1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION REGISTRANT AND STATE OF INCORPORATION IRS EMPLOYE FILE NO. ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO. ------------- ------------------------------------- ------------------ 333-47647 American States Water Company 95-4676679 (A California Corporation) 630 East Foothill Boulevard San Dimas, California 91773-9016 909-394-3600 000-01121 Southern California Water Company 95-1243678 (A California Corporation) 630 East Foothill Boulevard San Dimas, California 91773-9016 909-394-3600 Securities registered pursuant to Section 12(b) of the Act: AMERICAN STATES WATER COMPANY COMMON SHARES, $2.50 STATED VALUE NEW YORK STOCK EXCHANGE - -------------------------------------- -------------------------------------- Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether Registrant 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 and has been subject to such filing requirements for the past 90 days. American States Water Company Yes [x] No [ ] Southern California Water Company Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] The aggregate market value of the total voting stock held by non-affiliates of American States Water Company was approximately $263,068,000 on March 20, 2000. The closing price per Common Share on that date, as quoted in the Western Edition of The Wall Street Journal, was $29-3/8. Voting Preferred Shares of American States Water Company, for which there is no established market, were valued on March 20, 2000 at $1,793,000 based on a yield of 4.80%. As of March 20, 2000, the number of Common Shares of American States Water Company, $2.50 Stated Value, outstanding was 8,957,671. As of that same date, all 100 outstanding Common Shares of Southern California Water Company were owned by American States Water Company. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement will be subsequently filed with the Securities and Exchange Commission as to Part III, Item Nos. 10, 11, 12 and 13, in each case as specifically referenced herein. 2 AMERICAN STATES WATER COMPANY AND SOUTHERN CALIFORNIA WATER COMPANY FORM 10-K INDEX Page No. -------- PART I Item 1: Business 1 Item 2: Properties 2 - 3 Item 3: Legal Proceedings 3 - 5 Item 4: Submission of Matters to a Vote of Security Holders 5 PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 5 - 6 Item 6: Selected Financial Data 7 Item 7: Management's Discussion and Analysis of Financial Conditions and Results of Operation 7 - 21 Item 7A: Quantitative and Qualitative Disclosures About Market Risk 22 Item 8: Financial Statements and Supplementary Data 23 - 48 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 49 PART III Item 10: Directors and Executive Officers of Registrant 49 Item 11: Executive Compensation 49 Item 12: Security Ownership of Certain Beneficial Owners and Management 49 Item 13: Certain Relationships and Related Transactions 49 PART IV Item 14: Exhibits, Financial Schedules and Reports on Form 8-K 49 - 56 Signature(s) 57 - 58 3 ITEM 1. BUSINESS This annual report on Form 10-K is a combined report being filed by two separate Registrants: American States Water Company (hereinafter "AWR") and Southern California Water Company (hereinafter "SCW"). References in this report to "Registrant" are to AWR and SCW, collectively, unless otherwise specified. SCW makes no representations as to the information contained in this report relating to AWR and its subsidiaries, other than SCW. GENERAL AWR was incorporated in 1998 in connection with the formation of a holding company by SCW and became a public company on July 1, 1998. AWR has no material assets other than the common stock of SCW. SCW is a public utility company engaged principally in the purchase, production, distribution and sale of water (SIC No. 4941). SCW also distributes electricity in one customer service area (SIC No. 4911). SCW is regulated by the California Public Utilities Commission (CPUC) and was incorporated on December 31, 1929 under the laws of the State of California. AWR has another subsidiary, American States Utility Services, Inc. (ASUS) which contracts to lease, operate and maintain governmentally owned water and wastewater systems and to provide other services to local governments to assist them in the operation and maintenance of their water and wastewater systems. Neither AWR nor ASUS are regulated by the CPUC. SCW is organized into three regions and one electric customer service area operating within 75 communities in 10 counties in the State of California and provides water service in 21 customer service areas. Region I incorporates 7 customer service areas in northern and central California; Region II has 4 customer service areas located in Los Angeles; Region III incorporates 10 water customer service areas. SCW also provides electric service to the City of Big Bear Lake and surrounding areas in San Bernardino County. All electric energy sold by SCW to customers in its Bear Valley Electric customer service area was purchased under an energy brokerage contract with Sempra Energy Corporation from March 26, 1996 to May 1, 1999, and with Illinova Energy Partners, currently under the name of Dynegy Energy Services resulting from the merger of Dynegy and Illinova, since May 1, 1999. SCW served 244,086 water customers and 21,181 electric customers at December 31, 1999, or a total of 265,267 customers, compared with 263,499 total customers at December 31, 1998. ACQUISITION OF PEERLESS WATER CO. In December 1999, Registrant agreed to acquire Peerless Water Co., a privately owned water company in Bellflower, California, subject to satisfaction of certain conditions, including CPUC approval. The number of Common Shares to be issued will be determined at the closing, but will in no event be greater than 131,036 shares nor less than 107,538 shares. ACQUISITION OF CHAPARRAL CITY WATER COMPANY On March 10, 2000, Registrant entered into an agreement to acquire the common stock of Chaparral City Water Company, a privately operated water company serving approximately 10,000 customers in the town of Fountain Hills, Arizona and portions of Scottsdale, Arizona for an aggregate value of $31.2 million, including assumption of approximately $12 million in debt. Chaparral City Water Company was purchased from MCO Properties Inc., a wholly-owned subsidiary of MAXXAM Inc. This marks the first acquisition outside of California for Registrant. The sale of Chaparral City Water Company requires notification to the Arizona Corporation Commission and other conditions customary in transactions of this type. The approval of Registrant's shareholders is not required. It is anticipated that the transaction will close within one year. 1 4 COMPETITION The business of SCW is substantially free from direct and indirect competition with other public utilities, municipalities and other public agencies. AWR's other subsidiary, ASUS, actively competes with other investor-owned utilities, other third party providers of water and wastewater services, and governmental entities on the basis of price and quality of service. EMPLOYEE RELATIONS Registrant had 492 employees as of December 31, 1999 as compared to 470 at December 31, 1998. Seventeen positions in SCW's Bear Valley Electric customer service area are covered by a collective bargaining union agreement, which expires in 2002, with the International Brotherhood of Electrical Workers. Sixty positions in SCW's Metropolitan ratemaking district are covered by a collective bargaining unit agreement, which expires in 2001, with the Utility Workers of America. Registrant has no other unionized employees. ITEM 2 - PROPERTIES FRANCHISES AND CONDEMNATION OF PROPERTIES SCW holds franchises from incorporated communities and counties which it serves. SCW holds certificates of public convenience and necessity granted by the CPUC in each of the ratemaking districts it serves. SCW's certificates, franchises and similar rights are subject to alteration, suspension or repeal by the respective governmental authorities having jurisdiction. The laws of the State of California provide for the acquisition of public utility property by governmental agencies through their power of eminent domain, also known as condemnation. Registrant has not been, within the last three years, involved in activities related to the condemnation of any of its water customer service areas or in its Bear Valley Electric customer service area. ELECTRIC PROPERTIES SCW's electric properties are all located in the Big Bear area of San Bernardino County. As of December 31, 1999, SCW operated 28.7 miles of overhead 34.5 KV transmission lines, 0.6 miles of underground 34.5 KV transmission lines, 173.1 miles of 4.16 KV or 2.4 KV distribution lines, 41.7 miles of underground cable and 14 sub-stations. There are no generating plants in SCW's system. OFFICE BUILDINGS Registrant's general offices are housed in a single-story office building located in San Dimas, California. The land and the building, which was completed and occupied in early 1990, are owned by Registrant. The Registrant also owns and occupies certain facilities housing regional, district and customer service offices while other such facilities are housed in leased premises. WATER PROPERTIES As of December 31, 1999, SCW's physical properties consisted of water transmission and distribution systems which included 2,742 miles of pipeline together with services, meters and fire hydrants and 436 parcels of land, generally less than 1 acre each, on which are located wells, pumping plants, reservoirs and other water utility facilities including five surface water treatment plants. 2 5 As of December 31, 1999, SCW owned 297 wells. Certain wells have been removed from service due to water quality problems. (See Environmental Matters to the Management's Discussion and Analysis) All wells are equipped with pumps with an aggregate capacity of approximately 240 million gallons per day. SCW has 40 connections to the water distribution facilities of the Metropolitan Water District of Southern California (MWD) and other municipal water agencies. SCW's storage reservoirs and tanks have an aggregate capacity of approximately 97 million gallons. SCW owns no dams in its customer service areas. The following table provides, in greater detail, selected water utility plant of SCW for each of its water ratemaking districts: Pumps Distribution Facilities Reservoirs ------------------------ ---------------------------------------------------- ------------------------ District Well Booster Mains Meters Services Hydrants Tanks Capacity - ------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Arden Cordova 27 17 476,694 3,392 8,452 1,186 3 4,000 Barstow 24 37 873,447 13,734 10,784 1,013 13 8,025 Bay Point 3 14 161,504 5,295 3,465 341 7 4,046 Calipatria 0 8 139,180 1,200 1,664 84 1 150 Claremont 28 35 721,021 14,139 11,184 1,176 13 16,061 Clearlake 0 13 192,298 2,743 954 75 4 847 Desert 16 20 750,004 7,492 4,570 575 13 1,477 Los Osos 8 10 201,408 3,973 1,466 167 5 1,134 Metro 79 83 4,799,404 171,815 109,478 7,719 41 25,209 Ojai 5 12 234,319 5,168 3,436 348 4 1,490 Orange 33 38 2,202,610 66,503 41,712 4,534 16 11,755 San Dimas 11 38 1,491,515 34,485 8,096 879 16 10,149 San Gabriel 23 8 553,449 11,298 13,073 792 3 1,520 Santa Maria 30 24 961,541 22,367 7,648 775 9 3,173 Simi 2 23 503,632 14,522 10,138 873 8 6,250 Wrightwood 8 5 216,809 5,464 680 76 7 1,546 - ------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total 297 385 14,478,835 383,590 236,800 20,613 163 96,832 Capacity is measured in thousands of gallons MORTGAGE AND OTHER LIENS As of December 31, 1999, Registrant had no mortgage debt outstanding, and its properties were free of any encumbrances or liens securing indebtedness. ITEM 3 - LEGAL PROCEEDINGS WATER QUALITY-RELATED LITIGATION SCW is a defendant in eleven lawsuits involving claims pertaining to water quality. Nine of the lawsuits involve customer service areas located in Los Angeles county in the southern portion of the State of California; two of the lawsuits involve a customer service area located in Sacramento county in northern California. See the section entitled "Risk Factor Summary" for more information. On September 1, 1999, the First District Court of Appeal in San Francisco, in a published opinion entitled Hartwell Corporation v. The Superior Court of Ventura County, held that the CPUC had pre-emptive jurisdiction over regulated public utilities and ordered dismissal of a series of lawsuits pertaining to water quality filed against water utilities, including SCW. Seven out of eleven lawsuits against SCW have been ordered for dismissal by the state Court of Appeals -- the Adler (Case No. 1), Santamaria (Case No. 2), Anderson (Case No. 3), Dominguez (Case No. 4), Celi (Case No. 5), Boswell (Case No. 6), and Demciuc (Case No. 7) Matters. On October 11, 1999, one group of plaintiffs has 3 6 appealed to the California Supreme Court. The Supreme Court has accepted the petition. Management can not predict whether the plaintiffs will be successful in the appeal. On December 3, 1998, SCW was named as a defendant in a complaint in multiple counts, styled Abarca, et al. v. City of Pomona, et al. (Case No. 8), filed in Los Angeles Superior Court which seeks recovery for negligence, wrongful death, strict liability, permanent trespass, continuing trespass, continuing nuisance, permanent nuisance, negligence per se, absolute liability for ultrahazardous activity, fraudulent concealment, conspiracy/fraudulent concealment, battery and unfair business practices on behalf of 383 plaintiffs (the Abarca Matter). Plaintiffs seek damages, including general and special damages according to proof, punitive and exemplary damages, as well as attorney's fees, costs of suit and other unspecified relief. SCW was served on June 18, 1999. SCW was named as a defendant, along with the City of Pomona, California and Xerox Corporation in the matter styled Adejare, et al. v. Southern California Water Company, et al. (Case No. 9), filed on July 22, 1999 in Los Angeles Superior Court which seeks recovery for wrongful death, battery and fraudulent concealment (the Adejare Matter). Plaintiffs seek damages, including general and special damages according to proof, punitive and exemplary damages, as well as attorney's fees, costs of suit and other unspecified relief. In December 1997 SCW was named a defendant in the matter of Nathaniel Allen, Jr., et al. v. Aerojet-General Corporation, et al. (Case No. 10), which was filed in Sacramento Superior Court. The complaint makes claims based on wrongful death, personal injury, property damage as a result of nuisance and trespass, medical monitoring, and diminution of property values (the Allen Matter). Plaintiffs allege that SCW and other defendants have delivered water to plaintiffs which allegedly is, or has been in the past, contaminated with a number of chemicals, including TCE, PCE, carbon tetrachloride, perchlorate, Freon-113, hexavalent chromium and other, unnamed, chemicals. SCW filed Demurrers and Motion to Strike in this matter on June 5, 1998. On August 31, 1998, the judge assigned to the Allen Matter, acting on the Court's own motion, issued a stay of all proceedings in the Allen matter pending the outcome of the CPUC's Order Instituting Investigation (OII) proceeding. The plaintiffs petitioned the Third District Court of Appeal for a Writ of Mandamus to overrule the stay. The Court denied the petition. Plaintiff's then petitioned the California Supreme Court for relief from the Appellate Court's ruling. The California Supreme Court denied plaintiff's petition. Thus the stay in the Allen Matter remains in effect. In March 1998, SCW was named a defendant in the matter of Daphne Adams, et al. v. Aerojet General, et al. (Case No. 11) which was filed in Sacramento Superior Court (the Adams Matter). The complaint makes claims based on negligence, strict liability, trespass, public nuisance, private nuisance, negligence per se, absolute liability for ultrahazardous activity, fraudulent concealment, violation of California Business and Professions Code section 17200 et seq., intentional infliction of emotional distress, intentional spoilage of evidence, negligent destruction of evidence needed for prospective civil litigation, wrongful death and medical monitoring. Plaintiffs seek damages, including general, punitive and exemplary damages, as well as attorney's fees, costs of suit, injunctive and restitutionary relief, disgorged profits and civil penalties, medical monitoring according to proof and other unspecified relief. SCW filed its Demurrers and Motion to Strike in this matter on June 5, 1998. On August 31, 1998, the judge assigned to the Adams Matter, acting on the Court's own motion, issued a stay of all proceedings in the Adams matter pending the outcome of the CPUC's OII proceeding. The plaintiff's petitioned the Third District Court of Appeal for a Writ of Mandamus to overrule the stay. The Court denied the petition. Plaintiff's then petitioned the California Supreme Court