1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION REGISTRANT AND STATE OF INCORPORATION IRS EMPLOYER
FILE NO. ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO.
- ---------- -------------------------------------- ------------------
333-47647 American States Water Company 05-4676679
(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
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 3, 1998, the number of Common Shares outstanding, No Par Value
with Stated Value of $2.50, of American States Water Company was 8,957,671,
all of which are listed on the New York Stock Exchange.
As of November 3, 1998, all of the 100 outstanding Common Shares of Southern
California Water Company are owned by American States Water Company.
2
AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-Q
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1: Financial Statements 1
Consolidated Balance Sheets of American States Water Company as of
September 30, 1998 and December 31, 1997 2 - 3
Consolidated Statements of Income of American States Water Company for
the Three Months Ended September 30, 1998 and June 30, 1997 4
Consolidated Statements of Income of American States Water Company for
the Six Months Ended September 30, 1998 and June 30, 1997 5
Consolidated Statements of Income of American States Water Company for
the Twelve Months Ended September 30, 1998 and June 30, 1997 6
Consolidated Statements of Cash Flows of American States Water Company for
the Nine Months Ended September 30, 1998 and June 30, 1997 7
Consolidated Balance Sheets of Southern California Water Company as of
September 30, 1998 and December 31, 1997 8 - 9
Consolidated Statements of Income of Southern California Water Company for
the Three Months Ended September 30, 1998 and June 30, 1997 10
Consolidated Statements of Income of Southern California Water Company for
the Six Months Ended September 30, 1998 and June 30, 1997 11
Consolidated Statements of Income of Southern California Water Company for
the Twelve Months Ended September 30, 1998 and June 30, 1997 12
Consolidated Statements of Cash Flows of Southern California Water Company for
the Nine Months Ended September 30, 1998 and June 30, 1997 13
Notes to Financial Statements 14
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operation 15 - 25
i
3
AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-Q
INDEX - CONTINUED
PART II OTHER INFORMATION
Item 1: Legal Proceedings 25 - 27
Item 2: Changes in Securities 27 - 28
Item 3: Defaults Upon Senior Securities 28
Item 4: Submission of Matters to a Vote of Security Holders 28
Item 5: Other Information 28
Item 6: Exhibits and Reports on Form 8-K 28 - 29
Signatures 30
ii
4
PART I
ITEM 1. FINANCIAL STATEMENTS
General
The basic financial statements included herein have been
prepared by Registrant, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission.
Certain information and footnote disclosures normally
included in financial statements, prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to such rules and
regulations, although Registrant believes that the disclosures are adequate to
make the information presented not misleading. In the opinion of management, all
adjustments necessary for a fair statement of results for the interim period
have been made.
It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto in the latest Annual
Report on Form 10-K of Southern California Water Company.
Filing Format
This quarterly report on Form 10-Q is a combined report
being filed by two separate Registrants: American States Water Company
(hereinafter "AWR") and Southern California Water Company (hereinafter "SCW").
For more information, please see Note 1 to the Notes to Financial Statements and
the heading entitled General in Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operation. 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.
1
5
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPT. 30, DECEMBER 31,
1998 1997
----------------- ------------------
(Unaudited)
(in thousands)
UTILITY PLANT, at cost
Water........................................................................... $466,789 $446,605
Electric........................................................................ 34,380 34,137
----------------- ------------------
501,169 480,742
Less - Accumulated depreciation................................................. (135,980) (125,020)
----------------- ------------------
365,189 355,722
Construction work in progress................................................... 40,559 27,901
----------------- ------------------
405,748 383,623
----------------- ------------------
OTHER PROPERTY AND INVESTMENTS.................................................. 1,602 1,355
----------------- ------------------
CURRENT ASSETS
Cash and cash equivalents..................................................... 284 4,186
Accounts receivable -
Customers, less reserves of $320
in 1998 and $466 in 1997.................................................. 10,248 8,544
Other......................................................................... 5,304 3,614
Unbilled revenue................................................................ 11,838 9,106
Materials and supplies, at average cost......................................... 1,257 1,299
Supply cost balancing accounts.................................................. 5,384 4,286
Prepayments and other........................................................... 4,266 7,676
Accumulated deferred income taxes - net......................................... 5,072 5,783
----------------- ------------------
43,653 44,494
----------------- ------------------
DEFERRED CHARGES
Regulatory tax-related assets................................................. 21,469 22,337
Other deferred charges........................................................ 6,299 5,265
----------------- ------------------
27,768 27,602
----------------- ------------------
$478,771 $457,074
================= ==================
The accompanying notes are an integral part of these financial statements.
2
6
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
SEPT. 30, DECEMBER 31,
1998 1997
--------------- -----------------
(Unaudited)
(in thousands)
CAPITALIZATION
Common shareholders' equity................................................... $153,504 $151,053
Preferred shares.............................................................. 1,600 1,600
Preferred shares subject to mandatory
redemption requirements..................................................... 440 440
Long-term debt................................................................ 130,803 115,286
--------------- -----------------
286,347 268,379
--------------- -----------------
CURRENT LIABILITIES
Notes payable to banks........................................................ 19,000 26,000
Long-term debt and preferred shares
due within one year......................................................... 255 231
Accounts payable.............................................................. 11,623 11,770
Taxes payable................................................................. 10,173 9,115
Accrued interest.............................................................. 2,680 1,868
Other accrued liabilities..................................................... 7,653 7,196
--------------- -----------------
51,384 56,180
--------------- -----------------
OTHER CREDITS
Advances for construction..................................................... 54,278 55,574
Contributions in aid of construction.......................................... 36,153 28,467
Accumulated deferred income taxes - net....................................... 44,953 42,984
Unamortized investment tax credits............................................ 3,179 3,246
Regulatory tax-related liability.............................................. 1,917 1,950
Other......................................................................... 560 294
--------------- -----------------
141,040 132,515
--------------- -----------------
$478,771 $457,074
=============== =================
The accompanying notes are an integral part of these financial statements.
3
7
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
THREE MONTHS ENDED
SEPT. 30,
---------------------------------------
1998 1997
-------------- ------------
(in thousands, except
per share amounts)
OPERATING REVENUES
Water......................................................................... $43,813 $42,494
Electric...................................................................... 3,189 3,206
-------------- ------------
47,002 45,700
-------------- ------------
OPERATING EXPENSES
Water purchased............................................................... 11,104 13,300
Power purchased for pumping................................................... 2,280 2,446
Power purchased for resale.................................................... 1,320 1,357
Groundwater production assessment............................................. 1,934 1,800
Supply cost balancing accounts................................................ 182 160
Other operating expenses...................................................... 3,840 2,896
Administrative and general expenses........................................... 5,151 5,458
Depreciation.................................................................. 3,639 2,739
Maintenance................................................................... 1,770 1,651
Taxes on income............................................................... 4,740 3,912
Other taxes................................................................... 1,610 1,596
-------------- ------------
37,570 37,315
-------------- ------------
Operating income.............................................................. 9,432 8,385
OTHER INCOME/(LOSS)............................................................. (209) 197
-------------- ------------
Income before interest charges................................................ 9,223 8,582
INTEREST CHARGES................................................................ 2,849 2,538
-------------- ------------
NET INCOME...................................................................... 6,374 6,044
DIVIDENDS ON PREFERRED SHARES................................................... (23) (23)
-------------- ------------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS...................................... $6,351 $6,021
============== ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING................................... 8,958 8,958
============== ============
Basic Earnings Per Common Share................................................. $0.71 $0.67
============== ============
Dividends Declared Per Common Share............................................. $0.315 $0.310
============== ============
The accompanying notes are an integral part of these financial statements.
