UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________ to________________
Commission file number: 0-8176
[LOGO] Southwest Water Company
(Exact name of registrant as specified in its charter)
Delaware 95-1840947
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605
(Address of principal executive offices) (Zip Code)
(626) 915-1551
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
-
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. On May 8, 2002, there were
9,255,235 common shares outstanding.
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
- ------- ---------------------- --------
Item 1. Financial Statements:
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 2002 and 2001 1
Condensed Consolidated Balance Sheets -
As of March 31, 2002 and December 31, 2001 2
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2002 and 2001 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
Part II. Other Information:
- -------- ------------------
Item 1. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
- ----------------------------------------------------------------------------------------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------------
(in thousands,
except per share data)
Operating Revenues $ 28,168 $ 23,215
Operating Expenses:
Direct operating expenses 21,618 17,760
Selling, general and administrative expenses 4,404 3,579
- ----------------------------------------------------------------------------------------------------------
26,022 21,339
- ----------------------------------------------------------------------------------------------------------
Operating Income 2,146 1,876
Other Income (Expense):
Interest expense (1,156) (992)
Interest income 20 19
Other (Note 4) 980 (40)
- ----------------------------------------------------------------------------------------------------------
(156) (1,013)
- ----------------------------------------------------------------------------------------------------------
Income Before Income Taxes 1,990 863
Provision for Income Taxes 696 328
- ----------------------------------------------------------------------------------------------------------
Net Income 1,294 535
Dividends on Preferred Shares 7 7
- ----------------------------------------------------------------------------------------------------------
Net Income Available for Common Shares $ 1,287 $ 528
==========================================================================================================
Earnings per Common Share (Note 3):
Basic $ 0.14 $ 0.06
Diluted $ 0.13 $ 0.06
- ----------------------------------------------------------------------------------------------------------
Cash Dividends per Common Share $ 0.056 $ 0.056
==========================================================================================================
Weighted Average Outstanding Common Shares (Note 3)
Basic 9,199 8,996
Diluted 9,758 9,431
==========================================================================================================
See accompanying notes to condensed consolidated financial statements.
1
Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
- ----------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
- ----------------------------------------------------------------------------------------------------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 701 $ 789
Customers accounts receivable 14,201 21,443
Other current assets 10,531 8,939
- ----------------------------------------------------------------------------------------------------------
25,433 31,171
Property, Plant and Equipment:
Utility group property, plant and equipment--at cost 224,205 218,696
Services group operations property, plant and equipment--at cost 15,103 14,317
- ----------------------------------------------------------------------------------------------------------
239,308 233,013
Less accumulated depreciation and amortization 63,564 61,889
- ----------------------------------------------------------------------------------------------------------
175,744 171,124
Other Assets 22,401 22,891
- ----------------------------------------------------------------------------------------------------------
$ 223,578 $ 225,186
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------
Current Liabilities:
Current portion of long-term debt and lines of credit $ 6,099 $ 5,029
Accounts payable 4,485 6,211
Other current liabilities 14,886 15,127
- ----------------------------------------------------------------------------------------------------------
25,470 26,367
Other Liabilities and Deferred Credits:
Long-term debt 42,145 44,200
Lines of credit 11,179 13,863
Advances for construction 7,634 7,482
Contributions in aid of construction 56,047 53,619
Deferred income taxes 8,460 8,354
Other liabilities and deferred credits 16,763 16,346
- ----------------------------------------------------------------------------------------------------------
Total Liabilities and Deferred Credits 167,698 170,231
Stockholders' Equity:
Cumulative preferred stock 513 513
Common stock 92 92
Paid-in capital 37,815 37,663
Retained earnings 17,460 16,687
- ----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 55,880 54,955
- ----------------------------------------------------------------------------------------------------------
$ 223,578 $ 225,186
==========================================================================================================
See accompanying notes to condensed consolidated financial statements.
