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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION REGISTRANT AND STATE OF INCORPORATION IRS EMPLOYER
FILE NO. ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO.
- ------------------ ---------------------------------------------- ---------------------
333-47647 American States Water Company 95-4676679
(A California Corporation)
630 East Foothill Boulevard
San Dimas, California 91773-9016
909-394-3600
000-01121 Southern California Water Company 95-1243678
(A California Corporation)
630 East Foothill Boulevard
San Dimas, California 91773-9016
909-394-3600
Securities registered pursuant to Section 12(b) of the Act:
AMERICAN STATES WATER COMPANY
COMMON SHARES, $2.50 STATED VALUE NEW YORK STOCK EXCHANGE
--------------------------------- -----------------------
Title of Each Class Name of Each Exchange On Which Registered
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether Registrant has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and has been subject to such filing requirements for the
past 90 days.
American States Water Company Yes [x] No [ ]
Southern California Water Company Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the total voting stock held by non-affiliates of
American States Water Company was approximately $226,836,000 on March 26, 1999.
The closing price per Common Share on that date, as quoted in the Western
Edition of The Wall Street Journal, was $25-5/16. Voting Preferred Shares of
American States Water Company, for which there is no established market, were
valued on March 26, 1999 at $1,434,000 based on a yield of 5.56%. As of March
26, 1999, the number of Common Shares of American States Water Company, $2.50
Stated Value, outstanding was 8,957,671. As of that same date, all 100
outstanding Common Shares of Southern California Water Company were owned by
American States Water Company.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement filed with the Securities and Exchange
Commission on or about March 28, 1999 as to Part III, Item Nos. 10, 11, 12 and
13, in each case as specifically referenced herein.
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AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-K
INDEX
Page No.
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PART I
Item 1: Business 1
Item 2: Properties 2 - 3
Item 3: Legal Proceedings 3 - 6
Item 4: Submission of Matters to a Vote of Security Holders 6
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 6 - 7
Item 6: Selected Financial Data 8
Item 7: Management's Discussion and Analysis of Financial Conditions and
Results of Operation 8 - 24
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 25
Item 8: Financial Statements and Supplementary Data 25 - 56
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 57
PART III
Item 10: Directors and Executive Officers of Registrant 57
Item 11: Executive Compensation 57
Item 12: Security Ownership of Certain Beneficial Owners and Management 57
Item 13: Certain Relationships and Related Transactions 57
PART IV
Item 14: Exhibits, Financial Schedules and Reports on Form 8-K 57 - 58
Exhibit Index 58 - 60
Signature(s) 61 - 62
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ITEM 1. BUSINESS
This annual report on Form 10-K is a combined report being filed by two
separate Registrants: American States Water Company (hereinafter "AWR") and
Southern California Water Company (hereinafter "SCW"). References in this report
to "Registrant" are to AWR and SCW, collectively, unless otherwise specified.
SCW makes no representations as to the information contained in this report
relating to AWR and its subsidiaries, other than SCW.
GENERAL
AWR was incorporated in 1998 in connection with the formation of a
holding company by SCW and became a public company on July 1, 1998. AWR has no
material assets other than the common stock of SCW. SCW is a public utility
company engaged principally in the purchase, production, distribution and sale
of water (SIC No. 4941). SCW also distributes electricity in one customer
service area (SIC No. 4911). SCW is regulated by the California Public Utilities
Commission ("CPUC") and was incorporated on December 31, 1929 under the laws of
the State of California. AWR has another subsidiary, American States Utility
Services, Inc. ("ASUS") which contracts to lease, operate and maintain
governmentally owned water and wastewater systems and to provide other services
to local governments to assist them in the operation and maintenance of their
water and wastewater systems. Neither AWR nor ASUS are regulated by the CPUC.
SCW is organized into three regions operating within 75 communities in
10 counties in the State of California and provides water service in 21 customer
service areas. Region I incorporates 7 customer service areas in northern and
central California, Region II has 6 customer service areas located in Los
Angeles and Orange counties; and Region III incorporates 8 water customer
service areas and the Bear Valley Electric customer service area. As of December
31, 1998, about 73% of SCW's water customers were located in the greater
metropolitan areas of Los Angeles and Orange Counties. SCW also provides
electric service to the City of Big Bear Lake and surrounding areas in San
Bernardino County. All electric energy sold by SCW to customers in its Bear
Valley Electric customer service area in 1998 was purchased under an energy
brokerage contract with Sempra Energy Corporation.
SCW's utility operations exhibit seasonal trends. Although SCW's water
utility operations have a diversified customer base, revenues derived from
commercial and residential water customers accounted for approximately 91% and
93% of total water revenues in 1998 and 1997, respectively.
SCW served 242,634 water customers and 20,865 electric customers at
December 31, 1998, or a total of 263,499 customers, compared with 262,279 total
customers at December 31, 1997.
COMPETITION
The business of SCW is substantially free from direct and indirect
competition with other public utilities, municipalities and other public
agencies. AWR's other subsidiary, ASUS, actively competes with other
investor-owned utilities and governmental entities on the basis of price and
quality of service.
EMPLOYEE RELATIONS
Registrant had 470 employees as of December 31, 1998 as compared to 467
at December 31, 1997. Seventeen positions in SCW's Bear Valley Electric customer
service area are covered by a collective bargaining unit agreement, which
expires in 1999, with the International Brotherhood of Electrical Workers.
Forty-nine positions in SCW's Metropolitan ratemaking district are covered by a
collective bargaining unit agreement, which expires in 2001, with the Utility
Workers of America. Registrant has no other unionized employees.
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ITEM 2 - PROPERTIES
FRANCHISES, COMPETITION, ACQUISITIONS AND CONDEMNATION OF PROPERTIES
SCW holds all necessary franchises from the incorporated communities and
the counties which it serves. SCW holds certificates of public convenience and
necessity granted by the CPUC in each of the ratemaking districts it serves.
SCW's certificates, franchises and similar rights are subject to alteration,
suspension or repeal by the respective governmental authorities having
jurisdiction.
The laws of the State of California provide for the acquisition of
public utility property by governmental agencies through their power of eminent
domain, also known as condemnation. Registrant has not been, within the last
three years, involved in activities related to the condemnation of any of its
water customer service areas or in its Bear Valley Electric customer service
area.
ELECTRIC PROPERTIES
SCW's electric properties are all located in the Big Bear area of San
Bernardino County. As of December 31, 1998, SCW operated 28.7 miles of overhead
34.5 KV transmission lines, 0.6 miles of underground 34.5 KV transmission lines,
172.4 miles of 4.16 KV or 2.4 KV distribution lines, 39.5 miles of underground
cable and 14 sub-stations. There are no generating plants in SCW's system.
OFFICE BUILDINGS
Registrant's general offices are housed in a single-story office
building located in San Dimas, California. The land and the building, which was
completed and occupied in early 1990, are owned by SCW. SCW also owns and
occupies certain facilities housing regional, district and customer service
offices while other such facilities are housed in leased premises.
WATER PROPERTIES
As of December 31, 1998, SCW's physical properties consisted of water
transmission and distribution systems which included 2,768 miles of pipeline
together with services, meters and fire hydrants and 437 parcels of land,
generally less than 1 acre each, on which are located wells, pumping plants,
reservoirs and other water utility facilities including five surface water
treatment plants.
As of December 31, 1998, SCW owned and operated 294 active wells
equipped with pumps with an aggregate capacity of approximately 180 million
gallons per day. SCW has 52 connections to the water distribution facilities of
the Metropolitan Water District of Southern California ("MWD") and other
municipal water agencies. SCW's storage reservoirs and tanks have an aggregate
capacity of approximately 95 million gallons. SCW owns no dams in its customer
service areas. The following table provides, in greater detail, selected water
utility plant of SCW for each of its water ratemaking districts:
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Pumps Distribution Facilities Reservoirs
---------------- ----------------------------------------------------- ------------------
Well Booster Mains (ft.) Meters Services Hydrants Tanks Capacity
---- ------- ----------- ------ -------- -------- ----- --------
Arden Cordova 25 17 473,391 3,389 8,337 1,175 3 4,000
Barstow 25 37 866,308 14,404 10,765 997 13 8,025
Bay Point 1 16 139,299 5,150 3,034 300 7 4,046
Calipatria 0 8 134,879 1,133 1,664 73 1 150
Claremont 27 35 722,899 16,394 11,229 1,175 16 16,082
Clearlake 0 13 189,418 2,549 915 74 4 647
Desert 17 22 749,165 7,408 4,562 572 14 1,477
Los Osos 10 10 195,812 3,916 1,385 154 8 834
Metro 79 83 4,743,429 150,102 108,328 7,440 41 25,209
Ojai 5 12 234,318 5,120 3,434 348 5 1,494
Orange 33 37 2,176,187 59,498 40,762 4,433 18 11,903
San Dimas 11 37 1,198,326 20,571 7,901 861 16 10,149
San Gabriel 23 10 551,101 12,827 12,849 784 3 1,520
Santa Maria 29 23 956,414 21,628 7,617 767 8 2,541
Simi 1 22 470,091 13,940 9,492 826 6 6,210
Wrightwood 8 5 216,809 5,428 670 76 7 1,546
--- --- ---------- ------- ------- ------ --- ------
Total 294 387 14,017,846 343,457 232,944 20,055 170 95,833
Capacity is measured in thousands of gallons
MORTGAGE AND OTHER LIENS
As of December 31, 1998, Registrant had no mortgage debt outstanding,
and its properties were free of any liens securing indebtedness.
ITEM 3 - LEGAL PROCEEDINGS
WATER QUALITY-RELATED LITIGATION
On April 24, 1997, a complaint in multiple counts seeking recovery for
negligence, wrongful death, strict liability, trespass, public nuisance, private
nuisance, negligence per se, strict liability for ultrahazardous activities and
fraudulent concealment was filed in Los Angeles Superior Court on behalf of
approximately 145 plaintiffs (the "Adler Matter"). After preliminary Demurrers
and Motions to Strike, these same plaintiffs filed a First Amended Complaint on
or about October 16, 1997 seeking recovery on essentially the same theories.
