UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
_____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________ to________________
Commission file number: 0-8176
[LOGO] SOUTHWEST WATER COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-1840947
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605
(Address of Principal executive offices) (Zip Code)
(626) 915-1551
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
-
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. On November 12, 1998, there
were 4,218,676 common shares outstanding.
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
- - ------- ---------------------- --------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Income -
Three and nine months ended September 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5 - 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6 - 11
Part II. Other Information:
- - -------- ------------------
Item 1. Legal Proceedings 12 - 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
- - ------------------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
- - ------------------------------------------------------------------------------------------------------------------
(unaudited)
(in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 798 $ 1,237
Customers' accounts receivable, net 9,838 7,286
Other current assets 2,621 2,976
- - ------------------------------------------------------------------------------------------------------------------
13,257 11,499
PROPERTY, PLANT AND EQUIPMENT:
Utility property, plant and equipment -- at cost 140,992 133,936
Contract operations property, plant and equipment -- at cost 4,957 4,854
- - ------------------------------------------------------------------------------------------------------------------
145,949 138,790
Less accumulated depreciation and amortization 39,736 36,654
- - ------------------------------------------------------------------------------------------------------------------
106,213 102,136
OTHER ASSETS 9,040 9,465
- - ------------------------------------------------------------------------------------------------------------------
$128,510 $123,100
- - ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current portion of bank notes payable and long-term debt $ 1,393 $ 900
Accounts payable 1,943 1,214
Other current liabilities 10,250 8,912
- - ------------------------------------------------------------------------------------------------------------------
13,586 11,026
OTHER LIABILITIES AND DEFERRED CREDITS:
Bank notes payable 4,711 7,131
Long-term debt 29,800 29,800
Advances for construction 7,774 7,931
Contributions in aid of construction 30,748 27,822
Deferred income taxes 4,555 4,130
Other liabilities and deferred credits 2,731 2,833
- - ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND DEFERRED CREDITS 93,905 90,673
STOCKHOLDERS' EQUITY
Cumulative preferred stock 517 517
Common stock 42 33
Paid-in capital 30,004 29,469
Retained earnings 4,045 2,420
Unamortized value of restricted stock issued (3) (12)
- - ------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 34,605 32,427
- - ------------------------------------------------------------------------------------------------------------------
$128,510 $123,100
- - ------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
2
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- - --------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- - --------------------------------------------------------------------------------------------------------------------
(in thousands except per share data)
OPERATING REVENUES $19,960 $19,975 $54,238 $53,876
OPERATING EXPENSES:
Direct operating expenses 14,148 14,590 39,575 40,020
Selling, general and administrative 2,724 2,658 8,369 8,221
- - --------------------------------------------------------------------------------------------------------------------
16,872 17,248 47,944 48,241
OPERATING INCOME 3,088 2,727 6,294 5,635
OTHER INCOME (EXPENSE):
Interest expense (715) (807) (2,299) (2,397)
Interest income 30 28 68 91
Other 10 106 197 227
- - --------------------------------------------------------------------------------------------------------------------
(675) (673) (2,034) (2,079)
INCOME BEFORE INCOME TAXES 2,413 2,054 4,260 3,556
Provision for income taxes 965 862 1,704 1,493
- - --------------------------------------------------------------------------------------------------------------------
NET INCOME 1,448 1,192 2,556 2,063
Dividends on preferred shares 7 6 21 20
- - --------------------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE FOR COMMON SHARES $ 1,441 $ 1,186 $ 2,535 $ 2,043
- - --------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE (NOTE 8):
Basic $ 0.34 $ 0.29 $ 0.61 $ 0.50
Diluted $ 0.34 $ 0.28 $ 0.59 $ 0.49
- - --------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER COMMON SHARE(NOTE 8) $ 0.080 $ 0.069 $ 0.224 $ 0.206
- - --------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE OUTSTANDING COMMON SHARES(NOTE 8)
Basic 4,206 4,129 4,191 4,121
Diluted 4,295 4,180 4,288 4,172
- - --------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
3
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
- - ---------------------------------------------------------------------------------------------
1998 1997
- - ---------------------------------------------------------------------------------------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES, NET $ 6,555 $ 3,662
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (5,936) (7,928)
- - ---------------------------------------------------------------------------------------------
Net cash used in investing activities (5,936) (7,928)
- - ---------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions in aid of construction 1,597 1,583
Net proceeds from dividend reinvestment and
employee stock purchase plans 349 292
Net borrowing on (repayment of) bank notes payable (1,927) 3,151
Dividends paid (923) (866)
Payments on advances for construction, net of additions (154) (145)
- - ---------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,058) 4,015
- - ---------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (439) (251)
Cash and cash equivalents at beginning of period 1,237 790
- - ---------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 798 $ 539
- - ---------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,037 $ 2,151
Income taxes $ 845 $ 539
Depreciation and amortization $ 3,307 $ 3,139
Non-cash contributions in aid of construction
conveyed to Company by developers $ 1,775 $ 4,276
See accompanying notes to condensed consolidated financial statements.