2
Southwest Water Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
- ---------------------------------------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------
(in thousands)
Cash Flows From Operating Activities:
Net income $ 2,274 $ 535
Adjustments to reconcile net income to
net cash provided by operating activities 2,063 651
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,337 1,186
- ---------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Additions to property, plant and equipment (3,522) (3,432)
Proceeds from sale of land 165 -
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,357) (3,432)
- ---------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net (repayments) borrowings on bank notes payable (1,614) 1,943
Contributions in aid of construction and advances for
construction 1,044 587
Net proceeds from dividend reinvestment plan,
employee stock purchase and stock option plans 152 198
Dividends paid (521) (485)
Repayments on advances for construction (74) (133)
Redemption of long-term debentures (55) -
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,068) 2,110
- ---------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (88) (136)
Cash and cash equivalents at beginning of period 789 1,379
=========================================================================================================
Cash and cash equivalents at end of period $ 701 $ 1,243
=========================================================================================================
=========================================================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,326 $ 906
Income taxes $ 263 $ 20
Depreciation and amortization $ 1,733 $ 1,643
Non-cash contributions in aid of construction
conveyed to Company by developers $ 2,540 $ 423
- ---------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
3
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
1. Southwest Water Company (Southwest Water, the Company, or "we", "us" or
"our") was incorporated in California in 1954 and reincorporated in
Delaware in 1988. Southwest Water is a publicly traded holding company. All
of our business operations are conducted through our subsidiaries which
provide a broad range of services including water production and
distribution, wastewater collection and treatment, public works services
and utility submetering. We serve more than 1.5 million people in 29 states
nationwide. Our business is segmented into a utility group and a services
group.
In our utility group, we own and operate rate-regulated public water and
wastewater utilities. State regulatory agencies oversee the operations of
our utilities and establish the rates that we can charge for our services.
Our utility group operations are performed by four subsidiaries: Suburban
Water Systems (Suburban), New Mexico Utilities, Inc. (NMUI) and Hornsby
Bend Utility Company (Hornsby), which are wholly owned, and Windermere
Utility Company (Windermere), of which we own 80%.
In our services group, we own contract service businesses. Through our
wholly owned subsidiary, ECO Resources, Inc. (ECO), we operate and manage
water and wastewater treatment facilities owned by cities, public agencies,
municipal utility districts and private entities. We also own a 90%
interest in Operations Technologies, Inc. (OpTech), a provider of contract
water, wastewater and public works services in the southeastern United
States. Nationwide, we provide utility submetering and billing and
collection services through our 85%-owned (see Note 7) subsidiary, Master
Tek International, Inc. (Master Tek). Our service group companies may be
subject to regulatory oversight; however, the pricing of our services is
not subject to regulation.
2. Certain information and footnote disclosures normally included in our
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America (US GAAP) have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (the SEC). Our condensed consolidated
financial statements should be read in conjunction with the financial
statements and related notes contained in our Annual Report on Form 10-K
for the year ended December 31, 2001 (the 2001 Annual Report). We are not
aware of any new accounting standards that would have an adverse material
impact on our financial position, results of operations or cash flows.
The unaudited condensed consolidated financial statements reflect all
adjustments which, in our opinion, are necessary to present fairly the
financial position of Southwest Water as of March 31, 2002, and our results
of operations for the three months ended March 31, 2002 and 2001. These
adjustments are of a normal recurring nature. Certain reclassifications
have been made to the 2001 financial statements to conform to the 2002
presentation.
3. We record earnings per share (EPS) by computing "basic EPS" and "diluted
EPS" in accordance with US GAAP. "Basic EPS" measures our performance over
the reporting period by dividing net income available to common
stockholders by the weighted average number of common shares outstanding
during the period. "Diluted EPS" measures our performance over the
reporting period after giving effect to all potentially dilutive common
shares that would have been outstanding if the dilutive common shares had
been issued. Stock options, convertible debentures and warrants give rise
to potentially dilutive common shares. On September 25, 2001, our Board of
Directors
4
declared a five percent stock dividend, payable on October 22, 2001 to
stockholders of record on October 1, 2001. Per share amounts and shares
outstanding reflect this dividend.