for relief from the Appellate Court's ruling. The California Supreme Court denied plaintiff's petition. Thus the stay in the Adams Matter remains in effect. In light of the breadth of plaintiffs' claims in these matters, the lack of factual information regarding plaintiffs' claims and injuries, if any, and the fact that no discovery has yet been completed, SCW is unable at this time to determine what, if any, potential liability it may have with respect to these 4 7 claims. Registrant believes there are no merits to these claims and intends to vigorously defend against them. ORDER INSTITUTING INVESTIGATION In March 1998, the CPUC issued an OII to regulated water utilities in the state of California, including SCW. The purpose of the OII is to determine whether existing standards and policies regarding drinking water quality adequately protect the public health and whether those standards and policies are being uniformly complied with by those water utilities. The OII delineates the constitutional and statutory jurisdiction of the CPUC and the California Department of Health Services (DOHS) in establishing and enforcing adherence to water quality standards. The CPUC's jurisdiction provides for the establishment of rates which permit water utilities to furnish water service meeting the established water quality standards at prices which are both affordable and allow the utility to earn a reasonable return on its investment. SCW has provided its response to a series of questions dealing with the adequacy of current drinking water standards, compliance by water utilities with such standards, appropriate remedies for failure to comply with safe drinking water standards and whether increased enforcement and additional drinking water standards are necessary. On June 10, 1999, the CPUC issued an interim order which established that the CPUC has jurisdiction to conduct the investigation regarding matters related to water quality over those water utilities subject to its authority. The Administrative Law Judge assigned to the OII has issued a draft decision finding that water utilities, including SCW, have complied with DOHS regulation and requirements. SCW is unable to predict whether the draft decision will be approved in part or in its entirety by the CPUC. SCW anticipates a final decision by the CPUC on this matter in 2000. See Note 8 to the Notes to Financial Statements. OTHER LITIGATION Registrant is also subject to ordinary routine litigation incidental to its business. Other than as disclosed above, no legal proceedings are pending, except such incidental litigation, to which Registrant is a party or of which any of its properties is the subject which are believed to be material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION RELATING TO COMMON SHARES - Common Shares of American States Water Company are traded on the New York Stock Exchange (NYSE) under the symbol AWR. The high and low NYSE prices on the Common Shares for each quarter during the past two years were: 5 8 Stock Prices ----------------------------------- High Low -------------- --------------- 1999 First Quarter $ 30 $ 23 9/16 Second Quarter 29 1/4 22 3/16 Third Quarter 37 1/8 28 3/8 Fourth Quarter 39 3/4 31 3/4 1998 First Quarter $ 26 $ 23 1/16 Second Quarter 27 1/8 21 1/8 Third Quarter 27 23 1/4 Fourth Quarter 29 1/4 24 7/8 All of the Common Shares of Southern California Water Company and American States Utility Services are owned by American States Water Company. Hence, there is no market for the Common Shares of either entity. (b) APPROXIMATE NUMBER OF HOLDERS OF COMMON SHARES - As of March 6, 2000, there were 3,519 holders of record of Common Shares of American States Water Company. All of the Common Shares of Southern California Water Company are owned by American States Water Company. (c) FREQUENCY AND AMOUNT OF ANY DIVIDENDS DECLARED AND DIVIDEND RESTRICTIONS For the last three years, Registrant has paid dividends on its Common Shares on March 1, June 1, September 1 and December 1. The following table lists the amount of dividends paid on Common Shares of American States Water Company for the last two years: 1999 1998 --------------- -------------- First Quarter $ 0.32 $ 0.315 Second Quarter 0.32 0.315 Third Quarter 0.32 0.315 Fourth Quarter 0.32 0.315 =============== ============== Total $ 1.28 $ 1.260 =============== ============== Registrant is not subject to any contractual restriction on its ability to pay dividends. 6 9 ITEM 6. SELECTED FINANCIAL DATA 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- ( in thousand, except per share amounts) INCOME STATEMENT INFORMATION Total Operating Revenues $173,421 $148,060 $153,755 $151,529 $129,813 Total Operating Expenses 144,907 122,999 130,297 128,100 108,425 Operating Income 28,514 25,061 23,458 23,429 21,388 Other Income 532 769 758 531 336 Interest Charges 12,945 11,207 10,157 10,500 9,559 Net Income 16,101 14,623 14,059 13,460 12,165 Preferred Dividends 88 90 92 94 96 Earnings Available for Common Shareholders 16,013 14,533 13,967 13,366 12,069 Basic Earnings per Common Share $ 1.79 $ 1.62 $ 1.56 $ 1.69 $ 1.54 Dividends Declared per Common Shares $ 1.28 $ 1.26 $ 1.25 $ 1.23 $ 1.21 Average Shares Outstanding 8,958 8,958 8,957 7,891 7,845 BALANCE SHEET INFORMATION Total Assets $533,181 $484,671 $457,074 $430,922 $406,255 Common Shareholders' Equity 158,846 154,299 151,053 146,766 121,576 Long-Term Debt 167,363 120,809 115,286 107,190 107,455 Preferred Shares-Not subject to Mandatory 1,600 1,600 1,600 1,600 1,600 Preferred Shares-Mandatory Redemption 360 400 440 480 520 Total Capitalization 328,169 $277,108 $268,379 $256,036 $231,151 Book Value per Common Share $ 17.73 $ 17.23 $ 16.86 $ 16.52 $ 15.50 OTHER INFORMATION Ratio of Earnings to Fixed Charges 3.27% 3.21% 3.35% 3.26% 3.19% Ratio of Earnings to Total Fixed Charges 3.23% 3.17% 3.30% 3.21% 3.14% Return on Average Common Equity 10.2% 9.6% 9.5% 10.7% 10.3% ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Unless specifically noted, the following discussion and analysis provides information on AWR's consolidated operations and assets. There are no material differences between the consolidated operations and assets of AWR and the operations and assets of SCW. FORWARD-LOOKING INFORMATION Certain matters discussed in this report (including the documents incorporated herein by reference) are forward-looking statements intended to qualify for the "safe harbor" from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as Registrant "believes," "anticipates," "expects" or words of similar import. Similarly, statements that describe Registrant's future plans, objectives, estimates or goals are also forward-looking statements. Such statements address future events and conditions concerning capital expenditures, earnings, litigation, rates, water quality and other regulatory matters, adequacy of water supplies, liquidity and capital resources, opportunities related to operations of municipally-owned water systems and accounting matters. Actual results in each case could differ materially from those currently anticipated in such statements, by reason of factors such as utility restructuring, including ongoing local, state and federal activities; future economic conditions, including 7 10 changes in customer demand; future climatic conditions; legislative, regulatory and other circumstances affecting anticipated revenues and costs. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999 AND 1998 Basic earnings per Common Share in 1999 increased by 10.5% to $1.79 per share as compared to $1.62 per share for the comparable period of 1998. The increase in the recorded results primarily reflects higher revenues at the SCW unit during 1999 as is more fully discussed below. Water operating revenues increased by 18.5% in 1999 to $159.7 million from the $134.8 million reported in 1998. Water sales volumes in 1999 were 9.0% higher than 1998 due primarily to the much drier and warmer weather conditions throughout Southern California in 1999 than in 1998. Additional increases in revenues were due to the general rate increases in six of Registrant's customer service areas effective January 1, 1999, which were applicable to 65% of SCW's water customers. Electric operating revenues of $13.3 million were 1.0% higher in 1999 as compared to 1998 due to a 2.7% increase in kilowatt-hour sales, primarily by industrial power users. The sales increase was partially offset by the lower billing rates of industrial customers relative to residential customers. Other revenues increased from $65,000 to $390,000 in 1999 due to increased management fees resulting from new ASUS service contracts established in the year and increased activities with existing contracts. Purchased water costs in 1999 increased to $36.1 million as compared to $30.8 million in 1998 due to a 12.1% increase in volumes purchased. The increase also reflects reduced reimbursements in 1999 from potentially responsible parties related to groundwater contamination in SCW's Culver City customer service area of approximately $570,000, compared with reimbursements of $1.7 million in 1998. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation - Environmental Matters - Matters Relating to Culver City System. Costs of power purchased for pumping increased by 5.5% to $7.4 million in 1999 chiefly as a result of an increase in pumped groundwater in SCW's water supply mix due to increased sales volumes. Costs of power purchased for resale in 1999 increased by 42.0% to $7.1 million from the $5.0 million recorded in 1998 due primarily to additional energy demand charges from the energy supplier serving SCW's Bear Valley Electric Service unit in 1999. As described below, most of this increase has been included in the supply balancing account and that Registrant will seek to recover these in future rate increases. Groundwater production assessments decreased by 5.3% to $7.2. million in 1999 from $7.6 million in 1998 due to reduced quantity rates in SCW's Metropolitan and San Dimas customer service areas. A positive entry for the provision for supply cost balancing accounts reflects recovery of previously under-collected supply costs. Conversely, a negative entry for the provision for supply cost balancing accounts reflects an under-collection of previously incurred supply costs. In 1999, recovery of previously under-collected supply costs was lower than 1998 due to the previously discussed increase in energy demand charges, the effect of which was partially offset by new rates effective January 1999 authorized to implement new supply costs and to increase collection of previously under-collected costs. 8 11 The balancing account mechanism insulates earnings from changes in the unit cost of supply costs which are outside of the immediate control of Registrant. However, the balancing account is not designed to insulate earnings against changes in the actual supply mix as compared to that mix authorized for recovery in rates. In 1999, SCW's overall supply mix improved favorably over that mix authorized in rates resulting in additional income. There is no assurance that the favorable mix can be sustained in future periods since actual results are affected by availability and quality of water, both purchased and produced from SCW's wells. See the section entitled "Water Supply." Other operating expenses increased by 7.8% from the $14.5 million recorded in 1998 due to increased costs for water treatment, and higher uncollectible provisions as a result of increased revenues. Administrative and general expenses increased by 30.0% to $28.6 million in 1999 from the $22.0 million recorded in 1998. The increase is due to costs associated with various acquisition projects, increased employee benefit costs, and additional amounts reserved for certain legal proceedings. In 1999, maintenance expense increased to the $9.8 million level compared to the recorded $7.3 million in 1998 due principally to increased maintenance on Registrant's water supply sources, and costs incurred on main replacements. The wet weather conditions during the first part of 1998 also hampered planned maintenance activities, thereby reducing maintenance expense in 1998. Depreciation expense in 1999 increased by 8.9% to $13.7 million reflecting the effects of recording approximately $38.2 million in net plant additions during 1998, depreciation on which began in 1999. Taxes on income increased by approximately 31.7% to $13.3 million in 1999 as compared to the $10.1 million in 1998 due to a 24.5% increase in pre-tax income and a higher effective tax rate in 1999 resulting from the turn-around of depreciation related temporary differences, the benefits of which were previously flowed-through for ratemaking purposes. Property and other taxes increased by 7.2% in 1999 to $6.6 million due primarily to increased franchise fees resulting from higher revenues, and increased payroll taxes from higher wages and additional personnel. Other income decreased by 30.8% in 1999 due primarily to the flow-through of tax benefits related to refinancing of long-term debt in December 1998 for which there were no similar benefits in 1999. Interest expense increased by 15.5% to $12.9 million primarily due to the issuance of $40 million in long-term debt in January 1999, partially offset by the retirement of $10 million of 10.10% Notes in December 1998. YEARS ENDED DECEMBER 31, 1998 AND 1997 Basic earnings per Common Share in 1998 increased by 3.8 % to $1.62 per share as compared to $1.56 per share in 1997. Although wet weather significantly impacted revenues in 1998, lower supply costs and modest increases in other operating expenses partially offset the decline in revenues. Water operating revenues decreased by 4.3% in 1998 to $134.9 million from the $141.0 million reported in 1997. Water sales volumes in 1998 were 9.9% lower than 1997 due to extremely wet weather during the first half of the year. The decrease in sales was partially offset by rate increases effective during 1998. 9 12 Electric operating revenues of $13.2 million were 3.4% higher in 1998 as compared to 1997 due to the impact of a general rate increase effective January 1998, as well as a 2.0% increase in kilowatt-hour sales. Purchased water costs decreased in 1998 to $30.8 million as compared to $38.3 million in 1997 due to a 20.8% decrease in volumes purchased and refunds received from Registrant's wholesale water supplier during 1998 of approximately $1.4 million. Refunds of $2.0 million were received in 1997. Costs of power purchased for pumping decreased by 7.2% to $7.0 million in 1998 chiefly as a result of reduced energy costs from Registrant's suppliers. Costs of power purchased for resale in 1998 decreased by 3.4% to $5.0 million from the $5.2 million recorded in 1997 due to reduced costs from Registrant's energy providers offset by the effects of increased kilowatt-hour sales volumes recorded during the year. Groundwater production assessments increased by 10.5% to $7.6 million in 1998 from $6.8 million in 1997 due to the increased amounts of pumped water in Registrant's supply mix as well as additional assessments associated with increased pumping in Registrant's Metropolitan and Orange County customer service areas. A positive entry for the provision for supply cost balancing accounts reflects recovery of previously under-collected supply costs. Conversely, a negative entry for the provision for supply cost balancing accounts reflects an under-collection of previously incurred supply costs. In 1998, recovery of previously under-collected supply costs was lower than 1997 due to the expiration, in January 1998, of a surcharge designed to recover those costs. The new rates, effective January 1999, increased collection of these under-collected costs. The balancing account mechanism insulates earnings from changes in the unit cost of supply costs which are outside of the immediate control of Registrant. However, the balancing account is not designed to insulate earnings against changes in supply mix, as occurred during the first eight months of 1997. Other operating expenses increased by 10.6% from the $13.1 million recorded in 1997 due to employee time charged to this category. Reversals in 1997 of costs associated with recovery of water quality expenditures through the CPUC's memorandum account mechanism also contributed to the increase. There were no such reversals of equal magnitude in 1998. Administrative and general expenses decreased slightly by 0.7% to $22.0 million in 1998 from the $22.1 million recorded in 1997. The decrease is due to stability in costs associated with health insurance, post-retirement medical benefits, pension and 401(k) plan costs and to a reduction of time charged by employees to this category. In 1998, maintenance expense remained at approximately the $7.3 million level recorded in 1997 due principally to the wet weather conditions during the first part of 1998 that hampered planned maintenance activity. Depreciation expense in 1998 increased by 14.5% to $12.5 million reflecting