4
8
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
NINE MONTHS ENDED
SEPT. 30,
---------------------------------------
1998 1997
-------------- ------------
(in thousands, except
per share amounts)
OPERATING REVENUES
Water......................................................................... $102,127 $107,976
Electric...................................................................... 9,831 9,273
-------------- ------------
111,958 117,249
-------------- ------------
OPERATING EXPENSES
Water purchased............................................................... 24,529 30,897
Power purchased for pumping................................................... 4,904 5,452
Power purchased for resale.................................................... 3,764 3,651
Groundwater production assessment............................................. 5,542 5,382
Supply cost balancing accounts................................................ (1,055) 2,841
Other operating expenses...................................................... 10,866 9,698
Administrative and general expenses........................................... 15,897 16,238
Depreciation.................................................................. 9,588 8,217
Maintenance................................................................... 5,432 5,448
Taxes on income............................................................... 8,484 7,215
Other taxes................................................................... 4,607 4,714
-------------- ------------
92,558 99,753
-------------- ------------
Operating income.............................................................. 19,400 17,496
OTHER INCOME/(LOSS)........................................................... (78) 457
-------------- ------------
Income before interest charges................................................ 19,322 17,953
INTEREST CHARGES................................................................ 8,338 7,516
-------------- ------------
NET INCOME...................................................................... 10,984 10,437
DIVIDENDS ON PREFERRED SHARES................................................... (68) (69)
-------------- ------------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS...................................... $10,916 $10,368
============== ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING................................... 8,958 8,957
============== ============
Basic Earnings Per Common Share................................................. $1.220 $1.160
============== ============
Dividends Declared Per Common Share............................................. $0.945 $0.930
============== ============
The accompanying notes are an integral part of these financial statements.
5
9
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
TWELVE MONTHS ENDED
SEPT. 30,
-----------------------------------
1998 1997
------------- ------------
(in thousands, except
per share amounts)
OPERATING REVENUES
Water......................................................................... $135,138 $141,108
Electric...................................................................... 13,325 12,163
------------- ------------
148,463 153,271
------------- ------------
OPERATING EXPENSES
Water purchased............................................................... 31,949 39,966
Power purchased for pumping................................................... 7,006 7,632
Power purchased for resale.................................................... 5,302 5,525
Groundwater production assessment............................................. 7,007 6,796
Supply cost balancing accounts................................................ (1,083) 2,289
Other operating expenses...................................................... 14,218 13,018
Administrative and general expenses........................................... 21,819 22,191
Depreciation.................................................................. 12,323 10,743
Maintenance................................................................... 7,286 8,226
Taxes on income............................................................... 11,098 8,728
Other taxes................................................................... 6,175 6,363
------------- ------------
123,100 131,477
------------- ------------
Operating income.............................................................. 25,363 21,794
------------
-------------
OTHER INCOME.................................................................... 223 675
------------- ------------
Income before interest charges................................................ 25,586 22,469
INTEREST CHARGES................................................................ 10,979 10,220
------------- ------------
NET INCOME...................................................................... 14,607 12,249
DIVIDENDS ON PREFERRED SHARES................................................... (91) (92)
------------- ------------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS...................................... $14,516 $12,157
============= ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING................................... 8,958 8,720
============= ============
Basic Earnings Per Common Share................................................. $1.62 $1.39
============= ============
Dividends Declared Per Common Share............................................. $1.260 $1.240
============= ============
The accompanying notes are an integral part of these financial statements.
6
10
AMERICAN STATES WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
NINE MONTHS ENDED
SEPT. 30,
-------------------------------------
1998 1997
------------------ -------------
(in thousands)
CASH FLOWS FROM -
Operating Activities:
Net income.................................................................. $10,985 $10,437
Adjustments for non-cash items:
Depreciation and
Depreciation and amortization............................................... 9,926 8,535
Deferred income taxes and
investment tax credits.................................................. 3,447 800
Other - net............................................................... 3,408 (881)
Changes in assets and liabilities:
Accounts receivable....................................................... (1,958) (2,857)
Prepayments............................................................... 3,410 (73)
Supply cost balancing accounts............................................ (1,098) 2,025
Accounts payable.......................................................... 109 (1,882)
Taxes payable............................................................. 1,058 5,375
Unbilled revenue.......................................................... (2,731) 758
Accrued interest.......................................................... 812 635
Other..................................................................... (1,188) (387)
---------------- ----------------
Net Cash Provided....................................................... 26,180 22,485
---------------- ----------------
Investing Activities:
Construction expenditures..................................................... (30,386) (23,385)
---------------- ---------------
Net Cash Used............................................................... (30,386) (23,385)
---------------- ---------------
Financing Activities:
Issuance of securities...................................................... 15,000 7,637
Receipt of advances and
Receipt of advances and contributions....................................... 2,831 826
Repayments of long-term debt and
redemption of preferred shares............................................ 541 (132)
Refunds on advances......................................................... (2,536) (2,928)
Net change in notes payable to banks........................................ (7,000) 3,000
Common and preferred dividends paid......................................... (8,533) (8,405)
---------------- ---------------
Net Cash Provided/(Used)............................................... 304 (2)
---------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents.......................... (3,902) (902)
Cash and Cash Equivalents, Beginning of period................................ 4,186 3,783
---------------- ----------------
Cash and Cash Equivalents, End of period...................................... $284 $2,881
================ ================
The accompanying notes are an integral part of these financial statements.
7
11
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPT. 30, DECEMBER 31,
1998 1997
----------------- ------------------
(Unaudited)
(in thousands)
UTILITY PLANT, at cost
Water......................................................................... $466,789 $446,605
Electric...................................................................... 34,380 34,137
----------------- ------------------
501,169 480,742
Less - Accumulated depreciation............................................... (135,980) (125,020)
----------------- ------------------
365,189 355,722
Construction work in progress................................................. 40,559 27,901
----------------- ------------------
405,748 383,623
----------------- ------------------
OTHER PROPERTY AND INVESTMENTS.................................................. 763 1,355
----------------- ------------------
CURRENT ASSETS
Cash and cash equivalents..................................................... 76 4,186
Accounts receivable -
Customers, less reserves of $320
in 1998 and $466 in 1997.................................................. 10,702 8,544
Other....................................................................... 5,293 3,614
Unbilled revenue.............................................................. 11,838 9,106
Materials and supplies, at average cost....................................... 1,257 1,299
Supply cost balancing accounts................................................ 5,384 4,286
Prepayments and other......................................................... 4,266 7,676
Accumulated deferred income taxes - net....................................... 5,075 5,783
----------------- ------------------
43,891 44,494
----------------- ------------------
DEFERRED CHARGES
Regulatory tax-related assets................................................. 21,469 22,337
Other deferred charges........................................................ 6,301 5,265
----------------- ------------------
27,770 27,602
----------------- ------------------
$478,172 $457,074
================= ==================
The accompanying notes are an integral part of these financial statements.
