1
EXHIBIT 13
Strength
Growth
Strategy
AMERICAN STATES WATER COMPANY
1998 Annual Report
COVER
AWR offers long-term, income-oriented investors an attractive total return
potential.
Table of Contents
Corporate Profile 1
Selected Financial Data 3
Letter to Shareholders 4
Strategy and Operating Review 6
William V. Caveney: A Tribute 12
Management's Discussion and Analysis 13
Financial Statements 19
Report of Management 32
Report of Independent Public Accountants 32
Shareholder Information 32
Statistical Review 1998-1989 34
Customer Service Areas 36
Corporate Information IBC
INSIDE FRONT COVER
CORPORATE PROFILE
American States Water Company (NYSE:AWR) is a holding company for Southern
California Water Company (SCW) and American States Utility Services, Inc.
(ASUS).
SCW is a public utility company engaged principally in the delivery of water
service. SCW operates 41 separate water systems within 75 communities in 10
counties in the State of California and provides water service to over 1 million
people, or 1 out of every 30 Californians. In addition, SCW provides electric
service to approximately 21,000 customers.
SCW focuses on customers by providing water and electric services at affordable
rates approved by the California Public Utilities Commission (CPUC). Providing
over one-half of the water it sells from its own wells, SCW complies with state
environmental regulations and the federal Safe Drinking Water Act.
SCW has no mortgage debt and its unsecured debt rating of "A+" allows ample
access to finance its capital expansion programs.
ASUS engages in non-regulated business activities through long-term leases or
operation and maintenance contracts with municipally owned water and wastewater
systems. ASUS meets the needs and challenges facing municipalities throughout
the country, by offering cost effective alternatives to higher water rates and
diminishing water supplies.
AWR offers long-term, income-oriented investors an attractive total return
potential. AWR has paid dividends on its common shares every year since 1931 and
has increased dividends paid out annually since 1953. AWR has a corporate rating
of "A" and has no outstanding mortgage debt.
AWR's philosophy is to continue to implement long-term strategies through its
subsidiaries, to increase shareholder value by earning the authorized rate of
return for its utility operations, and to increase overall earnings through
selective non-regulated activities.
1929:
The Company's predecessor, American States Public Service Company of California
incorporated; serving 42,000 customers
1
2
HIGHLIGHTS
[3 GRAPHS P. 2]
2
3
1930:
First Shareholder
Meeting of American States
Public Service Company
of California
1936:
Official name change
to Southern California
Water Company
and the corporate merging of
Bear Valley Utility
Company into Southern
California Water Company
SELECTED FINANCIAL DATA
(dollars in thousand, expect per share 1998 1997 1996 1995 1994
amounts)
---- ---- ---- ---- ----
Income Statement Information
Total Operating Revenues $148,060 $153,755 $151,529 $129,813 $122,675
Total Operating Expenses 122,999 130,297 128,100 108,425 103,745
Operating Income 25,061 23,458 23,429 21,388 18,930
Other Income 769 758 531 336 236
Interest Charges 11,207 10,157 10,500 9,559 7,828
Net Income 14,623 14,059 13,460 12,165 11,338
Preferred Dividends 90 92 94 96 98
Earnings Available for Common 14,533 13,967 13,366 12,069 11,240
Shareholders
Basic Earnings per Common Share $ 1.62 $ 1.56 $ 1.69 $ 1.54 $ 1.43
Dividends Declared per Common Share $ 1.26 $ 1.25 $ 1.23 $ 1.21 $ 1.20
Balance Sheet Information
Total Assets $484,671 $457,074 $430,922 $406,255 $383,627
Net Utility Plant 414,753 383,623 357,776 334,968 317,879
Common Shareholders' Equity 154,299 151,053 146,766 121,576 118,962
Long-Term Debt 120,809 115,286 107,190 107,455 92,891
Preferred Shares 1,600 1,600 1,600 1,600 1,600
Preferred Shares-Subject to Mandatory
Redemption 400 440 480 520 560
Total Capitalization $277,108 $268,379 $256,036 $231,151 $214,013
Book Value per Common Share $ 17.23 $ 16.86 $ 16.52 $ 15.50 $ 15.16
Average Shares Outstanding 8,957 7,891 7,845 7,842
8,958
Other Information
Ratio of Earnings to Fixed Charges 3.21% 3.35% 3.26% 3.19% 3.58%
Ratio of Earnings to Total Fixed Charges 3.17% 3.30% 3.21% 3.14% 3.50%
Return on Average Common Equity 9.6% 9.5% 10.7% 10.3% 9.7%
3
4
LETTER TO SHAREHOLDERS
1998 was an eventful year in the history of your Company. On July 1, 1998,
American States Water Company was formed as the result of approvals received
from shareholders and the California Public Utilities Commission (CPUC). On that
date, shares of American States Water Company initiated trading on the New York
Stock Exchange under the symbol "AWR".
As part of this restructuring, Southern California Water Company became a
wholly-owned subsidiary and a new subsidiary, American States Utility Services,
Inc. was formed to engage in selective non-regulated operations. We believe the
Company is organizationally, operationally and financially poised to meet future
challenges in the water utility industry.
FINANCIAL RESULTS
We are pleased to report that for the year ended December 31, 1998, total
earnings available for common shareholders were $14.5 million, or $1.62 per
common share, as compared to total earnings recorded last year of $14.0 million,
or $1.56 per common share.
The abnormally wet winter weather experienced during the first half of 1998
significantly impacted water sales volumes at the Company's SCW subsidiary and,
accordingly, revenues from water and electric operations were $148.1 million,
down by 3.7% from the $153.8 million recorded in 1997. However, offsetting this
decline in revenues, total operating expenses for 1998 decreased by 5.6% to
$123.0 million, primarily reflecting reduced supply costs due to the increase in
total water supplied from Company-owned pumped sources.
The Company's stock market performance continued to reward management's efforts.
Based on performance measures set forth by the Securities and Exchange
Commission, a $10,000 investment in the common shares of American States Water
Company on December 31, 1993, assuming all dividends were reinvested in
additional common shares, would have increased in value to approximately
$16,800, a 68% increase in five years.(1)
REGULATORY MATTERS
The Company's subsidiary, SCW received an order from the CPUC increasing rates
covering approximately 65% of its water customers. The new rates were effective
January 1, 1999 and are based on a 10% return on common equity. In February
1999, SCW filed for rate increases in four additional water customer service
areas. When approved, new rates will likely be effective on January 1, 2000.
(1) Past performance is no guarantee of future results. Share values and
returns fluctuate and gain or loss may occur when shares are sold.
4
5
1936:
First Public Offering of Southern California Water Company
1939-1947:
The War Years, Southern California Water Company prepares for any eventuality
by partnering with various utilities for mutual aid in the event of enemy attack
1960:
State Water Project authorized by voters, project bringing a second source of
imported water supply to Southern California
WATER QUALITY AND WATER SUPPLY ISSUES
The Company's SCW subsidiary made its compliance filing with the CPUC, pursuant
to its Order Instituting Investigation into water quality. A final order in that
proceeding is anticipated during 1999. The CPUC maintains that it has primary
jurisdiction over water quality matters of the utilities it regulates and has
notified the courts of same in the lawsuits faced by the Company.
The California Department of Water Resources (DWR) recently released a report
detailing the explosive growth in population anticipated for California and the
state's current ability to meet water needs. DWR's plans for meeting these needs
include a combination of reduced water usage and the development of additional
water supplies. SCW currently meets the water needs of its customers through its
own wells and through purchased water. The increased availability of water
supplies coupled with enhanced conservation measures will play an important role
in the Company's future.
IN CLOSING
At the start of this letter, we discussed the formation of American States Water
Company and as you read this Annual Report you will note significant milestones
in the 70 year history of your Company. However, one thing has not changed over
the years - dedication to meeting our mission of providing safe and reliable
water and electric service to our customers and providing growth and return on
the investment made by our shareholders. American States Water Company is
positioned as a leader for the future, founded on the heritage of the past.
Sincerely,
/s/ Floyd E. Wicks
Floyd E. Wicks
President and Chief Executive Officer
/s/W.V. Caveney
William V. Caveney
Chairman of the Board
[PHOTO P. 5]
5
6
"with total assets in excess of $484,000,000, AWR operates the second largest
private water utility in the state of California."
[TABLE P. 6]
6
7
[GRAPH P. 7]
STRENGTH
Effective July 1, 1998, American States Water Company (AWR) became the parent
company of Southern California Water Company (SCW). The American States name is
an integral part of the strength and history of your Company. In 1929, American
States Water Services Company of California commenced operations with the
acquisition of 34 water systems, an electric utility and a telephone service
provider at an original cost of $5.7 million. In 1936 the name was changed to
Southern California Water Company. AWR today, with total assets in excess of
$484 million, operates the second largest private water utility in the state of
California, providing water service to over one million people, or 1 out of
every 30 Californians.
AWR's historical and continuing objective to improve shareholder value is
indicative of its strength. Since 1953, AWR has paid shareholders annual
increases in dividends. The Company continues to implement strategies and pursue
opportunities to grow earnings and dividends through rate base additions,
acquisitions and the provision of services through leases and/or contracts.
Because of this, AWR offers long-term, income oriented investors an attractive
total return potential.
With a credit rating of "A/A2" from Standard & Poor's and Moody's Investor
Services, respectively, AWR is prepared to move into the future by investing in
the needs of both the regulated and non-regulated water industry. SCW also
continues to maintain its healthy "A+/A2" ratings from Standard & Poor's and
Moody's Investor Services, respectively, which provides the financial strength
necessary to meet operating and capital expenses.
On August 3, 1998, the Board of Directors adopted a Shareholder Rights Plan. The
Plan was designed to address the issue of unilateral actions by hostile
acquirers, who would attempt to deprive the Board and shareholders of the
ability to determine the company's destiny and receive fair value.
AWR continues to aggressively pursue growth opportunities related to the
acquisition and/or operation of municipally-owned water and wastewater systems.
A new subsidiary, American States Utility Services, Inc., offers the financial
strength and technically trained personnel necessary to secure and provide
maintenance and operations under lease, purchase, or specific service contracts.
7
8
1994:
SCW organized into regions; Northridge earthquake (6.8 on the Richter Scale);
City of Simi Valley and the CPUC recognize SCW for restoring service to 90% of
its affected customers within 18 hours
GROWTH
1998 was an eventful year for AWR, with new contracts secured with the Cities of
Tustin, Bell Gardens, Goleta and Calipatria for various types of utility
services. On the regulated side, rates in three of SCW's districts were
increased in January 1998 with rates increased in six other districts in January
1999. Working towards stability of rates for customers, SCW filed an application
to combine tariff schedules among several of its districts into rates applicable
on a regional basis. Long-term rate stability is crucial to each district as
costs of operation and infrastructure replacement continue to increase. During
1998, the CPUC approved the Direct Access Implementation Plan of SCW's Bear
Valley Electric service area and also excluded any requirement to freeze rates
or reduce rates.