the effects of recording approximately $38 million in net plant additions during 1997, depreciation on which began in 1998. In addition, amortization of start-up and organizational costs associated with the formation of AWR is reflected in 1998 and there were no similar amortization costs in 1997. Taxes on income increased by approximately 3.1% to $10.1 million in 1998 as compared to the $9.8 million in 1997 due to a 5.7% increase in operating income partially offset by a lower effective tax rate. 10 13 Property and other taxes decreased by 2.5% in 1998 to $6.1 million due primarily to reduced franchise tax payments directly attributable to reduced revenues. Other income increased by 1.5% in 1998 due principally to the flow-through of tax benefits related to refinancing of long-term debt which was partially offset by an increase in reserves against costs associated with a non-regulated joint venture. Interest expense increased by 10.3% to $11.2 million primarily due to increased short-term bank borrowing and the issuance of $15 million in long-term debt in March 1998. LIQUIDITY AND CAPITAL RESOURCES AWR funds its operating expenses, dividends on its outstanding Common and Preferred Shares, and makes its mandatory sinking fund payments, principally through dividends from SCW. AWR has filed a Registration Statement with the Securities and Exchange Commission (SEC) for issuance, from time to time, of up to $60 million in Common Shares, Preferred Shares and/or debt securities. The proceeds will be used primarily for investment in its subsidiaries. No securities had been issued under this Registration Statement as of December 31, 1999. SCW funds the majority of its operating expenses, interest payments on its debt and dividends on its outstanding Common Shares through internal sources. SCW continues to rely on external sources, including short-term bank borrowing, contributions-in-aid-of-construction, advances for construction and install-and-convey advances, to fund the majority of its construction expenditures. Because of the seasonal nature of its water and electric operations, SCW utilizes its short-term borrowing capacity to finance current operating expenses. The aggregate short-term borrowing capacity available to SCW under its three bank lines of credit was $47 million as of December 31, 1999, of which a total of $21 million was outstanding. SCW routinely employs short-term bank borrowing as an interim financing source prior to funding capital expenditures on a long-term basis. In 1998, SCW filed a Registration Statement with the SEC for issuance, from time to time, of up to $60 million in long-term debt. In January 1999, SCW issued $40 million of long-term debt pursuant to this Registration Statement, leaving $20 million remaining for issuance at a later date. The funds were used primarily to repay short-term bank borrowings, after which capital expenditures were funded. Registrant has no derivative financial instruments, financial instruments with significant off-balance sheet risks or financial instruments with concentrations of credit risk. CONSTRUCTION PROGRAM A program for water pipeline replacement is on-going throughout the 22 customer service areas, based on priority of leaks detected, fire protection enhancements and reflection of the underlying replacement schedule. In addition, general upgrades in SCW's water supply facilities are anticipated to be on-going. SCW's board of directors has approved anticipated net capital expenditures of $55.4 million in 2000. Neither AWR nor ASUS have material capital commitments; however, ASUS actively seeks opportunities to own, lease or operate municipal water and wastewater systems, which may involve significant capital commitments. 11 14 REGULATORY MATTERS SCW is subject to regulation by the CPUC, which has broad powers with respect to service and facilities, rates, classifications of accounts, valuation of properties, the purchase, disposition and mortgaging of properties necessary or useful in rendering public utility service, the issuance of securities, the granting of certificates of convenience and necessity as to the extension of services and facilities and various other matters. AWR and ASUS are not regulated by the CPUC. The CPUC does, however, regulate certain transactions between SCW and its non-regulated affiliates. The 22 customer service areas (CSAs) of SCW are grouped into 16 water districts and 1 electric district for ratemaking purposes. Water rates vary among the 16 ratemaking districts due to differences in operating conditions and costs. SCW monitors operations on a regional basis in each of these districts so that applications for rate changes may be filed, when warranted. Under the CPUC's practices, rates may be increased by three methods: general rate case increases (GRC's), offsets for certain expense increases and advice letter filings related to certain plant additions. GRC's are typically for three-year periods, which include step increases for the second and third year. Rates are based on a forecast of expenses and capital costs. GRC's have a typical regulatory lag of one year. Offset rate increases typically have a two to four month regulatory lag. The following table lists information on estimated annual rate changes during 1999, 1998 and 1997. ($ in 000's) Supply Balancing General Cost Account and Step Advice Year Offset Amortization Increases Letters Total - ------------ ---------- ------------ ----------- ---------- ---------- 1999 $23 $1,349 $15,175 $657 $17,204 1998 $786 ($2,852) $3,590 $713 $2,237 1997 $183 $64 $1,332 ($126) $1,453 New water rates for six of SCW's customer service areas and recovery of costs associated with SCW's general office functions were implemented in January, 1999. Step increases in rates for Arden-Cordova, Bay Point and Los Osos CSAs were also effective in January, 1999. Applications to increase water rates were filed for four water ratemaking districts in SCW's Region III in March 1999. A draft decision has been issued by the Administrative Law Judge assigned to this matter that supports the settlement on all issues reached between SCW and the CPUC Staff. SCW has also filed an application with the CPUC to combine tariff schedules into regional rates for the customer service areas that make up SCW's Region III. The Administrative Law Judge assigned to this matter has issued a draft decision that supports SCW's application. A final decision from the CPUC on both issues is anticipated in the second quarter of 2000. GRC step increase for Metropolitan CSA and General Office Allocation step increases for Arden-Cordova, Bay Point, Simi Valley and Santa Maria CSAs were effective beginning January, 2000. Attrition increases for Arden-Cordova and Bay Point CSAs were also in effect beginning January, 2000. A Notice of Intent to increase water rates by approximately $5.8 million for ratemaking districts in SCW's Region I as well as to combine those tariff schedules into regional rates were filed in February 2000. The application will be submitted by end of March, 2000. The new rates, if authorized in total or in part by the CPUC, would be effective January 1, 2001. 12 15 An advice letter was filed with the CPUC on March 1, 2000 seeking recovery of capital expenditures associated with Y2K readiness, not already included in Registrant's water rates. See Note 13 to the Notes to Financial Statements. On April 22, 1999, the CPUC issued an order denying SCW's application seeking approval of its recovery through rates of costs associated with its participation in the Coastal Aqueduct Extension of the State Water Project (SWP). SCW's participation in the SWP commits it to a 40-year entitlement. SCW's investment of approximately $9.5 million in SWP is currently included in Other Property and Investments. The remaining balance of the related liability of approximately $7 million is recorded as other long-term debt. SCW intends to recover its investment in SWP through contributions from developers on a per-lot or other basis, or the sale of its 500 acre-foot entitlement in SWP. See Note 8 to the Notes to Financial Statements. ENVIRONMENTAL MATTERS 1996 Amendments to Federal Safe Drinking Water Act On August 6, 1996, amendments (the 1996 SDWA amendments) to the Safe Drinking Water Act (the SDWA) were signed into law. The 1996 SDWA revised the 1986 amendments to the SDWA with a new process for selecting and regulating contaminants. The U. S. Environmental Protection Agency (EPA) can only regulate contaminants that may have adverse health effects, are known or likely to occur at levels of public health concern, and the regulation of which will provide "a meaningful opportunity for health risk reduction." The EPA has published a list of contaminants for possible regulation and must update that list every five years. In addition, every five years, the EPA must select at least five contaminants on that list and determine whether to regulate them. The new law allows the EPA to bypass the selection process and adopt interim regulations for contaminants in order to address urgent health threats. Current regulations, however, remain in place and are not subject to the new standard-setting provisions. The DOHS, acting on behalf of the EPA, administers the EPA's program in California. The 1996 SDWA amendments allow the EPA for the first time to base primary drinking water regulations on risk assessment and cost/benefit considerations and on minimizing overall risk. The EPA must base regulations on best available, peer-reviewed science and data from best available methods. For proposed regulations that involve the setting of maximum contaminant levels (MCL's), the EPA must use, and seek public comment on, an analysis of quantifiable and non-quantifiable risk-reduction benefits and cost for each such MCL. SCW currently tests its wells and water systems according to requirements listed in the SDWA. Water from wells found to contain levels of contaminants above the established MCLs is treated to reduce contaminants to acceptable levels before it is delivered to customers. Since the SDWA became effective, SCW has experienced increased operating costs for testing to determine the levels, if any, of the constituents in SCW's sources of supply and additional expense to lower the level of any contaminants in order to meet the MCL standards. Such costs and the costs of controlling any other contaminants may cause SCW to experience additional capital costs as well as increased operating costs. Registrant is currently unable to predict the ultimate impact that the 1996 SDWA amendments might have on its financial position or its results of operation. The CPUC ratemaking process provides SCW with the opportunity to recover prudently incurred capital and operating costs associated with water quality. Management believes that such incurred costs will be authorized for recovery by the CPUC. 13 16 Proposed Enhanced Surface Water Treatment Rule On July 29, 1994, the EPA proposed an Enhanced Surface Water Treatment Rule (ESWTR) which would require increased surface-water treatment to decrease the risk of microbial contamination. The EPA has proposed several versions of the ESWTR for promulgation. The version selected for promulgation will be determined based on data collected by certain water suppliers and forwarded to the EPA pursuant to EPA's Information Collection Rule, which requires such water suppliers to monitor microbial and other contaminants in their water supplies and to conduct certain tests in respect of such contaminants. The EPA has adopted an Interim ESWTR applicable only to systems serving greater than 10,000 persons. The long-term ESWTR, in any of the forms currently proposed, would apply to each of SCW's five surface water treatment plants and is expected to be promulgated by November 2000. However, because it is impossible to predict the version of the ESWTR that will be promulgated, Registrant is unable to predict what additional costs, if any, will be incurred to comply with the ESWTR. Regulation of Disinfection/Disinfection By-Products Registrant is also subject to the new regulations concerning disinfection/disinfection by-products (DBP's), Stage I of which regulations were effective in November, 1998 with full compliance required by 2001. Stage I requires reduction of tri-halomethane contaminants from 100 micrograms per liter to 80 micrograms per liter. Two of SCW's systems are immediately impacted by this rule. SCW implemented modifications to the treatment process in its Bay Point and Cordova systems. It is anticipated that both systems will be in full compliance by 2001. The EPA must adopt Stage II rules pertaining to DBPs, according to a negotiated schedule by 2000. The EPA is not allowed to use the new cost/benefit analysis provided for in the 1996 SDWA amendments for establishing the Stage II rules applicable to DBPs but may utilize the regulatory negotiating process provided for in the 1996 SDWA amendments to develop the Stage II rule. The final rule is expected by 2002. Ground Water Rule By Spring 2000, the EPA is scheduled to propose regulations requiring disinfection of certain groundwater systems and provide guidance on determining which systems must provide disinfection facilities. The EPA may utilize the cost/benefit analysis provided in the 1996 SDWA amendments to establish such regulations. It is anticipated that the regulations will apply to several of SCW's systems using groundwater supplies. While no assurance can be given as to the nature and cost of any additional compliance measures, if any, Registrant does not believe that such regulations will impose significant compliance costs, since SCW already currently engages in disinfection of its groundwater systems. Regulation of Radon and Arsenic Registrant expects to be subject to new regulations regarding radon and arsenic. It is anticipated that the EPA will propose a reduction in the federal standard on arsenic from 50 parts per billion (ppb) to 5 ppb. This proposed arsenic rule is expected to be released in March or April of 2000, with a 60-day comment period. It is anticipated that EPA will propose 5 ppb as the lead regulatory option, but will take comments on 3 ppb and 10 ppb options as well. Compliance with an MCL of 5 ppb will require Registrant to implement costly well-head treatment remedies such as ion exchange or, alternatively, to purchase additional and more expensive water supplies already in compliance, for blending with well sources. The EPA has proposed new radon regulations following a National Academy of Sciences risk assessment and study of risk-reduction benefits associated with various mitigation measures. The National Academy of Sciences study is in agreement with much of EPA's original findings but has 14 17 slightly reduced the ingestion risk initially assumed by EPA. EPA established an MCL of 300 picoCuries per liter based on the findings and has also established an alternative MCL of 4000 picoCuries per liter, based upon potential mitigation measures for overall radon reduction. The final rule will be effective in August, 2000. The Registrant is currently conducting studies to determine the best treatment for affected wells. Voluntary Efforts to Exceed Surface Water Treatment Standards SCW is a voluntary member of the EPA's "Partnership for Safe Water", a national program designed to further protect the public from diseases caused by cryptosporidium and other microscopic organisms. As a volunteer in the program, SCW commits to exceed current regulations governing surface water treatment to ensure that its surface treatment facilities are performing as efficiently as possible. Fluoridation of Water Supplies Registrant is subject to State of California Assembly Bill 733 which requires fluoridation of water supplies for public water systems serving more than 10,000 service connections. Although the bill requires affected systems to install treatment facilities only when public funds have been made available to cover capital and operating costs, the bill requires the CPUC to authorize cost recovery through rates should public funds for operation of the facilities, once installed, become unavailable in future years. Matters Relating to Arden-Cordova System In January, 1997, SCW was notified that ammonium perchlorate in amounts above the state-determined action level had been detected in three of its 27 wells serving its Arden-Cordova system. Aerojet-General Corp. has, in the past, used ammonium perchlorate in their processing as an oxidizer of rocket fuels. SCW took the three wells detected with ammonium perchlorate out of service at that time. Although neither the EPA nor the DOHS has established a drinking water standard for ammonium perchlorate, DOHS has established an action level of 18 parts per billion (ppb) which required SCW to notify customers in its Arden-Cordova customer service area of detection of ammonium perchlorate in amounts in excess of this action level. In April, 1997, SCW found ammonium perchlorate in three additional wells and, at that time, removed those wells from service until it was determined that the levels were below the state-determined action level. Those wells were returned to service. SCW periodically monitors these wells to determine that levels of perchlorate are below the action level currently in effect. In February 1998, SCW was informed that nitrosodimethylamine (NDMA) had been detected in amounts in excess of the EPA reference dosage for health risks in four of its wells in its Arden-Cordova system. Each of the wells has been removed from service. Another well was also been removed from service in end of September, 1999 due to the contamination. NDMA is an additional by-product from the production of rocket fuel and it is believed that such contamination is related to the activities of Aerojet-General Corp. Aerojet-General Corp. has reimbursed SCW for constructing a pipeline to interconnect with the City of Folsom water system to provide an alternative source(s) of water supply in SCW's Arden-Cordova customer service area and has reimbursed SCW for costs associated with the drilling and equipping of two new wells. SCW and Aerojet-General Corp. are in negotiations on other matters related to procedures to address cleanup of the contaminated wells, costs associated with the cleanup, increased costs of purchased water as compared to pumped sources and costs associated with developing new sources of groundwater supply. SCW and Aerojet-General Corp. are attempting to negotiate an agreement on these matters. As of December 31, 1999, Aerojet-General Corp has reimbursed Registrant $4.5 million. The remainder of the costs is subject to further reimbursement, including interest. The reimbursement from Aerojet-General Corp. reduces SCW's utility plant and costs of purchased water. 