Plaintiffs allege SCW has provided and continues to provide them with allegedly
contaminated water from wells located in an area of the San Gabriel Valley that
has been designated a federal environmental superfund site, and that the
maintenance of this contaminated well water has resulted in contamination of the
soil, subsurface soil, and surrounding air, with trichloroethylene ("TCE"),
perchloroethene ("PCE"), carbon tetrachloride and other solvents. Plaintiffs
further allege that SCW's actions have caused, and continue to cause, injuries
to the plaintiffs. Plaintiffs seek damages, including general, special, and
punitive damages, according to proof at trial, as well as attorney's fees on
certain causes of action, costs of suit, and other unspecified relief.
On June 24, 1998, the judge assigned to the Adler Matter, acting on the
Court's own motion, issued a stay until June 15, 1999 of all proceedings in the
Adler matter pending the outcome of the CPUC's Order Instituting Investigation
("OII") proceeding described below. Plaintiffs in the Adler matter petitioned
the Second District Court of Appeal for a Writ of Mandamus to have the stay
lifted. Prior to hearings before the Appellate Court, the Court advised all
parties of a potential conflict of interest due to the fact that two clerical
staff members of the Court were plaintiffs in one of the consolidated cases,
Santamaria v. Suburban Water Systems. As a result, the Adler matter and all the
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consolidated cases were transferred to the First District Court of Appeal in San
Francisco. The Writ of Mandamus is scheduled to be heard by the First District
Appellate Court on April 19, 1999. In addition, the Appellate Court has
requested argument as to why the lower courts issued a stay in the Adler matter
rather than dismissing the case.
SCW was served on November 3, 1997 as Doe 1 in the matter of Santamaria
v. Suburban Water Systems which was filed in Los Angeles Superior Court (the
"Santamaria Matter"). On August 27, 1998, the judge assigned to the Santamaria
Matter sustained SCW's demurrer without leave to amend and dismissed the action
against SCW. Plaintiff's filed a Notice of Appeal with the Second District Court
of Appeals and this matter was consolidated with the Adler and other cases. A
conflict of interest arose as was mentioned previously. As a result, the Notice
of Appeal was transferred to the First District Court of Appeal. The Santamaria
matter was requested to be hear by the First District Appellate Court on April
19, 1999, along with the other cases. There has been no word as yet as to
whether the plaintiffs will agree to have the Santamaria matter heard at the
same time as Adler and the other cases since they are appealing the dismissal
and not responding to Writ petitions.
In January 1998 SCW was named a defendant in the matter of Nathaniel
Allen, Jr., et al. v. Aerojet-General Corporation, et al which was filed in
Sacramento Superior Court. The complaint makes claims based on wrongful death,
personal injury, property damage as a result of nuisance and trespass, medical
monitoring, and diminution of property values (the "Allen Matter"). Plaintiffs
allege that SCW and other defendants have delivered water to plaintiffs which
allegedly is, or has been in the past, contaminated with a number of chemicals,
including TCE, PCE, carbon tetrachloride, perchlorate, Freon-113, hexavalent
chromium and other, unnamed, chemicals. SCW filed Demurrers and Motion to Strike
in this matter on June 5, 1998. On August 31, 1998, the judge assigned to the
Allen Matter, acting on the Court's own motion, issued a stay until June 15,
1999 of all proceedings in the Allen matter pending the outcome of the CPUC's
OII proceeding. The plaintiff's petitioned the Third District Court of Appeal
for a Writ of Mandamus to overrule the stay. The Court denied the petition.
Plaintiff's then petitioned the California Supreme Court for relief from the
Appellate Court's ruling. The California Supreme Court denied plaintiff's
petition. Thus the stay in the Allen Matter remains in effect.
In April 1998, SCW was named a defendant in the matter of Daphne Adams,
et al. v. Aerojet General, et al. which was filed in Sacramento Superior Court
(the "Adams Matter"). The complaint makes claims based on negligence, strict
liability, trespass, public nuisance, private nuisance, negligence per se,
absolute liability for ultrahazardous activity, fraudulent concealment,
violation of California Business and Professions Code section 17200 et seq.,
intentional infliction of emotional distress, intentional spoilage of evidence,
negligent destruction of evidence needed for prospective civil litigation,
wrongful death and medical monitoring. Plaintiff's seek damages, including
general, punitive and exemplary damages, as well as attorney's fees, costs of
suit, injunctive and restitutionary relief, disgorged profits and civil
penalties, medical monitoring according to proof and other unspecified relief.
SCW filed its Demurrers and Motion to Strike in this matter on June 5, 1998. On
August 31, 1998, the judge assigned to the Adams Matter, acting on the Court's
own motion, issued a stay until June 15, 1999 of all proceedings in the Adams
matter pending the outcome of the CPUC's OII proceeding. The plaintiff's
petitioned the Third District Court of Appeal for a Writ of Mandamus to overrule
the stay. The Court denied the petition. Plaintiff's then petitioned the
California Supreme Court for relief from the Appellate Court's ruling. The
California Supreme Court denied plaintiff's petition. Thus the stay in the Adams
Matter remains in effect.
On July 30, 1998, a complaint in multiple counts, styled Georgianna
Dominguez, et al. v. Southern California Water Company, et al., was filed in Los
Angeles Superior Court seeking recovery for negligence, wrongful death, strict
liability, permanent trespass, continuing trespass, public permanent nuisance,
public continuing nuisance, private permanent nuisance, private continuing
nuisance, negligence per se, absolute liability for ultrahazardous activity and
fraudulent concealment on behalf of six plaintiffs
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(the "Dominguez Matter"). Plaintiff's seek damages, including general and
special damages according to proof, punitive and exemplary damages, as well as
attorney's fees, costs of suit and other unspecified relief. SCW was served with
the complaint on September 21, 1998.
By Stipulation, the Dominguez Matter has been "attached" to the Adler
Matter, and the parties have agreed that the Dominguez Matter will be bound by
actions taken in the Adler Matter. Parties to the Stipulation have, however
reserved any rights that might be distinct in the Dominguez Matter. Thus, the
Dominguez matter is presently under the same stay order as was issued in the
Adler Matter.
On October 13, 1998, a complaint in multiple counts was filed in Los
Angeles Superior Court, styled Anderson, et al. v. Suburban Water Systems, et
al., which seeks recovery for negligence, wrongful death, strict liability,
permanent trespass, continuing trespass, continuing nuisance, permanent
nuisance, negligence per se, absolute liability for ultrahazardous activity,
fraudulent concealment, conspiracy/fraudulent concealment, battery and unfair
business practices on behalf of 180 plaintiffs (the "Anderson Matter").
Plaintiff's seek damages, including general and special damages according to
proof, punitive and exemplary damages, as well as attorney's fees, costs of suit
and other unspecified relief. SCW has not yet been served in this matter.
On December 30, 1998, SCW was named as a defendant in a complaint in
multiple counts, styled Abarca, et al. v. City of Pomona, et al., filed in Los
Angeles Superior Court which seeks recovery for negligence, wrongful death,
strict liability, permanent trespass, continuing trespass, continuing nuisance,
permanent nuisance, negligence per se, absolute liability for ultrahazardous
activity, fraudulent concealment, conspiracy/fraudulent concealment, battery and
unfair business practices on behalf of 383 plaintiffs (the "Abarca Matter").
Plaintiff's seek damages, including general and special damages according to
proof, punitive and exemplary damages, as well as attorney's fees, costs of suit
and other unspecified relief. SCW has not yet been served in this matter.
SCW was served on March 19, 1999 as Doe 1 in the matter styled Celi, et
al. v. San Gabriel Valley Water Company, et al., filed in Los Angeles Superior
Court which seeks recovery for negligence, wrongful death, strict liability,
permanent trespass, continuing trespass, public continuing nuisance, public
permanent nuisance, private permanent nuisance, private continuing nuisance,
negligence per se, absolute liability for ultrahazardous activity and fraudulent
concealment (the "Celi Matter"). Plaintiff's seek damages, including general and
special damages according to proof, punitive and exemplary damages, as well as
attorney's fees, costs of suit and other unspecified relief.
SCW was served on March 19, 1999 as Doe 3 in the matter styled Boswell,
et al. v. Suburban Water Systems, et al., filed in Los Angeles Superior Court
which seeks recovery for negligence, wrongful death, strict liability, permanent
trespass, continuing trespass, public continuing nuisance, public permanent
nuisance, private permanent nuisance, private continuing nuisance, negligence
per se, absolute liability for ultrahazardous activity and fraudulent
concealment (the "Boswell Matter"). Plaintiff's seek damages, including general
and special damages according to proof, punitive and exemplary damages, as well
as attorney's fees, costs of suit and other unspecified relief.
SCW was served on March 19, 1999 as Doe 1 in the matter styled Demciuc,
et al. v. Suburban Water Systems, et al., filed in Los Angeles Superior Court
which seeks recovery for negligence, wrongful death, strict liability, permanent
trespass, continuing trespass, public continuing nuisance, public permanent
nuisance, private permanent nuisance, private continuing nuisance, negligence
per se, absolute liability for ultrahazardous activity and fraudulent
concealment (the "Demciuc Matter"). Plaintiff's seek damages, including general
and special damages according to proof, punitive and exemplary damages, as well
as attorney's fees, costs of suit and other unspecified relief.
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SCW was served on March 19, 1999 as Doe 1 in the matter styled Criner,
et al. v. San Gabriel Valley Water Company, et al., filed in Los Angeles
Superior Court which seeks recovery for negligence, wrongful death, strict
liability, permanent trespass, continuing trespass, public continuing nuisance,
public permanent nuisance, private permanent nuisance, private continuing
nuisance, negligence per se, absolute liability for ultrahazardous activity and
fraudulent concealment (the "Criner Matter"). Plaintiff's seek damages,
including general and special damages according to proof, punitive and exemplary
damages, as well as attorney's fees, costs of suit and other unspecified relief.
The Celi, Boswell, Domcuic and Criner Matters will be bound by actions
taken in the Adler Matter, although the parties have reserved any rights that
might be distinct in these matters.
In light of the breadth of plaintiff claims in these matters, the lack
of factual information regarding plaintiff's claims and injuries, if any, and
the fact that no discovery has yet been completed, SCW is unable at this time to
determine what, if any, potential liability it may have with respect to these
claims. Registrant intends to vigorously defend against these claims.