One of SCW's many strengths lies in its customer service. In addition to the
improved on-line access to the Customer Service Center, further strides were
made for Bear Valley electric customers when ATM, credit card and bank by phone
payment options were introduced in 1998.
One of the most challenging areas of providing water service continues to be
quality assurance. In 1998, SCW completed a comprehensive review of 25 years of
water quality records in its response to the CPUC-initiated Order Instituting
Investigation (OII) to determine if existing standards and policies regarding
drinking water quality adequately protect the public health and if those
standards and policies are being uniformly complied with by water utilities. The
OII notes the constitutional and statutory jurisdiction of the CPUC and the
Department of Health Services (DOHS) to establish and enforce adherence to water
quality standards for water delivered by utilities to their customers.
Continuing the Company's efforts in staff development, AWR's corporate
university achieved certification by the International Association for
Continuing Education and Training in 1998. The Employee Development University
is a unique training opportunity for employees and continues to deliver value to
its students and ultimately the Company.
8
9
[5 PHOTOS P. 9]
commitment
purity
dependable
community
confidence
9
10
[GRAPH P. 10]
1996:
Employee
Development University
established
1998:
Creation of
American States Water
Company and American States Utility
Services Company
1999:
First Annual
Meeting of Shareholders of
American States Water Company
STRATEGY
The water utility industry has historically attracted individual investors,
rather than institutional owners or sell-side analysts who follow companies and
make recommendations to investors on selected companies. This trend is changing
as the general turmoil within the regulated utility industry has left water
utilities uniquely possessing many of the characteristics which originally
attracted portfolio managers and analysts to the regulated industries: relative
safety of principal and income generation through dividends. Even within the
water utility industry, however, a number of events are changing the landscape.
Increased regulatory oversight, water quality and supply concerns, mergers and
acquisitions, and financial pressures are interacting to change the manner in
which water service is priced and provided.
AWR is well positioned to face these challenges and turn them into
opportunities. With good management, a proven earnings record, appropriate
valuation and growth potential, AWR ranks high on the key investment criteria
used by analysts and portfolio managers to evaluate a company. As one of the
largest investor-owned, publicly-traded companies in the U.S. water industry,
AWR is financially and technically positioned to meet the significant and
ongoing regulatory demands for high quality water service. Through the resources
and management of its subsidiaries, AWR can further capitalize on growth
opportunities in both the public/private market and the acquisition of other
water utility companies.
Management is committed to focus on AWR's four long-term growth strategies:
provide safe, reliable water and electric service to customers; earn the return
on equity authorized by the CPUC; increase earnings through selected
non-regulated, water related activities; acquire utility assets through purchase
or merger. Management believes that equal emphasis on all four strategies will
best serve the long-term interests of shareholders.
10
11
[GRAPH P. 11]
progress o partnering
opportunity
[GRAPH P. 11]
11
12
We all honor Bill for
his many years of service
and wish him a very
fulfilled future.
WILLIAM V. CAVENEY - A TRIBUTE
The 1999 Annual Meeting of Shareholders marks an end to a long and distinguished
career of a vital force in the Company's 69 year history. When William V.
Caveney, Chairman of the Board, retires on April 27, 1999, a 30 year chapter of
dedication to the shareholders and employees of the Company draws to a close.
His career will be remembered as one of conservative and loyal leadership by a
modest and friendly man.
Bill Caveney joined Southern California Water Company in 1968 as manager of the
Rate and Valuation Department. His prior 15 years of experience with the staff
of the California Public Utilities Commission regulating energy, communications
and water utilities assisted him well in leading the department.
Twelve years later his stewardship heightened when, in 1980, he was elected
President of Southern California Water Company. This occurred at a time when the
water industry was touting the benefits of the Peripheral Canal and the future
of importing water to Southern California seemed uncertain. Regardless of the
politics or uncertainties, this Company, under Bill's leadership, was poised for
a significant period of growth in new water and electric services. Two years
later Bill was elected to the position of Chief Executive Officer and, in 1990,
was also elected Chairman of the Board.
Bill's unwavering dedication to the success of your Company has been etched in
many ways. His guidance, counsel, evenhanded management and, humor will be
missed. We all honor Bill for his many years of contributions and wish him a
very fulfilled future.
[PHOTO P. 12]
12
13
MANAGEMENT"S DISCUSSION AND ANALYSIS
In April 1998, shareholders of Southern California Water Company (SCW) voted to
approve formation of a holding company. The formation process was completed on
July 1, 1998 at which time American States Water Company (AWR) became the parent
company. As a result, SCW became one of AWR's two operating subsidiaries. SCW
will continue as a public utility engaged principally in the purchase,
distribution and sale of water and also the distributor of electricity in
several mountain communities. SCW is regulated by the California Public
Utilities Commission (CPUC) as to its water and electric business including
properties, rates, services, facilities and other matters. The other subsidiary,
American States Utility Services, Inc. (ASUS) is a new company which will
perform non-regulated, water related services and operations. AWR and ASUS are
not regulated by the CPUC. Unless specifically noted, the following discussion
and analysis provides information on AWR's (the Company) consolidated operations
and assets.
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 the
Company "believes," "anticipates," "expects" or words of similar import.
Similarly, statements that describe the Company'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 ready.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Basic earnings per common share in 1998 increased by 3.8 % to $1.62 per share as
compared to $1.56 per share for the comparable period last year. Although wet
weather significantly impacted revenues in 1998, lower supply costs and modest
increases in other operating expenses partially offset the decline in revenues.
Water operating revenues decreased by 4.3% in 1998 to $134.9 million from the
$141.0 million reported in 1997. Water sales volumes in 1998 were 9.9% lower
than last year due to extremely wet weather during the first half of the year.
The decrease in sales was partially offset by rate increases effective during
1998.
Electric operating revenues of $13.2 million were 3.4% higher in 1998 as
compared to last year due to the impact of a general rate increase effective
January 1998 as well as a 2.0% increase in kilowatt-hour sales.
Purchased water costs decreased in 1998 to $30.8 million as compared to $38.3
million in 1997 due to a 20.8% decrease in volumes purchased and refunds
received from the Company's wholesale water supplier during 1998 of
approximately $1.4 million. Refunds of $20.0 million were received in 1997.
Costs of power purchased for pumping decreased by 7.2% to $7.0 million in 1998
chiefly as the result of the reduced energy costs from the Company's suppliers.
Costs of power purchased for resale in 1998 decreased by 3.4% to $5.0 million
from the $5.2 million recorded in 1997 due to reduced costs from the Company's
energy providers which partially offset the effects of increased kilowatt-hour
sales volumes recorded during the year.
Groundwater production assessments increased 10.5% to $7.6 million in 1998 from
$6.8 million in 1997 due to the increased amounts of pumped water in the
Company's resource mix as well as additional assessments associated with
increased pumping in the Company's Metropolitan and Orange County customer
service areas.
A positive entry for the provision for supply cost balancing accounts reflects
recovery of previously under-collected supply costs. Conversely, a negative
entry for the provision for supply cost balancing accounts reflects an
under-collection of previously incurred supply costs. In 1998, recovery of
previously under-collected supply costs was lower in 1998 than 1997 due to the
expiration in
13
14
January 1998 of a surcharge designed to recover those costs. It is anticipated
that the new rates, effective January 1999, will increase collection of these
under-collected costs. The balancing account mechanism insulates earnings from
changes in the unit cost of supply costs which are outside of the immediate
control of the Company. However, the balancing account is not designed to
insulate earnings against changes in supply mix, as occurred during the first
eight months of 1997.
Other operating expenses increased by 10.6% from the $13.1 million recorded in
1997 due to employee time charged to this category. Reversals in 1997 of costs
associated with recovery of water quality expenditures through the CPUC's
memorandum account mechanism also contributed to the increase. There were no
such reversals of equal magnitude in 1998.
Administrative and general expenses decreased slightly by 0.7% to $22.0 million
in 1998 from the $22.1 million recorded in 1997. The decrease is due to
stability in costs associated with health insurance, post-retirement medical
benefits, pension and 401(k) plan costs and to a reduction of time charge by
employees to this category.
In 1998, maintenance expense remained at approximately the $7.3 million level
recorded in 1997 due principally to the wet weather conditions during the first
part of the year that hampered planned maintenance activity.
Depreciation expense in 1998 increased by 14.5% to $12.5 million reflecting the
effects of recording approximately $38 million in net plant additions during
1997, depreciation on which began in 1998. In addition, amortization of start-up
and organizational costs associated with the formation of AWR is reflected in
1998 and there were no similar amortization costs in 1997.
Taxes on income increased by approximately 3.1% to $10.1 million in 1998 as
compared to the $9.8 million last year due to a 5.7% increase in operating
income partially offset by a lower effective tax rate.
Property and other taxes decreased by 2.5% in 1998 to $6.1 million due primarily
to reduced franchise tax payments directly attributable to reduced revenues.
Other income increased by 1.5% in 1998 due principally to the flow-through of
tax benefits related to refinancing of long-term debt which was partially offset
by an increase in reserves against costs associated with the Company's
non-regulated joint venture.
Interest expense increased by 10.3% to $11.2 million primarily due to increased
short-term bank borrowing and the issuance of $15 million in long-term debt in
March 1998.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Basic earnings per common share in 1997 decreased by 7.7% to $1.56 per share as
compared to $1.69 per share for the comparable period last year, directly
attributable to significantly increased supply costs during the first eight
months of 1997.
Water operating revenues increased by 0.7% in 1997 to $141.0 million from the
$140.0 million reported in 1996. Although water sales volumes were 2.7% higher
in 1997, in 1996 SCW began recovery of previously incurred supply costs, in
accordance with rules of the CPUC. In 1997, recovery of these costs was
completed in several customer service areas and rates were accordingly reduced,
partially offsetting rate increases effective during 1997 in other customer
service areas.
Electric operating revenues of $12.8 million were 10.7% higher in 1997 as
compared to last year due to the impact of a general rate increase effective
January 1997 as well as a 3.6% increase in kilowatt-hour sales.
Purchased water costs remained relatively the same at $38.3 million in 1997 as
compared to $38.4 million in 1996, despite a 6.4% increase in volumes purchased,
due to refunds received from SCW's wholesale water supplier during 1997 of
approximately $2.0 million, which reduced recorded purchased water costs. There
were no such refunds received during 1996.
Costs of power purchased for pumping decreased by 2.0% to $7.6 million in 1997,
chiefly as the result of the reduced amounts of water produced from pumped
sources in SCW's resource mix. During 1997, SCW had several wells out of service
due to water quality issues which significantly affected its ability to fully
utilize its groundwater resources.
14
15
Costs of power purchased for resale in 1997 decreased by 10.9% to $5.2 million
from the $5.8 million recorded in 1996 due to reduced costs from SCW's energy
provider which partially offset the effects of increased kilowatt-hour sales
volumes recorded during the year.
Groundwater production assessments increased 15.2% to $6.8 million in 1997 from
$5.9 million in 1996 due to additional assessments associated with increased
pumping in SCW's San Gabriel Valley and San Dimas customer service areas.