8
12
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
SEPT. 30, DECEMBER 31,
1998 1997
--------------- -----------------
(Unaudited)
(in thousands)
CAPITALIZATION
Common shareholders' equity................................................... $154,546 $151,053
Preferred shares.............................................................. - 1,600
Preferred shares subject to mandatory
redemption requirements..................................................... - 440
Long-term debt................................................................ 130,803 115,286
--------------- -----------------
285,349 268,379
--------------- -----------------
CURRENT LIABILITIES
Notes payable to banks........................................................ 19,000 26,000
Long-term debt and preferred shares
due within one year......................................................... 255 231
Accounts payable.............................................................. 11,971 11,770
Taxes payable................................................................. 10,224 9,115
Accrued interest.............................................................. 2,680 1,868
Other accrued liabilities..................................................... 7,653 7,196
--------------- -----------------
51,783 56,180
--------------- -----------------
OTHER CREDITS
Advances for construction..................................................... 54,278 55,574
Contributions in aid of construction.......................................... 36,153 28,467
Accumulated deferred income taxes - net....................................... 44,953 42,984
Unamortized investment tax credits............................................ 3,179 3,246
Regulatory tax-related liability.............................................. 1,917 1,950
Other......................................................................... 560 294
--------------- -----------------
141,040 132,515
--------------- -----------------
$478,172 $457,074
=============== =================
The accompanying notes are an integral part of these financial statements.
9
13
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
THREE MONTHS ENDED
SEPT. 30,
---------------------------------------
1998 1997
-------------- ------------
(in thousands, except
per share amounts)
OPERATING REVENUES
Water......................................................................... $43,797 $42,494
Electric...................................................................... 3,189 3,206
-------------- ------------
46,986 45,700
-------------- ------------
OPERATING EXPENSES
Water purchased............................................................... 11,104 13,300
Power purchased for pumping................................................... 2,280 2,446
Power purchased for resale.................................................... 1,320 1,357
Groundwater production assessment............................................. 1,934 1,800
Supply cost balancing accounts................................................ 182 160
Other operating expenses...................................................... 3,835 2,896
Administrative and general expenses........................................... 5,149 5,458
Depreciation.................................................................. 3,505 2,739
Maintenance................................................................... 1,770 1,651
Taxes on income............................................................... 4,787 3,912
Other taxes................................................................... 1,610 1,596
-------------- ------------
37,476 37,315
-------------- ------------
Operating income.............................................................. 9,510 8,385
OTHER INCOME/(LOSS)............................................................. (104) 197
-------------- ------------
Income before interest charges................................................ 9,406 8,582
INTEREST CHARGES.............................................................. 2,849 2,538
-------------- ------------
NET INCOME.................................................................... 6,557 6,044
DIVIDENDS ON PREFERRED SHARES................................................. - (23)
-------------- ------------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS...................................... $6,557 $6,021
============== ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING................................... 100 100
============== ============
Basic Earnings Per Common Share................................................. $65.57 $60.21
============== ============
Dividends Declared Per Common Share............................................. $30,450 $27,769
============== ============
The accompanying notes are an integral part of these financial statements.
10
14
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
NINE MONTHS ENDED
SEPT. 30,
---------------------------------------
1998 1997
-------------- ------------
(in thousands, except
per share amounts)
OPERATING REVENUES
Water......................................................................... $102,111 $107,976
Electric...................................................................... 9,831 9,273
-------------- ------------
111,942 117,249
-------------- ------------
OPERATING EXPENSES
Water purchased............................................................... 24,529 30,897
Power purchased for pumping................................................... 4,904 5,452
Power purchased for resale.................................................... 3,764 3,651
Groundwater production assessment............................................. 5,542 5,382
Supply cost balancing accounts................................................ (1,055) 2,841
Other operating expenses...................................................... 10,861 9,698
Administrative and general expenses........................................... 15,897 16,238
Depreciation.................................................................. 9,454 8,217
Maintenance................................................................... 5,432 5,448
Taxes on income............................................................... 8,531 7,215
Other taxes................................................................... 4,607 4,714
-------------- ------------
92,464 99,753
-------------- ------------
Operating income.............................................................. 19,478 17,496
OTHER INCOME.................................................................. 27 457
-------------- ------------
Income before interest charges................................................ 19,505 17,953
INTEREST CHARGES................................................................ 8,338 7,516
-------------- ------------
NET INCOME...................................................................... 11,167 10,437
DIVIDENDS ON PREFERRED SHARES................................................... (46) (69)
-------------- ------------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS...................................... $11,121 $10,368
============== ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING................................... 100 100
============== ============
Basic Earnings Per Common
Basic Earnings Per Common Share................................................. $111.21 $103.68
============== ============
Dividends Declared Per Common Share............................................. $86,883 $83,307
============== ============
The accompanying notes are an integral part of these financial statements.
11
15
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
TWELVE MONTHS ENDED
SEPT. 30,
-----------------------------------
1998 1997
------------- ------------
(in thousands, except
per share amounts)
OPERATING REVENUES
Water......................................................................... $135,123 $141,108
Electric...................................................................... 13,325 12,163
------------- ------------
148,448 153,271
------------- ------------
OPERATING EXPENSES
Water purchased............................................................... 31,949 39,966
Power purchased for pumping................................................... 7,006 7,632
Power purchased for resale.................................................... 5,302 5,525
Groundwater production assessment............................................. 7,007 6,796
Supply cost balancing accounts.............................................. (1,082) 2,289
Other operating expenses...................................................... 14,214 13,018
Administrative and general expenses........................................... 21,817 22,191
Depreciation.................................................................. 12,189 10,743
Maintenance................................................................... 7,286 8,226
Taxes on income............................................................... 11,145 8,728
Other taxes................................................................... 6,175 6,363
------------- ------------
123,008 131,477
------------- ------------
Operating income.............................................................. 25,440 21,794
------------
-------------
OTHER INCOME.................................................................... 328 675
------------- ------------
Income before interest charges................................................ 25,768 22,469
INTEREST CHARGES................................................................ 10,979 10,220
------------- ------------
NET INCOME...................................................................... 14,789 12,249
DIVIDENDS ON PREFERRED SHARES................................................... (69) (92)
------------- ------------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS...................................... $14,720 $12,157
============= ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING................................... 100 100
============= ============
Basic Earnings Per Common Share................................................. $147.20 $121.57
============= ============
Dividends Declared Per Common Share............................................. $115,100 $107,754
============= ============
The accompanying notes are an integral part of these financial statements.
