UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 1996
OR
- ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 0-8176
[LOGO OF SOUTHWEST
WATER COMPANY]
SOUTHWEST WATER COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-1840947
(STATE OR JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
225 NORTH BARRANCA AVENUE, SUITE 200
WEST COVINA, CALIFORNIA 91791-1605
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(818) 915-1551
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
On April 30, 1996, there were 2,589,882 common shares outstanding.
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
INDEX
Page No.
--------
Part I. Financial Information:
- -------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income -
Three months ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 -10
Part II. Other Information:
- --------
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1996 1995
---------- ------------
(Unaudited)
ASSETS (In thousands)
Current Assets:
Cash and cash equivalents $720 $784
Customers' accounts receivable, net 7,631 7,785
Other current assets 2,792 2,528
-------- -------
11,143 11,097
Property, Plant and Equipment:
Utility property, plant and equipment - at cost 108,612 106,280
Contract operations property, plant and equipment - at cost 6,073 6,273
-------- -------
114,685 112,553
Less accumulated depreciation and amortization 32,733 32,286
-------- -------
81,952 80,267
Other Assets 5,909 6,092
-------- -------
$99,004 $97,456
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and bank notes payable $11,820 $9,075
Accounts payable 1,151 2,269
Other current liabilities 6,848 7,019
-------- -------
19,819 18,363
Other Liabilities and Deferred Credits:
Long-term debt 19,600 19,600
Advances for construction 8,179 8,200
Contributions in aid of construction 16,626 16,380
Deferred income taxes 3,403 3,238
Other liabilities and deferred credits 2,440 2,429
-------- -------
Total Liabilities and Deferred Credits 70,067 68,210
Stockholders' Equity:
Cumulative preferred stock 517 519
Common stock 26 26
Paid-in capital 18,793 18,715
Retained earnings 9,654 10,045
Unamortized value of restricted stock issued (53) (59)
-------- -------
Total Stockholders' Equity 28,937 29,246
-------- -------
$99,004 $97,456
======== =======
See accompanying notes.
3
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
---------------------------
1996 1995
--------- ---------
(In thousands
except per share amounts)
OPERATING REVENUES $13,989 $11,290
OPERATING EXPENSES:
Direct operating expenses 11,275 9,020
Selling, general and administrative 2,311 2,119
------- -------
13,586 11,139
------- -------
OPERATING INCOME 403 151
OTHER INCOME (EXPENSE):
Interest expense (659) (560)
Interest income 31 25
Gain on sale of land - 84
Other 10 6
------- -------
(618) (445)
------- -------
LOSS BEFORE INCOME TAX BENEFIT (215) (294)
Income tax benefit (90) (123)
------- -------
NET LOSS (125) (171)
Dividends on preferred shares (7) (7)
------- -------
NET LOSS APPLICABLE TO COMMON SHARES ($132) ($178)
======= =======
LOSS PER COMMON SHARE (NOTE 5):
Primary ($0.05) ($0.07)
======= =======
Fully diluted ($0.05) ($0.07)
======= =======
CASH DIVIDENDS PER COMMON SHARE (NOTE 5) $0.10 $0.095
======= =======
WEIGHTED-AVERAGE OUTSTANDING COMMON
AND COMMON EQUIVALENT SHARES (NOTE 5):
Primary 2,582 2,544
======= =======
Fully diluted 2,582 2,544
======= =======
See accompanying notes.
4
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
----------------------
1996 1995
----- -----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES, NET ($202) ($100)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,662) (1,878)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of short-term debt 2,745 1,675
Contributions in aid of construction 288 270
Net proceeds from dividend reinvestment and
employee stock purchase plans 64 60
Additions to advances for construction - 13
Dividends paid (254) (249)
Payments on advances for construction (43) (42)
----- -----
Net cash provided by financing activities 2,800 1,727
----- -----
Net decrease in cash and cash equivalents (64) (251)
Cash and cash equivalents at beginning of year 784 828
----- -----
Cash and cash equivalents at end of quarter $720 $577
===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $605 $557
Income taxes $425 $8
Non-cash contributions in aid of construction
conveyed to Company by developers $56 -
See accompanying notes.