15 18 On October 25, 1999, SCW filed a lawsuit against the California Regional Water Quality Control Board (CRWQCB) alleging that the CRWQCB has willfully allowed portions of the Sacramento County Groundwater Basin to be injected with chemical pollution that is destroying the underground water supply in SCW's Rancho Cordova customer service area. In a separate case, also filed on October 25, 1999, SCW sued Aerojet General Corp. for causing the contamination. Registrant is unable to predict what actions, if any, the CRWQCB or Aerojet General Corp. will take in response to the lawsuits. Matters Relating to Culver City System The compound, methyl tertiary butyl ether (MTBE), has been detected in the Charnock Basin, located in the city of Santa Monica and within SCW's Culver City customer service area. MTBE is an oxygenate used in reformulated fuels. At the request of the Regional Water Quality Control Board, the City of Santa Monica and the California Environmental Protection Agency, SCW removed two of its wells in the Culver City system from service in October, 1996 to help in efforts to avoid further spread of the MTBE contamination plume. Neither of these wells has been found to be contaminated with MTBE. SCW is purchasing water from the MWD at an increased cost to replace the water supply formerly pumped from the two wells removed from service. On September 22, 1999, the U.S. EPA and the Los Angeles Regional Water Quality Control Board ordered Shell Oil Company, Shell Oil Products Company and Equilon Enterprises LLC to provide replacement drinking water to both SCW and the City of Santa Monica due to MTBE contamination of the Charnock Sub-Basin drinking water. The agencies are continuing to investigate the causes of MTBE pollution and intend to ensure that all responsible parties contribute to its clean up. Registrant is unable to predict the outcome of the EPA's enforcement efforts. Pursuant to an agreement with SCW in December, 1998, two of the potentially responsible parties (the Participants) have reimbursed SCW's legal and consulting costs related to this matter and for increased costs incurred by SCW in purchasing replacement water. However, a notice of termination from the "Participants" to the settlement agreement and a conditional termination from one of the responsible parties was received in October, 1999. SCW and such parties are currently in the process of negotiation. No assurances can be given that current or future negotiations will result in complete restoration of SCW's water rights or that continued reimbursement of SCW's costs will be forthcoming. Bear Valley Electric SCW has been, in conjunction with the Southern California Edison unit of Edison International, planning to upgrade transmission facilities to 115kv (the 115kv Project) in order to meet increased energy and demand requirements. The 115kv Project is subject to an environmental impact report (EIR) and delays in approval of the EIR may impact service in SCW's Bear Valley Electric Service customer service area. SCW has, however, taken other measures, including some measures that will be enacted on an emergency basis, to meet load growth and mitigate delays in approval of the EIR. WATER SUPPLY During 1999, Registrant supplied a total of 195,886 acre feet of water. Of this amount, approximately 58.2% came from pumped sources and 40.2% was purchased from others, principally the Metropolitan Water District of Southern California (MWD). The remaining amount was supplied by the Bureau of Reclamation (the Bureau) under a no-cost contract. During 1998, Registrant supplied 179,927 acre feet of water, 60.7% of which came from pumped sources, 39.0% was purchased and the remainder was supplied by the Bureau. The MWD is a water district organized under the laws of the State of California for the purpose of delivering imported water to areas within its jurisdiction. Registrant has 52 connections to the water distribution facilities of MWD and other municipal water agencies. MWD imports water from two 16 19 principal sources: the Colorado River and the State Water Project (SWP). Available water supplies from the Colorado River and the SWP have historically been sufficient to meet most of MWD's requirements and MWD's supplies from these sources are anticipated to remain adequate through 2000. MWD's import of water from the Colorado River is expected to decrease in future years due to the requirements of the Central Arizona Project. In response, MWD has taken a number of steps to secure additional storage capacity and to increase available water supplies, by effecting transfers of water rights from other sources. Registrant's water supply and revenues are significantly affected by changes in meteorological conditions. New research data released in January 2000 show the Pacific Ocean may be undergoing a dramatic climate shift, known as the Pacific Decadal Oscillation, that could alter global weather patterns and perhaps lead Southern California into decades of drier than normal weather. The changes signal that the Pacific is shifting to a "cool phase" could last for decades, bring far more rain than usual to the Pacific Northwest and less to Southland. Water sales volumes have been impacted during the last two years by the El Nino/La Nina Southern Oscillation phenomena. El Nino brings substantial rainfall to Southern California and the opposite, La Nina, often means diminished rainfall. During the '80s and '90s, El Nino increased precipitation as much as 250% of normal for some Southern California Water Company service areas, while La Nina conditions decreased rain levels 50% to 30% of normal. In 1999, after the 1997-1998 El Nino heavy rain season, La Nina moved rainfall to the North and substantially reduced rainfall in SCW's service areas with some systems experiencing less than 32% of normal rainfall. In spite of the anticipated La Nina conditions, the 2000 water year supply outlook remains adequate. As of January 2000, California reservoirs stood at 125% of average. This positive outlook is due to the fact that reservoirs are still holding some of the El Nino surplus and groundwater levels are usually not diminished by a single year of below normal precipitation. Although overall groundwater conditions remain at adequate levels, certain of SCW's groundwater supplies have been affected to varying degrees by various forms of contamination which, in some cases, have caused increased reliance on purchased water in its supply mix. BUSINESS SEGMENTS AWR currently has two principal business units: water service and electric distribution utility operations conducted through its SCW subsidiary, and its non-regulated activities through its ASUS subsidiary. All activities of Registrant currently are geographically located within the State of California, except for one contract for providing customer service and billing services to a utility located in the state of Arizona. SCW is a regulated utility which operates both water and electric systems. On a stand alone basis, AWR has no material assets other than its investments in its subsidiaries. See Note 11 to the Notes to Financial Statements. ACQUISITION OF CHAPARRAL CITY WATER COMPANY On March 10, 2000, Registrant entered into an agreement to acquire the common stock of Chaparral City Water Company, a privately operated water company serving approximately 10,000 customers in the town of Fountain Hills, Arizona and portions of Scottsdale, Arizona for an aggregate value of $31.2 million, including assumption of approximately $12 million in debt. Chaparral City Water Company was purchased from MCO Properties Inc., a wholly-owned subsidiary of MAXXAM Inc. This marks the first acquisition outside of California for Registrant. The sale of Chaparral City Water Company requires notification to the Arizona Corporation Commission and other conditions customary 17 20 in transactions of this type. The approval of Registrant's shareholders is not required. It is anticipated that the transaction will close within one year. YEAR 2000 ISSUE Registrant has no Y2K incidents, business disruptions, failures or legal proceedings to report. There were no actual or anticipated effects or changes to Registrant's operating trends or revenue patterns as a result of the transition from December, 1999 to January, 2000. SCW formally announced its 100% Y2K Ready status when it filed its Compliance Report with the CPUC on November 1, 1999. Registrant's general process for addressing the Y2K issue was (i) to inventory all systems that may have a potential Y2K impact, (ii) to determine the materiality of these non-Y2K ready systems, (iii) to replace and test, correct and test, or prepare for the failure of material items that have been determined to be non-Y2K ready, and (iv) to prepare contingency plans, which included, among other things, increased staffing during critical periods, manual back-up for automated systems and the use of portable generators capable of providing power during a black-out. Not all Y2K problems were necessarily expected to surface in early 2000. Registrant does not have, and may never fully have, sufficient information about the Y2K exposure of third parties to adequately predict the risks posed by them to Registrant. If the third parties later discover any Y2K problems that are not remedied, resulting problems could include loss of utility services and disruption of water supplies. Costs incurred to address Y2K issues are estimated to be $7.5 million. Registrant has incurred $4.8 million in costs associated with Y2K readiness at end of January 2000, $4.0 million of which is in capital investments. On March 1, 2000, Registrant filed an advice letter with the CPUC for recovery of Y2K related costs. Registrant believes that generally these capital expenditures as well as the remaining Y2K-related investments will be recovered through rates, but can give no assurance that the CPUC will authorize recovery of all or some of these costs. See Note 13 to the Notes to Financial Statements. RISK FACTOR SUMMARY This section (written in plain English to comply with certain SEC Standards) 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 eleven 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 July 29, 1997 alleging personal injury and property damage as a result of the sale of water; few of our systems are located in the geographical area covered by this suit - a suit filed on December 8, 1997 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 February 2, 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 18 21 - a suit filed on February 4, 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 - a suit filed in March 2, 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 June 29, 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 - two suits 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 - a suit filed on December 3, 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 - a suit filed in July 22, 1999 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 On September 1, 1999, the First District Court of Appeal in San Francisco, held that the CPUC had preemptive jurisdiction over regulated public utilities and ordered dismissal of a series of lawsuits against water utilities, including seven of the lawsuits against SCW. On October 11, one group of plaintiffs appealed the decision to the California Supreme Court which has accepted the petition. Management can not predict the outcome of the proceeding. 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 The Administrative Law Judge assigned to the OII has issued a draft decision finding that water utilities, including SCW, have complied with DOHS regulation and requirements. SCW is unable to predict whether the draft decision will be approved in part or in its entirety. The CPUC has authorized a memorandum account for legal expenses incurred by water utilities, including SCW, in the 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. As of December 31, 1999, Registrant had incurred $860,120 in the OII-related memorandum account. Environmental Regulation SCW is 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 19 22 - interim regulations expected to be adopted before the end of 2000 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 2002; these regulations will potentially affect two of SCW's systems - additional regulations expected to be adopted before the end of 2000 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 SCW 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 and ASUS are 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 4 of its 16 rate-making jurisdictions; a final decision is not expected until second quarter of 2000 although a tentative settlement has been worked out - an application filed to consolidate the rate-making jurisdictions located in SCW's Region III area into a single tariff - the OII - new guidelines under consideration by the CPUC for the acquisition and merger of water utilities and for privatization transactions 20 23 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 1998-1999, most of California's reservoirs remain at or 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 could be caused by the above factors and may affect us in several ways: - they adversely affect supply mix by causing Registrant 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. Registrant 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 negotiating with Aerojet General Corporation 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 participants 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. These two potentially responsible parties have previously reimbursed us for replacement water and certain legal and consulting expenses. The Charnock Basin is in SCW's service territory. ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes a new model for accounting for derivative and hedging activities, and supersedes and amends a number of existing standards. Adoption of this statement, with an extended effective date for fiscal years beginning after December 15, 1999, will not have a significant impact on financial position or results of operation. 21 24 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Registrant has no derivative financial instruments, financial instruments with significant off-balance sheet risks or financial instruments with concentrations of credit risk. The disclosure required is, therefore, not applicable. 