4
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
1. Southwest Water Company ("the Company" or "Registrant") and its
subsidiaries provide water management services through contract and utility
operations. The unaudited condensed consolidated financial statements
reflect all adjustments which, in the opinion of management, are necessary
to present fairly the financial position of the Company as of September 30,
1998, and the Company's results of operations for the three and nine months
ended September 30, 1998. All such adjustments are of a normal recurring
nature. Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 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, 1997.
3. There is seasonality to the water management services industry; thus, the
results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the full year. The
first and fourth quarters of each year are normally the lowest in terms of
average customer water usage for the Company's water utilities. Rainfall
and weather conditions affect utility operations, and utility revenues
usually peak during the third quarter of each year. The Company's contract
operations business can also be seasonal in nature. Heavy rainfall during a
quarter hampers the Company's ability to perform billable work such as
pipeline maintenance, manhole rehabilitation and other outdoor services.
Moderate rainfall may create opportunities for additional billable work
outside the scope of existing contracts.
4. The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128 "Earnings Per Share," which is required for interim and annual
financial statements issued after December 15, 1997. Under SFAS No. 128,
basic earnings per share ("EPS") replaced the presentation of primary EPS,
and diluted EPS replaced fully diluted EPS. For the three and nine months
ended September 30, 1998 and 1997, basic EPS was calculated using the
weighted average number of common shares outstanding during the period.
Diluted EPS was calculated using the weighted average number of common
shares and dilutive common stock equivalents. Common equivalent shares
arise from stock options and reflect the potential dilution that could
occur if common stock equivalents were exercised or converted into common
stock that could share in the earnings of the Company.
5. The Company has implemented SFAS No. 130 "Reporting Comprehensive Income"
which is required for interim and annual financial statements issued for
periods beginning after December 15, 1997. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components. The implementation of SFAS No. 130 did not have any effect on
the Company's financial position or results of operations.
6. Beginning in 1998, the Company is subject to SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" for annual
financial statements. The disclosure requirements of SFAS No. 131 are not
required in interim financial statements in the initial year of
application. SFAS No. 131 establishes standards for reporting financial and
descriptive information regarding an enterprise's operating segments. SFAS
No. 131 will require additional financial disclosure by the Company but
will not have any effect on the Company's financial position or results of
operations.
5
7. Beginning in 1998, the Company is subject to SFAS No. 132, "Employers'
Disclosures about Pension and Other Postretirement Benefits," for annual
financial statements. SFAS No. 132 requires certain changes in the
financial disclosure by the Company but will not have any effect on the
Company's financial position or results of operations.
8. The 1998 and 1997 earnings per common share, cash dividends per common
share and weighted average outstanding common shares reflect a 5-for-4
stock split (in the form of a stock dividend) granted to stockholders of
record on October 1, 1998, and a 5-percent stock dividend granted to
stockholders of record on January 2, 1998.