5
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Southwest Water Company (the Company) and its subsidiaries provide water
management services through contract and utility operations. The
accompanying unaudited consolidated condensed financial statements reflect
all adjustments which, in the opinion of the Company's management, are
necessary to present fairly the financial position of the Company as of
March 31, 1996, and the Company's results of operations for the three
months ended March 31, 1996. All such adjustments are of a normal recurring
nature. Certain reclassifications have been made to the 1995 financial
statements to conform to the 1996 presentation.
2. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and related notes contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
3. The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full year. The
first quarter of each year is normally the lowest in terms of average
customer water usage for the Company's water utilities due to heavier
rainfall and lower temperature levels. The Company's contract operations
business can also be seasonal in nature. Heavy rainfall during a quarter
may reduce contract operations revenue since it hampers the Company's
ability to perform billable work such as pipeline maintenance, manhole
rehabilitation, and outdoor services.
4. For the three months ended March 31, 1996, the computations of primary and
fully diluted earnings per common share have been calculated using the
weighted-average number of common shares and dilutive common equivalent
shares outstanding during the period, after recognition of dividend
requirements on preferred shares. For the three months ended March 31,
1995, fully diluted earnings per share were computed based upon the
weighted-average number of common shares and dilutive common equivalent
shares outstanding, assuming that the 9.5% convertible subordinated
debentures were converted at the beginning of the period and the related
interest for the period, net of income taxes, was eliminated. The 9.5%
convertible debentures were retired on August 15, 1995.
5. The 1995 loss per common share, cash dividends per common share and
weighted-average outstanding common and common equivalent shares have been
restated to reflect a 5% stock dividend granted to stockholders of record
on January 2, 1996.
6. Effective January 1, 1996, the Company was subject to 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 is required to review for impairment
long-lived assets, including regulatory assets, as well as costs excluded
from rate base by regulators. The Company expects that SFAS No. 121 will
not have a material impact on the Company's results of operations or
financial condition.
7. Effective January 1, 1996, the Company was subject to Statement of
Financial Accounting Standard No. 123 (SFAS No. 123) "Accounting for Stock-
Based Compensation." The
6
Company has chosen to retain the current approach for recognizing stock-
based compensation expense as set forth in APB Opinion No. 25 "Accounting
for Stock Issued to Employees". The pro forma impact of recording stock-
based compensation on the fair value method of accounting will be disclosed
in the notes to the Company's year-end financial statements. SFAS No. 123
will not have an impact on the Company's results of operations or financial
condition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity and capital resources of 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 March 31, 1996, the Company had cash and cash equivalent balances totaling
$720,000 and unused lines of credit from three commercial banks of $3,580,000
with total line of credit capacity of $14,500,000. During the first three
months of 1996, the Company borrowed a net $2,745,000 on its lines of credit
primarily to meet construction requirements. Additional short-term borrowing is
anticipated during 1996 to meet construction requirements. On April 17, 1996,
one of the lines of credit was renewed and its borrowing capacity was increased
by $1,500,000. The two remaining lines of credit expire on various dates in
1996, and the Company anticipates renewing these lines in the normal course of
business.
The Company's additions to property, plant and equipment were $2,718,000 for the
three months ended March 31, 1996, representing an increase of $840,000 over the
same period in 1995. This increase relates primarily to utility plant additions
at NMUI in response to increased residential and commercial construction in
NMUI's service area. Of the total additions, $344,000 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 nine months.
The Company has initiated negotiations with investment bankers and anticipates
obtaining long-term financing during the second or third quarter of 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 approximately $27,725,000. The
amount of additional borrowings available to the Company under the indentures
and lines of credit currently in place is limited by certain financial covenants
that restrict additional borrowings at March 31, 1996, to a maximum of
approximately $11,400,000.
The amount and timing of future long-term financing will depend on various
factors including the timeliness and adequacy of rate increases, the
availability of capital, and the Company's ability to meet interest and fixed
charge coverage requirements. Regulatory approval is required for any long-term
financing agreement by Suburban and NMUI. 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
7
until new financing arrangements were secured. Such financing arrangements
could include seeking equity financing through a private placement or a public
offering.
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 allowed are intended to provide a reasonable
return on common equity. The Company anticipates that future construction
expenditures and increased direct operating expenses will require periodic
requests for rate increases.