4. As fully described in the 2001 Annual Report, prior to December 30, 1999,
Southwest Water had a non-contributory defined benefit pension plan (the
Pension Plan) for employees of Southwest Water, Suburban and NMUI. On
August 5, 1999, our Board of Directors adopted a resolution to terminate
the Pension Plan, freeze the assets of the Pension Plan and cease all
benefit accruals as of December 30, 1999. In January 2002, the net assets
of the Pension Plan were distributed to plan participants as outlined by
the Employee Retirement Income Security Act (ERISA) and its related
regulations. Following distribution of approximately $14,400,000 to satisfy
the pension benefit obligation and settlement of expenses paid by the
Pension Plan in accordance with ERISA and its related regulations, the
Pension Plan had excess assets of approximately $1,200,000. Under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, we recognized a termination
gain of approximately $980,000 in the first quarter of 2002.
5. Under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets,
goodwill is no longer subject to amortization over its estimated useful
life. Instead, goodwill is assessed for impairment on an annual basis (or
more frequently if circumstances indicate a possible impairment) by means
of a fair-value-based test. SFAS No. 142 requires that goodwill incurred
subsequent to June 30, 2001 not be amortized over a fixed period, but
rather that it be periodically assessed for impairment.
SFAS No. 142 also requires that we provide the following information
concerning prior goodwill amortization and the impact of prior goodwill
amortization on basic and diluted EPS.
For the Three Months Ended March 31,
2002 2001 2000
=========================================================================================
Reported net income (thousands) $ 1,294 $ 535 $ 430
Add back: Prior goodwill amortization - 53 28
----------------------------------
Adjusted net income $ 1,294 $ 588 $ 458
==================================
Basic earnings per share:
Reported EPS $ 0.14 $ 0.06 $ 0.05
Add back: Prior goodwill amortization - - -
----------------------------------
Adjusted EPS $ 0.14 $ 0.06 $ 0.05
==================================
Diluted earnings per share:
Reported EPS $ 0.13 $ 0.06 $ 0.04
Add back: Prior goodwill amortization - - -
----------------------------------
Adjusted EPS $ 0.13 $ 0.06 $ 0.04
==================================
=========================================================================================
6. Effective January 2002, we were subject to SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that
long-lived assets be tested for recoverability when events or changes in
circumstances indicate carrying amounts may not be recoverable. SFAS No.
144 further clarifies the methods of accounting for assets that are
disposed of. We regularly review assets for impairment. The implementation
of SFAS No. 144 did not
5
result in any material adverse effect on our results of operations or
financial condition. SFAS No. 144 does not apply to goodwill impairment
which is accounted for under SFAS No. 142 as described in Note 5.
7. Through March 31, 2002, we owned 80% of Master Tek. Under the terms of our
purchase agreement for Master Tek, the minority owner of Master Tek has the
option to require us to purchase his minority interest in increments. The
minority owner exercised this option to sell us 5% of Master Tek stock for
which we paid $1,000,000 in April 2002, at which point our ownership
percentage increased to 85%.
8. We have two reportable segments as defined under the requirements of SFAS
No. 131, Disclosures about Segments of an Enterprise and Related
Information. We have not changed the basis of segmentation or the basis of
measurement of segment profit or loss from the information reported in our
2001 Annual Report.
The following table sets forth the disclosures about Southwest Water's
reportable segments as required by SFAS No. 131.
================================================================================================================
Total
Services Utility Total Segment Consolidated
Group Group Information Other Information
----------------------------------------------------------------------------------------------------------------
(in thousands)
Three Months Ended March 31, 2002
---------------------------------
Revenues from external customers $ 17,177 $ 10,991 $ 28,168 $ - $ 28,168
Segment operating profit 496 2,678 3,171 (1,028) 2,146
As of March 31, 2002
--------------------
Segment assets 42,545 176,681 219,226 4,352 223,578
Three Months Ended March 31, 2001
---------------------------------
Revenues from external customers $ 13,826 $ 9,389 $ 23,215 $ - $ 23,215
Segment operating profit 698 2,255 2,953 (1,077) 1,876
As of March 31, 2001
--------------------
Segment assets 33,252 165,496 198,748 2,157 200,905
===============================================================================================================
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Our liquidity, capital resources and cash flows are influenced primarily by
capital expenditures at our utility group for the addition, replacement and
renovation of water and wastewater utility facilities. Our capital resources are
also influenced by investments in new business opportunities, including the
acquisition of companies, funding of projects and acquisition of contracts. As
fully described in our 2001 Annual Report, ECO financed and built a reverse
osmosis water treatment plant, which began operating in 2001. In connection with
this project, at December 31, 2001, ECO had recorded a receivable in the amount
of approximately $6,600,000 for the work done. Payment for the full amount was
received in January 2002.