ORDER INSTITUTING INVESTIGATION
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 California Department of Health Services
("DOHS") in establishing and enforcing adherence to water quality standards. The
CPUC's jurisdiction provides for the establishment of rates which permit water
utilities to furnish safe water meeting the established water quality standards
at prices which are both affordable and allow the utility to earn a reasonable
return on its investment. SCW has provided its response to a series of questions
dealing with the adequacy of current drinking water standards, compliance by
water utilities with such standards, appropriate remedies for failure to comply
with safe drinking water standards and whether increased enforcement and
additional drinking water standards are necessary. SCW anticipates a final
decision by the CPUC on this matter in or about June 1999. See Note 8 to the
Notes to Financial Statements contained in Part II, Item 8.
OTHER LITIGATION
Registrant is also subject to ordinary routine litigation incidental to
its business. Other than as disclosed above, no legal proceedings are pending,
except such incidental litigation to which Registrant is a party or of which any
of its properties is the subject which are believed to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION RELATING TO COMMON SHARES -
Common shares of American States Water Company are traded on the
New York Stock Exchange under the symbol "AWR". The high and low sales
prices of the
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Common Shares of AWR for the third and fourth quarters of 1998 and of
SCW for all other periods for the past two years are as follows:
STOCK PRICES
-----------------------
HIGH LOW
--------- --------
1998
First Quarter $ 26 $ 23-1/16
Second Quarter 27-1/8 21-1/8
Third Quarter 27 23-1/4
Fourth Quarter 29-1/4 24-7/8
1997
First Quarter $ 23 $ 20-5/8
Second Quarter 24-1/2 20-1/4
Third Quarter 24-5/8 20-1/2
Fourth Quarter 25-5/8 21-1/2
All of the outstanding Common Shares of SCW and ASUS are owned
by AWR. Hence, there is no market for the Common Shares of either
entity.
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON SHARES -
As of February 26, 1999, there were 3,691 holders of record of
Common Shares of AWR. All of the outstanding Common Shares of SSCW and
ASUS are owned by AWR.
(c) FREQUENCY AND AMOUNT OF ANY DIVIDENDS DECLARED AND DIVIDEND
RESTRICTIONS
For the last three years, Registrant has paid dividends on its
Common Shares on March 1, June 1, September 1 and December 1. The
following table lists the amount of dividends paid on Common Shares of
AWR for the third and fourth quarters of 1998 and of SCW for all other
periods for the last two years:
1998 1997
---------- ----------
First Quarter $ 0.315 $ 0.310
Second Quarter 0.315 0.310
Third Quarter 0.315 0.310
Fourth Quarter 0.315 0.315
---------- ----------
Total $ 1.260 $ 1.245
Information on dividend restrictions for AWR and SCW may be
found in Note 2 captioned "Capital Stock" of the Notes to Financial
Statements in Part II, Item 8 Financial Statements and Supplementary
Data.
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ITEM 6. SELECTED FINANCIAL DATA
($ in thousand, except per share amounts) 1998 1997 1996 1995 1994
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
Shareholders 14,533 13,967 13,366 12,069 11,240
Basic Earnings per Common Share $ 1.62 $ 1.56 $ 1.69 $ 1.54 $ 1.43
Dividends Declared per Common Shares $ 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
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-Not subject to Mandatory 1,600 1,600 1,600 1,600 1,600
Preferred Shares-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 8,958 8,957 7,891 7,845 7,842
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%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Unless specifically noted, the following discussion and analysis
provides information on AWR's consolidated operations and assets. There are no
material differences between the consolidated operations and assets of AWR and
the operations and assets of SCW.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this report (including the documents
incorporated herein by reference) are forward-looking statements intended to
qualify for the "safe harbor" from liability established by the Private
Securities Litigation Reform Act of 1995. These forward-looking statements can
generally be identified as such because the context of the statement will
include words such as the Company or Registrant "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.
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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 1997 due to extremely wet weather during the first half of 1998. 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 1997 due to the impact of a general rate increase effective January
1998 as well as a 2.0% increase in kilowatt-hour sales.
Purchased water costs decreased in 1998 to $30.8 million as compared to
$38.3 million in 1997 due to a 20.8% decrease in volumes purchased and refunds
received from SCW's wholesale water supplier during 1998 of approximately $1.4
million. Refunds of $2.0 million were received in 1997.
Costs of power purchased for pumping decreased by 7.2% to $7.0 million
in 1998 chiefly as the result of the reduced energy costs from SCW'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 SCW'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
SCW's resource mix as well as additional assessments associated with increased
pumping in SCW'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. Recovery of previously
under-collected supply costs was lower in 1998 than 1997 due to the expiration
in January 1998 of a surcharge designed to recover those costs. It is
anticipated that 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 Registrant. However, the balancing account is not designed to
insulate earnings against changes in supply mix, as occurred during the first
eight months of 1997.
Other operating expenses increased by 10.6% from the $13.1 million
recorded in 1997 due to employee time charged to this category. Reversals in
1997 of costs associated with recovery of water quality expenditures through the
CPUC's memorandum account mechanism also contributed to the increase. There were
no such reversals of equal magnitude in 1998.
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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. There were no similar amortization costs in 1997.
Taxes on income increased by approximately 3.1% to $10.1 million in 1998
as compared to the $9.8 million in 1997 due to a 5.7% increase in operating
income partially offset by a lower effective tax rate.
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 SCW's
non-regulated activities.
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 in 1996, 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 1996 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.
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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.
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.
The positive entry for supply cost balancing accounts 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, on which depreciation 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. In December 1998, AWR 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,
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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.
In December 1998, SCW redeemed, at a premium, the entire $10 million
outstanding of its 10.10% Notes. These Notes were refinanced in January 1999.
In December 1998, SCW 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.
Registrant 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 directly
regulated by the CPUC. The CPUC does, however, regulate certain transaction
between SCW and its unregulated affiliates.
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
projected expenses and capital costs. GRC's have a typical regulatory lag of one
year. Offset rate increases typically have a two to four month regulatory lag.
The following table lists information on estimated annual rate changes during
1998, 1997 and 1996:
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Supply Balancing General
Cost Account and Step Advice
Year Offset Amortization Increases Letters Total
- ---- ------ ------------ --------- ------- -----
(Amounts are in $000's)
-----------------------
1998 $ 786 $(2,852) $ 3,590 $ 713 $ 2,237
1997 $ 183 $ 64 $ 1,332 $ (126) $ 1,453
1996 $ 103 $ (758) $16,805 $ 913 $17,063
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 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 (the
"Project"). In February 1999, the Administrative Law Judge assigned to the
application issued his proposed decision which denied recovery of SCW's costs in
the Project. SCW is continuing to pursue alternative forms of recovery of its
investment in the Project including sale of its interests therein to other
participants in the Project. A final order from the CPUC is anticipated in the
second quarter of 1999. See Note 8 of the Notes to Financial Statements in Part
II, Item 8.
ENVIRONMENTAL MATTERS
1996 Amendments to Federal Safe Drinking Water Act
On August 6, 1996, amendments (the "1996 SDWA amendments") to the Safe
Drinking Water Act (the "SDWA") were signed into law. The 1996 SDWA revised the
1986 amendments to the SDWA with a new process for selecting and regulating
contaminants. The U. S. Environmental Protection Agency ("EPA") can only
regulate contaminants that may have adverse health effects, are known or likely
to occur at levels of public health concern, and the regulation of which will
provide "a meaningful opportunity for health risk reduction." The EPA has
published a list of contaminants for possible regulation and must update that
list every five years. In addition, every five years, the EPA must select at
least five contaminants on that list and determine whether to regulate them. The
new law allows the EPA to bypass the selection process and adopt interim
regulations for contaminants in order to address urgent health threats. Current
regulations, however, remain in place and are not subject to the new
standard-setting provisions. The DOHS, acting on behalf of the EPA, administers
the EPA's program in California.
The 1996 SDWA amendments allow the EPA for the first time to base
primary drinking water regulations on risk assessment and cost/benefit
considerations and on minimizing overall risk. The EPA must base regulations on
best available, peer-reviewed science and data from best available methods. For
proposed regulations that involve the setting of maximum contaminant levels
("MCL's"), the EPA must use, and seek public comment on, an analysis of
quantifiable and non-quantifiable risk-reduction benefits and cost for each such
MCL.
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SCW currently tests its wells and water systems according to
requirements listed in the SDWA. Water from wells found to contain levels of
contaminants above the established MCLs is treated before it is delivered to
customers.
Since the SDWA became effective, SCW has experienced increased operating
costs for testing to determine the levels, if any, of the constituents in SCW's
sources of supply and additional expense to lower the level of any contaminants
in order to meet the MCL standards. Such costs and the costs of controlling any
other contaminants may cause SCW to experience additional capital costs as well
as increased operating costs.
Registrant is currently unable to predict the ultimate impact that the
1996 SDWA amendments might have on its financial position or its results of
operation. The CPUC ratemaking process provides SCW with the opportunity to
recover prudently incurred capital and operating costs associated with water
quality. Management believes that such incurred costs will be authorized for
recovery by the CPUC.
Proposed Enhanced Surface Water Treatment Rule
On July 29, 1994, the EPA proposed an Enhanced Surface Water Treatment
Rule ("ESWTR") which would require increased surface-water treatment to decrease
the risk of microbial contamination. The EPA has proposed several versions of
the ESWTR for promulgation. The version selected for promulgation will be
determined based on data collected by certain water suppliers and forwarded to
the EPA pursuant to EPA's Information Collection Rule, which requires such water
suppliers to monitor microbial and other contaminants in their water supplies
and to conduct certain tests in respect of such contaminants. The EPA has
adopted an Interim ESWTR applicable only to systems serving greater than 10,000
persons. The long-term ESWTR, in any of the forms currently proposed, would
apply to each of SCW's five surface water treatment plants and is expected to be
promulgated by November 2000. However, because it is impossible to predict the
version of the ESWTR that will be promulgated, Registrant is unable to predict
what additional costs, if any, will be incurred to comply with the ESWTR.
Regulation of Disinfection/Disinfection By-Products
Registrant is also subject to the new regulations concerning
disinfection/disinfection by-products ("DBPs"), Stage I of which regulations
were effective in November, 1998 with full compliance required by 2001. Stage I
requires reduction of tri-halomethane contaminants from 100 micrograms per liter
to 80 micrograms per liter. Two of SCW's systems are immediately impacted by
this rule. SCW implemented modifications to the treatment process in its Bay
Point and Cordova systems. It is anticipated that both systems will be in full
compliance by 2001.
