UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

 

 

(213) 929-1800
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. On August 4, 2004, there were 16,568,295 common shares outstanding.

 

 

SOUTHWEST WATER COMPANY

 

INDEX

 

Part I.	Financial Information:
	Item 1.	Financial Statements:
		Condensed Consolidated Statements of Income (unaudited) –  Three and Six Months Ended June 30, 2004 and 2003
		Condensed Consolidated Balance Sheets– June 30, 2004 (unaudited)  and December 31, 2003
		Condensed Consolidated Statements of Cash Flows (unaudited) –  Six Months Ended June 30, 2004 and 2003
		Notes to Condensed Consolidated Financial Statements (unaudited)
	Item 2.	Management’s Discussion and Analysis of  Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	Item 4.	Controls and Procedures
Part II.	Other Information:
	Item 1.	Legal Proceedings
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 5.	Other Information
	Item 6.	Exhibits and Reports on Form 8-K
Signatures

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SOUTHWEST WATER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
		(in thousands except per share data)
Revenues:
Services group		$	29,118		$	27,702		$	55,782		$	52,890
Utility group		16,576			13,762			29,639			24,688
		45,694			41,464			85,421			77,578
Expenses:
Operating expenses - services group		25,055			24,323			50,126			46,329
Operating expenses - utility group		8,614			8,219			16,232			15,646
Selling, general and administrative expenses		6,857			5,425			12,962			11,185
		40,526			37,967			79,320			73,160
Operating Income		5,168			3,497			6,101			4,418
Other Income (Expense):
Interest expense		(1,076		)	(1,109		)	(2,153		)	(2,306		)
Interest income		188			—			308			49
Gain on sale of land		—			720			—			720
Other		(227		)	(110		)	(174		)	(119		)
		(1,115		)	(499		)	(2,019		)	(1,656		)
Income Before Income Taxes		4,053			2,998			4,082			2,762
Income Tax Provision		1,500			1,109			1,511			1,022
Net Income		2,553			1,889			2,571			1,740
Dividends on Preferred Shares		7			7			14			14
Net Income Available for Common Shareholders		$	2,546		$	1,882		$	2,557		$	1,726
Earnings Per Common Share:
Basic		$	0.15		$	0.14		$	0.16		$	0.13
Diluted		$	0.15		$	0.13		$	0.15		$	0.12
Weighted Average Outstanding Common Shares:
Basic		16,502			13,561			15,637			13,295
Diluted		17,338			14,103			16,517			13,840

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

1

 

SOUTHWEST WATER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		June 30, 2004			December 31, 2003
		(Unaudited)
		(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents		$	1,867		$	2,570
Restricted cash		991			2,806
Trade accounts receivable, less allowance for doubtful accounts		25,475			19,759
Other current assets		10,971			10,259
		39,304			35,394
Property, Plant and Equipment:
Utility property, plant and equipment—at cost		282,129			271,502
Non-regulated operations property, plant and equipment—at cost		17,227			17,485
		299,356			288,987
Less accumulated depreciation and amortization		71,631			67,900
		227,725			221,087
Other Assets:
Goodwill		21,959			21,388
Intangible assets, net		7,141			2,026
Other assets		15,695			16,327
		$	311,824		$	296,222
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt		$	4,125		$	2,697
Accounts payable		8,240			11,448
Other current liabilities		16,992			17,244
		29,357			31,389
Other Liabilities and Deferred Credits:
Long-term debt		53,746			56,493
Bank lines of credit		7,009			16,609
Advances for construction		7,203			7,238
Contributions in aid of construction		84,494			81,556
Deferred income taxes		10,772			10,590
Other liabilities and deferred credits		14,954			12,680
Total Liabilities and Deferred Credits		207,535			216,555
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock		466			507
Common stock		165			147
Paid-in capital		79,631			55,981
Retained earnings		24,027			23,032
Total Stockholders’ Equity		104,289			79,667
		$	311,824		$	296,222

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

2

 

SOUTHWEST WATER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

		Six Months Ended June 30,
		2004			2003
		(in thousands)
Cash Flows From Operating Activities:
Net income		$	2,571		$	1,740
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		3,687			4,003
Stock-based compensation expense		447			467
Gain on sale of land		—			(720		)
Deferred income taxes		181			860
Changes in assets and liabilities, net of effects of acquisitions:
Restricted cash		1,815			—
Trade accounts receivable		(5,716		)	(3,135		)
Other current assets		(712		)	838
Other assets		634			1,137
Accounts payable		(3,210		)	(2,779		)
Other current liabilities		2,647			(1,915		)
Other liabilities		1,484			(1,369		)
Other		(580		)	11
Net cash provided by (used in) operating activities		3,248			(862		)
Cash Flows From Investing Activities:
Additions to property, plant and equipment		(11,217		)	(9,179		)
Proceeds from disposition of assets		—			741
Purchase of minority interest in subsidiary		(2,900		)	—
Cash used to acquire customer units		(4,063		)	—
Net cash used in investing activities		(18,180		)	(8,438		)
Cash Flows From Financing Activities:
Net proceeds from stock offerings		20,573			10,988
Capital improvement reimbursements		169			2,182
Contributions in aid of construction and LUE fees		4,891			1,975
Net repayment of bank notes		(9,622		)	(5,934		)
Proceeds from sale/leaseback of assets		78			1,102
Net proceeds from dividend reinvestment, debenture conversion, employee stock purchase and stock option plans		445			733
Dividends paid		(1,576		)	(1,141		)
Payments of long-term debt		(572		)	(177		)
Payments on advances for construction, net		(157		)	(166		)
Net cash provided by financing activities		14,229			9,562
Net (decrease) increase in cash and cash equivalents		(703		)	262
Cash and cash equivalents at beginning of period		2,570			1,606
Cash and cash equivalents at end of period		$	1,867		$	1,868
Supplemental Disclosure of Cash Flow information
Cash paid during the period for:
Interest		$	2,085		$	2,555
Income taxes		$	125		$	305
Non-cash investing and financing activities:
Purchase of businesses
Fair value of customer units acquired		$	5,502		$	—
Cash used to acquire customer units		(4,063		)	—
Notes issued to acquire customer units		(1,439		)	—
Liabilities assumed		$	—		$	—
Non-cash contributions in aid of construction and advances for construction conveyed to Company by developers		$	2,349		$	3,629