As of March 31, 2002, we had cash and cash-equivalent balances totaling
$701,000 and aggregate lines of credit totaling $24,000,000 consisting of three
separate unsecured lines of credit from three commercial banks. Two of the lines
of credit expire in July 2003. The remaining $4,000,000 line, with a balance of
approximately $3,200,000 as of March 31, 2002, was renewed in April 2002 and now
expires
6
in April 2004. As of March 31, 2002, we had $14,379,000 outstanding on these
lines of credit. During the first quarter of 2002, our outstanding line of
credit borrowings decreased by $1,614,000. We paid down our lines of credit
primarily with the proceeds from the outstanding receivable from ECO. We also
used the proceeds to pay in full our NMUI Series A First Mortgage Bonds in the
amount of $2,000,000, and we purchased certain utility property.
Under the terms of our purchase agreement for Master Tek, the minority
owner of Master Tek has the option to require us to purchase his minority
interest in increments. The minority owner exercised this option to sell us 5%
of Master Tek stock for which we paid $1,000,000 in April 2002.
We expect to maintain our lines of credit in the normal course of business.
Each of the line of credit agreements contains certain financial covenants. As
of March 31, 2002, we were in compliance with all applicable covenants of each
of the line of credit agreements. As of March 31, 2002, we were also in
compliance with all restrictions under the indenture for our convertible
subordinate debentures.
In addition to our lines of credit, we have existing borrowing capacity
under our First Mortgage Bond Indentures of approximately $58,000,000 as of
March 31, 2002. However, our additional borrowing available under our current
commercial lines of credit is limited by financial covenants that restrict
additional borrowing at March 31, 2002 to an amount no greater than the
remaining unused credit line amount. Additional borrowing outside our lines of
credit requires bank approval.
During the first quarter of 2002, our additions to property, plant and
equipment were $6,062,000, representing an increase of $2,207,000 over 2001. The
increase was due primarily to the addition of utility plant by our utility
group, including new well and transmission lines at NMUI and the construction of
a lift station and forced main, and an elevated storage tank at Windermere. In
addition, ECO completed expansion of an office building in Austin, Texas.
Developers made contributions in aid of construction (CIAC), Living Unit
Equivalent (LUE) fees and advances totaling $3,584,000 during the first quarter
of 2002, of which $1,044,000 was received in cash and $2,540,000 was received as
non-cash contributions of property. Company-financed capital additions were
$2,478,000, funded primarily by cash flow from operations and borrowing on the
lines of credit. We estimate that our total capital additions in 2002 will be
approximately $14,000,000, primarily for utility plant, and that our cash flows
from operations, borrowings on our lines of credit and CIAC will fund these
additions.
We anticipate that our available line of credit borrowing capacity and cash
flows generated from operations will be sufficient to fund our activities during
the next 12 months. If we were unable to renew our existing lines of credit, our
capital spending or acquisitions would be reduced or delayed until new financing
arrangements were secured. Such financing arrangements could include seeking
debt or equity financing through a private placement or a public offering.
Similarly, if additional cash were needed to fund an acquisition, financing
arrangements could include long-term borrowing or equity financing.
Critical Accounting Policies
We consider certain accounting policies critical in preparing our
consolidated financial statements. These include, but are not limited to:
recognition of revenues, impairment of goodwill, and utility accounting. Certain
of these policies require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of certain
contingent assets and liabilities at the date of the consolidated financial
statements, as well as amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates. Our 2001 Annual
Report includes a detailed description of both our critical and significant
accounting policies.
7
Regulatory Affairs
The California Public Utilities Commission (CPUC), the New Mexico Public
Regulation Commission (NMPRC) and the Texas Natural Resources Conservation
Commission (TNRCC) regulate the rates and operations of Suburban, NMUI and
Windermere and Hornsby, respectively. The rates allowed are intended to provide
the utilities an opportunity to recover costs and earn a reasonable return on
common equity.