The EPA must adopt Stage II rules pertaining to DBPs, according to a
negotiated schedule by 2000. The EPA is not allowed to use the new cost/benefit
analysis provided for in the 1996 SDWA amendments for establishing the Stage II
rules applicable to DBPs but may utilize the regulatory negotiating process
provided for in the 1996 SDWA amendments to develop the Stage II rule. The final
rule is expected by 2002.
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Ground Water Rule
By August 1999, the EPA is scheduled to propose regulations requiring
disinfection of certain groundwater systems and provide guidance on determining
which systems must provide disinfection facilities. The EPA may utilize the
cost/benefit analysis provided in the 1996 SDWA amendments to establish such
regulations. It is anticipated that the regulations will apply to several of
SCW's systems using groundwater supplies. While no assurance can be given as to
the nature and cost of any additional compliance measures, if any, Registrant
does not believe that such regulations will impose significant compliance costs,
since SCW already currently engages in disinfection of its groundwater systems.
Regulation of Radon and Arsenic
Registrant will be subject to new regulations regarding radon and
arsenic. EPA must propose an arsenic rule by January 1, 2000 and adopt a rule
one year later. The EPA originally had 180 days after enactment of the 1996 SDWA
amendments to develop a plan to study ways to reduce arsenic health risk
uncertainties and was authorized to enter into cooperative agreements to carry
out the study. It is anticipated that the completed study will be available for
review in 1999. Depending on the MCL eventually established for arsenic,
compliance could cause Registrant to implement costly well-head treatment
remedies such as ion exchange or, alternatively, to purchase additional and more
expensive water supplies already in compliance, for blending with well sources.
The EPA has withdrawn its proposed radon rule and has arranged for the
National Academy of Sciences to conduct a risk assessment and a study of
risk-reduction benefits associated with various mitigation measures. The
National Academy of Sciences has completed its study and has agreed with much of
EPA's original findings but has slightly reduced the ingestion risk initially
assumed by EPA. The EPA is expected to establish an MCL based on the findings of
the National Academy of Sciences' risk assessment report and to set an
alternative MCL based on potential mitigation measures for overall radon
reduction by August 1999. Although Registrant is unable to predict the standard
for radon, Registrant itself is currently conducting studies to determine the
best treatment for affected wells.
Voluntary Efforts to Exceed Surface Water Treatment Standards
SCW is a voluntary member of the EPA's "Partnership for Safe Water", a
national program designed to further protect the public from diseases caused by
cryptosporidium and other microscopic organisms. As a volunteer in the program,
SCW commits to exceed current regulations governing surface water treatment to
ensure that its surface treatment facilities are performing as efficiently as
possible.
Fluoridation of Water Supplies
Registrant is subject to State of California Assembly Bill 733 which
requires fluoridation of water supplies for public water systems serving more
than 10,000 service connections. Although the bill requires affected systems to
install treatment facilities only when public funds have been made available to
cover capital and operating costs, the bill requires the CPUC to authorize cost
recovery through rates should public funds for operation of the facilities, once
installed, become unavailable in future years.
Matters Relating to Arden-Cordova System
In January, 1997, SCW was notified that ammonium perchlorate in amounts
above the state-determined action level had been detected in three of its 27
wells serving its Arden-Cordova system. Aerojet-General Corporation has, in the
past, used ammonium perchlorate in their processing as an oxidizer of rocket
fuels. SCW took the three wells detected with ammonium perchlorate out of
service at that time. Although neither the EPA nor the DOHS has established a
drinking water standard for ammonium
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perchlorate, DOHS has established an action level of 18 parts per billion
("ppb") which required SCW to notify customers in its Arden-Cordova customer
service area of detection of ammonium perchlorate in amounts in excess of this
action level. In April, 1997, SCW found ammonium perchlorate in three additional
wells and, at that time, removed those wells from service until it was
determined that the levels were below the state-determined action level. Those
wells were returned to service. SCW periodically monitors of these wells to
determine that levels of perchlorate are below the action level currently in
effect.
In February 1998, SCW was informed that a substance called
nitrosodimethylemine ("NDMA") had been detected in amounts in excess of the EPA
reference dosage for health risks in three of its wells in its Arden-Cordova
system. Each of the wells has been removed from service. NDMA is an additional
by-product from the production of rocket fuel and it is believed that such
contamination is related to the activities of Aerojet-General Corporation.
Aerojet-General Corporation has reimbursed SCW for constructing a pipeline to
interconnect with the City of Folsom water system to provide an alternative
source(s) of water supply in SCW's Arden-Cordova customer service area as well
as reimburse SCW for costs associated with the drilling and equipping of two new
wells.
SCW and Aerojet-General Corporation are in negotiations on other matters
related to procedures to address cleanup of the contaminated wells, costs
associated with the cleanup, costs associated with increased costs of purchased
water as compared to pumped sources and costs associated with developing new
sources of groundwater supply. Registrant is unable to predict when the
negotiations will be completed or the likely outcome of such negotiations.
Matters Relating to Culver City System
The compound, methyl tertiary butyl ether ("MTBE"), has been detected in
the Charnock Basin, located in the city of Santa Monica and within SCW's Culver
City customer service area. MTBE is an oxygenate used in reformulated fuels. At
the request of the Regional Water Quality Control Board, the City of Santa
Monica and the California Environmental Protection Agency, SCW removed two of
its wells in the Culver City system from service in October, 1996 to help in
efforts to avoid further spread of the MTBE contamination plume. Neither of
these wells has been found to be contaminated with MTBE. SCW is purchasing water
from the MWD at an increased cost to replace the water supply formerly pumped
from the two wells removed from service.
Several studies are under way to determine the possible sources and
causes of the MTBE contamination. The federal EPA is pursuing an enforcement
effort to reach a settlement with the potentially responsible parties on matters
relating to the cleanup of the contamination. Registrant is unable to predict
the outcome of the EPA's enforcement efforts. Pursuant to an agreement with SCW,
two of the potentially responsible parties have reimbursed SCW's legal and
consulting costs related to this matter as well as for increased costs incurred
by SCW in purchasing replacement water. SCW and such parties have negotiated a
month-to-month extension of this agreement which is anticipated to remain
effective until the underlying groundwater basin contamination is remediated.
Bear Valley Electric
SCW has been, in conjunction with the Southern California Edison unit of
Edison International, planning to upgrade transmission facilities to 115kv (the
"115kv Project")in order to meet increased energy and demand requirements. The
115kv Project is subject to an environmental impact report ("EIR") and delays in
approval of the EIR may impact service in SCW's Bear Valley electric customer
service area. SCW has, however, taken other measures, including some measures
that will be enacted on an emergency basis, to meet load growth in order
mitigate delays in approval of the EIR.
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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 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
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.
BUSINESS SEGMENTS
AWR currently has two principal business units: water service and
electric distribution utility operations conducted through its SCW subsidiary,
and its non-regulated activities through its ASUS subsidiary. All activities of
Registrant currently are geographically located within the State of California,
except for one contract providing customer service and billing services to a
utility located in the state of Arizona. SCW is a regulated utility which
operates both water and electric systems. On a stand alone basis, AWR has no
material assets other than its investments in its subsidiaries. SCW terminated
its Golden State Water Company joint venture effective December 31, 1998.
YEAR 2000 ISSUE
Registrant 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 Registrant 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 Registrant resulting in business interruption or shutdown, financial loss,
regulatory citations and legal liability.
Registrant has been actively assessing its Y2K readiness since early
1997 and has inventoried its significant computer hardware and software
programs. Since Registrant is dependent upon its management information and
customer service systems, upgrades to these systems have been a priority.
Registrant has, since 1995, been in the process of replacing and/or upgrading as
necessary its core business information and operating systems with newer
technologies, all of which are intended to 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
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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, Registrant has
sought compliance certification from external vendors and service providers.
Testing on Registrant's interface with financial and other institutions with
which it does business is being conducted to ensure Y2K readiness. In order to
more fully address Y2K readiness of its field equipment, major vendors and
service providers, Registrant engaged the services of a nationally-recognized
business consulting firm and has completed its written plan to address the Y2K
issue. Registrant 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.
Registrant'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 Registrant's operations.
Registrant is significantly dependent on third party suppliers, such as
energy and telecommunication companies and wholesale water suppliers. In order
to conduct its business, Registrant has initiated due diligence with certain of
its major service providers to address their Y2K readiness. In the event that
such suppliers might be adversely affected by Y2K, Registrant is preparing its
contingency plan which will likely include, among other things, increased
staffing during critical periods, manual back-up for automated systems and the
use of electric generators capable of providing power during a black-out.
Registrant 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 Registrant. 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.
Registrant 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. Registrant
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 SCW, that it will review their Y2K preparations.
RISK FACTOR SUMMARY
This report (written in plain English) summarizes certain risks of our
business that may affect our future financial results. We also periodically file
with the Securities and Exchange Commission documents that include more
information on these risks. It is important for investors to read these
documents.
Litigation
SCW has recently been sued in nine water-quality related lawsuits:
- a suit filed on April 24, 1997 alleging personal injury
and property damage as a result of the sale of water
from wells located in an area of the San Gabriel Valley
that has been designated a federal superfund site
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- a suit filed on November 3, 1997 alleging personal
injury and property damage as a result of the sale of
water; few of our systems are located in the
geographical area covered by this suit
- a suit filed on January 8, 1998 alleging personal injury
and property damage as a result of the delivery of
contaminated water in SCW's Arden-Cordova service area
- a suit filed on February 2, 1998 alleging personal
injury and property damage as a result of the sale of
water from wells located in an area of the San Gabriel
Valley that has been designated a superfund site
- a suit filed on February 4, 1998 alleging personal
injury and property damage as a result of the sale of
water from wells located in an area of the San Gabriel
Valley that has been designated a superfund site
- a suit filed in April 1998 alleging personal injury and
property damage as a result of the delivery of
contaminated water in SCW's Arden-Cordova service area
- three suits filed on July 30, 1998 alleging personal
injury and property damage as a result of the sale of
water from wells located in an area of the San Gabriel
Valley that has been designated a superfund site
In March 1998, the CPUC issued an order instituting investigation (the
"OII") as a result of these types of suits being filed against water utilities
in California. The CPUC is seeking to determine:
- whether existing standards and policies regarding drinking water
quality adequately protect the public health
- whether water utilities are following existing standards
The lawsuits have been stayed pending the outcome of the OII and a
hearing before the First District Court of Appeal on April 19, 1999. We
anticipate that the CPUC will issue a decision in the OII on or about June 1999.