9. In May 1998, the Company signed an amendment to the RTNT Right of First
Refusal Agreement and RTNT Call Purchase Agreement ("the Agreements"). As
discussed in the Company's 1997 Annual Report on Form 10-K, in 1996, the
Company purchased a 49% interest in Windermere Utility Company
("Windermere"). The Agreements permit the majority shareholder to acquire
the Company's interest at an agreed-upon price. If the majority shareholder
does not exercise his option, then the Company has the right to acquire
100% of Windermere for an agreed-upon price. The amendment extends to
December 31, 1998 the date by which the majority shareholder may exercise
this right and increases the agreed-upon purchase price for the majority
shareholder.
10. In August 1998, the Company was granted an Exclusive Negotiation Agreement
for 120 days by the City of West Covina ("West Covina"), the purpose of
which is for Suburban Water Systems ("Suburban") and West Covina to
establish a price that will allow West Covina to divest itself of its water
distribution system and facilities. Successful negotiations would enable
Suburban to acquire the 7,000 customer connections served by West Covina's
water system. The Exclusive Negotiation Agreement also provides for the
consideration of lease and contract operation options in the event that the
acquisition of all or part of the West Covina system is not feasible.
While there can be no guarantee that the City and Suburban will reach any
final agreement, the acquisition of 7,000 water customers would add 11% to
Suburban's current customer base of 66,700 customers.
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 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"). The
operations of ECO Resources, Inc. ("ECO") are currently generating positive cash
flow for the Company; however, cash flow may be influenced from time to time by
ECO's investments in operating and computer equipment, as well as new business
development and acquisition costs.
At September 30, 1998, the Company had cash and cash-equivalent balances
totaling $798,000 and unused lines of credit of $10,796,000, with a total line
of credit capacity of $16,000,000. The Company has three lines of credit from
three commercial banks, one of which expires in 1999. The two remaining line of
credit agreements were renewed in September 1998 and will not expire until 2000.
The Company expects to renew its lines of credit in the normal course of
business. During the first nine months of 1998, the Company repaid $1,927,000
on its lines of credit.
The Company has remaining borrowing capacity under its First Mortgage Bond
Indentures of approximately $34,049,000. However, the amount of additional
borrowing available to the Company under its current lines of credit is limited
by financial covenants that restricted additional borrowing at September 30,
1998 to the unused lines of credit amount. As of September 30, 1998, the
Company was in compliance with all financial covenants as required by its line
of credit agreements.
6
During the first nine months of 1998, the Company's additions to property,
plant and equipment were $7,711,000, representing a decrease of $4,493,000 over
the same period in 1997. Developers made contributions in aid of construction
("CIAC"), and advances totaling $3,372,000, of which $1,597,000 was received in
cash. The cost of Company-financed capital additions was $5,936,000, which was
paid for primarily by cash flow from operations. Capital expenditures are
expected to decrease from $15,202,000 in 1997 to approximately $13,200,000 in
1998. This decrease is primarily due to the completion of certain major capital
projects in 1997. The Company estimates that its capital additions will be
approximately $10,000,000 in 1999. The Company anticipates borrowing
approximately $3,500,000 under its lines of credit during the remainder of 1998
to meet construction requirements not funded by operations or CIAC.
The Company anticipates that its available short-term borrowing capacity and
its cash flow generated from operations will be sufficient to fund its
activities over the next 12 months. If additional cash were needed, the Company
would consider alternative sources, including long-term financing. The amount
and timing of any future long-term financing would depend on various factors,
including the timeliness and adequacy of rate increases, the availability of
capital, and the Company's ability to meet interest and fixed charge coverage
requirements. Regulatory approval is required for any long-term financing by
Suburban 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
until new financing arrangements were secured. Such financing arrangements
could include seeking equity financing through a private placement or a public
offering. Similarly, if the Company were to need additional cash to fund an
acquisition, financing arrangements could include long-term borrowing or equity
financing.
REGULATORY AFFAIRS:
Regulation:
The California Public Utilities Commission ("CPUC") and the New Mexico Public
Utility Commission ("NMPUC") regulate the rates and operations of Suburban and
NMUI, respectively. The rates allowed are intended to provide the utilities an
opportunity to recover costs and earn a reasonable return on common equity. The
Company anticipates that future construction expenditures and increased direct
operating expenses will require periodic requests for rate increases.