A positive entry for the provision for supply cost balancing accounts reflects
recovery of previously under-collected supply costs. Conversely, a negative
entry for the provision for supply cost balancing accounts reflects an
under-collection of previously incurred supply costs. The positive entry for
1997 is a result of approval by the CPUC of rate increases sufficient to recover
previously under-collected purchased supply costs, as well as refunds received
during 1997 from wholesale suppliers. The balancing account mechanism insulates
earnings from changes in the unit costs of supply costs which are outside of the
immediate control of SCW. However, the balancing account is not designed to
insulate earnings against changes in supply mix, as occurred during the first
eight months of 1997.
Administrative and general expenses increased by 7.7% to $22.1 million in 1997
from the $20.5 million recorded in 1996. This increase reflects higher labor
costs. In addition, during 1997 SCW incurred costs for consulting on water
quality litigation for which there was no corresponding amount in 1996.
In 1997, maintenance expense decreased by 5.7% to $7.3 million from $7.7 million
recorded in 1996 due principally to increased emphasis being placed on SCW's
meter replacement and capital improvement program which partially offset
increased maintenance on SCW's water supply sources.
Depreciation expense in 1997 increased by 8.4% to $11.0 million reflecting the
effects of recording approximately $31.0 million in net plant additions during
1996, depreciation on which began in 1997.
Taxes on income decreased by approximately 4.4% to $9.8 million in 1997 as
compared to the $10.3 million in 1996 as a result of lower pre-tax income. Other
taxes increased by 3.0% in 1997 to $6.3 million due primarily to increased
property taxes resulting from higher valuation assessments in 1997.
Other income increased by 42.7% in 1997 due principally to an increase in
billings to the City of Folsom for the lease of a portion of SCW's water rights
in the American River.
Interest expense decreased by 3.3% to $10.2 million primarily due to reduced
short-term bank borrowing and the lower borrowing rates experienced during 1997.
LIQUIDITY AND CAPITAL RESOURCES
AWR funds its operating expenses, dividends on its outstanding Common and
Preferred Shares and makes its mandatory sinking fund payments principally
through dividends from SCW. AWR has filed a Registration Statement with the
Securities and Exchange Commission (SEC) for issuance, from time to time, of up
to $60 million in Common Shares, Preferred Shares and/or debt securities. The
proceeds will be used primarily for investment in its subsidiaries.
SCW funds the majority of its operating expenses, interest payments on its debt
and dividends on its outstanding Common Shares through internal sources. SCW
continues to rely on external sources, including short-term bank borrowing,
contributions-in-aid-of-construction, advances for construction and
install-and-convey advances, to fund the majority of its construction
expenditures.
Because of the seasonal nature of its water and electric operations, SCW
utilizes its short-term borrowing capacity to finance current operating
expenses. The aggregate short-term borrowing capacity available to SCW under its
three bank lines of credit was $47 million as of December 31, 1998 of which a
total of $38 million was outstanding. 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 long-term debt totaling $15.0 million in March
1998. The funds were used initially to repay short-term bank borrowings, after
which construction expenditures were funded.
15
16
SCW has filed a Registration Statement with the SEC for issuance, from time to
time, of up to $60 million in long-term debt with the net proceeds being used to
repay short-term bank borrowings and fund construction needs. In January 1999,
SCW issued $40 million of long-term debt pursuant to this Registration
Statement, all of which was used to reduce bank borrowing.
The Company has no derivative financial instruments, financial instruments with
significant off-balance sheet risks or financial instruments with concentrations
of credit risk.
CONSTRUCTION PROGRAM
SCW's construction program is designed to ensure its customers high quality
service. A program for water pipeline replacement is on-going throughout the 22
customer service areas, based on priority of leaks detected, fire protection
enhancements and reflection of the underlying replacement schedule. In addition,
general upgrades in SCW's water supply facilities are anticipated to be
on-going. SCW's Board of Directors has approved anticipated net capital
expenditures of $42.1 million in 1999. Neither AWR nor ASUS have material
capital requirements.
REGULATORY MATTERS
SCW is subject to regulation by the CPUC, which has broad powers with respect to
service and facilities, rates, classifications of accounts, valuation of
properties, the purchase, disposition and mortgaging of properties necessary or
useful in rendering public utility service, the issuance of securities, the
granting of certificates of convenience and necessity as to the extension of
services and facilities and various other matters. AWR and ASUS are not
regulated by the CPUC.
The 22 customer service areas of SCW are grouped into 16 water districts and one
electric district for ratemaking purposes. Water rates vary among the 16
ratemaking districts due to differences in operating conditions and costs. SCW
monitors operations on a regional basis in each of these districts so that
applications for rate changes may be filed, when warranted. Under the CPUC's
practices, rates may be increased by three methods: general rate case increases
(GRC's), offsets for certain expense increases and advice letter filings related
to certain plant additions. GRC's are typically for three-year periods, which
include step increases for the second and third year. Rates are based on
forecasted expenses and capital costs. GRC's have a typical regulatory lag of
one year. Offset rate increases typically have a two to four month regulatory
lag.
New water rates were implemented in three of SCW's customer service areas in
January 1, 1998 to recover costs associated with capital projects in those
areas. Step increases in rates were effective in April 1998 in Barstow and in
May 1998 in Santa Maria. Increased rates for six additional water ratemaking
districts and recovery of costs associated with SCW's general office functions
were effective January 1, 1999.
Applications to increase water rates were filed for four water ratemaking
districts in February 1999. The new rates, if authorized in total or in part by
the CPUC, would be effective January 1, 2000.
SCW has filed an application with the CPUC to combine tariff schedules into
regional rates over a six year phase-in plan for the customer service areas that
make up SCW's Region III. A final decision from the CPUC is anticipated by the
fourth quarter of 1999.
Hearings were held before the CPUC in November 1998 on SCW's filing seeking
recovery through rates of $1.8 million in costs associated with its
participation in the coastal aqueduct extension of the State Water Project. SCW
is continuing to pursue alternative forms of recovery of its investment in the
Project, which will require CPUC approval. A final order from the CPUC is
anticipated in 1999. See Note 8 to the Notes to Financial Statements.
In March 1998, the CPUC issued an Order Instituting Investigation (OII) to
regulated water utilities in the state of California, including SCW. The purpose
of the OII is to determine whether existing standards and policies regarding
drinking water quality adequately protect the public health and whether those
standards and policies are being uniformly complied with by those water
utilities. The OII delineates the constitutional and statutory jurisdiction of
the CPUC and the DOHS in establishing and enforcing adherence to water quality
standards. The CPUC's jurisdiction provides for the establishment of rates which
permit water utilities to furnish safe water meeting the established water
quality standards at prices
16
17
which are both affordable and allow the utility to earn a reasonable return on
its investment. SCW has provided its response to a series of questions dealing
with the adequacy of current drinking water standards, compliance by water
utilities with such standards, appropriate remedies for failure to comply with
safe drinking water standards and whether increased enforcement and additional
drinking water standards are necessary. SCW anticipates a final decision by the
CPUC on this matter in 1999. See Note 8 to the Notes to Financial Statements.
See Note 8 to the Notes to Financial Statements.
ENVIRONMENTAL MATTERS
The 1996 amendments to the Safe Drinking Water Act (SDWA) revised the 1986
amendments to the SDWA with a new process for selecting and regulating
contaminants. The Environmental Protection Agency (EPA) can only regulate
contaminants that may have adverse health effects, are known or likely to occur
at levels of public health concern, and if regulated the regulation would
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 the 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 or near the established MCL's 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 such
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. The ratemaking process
provides SCW with the opportunity to recover prudently incurred capital and
operating costs associated with water quality.
There have been no environmental matters that have materially affected or are
currently materially affecting the Company's Bear Valley Electric customer
service area. The construction of a proposed 115kv line to serve the Bear Valley
Electric customer service area is subject to an Environmental Impact Statement
(EIS). Delays in approval of the EIS could impact SCW's ability to meet electric
load growth in the future until the project is completed.
WATER SUPPLY
During 1998, the Company supplied a total of 179,927 acre feet of water. Of this
amount, approximately 61% came from pumped sources and 39% was purchased from
others, principally the Metropolitan Water District of Southern California
(MWD). The remaining amount was supplied by the Bureau of Reclamation (the
"Bureau") under a no-cost contract. During 1997, the Company produced 199,146
acre feet of water, 54% of which came from pumped sources, 45% was purchased and
the remainder was supplied by the Bureau.
The MWD is a water district organized under the laws of the State of California
for the purpose of delivering imported water to areas within its jurisdiction.
The Company has 52 connections for 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
17
18
sources are anticipated to remain adequate through 1999. However, MWD has taken
a number of steps to secure additional storage capacity and increase available
water supplies, including effecting transfers of water rights from other
sources.
The 1997-1998 water year, which ended September 1998, was labeled a "wet one" by
the California Department of Water Resources. The outlook for water supply in
1999 remains favorable. In those customer services areas of SCW which pump
groundwater, overall groundwater conditions remain at adequate levels. However,
certain of SCW's groundwater supplies have been affected to varying degrees by
various forms of contamination which, in some cases, has caused increased
reliance on purchased water in its resource mix.
WATER-RELATED OPPORTUNITIES
SCW anticipates terminating its Golden State Water Company joint venture in
1999. In its place, American States Utility Services Inc. was formed to pursue
opportunities such as long-term leases, and operation and maintenance contracts
of government or municipally owned water and wastewater systems.
YEAR 2000 READINESS
The Company has been actively assessing its Year 2000 (Y2K) readiness since
early 1997 and has inventoried its significant computer hardware and software
programs. All major upgrades to these systems have been completed and were
operational at year-end 1998. In addition to work being done on internal
systems, the Company has sought compliance certification from external vendors
and service providers. The Company has initiated due diligence with those
external vendors upon which the Company is significantly dependent, such as
energy and telecommunication companies and wholesale water suppliers. In the
event that such suppliers might be adversely affected by Y2K, the Company has
prepared a contingency plan, which is anticipated to be completed by the second
quarter of 1999. See Note 13 of the Notes to Financial Statements for more
information.
To date, there have been no significant costs associated with Y2K readiness that
have not been approved by the CPUC for recovery through rates. The Company
believes that future costs associated with Y2K, which are prudently incurred,
will be allowed for recovery through rates.
ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for the
reporting and displaying of comprehensive income and its components, such as
minimum pension liability, in a full set of general-purpose financial
statements. Adoption of this statement, effective for fiscal years beginning
after December 15, 1997, did not have a significant impact on the Company's
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the method
of reporting information about operating segments in annual financial statements
and in interim reports issued to shareholders. Adoption of this statement,
effective for fiscal years beginning after December 15, 1997, did not have a
significant impact on disclosure of segment related information.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which amends SFAS No. 87 and SFAS
No. 109 and revises employers' disclosure concerning pension and other
postretirement benefits plans. Adoption of this statement, effective for fiscal
years beginning after December 15, 1997, did not have a significant impact the
Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes a new model for
accounting for derivative and hedging activities, and supersedes and amends a
number of existing standards. Adoption of this statement, effective for fiscal
years beginning after June 15, 1999, will not have a significant impact on
financial position or results of operation.