We are unable to predict the nature of the CPUC's final decision or the outcome
of the lawsuits. An adverse outcome in this type of litigation is, however,
likely to be material.
The CPUC has authorized a memorandum account for legal expenses incurred
by water utilities, including SCW, in the water quality lawsuits. Under the
memorandum account procedure, SCW may recover litigation costs from ratepayers
to the extent authorized by the CPUC. The CPUC has not yet authorized SCW to
recover any of its litigation costs.
Environmental Regulation
We are subject to increasingly stringent environmental regulations that
will result in increasing capital and operating costs. These regulations
include:
- the 1996 amendments to the Safe Drinking Water Act that require
increased testing and treatment of water to reduce specified
contaminants to minimum containment levels
- interim regulations expected to be adopted before the end of
1998 requiring increased surface-water treatment to decrease the
risk of microbial contamination; these regulations will affect
SCW's five surface water treatment plants
- additional regulation of disinfection/disinfection byproducts
expected to be adopted before the end of 1998; these regulations
will potentially affect two of SCW's systems
- additional regulations expected to be adopted before the end of
1998 requiring disinfection of certain groundwater systems;
these regulations will potentially impact several of SCW's
systems using groundwater supplies
- potential regulation of radon and arsenic
19
22
- new California requirements to fluoridate public water systems
serving over 10,000 customers
We may be able to recover costs incurred to comply with these
regulations through the ratemaking process for our regulated systems. We may
also be able to recover certain of these costs under our contractual
arrangements with municipalities. In certain circumstances, we may recover costs
from parties responsible or potentially responsible for contamination.
Rates and Regulation
SCW is subject to regulation by the CPUC. AWR and ASUS are not directly
subject to CPUC regulation. The CPUC may, however, regulate transactions between
SCW and AWR, including the manner in which overhead costs are allocated between
SCW and AWR and the pricing of services rendered by SCW to AWR.
SCW's revenues depend substantially on the rates that it is permitted to
charge its customers. SCW may increase rates in three ways:
- by filing for a general rate increase
- by filing for recovery of certain expenses
- by filing an "advice letter" for certain plant additions,
thereby increasing rate base
In addition, SCW recovers certain supply costs through a balancing
account mechanism. Supply costs include the cost of purchased water and power
and groundwater production assessments. The balancing account mechanism is
intended to insulate SCW's earnings from changes in supply costs that are beyond
SCW's control. The balancing account is not, however, designed to insulate SCW's
earnings against changes in supply mix. As a result, SCW may not recover
increased costs due to increased use of purchased water through the balancing
account mechanism. In addition, balancing account adjustments, if authorized by
the CPUC, may result in either increases or decreases in revenues attributable
to supply costs incurred in prior periods, depending upon whether there has been
an undercollection or overcollection of supply costs.
There are also a number of matters pending before the CPUC that may
affect our future financial results. These matters include:
- applications filed by SCW to increase rates in four of its 16
rate-making jurisdictions; a final decision is not expected
until near year-end 1999
- an application filed to consolidate the rate-making
jurisdictions located in SCW's Region III area into a single
tariff
- an application filed by SCW for permission to recover certain
costs of SCW's participation in the coastal aqueduct extension
of the state water project; the ALJ assigned to this matter has
issued a proposed decision that denies recovery of our costs for
participation in the project; the final order could differ
uphold the ALJ's decision or differ materially from his proposed
decision
- the OII
- new guidelines under consideration by the CPUC for the
acquisition and merger of water utilities and for privatization
transactions
20
23
Adequacy of Water Supplies
The adequacy of water supplies varies from year to year depending upon a
variety of factors, including
- rainfall
- the amount of water stored in reservoirs
- the amount used by our customers and others
- water quality, and
- legal limitations on use.
As a result of heavier than normal rainfall in the winter of 1997-1998,
most of California's reservoirs are near capacity and the outlook for water
supply in the near term is generally favorable. Population growth and increases
in the amount of water used have, however, increased limitations on use to
prevent overdrafting of groundwater basins. The import of water from the
Colorado River, one of our important sources of supply, is expected to decrease
in future years due to the requirements of the Central Arizona Project. We also
have in recent years taken wells out of service due to water quality problems.
Water shortages affect us in several ways:
- they adversely affect supply mix by causing us to rely on more
expensive purchased water
- they adversely affect operating costs
- they may result in an increase in capital expenditures for
building pipelines to connect to alternative sources of supplies
and reservoirs and other facilities to conserve or reclaim water
We may be able to recover increased operating and construction costs for
our regulated systems through the ratemaking process. We may also be able to
recover certain of these costs under the terms of our contractual agreements
with municipalities.
In certain circumstances, we may recover these costs from third parties
that may be responsible, or potentially responsible, for groundwater
contamination. We are currently in negotiations with Aerojet General Corporation
regarding costs associated with the cleanup of the groundwater supply for our
Arden-Cordova System and for the increased costs of purchasing water and
developing new sources of groundwater supply. We are also negotiating with two
potentially responsible parties on matters relating to the clean-up and purchase
of replacement water in the Charnock Basin located in the cities of Santa Monica
and Culver City. These two potentially responsible parties have previously
reimbursed us for replacement water and certain legal and consulting expenses.
The Charnock Basin is in SCW's service territory.
Water Quality
SCW has detected ammonium perchlorate and nitrosodimethylemine in
amounts in excess of certain state or federal limits in wells serving its
Arden-Cordova system. Both substances are byproducts from the production of
rocket fuel. SCW has taken wells out of service, increased monitoring of other
wells and drilled new wells in the area. In addition, SCW is constructing a new
pipeline to the City of Folsom's water system in order to obtain an alternative
source of supply for its Arden-Cordova customers. Aerojet General Corporation
has reimbursed SCW for certain of these costs. Negotiations with Aerojet General
corporation are continuing with respect to other costs.
21
24
The compound methyl tertiary butyl ether has been detected in the
Charnock Basin. SCW has taken two wells out of service in this area and is
purchasing more expensive groundwater from the Metropolitan Water District to
replace the water supply formerly obtained from these wells. SCW is negotiating
with two of the potentially responsible parties for continuation of recovery of
its increased costs.
SCW has recently been sued on water quality issues. In addition, we are
subject to increasing regulation relating to water quality matters.
Weather
Our business may be affected by weather in a variety of ways. For
instance:
- water volumes sold decrease during wet weather
- water volumes sold decrease during cold weather
- water volumes sold may also decrease during drought conditions
if mandatory rationing is imposed
- we may be required to purchase more expensive water and to use
less groundwater during drought conditions
- kilowatt-hour sales of electricity decrease if winters are
warmer than normal or summers are cooler than normal
- maintenance and capital expenditures decrease during periods of
inclement weather
- adverse weather conditions may result in damage to our water and
electric systems resulting in increased repair and capital
replacement costs, loss of sales and loss of water from broken
reservoirs and mains
Weather patterns in California are inherently uncertain. It is therefore
difficult to predict from year to year the impact of weather on our financial
results.
Unregulated Activities
ASUS was formed for the purpose of, among other things, operating and
maintaining municipally-owned water systems and providing billing, meter reading
and other services for municipalities and special water districts and making
investments in subsidiaries and other entities. These activities present
different risks than CPUC-regulated activities. ASUS does not have extensive
experience in engaging in these types of activities and must compete with other
private parties with more experience and greater capital resources. It must also
compete with special water districts and other government agencies that may have
a lower cost of funds and other competitive advantages afforded governmental
entities.
AWR's ability to earn a profit on these activities will depend upon a
variety of factors, including
- its ability to obtain contracts in a competitive marketplace
- its ability to price its services at a level sufficient to
enable it to earn a profit
- its ability to recover the costs of obtaining contracts in a
competitive marketplace
- the cost of developing the privatization market in California
- its ability to operate in a cost effective matter
- its ability to negotiate contracts containing favorable terms
Our unregulated activities are not currently profitable. As a result,
our unregulated activities cannot currently be financed from AWR's earnings.
Under California law, SCW is not permitted to issue securities to finance
unregulated activities. Our unregulated activities must therefore be financed
directly by
22
25
AWR or its unregulated subsidiaries or from dividends received by AWR from SCW.
To the extent that AWR's activities are financed from dividends from SCW, the
funds available for the payment of dividends to AWR's shareholders will be
reduced.
Potential Year 2000 Risks
We are currently addressing the effect of the Year 2000 ("Y2K") issue on
our reporting systems and operations. We are also assessing operational risks
related to our suppliers and vendors and developing contingency plans in order
to mitigate this risk. We have not currently experienced significant costs with
respect to addressing these issues. We anticipate completion of our assessment
of risks related to our suppliers and vendors and our operational contingency
plan by June 1999.
The primary business risk associated with Y2K is our ability to continue
to treat, transport and distribute water to our customers without interruption.
Our operations could be significantly impacted if
- we are unable to resolve or fail to identify all Y2K problems
prior to January 1, 2000
- any of our critical suppliers and vendors, such as suppliers of
chemicals for water treatment or electric utilities, are unable
to resolve or fail to identify all Y2K problems affecting our
business prior to January 1, 2000
- we are unable to mitigate or fail to address all operational
risks in our contingency plans
Capital Expenditures
We anticipate spending approximately $46.5 million on capital
expenditures during the next 12 months. We anticipate that approximately 45 to
60% of these funds will come from developers and other external sources. The
price and terms of this funding will depend upon conditions in the capital
markets at the time funds are needed.
We anticipate that capital expenditures will continue to increase due to
a variety of factors, including:
- the need to replace aging infrastructure
- the need to comply with increasingly stringent environmental
requirements
- the need to address potential water shortage problems
- the need to address water quality problems
Capital expenditures may also increase if AWR is successful in its
privatization efforts since many municipalities view privatization as a means to
finance needed capital improvements.
Economic Conditions
Our ability to finance capital expenditures, unregulated
activities and other matters will depend upon general economic conditions and
conditions in the capital markets. Conditions in the capital markets are
currently uncertain. We are unable to predict to what extent this uncertainty
may impact our access to capital or financing costs or our ability to compete in
the privatization market.