Suburban received CPUC approval for a 2.62% ($705,000) step rate increase
effective January 1, 1997 and a 2.62% ($740,000) step rate increase effective
January 1, 1998. This was the last step rate increase from the 1995 general
rate case. As of September 30, 1998, Suburban has not filed for any further
rate increases.
Regulatory Developments:
Legislative and CPUC developments are closely monitored by the Company and by
the various water industry associations in which the Company actively
participates. Whether legislative or CPUC changes will be enacted, or, if
enacted, what the terms of any changes would be, are not known by the Company.
Therefore, management cannot predict the impact, if any, of final legislative or
CPUC developments on the Company's financial position or results of operations.
In 1996, the residents of the state of New Mexico approved a constitutional
amendment to combine the NMPUC and the New Mexico Corporation Commission
("NMCC") and create the New Mexico Public Regulatory Commission ("NMPRC").
Presently, the NMPUC consists of three appointed officials and the NMCC consists
of three elected officials. Under the enacted legislation, the NMPRC consists
of five elected officials who were elected in November 1998, and who will take
office on January 1, 1999. A legislative committee is currently reviewing
proposed changes to the Public Utilities Act (the "PUA"). The Company cannot
predict if or when changes to the PUA will ultimately occur; or, if changes are
enacted, the impact, if any, on NMUI's financial position or results of
operations.
7
Contract Operations:
ECO's pricing is not subject to regulation by a public utilities commission.
Most contracts with municipal utility districts are short-term contracts and do
not generally include inflation adjustments. Changes in prices are negotiated
on a contract-by-contract basis. ECO's longer-term water and wastewater service
contracts, primarily with municipalities, typically include annual inflation
adjustments.
In the United States, municipal employees perform the majority of water and
wastewater utility operations. As a result, a significant portion of ECO's
sales and marketing efforts require convincing elected officials and city staff
persons that outsourcing of the utility operations is of benefit to the city.
Typical sales efforts have an 18- to 36-month lead-time with no assurance that
the city will select outsourcing or select ECO at the end of the sales effort.
While industry renewal rates tend to be high, periodically cities change
operators or terminate outsourcing at the end of a contract.
As discussed in the Company's Form 10-Q for the period ending June 30, 1998,
the City of Rio Rancho, New Mexico ("Rio Rancho") notified ECO that Rio Rancho
would not renew ECO's $4 million annual operations and maintenance ("O&M")
contract to operate Rio Rancho's water and wastewater facilities. This contract
expired June 30, 1998 and is expected to result in reduced revenues of
approximately $2 million in 1998. ECO has negotiated several new contracts in
1998, which should offset the impact on earnings of the loss of the Rio Rancho
contract, although not necessarily the impact on revenues. Additionally, the
Company is aggressively pursuing additional operating contracts as well as
acquisition and joint venture opportunities which would offset the effect of the
loss of earnings in the event other contracts are not renewed.
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 (the "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 (as reenacted in 1996), and the Resource Conservation and
Recovery Act. Both the EPA and state regulatory agencies require periodic
testing and sampling of water. To date, the Company has not experienced any
material adverse effects upon its operations resulting from compliance with
governmental regulations. In June 1998, the Company became aware that a
substance called N-nitrosodimethylamine ("NDMA") had been detected in one of its
wells in excess of the EPA reference dosage for health risks. Upon detection,
the well was immediately removed from service. The Company believes that future
incremental costs of complying with governmental regulations, including capital
expenditures, will be recoverable through increased rates and contract
operations revenues. However, there is no assurance that recovery of such costs
will be allowed.
YEAR 2000 ISSUE:
The Year 2000 ("Y2K") issue is the result of software applications using a
two-digit code instead of a four-digit code to identify the year. Such
applications may be unable to interpret dates beyond 1999, which could result in
system failure or other erroneous data in the year 2000 causing serious
disruptions in operations. The Company began evaluating the Y2K issue in 1997
and has implemented a five-phase plan to assess its exposure from potential Y2K
related failures in its internal systems and those of its significant suppliers,
vendors and customers.
