SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): October 27, 1998
American States Water Company
Southern California Water Company
(Exact name of registrants as specified in their charter)
American States Water Company
California 333-47647 95-4676679
(State or other (Commission File (IRS Employer
jurisdiction Number) Identification No.)
of incorporation)
Southern California Water Company
California 000-01121 95-1243678
(State or other (Commission File (IRS Employer
jurisdiction Number) Identification No.)
of incorporation)
630 East Foothill Boulevard, San Dimas, California 91773-9016
(Address of Principal Executive Offices) (Zip Code)
Registrants' telephone number including area code: (909) 394-3600
(Former name or former address, if changed since last report.)
Not applicable.
Item 5. Other Events.
We are filing this Current Report as a combined report
for American States Water Company ("AWR") and its wholly owned
subsidiary, Southern California Water Company ("SCW"). Unless
otherwise indicated, all references to "Company", "our" or
"we" are references to AWR and SCW collectively.
On October 29, 1998, the Administrative Law Judge ("ALJ")
assigned to SCW's six pending water rate increase applications
issued his proposed decision that, among other things,
recommended adoption of a settlement agreement previously
signed by all parties and proposed a return on equity of 10%.
We anticipate that the final order will be issued by the
California Public Utilities Commission ("CPUC") prior to year-
end, with new rates effective January 1, 1999. The final
order could differ materially from the decision proposed by
the ALJ.
This Current Report summarizes certain risks of our
business that may affect our future financial results. We
also periodically file with the Securities and Exchange
Commission documents that include more information on these
risks. It is important for investors to read these documents.
Litigation
SCW has recently been sued in five water-quality related
lawsuits:
- a suit filed on April 24, 1997 alleging personal injury and
property damage as a result of the sale of water from wells located
in an area of the San Gabriel Valley that has been designated a
federal superfund site
- a suit filed on November 3, 1997 alleging personal injury and
property damage as a result of the sale of water; few our systems
are located in the geographical area covered by this suit
- a suit filed on January 8, 1998 alleging personal injury and
property damage as a result of the delivery of contaminated water
in SCW's Arden-Cordova service area
- a suit filed in April 1998 alleging personal injury and
property damage as a result of the delivery of contaminated water
in SCW's Arden-Cordova service area
- a suit filed on July 30, 1998 alleging personal injury and
property damage as a result of the sale of water from wells located
in an area of the San Gabriel Valley that has been designated a
superfund site
In March 1998, the CPUC issued an order instituting
investigation (the "OII") as a result of these types of suits being
filed against water utilities in California. The CPUC is seeking
to determine:
- whether existing standards and policies regarding drinking
water quality adequately protect the public health
- whether water utilities are following existing standards
With the exception of the lawsuit filed in July 1998, the
lawsuits have been stayed pending the outcome of the OII. We
anticipate that the CPUC will issue a report of its initial
findings in January 1999. We are unable to predict the nature of
the CPUC's findings or the outcome of the lawsuits. An adverse
outcome in this type of litigation is, however, likely to be
material.
The CPUC has authorized a memorandum account for legal
expenses incurred by SCW in the San Gabriel Valley and Arden-
Cordova water quality lawsuits. Under the memorandum account
procedure, SCW may recover litigation costs from ratepayers to the
extent authorized by the CPUC. The CPUC has not yet authorized SCW
to recover any of its litigation costs.
Environmental Regulation
We are subject to increasingly stringent environmental
regulations that will result in increasing capital and operating
costs. These regulations include:
- the 1996 amendments to the Safe Drinking Water Act that
require increased testing and treatment of water to reduce
specified contaminants to minimum containment levels
- interim regulations expected to be adopted before the end of
1998 requiring increased surface-water treatment to decrease the
risk of microbial contamination; these regulations will affect
SCW's five surface water treatment plants
- additional regulation of disinfection/disinfection byproducts
expected to be adopted before the end of 1998; these regulations
will potentially affect two of SCW's systems
- additional regulations expected to be adopted before the end
of 1998 requiring disinfection of certain groundwater systems;
these regulations will potentially impact several of SCW's systems
using groundwater supplies
- potential regulation of radon and arsenic
- new California requirements to fluoridate public water systems
serving over 10,000 customers
We may be able to recover costs incurred to comply with these
regulations through the ratemaking process for our regulated
systems. We may also be able to recover certain of these costs
under our contractual arrangements with municipalities. In certain
circumstances, we may recover costs from parties responsible or
potentially responsible for contamination.
Rates and Regulation
SCW is subject to regulation by the CPUC. AWR is not directly
subject to CPUC regulation. The CPUC may, however, regulate
transactions between SCW and AWR, including the manner in which
overhead costs are allocated between SCW and AWR and the pricing of
services rendered by SCW to AWR.
SCW's revenues depend substantially on the rates that it is
permitted to charge its customers. SCW may increase rates in
three ways:
- by filing for a general rate increase
- by filing for recovery of certain expenses
- by filing an "advice letter" for certain plant additions,
thereby increasing rate base
In addition, SCW recovers certain supply costs through a
balancing account mechanism. Supply costs include the cost of
purchased water and power and groundwater production assessments.