18
19
Balance Sheets
For the years ended December 31,
(dollars in thousands) 1998 1997
--------- ---------
Assets
Utility Plant, at cost
Water $ 482,989 $ 446,605
Electric 35,171 34,137
--------- ---------
518,160 480,742
Less - Accumulated depreciation (138,423) (125,020)
--------- ---------
379,737 355,722
Construction work in progress 35,016 27,901
--------- ---------
Net utility plant 414,753 383,623
--------- ---------
Other Property and Investments 1,077 1,355
--------- ---------
Current Assets
Cash and cash equivalents 620 4,186
Accounts receivable-Customers, less reserves of $403 in 1998;
$466 in 1997 7,626 8,544
Other 5,301 3,614
Unbilled revenue 9,303 9,106
Materials and supplies, at average cost 994 1,299
Supply cost balancing accounts 4,300 4,286
Prepayments 5,988 7,676
Accumulated deferred income taxes - net 5,156 5,783
--------- ---------
Total current assets 39,288 44,494
--------- ---------
Deferred Charges
Regulatory tax-related assets 21,506 22,337
Other 8,047 5,265
--------- ---------
Total deferred charges 29,553 27,602
--------- ---------
Total Assets $ 484,671 $ 457,074
========= =========
Capitalization and Liabilities
Capitalization
Common shareholders' equity $ 154,299 $ 151,053
Preferred shares 1,600 1,600
Preferred shares - mandatory redemption 400 440
Long-term debt 120,809 115,286
--------- ---------
Total capitalization 277,108 268,379
--------- ---------
Current Liabilities
Notes payable to banks 38,000 26,000
Long-term debt and preferred shares - current 260 231
Accounts payable 10,218 11,770
Taxes payable 5,900 9,115
Accrued interest 1,405 1,868
Other 7,985 7,196
--------- ---------
Total current liabilities 63,768 56,180
--------- ---------
Other Credits
Advances for construction 54,743 55,574
Contributions in aid of construction 36,530 28,467
Accumulated deferred income taxes - net 46,902 42,984
Unamortized investment tax credits 3,155 3,246
Regulatory tax-related liability 1,906 1,950
Other 559 294
--------- ---------
Total other credits 143,795 132,515
--------- ---------
Total Capitalization and Liabilities $ 484,671 $ 457,074
========= =========
The accompanying notes are an integral part of these financial statements
19
20
Statements Of Capitalization
For the years ended December 31,
(dollars in thousands) 1998 1997
--------- ---------
Common Shareholders' Equity:
Common shares, $2.50 stated value--
Authorized 30,000,000 shares
Outstanding 8,957,671 in 1998 and 1997 $ 22,394 $ 22,394
Additional paid-in capital 74,937 74,937
Earnings reinvested in the business 56,968 53,722
--------- ---------
154,299 151,053
--------- ---------
Preferred Shares: $25 par value
Authorized 64,000 shares
Outstanding 32,000 shares, 4% Series 800 800
Outstanding 32,000 shares, 4 1/4 % Series 800 800
--------- ---------
1,600 1,600
--------- ---------
Preferred Shares Subject to Mandatory Redemption
Requirements: $25 par value
Authorized and outstanding 17,600 shares in 1998 and 440 480
19,200 shares in 1997, 5% Series
Less: Preferred shares to be redeemed within one year (40) (40)
--------- ---------
400 440
--------- ---------
Long-Term Debt
5.82% notes due 2003 12,500 12,500
10.10% notes due 2009 -- 10,000
6.64% notes due 2013 1,100 1,100
6.80% notes due 2013 2,000 2,000
8.50% fixed rate obligation due 2013 1,882 1,947
Variable rate obligation due 2014 6,000 6,000
Variable rate obligation due 2018 630 --
6.87% notes due 2023 5,000 5,000
7.00% notes due 2023 10,000 10,000
7.55% notes due 2025 8,000 8,000
7.65% notes due 2025 22,000 22,000
5.50% notes due 2026 8,000 8,000
6.81% notes due 2028 15,000 --
9.56% notes due 2031 28,000 28,000
Other 917 930
--------- ---------
121,029 115,477
Less: Current maturities (220) (191)
--------- ---------
120,809 115,286
========= =========
Total Capitalization $ 277,108 $ 268,379
========= =========
The accompanying notes are an integral part of these financial statements
20
21
Statements Of Income
(dollars in thousands, except per share amounts) For the years ended December 31,
1998 1997 1996
--------- --------- ---------
Operating Revenues
Water $ 134,859 $ 140,988 $ 139,997
Electric 13,201 12,767 11,532
--------- --------- ---------
Total operating revenues 148,060 153,755 151,529
--------- --------- ---------
Operating Expenses
Water purchased 30,833 38,318 38,355
Power purchased for resale 5,013 5,188 5,825
Power purchased for pumping 7,009 7,554 7,711
Groundwater production assessment 7,567 6,847 5,946
Supply cost balancing accounts 28 2,813 2,064
Other operating expenses 14,459 13,074 13,421
Administrative and general expenses 21,987 22,138 20,549
Depreciation 12,538 10,952 10,102
Maintenance 7,311 7,301 7,745
Taxes on income 10,130 9,830 10,283
Property and other taxes 6,124 6,282 6,099
--------- --------- ---------
Total operating expenses 122,999 130,297 128,100
--------- --------- ---------
Operating Income 25,061 23,458 23,429
--------- --------- ---------
Other Income
Total other income - net 769 758 531
--------- --------- ---------
Income before interest charges 25,830 24,216 23,960
--------- --------- ---------
Interest Charges
Interest on long-term debt 9,612 8,821 8,551
Other interest and amortization of debt expense 1,595 1,336 1,949
--------- --------- ---------
Total interest charges 11,207 10,157 10,500
--------- --------- ---------
Net Income 14,623 14,059 13,460
Dividends on Preferred Shares (90) (92) (94)
Earnings Available For Common Shareholders $ 14,533 $ 13,967 $ 13,366
Basic Earnings Per Common Share $ 1.62 $ 1.56 $ 1.69
Weighted Average Number of Common Shares Outstanding 8,958 8,957 7,891
The accompanying notes are an integral part of these financial statements
21
22
Statements Of Changes In Common Shareholders' Equity
Earnings
(dollars in thousands) Common Shares Additional Reinvested
Number of Paid-in in the
Shares Amount Capital Business
------- ------- ------- -------
Balances at December 31, 1995 7,845 $19,613 $54,753 $47,210
Add:
Net Income 13,460
Issuance of Common Shares
for public offering 1,000 2,500 18,090
under Dividend Reinvestment and 401(k) 41 102 802
Plans
Deduct:
Dividends on Preferred Shares 94
Dividends on Common Shares - $1.225 per share 9,670
------- ------- ------- -------
Balances at December 31, 1996 8,886 $22,215 $73,645 $50,906
Add:
Net Income 14,059
Issuance of Common Shares for public offering 72 179 1,292
Deduct:
Dividends on Preferred Shares 92
Dividends on Common Shares - $1.245 per share 11,151
------- ------- ------- -------
Balances at December 31, 1997 8,958 $22,394 $74,937 $53,722
Add:
Net Income 14,623
Deduct:
Dividends on Preferred Shares 90
Dividends on Common Shares - $1.26 per share 11,287
------- ------- ------- -------
Balances at December 31, 1998 8,958 $22,394 $74,937 $56,968
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements
22
23
Statements Of Cash Flows
(dollars in thousands) For the years ended December 31,
1998 1997 1996
-------- -------- --------
Cash Flows From Operating Activities:
Net income 14,623 $ 14,059 $ 13,460
Adjustments for non-cash items:
Depreciation and amortization 12,929 11,387 10,389
Deferred income taxes and investment tax credits 5,241 826 577
Other - net 2,036 (1,426) (1,660)
Changes in assets and liabilities:
Customer receivables 918 (673) 368
Supply cost balancing accounts (14) 1,987 1,800
Accounts payable (1,552) (1,095) 6,026
Taxes payable (3,215) 3,338 215
Other - net 438 341 122
-------- -------- --------
Net cash provided 31,404 28,744 31,297
-------- -------- --------
Cash Flows from Investing Activities:
Construction expenditures (41,826) (34,717) (31,953)
-------- -------- --------
Net cash used (41,826) (34,717) (31,953)
-------- -------- --------
Cash Flows from Financing Activities:
Issuance of Common Shares -- 1,472 21,494
Issuance of long-term debt and lease obligations 15,000 8,000 --
Receipt of advances for and contributions in aid of 3,381 1,302 2,462
construction
Refunds on advances for construction (2,651) (2,957) (2,088)
Retirement or repayments of long-term debt and (9,488) (198) (15,447)
redemption of preferred shares - net
Net change in notes payable to banks 12,000 10,000 7,500
Common and preferred dividends paid (11,386) (11,243) (9,825)
-------- -------- --------
Net cash provided 6,856 6,376 4,096
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (3,566) 403 3,440
Cash and Cash Equivalents, Beginning of Year 4,186 3,783 343
-------- -------- --------
Cash and Cash Equivalents, End of Year 620 4,186 $ 3,783
-------- -------- --------
Taxes and Interest Paid:
Income taxes paid $ 5,430 $ 6,338 $ 10,767
Interest paid $ 11,391 9,451 10,128
-------- -------- --------
Non-Cash Transactions:
Property installed by developers and conveyed to
Company $ 1,797 $ 2,082 $ 957
======== ======== ========
23
24
NOTES TO FINANCIAL STATEMENTS
In April 1998, shareholders of Southern California Water Company (SCW) voted to
approve formation of a holding company. The formation process was completed on
July 1, 1998 at which time American States Water Company (AWR) became the parent
company. As a result of the holding company formation, SCW became one of AWR's
two operating subsidiaries. SCW will continue to be a public utility engaged
principally in the purchase, production, distribution and sale of water and also
the distributor of electricity in several mountain communities. SCW is regulated
by the California Public Utilities Commission (CPUC) as to its water and
electric business including properties, rates, services, facilities and other
matters. The other subsidiary, American States Utility Services, Inc. (ASUS) is
a new company which will perform non-regulated, water related services and
operations. The consolidated financial statements include the accounts of SCW
which comprise virtually all of AWR's assets and revenues.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of American States
Water Company and its wholly-owned subsidiaries, Southern California Water
Company and American States Utility Services, Inc., collectively referred to as
the Company. Inter-company transactions and balances have been eliminated.
The accounting records for SCW are maintained in accordance with the Uniform
System of Accounts prescribed by the California Public Utilities Commission. The
preparation of these financial statements required the use of certain estimates
by management in determining the company's assets, liabilities, revenues and
expenses.