22 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA American States Water Company Consolidated Balance Sheets - December 31, 1999 and 1998 Consolidated Statements of Capitalization - December 31, 1999 and 1998 Consolidated Statements of Income - for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Changes in Common Shareholders' Equity - for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows - for the years ended December 31, 1999, 1998 and 1997 Southern California Water Company Balance Sheets - December 31, 1999 and 1998 Statements of Capitalization - December 31, 1999 and 1998 Statements of Income - for the years ended December 31, 1999, 1998 and 1997 Statements of Changes in Common Shareholders' Equity - for the years ended December 31, 1999, 1998 and 1997 Statements of Cash Flows - for the years ended December 31, 1999, 1998 and 1997 Notes to Financial Statements Report of Independent Public Accountants 23 26 AMERICAN STATES WATER COMPANY CONSOLIDATED BALANCE SHEETS December 31, ------------------------- 1999 1998 --------- --------- (in thousands) ASSETS UTILITY PLANT, AT COST Water $ 532,007 $ 482,989 Electric 36,349 35,171 --------- --------- 568,356 518,160 Less - Accumulated depreciation (151,733) (138,423) --------- --------- 416,623 379,737 Construction work in progress 32,972 35,016 --------- --------- Net utility plant 449,595 414,753 --------- --------- OTHER PROPERTY AND INVESTMENTS 10,583 1,077 CURRENT ASSETS Cash and cash equivalents 2,189 620 Accounts receivable-Customers, less reserves of $487 in 1999; $403 in 1998 10,135 7,626 Other account receivable 4,347 5,301 Unbilled revenue 11,345 9,303 Materials and supplies, at average cost 1,153 994 Supply cost balancing accounts 4,774 4,300 Prepayments 4,851 5,988 Accumulated deferred income taxes - net 5,546 5,156 --------- --------- Total current assets 44,340 39,288 --------- --------- DEFERRED CHARGES Unamortized debt expense and redemption premium 6,811 6,635 Regulatory tax-related assets 19,941 21,506 Other 1,911 1,412 --------- --------- Total deferred charges 28,663 29,553 --------- --------- TOTAL ASSETS $ 533,181 $ 484,671 ========= ========= The accompanying notes are an integral part of these financial statements 24 27 AMERICAN STATES WATER COMPANY CONSOLIDATED BALANCE SHEETS December 31, ---------------------- 1999 1998 -------- -------- (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholders' equity $158,846 $154,299 Preferred Shares 1,600 1,600 Preferred Shares - mandatory redemption 360 400 Long-term debt 167,363 120,809 -------- -------- Total capitalization 328,169 277,108 -------- -------- CURRENT LIABILITIES Notes payable to banks 21,000 38,000 Long-term debt and Preferred Shares - current 340 260 Accounts payable 13,777 10,218 Taxes payable 5,432 5,900 Accrued interest 1,584 1,405 Other 12,832 7,985 -------- -------- Total current liabilities 54,965 63,768 -------- -------- OTHER CREDITS Advances for construction 57,485 54,743 Contributions in aid of construction 38,895 36,530 Accumulated deferred income taxes - net 48,302 46,902 Unamortized investment tax credits 3,064 3,155 Regulatory tax-related liability 1,861 1,906 Other 440 559 -------- -------- Total other credits 150,047 143,795 ======== ======== TOTAL CAPITALIZATION AND LIABILITIES $533,181 $484,671 ======== ======== The accompanying notes are an integral part of these financial statements 25 28 AMERICAN STATES WATER COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION December 31, ------------------------- 1999 1998 --------- --------- (in thousands) COMMON SHAREHOLDERS' EQUITY: Common Shares, $2.50 stated value-- Authorized 31,071,408 shares Outstanding 8,957,671 in 1999 and 1998 $ 22,394 $ 22,394 Additional paid-in capital 74,937 74,937 Earnings reinvested in the business 61,515 56,968 --------- --------- 158,846 154,299 --------- --------- PREFERRED SHARES: $25 PAR VALUE Authorized 64,000 shares Outstanding 32,000 shares, 4% Series 800 800 Outstanding 32,000 shares, 4-1/4% Series 800 800 --------- --------- 1,600 1,600 --------- --------- PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION Requirements: $25 par value Authorized and outstanding 16,000 shares in 1999 and 17,600 shares in 1998, 5% Series 400 440 Less: Preferred Shares to be redeemed within one year (40) (40) --------- --------- 360 400 --------- --------- LONG-TERM DEBT 5.82% notes due 2003 12,500 12,500 6.64% notes due 2013 1,100 1,100 6.80% notes due 2013 2,000 2,000 8.50% fixed rate obligation due 2013 1,798 1,882 Variable rate obligation due 2014 6,000 6,000 Variable rate obligation due 2018 650 630 6.87% notes due 2023 5,000 5,000 7.00% notes due 2023 10,000 10,000 7.55% notes due 2025 8,000 8,000 7.65% notes due 2025 22,000 22,000 5.50% notes due 2026 8,000 8,000 6.81% notes due 2028 15,000 15,000 6.59% notes due 2029 40,000 -- 9.56% notes due 2031 28,000 28,000 State Water Project due 2035 7,028 -- Other 587 917 --------- --------- 167,663 121,029 Less: Current maturities (300) (220) --------- --------- 167,363 120,809 ========= ========= TOTAL CAPITALIZATION $ 328,169 $ 277,108 ========= ========= The accompanying notes are an integral part of these financial statements 26 29 AMERICAN STATES WATER COMPANY CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, ----------------------------------------- 1999 1998 1997 --------- --------- --------- (in thousands, except per share amounts) OPERATING REVENUES Water $ 159,693 $ 134,794 $ 140,988 Electric 13,338 13,201 12,767 Other 390 65 -- --------- --------- --------- Total operating revenues 173,421 148,060 153,755 --------- --------- --------- OPERATING EXPENSES Water purchased 36,143 30,833 38,318 Power purchased for resale 7,119 5,013 5,188 Power purchased for pumping 7,394 7,009 7,554 Groundwater production assessment 7,170 7,567 6,847 Supply cost balancing accounts (473) 28 2,813 Other operating expenses 15,594 14,459 13,074 Administrative and general expenses 28,600 21,987 22,138 Depreciation 13,650 12,538 10,952 Maintenance 9,799 7,311 7,301 Taxes on income 13,345 10,130 9,830 Property and other taxes 6,566 6,124 6,282 --------- --------- --------- Total operating expenses 144,907 122,999 130,297 --------- --------- --------- OPERATING INCOME 28,514 25,061 23,458 --------- --------- --------- OTHER INCOME Total other income - net 532 769 758 --------- --------- --------- Income before interest charges 29,046 25,830 24,216 --------- --------- --------- INTEREST CHARGES Interest on long-term debt 11,294 9,612 8,821 Other interest and amortization of debt expense 1,651 1,595 1,336 --------- --------- --------- Total interest charges 12,945 11,207 10,157 --------- --------- --------- NET INCOME 16,101 14,623 14,059 Dividends on Preferred Shares (88) (90) (92) --------- --------- --------- EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 16,013 $ 14,533 $ 13,967 BASIC EARNINGS PER COMMON SHARE $ 1.79 $ 1.62 $ 1.56 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 8,958 8,958 8,957 The accompanying notes are an integral part of these financial statements 27 30 AMERICAN STATES WATER COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY Common Shares Earnings -------------------- Additional Reinvested Number Paid-in in the of Shares Amount Capital Business ------- ------- ------- ------- (in thousands) BALANCES AT DECEMBER 31, 1996 8,886 $22,215 $73,645 $50,906 Add: Net Income 14,059 Issuance of Common Shares for public offering 72 179 1,292 Deduct: Dividends on Preferred Shares 92 Dividends on Common Shares - $1.245 per share 11,151 ------- ------- ------- ------- BALANCES AT DECEMBER 31, 1997 8,958 $22,394 $74,937 $53,722 Add: Net Income 14,623 Deduct: Dividends on Preferred Shares 90 Dividends on Common Shares - $1.26 per share 11,287 ------- ------- ------- ------- BALANCES AT DECEMBER 31, 1998 8,958 $22,394 $74,937 $56,968 Add: Net Income 16,101 Deduct: Dividends on Preferred Shares 88 Dividends on Common Shares - $1.28 per share 11,466 ------- ------- ------- ------- BALANCES AT DECEMBER 31, 1999 8,958 $22,394 $74,937 $61,515 ======= ======= ======= ======= The accompanying notes are an integral part of these financial statements 28 31 AMERICAN STATES WATER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, -------------------------------------- 1999 1998 1997 -------- -------- -------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 16,101 $ 14,623 $ 14,059 Adjustments for non-cash items: Depreciation and amortization 14,364 15,368 11,170 Deferred income taxes and investment tax credits 2,440 5,241 826 Other - net 1,066 1,394 873 Changes in assets and liabilities: Customer receivables (1,555) 918 (673) Supply cost balancing accounts (474) (14) 1,987 Accounts payable 3,559 (1,552) (1,095) Taxes payable (468) (3,215) 3,338 Other - net 3,977 438 341 -------- -------- -------- Net cash provided 39,010 33,201 30,826 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (57,823) (43,623) (36,799) -------- -------- -------- Net cash used (57,823) (43,623) (36,799) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Common Shares -- -- 1,472 Issuance of long-term debt and lease obligations 47,028 15,000 8,000 Receipt of advances for and contributions in aid of construction 5,300 3,381 1,302 Refunds on advances for construction (2,957) (2,651) (2,957) Retirement or repayments of long-term debt and redemption of Preferred Shares - net (435) (9,488) (198) Net change in notes payable to banks (17,000) 12,000 10,000 Common and preferred dividends paid (11,554) (11,386) (11,243) -------- -------- -------- Net cash provided 20,384 6,856 6,376 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,569 (3,566) 403 Cash and Cash Equivalents, Beginning of Year 620 4,186 3,783 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,189 $ 620 $ 4,186 -------- -------- -------- TAXES AND INTEREST PAID: Income taxes paid $ 12,137 $ 5,430 $ 6,338 Interest paid 11,834 11,391 9,451 -------- -------- -------- NON-CASH TRANSACTIONS: Property installed by developers and conveyed to Company $ 4,096 $ 1,797 $ 2,082 ======== ======== ======== The accompanying notes are an integral part of these financial statements 29 32 SOUTHERN CALIFORNIA WATER COMPANY BALANCE SHEETS December 31, ------------------------- 1999 1998 --------- --------- (in thousands) ASSETS UTILITY PLANT, AT COST Water $ 532,007 $ 482,989 Electric 36,349 35,171 --------- --------- 568,356 518,160 Less - Accumulated depreciation (151,733) (138,423) --------- --------- 416,623 379,737 Construction work in progress 32,972 35,016 --------- --------- Net utility plant 449,595 414,753 --------- --------- OTHER PROPERTY AND INVESTMENTS 10,233 763 --------- --------- CURRENT ASSETS Cash and cash equivalents 2,020 524 Accounts receivable-Customers, less reserves of $487 in 1999; $403 in 1998 10,135 7,498 Other 4,275 5,272 Intercompany receivable -- 104 Unbilled revenue 11,345 9,303 Materials and supplies, at average cost 1,153 994 Supply cost balancing accounts 4,774 4,300 Prepayments 4,851 5,988 Accumulated deferred income taxes - net 5,573 5,173 --------- --------- Total current assets 44,126 39,156 --------- --------- DEFERRED CHARGES Regulatory tax-related assets 19,941 21,506 Other 8,599 7,997 --------- --------- Total deferred charges 28,540 29,503 --------- --------- TOTAL ASSETS $ 532,494 $ 484,175 ========= ========= The accompanying notes are an integral part of these financial statements 30 33 SOUTHERN CALIFORNIA WATER COMPANY BALANCE SHEETS December 31, ------------------------ 1999 1998 -------- -------- (in thousands) CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholders' equity $160,023 $155,721 Preferred shares -- -- Preferred shares - mandatory redemption -- -- Long-term debt 167,363 120,809 -------- -------- Total capitalization 327,386 276,530 -------- -------- CURRENT LIABILITIES Notes payable to banks 21,000 38,000 Long-term debt and preferred shares - current 340 260 Accounts payable 13,615 10,054 Intercompany payable 4 -- Taxes payable 5,700 6,147 Accrued interest 1,584 1,405 Other 12,818 7,984 -------- -------- Total current liabilities 55,061 63,850 -------- -------- OTHER CREDITS Advances for construction 57,485 54,743 Contributions in aid of construction 38,895 36,531 Accumulated deferred income taxes - net 48,302 46,901 Unamortized investment tax credits 3,064 3,155 Regulatory tax-related liability 1,861 1,907 Other 440 558 -------- -------- Total other credits 150,047 143,795 ======== ======== TOTAL CAPITALIZATION AND LIABILITIES $532,494 $484,175 ======== ======== The accompanying notes are an integral part of these financial statements 31 34 SOUTHERN CALIFORNIA WATER COMPANY STATEMENTS OF CAPITALIZATION December 31, --------------------------- 1999 1998 --------- --------- (in thousands) COMMON SHAREHOLDERS' EQUITY: Common shares, no par value Outstanding 100 in 1998 and 1999 $ 98,391 $ 98,391 Additional paid-in capital -- -- Earnings reinvested in the business 61,632 57,330 --------- --------- 160,023 155,721 --------- --------- LONG-TERM DEBT 5.82% notes due 2003 12,500 12,500 6.64% notes due 2013 1,100 1,100 6.80% notes due 2013 2,000 2,000 8.50% fixed rate obligation due 2013 1,798 1,882 Variable rate obligation due 2014 6,000 6,000 Variable rate obligation due 2018 649 630 6.87% notes due 2023 5,000 5,000 7.00% notes due 2023 10,000 10,000 7.55% notes due 2025 8,000 8,000 7.65% notes due 2025 22,000 22,000 5.50% notes due 2026 8,000 8,000 6.81% notes due 2028 15,000 15,000 6.59% notes due 2029 40,000 -- 9.56% notes due 2031 28,000 28,000 State Water Project due 2035 7,028 -- Other 588 917 --------- --------- 167,663 121,029 Less: Current maturities (300) (220) --------- --------- 167,363 120,809 ========= ========= TOTAL CAPITALIZATION $ 327,386 $ 276,530 ========= ========= The accompanying notes are an integral part of these financial statements 32 35 SOUTHERN CALIFORNIA WATER COMPANY STATEMENTS OF INCOME For the years ended December 31, --------------------------------------------- 1999 1998 1997 --------- --------- --------- ($ in thousands, except per share amounts) OPERATING REVENUES Water $ 159,693 $ 134,794 $ 140,988 Electric 13,338 13,201 12,767 --------- --------- --------- Total operating revenues 173,031 147,995 153,755 --------- --------- --------- OPERATING EXPENSES Water purchased 36,145 30,833 38,318 Power purchased for resale 7,119 5,013 5,188 Power purchased for pumping 7,394 7,009 7,554 Groundwater production assessment 7,170 7,567 6,847 Supply cost balancing accounts (473) 28 2,813 Other operating expenses 15,475 14,434 13,074 Administrative and general expenses 28,077 21,884 22,138 Depreciation 13,516 12,270 10,952 Maintenance 9,794 7,311 7,301 Taxes on income 13,473 10,360 9,830 Property and other taxes 6,563 6,124 6,282 --------- --------- --------- Total operating expenses 144,253 122,833 130,297 --------- --------- --------- OPERATING INCOME 28,778 25,162 23,458 --------- --------- --------- OTHER INCOME Total other income - net 509 1,231 758 --------- --------- --------- Income before interest charges 29,287 26,393 24,216 --------- --------- --------- INTEREST CHARGES Interest on long-term debt 11,294 9,612 8,821 Other interest and amortization of debt expense 1,651 1,595 1,336 --------- --------- --------- Total interest charges 12,945 11,207 10,157 --------- --------- --------- NET INCOME 16,342 15,186 14,059 Dividends on Preferred Shares -- (46) (92) EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 16,342 $ 15,140 $ 13,967 BASIC EARNINGS PER COMMON SHARE $ 163,420 $ 151,400 $ 139,670 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 100 100 100 The accompanying notes are an integral part of these financial statements. All information has been adjusted to reflect formation of holding company in 1998. 33 36 SOUTHERN CALIFORNIA WATER COMPANY STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY Common Shares Earnings ------------------------ Additional Reinvested Number Paid-in in the of Shares Amount Capital Business --------- ------- ------- ------- (in thousands) BALANCES AT DECEMBER 31, 1996 8,886 $22,215 $73,645 $50,906 Add: Net Income 14,059 Issuance of Common Shares for public offering 72 179 1,292 Deduct: Dividends on Preferred Shares 92 Dividends on Common Shares - $1.245 per share 11,151 ------- ------- ------- ------- BALANCES AT DECEMBER 31, 1997 8,958 $22,394 $74,937 $53,722 Add: Transfer Preferred Shares & Investments $ 1,060 Net Income 15,186 Deduct: Dividends on Preferred Shares 46 Dividends on Common Shares - $.63 per share for 8,957,671 shares 5,643 Dividends on Common Shares - $58,890 per share for 100 shares 5,889 ------- ------- ------- ------- BALANCES AT DECEMBER 31, 1998 100 $22,394 $75,997 $57,330 Add: Net Income 16,342 Deduct: Dividends on Preferred Shares -- Dividends on Common Shares - $30,900 per share 3,090 Dividends on Common Shares - $30,500 per share 3,050 Dividends on Common Shares - $29,000 per share 2,900 Dividends on Common Shares - $30,000 per share 3,000 ======= ======= ======= ======= BALANCES AT DECEMBER 31, 1999 100 $22,394 $75,997 $61,632 ======= ======= ======= ======= The accompanying notes are an integral part of these financial statements 34 37 SOUTHERN CALIFORNIA WATER COMPANY STATEMENTS OF CASH FLOWS For the years ended December 31, ------------------------------------------ 1999 1998 1997 -------- -------- -------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income 16,342 15,185 $ 14,059 Adjustments for non-cash items: Depreciation and amortization 14,229 15,100 11,170 Deferred income taxes and investment tax credits 2,430 5,224 826 Other - net 1,308 1,077 873 Changes in assets and liabilities: Customer receivables (1,640) 1,046 (673) Prepayments (1,137) 660 (743) Supply cost balancing accounts (474) (14) 1,987 Accounts payable 3,561 (1,716) (1,095) Taxes payable (447) (2,968) 3,338 Unbilled revenue (2,042) (197) 3,490 Accrued Interest 179 (463) 96 Other - net 7,074 362 (2,502) -------- -------- -------- Net cash provided 39,383 33,296 30,826 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (57,823) (43,623) (36,799) -------- -------- -------- Net cash used (57,823) (43,623) (36,799) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Common Shares -- -- 1,472 Issuance of long-term debt and lease obligations 47,028 15,000 8,000 Receipt of advances for and contributions in aid of construction 3,883 3,381 1,302 Refunds on advances for construction (1,540) (2,651) (2,957) Repayments of long-term debt and redemption of Preferred Shares - net (395) (9,488) (198) Net change in notes payable to banks (17,000) 12,000 10,000 Common and preferred dividends paid (12,040) (11,577) (11,243) -------- -------- -------- Net cash provided 19,936 6,665 6,376 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,496 (3,662) 403 Cash and Cash Equivalents, Beginning of Year 524 4,186 3,783 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR 2,020 524 4,186 -------- -------- -------- TAXES AND INTEREST PAID: Income taxes paid $ 12,241 $ 5,430 $ 6,338 Interest paid 11,834 11,391 9,451 -------- -------- -------- NON-CASH TRANSACTIONS: Property installed by developers and conveyed to Company $ 4,096 $ 1,797 $ 2,082 ======== ======== ======== The accompanying notes are an integral part of these financial statements 35 38 NOTES TO FINANCIAL STATEMENTS American States Water Company (AWR) is the parent company of Southern California Water Company (SCW) and American States Utility Services, Inc. (ASUS). SCW is a public utility engaged principally in the purchase, production, distribution and sale of water as well as in the distribution of electricity in several mountain communities. SCW is regulated by the California Public Utilities Commission (CPUC) as to its water and electric business including properties, rates, services, facilities and other matters. ASUS performs non-regulated, water related services and operations on a contract basis. The consolidated financial statements include the accounts of AWR, SCW and ASUS . Virtually all of AWR's assets and revenues are those of SCW. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of AWR and its wholly-owned subsidiaries, SCW and ASUS collectively referred to as Registrant. Inter-company transactions and balances have been eliminated. The accounting records for SCW are maintained in accordance with the Uniform System of Accounts prescribed by the CPUC. The preparation of these financial statements required the use of certain estimates by management in determining Registrant's assets, liabilities, revenues and expenses. Property and Depreciation: Registrant capitalizes, as utility plant, the cost of additions and replacements of retirement units. Such cost includes labor, material and certain indirect charges. Depreciation is computed on the straight-line, remaining-life basis. For the years 1999, 1998 and 1997 the aggregate provisions for depreciation approximated 2.91%, 2.79%, and 2.77% of the beginning of the year depreciable plant, respectively. Interest: Interest is generally not capitalized for financial reporting purposes as such procedure is usually not followed for rate-making purposes. Revenues: Revenues include amounts billed to customers and an amount of unbilled revenue representing amounts to be billed for usage from the last meter reading date to the end of the accounting period. Basic Earnings Per Common Share: Basic Earnings per Common Share are based upon the weighted average number of Common Shares outstanding and net income after deducting preferred dividend requirements. There are no dilutive securities. Accordingly, diluted earnings per share is not calculated. Supply Cost Balancing Accounts: As permitted by the CPUC, Registrant maintains water and electric supply cost balancing accounts to account for under-collections and over-collections of revenues designed to recover such costs. Recoverability of such costs is recorded in income and charged to balancing accounts when such costs are incurred. The balancing accounts are reversed when such costs are recovered through rate adjustments. Registrant accrues interest on its supply cost balancing accounts at the rate prevailing for 90-day commercial paper. Debt Issue Expense and Redemption Premiums: Original debt issue expenses are amortized over the lives of the respective issues. Premiums paid on the early redemption of debt which is reacquired through refunding are deferred and amortized over the life of the debt issued to finance the refunding. The redemption premium on debt reacquired without refunding is amortized over the remaining period the debt would have been outstanding. 36 39 Other Credits: Advances for construction represent amounts advanced by developers which are generally refundable at either a rate of 22% of the revenue received from the installations for which funds were advanced or in equal annual installments over a 40-year period. Contributions-in-aid of construction are similar to advances, but require no refunding and are amortized over the useful lives of the related property. Cash and Cash Equivalents: For purposes of the Statements of Cash Flows, cash and cash equivalents include short-term cash investments with an original maturity of three months or less. Financial Instrument Risk: Registrant does not carry any financial instruments with off-balance sheet risk nor does its operations result in concentrations of credit risk. Fair Value of Financial Instruments: The table below estimates the fair value of each represented class of financial instrument. For cash and cash equivalents, accounts receivable and short-term debt, the carrying amount is used. Otherwise, rates available to Registrant at December 31, 1999 and 1998 for debt with similar terms and remaining maturities were used to estimate fair value for long-term debt. Changes in the assumptions will produce differing results. 1999 1998 ------------------------- ---------------------------- CARRYING AMOUNT FAIR VALUE Carrying amount Fair value -------- --------- --------------- ---------- (dollars in thousands) Financial assets: Cash $ 2,189 $ 2,189 $ 620 $ 620 Accounts receivable 25,827 25,827 22,230 22,230 Financial liabilities: Short-term debt 21,000 21,000 38,000 38,000 Long-term debt $167,663 $161,843 $120,809 $135,092 -------- -------- -------- -------- NOTE 2 - CAPITAL STOCK All of the series of Preferred Shares outstanding at December 31, 1999 are redeemable at the option of Registrant. At December 31, 1999, the redemption price per share for each series of $25 Preferred Shares was $27.00, $26.50 and $25.25 for the 4%, 4 1/4% and 5% Series, respectively. To each of the redemption prices must be added accrued and unpaid dividends to the redemption date. The $25 Preferred Shares, 5% Series, are subject to mandatory redemption provisions of 1,600 shares per year. The annual aggregate mandatory redemption requirements for this Series for the five years subsequent to December 31, 1999 is $40,000 each year. In 1996, Registrant issued 1,000,000 Common Shares through a secondary public offering. In January 1997, Registrant issued 71,500 Common Shares through a secondary public offering. The net proceeds from this sale were used to repay a portion of short-term debt then outstanding. For the years ended December 31, 1999, December 31, 1998 and December 31, 1997, all shares issued under Registrant's Common Share Purchase and Dividend Reinvestment Plan (DRP) and the 401(k) Plan were purchased on the open market. There are 500,000 and 571,408 Common Shares reserved for issuance under the DRP and the 401(k) Plan, respectively, at December 31, 1999. Shares reserved for the 401(k) Plan are in relation to company matching contributions and for investment purposes by participants. As of December 31, 1999 there were no retained earnings restricted, under any of Registrant's debt instruments, as to the payment of cash dividends on Common Shares. 37 40 In 1998, the board of directors adopted a Shareholder Rights Plan (Rights Plan) and authorized a dividend distribution of one right (a Right) to purchase 1/1000th of Junior Participating Preferred Share for each outstanding Common Share. The Rights Plan became effective in September 1998 and will expire in September 2008. The Rights Plan is designed to provide shareholders' protection and to maximize shareholder value by encouraging a prospective acquirer to negotiate with the board. Each Right represents a right to purchase 1/1000th of Junior Participating Preferred Share at the price of $120, subject to adjustment (the Purchase Price). Each Junior Participating Preferred Share is entitled to receive a dividend equal to 1000 times any dividend paid on each Common Share and 100 votes per share in any shareholder election. The Rights become exercisable upon occurrence of a Distribution Date. A Distribution Date event occurs if (i) any person accumulates 15% of the then outstanding Common Shares, (ii) any person presents a tender offer which caused the person's ownership level to exceed 15% and the board determines the tender offer not to be fair to AWR's shareholders, or (iii) the board determines that a shareholder maintaining a 15% interest in the Common shares could have an adverse impact on AWR or could attempt to pressure AWR to repurchase the holder's shares at a premium. Until the occurrence of a Distribution Date, each Right trades with the Common Share and is not separately transferable. When a Distribution Date occurs, AWR would distribute separately Rights Certificates to Common Shareholders and the Rights would subsequently trade separate from the Common Shares and each holder of a Right, other than the acquiring person whose Rights will thereafter be void, will have the right to receive upon exercise at its then current Purchase Price that number of Common Shares having a market value of two times the Purchase Price of the Right. If AWR merges into the acquiring person or enters into any transaction that unfairly favors the acquiring person or disfavors AWR's other shareholders, the Right becomes a right to purchase Common Shares of the acquiring person having market value of two times the Purchase Price. The board of directors may determine that in certain circumstances a proposal which would cause a Distribution Date is in the best interest of AWR's shareholders. Therefore, the board of directors may, at its option, redeem the Rights at a redemption price of $0.01 per Right. NOTE 3 - COMPENSATING BALANCES AND BANK DEBT At December 31, 1999, SCW maintained $47 million in aggregate borrowing capacity with three commercial banks with no compensating balances required. Of this amount, $21 million was outstanding at year-end. Loans can be obtained at the option of SCW and bear interest at rates based on floating prime borrowing rates or at money market rates. Short-term borrowing activities for the last three years were as follows: December 31, --------------------------------------- 1999 1998 1997 ------- ------- ------- (in thousands, except percent) Balance Outstanding at December 31, $21,000 $38,000 $26,000 Interest Rate at December 31, 7.35% 5.86% 6.39% Average Amount Outstanding 8,775 19,309 $15,678 Weighted Average Annual Interest Rate 5.11% 6.78% 6.27% Maximum Amount Outstanding $21,000 $39,000 $32,000 ------- ------- ------- 38 41 NOTE 4 - LONG TERM DEBT In March 1998, SCW sold the remaining $15 million under its Series B Medium Term Note Program and in December 1998, SCW redeemed all of its outstanding 10.10% Notes. In January 1999, $40 million of Series C Medium Term Notes were sold. The funds were used initially to repay short-term bank borrowings and, after that, to fund construction expenditures. Registrant has no mortgage debt, and leases and other similar financial arrangements are not material. SCW has posted an Irrevocable Letter of Credit, which expires July 31, 2000, in the amount of $646,631 as security for its self-insured workers' compensation plan. SCW has also provided an Irrevocable Letter of Credit, which expires November 14, 2000, in the amount of $6,296,000 to a trustee with respect to the variable rate obligation issued by the Three Valleys Municipal Water District. Annual maturities of all long-term debt, including capitalized leases, amount to $303,356, $231,559, $246,528, $262,036 and $278,644 for the five years ending December 31, 2000 through 2004, respectively. NOTE 5 - TAXES ON INCOME Registrant provides deferred income taxes for temporary differences under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), for certain transactions which are recognized for income tax purposes in a period different from that in which they are reported in the financial statements. The most significant items are the tax effects of accelerated depreciation, the supply cost balancing accounts and advances for and contributions-in-aid-of-construction. SFAS No. 109 also requires that rate-regulated enterprises record deferred income taxes for temporary differences accorded flow-through treatment at the direction of a regulatory commission. The resulting deferred tax assets and liabilities are recorded at the expected cash flow to be reflected in future rates. Since the CPUC has consistently permitted the recovery of previously flowed-through tax effects, SCW has established regulatory liabilities and assets offsetting such deferred tax assets and liabilities. Deferred investment tax credits are being amortized to other income ratably over the lives of the property giving rise to the credits. The significant components of deferred tax assets and deferred tax liabilities, as reflected in the balance sheets, and the accumulated net deferred income tax liabilities at December 31, 1999 and 1998 were: December 31, ------------------------- 1999 1998 -------- -------- (dollars in thousands) Deferred tax assets: Balancing accounts $ (175) $ 33 State tax effect 5,721 5,123 -------- -------- 5,546 5,156 -------- -------- Deferred tax liabilities Depreciation (44,939) (43,442) Advances and contributions 15,862 16,694 Other property related (10,007) (11,488) Other non-property related (9,218) (8,666) -------- -------- (48,302) (46,902) -------- -------- Accumulated deferred income taxes - net $(42,756) $(41,746) -------- -------- 39 42 The current and deferred components of income tax expense are as follows: December 31, ------------------------------------------ 1999 1998 1997 -------- -------- -------- (dollars in thousands) Current Federal $ 9,360 $ 5,219 $ 7,205 State 2,799 1,727 2,287 -------- -------- -------- Total current tax expense 12,159 6,946 9,492 -------- -------- -------- Deferred - Federal and State: Accelerated depreciation 3,405 3,319 2,996 Balancing accounts (207) 6 (871) Advances and contributions -- -- (210) California privilege year franchise tax (970) (544) (617) Other (664) (398) (566) -------- -------- -------- Total deferred tax expense 1,564 2,383 732 -------- -------- -------- Total income tax expense 13,723 9,329 10,224 -------- -------- -------- Income taxes included in operating expenses 13,345 10,130 9,830 Income taxes included in other income and expenses - net 378 (801) 394 -------- -------- -------- Total income tax expense $ 13,723 $ 9,329 $ 10,224 -------- -------- -------- Additional information regarding taxes on income is set forth in the following table: December 31, ------------------------------------------ 1999 1998 1997 -------- -------- -------- (dollars in thousands, except percent) Federal taxes on pre-tax income at statutory rates $ 10,438 $ 8,470 $ 8,451 Increase (decrease) in taxes resulting from: State income tax expense 2,605 1,654 1,864 Depreciation 1,184 944 853 Federal benefit of state taxes (912) (579) (652) Adjustments to prior years' provisions 433 (97) (143) Payment of premium on redemption 66 (813) -- Other - net (91) (250) (149) -------- -------- -------- Total income tax expense $ 13,723 $ 9,329 $ 10,224 -------- -------- -------- Pre-tax income $ 29,824 $ 23,952 $ 24,145 -------- -------- -------- Effective income tax rate 46.0% 38.9% 42.3% -------- -------- -------- NOTE 6 - EMPLOYEE BENEFIT PLANS Registrant maintains a pension plan (the Plan) which provides eligible employees (those age 21 and older, with one year of service) monthly benefits upon retirement based on average salaries and length of service. The normal retirement benefit is equal to 2% of the five highest consecutive years average earnings multiplied by the number of years of credited service, up to a maximum of 40 years, reduced by a percentage of primary social security benefits. There is also an early retirement option. Annual contributions are made to the Plan which comply with the funding requirements of the Employee Retirement Income Security Act (ERISA). At December 31, 1999, Registrant had 713 participants in the Plan, 54 of these are employees covered by collective bargaining agreements, the earliest of which expires in 2001. Registrant also provides all active employees medical, dental and vision care benefits