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3

 

SOUTHWEST WATER COMPANY AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Note 1. – Basis of Presentation

 

Southwest Water Company was incorporated in California in 1954 and reincorporated in Delaware in 1988. Southwest Water Company and its subsidiaries (collectively referred to in this report as “Southwest Water”, the “Company”, “we”, “us” or “our” except where the context otherwise requires) provide a broad range of water and wastewater services including water production and distribution, wastewater collection and treatment, public works services, water and wastewater infrastructure development, and utility  billing and collecting. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X; accordingly, they do not include all information and notes required by US GAAP for complete financial statements. Except as disclosed herein, there have been no material changes in the information disclosed in the notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2003 (the 2003 Annual Report). The unaudited condensed consolidated financial statements reflect all adjustments which, in our opinion, are necessary to present fairly the financial position of Southwest Water as of June 30, 2004, and our results of operations for the three and six months ended June 30, 2004 and 2003 and the results of cashflows for the six months ended June 30, 2004 and 2003. These adjustments are of a normal recurring nature.

 

Certain reclassifications have been made to the prior period financial statement presentation to conform to the current period presentation.

 

Note 2. – Earnings Per Share

 

We record earnings per share (EPS) by computing “basic EPS” and “diluted EPS”. Basic EPS measures our performance over the reporting period by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS measures our performance over the reporting period after giving effect to all potentially dilutive common shares that would have been outstanding if the dilutive common shares had been issued. Stock options, convertible debentures and warrants give rise to potentially dilutive common shares.  In July 2001, we issued $20.0 million of 6.85% fixed-rate convertible subordinate debentures. The debentures are convertible at any time prior to maturity, unless previously redeemed, at a conversion price of $12.148. When our annual diluted earnings exceed $0.53 per share, the debentures will be included in the calculation of diluted earnings per share after adjusting net income for the after-tax effect of the debenture interest expense.

 

We effected a 4-for-3 stock split in the form of a stock dividend on January 1, 2004. All per share amounts and numbers of shares outstanding reflect this dividend.  The following table is a reconciliation of the numerators (income) and denominators (shares) used in both basic and diluted EPS calculations:

 

On August 6, 2004 we announced a 10.5 percent increase in our quarterly common share cash dividend, from $.0475 to $.0525 per share. The Company's Board of Directors also declared a quarterly cash dividend of $.65625 per share of Series A preferred stock. The cash dividends will be paid on October 21, 2004, to stockholders of record on September 30, 2004.

 

Basic EPS

 

		For the three months ended June 30,						For the six months ended June 30,
		2004			2003			2004			2003
		(in thousands except per share data)
Net income per share
Net income		$	2,553		$	1,889		$	2,571		$	1,740
Less: dividends on preferred shares		(7		)	(7		)	(14		)	(14		)
Net income available for common shares		$	2,546		$	1,882		$	2,557		$	1,726
Weighted average outstanding common shares		16,502			13,561			15,637			13,295
Earnings per common share - basic		$	0.15		$	0.14		$	0.16		$	0.13

 

4

 

Diluted EPS

 

		For the three months ended June 30,						For the six months ended June 30,
		2004			2003			2004			2003
		(in thousands except per share data)
Net income per share - assuming dilution
Net income available for common shares		$	2,546		$	1,882		$	2,557		$	1,726
Weighted average outstanding common shares		16,502			13,561			15,637			13,295
Plus:  shares issued on assumed exercise of stock options and warrants		836			541			880			545
Weighted average outstanding common shares		17,338			14,103			16,517			13,840
Earnings per common share - diluted		$	0.15		$	0.13		$	0.15		$	0.12

 

Note 3. –Stock-Based Compensation

 

At June 30, 2004, Southwest Water had three stock-based plans: the Stock Option Plan (SOP), the Director Stock Option Plan (DOP), and the Employee Stock Purchase Plan. In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2004 and 2003:

 

 

Compensation expense arising from stock option grants as determined using the Black-Scholes fair value option model was approximately as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
Stock-based compensation expense		$	169,000		$	252,000		$	447,000		$	467,000

 

Note 4. – Common Stock Issued

 

On December 29, 2003, we filed a shelf registration statement with the Securities and Exchange Commission for the issuance from time to time of up to $50 million aggregate principal amount of common stock, debt securities and warrants.  In March 2004, we completed a public offering of 1,610,000 shares of our common stock under the shelf registration statement.  These shares were sold at $13.58 per share and our net proceeds were approximately $20.6 million.  We may offer additional securities under this shelf registration.