The first phase of the plan is to conduct an inventory of all systems and
programs to determine which might be affected by the Y2K issue. The second
phase involves assessment and determination as to how to correct any Y2K issues
that are identified in the first phase of the Company's plan. The third phase
of the plan involves implementation and testing of the corrective measures. The
fourth phase of the plan is to ensure that all significant Y2K issues have been
properly corrected and all critical internal systems are Y2K compliant. The
final phase of the plan is to assess whether the Company's principal suppliers,
vendors and material customers have Y2K issues, which could adversely affect the
Company.
8
The first phase of the plan, conducting an inventory of systems and programs
that may be affected by Y2K has been substantially completed. The Company's
billing and general ledger systems are already substantially Y2K compliant. For
those systems that are not compliant, the second phase of the plan, identifying
corrective measures, has been substantially completed with solutions identified
to correct the existing system problems. The third phase of the plan,
implementation and testing of corrective measures is currently in progress and
is expected to be completed by the first quarter of 1999, with final critical
internal systems Y2K compliant without material deviation by July 1999 (phase
four). In the event compliance is not possible, the Company will consider
replacing non-compliant software. Costs to be incurred in order for the Company
to be Y2K compliant are not expected to have a material effect on the Company's
financial position or results of operations.
The fifth phase of the plan involves the Company contacting principal
suppliers and vendors, all single source suppliers and vendors, and material
customers including local governments and municipal utility districts to assess
their readiness for Y2K. The Company is currently making inquiries with respect
to Y2K compliance of these other systems; however; the Company has not received
assurance that those other systems are Y2K compliant. If the systems of
principal suppliers and vendors are found to be non-compliant, the Company will
evaluate and consider appropriate contingency plans. The Company is unable to
predict whether there will be a material adverse effect on the Company's
financial position or results of operations since the final determination of the
Y2K compliance of principal suppliers, vendors, and material customers is not
known at this time.
OUTLOOK:
Certain statements in this Form 10-Q are forward looking and, as such, involve
risk and uncertainty. Uncertainties arise from weather, environmental issues,
legal contingencies and other matters which management cannot predict. Actual
results may vary from those projected or implied. This Form 10-Q should be read
in conjunction with the Company's 1997 Annual Report on Form 10-K which
includes: consolidated financial statements and footnote disclosures prepared in
accordance with generally accepted accounting principles; management's
discussion and analysis of financial condition and results of operations; a
detailed description of the Company's business and a discussion of various risks
and uncertainties.
RESULTS OF OPERATIONS:
ALL EARNINGS PER SHARE AMOUNTS REFLECT A 5-FOR-4 STOCK SPLIT (PAYABLE IN THE
FORM OF A STOCK DIVIDEND) GRANTED TO STOCKHOLDERS OF RECORD ON OCTOBER 1, 1998,
AND A 5-PERCENT STOCK DIVIDEND GRANTED TO STOCKHOLDERS OF RECORD ON JANUARY 2,
1998.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Diluted earnings per common share were $.34 in 1998, compared to $.28 during
the same period in 1997.
Operating income increased $361,000 or 13%, and, as a percentage of operating
revenues, was 15% in 1998 compared with 14% in 1997. Operating income at the
utilities increased $284,000, due primarily to the positive effects of a step
rate increase at Suburban and to the increase in new customers at NMUI. ECO's
operating results improved $43,000, due primarily to new contracts, additional
work performed outside the scope of existing contracts and aggressive cost
containment measures. The improvement in operating income was partially offset
by the loss of the Rio Rancho contract as discussed earlier, and an increase in
marketing costs associated with new contracts. Parent company expenses
decreased $34,000, due primarily to decreases in compensation-related expenses.
9
Operating revenues
Operating revenues decreased $15,000, when compared to the revenue for the
same period in 1997. Suburban's revenues increased $63,000 or 1% due primarily
to a step rate increase at Suburban, which was partially offset by a 2% decrease
in water consumption. Revenues increased at NMUI by $182,000 or 12% primarily
due to an increase in the number of customers. ECO's revenues decreased
$260,000 or 3%, primarily as a result of the loss of an operating contract for
the City of Rio Rancho. The loss of revenue was partially offset by new
contracts and additional billable work outside the scope of existing contracts.