Under current CPUC practices, customer water rates may be increased through
general rate increases or by offsets for certain expense increases. Typically,
general rate increases are for three years and include step increases in the
second and third years. General rate increases require formal proceedings with
the CPUC in which overall rate structure, expenses and rate base are examined by
CPUC staff. Public hearings are also held. General rate proceedings require
approximately 12 months from the time an application is filed to the CPUC's
authorization of new rates. The step increases for the second and third years
are intended to compensate for projected expense increases. Prior to their
approval, step increases are subject to verification that earnings levels have
not exceeded the rate of return authorized at the general rate proceeding. In
recent years, Suburban succeeded in achieving efficiencies and cost savings that
resulted in the deferral of rate requests. At the direction of the CPUC,
Suburban filed a rate application on April 2, 2002. This application is expected
to take approximately one year to process. Southwest Water and Suburban are
unable to predict the outcome of this rate proceeding at this time.
Prior to December 1, 2001, the CPUC permitted Suburban (and other regulated
utilities) to record the difference between actual and CPUC-adopted water
production costs in balancing accounts in the income statement, with a
corresponding adjustment on the balance sheet. The CPUC significantly changed
this policy by eliminating the use of balancing accounts as of December 1, 2001.
In place of the balancing account, Suburban will track the difference between
actual and CPUC-adopted water production costs in current operations. Such costs
will be accumulated in a memorandum account and Suburban will attempt to recover
these costs during its regularly scheduled general rate hearings. We believe
that at the conclusion of the current general rate hearing Suburban will be able
to recover approximately $2,300,000 that was in the balancing account as of
March 31, 2002. However, we cannot assure you of such recovery. Suburban
believes that the changed CPUC rules will likely result in greater fluctuations
in earnings beginning in 2002.
Windermere filed for a general rate increase in June 2001, and new rates
became effective in January 2002. NMUI and Hornsby are not currently seeking any
rate increase; however, regulatory changes concerning water quality, future
construction expenditures and increased operating expenses may result in
periodic requests for rate increases.
Southwest Water closely monitors legislative, Environmental Protection
Agency (EPA), CPUC, NMPRC and TNRCC developments. The various water industry
associations in which we actively participate also monitor these developments.
We do not know the possible legislative, EPA, CPUC, NMPRC or TNRCC changes that
will be enacted or the terms of such changes if enacted. Therefore, we cannot
predict the impact, if any, of future legislative changes, EPA, CPUC, NMPRC or
TNRCC developments or changes on our financial position, results of operations
or cash flows.
Our services group business pricing is not subject to regulation by any
public regulatory commissions. Most contracts with municipal utility districts
are short-term contracts and do not generally include inflation adjustments.
Changes in prices are negotiated on a contract-by-contract basis. Our operations
and maintenance contracts are generally longer-term water and wastewater service
contracts, primarily with cities, and may include inflation adjustments. Most
contracts with management companies and owners of apartment or condominium
communities are short-term contracts and do not generally include inflation
adjustments. Changes in prices are negotiated on a contract-by-contract basis.
8
Weather and Seasonality Considerations
Our regulated water utility operations are seasonal. Therefore, the results
of operations for one quarter do not indicate results to be expected in another
quarter. Rainfall and weather conditions affect our utility group operations,
with significant water consumption occurring during the third quarter of each
year when weather tends to be hot and dry. Drought conditions may result in
lower revenue due to consumer conservation efforts and a shortage of water
supply. Drought conditions may also result in increased water costs to us and
adversely affect our profitability. Conversely, unusually wet conditions may
result in decreased customer demand, lower revenues and lower profit to our
utility operations.
Our services group operations can also be seasonal in nature. For example,
heavy rainfall limits our ability to perform certain billable work such as
pipeline maintenance, manhole rehabilitation and other outdoor services. Severe
weather conditions can result in additional labor and material costs to us that
may not necessarily be recoverable from the various cities under operations and
maintenance contracts with us.