 

In May 2003, we completed a private placement of 1,477,377 shares of newly issued common stock to certain institutional investors. Net proceeds from the private placement were approximately $11.0 million.

 

During the six months ended June 30, 2004, approximately $2.2 million of our 6.85% fixed-rate convertible subordinate debentures were converted into approximately 180,000 shares of our common stock.

 

5

 

Note 5. –Stock Options and Warrants

 

A combined summary of shares authorized and available for issuance under the SOP and the DOP as of June 30, 2004 is as follows:

 

		SOP		DOP		Total
Shares authorized for issuance		4,241,178		687,555		4,928,732
Shares available for issuance		1,074,571		363,830		1,438,401

 

A combined summary of the status of the SOP, the DOP and warrants as well as changes during the six months ended June 30, 2004 is presented below:

 

		Stock Options and Warrants		Weighted Average Exercise Price
		(in thousands)
Outstanding at December 31, 2003		2,491		$	6.91
Granted		393		13.88
Exercised		(66	)	4.57
Forfeited		(114	)	7.27
Outstanding at June 30, 2004		2,704		$	8.26
Exercisable at June 30, 2004		1,624		$	6.59

 

The following table summarizes information about stock options and warrants outstanding at June 30, 2004:

 

Range of Exercise Prices						Options and Warrants Outstanding							Options and Warrants Exercisable
						Number Outstanding at June 30, 2004		Weighted Average Remaining Contractual Life in Years		Weighted Average Exercise Price
													Number Exercisable at June 30, 2004		Weighted Average Exercise Price
						(in thousands)							(in thousands)
$	1.50		$	3.75		265		0.2		$	2.75		265		$	2.75
3.75			7.50			593		1.5		5.32			575		5.30
7.50			11.25			1,418		5.1		8.85			739		8.66
11.25			15.00			428		6.5		13.78			45		11.70
$	1.50		$	15.00		2,704		4.0		$	8.26		1,624		$	6.59

 

Employee Stock Purchase Plan (ESPP): We have a stockholder-approved ESPP that allows eligible employees to purchase our common stock through payroll deductions of up to 10% of their salary (not to exceed $25,000 per year). The purchase price of the stock is 90% of the lower of the share price as calculated at the beginning and end of each three-month offering period. Under the ESPP, we issued 8,928 shares to employees during the six months ended June 30, 2004. At June 30, 2004, 1,139,532 shares were reserved for issuance under the ESPP and 861,321 shares were available for issuance.

 

Note 6. – Operating Segments

 

Southwest Water has two reportable segments: the Services Group and the Utility Group.  We have not changed the basis of segmentation or measurement of segment profit or loss from that reported in our 2003 Annual Report.

 

The Services Group operates and manages water and wastewater treatment facilities owned by cities, public agencies, municipal utility districts and private entities. Revenues are earned by providing operations and maintenance services under contracts with municipalities and other clients.  The Services Group also provides construction management and utility billing services.

 

6

 

The Utility Group owns regulated water utilities in California, New Mexico and Texas, as well as wastewater facilities in New Mexico and Texas.  State and federal agencies issue regulations regarding standards of water quality, safety, environmental and other matters which affect these operations. In the regulated utility subsidiaries, the rates that we charge for water and wastewater services are established by state authorities.

 

The following table presents information about the operations of each reported segment for the three and six months ended June 30, 2004 and 2003:

 

		Services Group (1)			Utility Group			Total Segments Information			Other (2)			Total Consolidated Information
		(in thousands)
For the Three Months Ended June 30, 2004
Total revenues (1)		$	29,118		$	16,576		$	45,694		$	—		$	45,694
Segment operating income (loss)		744			7,702			8,446			(3,278		)	5,168
Interest income		98			83			181			7			188
Interest expense		(126		)	(626		)	(752		)	(324		)	(1,076		)
Other income (expense)		(616		)	(54		)	(670		)	443			(227		)
Income (loss) before income taxes		100			7,105			7,205			(3,152		)	4,053
For the Three Months Ended June 30, 2003
Total revenues (1)		$	27,702		$	13,762		$	41,464		$	—		$	41,464
Segment operating income (loss)		867			4,415			5,282			(1,785		)	3,497
Interest income		(21		)	21			—			—			—
Interest expense		(115		)	(574		)	(689		)	(420		)	(1,109		)
Other income (expense)		(317		)	838			521			89			610
Income (loss) before income taxes		414			4,700			5,114			(2,116		)	2,998

 

		Services Group (1)			Utility Group			Total Segments Information			Other (2)			Total Consolidated Information
		(in thousands)
For the Six Months Ended June 30, 2004
Total revenues (1)		$	55,782		$	29,639		$	85,421		$	—		$	85,421
Segment operating income (loss)		12			10,713			10,725			(4,624		)	6,101
Interest income		197			83			280			28			308
Interest expense		(233		)	(1,206		)	(1,439		)	(714		)	(2,153		)
Other income (expense)		(968		)	(11		)	(979		)	805			(174		)
Income (loss) before income taxes		(992		)	9,579			8,587			(4,505		)	4,082
For the Six Months Ended June 30, 2003
Total revenues (1)		$	52,890		$	24,688		$	77,578		$	—		$	77,578
Segment operating income (loss)		902			6,614			7,516			(3,098		)	4,418
Interest income		10			39			49			—			49
Interest expense		(233		)	(1,215		)	(1,448		)	(858		)	(2,306		)
Other income (expense)		(642		)	1,058			416			185			601
Income (loss) before income taxes		37			6,496			6,533			(3,771		)	2,762