Direct operating expenses
Direct operating expenses decreased $442,000 or 3%. As a percentage of
operating revenues, these expenses were 71% in 1998 and 73% in 1997. Suburban's
direct operating expenses decreased $114,000, primarily reflecting a decrease in
the cost of water produced because of the lower level of water consumption.
NMUI's direct operating expenses increased $143,000 as a result of the increase
in NMUI's customers. ECO's direct operating expenses decreased $470,000
primarily as a result of the loss of the Rio Rancho contract. The decrease was
partially offset by higher expenses associated with new contracts.
Selling, general and administrative
Selling, general and administrative expenses for the third quarter of 1998
increased $66,000 as compared with the same period in 1997. As a percentage of
operating revenues, these expenses were 14% in 1998 and 13% in 1997. General
and administrative expenses at the utilities decreased $68,000, primarily as a
result of decreased compensation-related expenses. ECO's selling, general and
administrative expenses increased $168,000, primarily due to increased regional
marketing costs associated with new business development opportunities. As
discussed above, general and administrative expenses of the parent company
decreased $34,000.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Diluted earnings per common share were $.59 in 1998, compared to $.49 during
the same period in 1997.
Operating income increased $659,000 or 12% and, as a percentage of operating
revenues, was 12% in 1998 and 10% in 1997. Operating income at the utilities
decreased $114,000, due primarily to decreased water sales at Suburban because
of inclement weather in California as a result of El Nino-generated storms. The
decrease in operating income was partially offset by the addition of new
customers and increased consumption at NMUI. The impact of the El Nino-
generated storms on water utility revenue and operating income during 1998 may
reduce the Company's earnings growth rate from the growth rate of the last few
years.
ECO's operating results improved $621,000, due to increased revenue from new
contracts, additional work performed outside the scope of existing contracts,
aggressive cost containment measures, and restructuring of marketing
responsibilities. Parent company expenses decreased $152,000, due primarily to
decreases in compensation-related expenses.
Operating revenues
Operating revenues increased $362,000 or 1%. Water utility revenues decreased
$1,206,000 or 4%, due primarily to a 13% decrease in water consumption by
Suburban's customers due to El Nino-generated storms. Revenues increased at NMUI
by 12% due to an increase in the number of NMUI's customers and increased
consumption. ECO's revenues increased $2,870,000, primarily as a result of new
contracts and additional work performed outside the scope of existing contracts.
This increase was partially offset by the loss of the Rio Rancho contract,
resulting in a net revenue increase of $1,568,000.
10
Direct operating expenses
Direct operating expenses for the nine months ended September 30, 1998
decreased $445,000 as compared with the same period in 1997. As a percentage of
operating revenues, these expenses were 73% in 1998 and 74% in 1997. Suburban's
direct operating expenses decreased $1,355,000, primarily reflecting a decrease
in the cost of water produced because of the lower level of water consumption.
NMUI's direct operating expenses increased $299,000 as a result of the addition
of new NMUI customers and increased consumption. ECO's direct operating
expenses increased $611,000, resulting primarily from higher expenses associated
with the effects of new contracts and additional work performed outside the
scope of existing contracts.
Selling, general and administrative
Selling, general and administrative expenses for the nine months ended
September 30, 1998 increased $148,000 or 2% as compared with the same period in
1997. As a percentage of operating revenues, these expenses were 15% in 1998 and
1997. General and administrative expenses at the utilities decreased $47,000.
ECO's selling, general and administrative expenses increased $347,000, primarily
due to increased regional marketing costs associated with new business. As
discussed above, general and administrative expenses of the parent company
decreased $152,000.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1998, the Company and ECO were served with a summons and complaint
in an action entitled Patrick K. Accrocco, et al vs. ECO Resources, Inc., et al
in the District Court of Fort Bend County, Texas. The action relates to a fatal
automobile accident that occurred in September 1998 and involved an ECO truck.
