to
the outstanding restricted stock issued. A total of 262,500 shares are
authorized for issuance under the Plan, including adjustment for the 5% stock
dividend on January 2, 1996.
The Plan 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 last trading date preceding the date
of grant. Generally, options vest over a period of five years and expire 10
years from the date of grant.
Restricted stock issued to officers 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
15,488 shares (adjusted for the 5% stock dividend on January 2, 1996) of
restricted stock is being amortized over the vesting period. During 1994, 2,000
shares were repurchased and cancelled by the 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 the table on page 21, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1995 and 1994: dividend yield of
4.6%; expected volatility of 34%; risk-free interest rate of 6.6%; and an
expected life of eight years.
20
A summary of the status of the Company's Plan as of December 31, 1995, 1994 and
1993, and changes during the years ended on those dates is presented below:
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 117,224 $ 14.08 124,268 $ 14.74 124,583 $ 14.74
Granted 33,900 8.44 23,630 9.29 -- --
Forfeited (12,548) 13.98 (30,674) 13.05 (315) 14.76
------- -------- --------
Outstanding at end of year 138,576 12.71 117,224 14.08 124,268 14.74
- ------------------------------------------======== ======== ========
Options exercisable at year-end 80,852 72,629 64,218
- ------------------------------------------======== ======== ========
Weighted-average fair value of
options granted during the year $ 2.44 $ 2.69 $ --
- ------------------------------------------======== ======== ========
- --------------------------------------------------------------------------------
The following table summarizes information about fixed stock options outstanding
at December 31, 1995:
- ------------------------------------------------------------------------------------------ ----------------------------------
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------ ----------------------------------
Number Weighted-Average Number
Outstanding Remaining Contract- Weighted-Average Exercisable Weighted-Average
Range of Exercise Prices at 12/31/95 ual Life in Years Exercise Price at 12/31/95 Exercise Price
- ------------------------------------------------------------------------------------------ ----------------------------------
$8 to $10 50,370 9.0 $ 8.74 3,651 $ 9.29
12 to 15 48,201 4.9 14.03 39,716 14.17
15 to 17 40,005 4.6 16.10 37,485 16.13
- ------------------------------------------------------------------------------------------ ----------------------------------
$8 to $17 138,576 6.3 $12.71 80,852 $ 14.86
- ----------------------------------------------------------------------------------------- ----------------------------------
Employee Stock Purchase Plan (ESPP): The Company has an ESPP, approved by the
stockholders, that allows eligible employees to purchase common stock through
payroll deductions in an amount up to 10% of their salary (not to exceed $25,000
per year). The purchase price of the stock is 90% of the lower of the beginning
of period or end of period stock price. Under the ESPP, the Company issued 3,277
shares, 5,851 shares and 3,584 shares to employees in 1995, 1994 and 1993,
respectively. At December 31, 1995, 186,092 common shares were reserved for
issuance under the ESPP. Under SFAS No. 123, compensation cost is recognized for
the fair value of the employees' purchase rights, which was estimated using the
Black-Scholes model with the following assumptions for 1995: dividend yield of
4.6%; an expected life of one year; expected volatility of 34%; and risk-free
interest rate of 6.6%. The weighted-average fair value of those purchase rights
granted in 1995 was $1.72, which resulted in compensation expense of $5,640 and
is included in the pro forma net income available for common shares amount shown
in the table on page 20.
note 11. employee benefit plans
Defined Benefit Plan: The Company has a noncontributory pension plan (the
pension plan) under which employees of the parent company, Suburban and NMUI 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 1995 and 1994, the Company contributed $531,000 and
$516,000, respectively, to the pension plan. No contributions were required in
1993. The benefits are based on employees' years of service and their average
compensation during the highest five consecutive years of the last 10 years
before retirement. Benefits are reduced if a participant retires early.