 

(1)          In addition to services provided to external customers, certain companies in our Services Group provide construction, operations and maintenance services to companies in our Utility Group. In accordance with SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, we do not eliminate the intersegment profit on the work performed when the sales price is reasonable and it is probable that the costs will be recoverable through the rate making process. Intersegment revenue eliminated was approximately $2.3 million and $2.2 million for the three months ended June 30, 2004 and 2003, respectively.  Intersegment revenue eliminated was approximately $3.4 million and $4.2 million for the six months ended June 30, 2004 and 2003, respectively.

 

(2)          “Other” consists primarily of costs that include corporate headquarters expenses and functional departments whose costs are not allocated to the segments.

 

7

 

The following table presents information about the identifiable assets of each reported segment as of June 30, 2004 and December 31, 2003:

 

		June 30, 2004			December 31, 2003
		(in thousands)
Services Group		$	73,642		$	67,831
Utility Group		232,496			222,436
Corporate and Other		5,686			5,955
Consolidated		$	311,824		$	296,222

 

Note 7. – Seasonality

 

Because our businesses are affected  by weather, the results of operations for one quarter do not indicate results to be expected in another quarter.  Our Services Group operations can be affected by weather and rainfall. In general, heavy rainfall or storm conditions may limit our ability to perform certain billable work such as pipeline maintenance, manhole rehabilitation, construction and other outdoor services. Severe weather conditions may also result in additional labor and material costs to us as we meet the terms of our operations and maintenance contracts. Depending on the specific contractual terms, this additional work may be billable to our various clients.  A significant portion of revenues of our Texas subsidiaries is earned under time and materials contracts where in revenues can be affected by weather and rainfall.  Precipitation in our Texas base of operations was 221% of average and 187% of average during the three and six months ended June 30, 2004, respectively.  Higher than average precipitation has limited or delayed our ability to perform billable services and construction during 2004 as noted above.  Precipitation in the Services Group’s Houston base of operations for the three and six month periods ended June 30, 2004 and 2003 was as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2004		% of Average		2003		% of Average		2004		% of Average		2003		% of Average
Actual precipitation inches		31.22		221	%	5.14		36	%	45.04		187	%	13.35		55	%
Average precipitation inches		14.1				14.1				24.12				24.12

 

Our Utility Group water operations are seasonal, as rainfall and weather conditions affect water consumption.  In our service areas the second and third quarters of each year typically account for the highest volume of water consumption when weather tends to be hot and dry. Drought conditions may result in lower revenue due to consumer conservation efforts and a shortage of water. Drought conditions may also result in increased water costs to us, which could adversely affect our profitability. Conversely, unusually wet conditions may result in decreased customer demand, lower revenues and lower profit in our Utility Group operations.

 

Note 8. – Commitment, Contingencies and Restrictions

 

Commitments Under Acquisition Agreements.

 

We own 90% of the outstanding common stock of Operations Technologies, Inc. (OpTech). We have the right to acquire the remaining 10% of OpTech in August 2006 based on a formula relating to the profitability of OpTech, subject to a minimum price of  $1 million. The minority owner has the option to sell the remaining 10% of OpTech to us using the same formula.

 

We have an 80% interest in Windermere Utility Company (Windermere) in Texas. We have the right to acquire the remaining 20% ownership in Windermere.  The minority owner of Windermere has the right to require us to purchase the remaining 20% after October 1, 2005, for $6.0 million payable in our common stock, subject to a limitation on the maximum and minimum number of shares issuable.

 

Commitments Under Long-term Service Contracts

 

In September 2002, we agreed to facilitate the engineering and construction of a $25.0 million reverse osmosis water treatment system in the city of San Juan Capistrano, California, for the Capistrano Valley Water District (CVWD). The project includes the drilling of new wells and the development of associated water lines. We have entered into subcontractor agreements with an engineering firm and a large construction firm to fulfill significant obligations of this service contract.

 

8

 

We account for the project under the percentage of completion method. In doing so, we make important judgments in estimating revenue and cost and in measuring progress toward completion. Percentage complete is determined based upon the actual costs incurred compared to the total estimated costs to complete, subject to cash received and milestones accomplished. Milestones include specific construction objectives that must be completed and accepted by the CVWD. These judgments underlie our determinations regarding overall contract value, contract profitability and timing of revenue recognition. Revenue and cost estimates are revised periodically based on changes in circumstances; any expected losses on contracts are recognized immediately upon contract signing or as soon thereafter as identified. During construction of the CVWD plant, we have received payments upon completion of construction milestones and we expect to continue to receive such payments until final completion of the construction. Construction of the plant commenced in December 2002. As of June 30, 2004, the plant was approximately 84% complete. We expect construction to be completed in the latter portion of 2004, at which time we will begin to operate and maintain the facility under the 20-year contract. Upon completion, the plant will have the capacity to treat in excess of 5.0 million gallons of water per day.

 

On January 8, 2003, we obtained an unsecured line of credit facility from a commercial bank used to issue a $3.4 million standby letter of credit as collateral for performance under a contract with the CVWD to manage the design and construction project. This standby letter of credit is in force for the estimated two-year construction period of the project. Upon final acceptance of the completed project by the CVWD, the standby letter of credit facility will be terminated.