Property and Depreciation - The Company capitalizes as utility plant the cost of
additions and replacements of retirement units. Such cost includes labor,
material and certain indirect charges. Depreciation is computed on the
straight-line, remaining-life basis. For the years 1998, 1997 and 1996, the
aggregate provisions for depreciation approximated 2.79%, 2.77% and 2.71% of
beginning of the year depreciable plant, respectively.
Interest - Interest is generally not capitalized for financial reporting
purposes as such procedure is usually not followed for rate-making purposes.
Revenues - Revenues include amounts billed to customers and an amount of
unbilled revenue representing amounts to be billed for usage from the last meter
reading date to the end of the accounting period.
Basic Earnings Per Common Share - Basic Earnings per Common Share are based upon
the weighted average number of Common Shares outstanding and net income after
deducting preferred dividend requirements. There are no dilutive securities.
Accordingly, diluted earnings per share is not calculated.
Supply Cost Balancing Accounts - As permitted by the CPUC, the Company maintains
water and electric supply cost balancing accounts to account for
under-collections and over-collections of revenues designed to recover such
costs. Recoverability of such costs is recorded in income and charged to
balancing accounts when such costs are incurred. The balancing accounts are
reversed when such costs are recovered through rate adjustments. The Company
accrues interest on its supply cost balancing accounts at the rate prevailing
for 90-day commercial paper.
Debt Issue Expense and Redemption Premiums - Original debt issue expenses are
amortized over the lives of the respective issues. Premiums paid on the early
redemption of debt which is reacquired through refunding are deferred and
amortized over the life of the debt issued to finance the refunding. The
redemption premium on debt reacquired without refunding is amortized over the
remaining period the debt would have been outstanding.
Other Credits - Advances for construction represent amounts advanced by
developers which are generally refundable at either a rate of 22% of the revenue
received from the installations for which funds were advanced or in equal annual
installments over a 40-year period. Contributions in aid of construction are
similar to advances, but require no refunding and are amortized over the useful
lives of the related property.
24
25
Cash and Cash Equivalents - For purposes of the Statements of Cash Flows, cash
and cash equivalents include short-term cash investments with an original
maturity of three months or less.
Financial Instrument Risk - The Company does not carry any financial instruments
with off-balance sheet risk nor does its operations result in concentrations of
credit risk.
Fair Value of Financial Instruments - The table below estimates the fair value
of each represented class of financial instrument. For cash and cash
equivalents, accounts receivable and short-term debt, the carrying amount is
used. Otherwise, rates available to the Company at December 31, 1998 and 1997
for debt with similar terms and remaining maturities were used to estimate fair
value for long-term debt. Changes in the assumptions will produce differing
results.
1998 1997
------------------------------- -------------------------------
(dollars in thousands) Carrying amount Fair value Carrying amount Fair value
--------------- ---------- --------------- ----------
Financial assets:
Cash $ 620 $ 620 $ 4,186 $ 4,186
Accounts receivable 22,230 22,230 21,264 21,264
Financial liabilities:
Short-term debt 38,000 38,000 26,000 26,000
Long-term debt 120,809 135,092 115,326 126,930
-------- -------- -------- --------
NOTE 2 - CAPITAL STOCK
All of the series of Preferred Shares outstanding at December 31, 1998 are
redeemable at the option of the Company. At December 31, 1998, the redemption
price per share for each series of $25 Preferred Shares was $27.00, $26.50 and
$25.25 for the 4%, 4 1/4% and 5% Series, respectively. To each of the redemption
prices must be added accrued and unpaid dividends to the redemption date.
The $25 Preferred Shares, 5% Series, are subject to mandatory redemption
provisions of 1,600 shares per year. The annual aggregate mandatory redemption
requirements for this Series for the five years subsequent to December 31, 1998
is $40,000 each year.
In 1996, the Company issued 1,000,000 Common Shares through a secondary public
offering. In January 1997, the Company issued 71,500 Common Shares through a
secondary public offering. The net proceeds from this sale were used to repay a
portion of short-term debt then outstanding.
For the years ended December 31, 1998 and December 31, 1997, all shares issued
under the Company's Common Share Purchase and Dividend Reinvestment Plan (DRP)
and the 401(k) Plan were purchased on the open market. For the year ended
December 31, 1996, the Company issued 20,228 and 20,851 Common Shares,
respectively, under the DRP and the 401(k) programs. There are 89,226 and 71,408
Common Shares reserved for issuance under the DRP and the 401(k) Plan,
respectively, at December 31, 1998. Shares reserved for the 401(k) Plan are in
relation to Company matching contributions and for investment purposes by
participants.
As of December 31, 1998 there were no retained earnings restricted as to the
payment of cash dividends on Common Shares.
In August 1998, the Board of Directors adopted a Shareholder Rights Plan (Rights
Plan) and authorized a dividend distribution of one right (a Right) to purchase
1/1000th share of Junior Participating Preferred Stock for each outstanding
share of Common Stock. The Rights became effective in September 1998 and will
expire in September 2008. The Rights Plan is designed to provide shareholders'
protection and to maximize shareholder value by encouraging a prospective
acquirer to negotiate with the Board.
Each Right represents a right to purchase 1/1000th of Junior Participating
Preferred Stock at the price of $120, subject to adjustment (the Purchase
Price). Each share of Junior Participating Preferred Stock is entitled to
receive a dividend equal to 1000 times any dividend paid on common stock and 100
votes per share in any shareholder election. The Rights become exercisable upon
occurrence of a Distribution Date. A Distribution Date event occurs if (i) any
person accumulates 15% of the then outstanding Common stock, (ii) any person
presents a tender offer which caused the person's ownership level to exceed 15%
and the Board determines the tender offer not to be fair to AWR's shareholders,
or (iii) the Board determines that a shareholder maintaining a 15% interest in
the Common stock could have an adverse impact on AWR or could attempt to
pressure AWR to repurchase the holder's shares at a premium.
25
26
Until the occurrence of a Distribution Date, each Right trades with the Common
Stock and is not separately transferable. When a Distribution Date occurs, AWR
would distribute separately Rights Certificates to Common Shareholders and the
Rights would subsequently trade separate from the Common Stock and each holder
of a Right, other than the acquiring person whose Rights will thereafter be
void, will have the right to receive upon exercise at its then current Purchase
Price that number of shares of Common Stock having a market value of two times
the Purchase Price of the Right. If AWR merges into the acquiring person or
enters into any transaction that unfairly favors the acquiring person or
disfavors AWR's other shareholders, the Right becomes a right to purchase Common
Stock of the acquiring person having market value of two times the Purchase
Price.
The Board of Directors may determine that in certain circumstances a proposal
which would cause a Distribution Date is in the best interest of AWR's
shareholders. Therefore, the Board of Directors may, at its option, redeem the
Rights at a redemption price of $0.01 per Right.
NOTE 3 - COMPENSATING BALANCES AND BANK DEBT
At December 31, 1998, SCW maintained $47.0 million in aggregate borrowing
capacity with three commercial banks with no compensating balances required. Of
this amount, $38.0 million was outstanding at year-end. Loans can be obtained at
the option of SCW and bear interest at rates based on floating prime borrowing
rates or at money market rates.
Short-term borrowing activities for the last three years were as follows:
December 31,
-------------------------------------
(dollars in thousands, except percent) 1998 1997 1996
------- ------- -------
Balance Outstanding at December 31, $38,000 $26,000 $16,000
Interest Rate at December 31, 5.86% 6.39% 6.17%
Average Amount Outstanding 19,309 $15,678 $26,109
Weighted Average Annual Interest Rate 6.78% 6.27% 5.97%
Maximum Amount Outstanding $39,000 $32,000 $36,000
------- ------- -------
NOTE 4 - LONG TERM DEBT
In December 1996, SCW sold $8 million in tax-exempt debt that was issued through
the California Pollution Control Financing Authority. The funds were deposited
with a trustee and were used during 1997 to finance water main replacements.
In March 1998, SCW sold the remaining $15 million under its Series B Medium Term
Note Program and in December 1998, SCW redeemed all of its outstanding 10.10%
Notes. In January 1999, $40 million of Series C Medium Term Notes were sold. The
funds were used initially to repay short-term bank borrowings and, after that,
fund construction expenditures. The Company has no mortgage debt, and leases and
other similar financial arrangements are not material.
SCW has posted an Irrevocable Letter of Credit, which expires July 31, 1999, in
the amount of $797,979 as security for its self-insured workers' compensation
plan. SCW has also provided an Irrevocable Letter of Credit in the amount of
$6,296,000 to a trustee with respect to the variable rate obligation issued by
the Three Valleys Municipal Water District.
Annual maturities of all long-term debt, including capitalized leases, amount to
$220,139, $227,277, $236,167, $230,383 and $199,841 for the 5 years ending
December 31, 1999 through 2003, respectively.
NOTE 5 - TAXES ON INCOME
The Company provides deferred income taxes for temporary differences under
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109) for certain transactions which are recognized for income
tax purposes in a period different from that in which they are reported in the
financial statements. The most significant items are the tax effects of
accelerated depreciation, the supply cost balancing accounts and advances for
and contributions in aid of construction. SFAS No. 109 also requires that
rate-regulated enterprises record deferred income taxes for temporary
differences accorded flow-through treatment at the direction of a regulatory
commission. The resulting deferred tax assets and liabilities are recorded at
the expected cash flow to be reflected in future rates. Since the CPUC has
consistently permitted the recovery of pre-
26
27
viously flowed-through tax effects, SCW has established regulatory liabilities
and assets offsetting such deferred tax assets and liabilities.
Deferred investment tax credits are being amortized to other income ratably over
the lives of the property giving rise to the credits.