- --------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Service cost - benefits
earned during the period $ 406,000 $ 548,000 $ 357,000
Interest cost on projected
benefit obligation 556,000 555,000 484,000
Actual return on plan assets (912,000) 303,000 (750,000)
Net amortization and deferral 243,000 (961,000) 126,000
- --------------------------------------------------------------------------------
Net pension expense $ 293,000 $ 445,000 $ 217,000
- -----------------------------------=============================================
21
Southwest Water Company and Subsidiaries
notes to consolidated financial statements
The funded status at December 31, 1995 and 1994, is reconciled to accrued
expense as follows:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation $ (5,699,000) $(4,687,000)
Effect of increase in compensation levels (1,935,000) (1,855,000)
- --------------------------------------------------------------------------------
Projected benefit obligation for service
rendered through December 31 (7,634,000) (6,542,000)
Plan assets at fair value 8,288,000 7,121,000
- --------------------------------------------------------------------------------
Plan assets in excess of
projected benefit obligation 654,000 579,000
Unrecognized net asset at transition date (872,000) (997,000)
Unrecognized prior service cost (174,000) (185,000)
Unrecognized net gain
from past experience, different
from that assumed and effects
of changes in assumptions (40,000) (67,000)
- --------------------------------------------------------------------------------
Accrued expense $ (432,000) $ ( 670,000)
- --------------------------------------------------==============================
Included in the accumulated benefit obligation are vested benefits of $5,634,000
and $4,583,000 at December 31, 1995 and 1994, respectively. Approximately 90% of
pension 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 10% of pension plan
assets are invested primarily in the Company's common stock. The pension plan
owns 67,267 common shares of the Company (after adjusting for the 5% stock
dividend on January 2, 1996), which had a market value of approximately $647,000
and $545,000 at December 31, 1995 and 1994, respectively. The pension plan
received dividends on these shares of approximately $26,000 in 1995 and 1994,
and $53,000 in 1993.
The following represent actuarial assumptions used at December 31, 1995, 1994
and 1993:
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Discount rate 7.5% 8.5% 7.25%
Compensation level increase 4.5% 5.5% 6.0 %
Expected long-term rate of
return on assets 8.0% 7.5% 7.5 %
- --------------------------------------------------------------------------------
Defined Contribution Plans: The Company has established a 401(k) profit-sharing
plan (ECO 401(k) Plan) covering employees of its contract operations business.
The ECO 401(k) Plan provides for monthly enrollment by employees after the
completion of three months of service. 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 the
participant's salary. Company contributions vest immediately. Company
contributions to the ECO 401(k) Plan were $104,000, $91,000 and $77,000 in 1995,
1994 and 1993, 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.
The Company also has established a 401(k) plan (the Utility 401(k) Plan)
covering employees of the parent company, Suburban and NMUI. The Utility 401(k)
Plan provides for monthly 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 provide for 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 lawsuits
arising from a chlorine gas leak that occurred in October 1990 at a water
distribution facility, and made an aggregate cash payment of approximately
$1,437,000. In 1993, the Company recorded a nonrecurring charge of $.35 (after
adjusting for the 5% stock dividend on January 2, 1996) per fully diluted share
related to the cash payment; however, the full impact on 1993 earnings was $.54
(after adjusting for the 5% stock dividend on January 2, 1996) per fully diluted
share, including the impact of $822,000 in defense costs. At the date of the
chlorine gas incident, the Company and Suburban maintained liability insurance
coverage; however, the primary and excess liability insurance carrier declined
to defend or indemnify Suburban on the basis of applicable exclusions in the
policies.
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 $1,989,000 in 1995, $1,724,000 in 1994 and $1,244,000 in
1993. At December 31, 1995, the minimum rental commitments under existing
noncancelable operating leases are as follows: 1996 - $2,029,000; 1997 -
$1,735,000; 1998 - $1,183,000; 1999 - $767,000; 2000 - $445,000; and thereafter
- - $725,000.