In December 1995, Suburban and the CPUC staff negotiated a rate increase of
4.25% ($1.1 million), with two additional increases for inflation in 1997 and
1998. Final CPUC approval was received on April 19, 1996 with the new rates
effective April 24, 1996. The rate increase authorizes Suburban 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.
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
condensed 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 rate making, which provides incentives for utilities to
operate more efficiently and improve productivity, and is intended to reduce
regulatory burden and promote efficiency among utilities. Ratepayers and
stockholders would both likely benefit from improved productivity.
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.
8
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 however, have increased and are
expected to increase further as the regulatory agencies adopt additional
monitoring requirements. The Company believes that future incremental costs of
complying with governmental regulations, including capital expenditures, if any,
will be recoverable through increased rates and contract operations revenues.
However, there is no assurance that recovery of such costs will be allowed.
RESULTS OF OPERATIONS:
THREE MONTHS ENDED MARCH 31, 1996 VERSUS THREE MONTHS ENDED MARCH 31, 1995
- --------------------------------------------------------------------------
Fully diluted losses per common share decreased from $.07 in 1995 to $.05 in
1996. Results for the first three months of 1995 include a net gain of $50,000,
or $.02 per fully diluted share arising from the sale of surplus land owned by
Suburban.
Operating income increased $252,000, and, as a percentage of operating revenues,
increased from 1% in 1995 to 3% in 1996. Utility operating income increased
$213,000 due primarily to a significant increase in NMUI's customer base and to
an increase in water consumption by Suburban's customers. ECO experienced a
decrease in its operating loss of $174,000 compared to 1995, due primarily to
improved gross profit margins on billable and project services and operating
profits recorded on new contracts entered into in 1995 after the first quarter.
Parent company expenses increased $135,000 primarily due to higher payroll
expenses and other reserves recorded.
Operating revenues
- ------------------
Operating revenues increased $2,699,000 or 24%. Water utility operating
revenues increased $477,000. An increase of water consumption by Suburban's
customers due to warmer weather in comparison to 1995 resulted in an increase in
revenues of $308,000. NMUI added 199 new water customers in the first three
months of 1996, which contributed to a 43% increase in water consumption and an
increase in water revenues of $108,000. Higher sewer collection volume at NMUI
led to an increase in sewer revenues of $61,000. ECO's revenues increased
$2,222,000 primarily as a result of revenues from new contracts entered into in
1995 after the first quarter and increased billable and project services.
Direct operating expenses
- -------------------------
Direct operating expenses increased $2,255,000 or 25%. As a percentage of
operating revenues, these expenses were 81% in 1996 and 80% in 1995. Water
utility direct operating expenses increased $163,000. Suburban recorded higher
water production expenses related to the corresponding increase in water
consumption by Suburban customers. ECO's direct operating expenses increased
$2,092,000, resulting primarily from higher expenses associated with new
contracts and increased billable work.
9
Selling, general and administrative
- -----------------------------------
Selling, general and administrative expenses increased $192,000 or 9%. As a
percentage of operating revenues, these expenses decreased from 19% in 1995 to
17% in 1996. Selling, general and administrative expenses at Suburban and NMUI
increased $101,000 primarily due to higher payroll, associated payroll benefits
and legal expenses. ECO's selling, general and administrative expenses
decreased $44,000. As discussed above, general and administrative expenses of
the parent company increased $135,000.
Interest expense
- ----------------
Interest expense increased $99,000 primarily due to the Company maintaining
higher line of credit balances with borrowings used primarily to meet
construction requirements.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
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. There have been no significant changes in the
various litigation matters as described in the Company's 1995 Form 10-K Report.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits furnished pursuant to Item 601 of Regulation S-K
10.10A First Amendment to Loan Agreement dated October 10, 1995, between
New Mexico Utilities, Inc. and Sunwest Bank of Albuquerque, filed
herewith.
10.10B Second Amendment to Loan Agreement and Promissory Note dated
April 17, 1996, between New Mexico Utilities, Inc. and Sunwest
Bank of Albuquerque, filed herewith.
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended March
31, 1996.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHWEST WATER COMPANY
-----------------------
(Registrant)
Dated: May 13, 1996 /s/ PETER J. MOERBEEK
- ------------------- ---------------------
Peter J. Moerbeek, Vice President
Finance and Chief Financial Officer
11