 

The CVWD service contract contains certain guarantees related to our performance, including certain liquidated damages in the event of our failure to perform not caused by uncontrollable circumstances as defined in the service contract. Among other things, we are obligated to produce from the completed plant a specified volume of treated water by December 4, 2004. In the event of a delay beyond this date, not caused by a defined uncontrollable circumstance, specified delay liquidated damages are to be paid to CVWD. To help mitigate these risks, we have secured from our construction subcontractors both contractual liquidated damage provisions and performance and completion bonds. In addition, we may also be liable for liquidated damages relating to any lost payments from an agreement with a state water agency providing financial assistance to CVWD. During the 20-year operation period, we have made certain other operating guarantees to CVWD.

 

As part of the financing of this project, the CVWD issued insured municipal bonds. We entered into an agreement with the bond insurer to guarantee our performance under the service contract, subject to certain liability limits to the bond insurer in the event of a default. Such liability limits will not exceed an amount equal to $6.0 million during the construction period of the project, and afterwards, during the 20-year operation of the facility, the liability limits will not exceed an amount equal to $4.0 million plus an amount no greater than the replacement cost of the actual reverse osmosis filtration unit within the facility estimated to be approximately $1.5 million.

 

Credit Line Expansion

 

In April 2004, we obtained a firm commitment from two of our commercial banks to expand our lines of credit by an additional $30 million in the aggregate and to extend the maturity of our two existing lines from September 2005 to September 2006.  The line of credit expansions were entered into to provide us with additional funds to facilitate the Monarch acquisition (see note 9 following).

 

Legal Proceedings

 

Southwest Water and a subsidiary have been named as defendants in several lawsuits alleging various injuries as a result of water contamination in the San Gabriel Valley Main Basin. The California Supreme Court ruled in February 2002 that the plaintiffs cannot challenge the adequacy of the water quality standards established by California Department of Health Services (DOHS). The plaintiffs may sue and collect damages from CPUC-regulated water companies only by proving that water delivered did not meet these water quality standards. The California Supreme Court directed that the cases be sent to a trial court for further proceedings. A number of cases, including those involving Southwest Water Company, were consolidated before a single judge. Southwest Water Company requested defense and indemnification from its liability insurance carriers for these lawsuits. Several of the liability insurance carriers absorbed the costs of defense of the lawsuits. After discovery, the plaintiffs admitted that they could not prove any violation of DOHS water quality standards by Southwest Water Company. On August 4, 2004 the case against Southwest Water was dismissed.

 

Southwest Water and its subsidiaries are subject to litigation arising in the ordinary course of operations. We believe the ultimate resolution of such matters will not materially adversely affect our financial position, results of operations or cash flows.

 

9

 

Groundwater Settlement

 

One of the water sources for our California water utility has been affected by the presence of certain groundwater contaminants. These contaminants consist mainly of chemicals disposed of by various industrial companies in the 1940s and 1950s. In 2001 and 2002, this contamination necessitated the shutdown of a number of our wells, and we purchased replacement water at a cost substantially higher than the cost of water pumped from our own wells.

 

As a result of this contamination, under the terms of an agreement with the responsible parties, we have received payments from these parties, and we expect to continue to receive payments until completion of remediation or until our production capacities have been restored.  These payments represent the incremental cost of purchasing water over the cost that would have been incurred by us to pump water from our wells.  Our agreement with the responsible parties provided for ongoing reimbursement of our excess water costs and as such we bill and collect reimbursements monthly.  These monthly reimbursements are recorded as a reduction to operating expenses – utility group.  During the six months ended June 30, 2004 and 2003 these reimbursements were approximately $1.6 million and $1.9 million, respectively.

 

The settlement agreement also provides for contributions by the responsible parties to construct new wells and to develop additional interconnections with nearby water sources. Funds from the settlement agreement will also be used to develop long-term solutions that will potentially enable us to use our own less costly groundwater supplies in the future.  These contributions, recorded as contributions in aid of construction (CIAC), were approximately $169,000 and $2.2 million for the six months ended June 30, 2004 and 2003, respectively.

 

Note 9. – Acquisitions

 

On July 14, 2004, we acquired a Texas utility consisting of approximately 86 rural regulated water systems and 11 wastewater systems from Tecon Water Holdings, L.P, and renamed the utility, Monarch Utilities Inc. (Monarch).  The acquired water and wastewater systems provide service to approximately 21,000 water and approximately 4,000 wastewater connections in Texas and recorded revenues of approximately $13 million in 2003.  The acquisition will expand our regulated operations in the state of Texas where our Utility Group currently serves approximately 6,000 customers.  We expect the proximity of these new systems to our existing Services Group and Utility Group operations to allow us to obtain operating efficiencies by sharing overhead costs and employee competency in this region.  The aggregate purchase price, which is subject to post-closing adjustment, was approximately $63 million, comprised of approximately $45 million in cash payments and the assumption of approximately $18 million in debt.  Transaction costs incurred in the acquisition are expected to be approximately $1.1 million.  The final purchase price for water and wastewater systems will be adjusted when certain contingencies are resolved. Monarch filed a general rate case with the Texas Commission on Environmental Quality (TCEQ) in June 2003, and put the requested rates into effect in August 2003.  The requested rates would represent an increase of approximately 21% from the rates previously approved by the TCEQ.  Neither the Monarch acquisition nor its operations are reflected in the accompanying financial statements, as the acquisition closed subsequent to June 30, 2004.