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 1995, Suburban recorded pretax gains on five land transactions
which aggregated $1,900,000. In 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. The Water Utility Infrastructure Improvement Act of
1995 provides that water utilities selling real property that is no longer
necessary or useful may invest the net proceeds in utility plant. Any net
proceeds (and the interest thereon) not invested in an eight-year period shall
be allocated to ratepayers. While Suburban's remaining transactions from the
1989-1995 period are subject to CPUC review, the proceeds were invested in
utility plant, and, therefore, management believes these gains should not affect
water rates. No regulatory 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, 1995 and 1994, 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,
1995. 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, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/KPMG Peat Marwick LLP
Los Angeles, California
January 23, 1996
report of management
The consolidated financial statements and other financial information contained
in this report have been prepared by the management of Southwest Water Company,
which has directed considerable effort to ensure the integrity and objectivity
of such information. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles deemed appropriate
under the circumstances and include amounts based on the best estimates and
judgments of management. All of the financial information in this report is
consistent with that in the consolidated financial statements.
The Company maintains a system of internal accounting control designed to
provide reasonable assurance that assets are protected from improper use and to
produce records sufficient to prepare reliable financial information. The system
is augmented by careful selection and training of qualified personnel, division
of responsibilities, delegation of authority and communication programs for the
entire organization that demand high standards of professional and financial
integrity from management.
The Company's independent auditors are responsible, under generally accepted
auditing standards, to perform a review of the system of internal accounting
control in sufficient detail to design their audit tests and to express their
opinion on the consolidated financial statements in accordance with such
standards.
The Board of Directors, through its Audit Committee consisting solely of outside
directors, oversees management's responsibilities in the preparation of
financial statements and selects the independent auditors, subject to
stockholder ratification. The Audit Committee meets regularly with management
and the independent auditors. The Company's independent auditors have full and
free access to the Audit Committee.
/s/ Anton C. Garner /s/ Peter J. Moerbeek
Anton C. Garnier Peter J. Moerbeek
President and Vice President Finance and
Chief Executive Officer Chief Financial Officer
23
Southwest Water Company and Subsidiaries
unaudited quarterly financial information
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
1995 Quarter Ended(1) March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 11,290 $ 13,329 $ 16,848 $15,340
Operating income 151 1,003 1,943 1,335
Net income (loss) (171) 248 806 556
Net income (loss) available for common shares (178) 241 799 550
Primary earnings (loss) per common share (0.07) .09 .31 .21
Fully diluted earnings (loss) per common share (0.07) .09 .31 .21
- ------------------------------------------------------------------------------------------------------------------------------------
1994 Quarter Ended(1) March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------------------------------------------------------------
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) .09 .25 .11
Fully diluted earnings (loss) per common share (.06) .09 .25 .11
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The fluctuations in operating revenues and operating income between quarters
reflect the seasonal nature of the water utility and contract operations.
Primary and fully diluted earnings (loss) per common share have been
restated to reflect the 5% stock dividend on January 2, 1996.
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. High and low market price ranges shown below, as well as cash
dividends, have been restated to reflect the 5% stock dividend on January 2,
1996. The shares are traded on the Nasdaq Stock Market -- symbol SWWC. The
current quarterly dividend rate is $.10 per share. At December 31, 1995, there
were 2,029 stockholders of record.
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Market Price Range Market Price Range
Dividends High Low Dividends High Low
- ------------------------------------------------------------------------------------------------------------------------------------
1st Quarter $.095 $8 37/64 $7 9/64 $ .095 $10 23/32 $8 21/64
2nd Quarter .095 9 3/64 7 3/8 .095 11 43/64 8 3/32
3rd Quarter .095 9 3/64 7 5/8 .095 10 15/32 7 55/64
4th Quarter .095 9 17/32 7 55/64 .095 9 9/32 7 9/64
- ------------------------------------------------------------------------------------------------------------------------------------
24