The balancing account mechanism is intended to insulate SCW's
earnings from changes in supply costs that are beyond SCW's
control. The balancing account is not, however, designed to
insulate SCW's earnings against changes in supply mix. As a
result, SCW may not recover increased costs due to increased use of
purchased water through the balancing account mechanism. In
addition, balancing account adjustments, if authorized by the CPUC,
may result in either increases or decreases in revenues
attributable to supply costs incurred in prior periods, depending
upon whether there has been an undercollection or overcollection of
supply costs.
There are also a number of matters pending before the CPUC
that may affect our future financial results. These matters
include:
- applications filed by SCW to increase rates in six of its 16
rate-making jurisdictions; the ALJ assigned to this matter has
proposed a return on equity of 10%; the final order could provide
for a return on equity that is materially different than that
proposed by the ALJ
- an application filed by SCW for permission to recover certain
costs of SCW's participation in the coastal aqueduct extension of
the state water project
- the OII
- new guidelines under consideration by the CPUC for the
acquisition and merger of water utilities and for privatization
transactions
Adequacy of Water Supplies
The adequacy of water supplies varies from year to year
depending upon a variety of factors, including
- rainfall
- the amount of water stored in reservoirs
- the amount used by our customers and others
- water quality, and
- legal limitations on use.
As a result of heavier than normal rainfall in the winter of
1997-1998, most of California's reservoirs are near capacity and
the outlook for water supply in the near term is generally
favorable. Population growth and increases in the amount of water
used have, however, increased limitations on use to prevent
overdrafting of groundwater basins. The import of water from the
Colorado River, one of our important sources of supply, is expected
to decrease in future years due to the requirements of the Central
Arizona Project. We also have in recent years taken wells out of
service due to water quality problems.
Water shortages affect us in several ways:
- they adversely affect supply mix by causing us to rely on more
expensive purchased water
- they adversely affect operating costs
- they may result in an increase in capital expenditures for
building pipelines to connect to alternative sources of supplies
and reservoirs and other facilities to conserve or reclaim water
We may be able to recover increased operating and construction
costs for our regulated systems through the ratemaking process. We
may also be able to recover certain of these costs under the terms
of our contractual agreements with municipalities.
In certain circumstances, we may recover these costs from
third parties that may be responsible, or potentially responsible,
for groundwater contamination. We are currently in negotiations
with GenCorp Aerojet regarding costs associated with the cleanup of
the groundwater supply for our Arden-Cordova System and for the
increased costs of purchasing water and developing new sources of
groundwater supply. We are also negotiating with two potentially
responsible parties on matters relating to the clean-up and
purchase of replacement water in the Charnock Basin located in the
cities of Santa Monica and Culver City. The Charnock Basin is in
SCW's service territory.
Water Quality
SCW has detected ammonium perchlorate and nitrosodimethylemine
in amounts in excess of certain state or federal limits in wells
serving its Arden-Cordova system. Both substances are byproducts
from the production of rocket fuel. SCW has taken wells out of
service, increased monitoring of other wells and drilled new wells
in the area. In addition, SCW is constructing a new pipeline to
the City of Folsom's water system in order to obtain an alternative
source of supply for its Arden-Cordova customers. GenCorp Aerojet
has reimbursed SCW for certain of these costs. Negotiations with
GenCorp Aerojet are continuing with respect to other costs.
The compound methyl tertiary butyl ether has been detected in
the Charnock Basin. SCW has taken two wells out of service in this
area and is purchasing more expensive groundwater from the
Metropolitan Water District to replace the water supply formerly
obtained from these wells. SCW is negotiating with two of the
potentially responsible parties for recovery of its increased
costs.
SCW has recently been sued on water quality issues. In
addition, we are subject to increasing regulation relating to water
quality matters.
Weather
Our business may be affected by weather in a variety of ways.
For instance:
- water volumes sold decrease during wet weather
- water volumes sold decrease during cold weather
- water volumes sold may also decrease during drought conditions
if mandatory rationing is imposed
- we may be required to purchase more expensive water and to use
less groundwater during drought conditions
- kilowatt-hour sales of electricity decrease if winters are
warmer than normal or summers are cooler than normal
- maintenance and capital expenditures decrease during periods
of inclement weather
- adverse weather conditions may result in damage to our water
and electric systems resulting in increased repair and capital
replacement costs, loss of sales and loss of water from broken
reservoirs and mains
Weather patterns in California are inherently uncertain. It
is therefore difficult to predict from year to year the impact of
weather on our financial results.
Unregulated Activities
AWR was formed on July 1, 1998 for the purpose of, among other
things, operating and maintaining municipally-owned water systems
and providing billing, meter reading and other services for
municipalities and special water districts and making investments
in subsidiaries and other entities. These activities present
different risks than CPUC-regulated activities. AWR does not have
extensive experience in engaging in these types of activities and
must compete with other private parties with more experience and
greater capital resources. It must also compete with special water
districts and other government agencies that may have a lower cost
of funds and other competitive advantages afforded governmental
entities.