The plaintiffs allege that the accident was caused by the driver's negligence
and that ECO and the Company were negligent in hiring, training, monitoring, and
supervising the driver. The plaintiffs seek damages for pecuniary loss, loss of
companionship and society, loss of consortium, and mental anguish in an amount
to be determined at trial. The Company and ECO maintain automobile liability
insurance and umbrella liability policies in an aggregate amount which the
Company believes to be in excess of any award which the plaintiffs may obtain.
The Company, ECO and the ECO truck driver are being defended in this action by
legal counsel appointed by the Company's automobile liability carrier, and will
answer denying any liability to the plaintiffs. The Company believes that its
maximum exposure in this action is limited to the self-insured retention under
its umbrella liability policy. Based on the information available at this time,
management does not expect that this action will have a material effect on the
Company's financial position or results of operations.
As discussed in the Company's 1997 Annual Report on Form 10-K, Suburban and
the Company were served with a summons and an amended complaint in the Kristin
Santamaria, et al vs. Suburban Water Systems, et al action ("Santamaria"). The
amended complaint lists approximately 350 plaintiffs who contend, in essence,
that they or deceased family members are or were long-time residents of the San
Gabriel Valley ("the Valley") and that, by virtue of their residence in the
Valley, they have suffered long-term exposure to various hazardous substances in
their drinking water resulting in serious illness or, in some cases, wrongful
death. Suburban and the Company filed demurrers (i.e. motions to dismiss the
action) which alleged that the action must be dismissed because exclusive
jurisdiction of the subject matter rests with the CPUC. On August 27, 1998, the
Superior Court Judge agreed and dismissed the case as to all water utility
defendants. The plaintiffs have appealed that decision.
As discussed in the Company's Form 10-Q Report for the quarter ended June 30,
1998 (the "June Report"), the Company and Suburban were served with a summons
and complaint in a second action entitled Christine Boswell et al vs. Suburban
Water Systems, et al, in the Los Angeles County Superior Court. The plaintiffs
allege complaints similar to that in Santamaria. Information as to the action
is described in the June Report. Since the filing of the June Report, the Court
of Appeal has issued an order setting forth a briefing schedule for a review of
the plaintiffs' petition requesting that the trial court be required to
terminate the stay and rule on the demurrers. The briefs of the water utilities
were filed on October 26, 1998. The water utility defendants asked the Court of
Appeal to order the trial court to dismiss these actions based on the exclusive
jurisdiction of the CPUC. Oral Arguments in the Court of Appeal will begin on
January 26, 1999.
A third action, Anthony Anderson, et al vs. Suburban Water Systems, et al was
filed in the Los Angeles County Superior Court. The action has not been served,
although a copy of the complaint has been furnished to the Company. The
allegations of the Anderson action are virtually identical to the Santamaria
action and involve approximately 180 plaintiffs.
A fourth action, Demciuc, et al vs. Suburban Water Systems, et al, was filed
in the Los Angeles County Superior Court and was served in September 1998. That
action is similar to the Boswell action and involves two other water purveyors
and five industrial defendants. All of the parties to the Demciuc action have
agreed to stay that action pending the outcome of the Boswell petitions.
The Company and Suburban intend to vigorously defend all three pending
actions, (and the Santamaria action if the dismissal is reversed) and have
requested that their liability insurance carriers defend and indemnify the
Company and Suburban. Several of the liability insurance carriers are currently
contributing to the costs of defense of the lawsuits. Based upon information
available at this time,
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management does not expect that these actions will have a material effect on the
Company's financial position or results of operations.
As described in the June Report, Suburban has applied for and received CPUC
authority to establish and maintain a memorandum or tracking account to
accumulate all costs and fees incurred by Suburban in defense of these actions
and any similar actions which may be filed, costs and fees incurred in legal
actions against industrial potentially responsible parties ("PRPs"), and costs
and fees incurred in seeking recovery against Suburban's insurance carriers of
costs and fees incurred with respect to the underlying actions and those against
PRPs. The Company and Suburban are unable to estimate or predict whether the
CPUC will ultimately allow Suburban to recover these accumulated costs and fees
from Suburban's customers or, if such recovery is allowed, how much of such
costs and fees will be recoverable.