through a medical insurance plan. Eligible employees who retired prior to age 65, and/or their spouses, were able to retain the benefits under the active plan until reaching age 65. Eligible employees upon reaching age 65, 40 43 and those employees retiring at or after age 65, and/or their spouses, receive coverage through a Medicare supplement insurance policy paid for by Registrant subject to an annual cap limit. The CPUC has issued a decision which provides for the recovery in rates of tax-deductible contributions made to a separately trusteed fund. In accordance with that decision, SCW established two separate trusts in 1995, one for those retirees who were subject to a collective bargaining agreement and another for all other retirees. Registrant's funding policy is to contribute annually an amount at least equal to the revenues authorized to be collected through rates for post-retirement benefit costs. Post-retirement benefit costs for 1993, 1994 and 1995 were estimated at a total of $1.6 million and have been recorded as a regulatory asset for recovery over a 20 year period. The unamortized balance at December 31, 1999 was approximately $610,000. The following table sets forth the Plan's funded status and amounts recognized in Registrant's balance sheets and the components of net pension cost and accrued post-retirement liability at December 31, 1999 and 1998: Pension Benefits Other Benefits -------------------------- ------------------------ 1999 1998 1999 1998 -------- -------- ------- ------- (dollars in thousands) CHANGE IN BENEFIT OBLIGATION: Benefit Obligation at beginning of year $ 38,572 $ 33,410 $ 4,363 $ 4,503 Service Cost 1,963 1,597 125 112 Interest Cost 2,538 2,278 305 283 Actuarial Loss/(Gain) (6,255) 2,514 (171) (368) Benefits Paid (1,305) (1,227) (191) (167) -------- -------- ------- ------- Benefit Obligation at end of year $ 35,513 $ 38,572 $ 4,431 $ 4,363 CHANGES IN PLAN ASSETS: Fair Value of Plan Assets at beginning of year $ 39,541 $ 33,433 $ 1,442 $ 1,104 Actual Return of Plan Assets 8,277 6,051 25 44 Employer Contributions 1,264 1,284 484 461 Benefits Paid (1,305) (1,227) (191) (167) -------- -------- ------- ------- Fair Value of Plan Assets at end of year $ 47,777 $ 39,541 $ 1,760 $ 1,442 RECONCILIATION OF FUNDED STATUS: Funded Status $ 12,263 $ 969 $(2,671) $(2,921) Unrecognized Transition Obligation 57 114 6,288 6,707 Unrecognized Net Loss/(Gain) (10,683) 677 (1,869) (1,860) Unrecognized Prior Service Cost 355 400 (3,228) (3,427) -------- -------- ------- ------- Prepaid/(Accrued) Pension Cost $ 1,992 $ 2,160 $(1,480) $(1,501) WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31: Discount Rate 7.75% 6.50% 7.75% 6.50% Long-term Rate of Return 8.00% 8.00% 8.00% 8.00% Salary Assumption 4.00% 4.00% -- -- A sliding scale for assumed health care cost increases was used for both periods, starting at 8% in 1999 and then remaining at 6% thereafter. The components of net periodic post-retirement benefits cost for 1999 and 1998 are as follows: 41 44 Pension Benefits Other Benefits ----------------------- -------------------- (dollars in thousands) 1999 1998 1999 1998 ------- ------- ----- ----- COMPONENTS OF NET PERIODIC BENEFITS COST Service Cost $ 1,963 $ 1,597 $ 125 $ 112 Interest Cost 2,538 2,278 305 283 Actual Return on Plan Assets (8,277) (6,051) (25) (44) Net Amortization 5,207 3,476 58 67 ------- ------- ----- ----- Net Periodic Pension Cost $ 1,431 $ 1,300 $ 463 $ 418 Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects: 1-Percentage-Point 1-Percentage-Point (dollars in thousands) Increase Decrease -------- -------- Effect on Total of Service and Interest Cost Components $ 13 $ (12) Effect on Postretirement Benefit Obligation 177 (156) Registrant has a 401(k) Investment Incentive Program under which employees may invest a percentage of their pay, up to a maximum investment prescribed by law, in an investment program managed by an outside investment manager. Company contributions to the 401(k) are based upon a percentage of individual employee contributions and, for 1999, 1998 and 1997, totaled $920,340, $874,113, and $785,687, respectively. NOTE 7 - BUSINESS RISKS AND CONCENTRATION OF SALES Registrant's utility operations are engaged in supplying water and electric service to the public. SCW is required to provide service and grant credit to customers within its defined service areas. Although Registrant has a diversified base of residential, industrial and other customers, revenues derived from commercial and residential water customers accounted for approximately 90% of total water revenues in 1999 and 91% in 1998. Registrant faces additional risks associated with weather conditions, adequacy and quality of water supplies, regulatory decisions, pronouncements and laws, water-related litigation, general business conditions and condemnation Approximately 40% of the SCW's water supply is purchased from wholesalers of imported water, with the remainder produced from company wells. The long-term availability of imported water supplies is dependent upon, among other things, drought conditions throughout the state, increases in population, water quality standards and legislation that may potentially reduce water supplies. SCW does not anticipate any constraints on its imported water supplies in 2000. NOTE 8 - CONTINGENCIES In 1998, ASUS was formed to pursue non-regulated opportunities such as long-term leases, and operation and maintenance contracts of governmentally-owned water and wastewater systems. In 1999, Registrant terminated its Golden State Water Company joint venture. Registrant expensed approximately $336,000 against future losses and capital account adjustments in 1998. There was no significant financial impact in 1999 associated with the termination. On April 22, 1999, the CPUC issued an order denying SCW's application seeking approval of its recovery through rates of costs associated with its participation in the Coastal Aqueduct Extension of the State Water Project (SWP). SCW's participation in the SWP commits it to a 40-year entitlement with a 42 45 value of approximately $9.5 million. SCW's investment in SWP is currently included in Other Property and Investments. The remaining balance of the related liability of approximately $7 million is recorded as other long-term debt. SCW intends to recover its investment in SWP through contributions from developers on a per-lot or other basis, and, failing that, sale of its 500 acre-foot entitlement in SWP. SCW believes that its full investment and on-going costs associated with its ownership will be fully recovered. SCW has been named as a defendant in eleven lawsuits which allege that SCW delivered contaminated water to its customers. Plaintiffs in these actions seek damages, including general, special, and punitive damages, according to proof of trial, as well as attorney's fees on certain causes of action, costs of suit, and other unspecified relief. Nine of the lawsuits involve customer service areas located in Los Angeles county in the southern portion of California; two of the lawsuits involve a customer service area located in Sacramento county in northern California. On September 1, 1999, the Court of Appeal in San Francisco held that the CPUC had preemptive jurisdiction over regulated public utilities and ordered dismissal of a series of lawsuits pertaining to water quality filed against water utilities, including SCW. Seven out of eleven lawsuits against SCW had been ordered for dismissal by the state Court of Appeals. On October 11, 1999, one group of plaintiffs appealed the decision to the California Supreme Court which has accepted the case. Management is unable to predict the outcome of this proceeding but, in any event, does not anticipate a decision prior to 2001. In light of the breadth of plaintiff's claims, the lack of factual information regarding plaintiff's claims and injuries, if any, the fact that no discovery has yet been completed, SCW is unable to determine at this time what, if any, potential liability it may have with respect to these claims. SCW intends to vigorously defend itself against these allegations. Management can not predict the outcome of these proceedings and if SCW is found liable, SCW would pursue recovery through its insurance coverage providers. In response to those lawsuits and similar actions, in March 1998 the CPUC issued an Order Instituting Investigation (OII) directed to all Class A and B water utilities in California, including SCW, into whether existing standards and policies regarding drinking water quality adequately protect the public health and whether those standards and policies are being uniformly complied with by those water utilities. The OII notes the constitutional and statutory jurisdiction of the CPUC and the DOHS to establish and enforce adherence to water quality standards for water delivered by utilities to their customers and, in the case of the CPUC, to establish rates which permit water utilities to furnish water that meets the established water quality standards at prices which are both affordable and that allow the utility to earn a reasonable return on its investment. SCW has made its filing in this proceeding on a series of questions dealing with the current drinking water standards, compliance by water utilities with such standards, appropriate remedies for failure to comply with drinking standards and whether stricter or additional drinking water standards are required. The Water Division of the CPUC has issued its report based on these filings by the utilities. A final decision in the OII is anticipated in 2000. The OII leaves open the possibility of evidentiary hearings and further action by the CPUC. The Administrative Law Judge assigned to the OII has issued a draft decision finding that water utilities, including SCW, have complied with DOHS regulation and requirements. SCW is unable to predict whether the draft decision will be approved in part or in its entirety by the CPUC. Management believes that proper insurance coverage and reserves are in place to insure against anticipated property, general liability and workers' compensation claims. 43 46 NOTE 9 - CONSTRUCTION PROGRAM SCW's 2000 construction budget provides for gross expenditures of approximately $59 million, $3.6 million of which is anticipated to be obtained from developers and others. Neither AWR nor ASUS have material capital commitments; however, ASUS actively seeks opportunities to own, lease or operate municipal water and wastewater systems, which may involve significant capital commitments. NOTE 10 - ALLOWANCE FOR DOUBTFUL ACCOUNTS The table below presents SCW's provision for doubtful accounts charged to expense and accounts written off, net of recoveries for the last three years. December 31, --------------------------------- 1999 1998 1997 ----- ----- ----- (dollars in thousands) Balance at beginning of year $ 403 $ 466 $ 387 Provision charged to expense 852 631 707 Accounts written off, net of recoveries (768) (694) (628) ----- ----- ----- Balance at end of year $ 487 $ 403 $ 466 ----- ----- ----- Neither AWR nor ASUS have established any provision for doubtful accounts. NOTE 11 - BUSINESS SEGMENTS Registrant has two principal business units: a water and electric distribution unit, through its SCW subsidiary, and a non-regulated activity unit through the ASUS subsidiary. All activities currently are geographically located within California, except for one contract providing customer service and billing services to a utility located in Arizona. SCW is a regulated utility which operates both water and electric systems. AWR has no material operations other than its SCW subsidiary. On a stand alone basis, AWR has no material assets other than its investments in its subsidiaries. The tables below set forth information relating to SCW's operating segments. SCW manages its operations on a regional basis using the five categories below as broad-level measures of profitability. Region I incorporates service areas in northern and central California; Region II contains service areas throughout Los Angeles; Region III encompasses water operations in eastern Los Angles County, Orange County, San Bernardino County and Imperial County. SCW also provides electric service to the City of Big Bear Lake and surrounding areas. Included in the amounts set forth, certain assets, revenues and expenses have been allocated. The identifiable assets are net of respective accumulated provisions for depreciation. YEAR ENDED DECEMBER 31, 1999 ----------------------------------------------------------------------- WATER ---------------------------------------- REGION I REGION II REGION III ELECTRIC TOTAL -------- --------- ---------- -------- -------- (dollars in thousands) Operating revenues $ 27,221 $ 70,770 $ 61,692 $13,348 $173,031 Operating income before income taxes 6,567 15,841 16,022 3,821 42,251 Identifiable assets 108,675 140,175 177,457 25,725 452,032 Depreciation expense 2,736 4,041 5,395 1,344 13,516 Capital additions $ 12,966 $ 21,926 $ 14,513 $ 2,173 $ 51,578 -------- -------- -------- ------- -------- 44 47 Year Ended December 31, 1998 ----------------------------------------------------------------------- Water ----------------------------------------- Region I Region II Region III Electric Total -------- --------- ---------- -------- -------- (dollars in thousands) Operating revenues $24,927 $ 57,273 $ 52,584 $13,211 $147,995 Operating income before income taxes 6,799 11,732 13,144 3,847 35,522 Identifiable assets 97,463 123,044 169,264 24,981 414,752 Depreciation expense 2,551 3,378 4,701 1,640 12,270 Capital additions $13,302 $ 14,452 $ 15,795 $ 1,720 $ 45,239 ------- -------- -------- ------- -------- Year Ended December 31, 1997 ----------------------------------------------------------------------- Water ----------------------------------------- Region I Region II Region III Electric Total -------- --------- ---------- -------- -------- (dollars in thousands) Operating revenues $24,340 61,085 55,551 $12,779 $153,755 Operating income before income taxes 5,897 9,593 13,709 4,089 33,288 Identifiable assets 87,039 112,556 158,934 25,095 383,624 Depreciation expense 2,306 3,042 4,603 1,001 10,952 Capital additions $10,007 15,431 11,671 $ 2,116 $ 39,225 ------- -------- -------- ------- -------- NOTE 12 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The quarterly financial information presented below is unaudited. The business of Registrant is of a seasonal nature and it is management's opinion that comparisons of earnings for the quarter periods do not reflect overall trends and changes in Registrant's operations. Operating Revenues Operating Income Net Income Earnings per Share ------------------------ ---------------------- ---------------------- ------------------ 1999 1998 1999 1998 1999 1998 1999 1998 -------- -------- ------- ------- ------- ------- ----- ----- (in thousands, except per share amounts) First Quarter $ 36,132 $ 29,955 $ 5,854 $ 4,382 $ 2,977 $ 1,843 $0.33 $0.20 Second Quarter 42,116 35,001 7,251 5,586 4,406 2,767 0.49 0.31 Third Quarter 51,597 47,002 10,266 9,432 6,690 6,374 0.74 0.71 Fourth Quarter 43,576 36,102 5,143 5,661 2,028 3,639 0.23 0.40 -------- -------- ------- ------- ------- ------- ----- ----- Year $173,421 $148,060 $28,514 $25,061 $16,101 $14,623 $1.79 $1.62 -------- -------- ------- ------- ------- ------- ----- ----- NOTE 13 - YEAR 2000 READINESS UPDATE Registrant has no Y2K incidents, business disruptions, failures or legal proceedings to report. There were no effects or changes to Registrant's operating trends or revenue patterns as a result of the millennium turnover. SCW formally announced its 100% Y2K Ready status when it filed its Compliance Report with the CPUC on November 1, 1999. SCW will be submitting the last CPUC report on this issue by March 1, 2000. Registrant's general process for addressing the Y2K issue was (i) to inventory all systems that may have a potential Y2K impact, (ii) to determine the materiality of these non-Y2K ready systems, (iii) to replace and test, correct and test, or prepare for the failure of material items that have been determined to be non-Y2K ready, and (iv) to prepare contingency plans. Registrant is significantly dependent on third party suppliers, such as energy and telecommunication companies and wholesale water suppliers. In order to conduct its business, Registrant initiated due diligence with certain of its major service providers to address their Y2K readiness. In the event that such suppliers might be adversely affected by Y2K, Registrant prepared its contingency plan which included, among other things, increased staffing during critical periods, manual back-up for 45 48 automated systems and the use of portable generators capable of providing power during a black-out. Several "dry runs" were exercised in 1999, which simulated Y2K situations that implemented Registrant's contingency plan. The dry runs proved to be effective exercises that identified areas of strength and weakness, and provided real-life