The significant components of deferred tax assets and deferred tax liabilities,
as reflected in the balance sheets, and the accumulated net deferred income tax
liabilities at December 31, 1998 and 1997 were:
December 31,
------------------------
(dollars in thousands) 1998 1997
-------- --------
Deferred tax assets:
Balancing accounts $ 33 $ 27
State tax effect 5,123 5,756
-------- --------
5,156 5,783
-------- --------
Deferred tax liabilities
Depreciation (43,442) (40,822)
Advances and contributions 16,694 17,005
Other property related (11,488) (9,602)
Other non-property related (8,666) (9,565)
-------- --------
(46,902) (42,984)
-------- --------
Accumulated deferred income taxes - net $(41,746) $(37,201)
-------- --------
The current and deferred components of income tax expense are as follows:
December 31,
--------------------------------------
(dollars in thousands) 1998 1997 1996
-------- -------- --------
Current
Federal $ 5,219 $ 7,205 $ 7,224
State 1,727 2,287 2,452
-------- -------- --------
Total current tax expense 6,946 9,492 9,676
-------- -------- --------
Deferred - Federal and State:
Accelerated depreciation 3,319 2,996 3,175
Balancing accounts 6 (871) (798)
State Water Project -- -- 296
Advances and contributions -- (210) (894)
California privilege year franchise tax (544) (617) (683)
Adjustments to prior year provision -- -- 410
Other (398) (566) (732)
-------- -------- --------
Total deferred tax expense 2,383 732 774
-------- -------- --------
Total income tax expense $ 9,329 $ 10,224 $ 10,450
-------- -------- --------
Income taxes included in operating expenses $ 10,130 $ 9,830 $ 10,283
Income taxes included in other income and
expenses - net (801) 394 167
-------- -------- --------
Total income tax expense $ 9,329 $ 10,224 $ 10,450
-------- -------- --------
Additional information regarding taxes on income is set forth in the following
table:
December 31,
----------------------------------------
(dollars in thousands, except percent) 1998 1997 1996
-------- -------- --------
Federal taxes on pre-tax income at statutory rates $ 8,470 $ 8,451 $ 8,368
Increase (decrease) in taxes resulting from:
State income tax expense 1,654 1,864 2,051
Depreciation 944 853 716
Federal benefit of state taxes (579) (652) (718)
Adjustments to prior years' provisions (97) (143) 254
Payment of premium on redemption (813) -- --
Other - net (250) (149) (221)
-------- -------- --------
Total income tax expense $ 9,329 $ 10,224 $ 10,450
-------- -------- --------
Pre-tax income $ 24,201 $ 24,145 $ 23,910
-------- -------- --------
Effective income tax rate 38.5% 42.3% 43.7%
-------- -------- --------
NOTE 6 - EMPLOYEE BENEFIT PLANS
The Company maintains a pension plan (the Plan) which provides eligible
employees (those age 21 and older, with one year of service) monthly benefits
upon retirement based on average salaries and length of service. The normal
retirement benefit is equal to 2% of the five highest consecutive years average
earnings multiplied by the number of years of credited service, up to a maximum
of 40 years, reduced by a percentage of primary social security benefits. There
is also an early retirement option. Annual contributions are made to the Plan
which comply with the funding requirements of the Employee Retirement Income
Security Act (ERISA). At December 31, 1998, the Company had 431 employees
participating in the Plan, 69 of these employees are covered by collective
bargaining agreements, the earliest of which expires in 1999.
The Company also provides all active employees medical, dental and vision care
benefits through a medical insurance plan. Eligible employees who retired prior
to age 65, and/or their spouses, were able to retain the benefits under the
active plan until reaching age 65. Upon reaching age 65, and for those employees
retiring at or after age 65, and/or their spouses, continued coverage was
provided through a Medicare supplement insurance policy paid for by the Company.
27
28
The CPUC has issued a decision which provides for the recovery in rates of
tax-deductible contributions made to a separately trusteed fund. In accordance
with that decision, SCW established two separate trusts in 1995, one for those
retirees who were subject to a collectively bargained agreement and another for
all other retirees. The company's funding policy is to contribute annually an
amount at least equal to the revenues authorized to be collected through rates
for post-retirement benefit costs. Post-retirement benefit costs for 1993, 1994
and 1995 were estimated at a total of $1.6 million and have been recorded as a
regulatory asset for recovery over a 20 year period.
The following table sets forth the Plan's funded status and amounts recognized
in the company's balance sheets and the components of net pension cost and
accrued post-retirement liability at December 31, 1998 and 1997:
Pension Benefits Other Benefits
------------------------------------------------
(dollars in thousands) 1998 1997 1998 1997
-------- -------- ------- -------
Change in Benefit Obligation:
Benefit Obligation at beginning of year $ 33,410 $ 28,733 $ 4,503 $ 4,013
Service Cost 1,597 1,351 112 120
Interest Cost 2,278 2,112 283 295
Actuarial Loss/(Gain) 2,514 2,373 (368) 225
Benefits Paid (1,227) (1,159) (167) (150)
-------- -------- ------- -------
Benefit Obligation at end of year $ 38,572 $ 33,410 $ 4,363 $ 4,503
Changes in Plan Assets:
Fair Value of Plan Assets at beginning
of year $ 33,433 $ 29,240 $ 1,104 $ 548
Actual Return of Plan Assets 6,051 4,065 44 49
Employer Contributions 1,284 1,287 461 656
Benefits Paid (1,227) (1,159) (167) (150)
-------- -------- ------- -------
Fair Value of Plan Assets at end of year $ 39,541 $ 33,433 $ 1,442 $ 1,103
Reconciliation of Funded Status:
Funded Status $ 969 $ 23 $(2,921) $(3,399)
Unrecognized Transition Obligation 114 171 6,707 7,126
Unrecognized Net Loss/(Gain) 677 1,538 (1,860) (1,644)
Unrecognized Prior Service Cost 400 444 (3,427) (3,627)
-------- -------- ------- -------
Prepaid/(Accrued) Pension Cost $ 2,160 $ 2,176 $(1,501) $(1,544)
Weighted-Average Assumptions as of
December 31:
Discount Rate 6.50% 7.00% 6.50% 7.00%
Long-term Rate of Return 8.00% 8.00% 8.00% 8.00%
Salary Assumption 4.00% 4.00% -- --
A sliding scale for assumed health care cost increases was used for both
periods, starting at 11% in 1996 declining 1% per year for five years and then
remaining at 6% thereafter. The components of net periodic post-retirement
benefits cost for 1998 and 1997 are as follows:
Pension Benefits Other Benefits
---------------------------------------------
(dollars in thousands) 1998 1997 1998 1997
------- ------- ----- -----
Components of Net Periodic Benefits
Cost
Service Cost $ 1,597 $ 1,351 $ 112 $ 120
Interest Cost 2,278 2,112 283 294
Actual Return on Plan Assets (6,051) (4,065) (44) (48)
Net Amortization 3,476 1,873 67 140
------- ------- ----- -----
Net Periodic Pension Cost $ 1,300 $ 1,271 $ 418 $ 506
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1-Percentage-Point 1-Percentage-Point
(dollars in thousands) Increase Decrease
------------------ ------------------
Effect on Total of Service and Interest Cost $ 13 $ (11)
Components
Effect on Postretirement Benefit Obligation 206 (180)
The Company has a 401(k) Investment Incentive Program under which employees may
invest a percentage of their pay, up to a maximum investment prescribed by law,
in an investment program managed by an outside investment manager. Company
contributions to the 401(k) are based upon a percentage of individual employee
contributions and, for 1998, 1997 and 1996, totaled $874,113, $785,687, and
$839,000, respectively.
NOTE 7 - BUSINESS RISKS AND CONCENTRATION OF SALES
The Company's utility operations are engaged in supplying water and electric
service to the public. The Company is required to provide service and grant
credit to customers within its defined service areas. Although the Company has a
diversified base of residential, industrial and other customers, revenues
derived from commercial and residential water customers accounted for
approximately 91% and 93% of total water revenues in 1998 and 1997. The Company
faces additional risks associated with weather conditions,
28
29
adequacy and quality of water supplies, regulatory decisions, pronouncements and
laws, water-related litigation, general business conditions and condemnation.
Approximately 39% of the Company's water supply is purchased from wholesalers of
imported water, with the remainder produced from Company-owned wells. The long
term availability of imported water supplies is dependent upon, among other
things, drought conditions throughout the state, increases in population, water
quality standards and legislation that may potentially reduce water supplies.
The Company does not anticipate any constraints on its imported water supplies
in 1999.
NOTE 8 - CONTINGENCIES
In 1998, ASUS was formed to pursue non-regulated opportunities such as long-term
leases, and operation and maintenance contracts of governmentally-owned water
and wastewater systems. As a result, the Company anticipates terminating its
Golden State Water Company joint venture during 1999. Accordingly, the Company
reserved approximately $336,000 against future losses and capital account
adjustments.
Hearings were held before the CPUC in November 1998 on SCW's filing seeking
recovery through rates of $1.8 million in costs associated with its
participation in the coastal aqueduct extension of the State Water Project. In
February 1999, the Administrative Law Judge in this proceeding issued his
proposed decision that denied rate recovery of SCW's costs in the project. A
final order from the CPUC is anticipated in 1999. SCW is unable to predict if
the CPUC will authorize recovery of all or any of the costs associated with its
participation in the project. Alternate forms of recovery are also being pursued
including assessment of costs to new construction based on an equivalent
dwelling unit charge or other applicable unit of measurement, which assessment
will require CPUC approval prior to implementation or, failing that, sale of
SCW's participation in the project.
SCW has been named as a defendant in seven lawsuits which allege that the SCW
delivered contaminated water to its customers. Plaintiffs in these actions seek
damages, including general, special, and punitive damages, according to proof of
trial, as well as attorney's fees on certain causes of action, costs of suit,
and other unspecified relief. Stays have been issued by the respective courts in
five of these cases pending the outcome of the CPUC's investigation into water
quality discussed below. One action has been dismissed against SCW and SCW has
petitioned for dismissal in the remaining case. Most activity related to these
lawsuits has ceased due to the stays although SCW anticipates that plaintiff's
attorneys will petition the courts to reconsider their prior decisions. In light
of the breadth of plaintiff's claims, the lack of factual information regarding
plaintiff's claims and injuries, if any, the fact that no discovery has yet been
completed, SCW is unable to determine at this time what, if any, potential
liability it may have with respect to these claims. SCW intends to vigorously
defend itself against these allegations. Management can not predict the outcome
of these proceedings and if SCW is found liable, SCW would pursue recovery
through its insurance coverage providers.
In response to those lawsuits and similar actions, in March 1998 the CPUC issued
an Order Instituting Investigation (OII) directed to all Class A and B water
utilities in 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. SCW has made its filing in this proceeding
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 standards and whether stricter
or additional safety drinking water standards are required. The Water Division
of the CPUC has issued its report based on these filings by the utilities.
Although the OII leaves open the possibility of evidentiary hearings and further
action by the CPUC, SCW is currently unable to predict the outcome of this
proceeding.
29
30
Management believes that proper insurance coverage and reserves are in place to
insure against anticipated property, general and product liability and workers'
compensation claims.
NOTE 9 - CONSTRUCTION PROGRAM
SCW's 1999 construction budget provides for gross expenditures of approximately
$46.5 million of which $4.4 million is anticipated to be obtained from
developers and others. AWR and ASUS have no material capital expenditure
programs.
NOTE 10 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The table below presents SCW's provision for doubtful accounts charged to
expense and accounts written off, net of recoveries for the last three years.
December 31,
---------------------------------
(dollars in thousands) 1998 1997 1996
----- ----- -----
Balance at beginning of year $ 466 $ 387 $ 648
Provision charged to expense 631 707 571
Accounts written off, net of recoveries (694) (628) (832)
----- ----- -----
Balance at end of year $ 403 $ 466 $ 387
----- ----- -----
Neither AWR nor ASUS have established any provision for doubtful accounts.
NOTE 11 - BUSINESS SEGMENTS
The Company has no material operations other than its SCW subsidiary. The tables
below set forth information relating to SCW's operating segments. SCW manages
its operations on a regional basis using the five categories below as
broad-level measures of profitability. In addition to the amounts set forth,
certain assets have been allocated. The identifiable assets are net of
respective accumulated provisions for depreciation.