Environmental Affairs
Operations of Suburban, NMUI and Windermere and Hornsby fall under the
regulatory jurisdiction of the CPUC, the NMPRC and the TNRCC, respectively. Our
utility group operations are also subject to water and wastewater pollution
standards and water and wastewater quality regulations of the EPA and various
state health regulatory agencies. Both the EPA and state health regulatory
agencies require periodic testing and sampling of water. Costs associated with
the testing of water supplies have increased and are expected to increase
further as the regulatory agencies adopt additional monitoring requirements. In
November 2001, the EPA announced a decision to lower the arsenic standard in
drinking water from 50 parts per billion to 10 parts per billion. Although our
utilities meet the current 50 parts per billion standard, NMUI does not meet the
newly adopted arsenic standard. Under current rules, the new standard must be
completely met by 2006. NMUI anticipates that significant capital expenditures
will be required in order to comply with the new standard. We believe that
future incremental costs of complying with government regulations, including any
capital expenditures, will be recoverable through increased rates and contract
operations revenues. However, we cannot assure you that recovery of such costs
will be allowed. To date, we have not experienced any material adverse effects
upon our financial position, results of operations or cash flows resulting from
compliance with government regulations.
As contract operators, ECO and OpTech do not own any of the water sources
or utility facilities that they operate for their clients. Although not the
owners, ECO and OpTech are responsible for operating these water and wastewater
facilities in compliance with all federal, state and local health standards and
regulations.
Master Tek is a utility submetering, billing and collection services
company and does not own or operate any water nor any production or treatment
facilities.
Results of Operations
Three Months Ended March 31, 2002 Compared to the Three Months Ended March
31, 2001
Diluted EPS was $0.13 for the first three months of 2002 compared to
diluted EPS of $0.06 in 2001 (after adjustment for a 5% stock dividend on
October 1, 2001). The $0.13 in 2002 includes a one-time gain on the termination
and settlement of our pension plan obligation (pension termination) which was
recorded in March 2002. Total diluted EPS, excluding the gain on pension
termination, was $0.07, which represents an increase of 17% over the 2001 first
quarter.
9
Operating revenues
Operating revenues for the first three months of 2002 increased $4,953,000,
or 21%, compared to 2001. Services group revenues increased $3,351,000, or 24%,
due primarily to the acquisition of OpTech in August 2001. Utility group
revenues increased $1,602,000, or 17%, as a result of increased water usage at
Suburban because of a warm, dry winter and the effect of a rate increase at
Windermere.
Operating income
Operating income for the first three months of 2002 increased $270,000, or
14%, compared to 2001 and, as a percentage of operating revenues, was 8% in both
2002 and 2001. Services group operating income decreased $202,000. During the
first quarter of 2001, ECO had the benefit of a one-time construction project of
a large water treatment plant in El Paso, Texas, and recognized the related
revenue and operating income. There was no comparable project in 2002. The
decrease in operating income was partially offset by the acquisition of OpTech
in August 2001. Operating income at the utilities increased $423,000, due
primarily to increased water consumption at Suburban because of unseasonably
dry, warm winter weather and the effect of a rate increase at Windermere. Parent
company expenses decreased $49,000.
Direct operating expenses
During the first three months of 2002, direct operating expenses increased
$3,858,000, or 22%, compared to 2001. As a percentage of operating revenues,
these expenses were 77% in 2002 and 2001. Services group direct operating
expenses increased $2,828,000, due primarily to the acquisition of OpTech in
August 2001. Utility group direct operating expenses increased $1,030,000,
primarily in California, as a result of energy costs and other
water-volume-related expenses at Suburban in connection with the increased
demand for water in the first quarter of 2002.
Selling, general and administrative expenses
Selling, general and administrative expenses in the first three months of
2002 increased by $825,000, or 23%, compared to 2001. As a percentage of
operating revenues, these expenses were 15.6% in 2002 and 15% in 2001. General
and administrative expenses of our services group increased $730,000 due
primarily to the acquisition of OpTech in August 2001. General and
administrative expenses of the utility group increased $144,000, primarily as a
result of depreciation, insurance and payroll expense. General and
administrative expenses of the parent company decreased $49,000.