 

In July 2004, we expanded our lines of credit by an additional $30 million to $70 million in the aggregate and extended the maturity of our two lines from September 2005 to September 2006.  The expansions provided us with liquidity to effect the Tecon transaction.  Our balance outstanding on the lines was $57 million immediately after the Tecon transaction.

 

During 2004, we completed several acquisitions in the utility billing and collection market.  These acquisitions were structured as asset purchases, primarily of account contracts, account lists, software and other assets. Under the purchase agreements we acquired approximately 136,000 active billing and collection units at a cost of approximately $5.5 million.  The aggregate purchase price for the account lists was approximately $4.1 million in cash and approximately $1.4 million in notes payable.  Substantially all of the purchase price was allocated to the account lists and the resulting intangible assets are to be amortized over eight years.

 

10

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the”34 Act”). Such statements are based upon current expectations that involve risks and uncertainties including those set forth under “Risk Factors” in this report.  Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, words such as “may”, “will”, “should”, “estimates”, “predicts”, “potential”, “continue”, “strategy”, “believes”, “expects”, “anticipates”, “plans”, “intends”, and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements.

 

The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes thereto and the consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2003.

 

Overview

 

Southwest Water Company and subsidiaries (“Southwest”, “we” or the “Company”) provide a broad range of water and waste water services including water production and distribution, wastewater collection and treatment, public works services, utility infrastructure and construction management, and utility billing and collecting. We provide services to more than two million people in 35 states. Our business is segmented into two operating groups: our Services Group and our Utility Group.

 

Our Services Group operates our contract service businesses in which we operate and maintain water supply and wastewater facilities owned by cities, public agencies, municipal utility districts and private entities primarily in Texas, New Mexico, California, Colorado, Mississippi and Georgia. While state and federal agencies issue regulations regarding standards of water quality, safety, environmental and other matters which affect these operations, our Services Group prices are not subject to regulation. We also provide utility billing and collecting services in numerous states.

 

Our Utility Group owns and manages rate-regulated public water utilities in California, New Mexico and Texas. We own and manage wastewater facilities in New Mexico and Texas.  State and federal agencies issue regulations regarding standards of water quality, safety, environmental and other matters which affect these operations, as well as establish the rates that we can charge for our water and wastewater services.

 

On July 14, 2004, we acquired a Texas utility consisting of approximately 86 rural regulated water systems and 11 wastewater systems from Tecon Water Holdings, L.P, and renamed the utility, Monarch Utilities Inc. (Monarch).  The acquired water and wastewater systems provide service to approximately 21,000 water and approximately 4,000 wastewater connections in Texas and generated revenues of approximately $13 million in 2003.  The acquisition will expand our regulated operations in the state of Texas where our Utility Group currently serves approximately 6,000 customers.  We expect the proximity of these new systems to our existing Services Group and Utility Group operations to allow us to obtain operating efficiencies by sharing overhead costs and employee competency in this region.  The aggregate purchase price, which is subject to post-closing adjustment, was approximately $63 million, comprised of approximately $45 million in cash payments and the assumption of approximately $18 million in debt.  Transaction costs incurred in the acquisition are expected to be approximately $1.1 million.  The final purchase price for water and wastewater systems will be adjusted when certain contingencies are resolved. Monarch filed a general rate case with the Texas Commission on Environmental Quality (TCEQ) in June 2003, and put the requested rates into effect in August 2003.  The requested rates would represent an increase of approximately 21% from the rates previously approved by the TCEQ.  Neither the Monarch acquisition nor its operations are reflected in the accompanying financial statements, as the acquisition closed subsequent to June 30, 2004.

 

11

 

Results of Operations

 

A summary of our consolidated results for the three and six months ended June 30, 2004 and 2003 is as follows:

 

		Three Months Ended June 30,										Six Months Ended June 30,
		2004			% of Revenue		2003			% of Revenue		2004			% of Revenue		2003			% of Revenue
		($amounts in millions)
Revenues:
Services group		$	29.1		64		$	27.7		67		$	55.8		65		$	52.9		68
Utility group		16.6			36		13.8			33		29.6			35		24.7			32
		45.7			100		41.5			100		85.4			100		77.6			100
Expenses:
Operating expenses - services group		25.1			55		24.3			59		50.1			59		46.3			60
Operating expenses - utility group		8.6			19		8.2			20		16.2			19		15.7			20
Selling, general and administrative expenses		6.9			15		5.5			13		13.0			15		11.2			14
		40.6			89		38.0			92		79.3			93		73.2			94
Operating Income		5.1			11		3.5			8		6.1			7		4.4			6
Other Income (Expense):
Interest expense		(1.1		)	2		(1.1		)	3		(2.2		)	3		(2.3		)	3
Interest income		0.2			—		—			—		0.3			—		—			—
Gain on sale of land		—			—		0.7			2		—			—		0.7			1
Other		(0.2		)	—		(0.1		)	—		(0.2		)	—		(0.1		)	—
		(1.1		)	2		(0.5		)	1		(2.1		)	2		(1.7		)	2
Income  Before Income Taxes		4.0			9		3.0			7		4.0			5		2.7			3
Income Tax Provision		1.5			3		1.1			3		1.5			2		1.0			1
Net Income		$	2.5		6		$	1.9		4		$	2.5		3		$	1.7		2