(dollars in thousands) Year Ended December 31, 1998
-------------------------------------------------------
Water Electric
Region I Region II Region III
-------- --------- --------- --------
Operating revenues $24,927 $ 76,304 $ 33,552 $13,211
Operating income before income 6,799 15,615 9,261 3,847
taxes
Identifiable assets 97,463 176,832 115,475 26,719
Depreciation expense 2,551 4,755 3,324 1,640
Capital additions $13,206 $ 20,650 $ 9,714 $ 1,699
------- -------- -------- -------
(dollars in thousands) Year Ended December 31, 1997
-------------------------------------------------------
Water Electric
Region I Region II Region III
-------- -------- ---------- --------
Operating revenues $24,340 $ 81,200 $ 35,436 $12,779
Operating income before income 5,897 13,032 10,270 4,089
taxes
Identifiable assets 87,039 162,037 109,436 25,095
Depreciation expense 2,306 4,483 3,162 1,001
Capital additions $10,065 $ 18,882 $ 8,139 $ 2,140
------- -------- -------- -------
(dollars in thousands) Year Ended December 31, 1996
-------------------------------------------------------
Water Electric
Region I Region II Region III
-------- --------- ---------- --------
Operating revenues $23,536 $ 81,474 $ 34,980 $11,540
Operating income before income 4,705 14,813 10,776 3,418
taxes
Identifiable assets 79,974 148,078 104,390 25,333
Depreciation expense 2,109 4,131 2,939 924
Capital additions $ 5,975 $ 19,370 $ 6,537 $ 2,492
------- -------- -------- -------
NOTE 12 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly financial information presented below is unaudited. The business
of the Company is of a seasonal nature and it is management's opinion that
comparisons of earnings for the quarter periods do not reflect overall trends
and changes in the Company's operations.
Operating Operating Earnings
Revenues Income Net Income per Share
-------------------- ------------------ ------------------ --------------
(in thousands, except
per share amounts) 1998 1997 1998 1997 1998 1997 1998 1997
-------- -------- ------- ------- ------- ------- ----- -----
First Quarter $ 29,955 $ 32,206 $ 4,382 $ 3,738 $ 1,843 $ 1,312 $0.20 $0.14
Second Quarter 35,001 39,343 5,586 5,372 2,767 3,080 0.31 0.34
Third Quarter 47,002 45,700 9,432 8,385 6,374 6,044 0.71 0.67
Fourth Quarter 36,102 36,506 5,661 5,963 3,639 3,623 0.40 0.41
-------- -------- ------- ------- ------- ------- ----- -----
Year $148,060 $153,755 $25,061 $23,458 $14,623 $14,059 $1.62 $1.56
-------- -------- ------- ------- ------- ------- ----- -----
30
31
NOTE 13 - YEAR 2000 READINESS
The Company continues to evaluate its exposure to the Year 2000 (Y2K) problem
that arises from the fact that many existing computer systems may contain date
sensitive embedded technology that uses only two digits to identify a year in
the date field. Based on the assumption that the first two digits of the date
field are always "19", such systems may misinterpret dates after December 31,
1999. Because the Company is dependent upon the proper functioning of these
computer systems and other equipment containing date sensitive technology, a
failure of these systems could have a material and adverse affect on the Company
resulting in business interruption or shutdown, financial loss, regulatory
citations and legal liability.
The Company has been actively assessing its Y2K readiness since early 1997 and
has inventoried its significant computer hardware and software programs. Since
the Company is dependent upon its management information and customer service
systems, upgrades to these systems have been a priority. The Company 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. All major upgrades to these systems are completed and were
operational at year-end 1998. Costs associated with the implementation and
upgrade of major management information and customer service software systems,
as well as upgrades to mainframe hardware systems, have been approved by the
CPUC and are being recovered through rates.
In addition to work being done on its internal systems, the Company has sought
compliance certification from external vendors and service providers. Testing on
the Company'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, the Company engaged the services of a nationally-recognized business
consulting firm and has completed its written plan to address the Y2K issue. The
Company has established a Year 2000 Task Force consisting of senior management
and operating personnel which will complete the inventory of computer systems
and other devices with embedded technology, as well as other considerations
potentially not revealed in preliminary internal analyses.
The Company's general process for addressing the Y2K issue is (i) to inventory
all systems that may have a potential Y2K impact, (ii) to determine the
materiality of these non-Y2K ready systems, (iii) to replace and test, correct
and test, or prepare for the failure of material items that have been determined
to be non-Y2K ready, and (iv) to prepare contingency plans. Some, less critical
systems may not be fully Y2K ready, but are not anticipated to materially affect
the Company's operations.
The Company is significantly dependent on third party suppliers, such as energy
and telecommunication companies and wholesale water suppliers. In order to
conduct its business, the Company 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, the Company is preparing its
contingency plan which will likely include, among other things, increased
staffing during critical periods, manual back-up for automated systems, the use
of electric generators capable of providing power during a black-out. The
Company does not have, and may never fully have, sufficient information about
the Y2K exposure or remediation plans of these third parties to adequately
predict the risks posed by them to the Company. If the third parties have Y2K
problems that are not remedied, resulting problems could include loss of utility
services and disruption of water supplies.
To date, there have been no significant costs associated with Y2K readiness that
have not been approved by the CPUC for recovery through rates. The Company
estimates that it may incur up to $800,000 in costs depending on the results of
on-going tests, to make critical systems Y2K ready. The Company believes that
the future costs, which are prudently incurred, will also be allowed for
recovery through rates. The CPUC has notified all utilities under its
jurisdiction, including the Company, that it will review their Y2K preparations.
31
32
REPORT OF MANAGEMENT
The financial statements contained in this annual report were prepared by the
management of American States Water Company, which is responsible for their
integrity and objectivity. The financial statements were prepared in accordance
with generally accepted accounting principles and include, where necessary,
amounts based upon management's best estimates and judgments. All other
financial information in the annual report is consistent with the financial
statements and is also the responsibility of management.
The Company maintains systems of internal control which are designed to help
safeguard the assets of the Company and provide reasonable assurance that
accounting and financial records can be relied upon to generate accurate
financial statements. These systems include the hiring and training of qualified
personnel, appropriate segregation of duties, delegation of authority and an
internal audit function which has reporting responsibility to the Audit
Committee of the Board of Directors.
The Audit Committee, composed of three outside directors, exercises oversight of
management's discharge of its responsibilities regarding the systems of internal
control and financial reporting. The committee periodically meets with
management, the internal auditor and the independent accountants to review the
work and findings of each. The committee also reviews the qualifications of, and
recommends to the Board of Directors, a firm of independent accountants.
The independent accountants, Arthur Andersen LLP, have performed an audit of the
financial statements in accordance with generally accepted auditing standards.
Their audit gave consideration to the company's system of internal accounting
control as a basis for establishing the nature, timing and scope of their work.
The result of their work is expressed in their Report of Independent Public
Accountants.
/s/ Floyd E. Wicks /s/ McClellan Harris III
Floyd E. Wicks McClellan Harris III
President, Chief Executive Officer Chief Financial Officer,
Vice President - Finance,
Treasurer and Corporate Secretary
February 8, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of American States Water Company:
We have audited the balance sheets and statements of capitalization of American
States Water Company (a California corporation) as of December 31, 1998 and 1997
and the related statements of income, changes in common shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American States Water Company
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Arthur Anderson
Arthur Andersen LLP
Los Angeles, California
February 8, 1999
32
33
SHAREHOLDER INFORMATION
ANNUAL MEETING OF SHAREHOLDERS
All shareholders are invited to attend the Annual Meeting of Shareholders which
will be held on Tuesday, April 27, 1999, beginning at 10:00 am, at the Industry
Hills Sheraton, One Industry Hills Parkway, City of Industry, California 91744.
Notice of meeting and proxy materials will be mailed.
STOCK LISTING
Common Shares of American States Water Company are traded on the New York Stock
Exchange under the symbol AWR. The high and low sales prices and dividends paid
on the Common Shares for the past two years were:
1998 High Low Dividends Paid
------- ------- --------------
First Quarter $26 $23 1/16 $0.315
Second Quarter 27 1/8 21 1/8 0.315
Third Quarter 27 23 1/4 0.315
Fourth Quarter 29 1/4 24 7/8 0.315
------- ------- ------
$1.260
1997
First Quarter $23 $20 5/8 $0.310
Second Quarter 24 1/2 20 1/4 0.310
Third Quarter 24 5/8 20 1/2 0.310
Fourth Quarter 25 5/8 21 1/2 0.315
------- ------- ------
$1.245
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Arthur Andersen LLP
633 West Fifth Street
Los Angeles, CA 90071
CORPORATE REPORTS
Shareholders with questions, or who wish to obtain a copy of the Company's
reports to the Securities and Exchange Commission without charge, should
contact:
AMERICAN STATES WATER COMPANY
Attn: Corporate Secretary
630 East Foothill Boulevard
San Dimas, CA 91773
Phone: (909) 394-3600
Fax: (909) 394-1382
SHAREHOLDER ASSISTANCE
Shareholders with questions about replacement of dividend checks, transferring
stock, replacing lost or stolen certificates or other matters related to their
ownership of stock, should contact:
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
(888) 816-6998
http://www.cmssonline.com
DIVIDEND REINVESTMENT AND COMMON SHARE PURCHASE PLAN
The Company has a Dividend Reinvestment and Common Share Purchase Plan that
offers shareholders of record a convenient way to increase their holdings by
reinvesting all or part of their cash dividends in additional Common Shares of
the Company. A prospectus and enrollment form may be obtained from ChaseMellon
Shareholder Services, L.L.C. or from the Company.