Interest and other
Total interest expense increased $164,000 during the first three months of
2002 compared to 2001. The increase reflects interest expense on our 20-year
convertible subordinate debentures that were issued in July 2001. This increase
was offset by decreases in the interest expense on our lines of credit because
we paid down a portion of our line of credit borrowing with the proceeds from
the debentures. Our interest expense on the lines of credit also decreased due
to generally lower interest rates in the first quarter of 2002 compared to 2001.
Other income increased $857,000. In March 2002, we recognized a $980,000
one-time gain from the termination and settlement of the pension plan obligation
as fully described in Note 4.
10
Item 3: Quantitative and Qualitative Disclosures About Market Risk
We have certain indebtedness that is subject to variable interest rates. As
a result, Southwest Water's interest expense is affected by changes in the
general level of interest rates. Changes in interest rates affect the interest
expense paid on the line of credit borrowings, which is determined based upon an
agreed rate with the banks. Contractually, the highest interest rates charged on
the lines of credit cannot exceed the banks' prime rate minus one-quarter
percent.
Southwest Water is using the favorable low interest rates in the current
market. In part to mitigate future market interest rate risk, we completed a
$20,000,000, 20-year convertible subordinate debenture offering in July 2001,
which bears a fixed interest rate of 6.85% per annum. The proceeds were used to
pay down our variable rate indebtedness. Our long-term debentures were sold with
a fixed interest rate, and are not subject to market fluctuation of interest
rates. Our debentures are convertible into common stock of Southwest Water and,
at a certain EPS level, our debentures will become dilutive in computing our
earnings per share.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
ECO was named as a defendant in four lawsuits alleging injury and damages as
the result of a sewage spill which occurred at an Austin, Texas, sewage pumping
station operated by ECO. In 2001, a settlement was reached with two of the
plaintiffs and a third suit is nearing settlement. ECO has been defended and
indemnified by its insurance carrier and was required to pay a $10,000
deductible on settlement of the claims. The remaining lawsuit is pending at this
date. Southwest Water and ECO continue to vigorously defend against the claims.
At this time, we do not believe these actions will have a material adverse
effect on our financial position, results of operations or cash flows.
Southwest Water and Suburban have been named as defendants in several
lawsuits alleging water contamination in the San Gabriel Valley Main Basin.
Defendants include Southwest Water, Suburban and others. The California Supreme
Court (the Court) ruled in February 2002 that the plaintiffs cannot challenge
the adequacy of the water quality standards established by the CPUC. The
plaintiffs may sue and collect damages from Suburban and other regulated water
companies only if they prove that water delivered did not meet CPUC water
quality standards. Suburban believes that it has complied with CPUC water
quality standards. The Court directed that the cases be sent to the trial court
for further proceedings. The plaintiffs have filed new briefs and a hearing is
scheduled for late May 2002. We now have ten pending cases and we have received
notice of the filing of an eleventh case, which has not yet been served.
Southwest Water and Suburban have requested defense and indemnification from our
liability insurance carriers for these lawsuits. Several of the liability
insurance carriers are currently absorbing the costs of defense of the lawsuits.
The Company cannot predict the outcome of these lawsuits. Based upon information
available at this time, we do not expect that these actions will have a material
adverse effect on our financial position, results of operations or cash flows.
In 1998, the city of Albuquerque (Albuquerque) initiated an action in
eminent domain to acquire the operations of NMUI. In September 2000, the
Albuquerque City Council voted to withdraw the condemnation proceeding. In
September 2001, we received a formal withdrawal of the lawsuit and Albuquerque
has paid us approximately $115,000 to cover the majority of the costs incurred
as a result of the condemnation proceedings. NMUI will attempt to recover the
balance of these costs of approximately $94,000 however, we cannot assure you
that NMUI will be successful in recovering such costs.
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Southwest Water and its subsidiaries are the subjects of certain litigation
arising from the ordinary course of operations. We believe the ultimate
resolution of such matters will not materially affect our financial position,
results of operations or cash flow.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits furnished pursuant to Item 601 of Regulation S-K:
None.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
SOUTHWEST WATER COMPANY
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(Registrant)
Dated: May 13, 2002 /s/ PETER J. MOERBEEK
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Peter J. Moerbeek
Chief Financial Officer
Dated: May 13, 2002 /s/THOMAS C. TEKULVE
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Thomas C. Tekulve
Chief Accounting Officer
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