 

Discussion of Results of Operations for Three Months Ended June 30, 2004 and 2003

 

Revenues

 

Services group

 

Services Group revenues represent fees earned for water and wastewater facility operations and maintenance (O&M) services, equipment maintenance and repair, sewer pipeline cleaning, utility billing and collection services, construction management services and state-certified water and wastewater laboratory analysis. Revenues for the three months ended June 30, 2004 increased approximately $1.4 million, or 5%, to $29.1 million from $27.7 million during the same period of the prior year.   Prolonged rainfall may limit our ability to perform certain billable work such as pipeline maintenance, manhole rehabilitation, construction and other outdoor services.

 

Revenues earned at our Services Group under time and materials contracts were in fact affected by prolonged rainfall in our Texas base of operations. Precipitation was 221% of average during the three months ended June 30, 2004 and 36% of average for the same period of 2003.   The effect of prolonged rainfall was offset by the following:

 

1.               A $0.7 million increase in operations and maintenance revenue under a 10-year, $30 million contract to operate and maintain the public works department of the City of Pascagoula, Mississippi, (the “Pascagoula contract”).  Revenues earned under the Pascagoula contract were $0.7 million and zero for the three months ended June 30, 2004 and 2003, respectively.

 

2.               A $0.7 million increase in revenue earned from utility billing and collection contracts.  This increase was driven by additional multi-family utility metering equipment installations, as well as construction activity revenues earned from approximately 136,000 customer units acquired during the three months ended June 30, 2004.

 

Utility group

 

Utility Group revenues result from the production and distribution of water and the collection and treatment of sewage for residential, business, industrial and public authority use. Our Utility Group water operations are seasonal, as rainfall and weather conditions affect

 

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water consumption.  In our service areas the second and third quarters of each year typically account for the highest volume of water consumption when weather tends to be hot and dry. Drought conditions may result in lower revenue due to consumer conservation efforts and a shortage of water. Drought conditions may also result in increased water costs to us, which could adversely affect our profitability. Conversely, unusually wet conditions may result in decreased customer demand, lower revenues and lower profit in our Utility Group operations.

 

Revenues in the Utility Group increased approximately $2.8 million, or 20%, to $16.6 million during the three months ended June 30, 2004 from $13.8 million during the same period of the prior year. The increase is in Utility group revenue is primarily due to the favorable effect of rate increases in our California and Texas utilities and increased customer connections in our New Mexico and Texas utilities.  The changes are represented as follows:

 

		(in millions)
Favorable effect of rate increase in revenues		$	1.4
Favorable effect of increase in connections		0.2
Increase in water consumption		1.2
Net increase in revenues		$	2.8

 

Expenses

 

Operating expenses – services group

 

Operating expenses – services group consist primarily of salaries, wages and employee benefits, fleet expenses, facilities costs, supplies and equipment, repairs and maintenance, professional fees and other costs.  Operating expenses – services group increased approximately $0.8 million, or 3%, to $25.1 million during the three months ended June 30, 2004 from $24.3 million during the same period of 2003.   We have  incurred increased costs in providing services to newer customers and under new contracts.  Costs to provide services under the Pascagoula contract were approximately $0.4 million during the three months ended June 30, 2004.  The contract commenced in the third quarter of 2003.   Operating expenses for multi-family utility billing contracts increased approximately $0.4  million due to the servicing of approximately 136,000 units purchased during the three months ended June 30, 2004 as well as increased installation of utility metering equipment.  Operating expenses for our government services operations were approximately $0.2 million during the three months ended June 30, 2004.  These operations began in the fourth quarter of 2003.

 

Operating expenses – services group, as a percentage of the related revenues decreased from 88% for the three months ended June 30, 2003 to 86% for the three months ended June 30, 2004 and 2003 due to the following:

 

1.               In the third quarter of 2003, the Services Group instituted certain cost reduction efforts in its utility billing and collection services as well as its operations and maintenance services.  These costs reduction efforts included headcount reductions and better management of overtime.

 

2.               As noted above, prolonged rainfall prevented this group from performing certain pipeline maintenance, manhole rehabilitation, construction services.   These services are “materials intensive” and consequently, provide lower margins than other operations and maintenance services provided by the Services Group.

 

3.               In the second quarter of 2003, the Services Group provided certain services under warranty.  The Services Group did not earn revenue for these services in 2003.

 

Operating expenses – utility group

 

Operating expenses—utility group represent the costs of purchasing and producing water, treating wastewater, salaries, wages and employee benefits, facilities costs, power and electricity supplies and equipment, repairs and maintenance, professional fees and other costs. Operating expenses—utility group represented approximately 52% and 59% of revenues from utility operations for the three months ended June 30, 2004 and 2003, respectively.  The decrease in operating expenses as a percentage of revenues was due to the aforementioned increase in Utility Group revenues, which was primarily due to an increase in rates at our California utility.  Operating expenses for our Utility Group increased $0.4 million, or 5%, to $8.6 million during the three months ended June 30, 2004 from $8.2 million during the comparable period of 2003 due to an increase in consumption of water due to weather conditions at our California utility.