12
16
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
NINE MONTHS ENDED
SEPT. 30,
-------------------------------------
1998 1997
------------------ -------------
(in thousands)
CASH FLOWS FROM -
Operating Activities:
Net income.................................................................. $11,167 $10,437
Adjustments for non-cash items:
Depreciation and amortization............................................... 9,926 8,535
Deferred income taxes and
investment tax credits.................................................. 3,444 800
Other - net................................................................. 5,772 (881)
Changes in assets and liabilities:
Accounts receivable....................................................... (1,906) (2,857)
Prepayments................................................................. 3,410 (73)
Supply cost balancing accounts.............................................. (1,098) 2,025
Accounts payable............................................................ (150) (1,882)
Taxes payable............................................................... 1,109 5,375
Unbilled revenue............................................................ (2,731) 758
Accrued interest............................................................ 812 635
Other....................................................................... (1,077) (387)
---------------- ----------------
Net Cash Provided......................................................... 28,678 22,485
---------------- ----------------
Investing Activities:
Construction expenditures................................................... (30,851) (23,385)
---------------- ---------------
Net Cash Used............................................................. (30,851) (23,385)
---------------- ---------------
Financing Activities:
Issuance of securities...................................................... 15,000 7,637
Receipt of advances and contributions....................................... 2,831 826
Repayments of long-term debt and
redemption of preferred shares............................................ (1,499) (132)
Refunds on advances......................................................... (2,536) (2,928)
Net change in notes payable to banks........................................ (7,000) 3,000
Common and preferred dividends paid......................................... (8,733) 8,405)
---------------- ---------------
Net Cash Provided/(Used)............................................... (1,937) (2)
---------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents............................ (4,110) (902)
Cash and Cash Equivalents, Beginning of period.................................. 4,186 3,783
---------------- ----------------
Cash and Cash Equivalents, End of period........................................ $76 $2,881
================ ================
The accompanying notes are an integral part of these financial statements.
13
17
AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Shareholders of Southern California Water Company approved the formation
of a holding company arrangement on April 28, 1998. Effective at 12:01
a.m. on July 1, 1998, American States Water Company ("AWR"), which was a
wholly-owned subsidiary of SCW, became the parent company of SCW. As of
the effective date, holders of SCW preferred and common shares became
holders of AWR preferred and common shares and the stock certificates
representing SCW preferred and common shares now represent AWR preferred
and common shares. Certain non-regulated transactions have been
transferred to AWR. Unless otherwise stated in this report, the term
Registrant applies to both AWR and SCW, collectively. For the balance
sheets at December 31, 1997 and, for all periods then ended, all of the
financial statements are for SCW only.
2. For a summary of significant accounting policies and other information
relating to these interim financial statements, reference is made to
pages 28 through 32 of the 1997 Annual Report to Shareholders of SCW
under the caption "Notes to Financial Statements."
3. Basic earnings per common share are calculated pursuant to SFAS No. 128 -
Earnings per Share and are based on the weighted average number of common
shares outstanding during each period and net income after deducting
preferred dividend requirements. Registrant has no dilutive securities
outstanding and, accordingly, diluted earnings per share is not shown.
4. In November, 1996, SCW filed an application with the California Public
Utilities Commission (CPUC) 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 current investment in
SWP is approximately $1.8 million and is included in utility plant. In
April 1998, SCW filed an amended application with the CPUC requesting
recovery of costs associated with SWP from future customers. Registrant
is currently unable to predict if the CPUC will authorize recovery
through rates of all or any costs associated with its participation in
SWP. See the section entitled "Rates and Regulation" for more
information.
5. SCW implemented increased water rates in three of its rate-making
districts on January 1, 1998. SCW filed applications with the CPUC to
increase water rates applicable in six rate-making districts in March
1998 in addition to seeking recovery of costs associated with its general
office functions from all customer service areas. See the section
entitled "Rates and Regulation" for more information.
6. As permitted by the CPUC, SCW maintains water and electric supply cost
balancing accounts to account for under-collections and over-collections
of revenues designed to recover such costs. Recoverability or refund of
such over/under collections are recorded in income when received from
customers and charged to balancing accounts when such costs are incurred.
The balancing accounts are reversed when such costs are recovered through
rate adjustments.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
American States Water Company ("AWR") was formed in 1998 and
incorporated in the State of California as the result of approval by
shareholders of Southern California Water Company ("SCW") to form a holding
company. AWR is a holding company which operates through its subsidiaries and
has no material assets other than the stock of SCW. Effective at 12:01 a.m. on
July 1, 1998, AWR became the parent company of SCW. AWR's principal subsidiary,
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.
SCW is organized into three regions 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 6 customer service areas located
in Los Angeles and Orange counties; and Region III incorporates 8 water customer
service areas and the Bear Valley Electric customer service area. As of June 30,
1998, about 73% of SCW's water customers were located in the greater
metropolitan areas of Los Angeles and Orange Counties. 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 ENOVA Energy Management, Inc.
Registrant served 242,523 water customers and 20,737 electric
customers at September 30, 1998, or a total of 263,260 customers compared with
261,929 total customers at September 30, 1997. Registrant had 460 employees as
of September 30, 1998 compared to 467 employees at September 30, 1997.
RESULTS OF OPERATION
Basic earnings per common share for the three months ended
September 30, 1998 increased by 6.0% to $0.71 per share as compared to $0.67 per
share for the comparable period last year. For the nine months ended September
30, 1998, basic earnings per share were $1.22 as compared to $1.16 for the nine
months ended September 30, 1997, an increase of 5.2%. Basic earnings for the
twelve months ended September 30, 1998 increased by 16.6% to $1.62 per share as
compared to $1.39 per share for the twelve months ended September 30, 1997.
For the three months ended September 30, 1998, water operating
revenues increased by 3.1% as compared to the three months ended September 30,
1997 despite a slight 0.8% decrease in sales volumes. In contrast, water
operating revenues decreased by 5.4% and 4.2% for the nine and twelve months
ended September 30, 1998 as compared to the same periods last year due
principally to decreases of 12.9% and 9.7%, respectively, in water sales volumes
resulting from the extremely wet weather experienced during the first two
quarters of 1998. In each of the three periods, the effects of the decreased
sales volumes were partially offset by rate increases effective January 1998.
See the section entitled "Rates and Regulation" for more information.
For the three months ended September 30, 1998, kilowatt-hour
sales of electricity decreased slightly by 0.7% as compared to the same period
ended September 30, 1997 and, as a result, electric operating revenues for the
quarter ended September 30, 1998 decreased slightly by 0.5%. For
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the nine months and twelve months ended September 30, 1998, kilowatt-hour sales
increased by 2.2% and 3.2%, respectively, as compared to the same periods ended
September 30, 1998. As a result of the increased kilowatt-hour sales volumes,
electric operating revenues for the nine and twelve month periods ending
September 30, 1998 increased by 6.0% and 9.6%, respectively, over the comparable
periods ending September 30, 1997. The increased revenues also reflect changes
in rates effective January 1998. See the section entitled "Rates and Regulation"
for more information.