Interest rates have recently been declining. Declining interest
rates are generally believed to be favorable for utilities because of their high
capital costs. On the other hand, SCW's authorized rate of return may be reduced
because of lower interest rates. As a result, funds available for the payment of
dividends may be reduced.
Sales may also be adversely affected by unfavorable economic
conditions if business activity and employment are reduced.
23
26
Condemnation
Under California law, a governmental agency may acquire public utility
property through the power of eminent domain, also know as condemnation.
Although we have not had any of our systems condemned during the past three
years, the potential for condemnation nevertheless remains.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Registrant has no derivative financial instruments, financial
instruments with significant off-balance sheet risks or financial instruments
with concentrations of credit risk. The disclosure required is, therefore, not
applicable.
24
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
American States Water Company - Consolidated
Balance Sheets - December 31, 1998 and 1997
Statements of Capitalization - December 31, 1998 and 1997
Statements of Income - for the years ended December 31, 1998, 1997 and
1996
Statements of Changes in Common Shareholders' Equity - for the years ended
December 31, 1998, 1997 and 1996
Statements of Cash Flows - for the years ended December 31, 1998, 1997
and 1996
American States Water Company - Parent Company - Condensed
Balance Sheets - December 31, 1998
Statements of Capitalization - December 31, 1998
Statements of Income - for the six months ended December 31, 1998
Statements of Changes in Common Shareholders' Equity - for the six months
ended December 31, 1998
Statements of Cash Flows - for the six months ended
December 31, 1998
Southern California Water Company
Balance Sheets - December 31, 1998 and 1997
Statements of Capitalization - December 31, 1998 and 1997
Statements of Income - for the years ended December 31, 1998, 1997 and 1996
Statements of Changes in Common Shareholders' Equity - for the years ended
December 31, 1998, 1997 and 1996
Statements of Cash Flows - for the years ended December 31, 1998, 1997
and 1996
Notes to Financial Statements
Report of Independent Public Accountants
25
28
AMERICAN STATES WATER COMPANY
CONSOLIDATED
BALANCE SHEETS
For the years ended December 31,
($ 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;
and $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
========= =========
The accompanying notes are an integral part of these financial statements
26
29
AMERICAN STATES WATER COMPANY
CONSOLIDATED
BALANCE SHEETS
For the years ended December 31,
($ in thousands) 1998 1997
-------- --------
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 $457,074
======== ========
The accompanying notes are an integral part of these financial statements
27
30
AMERICAN STATES WATER COMPANY
CONSOLIDATED
STATEMENTS OF CAPITALIZATION
For the years ended December 31,
($ 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
19,200 shares in 1997, 5% Series 440 480
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
28
31
AMERICAN STATES WATER COMPANY
CONSOLIDATED
STATEMENTS OF INCOME
($ in thousand, 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
29
32
AMERICAN STATES WATER COMPANY
CONSOLIDATED
STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Earnings
Common Shares Additional Reinvested
Number of Paid-in in the
(in thousands) 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)
Plans 41 102 802
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 $56,968
===== ======= ======= =======
The accompanying notes are an integral part of these financial statements
30
33
AMERICAN STATES WATER COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the years ended December 31,
($ in thousands) 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 construction 3,381 1,302 2,462
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
======== ======== ========
The accompanying notes are an integral part of these financial statements
31
34
AMERICAN STATES WATER COMPANY
CONDENSED FINANCIAL INFORMATION OF THE PARENT
BALANCE SHEET
December 31,
($ in thousands) 1998
---------
Assets
OTHER PROPERTY AND INVESTMENTS $ 156,035
CURRENT ASSETS
Cash and cash equivalents 96
Accounts receivable 128
Other 28
Accumulated deferred income taxes - net (17)
---------
Total current assets 235
DEFERRED CHARGES 50
=========
TOTAL ASSETS $ 156,320
=========
Capitalization and Liabilities
CAPITALIZATION
Common shareholders' equity $ 154,299
Preferred shares 1,600
Preferred shares - mandatory redemption 400
---------
Total capitalization 156,299
---------
CURRENT LIABILITIES
Intercompany Payable 104
Accounts payable 164
Taxes payable (247)
---------
Total current liabilities 21
---------
TOTAL CAPITALIZATION AND LIABILITIES $ 156,320
=========
The accompanying notes are an integral part of these financial statements
32
35
AMERICAN STATES WATER COMPANY
CONDENSED FINANCIAL INFORMATION OF PARENT
STATEMENT OF CAPITALIZATION
December 31,
($ in thousands) 1998
---------
COMMON SHAREHOLDERS' EQUITY:
Common shares, $2.50 stated value--
Authorized 30,000,000 shares
Outstanding 8,957,671 $ 22,394
Additional paid-in capital 74,937
Earnings reinvested in the business 56,968
---------
154,299
---------
PREFERRED SHARES: $25 PAR VALUE
Authorized 64,000 shares
Outstanding 32,000 shares, 4% Series 800
Outstanding 32,000 shares, 4 1/4% Series 800
---------
1,600
---------
PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION
Requirements: $25 par value
Authorized and outstanding 17,600 shares in 1998, 5% Series 440
Less: Preferred shares to be redeemed within one year (40)
---------
400
---------
TOTAL CAPITALIZATION 156,299
=========
The accompanying notes are an integral part of these financial statements
33
36
AMERICAN STATES WATER COMPANY
CONDENSED FINANCIAL INFORMATION OF PARENT
STATEMENT OF INCOME
($ in thousand, except per share amounts) For the six months ended December 31,
1998
-------
OPERATING REVENUES
Management Fees $ 65
OPERATING EXPENSES
Other operating expenses 3
Customer accounts expense 21
Administrative and general expenses 102
Employees' pension and benefits 1
Maintenance 1
Amortization 268
Taxes on income (231)
Property and other taxes 1
-------
Total operating expenses 166
-------
OPERATING INCOME (101)
-------
OTHER INCOME
Total other income - net (462)
Dividends from SCW 5,889
-------
NET INCOME/(LOSS) 5,326
Dividends on Preferred Shares (45)
-------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 5,282
=======
BASIC EARNINGS PER COMMON SHARE $ 0.59
-------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
8,958
-------
Included in Net Income are intercompany dividends which are eliminated as part
of the consolidated financial statements
The accompanying notes are an integral part of these financial statements
34
37
AMERICAN STATES WATER COMPANY
CONDENSED FINANCIAL INFORMATION OF THE PARENT
STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Earnings
Common Shares Additional Reinvested
Number of Paid-in in the
(in thousands) Shares Amount Capital Business
------- ------- ------- -------
BALANCES AT JULY 1, 1998 8,958 $22,394 $74,937 $52,643
Add:
Net Income 5,326
Net Increase in Subsidiary Equity 4,687
Deduct:
Dividends on Preferred Shares 45
Dividends on Common Shares - $.63 per share 5,643
------- ------- ------- -------
BALANCES AT DECEMBER 31, 1998 8,958 $22,394 $74,937 $56,968
======= ======= ======= =======
35
38
AMERICAN STATES WATER COMPANY
CONDENSED FINANCIAL INFORMATION OF PARENT
STATEMENTS OF CASH FLOWS
For the six months ended December 31,
($ in thousands) 1998
-------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 5,326
Adjustments for non-cash items:
Amortization 268
Deferred income taxes and investment tax credits 17
Other - net 317
Changes in assets and liabilities (135)
-------
Net cash used 5,793
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common and preferred dividends paid (5,697)
-------
Net cash provided (5,697)
-------
NET INCREASE IN CASH AND CASH EQUIVALENTS 96
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD --
-------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 96
-------
The accompanying notes are an integral part of these financial statements
36
39
SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
For the years ended December 31,
($ 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 763 1,355
--------- ---------
CURRENT ASSETS
Cash and cash equivalents 524 4,186
Accounts receivable-Customers, less reserves of $403 in 1998;
$466 in 1997 7,498 8,544
Other 5,272 3,614
Intercompany receivable 104 --
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 5,173 5,783
--------- ---------
Total current assets 39,156 44,494
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets 21,506 22,337
Other 7,997 5,265
--------- ---------
Total deferred charges 29,503 27,602
--------- ---------
Total Assets $ 484,175 $ 457,074
========= =========
The accompanying notes are an integral part of these financial statements
37
40
SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
For the years ended December 31,
($ in thousands) 1998 1997
--------------- ----------------
Capitalization and Liabilities
CAPITALIZATION
Common shareholders' equity $155,721 $151,053
Preferred shares - 1,600
Preferred shares - mandatory redemption - 440
Long-term debt 120,809 115,286
--------------- ----------------
Total capitalization 276,530 268,379
--------------- ----------------
CURRENT LIABILITIES
Notes payable to banks 38,000 26,000
Long-term debt and preferred shares - current 260 231
Accounts payable 10,054 11,770
Taxes payable 6,147 9,115
Accrued interest 1,405 1,868
Other 7,984 7,196
--------------- ----------------
Total current liabilities 63,850 56,180
--------------- ----------------
OTHER CREDITS
Advances for construction 54,744 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 558 294
--------------- ----------------
Total other credits 143,795 132,515
=============== ================
TOTAL CAPITALIZATION AND LIABILITIES $484,175 $457,074
=============== ================
The accompanying notes are an integral part of these financial statements
38
41
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF CAPITALIZATION
For the years ended December 31,
($ in thousands) 1998 1997
--------- ---------
COMMON SHAREHOLDERS' EQUITY:
Common shares, no par value
Outstanding 100 in 1998
and 8,957,671 in 1997 $ 98,391 $ 22,394
Additional paid-in capital -- 74,937
Earnings reinvested in the business 57,330 53,722
--------- ---------
155,721 151,053
--------- ---------
PREFERRED SHARES: $25 PAR VALUE
Authorized 64,000 shares
Outstanding 32,000 shares, 4% Series -- 800
Outstanding 32,000 shares, 4 1/4 % Series -- 800
--------- ---------
-- 1,600
--------- ---------
PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION
Requirements: $25 par value
Authorized and outstanding 19,200 shares in 1997, 5% Series -- 480
Less: Preferred shares to be redeemed within one year -- (40)
--------- ---------
-- 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 $ 276,530 $ 268,379
========= =========
The accompanying notes are an integral part of these financial statements. All
information has been adjusted to reflect formation of a holding company in 1998.