experience from which to make informed decisions about Y2K preparation and contingency plan. Not all Y2K problems were necessarily expected to surface in early 2000. Registrant does not have, and may never fully have, sufficient information about the Y2K exposure of these third parties to adequately predict the risks posed by them to Registrant. If the third parties later discover any Y2K problems that are not remedied, resulting problems could include loss of utility services and disruption of water supplies. On September 2, 1999, the CPUC issued an order denying regulated water utilities the authority to create memorandum accounts for Y2K expenses. The order, however, provides that, after January 1, 2000, regulated water utilities may file for recovery of capital investment, not otherwise included in current rates, associated with Y2K mitigation efforts. Y2K final expenditures have been estimated at approximately $7.5 million. Registrant has spent $4.8 million at January, 2000, $4.0 million of which is in capital investments. On March 1, 2000, Registrant filed an advice letter with the CPUC for recovery of Y2K related costs. Registrant believes that these capital expenditures as well as the remaining Y2K-related investments will be recovered through rates, but can give no assurance that the CPUC will authorize recovery of all or some of these costs. NOTE 14 - SUBSEQUENT EVENT On March 10, 2000, Registrant entered into an agreement to acquire the common stock of Chaparral City Water Company, a privately operated water company serving approximately 10,000 customers in the town of Fountain Hills, Arizona and portions of Scottsdale, Arizona for an aggregate value of $31.2 million, including assumption of approximately $12 million in debt. Chaparral City Water Company was purchased from MCO Properties Inc., a wholly-owned subsidiary of MAXXAM Inc. This marks the first acquisition outside of California for Registrant. The sale of Chaparral City Water Company requires notification to the Arizona Corporation Commission and other conditions customary in transactions of this type. The approval of Registrant's shareholders is not required. It is anticipated that the transaction will close within one year. 46 49 REPORT OF MANAGEMENT The consolidated financial statements contained in the annual report were prepared by the management of American States Water Company, which is responsible for their integrity and objectivity. The consolidated financial statements were prepared in accordance with generally accepted accounting principles and include, where necessary, amounts based upon management's best estimates and judgments. All other financial information in the annual report is consistent with the consolidated financial statements and is also the responsibility of management. Registrant maintains systems of internal control which are designed to help safeguard the assets of Registrant and provide reasonable assurance that accounting and financial records can be relied upon to generate accurate financial statements. These systems include the hiring and training of qualified personnel, appropriate segregation of duties, delegation of authority and an internal audit function which has reporting responsibility to the Audit Committee of the board of directors. The Audit Committee, composed of three outside directors, exercises oversight of management's discharge of its responsibilities regarding the systems of internal control and financial reporting. The committee periodically meets with management, the internal auditor and the independent accountants to review the work and findings of each. The committee also reviews the qualifications of, and recommends to the board of directors, a firm of independent accountants. The independent accountants, Arthur Andersen LLP, have performed an audit of the consolidated financial statements in accordance with generally accepted auditing standards. Their audit gave consideration to Registrant's system of internal accounting control as a basis for establishing the nature, timing and scope of their work. The result of their work is expressed in their Report of Independent Public Accountants. /s/ Floyd E. Wicks /s/ McClellan Harris III - ----------------------------------- ----------------------------------- President, Chief Executive Officer Chief Financial Officer, Vice President - Finance, Treasurer and Corporate Secretary February 10, 2000 47 50 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and the Board of Directors of American States Water Company: We have audited the accompanying consolidated balance sheets and statements of capitalization of American States Water Company and its subsidiary, Southern California Water Company (California corporations), as of December 31, 1999 and 1998 and the related consolidated statements of income, changes in common shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Registrant's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 American States Water Company and its subsidiary, Southern California Water Company, as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP - ----------------------------------- Arthur Andersen LLP Los Angeles, California February 10, 2000, except for Note 14, as to which the date is March 10, 2000 48 51 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information responsive to Part III, Item 10 is included in the Proxy Statement, to be filed by Registrant with the Commission pursuant to Regulation 14A, under the captions therein entitled "Election of Directors" and "Executive Officers - Experience, Security Ownership and Compensation" and is incorporated herein by reference pursuant to General Instruction G(3). ITEM 11. EXECUTIVE COMPENSATION Information responsive to Part III, Item 11 is included in the Proxy Statement, to be filed by Registrant with the Commission pursuant to Regulation 14A, under the captions therein entitled "Election of Directors" and "Executive Officers - Experience, Security Ownership and Compensation" and "Performance Graph" and is incorporated herein by reference pursuant to General Instruction G(3). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information responsive to Part III, Item 12 is included in the Proxy Statement, to be filed by Registrant with the Commission pursuant to Regulation 14A, under the captions therein entitled "Election of Directors" and "Executive Officers - Experience, Security Ownership and Compensation" and is incorporated herein by reference pursuant to General Instruction G(3). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information responsive to Part III, Item 13 is included in the Proxy Statement, to be filed by Registrant with the Commission pursuant to Regulation 14A, under the captions therein entitled "Election of Directors" and is incorporated herein by reference pursuant to General Instruction G(3). PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Reference is made to the Financial Statements incorporated herein by reference to Part II, Item 8 hereof. 2. All required schedules may be found in the Financial Statements and Notes to Financial Statements incorporated herein by reference to Part II, Item 8 hereof or at the conclusion of this Item. Schedules III, IV, and V are omitted as they are not applicable. (b) Exhibits - 3.1 By-Laws of American States Water Company incorporated herein by reference to Registrant's Form 8-K, dated November 2, 1998. Commission File No. 333- 47647. 49 52 3.2 By-laws of Southern California Water Company incorporated by reference to Registrant's Form 10-K for the year ended December 31, 1998. Commission File No. 001-14431. 3.3 Amended and Restated Articles of Incorporation of American States Water Company incorporated herein by reference to Registrant's Form 8-K, dated November 2, 1998. Commission File No. 333-47647. 3.3.1 Certificate of Amendment of Amended and Restated Articles of Incorporation, dated August 25, 1998, of American States Water Company incorporated by reference to Registrant's Form 10-K for the year ended December 31, 1998. Commission File No. 001-14431. 3.3.2 Certificate of Amendment of Amended and Restated Articles of Incorporation of American States Water Company, dated August 25, 1999.(1) 3.3 Restated Articles of Incorporation of Southern California Water Company incorporated herein by reference to Registrant's Form 8-K, dated January 20, 1999. Commission File No. 000-01121. 4.1 Amended and Restated Rights Agreement, dated January 25, 1999, by and between American States Water Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent incorporated by reference to Registrant's Form 10-K for the year ended December 31, 1998. Commission File No. 001-14431. 4.2 Indenture, dated September 1, 1993 between Southern California Water Company and Chemical Trust Company of California incorporated herein by reference to Registrant's Form 8-K. Registration No. 33-62832. 10.1 Agreement of Merger dated as of June 25, 1998 by and among Southern California Water Company, SCW Acquisition Corp. and American States Water Company incorporated herein by reference to Registrant's Form 8-K, dated July 1, 1998. Commission File No. 333-47647. 10.2 Deferred Compensation Plan for Directors and Executives incorporated herein by reference to Registrant's Registration Statement on Form S-2. Registration No. 33-5151.(2) 10.3 Reimbursement Agreement, dated October 3, 1997, between Southern California Water Company and The Bank of Nova Scotia incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1997. Commission File No. 000-01121. 10.4 Second Sublease dated October 5, 1984 between Southern California Water Company and Three Valleys Municipal Water District incorporated herein by reference to Registrant's Registration Statement on Form S-2. Registration No. 33-5151. 50 53 10.5 Note Agreement dated as of May 15, 1991 between Southern California Water Company and Transamerica Occidental Life Insurance Company incorporated herein by reference to Registrant's Form 10-Q with respect to the quarter ended June 30, 1991. Commission File No. 000-01121. 10.6 Schedule of omitted Note Agreements, dated May 15, 1991, between Southern California Water Company and Transamerica Annuity Life Insurance Company, and Southern California Water Company and First Colony Life Insurance Company incorporated herein by reference to Registrant's Form 10-Q with respect to the quarter ended June 30, 1991. Commission File No. 000-01121. 10.7 Loan Agreement between California Pollution Control Financing Authority and Southern California Water Company, dated as of December 1, 1996 incorporated by reference to Registrant's Form 10-K for the year ended December 31, 1998. Commission File No. 001-14431. 10.8 Agreement for Financing Capital Improvement dated as of June 2, 1992 between Southern California Water Company and Three Valleys Municipal Water District incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1992. Commission File No. 000-01121. 10.9 Water Supply Agreement dated as of June 1, 1994 between Southern California Water Company and Central Coast Water Authority incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1994. Commission File No. 000-01121. 10.10 Amended and Restated Retirement Plan for Non-Employee Directors of American States Water Company, dated as of October 25, 1999.(1)(2) 10.11 Dividend Reinvestment and Common Share Purchase Plan incorporated herein by reference to American States Water Company Rule 424 (b) (3) filing dated October 27, 1999. Commission File No. 333-88979. 10.12 Key Executive Long-Term Incentive Plan incorporated herein by reference to Registrant's 1995 Proxy Statement, Commission File No. 00 0-01121.(2) 10.13 Energy Management Services Agreement between Southern California Water Company and Illinova Energy Partners, Inc.(1) 10.14 Amended and Restated Change in Control Agreements, dated as of October 25, 1999, between American States Water Company, Southern California Water Company and certain executives.(1)(2) 10.15 Amended and Restated Change in Control Agreements, dated as of October 25, 1999, between Southern California Water Company and certain executives.(1)(2) 10.16 Southern California Water Company Pension Restoration Plan.(1)(2) 10.17 American States Water Company Annual Incentive Plan.(1)(2) 13. 1999 Annual Report to Shareholders.(1) 51 54 21. Subsidiaries of Registrant incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1998. Commission File No. 001-14431. 23. Consent of Independent Public Accountants.(1) 27. Schedule UT.(1) (d) None. --------------------- (1) Filed concurrently herewith (2) Management contract or compensatory arrangement 52 55 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE To American States Water Company: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in this Form 10-K, and have issued our report thereon dated February 10, 2000. Our audits of the consolidated financial statements were made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The supplemental schedule listed in Part IV of this Form 10-K, which is the responsibility of American States Water Company's management, is presented for purposes of complying with the Securities and Exchange Commission's rules and regulations, and is not part of the basic consolidated financial statements. This supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ Arthur Andersen LLP - ----------------------------------- Arthur Andersen LLP Los Angeles, California February 10, 2000 53 56 AMERICAN STATES WATER COMPANY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF PARENT CONDENSED BALANCE SHEETS December 31, --------------------------- 1999 1998 --------- --------- (in thousands) ASSETS Cash and equivalents $ 169 $ 96 Other current assets 4,003 139 --------- --------- Total current assets 4,172 235 Investments in subsidiaries 160,370 156,035 Other deferred debits 123 50 ========= ========= Total assets $ 164,665 $ 156,320 ========= ========= LIABILITIES AND CAPITALIZATION Accounts payable $ 4,116 $ 164 Other current liabilities (257) (143) --------- --------- Total current liabilities 3,859 21 Common shareholders' equity 158,846 154,299 Preferred shares 1,960 2,000 --------- --------- Total capitalization 160,806 156,299 Total liabilities and capitalization $ 164,665 $ 156,320 ========= ========= 54 57 CONDENSED STATEMENTS OF INCOME For the Year Ended December 31, 1999, and the Six Months Ended December 31, 1998 1999 1998 -------- -------- (in thousands except per share amount) Operating Revenue And Other Income $ 413 $ (397) Operating Expenses 654 166 -------- -------- Loss Before Equity in Earnings of Subsidiaries (241) (563) Equity in Earnings of Subsidiaries 16,342 15,140 -------- -------- Net Income 16,101 14,577 Dividends on Preferred Shares (88) (44) -------- -------- Earnings Available For Common Shareholders $ 16,013 $ 14,533 -------- -------- Weighted Average Number of Common Shares Outstanding 8,958 8,958 -------- -------- Basic Earnings Per Common Share $ 1.79 $ 1.62 -------- -------- 55 58 CONDENSED STATEMENTS OF CASH FLOWS For the Year Ended December 31, 1999, and the Six Months Ended December 31, 1998 1999 1998 -------- ------- (in thousands) Cash Flows From Operating Activities $ 11,666 $ 5,793 -------- ------- Cash Flows Used in Financing Activities (11,593) (5,697) -------- ------- Increase (Decrease) in Cash and Equivalents 73 96 Cash and Equivalents at Beginning of Period 96 -- -------- ------- Cash and Equivalents at the End of Period $ 169 $ 96 -------- ------- Cash dividends received from Southern California Water Company $ 12,040 $ 5,889 56 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN STATES WATER COMPANY and its subsidiary SOUTHERN CALIFORNIA WATER COMPANY By: /s/ McCLELLAN HARRIS III . -------------------------------- McClellan Harris III Vice President - Finance, Treasurer, Chief Financial Officer and Secretary Date: March 15, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated. /s/ LLOYD E. ROSS . Date: March 15, 2000 - ----------------------------------- Lloyd E. Ross Chairman of the Board and Director /s/ FLOYD E. WICKS . March 15, 2000 - ----------------------------------- Floyd E. Wicks Principal Executive Officer; President, CEO and Director /s/ McCLELLAN HARRIS III . March 15, 2000 - ----------------------------------- Clellan Harris III Principal Financial and Accounting Officer; CFO, VP - Finance, Treasurer and Secretary /s/ LINDA J. MATLICK . March 15, 2000 - ----------------------------------- Linda J. Matlick Controller - Southern California Water Company /s/ JAMES L. ANDERSON . March 15, 2000 - ----------------------------------- James L. Anderson, Director 57 60 /s/ JEAN E. AUER . March 15, 2000 - ----------------------------------- Jean E. Auer, Director /s/ N. P. DODGE, JR. . March 15, 2000 - ----------------------------------- N. P. Dodge, Jr., Director /s/ ANNE M. HOLLOWAY . March 15, 2000 - ----------------------------------- Anne M. Holloway, Director /s/ ROBERT F. KATHOL . March 15, 2000 - ----------------------------------- Robert F. Kathol, Director 58