Purchased water costs decreased by 16.5%, 20.6% and 20.1% as
compared to 1997, respectively, for the three, nine and twelve months ended
September 30, 1998 reflecting decreased amounts of water purchased by
Registrant. See the section entitled "Water Supply" for more information.
Costs of power purchased for pumping decreased by 6.8%, 10.1%
and 8.2%, respectively, for the three, nine and twelve months ended September
30, 1998 as compared to the same periods ended September 30, 1998. Registrant
expenses costs for pumping on its financial statements when statements for such
costs are presented. This methodology can reflect certain timing differences
between the period when water is pumped and the time when electric or gas
utility bills are rendered. Timing differences such as this, however, are
reflected in the balancing account entries.
As compared to the three months ended September 30, 1997, the
costs of power purchased for resale for the period ended September 30, 1998
decreased by 2.7% due to decreased kilowatt-hour sales. For the nine months
ended September 30, 1998, the cost of power purchased for resale increased by
3.1% due to increased kilowatt-hour sales. For the twelve months ended September
30, 1998, purchased power for resale expense decreased by 4.0% reflecting
savings from Registrant's energy supplier.
Groundwater production assessments are 7.4%, 3.0% and 3.1%
higher for the three, nine and twelve months ended September 30, 1998 as
compared to the same periods ended September 30, 1997 due to the increased
amounts of pumped ground water in Registrant's resource mix and an additional
assessment associated with increased pumping in Registrant's San Dimas customer
service area, which is recoverable through the balancing account.
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. The
negative entries for the nine and twelve months ended September 30, 1998 result
from expiration in January 1998 of a surcharge designed to recover previously
under-collected purchased water supply costs, supply costs for power purchased
for pumping and groundwater production assessments. Registrant anticipates that
previously under-collected supply costs will be recovered as part of new rates
effective January 1999. See the section entitled "Rates and Regulation" for more
information. The balancing account mechanism insulates earnings from changes in
costs of purchased water, power purchased for pumping or resale and groundwater
production assessments, all of which are outside the immediate control of
Registrant. However, the balancing account mechanism is not designed to insulate
earnings against changes in supply mix, as occurred during the first and second
quarters of 1997. See the section entitled "Water Supply" for more information.
Other operating expenses increased by 32.6%, 12.0% and 9.2%,
respectively, for the three, nine and twelve months ended September 30, 1998 as
compared to the same periods ended September 30, 1998 due to persons charging
more of their time to this category as well as to reversals
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associated with recovery of water quality costs through the CPUC's memorandum
account mechanism which were included in last years reported results. There were
no such reversals of similar magnitude for the periods ended September 30, 1998.
Administrative and general expenses decreased by 5.6%, 2.1%
and 1.7% for the three, nine and twelve months ended September 30, 1998,
respectively, as compared to the same periods ended September 30, 1997 due to
stability in costs associated with health insurance, post-retirement medical
benefits, pension and 401-k plan costs, in addition to a reduction of employees
charging all or some of their time to this category.
Depreciation expense increased by 32.9%, 16.7% and 14.7%,
respectively, for the three, nine and twelve months ended September 30, 1998
principally reflecting the effects of recording approximately $39 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 affect the three, nine and twelve months ended September 30, 1998. There
were no similar amortization costs in 1997.
Taxes on income increased by approximately 21.2%, 17.6% and
27.2%, respectively, for the three, nine and twelve months ended September 30,
1998 as compared to the same periods ended September 30, 1997 as a result of
higher pre-tax income.
For the three months ended September 30, 1998, other taxes
increased by 0.9%, attributable to an increase in franchise fee payments
resulting from the 2.8% increase in water and electric revenues. For the nine
and twelve months ended September 30, 1998, other taxes decreased by 2.3% and
3.0%, respectively, as compared to the same periods ending September 30, 1997
primarily due to decreased franchise fee payments resulting from lower revenues.
Maintenance expense decreased by 0.3% and 11.4% for the nine
and twelve months ended September 30, 1998 as compared to the nine and twelve
months ended September 30, 1997 reflecting the effects of the wet weather
conditions experienced earlier in the year. For the three months ended September
30, 1998, maintenance expense increased by 7.2% as weather conditions allowed
for planned maintenance.
As compared to the three, nine and twelve months ended
September 30, 1997, other income decreased in each of the comparable periods
ended September 30, 1998 due principally to continuing costs associated with
Registrant's non-regulated joint venture. See the section entitled
"Water-Related Opportunities" for more information.
Interest expense for the three, nine and twelve months ended
September 30, 1998 increased by 12.3%, 10.9% and 7.4% over the same period last
year primarily due to increased short-term bank borrowing during 1998 and the
issuance, in March 1998, of $15 million in long-term debt.
LIQUIDITY AND CAPITAL RESOURCES
AWR funds its operating expenses and dividends on its
outstanding common and preferred shares principally through dividends from SCW.
During the fourth quarter of 1998, AWR anticipates filing a Registration
Statement with the Securities and Exchange Commission for issuance from time to
time of securities, the proceeds of which will be utilized initially to repay
bank borrowing and for investment purposes in its subsidiaries.
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SCW's construction program is designed to ensure its customers
high quality service. SCW maintains an ongoing distribution main replacement
program throughout its customer service areas, based on the priority of leaks
detected, fire protection enhancement and a reflection of the underlying
replacement schedule. In addition, SCW upgrades its electric and water supply
facilities in accordance with industry standards, local requirements and CPUC
requirements. SCW's Board of Directors has approved anticipated net capital
expenditures of approximately $27.1 million in 1998 and $42.9 million for 1999.
SCW funds the majority of its operating expenses, interest
payments on its debt, dividends on its outstanding common shares and makes its
mandatory sinking fund payments through internal sources. However, because of
the seasonal nature of its water and electric businesses, SCW utilizes its
short-term borrowing capacity on occasion to finance current operating expenses.
SCW continues to rely on external sources, including
short-term bank borrowing, the receipt of contributions-in-aid-of-construction
and advances for construction and install-and-convey advances, to fund the
majority of its construction expenditures. The aggregate short-term borrowing
capacity available to SCW under its three bank lines of credit was $37 million
as of September 30, 1998. As of September 30, 1998, SCW had a total of $19
million in borrowing outstanding under those bank lines of credit. SCW routinely
employs short-term bank borrowing as an interim financing source prior to
executing either a long-term debt or equity issue. SCW issued $15 million in
long-term debt in March 1998 with the net proceeds used to repay a portion of
then outstanding short-term bank borrowings.
SCW anticipates that it will issue additional long-term debt
in 1998. During the fourth quarter of 1998, SCW anticipates filing a
Registration Statement with the Securities and Exchange Commission for issuance
of up to $60 million in debt securities with the proceeds initially used to
repay bank borrowing and, after that, to fund construction expenditures and
refund higher cost debt instruments.