39
42
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
($ in thousand, expect per share amounts) For the years ended December 31,
1998 1997 1996
--------- --------- ---------
OPERATING REVENUES
Water $ 134,793 $ 140,988 $ 139,997
Electric 13,201 12,767 11,532
--------- --------- ---------
Total operating revenues 147,994 153,755 151,529
--------- --------- ---------
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 14,434 13,074 13,421
Administrative and general expenses 21,884 22,138 20,549
Depreciation 12,270 10,952 10,102
Maintenance 7,311 7,301 7,745
Taxes on income 10,360 9,830 10,283
Property and other taxes 6,124 6,282 6,099
--------- --------- ---------
Total operating expenses 122,833 130,297 128,100
--------- --------- ---------
OPERATING INCOME 25,161 23,458 23,429
--------- --------- ---------
OTHER INCOME
Total other income - net 1,231 758 531
--------- --------- ---------
Income before interest charges 26,392 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 15,185 14,059 13,460
Dividends on Preferred Shares (46) (92) (94)
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 15,139 $ 13,967 $ 13,366
BASIC EARNINGS PER COMMON SHARE $ 151.39 $ 139.67 $ 133.66
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 100 100 100
The accompanying notes are an integral part of these financial statements.
All information has been adjusted to reflect formation of holding
company in 1998.
40
43
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Earnings
Common Shares Additional Reinvested
Number of Paid-in in the
(in thousands) 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)
Plans 41 102 802
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:
Formation of Holding Company (8,858) $ 74,397 ($74,397)
Transfer Preferred Shares & Investments $ 1,060
Net Income 15,185
Deduct:
Dividends on Preferred Shares 45
Dividends on Common Shares - $.63 per share 5,643
Dividends on Common Shares - $58.89 per share 5,889
-------- -------- -------- --------
BALANCES AT DECEMBER 31, 1998 100 $ 98,391 $ 0 $ 57,330
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements
41
44
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF CASH FLOWS
($ in thousands) For the years ended December 31,
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,185 $ 14,059 $ 13,460
Adjustments for non-cash items:
Depreciation and amortization 12,661 11,387 10,389
Deferred income taxes and investment tax credits 5,224 826 577
Other - net 1,719 (1,426) (1,660)
Changes in assets and liabilities:
Customer receivables 1,046 (673) 368
Supply cost balancing accounts (14) 1,987 1,800
Accounts payable (1,716) (1,095) 6,026
Taxes payable (2,968) 3,338 215
Other - net 362 341 122
-------- -------- --------
Net cash provided 31,499 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 construction 3,381 1,302 2,462
Refunds on advances for construction (2,651) (2,957) (2,088)
Retirement or repayments of long-term debt and
redemption of preferred shares - net (9,488) (198) (15,447)
Net change in notes payable to banks 12,000 10,000 7,500
Common and preferred dividends paid (11,577) (11,243) (9,825)
-------- -------- --------
Net cash provided 6,665 6,376 4,096
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,662) 403 3,440
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,186 3,783 343
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR 524 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
======== ======== ========
42
45
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 Registrant. Intercompany transactions and balances have been eliminated.
The accounting records for SCW are maintained in accordance with the
Uniform System of Accounts prescribed by the CPUC. The preparation of these
financial statements required the use of certain estimates by management in
determining the company's assets, liabilities, revenues and expenses.
Property and Depreciation - SCW 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, SCW maintains
water and electric supply cost balancing accounts to account for
under-collections and over-collections of revenues designed to recover such
costs. Recoverability 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. SCW accrues
interest on its supply cost balancing accounts at the rate prevailing for 90-day
commercial paper.
43
46
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.
Cash and Cash Equivalents - For purposes of the Statements of Cash
Flows, cash and cash equivalents include short-term cash investments with an
original maturity of three months or less.
Financial Instrument Risk - Registrant does not carry any financial
instruments with off-balance sheet risk nor does its operations result in
concentrations of credit risk.
Fair Value of Financial Instruments - The table below estimates the fair
value of each represented class of financial instrument. For cash and cash
equivalents, accounts receivable and short-term debt, the carrying amount is
used. Otherwise, rates available to Registrant at December 31, 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
----------------------------- -------------------------------
($ 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 Registrant. 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, Registrant issued 1,000,000 Common Shares through a secondary
public offering. In January 1997, Registrant issued 71,500 Common Shares through
a secondary public offering. The net proceeds from this sale were used to repay
a portion of short-term debt then outstanding.
44
47
For the years ended December 31, 1998 and December 31, 1997, all shares
issued under Registrant's Common Share Purchase and Dividend Reinvestment Plan
(DRP) and the 401(k) Plan were purchased on the open market. For the year ended
December 31, 1996, Registrant 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 matching contributions made by Registrant 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 Common Share. 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
Shares and 100 votes per share in any shareholder election. The Rights become
exercisable either (i) ten business days following a public announcement that a
person or group of persons has acquired a beneficial ownership of 15% or more of
AWR's general voting power, other than pursuant to a "qualified offer" or (ii)
ten business days (or such later date as may be determined by AWR's Board of
Directors) following the commencement of, or the announcement of an intention to
make, a tender offer or exchange offer, the consummation of which would result
in the beneficial ownership by a person or group of 15% or more of AWR's general
voting power. A "qualified offer" is a tender offer or exchange offer for all
outstanding Common Shares of AWR, which is determined by AWR's directors to be
fair and otherwise in the best interests of AWR and its shareholders.
Until the occurrence of a an event described above, each Right trades
with the Common Shares and is not separately transferable. After an event
described above occurs, AWR would distribute separately Rights Certificates to
Common Shareholders and the Rights would subsequently trade separately from the
Common Shares and each holder of a Right, other than the acquiring person whose
Rights will thereafter be void, will have the right to receive upon exercise at
its then current Purchase Price that number of Common Shares having a market
value of two times the Purchase Price of the Right. If AWR merges into the
acquiring person, other than a merger which follows a qualified offer at the
same or a higher price, or 50% or more of the consolidated assets or earnings
power of AWR is sold, the Right becomes a right to purchase Common Shares of the
acquiring person having a 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 of the Rights 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. Neither AWR nor ASUS have
established short term lines of credit.
45
48
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 by SCW. The funds were used initially to repay short-term bank
borrowings and, after that, fund construction expenditures. Registrant has no
mortgage debt, and leases and other similar financial arrangements are not
material.
SCW has posted an Irrevocable Letter of Credit, which expires July 31,
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
Registrant provides deferred income taxes for temporary differences
under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (SFAS No. 109) for certain transactions which are recognized for
income tax purposes in a period different from that in which they are reported
in the financial statements. The most significant items are the tax effects of
accelerated depreciation, the supply cost balancing accounts and advances for
and contributions in aid of construction. SFAS No. 109 also requires that
rate-regulated enterprises record deferred income taxes for temporary
differences accorded flow-through treatment at the direction of a regulatory
commission. The resulting deferred tax assets and liabilities are recorded at
the expected cash flow to be reflected in future rates. Since the CPUC has
consistently permitted the recovery of previously flowed-through tax effects,
SCW has established regulatory liabilities and assets offsetting such deferred
tax assets and liabilities.
Deferred investment tax credits are being amortized to other income
ratably over the lives of the property giving rise to the credits.
46
49
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
-------- -------- --------
47
50
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 $ 23,952 $ 24,145 $ 23,910
-------- -------- --------
Effective income tax rate 38.9% 42.3% 43.7%
-------- -------- --------
NOTE 6 - EMPLOYEE BENEFIT PLANS
Registrant maintains a pension plan (the Plan) which provides eligible
employees (those age 21 and older, with one year of service) monthly benefits
upon retirement based on average salaries and length of service. The normal
retirement benefit is equal to 2% of the five highest consecutive years average
earnings multiplied by the number of years of credited service, up to a maximum
of 40 years, reduced by a percentage of primary social security benefits. There
is also an early retirement option. Annual contributions are made to the Plan
which comply with the funding requirements of the Employee Retirement Income
Security Act (ERISA). At December 31, 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.
Registrant also provides all active employees medical, dental and vision
care benefits through a medical insurance plan. Eligible employees who retired
prior to age 65, and/or their spouses, were able to retain the benefits under
the active plan until reaching age 65. 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
Registrant.
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. SCW'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 Registrant's balance sheets and the components of net pension cost
and accrued post-retirement liability at December 31, 1998 and 1997:
48
51
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
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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)
Registrant has a 401(k) Investment Incentive Program under which
employees may invest a percentage of their pay, up to a maximum investment
prescribed by law, in an investment program managed by an outside investment
manager. 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
Registrant's utility operations are engaged in supplying water and
electric service to the public. SCW is required to provide service and grant
credit to customers within its defined service areas. Although SCW 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. SCW faces
additional risks associated with weather conditions, adequacy and quality of
water supplies, regulatory decisions, pronouncements and laws, water-related
litigation, general business conditions and condemnation.
Approximately 39% of SCW's water supply is purchased from wholesalers of
imported water, with the remainder produced from 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. SCW 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 for
governmentally-owned water and wastewater systems. And to provide other services
for such systems. SCW terminated its Golden State Water Company joint venture
effective December 31, 1998. Accordingly, Registrant 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 (the
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.
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53
SCW has been named as a defendant in ten 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 eight 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.
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.
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NOTE 11 - BUSINESS SEGMENTS
Registrant 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
taxes 6,799 15,615 9,261 3,847
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
taxes 5,897 13,032 10,270 4,089
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
taxes 4,705 14,813 10,776 3,418
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 Registrant is of a seasonal nature and it is management's opinion
that comparisons of earnings for the quarterly periods do not reflect overall
trends and changes in Registrant's operations.
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55
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
-------- -------- -------- -------- -------- -------- ----- -----
NOTE 13 - YEAR 2000 READINESS
Registrant 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 Registrant 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 Registrant resulting in business interruption or shutdown, financial loss,
regulatory citations and legal liability.
Registrant has been actively assessing its Y2K readiness since early
1997 and has inventoried its significant computer hardware and software
programs. Since Registrant is dependent upon its management information and
customer service systems, upgrades to these systems have been a priority.
Registrant has, since 1995, been in the process of replacing and/or upgrading as
necessary its core business information and operating systems with newer
technologies, all of which are intended to 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, Registrant has
sought compliance certification from external vendors and service providers.