AWR's ability to earn a profit on these activities will depend
upon a variety of factors, including
- its ability to obtain contracts in a competitive marketplace
- its ability to price its services at a level sufficient to
enable it to earn a profit
- its ability to recover the costs of obtaining contracts in a
competitive marketplace
- the cost of developing the privatization market in California
- its ability to operate in a cost effective matter
- its ability to negotiate contracts containing favorable terms
Our unregulated activities are not currently profitable. As a
result, our unregulated activities cannot currently be financed
from AWR's earnings. Under California law, SCW is not permitted to
issue securities to finance unregulated activities. Our unregulated
activities must therefore be financed directly by AWR or its
unregulated subsidiaries or from dividends received by AWR from
SCW. To the extent that AWR's activities are financed from
dividends from SCW, the funds available for the payment of
dividends to AWR's shareholders will be reduced.
Potential Year 2000 Risks
We are currently addressing the effect of the Year 2000
("Y2K") issue on our reporting systems and operations. We are also
assessing operational risks related to our suppliers and vendors
and developing contingency plans in order to mitigate this risk.
We have not currently experienced significant costs with respect to
addressing these issues. We anticipate completion of our internal
remediation and testing program by December, 1998 and completion of
our assessment of risks related to our suppliers and vendors and
our operational contingency plan by March, 1999.
The primary business risk associated with Y2K is our ability
to continue to treat, transport and distribute water to our
customers without interruption. Our operations could be
significantly impacted if
- we are unable to resolve or fail to identify all Y2K problems
prior to January 1, 2000
- any of our critical suppliers and vendors, such as suppliers
of chemicals for water treatment or electric utilities, are unable
to resolve or fail to identify all Y2K problems affecting our
business prior to January 1, 2000
- we are unable to mitigate or fail to address all operational
risks in our contingency plans
Capital Expenditures
We anticipate spending approximately $47.3 million on capital
expenditures during the next 12 months. We anticipate that
approximately 45 to 60% of these funds will come from developers
and other external sources. The price and terms of this funding
will depend upon conditions in the capital markets at the time
funds are needed.
We anticipate that capital expenditures will continue to
increase due to a variety of factors, including:
- the need to replace aging infrastructure
- the need to comply with increasingly stringent environmental
requirements
- the need to address potential water shortage problems
- the need to address water quality problems
Capital expenditures may also increase if AWR is successful in
its privatization efforts since many municipalities view
privatization as a means to finance needed capital improvements.
Economic Conditions
Our ability to finance capital expenditures, unregulated
activities and other matters will depend upon general economic
conditions and conditions in the capital markets. Conditions in
the capital markets are currently uncertain. We are unable to
predict to what extent this uncertainty may impact our access to
capital or financing costs or our ability to compete in the
privatization market.
Interest rates have recently been declining. Declining
interest rates are generally believed to be favorable for utilities
because of their high capital costs. On the other hand, SCW's
authorized rate of return may be reduced because of lower interest
rates. As a result, funds available for the payment of dividends
may be reduced.
Sales may also be adversely affected by unfavorable economic
conditions if business activity and employment are reduced.
Condemnation
Under California law, a governmental agency may acquire public
utility property through the power of eminent domain, also know as
condemnation. Although we have not had any of our systems
condemned during the past three years, the potential for
condemnation nevertheless remains.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
(c) Exhibits
3.01 Amended and Restated Articles of
Incorporation of American States
Water Company
3.02 Bylaws of American States Water Company
10.01 Change-in-Control Agreement dated as of
October 27, 1998 among American States Water
Company, Southern California Water Company and
Floyd E. Wicks
10.02 Change-in-Control Agreement dated as of
October 27, 1998 among American States Water
Company, Southern California Water Company and
McClellan Harris III
10.03 Change-in-Control Agreement dated as of
October 27, 1998 among American
States Water Company, Southern California
Water Company and Joel A. Dickson
10.04 Change-in-Control Agreement dated as of
October 27, 1998 between Southern California
Water Company and Joseph F. Young
10.05 Change-in-Control Agreement dated as of
October 27, 1998 between Southern California
Water Company and Donald K. Saddoris
10.06 Change-in-Control Agreement dated as of
October 27, 1998 between Southern California
Water Company and Randell J. Vogel
10.07 Change-in-Control Agreement dated as of
October 27, 1998 between Southern California
Water Company and James B. Gallagher
10.08 Change-in-Control Agreement dated as of
October 27, 1998 between Southern California
Water Company and Denise L. Kruger
10.09 Change-in-Control Agreement dated as of
October 27, 1998 between Southern California
Water Company and Susan L. Conway
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 hereunto duly authorized.
AMERICAN STATES WATER COMPANY
and its subsidiary
SOUTHERN CALIFORNIA WATER COMPANY
/s/ McClellan Harris III
---------------------------------
By: McClellan Harris III
Vice President - Finance,
Chief Financial Officer,
Treasurer and Secretary
DATED: October 30, 1998