As described in the June Report, in March 1998, the CPUC issued an order
instituting investigation ("OII") directed to all Class A and B water utilities
in California, including Suburban. Information about the OII is set forth in
the June Report. At this time, the Company and Suburban are unable to predict
what actions, if any, will be taken by the CPUC and/or the Department of Health
Services ("DOHS") as the results of this investigation, or their impact on the
operations or financial position of the Company and Suburban. At this time, it
is also uncertain whether the CPUC and/or DOHS will attempt to intervene in the
foregoing actions or assert exclusive jurisdiction on the likely results.
As discussed in the Company's 1997 Annual Report on Form 10-K and in the June
Report, Suburban and the Company were served with a complaint in September 1995,
wherein the plaintiff claimed that, while working in the 1950s and 1960s for an
independent contractor hired by Suburban, he was exposed to asbestos fibers and
contracted mesothelioma. Information as to the action is set forth in the
Company's Form 10-Q Report for the quarter ended March 31, 1998. In June 1998,
the plaintiffs filed a Case Report demanding $850,000 for damages suffered. A
mandatory settlement conference has been set for January 1999, with a trial date
set for March 1999. Suburban and the Company maintain that they have no
responsibility for the death of the decedent and intend to contest these claims
vigorously. Insurance carriers are currently paying all defense costs
associated with this case, and the Company expects that they will pay for
damages or settlement, if any.
As discussed in the Company's 1997 Annual Report on Form 10-K and the June
Report, the City of Albuquerque (the "City") initiated an action in eminent
domain to acquire the operations of NMUI. At present, discussions are ongoing,
but there are no certainties that these discussions will lead to a settlement of
the legal action.
The Company and its subsidiaries are the subjects of certain litigation
arising from the ordinary course of operations. The Company believes the
ultimate resolution of such matters will not materially affect its consolidated
financial position, results of operations or cash flow.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
As previously stated in the Company's April 24, 1998 Proxy Statement, any
stockholder who desires to submit a proposal for consideration at the Company's
1999 Annual Meeting of Stockholders ("the annual meeting") must submit the
proposal to the Company's Secretary in writing. Proposals received prior to
December 25, 1998 will be considered for inclusion in the 1999 Proxy Statement.
Proposals received after December 24, 1998 but prior to February 26, 1999 may
not be included in the 1999 Proxy Statement but would be considered at the
annual meeting. Proposals received after February 25, 1999 may be ruled untimely
and not subject to action at the annual meeting. For proposals received after
February 25, 1999, the Company may exercise discretionary authority to vote
proxies held by the Company. All proposals should be submitted in writing to the
Company's Secretary at: 225 North Barranca Ave., Suite 200, West Covina, CA
91791.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits furnished pursuant to Item 601 of Regulation S-K:
10.4H First Amendment to the Amended and Restated Credit Agreement dated
September 1, 1998, between Registrant and Wells Fargo Bank, filed
herewith.
10.4I Letter of Waiver to the Amended and Restated Credit Agreement dated
September 18, 1998 between Registrant and Wells Fargo Bank, filed
herewith.
10.13D First Amendment to the Amended and Restated Credit Agreement dated
September 1, 1998, between Suburban Water Systems and Wells Fargo
Bank, filed herewith.
10.17A First Amendment to the Amended and Restated Credit Agreement dated
September 1, 1998, between Registrant and Mellon Bank, N.A., filed
herewith.
10.17B Letter of Waiver to the Amended and Restated Credit Agreement
dated September 18, 1998 between Registrant and Mellon Bank, N.A.,
filed herewith.
10.18A First Amendment to the Amended and Restated Credit Agreement
dated September 1, 1998, between Suburban Water Systems and Mellon
Bank, N.A., filed herewith.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
SOUTHWEST WATER COMPANY
-----------------------
(Registrant)
Dated: November 12, 1998 /s/ PETER J. MOERBEEK
- - ------------------------ ---------------------
Peter J. Moerbeek
Vice President Finance
and Chief Financial Officer
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