Testing on Registrant's interface with financial and other institutions with
which it does business is being conducted to ensure Y2K readiness. In order to
more fully address Y2K readiness of its field equipment, major vendors and
service providers, Registrant engaged the services of a nationally-recognized
business consulting firm and has completed its written plan to address the Y2K
issue. Registrant 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.
Registrant'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 Registrant's operations.
Registrant is significantly dependent on third party suppliers, such as
energy and telecommunication companies and wholesale water suppliers. In order
to conduct its business, Registrant has initiated due diligence with certain of
its major service providers to address their Y2K readiness. In the event that
such suppliers might be adversely affected by Y2K, Registrant is preparing its
contingency plan which will likely include, among other things, increased
staffing during critical periods, manual back-up for automated systems and the
use of electric generators capable of providing power during a black-out.
53
56
Registrant 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 Registrant. 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.
Registrant 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. Registrant
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 SCW, that it will review their Y2K preparations.
54
57
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.
Registrant 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 Registrant's system of internal
accounting control as a basis for establishing the nature, timing and scope of
their work. The result of their work is expressed in their Report of Independent
Public Accountants.
/s/ Floyd E. Wicks /s/ McClellan Harris III
- ---------------------------------- ------------------------------------
President, Chief Executive Officer Chief Financial Officer,
Vice President - Finance,
Treasurer and Corporate Secretary
March 26, 1999
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of American States Water Company:
We have audited the accompanying consolidated and condensed balance
sheets and statements of capitalization of American States Water Company and its
subsidiary, Southern California Water Company (California corporations), 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 and its subsidiary, Southern California 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 Andersen LLP
- ----------------------------------
Arthur Andersen LLP
Los Angeles, California
March 26, 1999
56
59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information responsive to Part III, Item 10 is included in the Proxy
Statement, to be filed by Registrant with the Commission pursuant to Regulation
14A, under the captions therein entitled "Election of Directors" and "Executive
Officers - Experience, Security Ownership and Compensation" and is incorporated
herein by reference pursuant to General Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to Part III, Item 11 is included in the Proxy
Statement, to be filed by Registrant with the Commission pursuant to Regulation
14A, under the captions therein entitled "Election of Directors" and "Executive
Officers - Experience, Security Ownership and Compensation" and "Performance
Graph" and is incorporated herein by reference pursuant to General Instruction
G(3).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information responsive to Part III, Item 12 is included in the Proxy
Statement, to be filed by Registrant with the Commission pursuant to Regulation
14A, under the captions therein entitled "Election of Directors" and "Executive
Officers - Experience, Security Ownership and Compensation" and is incorporated
herein by reference pursuant to General Instruction G(3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to Part III, Item 13 is included in the Proxy
Statement, to be filed by Registrant with the Commission pursuant to Regulation
14A, under the captions therein entitled "Election of Directors" and is
incorporated herein by reference pursuant to General Instruction G(3).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Reference is made to the Financial Statements incorporated
herein by reference to Part II, Item 8 hereof.
2. All required schedules may be found in the Financial
Statements and Notes to Financial Statements incorporated herein
by reference to Part II, Item 8 hereof. Schedules I, III, IV,
and V are omitted as they are not applicable.
3. See (c) below.
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(b) Registrant filed a Form 8-K with the Securities and Exchange
Commission on November 2, 1998 which contained a discussion and
summary of certain risks faced by Registrant in the conduct of
its businesses all or any one of which could affect future
financial results. The risks discussed included litigation,
environmental regulation, rates and CPUC regulation, adequacy of
water supplies, water quality, weather, unregulated activities,
potential Year 2000 risks, capital expenditures, economic
conditions and condemnation. Included as exhibits to the form
8-K were the Amended and restated Articles of American States
Water Company, the by-laws of American States Water Company,
change-in-control agreements between American States Water
Company, Southern California Water Company and certain
executives, and change-in-control agreements between Southern
California Water Company and certain executives. There were no
financial statements filed with this Form 8-K.
(c) Exhibits -
3.1 By-Laws of American States Water Company incorporated
herein by reference to Registrant's Form 8-K, dated
November 2, 1998. Commission File No. 333-47647.
3.2 By-laws of Southern California Water Company.(1)
3.3 Amended and Restated Articles of Incorporation of
American States Water Company incorporated herein by
reference to Registrant's Form 8-K, dated November 2,
1998. Commission File No. 333-47647.
3.3.1 Certificate of Amendment of Articles of Incorporation,
dated August 25, 1998, of American States Water
Company.(1)
3.4 Restated Articles of Incorporation of Southern
California Water Company incorporated herein by
reference to Registrant's Form 8-K, dated January 20,
1999. Commission File No. 000-01121.
4.1 Amended and Restated Rights Agreement, dated January 25,
1999, by and between American States Water Company and
ChaseMellon Shareholder Services, L.L.C., as Rights
Agent.(1)
4.2 Indenture, dated September 1, 1993 between Southern
California Water Company and Chemical Trust Company of
California incorporated herein by reference to
Registrant's Form 8-K. Registration No. 33-62832.
10.1 Agreement of Merger dated as of June 25, 1998 by and
among Southern California Water Company, SCW Acquisition
Corp. and American States Water Company incorporated
herein by reference to Registrant's Form 8-K, dated July
1, 1998. Commission File No. 333-47647.
10.2 Deferred Compensation Plan for Directors and Executives
incorporated herein by reference to Registrant's
Registration Statement on Form S-2. Registration No.
33-5151.(2)
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61
10.3 Reimbursement Agreement, dated October 3, 1997, between
Southern California Water Company and The Bank of Nova
Scotia incorporated herein by reference to Registrant's
Form 10-K with respect to the year ended December 31,
1997. Commission File No. 000-01121.
10.4 Second Sublease dated October 5, 1984 between Southern
California Water Company and Three Valleys Municipal
Water District incorporated herein by reference to
Registrant's Registration Statement on Form S-2.
Registration No. 33-5151.
10.5 Note Agreement dated as of May 15, 1991 between Southern
California Water Company and Transamerica Occidental
Life Insurance Company incorporated herein by reference
to Registrant's Form 10-Q with respect to the quarter
ended June 30, 1991. Commission File No. 000-01121.
10.6 Schedule of omitted Note Agreements, dated May 15, 1991,
between Southern California Water Company and
Transamerica Annuity Life Insurance Company, and
Southern California Water Company and First Colony Life
Insurance Company incorporated herein by reference to
Registrant's Form 10-Q with respect to the quarter ended
June 30, 1991. Commission File No. 000-01121.
10.7 Loan Agreement between California Pollution Control
Financing Authority and Southern California Water
Company, dated as of December 1, 1996.(1)
10.8 Agreement for Financing Capital Improvement dated as of
June 2, 1992 between Southern California Water Company
and Three Valleys Municipal Water District incorporated
herein by reference to Registrant's Form 10-K with
respect to the year ended December 31, 1992. Commission
File No. 000-01121.
10.9 Water Supply Agreement dated as of June 1, 1994 between
Southern California Water Company and Central Coast
Water Authority incorporated herein by reference to
Registrant's Form 10-K with respect to the year ended
December 31, 1994. Commission File No. 000-01121.
10.10 Retirement Plan for Non-Employee Directors of Southern
California Water Company, as amended, January 25, 1995
incorporated herein by reference to Registrant's Form
10-K with respect to the year ended December 31, 1994.
Commission File No. 000-01121.(2)
10.11 Dividend Reinvestment and Common Share Purchase Plan
incorporated herein by reference to American States
Water Company Rule 424 (b) (3) filing dated August 28,
1998. (Registration No. 33-42218).
10.12 Key Executive Long-Term Incentive Plan incorporated
herein by reference to Registrant's 1995 Proxy
Statement, Commission File No. 00 0-01121.(2)
10.13 Energy Management Services Agreement between Southern
California Water Company and Enova Energy, Inc.
incorporated herein by reference to Registrant's Form
10-K with respect to the year ended December 31, 1996.
Commission File No. 000-01121.
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10.14 Change in Control Agreements, dated as of October 27,
1998, between American States Water Company, Southern
California Water Company and certain executives
incorporated herein by reference to Registrant's Form
8-K filed November 2, 1998. Commission File No.
333-47647.(2)
10.15 Change in Control Agreements, dated as of October 27,
1998, between Southern California Water Company and
certain executives incorporated herein by reference to
Registrant's Form 8-K filed November 2, 1998. Commission
File No. 000-01121.(2)
13. 1998 Annual Report to Shareholders.(1)
21. Subsidiaries of Registrant.
23. Consent of Independent Public Accountants.(1)
27. Schedule UT.(1)
(d) None.
--------------------
(1) Filed concurrently herewith
(2) Management contract or compensatory arrangement
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63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN STATES WATER COMPANY
and its subsidiary
SOUTHERN CALIFORNIA WATER COMPANY
By: /s/ McCLELLAN HARRIS III
---------------------------------
McClellan Harris III
Vice President - Finance, Treasurer,
Chief Financial Officer and Secretary
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Registrant and in the capacities and on the dates indicated.
/s/ W. V. CAVENEY Date: March 26, 1999
- -------------------------------------------
W. V. Caveney
Chairman of the Board and Director
/s/ FLOYD E. WICKS March 26, 1999
- -------------------------------------------
Floyd E. Wicks
Principal Executive Officer;
President, CEO and Director
/s/ McCLELLAN HARRIS III March 26, 1999
- ---------------------------------------
McClellan Harris III
Principal Financial and Accounting Officer;
CFO, VP - Finance, Treasurer and Secretary
/s/ LINDA J. MATLICK March 26, 1999
- --------------------------------------------
Linda J. Matlick
Controller - Southern California Water Company
/s/ JAMES L. ANDERSON March 26, 1999
- ---------------------------------------
James L. Anderson, Director
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64
/s/ JEAN E. AUER . March 26, 1999
- -------------------------------------------------
Jean E. Auer, Director
/s/ N. P. DODGE, JR. . March 26, 1999
- -------------------------------------------------
N. P. Dodge, Jr., Director
/s/ ANNE M. HOLLOWAY . March 26, 1999
- ----------------------------------------
Anne M. Holloway, Director
/s/ ROBERT F. KATHOL . March 26, 1999
- ------------------------------------------
Robert F. Kathol, Director
/s/ LLOYD E. ROSS . March 26, 1999
- -----------------------------------------------
Lloyd E. Ross, Director
61