Registrant has no derivative financial instruments, financial
instruments with significant off-balance sheet risks or financial instruments
with concentrations of credit risk.
RATES AND REGULATION
SCW is subject to regulation by the CPUC as to its water and
electric business and properties. The CPUC has broad powers to regulate public
utilities with respect to service and facilities, rates, classifications of
accounts, valuation of properties and the purchase, disposition and mortgaging
of properties necessary or useful in rendering public utility service. The CPUC
also has authority over the issuance of securities, the granting of certificates
of convenience and necessity as to the extension of services and facilities and
various other matters, including transactions with affiliates. AWR is not
regulated by the CPUC.
The 22 customer service areas of SCW are grouped into 16 water
districts and one electric district for rate-making purposes. SCW's water rates
vary among the 16 rate-making districts due to differences in operating
conditions and costs. SCW continuously monitors operations in each of these
districts so that it may file applications for rate changes, when warranted, on
a district-by-district basis, in accordance with the CPUC's procedure. Under the
CPUC's practices, rates may be increased by three methods: general rate
increases, offsets for certain expense increases and advice letter filings
related to certain plant additions.
Rates in three of SCW's customer service areas were increased
on January 1, 1998. In March 1998, SCW filed applications with the CPUC to
increase water rates applicable to six other rate-
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making districts, as well as recovery of costs associated with SCW's general
office functions from all customer service areas. Representatives of SCW and
CPUC Staff have settled all issues in these applications with the exception of
return on equity. On October 29, 1998, the Administrative Law Judge issued a
proposed decision which approved the settlement stipulation in its entirety and
recommended a first test year return on rate base of 9.03%. The recommended
return on rate base includes a recommended 10% return on equity. Registrant is
currently unable to predict the outcome of the final CPUC decision on the
settlement stipulation, the return on equity or if, ultimately, the CPUC will
authorize all or any of the proposed increases. It is not anticipated that new
rates, if approved, would be effective before January, 1999.
SCW has filed an application to combine tariff schedules among
the customer service areas that currently makeup SCW's Region III, into rates
applicable on a regional basis. SCW anticipates that the regional tariffs will
facilitate continued replacement of infrastructure while maintaining rates and
revenues at acceptable levels. Registrant is currently unable to predict whether
or not the CPUC will implement the regional tariffs.
Pursuant to a settlement agreement, new rates were effective
in May 1996 in SCW's Bear Valley Electric customer service area that were
completely offset by an increase in the amortization of an over-collection in
the supply cost balancing account. The net result was no increase in revenues.
An additional step increase was effective in January, 1997. In January 1998,
amortization of the over-collection in the supply cost balancing account was
complete and, as a result, rates increased accordingly.
In January 1998, the CPUC authorized a memorandum account for
legal expenses associated with SCW's involvement in water quality related
lawsuits in its San Gabriel Valley customer service area. In March 1998, the
CPUC authorized similar memorandum accounts for legal expenses in SCW's
Arden-Cordova customer service area. Moreover, and partially in response to the
lawsuits, the CPUC has initiated an Order Instituting Investigation ("OII") into
whether its 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 water utilities, including SCW, under its
jurisdiction. See the section entitled "Legal Proceedings" for more information.
The CPUC also has two active Orders Instituting Rulemaking
("OIR") - one to provide guidelines for acquisition and mergers of water
companies; the other to provide guidelines for the privatization and excess
capacity as it relates to investor-owned water companies. Settlement discussions
have begun in both OIR's although Registrant is unable to predict the outcome of
such discussions or whether the CPUC will issue guidelines under either or both
of the OIR's.
In November 1996, SCW filed an application with the CPUC
seeking recovery through rates of costs associated with its participation in the
coastal aqueduct extension of the State Water Project ("SWP"). In April 1998,
SCW filed an amended application with the CPUC requesting recovery of its costs
associated with participation in SWP from future customers. Registrant is
currently unable to predict if the CPUC will authorize recovery of all or any of
the costs associated with its participation in SWP. See "Notes to Financial
Statements" for more information.
WATER SUPPLY
For the three months ended September 30, 1998, SCW produced a
total of 26,730,000 ccf of water. Of this amount, approximately 60% came from
pumped sources and 39% was purchased from others, principally the MWD. The
remaining amount was supplied by the Bureau of Reclamation (the "Bureau") under
a no-cost contract. During the three months ended September 30, 1997, SCW
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produced 27,243,000 ccf of water, 51% of which came from pumped sources, 46% was
purchased and the remainder was supplied by the Bureau.
For the nine months ended September 30, 1998, SCW produced
59,365,000 ccf of water, 61% of which came from pumped sources, 39% was
purchased and the remaining amount was supplied by the Bureau. During the nine
months ended September 30, 1997, SCW produced 67,700,000 ccf of water. Of this
amount, 53% came from pumped sources, 45% was purchased and the remainder was
provided by the Bureau.
During the twelve months ended September 30, 1998, SCW
produced 78,068,000 ccf of water. Of this amount, approximately 60% of total
supply came from pumped sources, 39% was purchased and the remaining was
supplied by the Bureau. During the twelve months ended September 30, 1997, SCW
produced 86,893,000 ccf of water. Of this amount, 53% of total supply came from
pumped sources, 45% was purchased and the remainder came from 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. SCW has 52 connections to the water distribution facilities of
MWD and other municipal water agencies. MWD imports water from two 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 continue to remain adequate through 1998. 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 the State of Arizona. In
response, MWD has taken a number of steps to construct additional storage
capacity and increase available water supplies, including effecting transfers of
water rights from other sources.
Precipitation during the 1997-1998 winter period as a result
of the "El Nino" weather pattern provided adequate supply to fill most of the
state's reservoirs to near capacity and the outlook for water supply in 1998 is
favorable. In those districts of SCW which pump groundwater, overall groundwater
conditions remain at adequate levels, allowing SCW to use groundwater in its
resource mix and decrease its dependence on increasingly expensive purchased
water. SCW believes that its water supplies from all sources are adequate to
meet current year projected demands.
Hydrologists are cautious in making any predictions about the
long-term effects of the "El Nino" weather pattern, since weather patterns in
the state of California are generally unpredictable and the El Nino weather
patterns do not always repeat themselves. However, to the extent the El Nino
weather pattern has brought above normal precipitation during 1998, SCW's sales
volumes, revenues and earnings have been negatively impacted.
BUSINESS SEGMENTS
AWR currently has one principal business unit: water service
and electric distribution utility operations conducted through its SCW
subsidiary. AWR anticipates creating a new subsidiary company, American States
Utility Services, Inc., through which its non-regulated activities will be
conducted. All activities of Registrant currently are geographically located
within the State of California. 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.
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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 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 California
Department of Health Services, 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 for more than
90 contaminants, currently covering all contaminants listed in the SDWA, except
for those from which SCW has received an exemption. Water from wells found to
contain levels of contaminants above the established MCLs is treated 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 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.