1999 DIVIDEND SCHEDULE
The following schedule shows the anticipated Common and Preferred Share record
and payment dates for 1999:
Record Dates Payment Dates
February 8 March 1
May 10 June 1
August 9 September 1
November 8 December 1
INTERNET ADDRESS
http://www.aswater.com
33
34
STATISTICAL REVIEW
(dollars in thousands, except per share and per
customer amounts) 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Financial Information
Revenues by Classification
Residential and Commercial $123,271 $131,007 $126,456 $106,480 $100,796
Industrial 1,917 1,998 1,847 1,674 1,459
Fire Service 1,329 1,319 1,269 1,211 1,181
Other 8,342 6,664 10,425 9,557 8,651
Total Water 134,859 140,988 139,997 118,922 112,087
Electric 13,201 12,767 11,532 10,891 10,588
Total operation revenues 148,060 153,755 151,529 129,813 122,675
Net Income 14,623 14,059 13,460 12,165 11,338
Earnings available for common shareholders 14,533 13,967 13,366 12,069 11,240
Earnings per common share 1.62 1.56 1.69 1.54 1.43
Dividends declared per common share 1.26 1.25 1.23 1.21 1.20
Book value per common share 17.23 16.86 16.52 15.50 15.16
Total assets 484,671 457,074 430,922 406,255 383,627
Net Utility plant 414,753 383,623 357,776 334,968 317,879
Capital additions 45,269 39,226 34,374 28,761 30,307
Long-term debt 120,809 115,286 107,190 107,455 92,891
Preferred Shares 1,600 1,600 1,600 1,600 1,600
Preferred shares -- mandatory redemption 400 440 480 520 560
Investment per customer $ 2,099 $ 1,900 $ 1,808 $ 1,688 $ 1,578
Operation Information
Water sold by Classification (mg)
Residential and Commercial 49,302 54,623 52,843 49,641 51,084
Industrial 832 899 828 802 818
Fire Service 649 417 831 130 308
Other 4,201 5,070 4,932 4,706 4,537
Total Water 54,984 61,009 59,434 55,279 56,747
Total electric sales (mwh) 123,791 121,315 117,139 111,519 110,234
Customers by Classification
Residential and Commercial 237,157 236,270 235,244 233,920 232,879
Industrial 332 331 333 326 323
Fire Service 3,112 2,964 2,925 2,909 2,896
Other 2,033 2,016 2,046 1,807 1,807
Total Water 242,634 241,581 240,548 238,962 237,905
Electric 20,865 20,698 20,437 20,475 20,331
Total company 263,499 262,279 260,985 259,437 258,236
Water Production by Source (mg)
Purchased 22,885 28,894 27,147 24,356 25,940
Pumped -- electric 35,596 34,531 35,216 34,105 33,337
Pumped -- gas 75 316 40 218 198
Gravity and Surface 74 1,147 932 979 967
Total Supply 58,630 64,888 63,335 59,658 60,442
Miles of Main in Service 2,768 2,638 2,603 2,587 2,567
Number of Employees 470 467 463 448 467
-------- -------- -------- -------- --------
mg=Millions of Gallons mwh=Mega-Watt Hours
34
35
(dollars in thousands, except per share and per
customer amounts) 1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
Financial Information
Revenues by Classification
Residential and Commercial $ 86,918 $ 82,112 $ 68,063 $ 69,161 $ 67,404
Industrial 1,134 1,110 1,019 1,021 1,074
Fire Service 1,149 1,067 927 954 785
Other 8,954 6,336 8,273 5,150 4,909
Total Water 98,155 90,625 78,282 76,286 74,172
Electric 10,351 10,035 12,378 11,054 10,043
Total operation revenues 108,506 100,660 90,660 87,340 84,215
Net Income 12,026 12,142 15,363 8,907 8,730
Earnings available for common shareholders 11,926 12,040 15,259 8,801 8,622
Earnings per common share 1.66 1.82 2.34 1.40 1.38
Dividends declared per common share 1.19 1.15 1.10 1.08 1.04
Book value per common share 14.92 13.28 12.59 11.31 10.97
Total assets 358,533 312,491 293,444 268,028 254,346
Net Utility plant 294,990 277,525 258,558 235,713 214,465
Capital additions 28,626 26,975 32,472 27,078 25,726
Long-term debt 84,621 84,195 82,634 67,246 67,767
Preferred Shares 1,600 1,600 1,600 1,600 1,600
Preferred shares -- mandatory redemption 600 640 680 720 760
Investment per customer $ 1,480 $ 1,388 $ 1,297 $ 1,213 $ 1,125
Operation Information
Water sold by Classification (mg)
Residential and Commercial 48,033 47,541 44,528 51,696 51,841
Industrial 679 699 737 937 966
Fire Service 33 23 11 50 25
Other 4,019 3,890 3,807 4,511 4,635
Total Water 52,764 52,153 49,083 57,194 57,467
Total electric sales (mwh) 106,234 105,346 101,923 103,376 97,583
Customers by Classification
Residential and Commercial 231,966 230,956 230,175 221,888 220,876
Industrial 322 330 347 376 385
Fire Service 2,877 2,846 2,779 2,610 2,562
Other 1,820 1,795 1,812 1,819 1,813
Total Water 236,985 235,927 235,113 226,693 225,636
Electric 20,131 20,039 19,780 19,559 19,215
Total company 257,116 255,966 254,893 246,252 244,851
Water Production by Source (mg)
Purchased 25,156 24,377 23,221 31,021 32,189
Pumped -- electric 32,056 30,406 28,640 28,923 29,733
Pumped -- gas 195 177 245 270 306
Gravity and Surface 658 1,249 1,046 1,255 361
Total Supply 58,065 56,209 53,152 61,469 62,589
Miles of Main in Service 2,560 2,549 2,535 2,517 2,488
Number of Employees 486 445 422 410 388
-------- -------- -------- -------- --------
mg=Millions of Gallons mwh=Mega-Watt Hours
35
36
[MAP P. 36]
CUSTOMER SERVICE AREAS SERVED BY SOUTHERN CALIFORNIA WATER COMPANY
Number of Customers
Region I
Northern District
Arden-Cordova 13,700
Bay Point 4,900
Clearlake 2,000
Coastal District
Los Osos 3,100
Ojai 2,800
Santa Maria 12,600
Simi Valley 12,500
Region II
Central District
Central Basin East 19,600
Central Basin West 19,300
Culver City 9,300
Orange County District
Los Alamitos 26,200
Placentia 14,400
Southwest District 49,300
Region III
Foothill District
Claremont 10,400
San Dimas 15,600
San Gabriel Valley 11,800
Mountain/Desert District
Apple Valley 2,300
Barstow 8,400
Calipatria 1,100
Morongo Valley 800
Wrightwood 2,500
Total Water 242,600
Bear Valley Electric 20,900
Total Customers 263,500
36
37
CORPORATE INFORMATION
Board of Directors of American States Water Company, Southern California Water
Company and American States Utility Services, Inc.
W. V. Caveney (72,18)(a,c)
Chairman of the Board
Floyd E. Wicks (55,9)(c,d)
President, Chief Executive Officer
James L Anderson (57,2)(a,c)
Senior Vice President
Americo Life Inc.
Laguna Hills, California
Jean E. Auer (62,3)(a,b,c,d)
Consultant and member of the
Board of Directors of the Water
Education Foundation
Vice Mayor of the
Town of Hillsborough, California
N. P. Dodge, Jr. (62,8)(a,b)
President, N.P. Dodge Company
Omaha, Nebraska
Anne M. Holloway (45,1)(a,c)
Vice President, Peterson Worldwide, LLP
Atherton, California
Robert F. Kathol (57,3)(a,b)
Executive Vice President
Kirkpatrick, Pettis, Smith, Polian Inc.
Omaha, Nebraska
Lloyd E. Ross (57,3)(a,c,d)
Managing Partner, Invermex L.P.
Irvine, California
ELECTED OFFICERS
W. V. Caveney (72,30)(e)
Chairman of the Board
Floyd E. Wicks (55,11)(e)
President, Chief Executive Officer
McClellan Harris III (47,8)(e)
Chief Financial Officer, Vice President-Finance,
Treasurer and Corporate Secretary
Joel A. Dickson (46,8)(f)
Vice President-Business Development
Donald K. Saddoris (55,31)(g)
Vice President-Customer Service, Region I
Randell J. Vogel (63,6)(g)(h)
Vice President-Customer Service, Region II
James B. Gallagher (44,11)(g)
Vice President-Customer Service, Region III
Joseph F. Young (53,21)(g)
Vice President-Government Affairs
Denise L. Kruger (34,6)(g)
Vice President-Water Quality
Susan L. Conway (37,10)(g)
Vice President-Regulatory Affairs
(age, years of service as a Board member)
(a) Member - Compensation Committee
(b) Member - Audit Committee
(c) Member - Business Opportunities Committee
(d) Member - Nominating Committee
(e) Holds same title in Southern California Water Company and American
States Utility Services, Inc.
(f) Holds same title in American States Utility Services, Inc. and holds
title of Vice President - Customer and
Operations Support in Southern California Water Company
(g) Officer of Southern California Water Company only
(h) Mr. Vogel retired in February 1999
38
[PHOTO P. IBC]
IBC
39
AMERICAN STATES WATER COMPANY
630 East Foothill Boulevard, San Dimas, California 91773-1212
(909) 394-3600
www.aswater.com
BACK COVER
40
APPENDIX
Page 2
Three graphical representations displaying Book Value per Common Share, Basic
Earnings per Common Share and Dividends Declared per Common Share from 1994
through 1998. Book Value per Share was $15.16 in 1994, $15.50 in 1995, $16.52 in
1996, $16.86 in 1997 and $17.23 in 1998. Basic Earnings per Common Share was
$1.43 in 1994, $1.54 in 1995, $1.69 in 1996, $1.56 in 1997 and $1.62 in 1998.
Dividends Declared per Common Share was $1.20 in 1994, $1.21 in 1995, $1.23 in
1996, $1.25 in 1997 and 1.26 in 1998.
Page 5
A 2 by 2 inch photograph of W. V. Caveney, Chairman and Floyd E. Wicks,
President and Chief Executive Officer.
Page 6
A table reflecting asset growth from 1929-1998. At the end of the first 48 years
of the Company's existence between 1929 and 1977, Total Assets equaled $102.0
million. At the end of the period 1977 through 1986, a period of 9 years, Total
Assets equaled $209.0 million. At the end of the period 1986 through 1992, a
period of 6 years, Total Assets equaled $313.0 million. At the end of the period
1992 through 1995, a period of 3 years, Total Assets equaled $406.0 million. At
the end of the period 1995 through 1998, a 3 year period, Total Assets equaled
$485.0 million
Page 7
Graphical representation of Total Assets for the period 1994 through 1998. Total
Assets equaled $383,627,000 in 1994, $406,255,000 in 1995, $430,922,000 in 1996,
$457,074 in 1997, and $484,671 in 1998.
Page 9
Five pictorial representations including: Family of three with drinking glasses,
active lawn sprinklers, man reading newspaper while sitting next to a fountain,
children in swimming pool talking with adult male on edge of pool, and an aerial
view of a residential development.
Page 10
Graphical representation of Net Income for the period of 1994 through 1998. Net
Income was $11,338,000 in 1994, $12,165,000 in 1995, $13,460,000 in 1996,
$14,059,000 in 1997 and $14,623,000 in 1998.
Page 11
Graphical representation of Total Capitalization and Net Utility Plant for the
period 1994 through 1998. Total Capitalization was $214,013,000 in 1994,
$231,151,000 in 1995, $256,036,000 in 1996, $268,379,000 in 1997, and
$277,108,000 in 1998. Net Utility Plant was $317,879,000 in 1994, $334,968,000
in 1995, $357,776,000 in 1996, $383,623,000 in 1997, and $414,753,000 in 1998.
Page 12
A 2 by 1 1/2 inch photograph of W.V. Caveney, Chairman of the Board.
Page 36
A topographical map, with altitude legend, of the state of California with
bullet points marking all of Southern California Water Company's Customer
Service Areas.
Page IBC
A 3 3/8 by 2 1/2 inch photograph of the Board of Directors of American States
Water Company, Southern California Water Company and American States Utility
Services, Inc. From the left, seated, are Lloyd E. Ross and James L. Anderson.
From the left, standing, are Anne M. Holloway, W. V. Caveney, Jean E. Auer,
Robert F. Kathol, N. P. Dodge, Jr., Floyd E. Wicks.