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 proposed an Interim ESWTR applicable only to systems
serving greater than 10,000 persons. The final Interim ESWTR is expected to be
promulgated by November 1998.
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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 will also be subject to the new regulations
concerning disinfection/disinfection by-products ("DBPs"), Stage I of which
regulations is expected to become effective in November, 1998 with compliance
required by 2001. Stage I will require 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. It is anticipated that both systems will
be in full compliance by the time this rule is promulgated. SCW is presently
implementing modifications to the treatment process in its Bay Point system in
order to comply with the rule.
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 December, 1998, 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 final rule
is expected by December 1999. 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 will be subject to new regulations regarding radon
and arsenic. EPA must propose an arsenic rule by January 1, 2000 and adopt a
rule one year later. The EPA originally had 180 days after enactment of the 1996
SDWA amendments to develop a plan to study ways to reduce arsenic health risk
uncertainties and was authorized to enter into cooperative agreements to carry
out the study. The study is expected to be completed by the end of October 1998.
Depending on the MCL eventually established for arsenic, compliance could cause
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 withdrawn its proposed radon rule and has arranged
for the National Academy of Sciences to conduct a risk assessment and a study of
risk-reduction benefits associated with various mitigation measures. The
National Academy of Sciences has completed its study and has agreed with much of
EPA's original findings but has slightly reduced the ingestion risk initially
assumed by EPA. The EPA is expected to establish an MCL based on the findings of
the National Academy of Sciences' risk assessment report and to set an
alternative MCL based on potential mitigation measures for overall radon
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reduction. Although Registrant is unable to predict what the standard for radon
might eventually be, Registrant itself 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 has committed 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. GenCorp Aerojet 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 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 provided periodic monitoring of these wells
to determine that levels of perchlorate are below the action level currently in
effect.
In February 1998, SCW was informed that a substance called
nitrosodimethylemine ("NDMA") had been detected in amounts in excess of the EPA
reference dosage for health risks in three of its wells in its Arden-Cordova
system. Each of the wells has been removed from service. 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 Corporation.
GenCorp Aerojet has reimbursed SCW for all necessary and reasonable activities
in the construction of 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 as well as reimburse SCW for costs
associated with the drilling and equipping of two new wells.
SCW and GenCorp Aerojet are in negotiations on other matters
related to procedures to address cleanup of the contaminated wells, costs
associated with the cleanup, costs associated with increased costs of purchased
water as compared to pumped sources and costs associated with developing new
sources of groundwater supply. Registrant is unable to predict when the
negotiations will be completed or the likely outcome of such negotiations.
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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.
Several studies are under way to determine the possible
sources and causes of the MTBE contamination. The federal EPA is pursuing an
enforcement effort to reach a settlement with the potentially responsible
parties on matters relating to the cleanup of the contamination. Registrant is
unable to predict the outcome of the EPA's enforcement efforts. Two of the
potentially responsible parties and SCW have executed an agreement, effective
through 1998, which provides for reimbursement of SCW's legal and consulting
costs related to this matter as well as on-going reimbursement from such parties
for increased costs incurred by SCW in purchasing replacement water. SCW and
such parties are negotiating an extension of this agreement to remain effective
until the underlying groundwater basin contamination is remediated.
Bear Valley Electric
There have been no environmental matters that have materially
affected or are currently materially affecting SCW's Bear Valley Electric
customer service area. 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 EIR may impact service in SCW's Bear Valley
electric customer service area. SCW has, however, taken other measures to meet
load growth in order mitigate delays in approval of the EIR.
WATER-RELATED OPPORTUNITIES
AWR continues to pursue strategic opportunities and incur
expenses related thereto relative to the operation of municipally-owned water
and wastewater systems on a stand-alone basis, through its subsidiaries and as
part of a joint venture. AWR currently has a contract to read water meters for
the City of Tustin, California and a contract to operate and maintain the water
system of the City of Bell Gardens, California. The contract with the City of
Bell Gardens consolidates all residents of that city under the operation of a
single service provider. SCW is the service provider under both contracts.
YEAR 2000 COMPLIANCE
Registrant has been actively assessing its Year 2000 ("Y2K")
readiness since early 1997 and has inventoried its significant computer hardware
and software programs. Registrant is dependent upon its management information
and customer service systems and upgrades to these systems have been a priority.
Registrant has, since 1995, been in the process of replacing and/or upgrading as
necessary its core business information and operating systems with newer
technologies, all of which will be Y2K ready. Registrant is currently completing
upgrades to certain of its business information software and hardware which are
2000 compliant and initial tests performed on such upgrades has been successful.
Registrant anticipates that all major upgrades to these systems will be complete
and operational prior to year-end
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1998. Costs associated with the implementation and upgrade of major management
information and customer service software systems, as well as upgrades to its
mainframe hardware systems, has been approved by the CPUC and are recovered
through rates.
In addition to work being done on Registrant's internal
systems, Registrant has sought compliance certification from external vendors
and service providers. Testing on Registrant's interface with financial and
other institutions with which it does business is being conducted to ensure Y2K
readiness. In order to more fully address Y2K readiness of its field equipment,
major vendors and service providers, Registrant has engaged the services of a
nationally-recognized business consulting firm. With this assistance, Registrant
will complete its inventory of computer system and other devices with embedded
technology as well as other considerations potentially not revealed in
Registrant's analyses. Based on this inventory, remediation of these critical
systems will be prioritized to ensure Y2K readiness. Some, less critical systems
may not be fully Y2K ready, but are not anticipated to materially affect
Registrant's operations.
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 has 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 is preparing its contingency plan, which is anticipated to be
completed by the first quarter of 1999.
To date, there have been no significant costs associated with
Y2K readiness that have not been approved by the CPUC for recovery through
rates. Registrant believes that future costs associated with Y2K, which are
prudently incurred, will be allowed for recovery through rates.
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 changes in customer
demand; future climatic conditions; legislative, regulatory and other
circumstances affecting anticipated revenues and costs; and abilities of other
companies to remain or become year 2000 compliant.
PART II
ITEM 1. LEGAL PROCEEDINGS
Water Quality-Related Litigation
On April 24, 1997, a complaint in multiple counts seeking
recovery for negligence, wrongful death, strict liability, trespass, public
nuisance, private nuisance, negligence per se, strict
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liability for ultrahazardous activities and fraudulent concealment was filed in
Los Angeles Superior Court on behalf of approximately 145 plaintiffs (the "Adler
Matter"). After preliminary Demurrers and Motions to Strike, these same
plaintiffs filed a First Amended Complaint on or about October 16, 1997 seeking
recovery on essentially the same theories. Plaintiffs allege SCW has provided
and continues to provide them with allegedly contaminated water from wells
located in an area of the San Gabriel Valley that has been designated a federal
environmental superfund site, and that the maintenance of this contaminated well
water has resulted in contamination of the soil, subsurface soil, and
surrounding air, with trichloroethylene, perchloroethene, carbon tetrachloride
and other solvents. Plaintiffs further allege that SCW's actions have caused,
and continue to cause, injuries to the plaintiffs. Plaintiffs seek damages,
including general, special, and punitive damages, according to proof at trial,
as well as attorney's fees on certain causes of action, costs of suit, and other
unspecified relief.
On June 23, 1998, the judge assigned to the Adler Matter,
acting on the Court's own motion, issued a stay until June 15, 1999 of all
proceedings in the Adler matter pending the outcome of the CPUC's OII
proceeding. Plaintiffs in the Adler matter have filed a Writ of Mandate and
hearings before the Appellate Court have been scheduled for January 1999.
SCW was served on November 3, 1997 as Doe I in the matter of
Santamaria v. Suburban Water Systems which was filed in Los Angeles Superior
court (the "Santamaria Matter"). On August 27, 1998, the judge assigned to the
Santamaria Matter sustained SCW's demurrer without leave to amend and dismissed
the action against SCW.
In January 1998 SCW was named a defendant in the matter of
Nathaniel Allen, Jr., et al. V. Aerojet-General Corporation, et al 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"). 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. On February 9, 1998, defendant McDonnell Douglas
Corporation removed this case to United States District Court for the Eastern
District of California. A Motion for Partial Dismissal or in the Alternative to
Strike and for a More Definitive Statement was also filed by McDonnell Douglas
Corporation. SCW filed its 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 until June 15, 1999 of all proceedings in
the Allen Matter pending the outcome of the CPUC's OII proceeding. As a result,
Registrant anticipates that legal activity related to this matter will not be
significant during the period in which the stay is in effect.
In April 1998, SCW was named a defendant in the matter of
Daphne Adams, et al. v. Aerojet General, et al. 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, 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 until June 15, 1999 of all proceedings in the Adams
Matter pending the outcome of the CPUC's OII proceeding. As a result,
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Registrant anticipates that activity related to this matter will not be
significant during the period in which the stay is in effect.
On July 30, 1998, a complaint in multiple counts, styled
Georgianna Dominguez, et al. V. Southern California Water Company, et al., was
filed in Los Angeles Superior Court seeking recovery for negligence, wrongful
death, strict liability, permanent trespass, continuing trespass, public
permanent nuisance, public continuing nuisance, private permanent nuisance,
private continuing nuisance, negligence per se, absolute liability for
ultrahazardous activity and fraudulent concealment on behalf of six plaintiffs
(the "Dominguez Matter"). Plaintiffs seek damages, including general and special
according to proof, punitive and exemplary damages, as well as attorney's fees,
costs of suit and other unspecified relief. SCW was served with the complaint on
September 21, 1998.
In light of the breadth of plaintiff's claims, the lack of
factual information regarding plaintiff's claims and injuries, if any, and the
fact that no discovery has yet been completed, Registrant is unable at this time
to determine what, if any, potential liability it may have with respect to
claims in these matters. Registrant intends to vigorously defend itself against
these claims.
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.
Order Instituting Investigation
In response to these lawsuits and similar actions, the CPUC in
March 1998 issued an Order Instituting Investigation ("OII") directed to all
Class A and B water utilities in the state of 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 safe water meeting the established water
quality standards at prices which are both affordable and that allow the utility
to earn a reasonable return on its investment. The OII initially provides for
compliance reports to be submitted by all Class A and B water utilities,
including SCW, on a series of questions dealing with the safety 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 stricter or additional safe drinking water standards are required.
The OII initially required all Class A and B water utilities to submit their
reports by July 15, 1998 although the deadline was extended to September 11,
1998. SCW has made its filing in this proceeding. It is anticipated that the
Water Division of the CPUC will issue its report, based on these filings by the
utilities, by January 4, 1999. Although the OII leaves open the possibility of
evidentiary hearings and further action by the CPUC, Registrant is currently
unable to predict the outcome of this proceeding.
ITEM 2. CHANGES IN SECURITIES
As of September 30, 1998, earned surplus amounted to
$56,173,000, none of which is restricted as to payment of cash dividends on
SCW's Common Shares by any terms of SCW's debt instruments.
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As of September 30, 1998, Authorized But Unissued Common
Shares includes 89,226 and 71,408 Common Shares reserved for issuance under
AWR's Dividend Reinvestment and Common Share Purchase Program ("DRP") and
Investment Incentive Program ("401-k" Plan), respectively. Common Shares
reserved for the 401-k Plan are in relation to the matching contributions by SCW
and for investment purposes by participants.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the third quarter of the fiscal
year covered by this report to a vote of security holders through the
solicitation of proxies or otherwise.
ITEM 5. OTHER INFORMATION
On October 26, 1998, the Board of Directors of AWR declared a
regular quarterly dividend of $0.315 per common share. The dividend will be paid
December 1, 1998 to shareholders of record of AWR as of the close of business on
November 9, 1998. In other actions, the Board of Directors declared regular
quarterly dividends of $0.25 per share, $0.265625 per share and $0.3125 per
share on its 4%, 4-1/4% and 5% Cumulative Preferred Shares, respectively.
On October 27, 1998, the Board of Directors of AWR approved
formation of American States Utility Services, Incorporated ("ASUS"). ASUS will
be a wholly-owned subsidiary of AWR and will conduct AWR's non-regulated
activities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits on Securities and Exchange
Commission Form 8-K were filed during the period covered by this report and are
incorporated herein by reference:
Rights Agreement, dated as of August 3, 1998, by and between
American States Water Company and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent (incorporated by reference
to the Form 8-A filed with the Securities and Exchange
Commission on August 20, 1998.)
(b) The following Reports on Securities and Exchange
Commission Form 8-K were filed during the period covered by this report:
Distribution of Rights -- relating to approval by the Board
of Directors of a distribution of one right for each
outstanding common share of Registrant. The distribution is
to be made of as September 22, 1998. Each Right entitles the
registered holder to purchase from Registrant, initially, one
one-thousandth of a share of Junior Preferred Stock at a
price of $120, subject to adjustment. The complete
description and terms of the Rights are set forth in a Rights
Agreement between Registrant and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent.
Summary of certain risks of Registrant's businesses that may
affect future financial results, including litigation,
environmental regulation, rates and regulation, adequacy of
water supplies, water quality, weather, unregulated
activities, potential year 2000 risks,
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capital expenditures, economic conditions and condemnation.
(Incorporated by reference to the filing made with the
Securities and Exchange Commission on November 2, 1998.)
Exhibit 27 Financial Data Schedule (Submitted in electronic format only
to the Securities and Exchange Commission)
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned duly authorized officer and chief financial officer.
AMERICAN STATES WATER COMPANY
and its subsidiary
SOUTHERN CALIFORNIA WATER COMPANY
By: /s/ McClellan Harris III
-----------------------------
McClellan Harris III
Vice President - Finance,
Chief Financial Officer,
Treasurer and Secretary
By: /s/ Linda J. Matlick
-----------------------------
Linda J. Matlick
Controller
Dated: November 3, 1998
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