 

Water production costs at our California utility decreased approximately 12% from $225 per acre foot for the three months ended June 30, 2003 to $198 per acre foot for the three months ended June 30, 2004.  This decrease resulted from a shift from higher cost purchased water toward less expensive produced water from our own wells.  This increased water production related to two new wells which were not available during the three months ended June 30, 2003.  The percentage of water used in our operations that was produced from our own wells was 41% and 29% during the three months ended June 30, 2004 and 2003, respectively. Depreciation expense at our California utility decreased $0.2 million to $0.7 million for the three months ended June 30, 2004 from $0.9 million for

 

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the three months ended June 30, 2003.  The decrease in depreciation was due to an extension in the estimated useful lives of certain utility assets, this extension was reviewed and accepted by the CPUC in conjunction with the California utility’s June  2003 rate case.

 

However, the benefit from the change in mix of water produced was partially offset by (i) increased utility plant maintenance and repair costs and (ii) increased energy costs.

 

Operating expenses at our New Mexico and Texas utilities increased during the three months ended June 30, 2004 as compared to the comparable period of 2003. The increase was primarily due to an increase in volume and in the number of connections served by our New Mexico and Texas utilities.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses consist mainly of personnel, facilities, insurance and professional services costs, which support our sales, marketing, human resources, finance and administration functions.  Selling, general and administrative costs increased $1.4 million, or 25%, to $6.9 million for the three months ended June 30, 2004 from $5.5 million during the same period of the prior year.  Selling, general and administrative expenses increased to 15% of revenues for the three months ended June 30, 2004 from 13% during the three months ended June 30, 2003 due to the increased size and complexity of our operations.  In particular, the change was due to:

 

1.               Increases in insurance costs, audit fees, legal fees, facilities costs and. benefit costs for administrative employees, and

 

2.               Our efforts to prepare for and comply with the Sarbanes Oxley Act of 2002 and related regulations.

 

Other Income (Expense)

 

Interest Expense

 

The major components of interest expense for three months ended June 30, 2004 and 2003 are as follows:

 

		For the Three Months Ended June 30,
		2004			2003
		(in thousands)
Interest expense - convertible subordinate debentures		$	316		$	335
Interest expense - bank lines of credit		165			124
Interest expense - mortgage bonds and bank term loan		493			579
Interest expense - other		173			187
Total interest expense before capitalized interest		1,147			1,225
Capitalized interest		(71		)	(116		)
Total interest expense		$	1,076		$	1,109

 

The decrease in total interest expense is primarily due to a reduction in our long-term debt.  Average long-term debt outstanding was $62.6 million and $80.0 million for the three months ended June 30, 2004 and 2003, respectively.  Proceeds from our March 2004 stock offering were used to pay down line of credit balances.  Interest rates on these lines are lower than our other debt and the reduction of the line of credit debt had the effect of increasing the weighted average borrowing rate during the three months ended June 30, 2004. The effect of decrease in average debt outstanding was partially offset by an increase in our weighted average borrowing rate from 5.6% during the three months ended June 30, 2003 to 6.9% during the three months ended June 30, 2004.

 

In the second quarter of 2003, we recognized a $720,000 pretax gain on the sale of surplus land at our California utility.

 

Provision for Income Taxes

 

Our effective income tax rates for the three months ended June 30, 2004 and 2003 were approximately 37%.

 

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Discussion of Results of Operations for the Six Months Ended June 30, 2004 and 2003

 

Revenues

 

Services group

 

Revenues for the six months ended June 30, 2004 increased approximately $2.9 million, or 5%, to $55.8 million from $52.9 million during the same period of the prior year.   Revenues earned under time and materials contracts were affected by prolonged rainfall in our Texas base of operations.  Actual rainfall exceeded average rainfall by approximately 87% during the six months ended June 30, 2004.  Rainfall was only 55% of average for the six months ended June 30, 2003.  In addition, during the first quarter of 2004, we determined that certain receivables of $0.3 million would not likely be collected.  Accordingly, the receivables and the related revenue were reversed.

 

The effect of the prolonged rainfall was offset by the following:

 

1.               A $1.2 million dollar increase in revenues earned from our construction management project for the city of San Juan Capistrano, California.  Revenues earned under the construction management contract were approximately $4.5 million and $3.3 million for the six months ended June 30, 2004 and 2003, respectively.

 

2.               A $1.4 million increase in operations and maintenance revenue under a 10-year, $30 million contract to operate and maintain the public works department of the City of Pascagoula, Mississippi.  Revenues earned under the Pascagoula contract were $1.6 million and $0.2 million for the six months ended June 30, 2004 and 2003, respectively.

 

3.               Approximately $1.3 million in revenues earned from utility billing units purchased or subsidiaries acquired subsequent to June 30, 2003.

 

Utility group

 

Revenues in the Utility Group increased approximately $4.9 million, or 20%, to $29.6 million during the six months ended June 30, 2004 from $24.7 million during the same period of the prior year. The increase is primarily due to the favorable effect of rate increases in our California and Texas utilities, increased consumption at our California utility due to weather, and increased customer connections in our New Mexico and Texas utilities.  The changes are represented as follows:

 

		(in millions)
Favorable effect of rate increase in revenues		$	3.0
Favorable effect of increase in connections		0.4
Increase in water consumption		1.5
Net increase in revenues		$	4.9

 

Expenses

 

Operating expenses – services group

 

Our operating expenses in the Services Group increased approximately $3.8 million, or 8%, to $50.1 million during the six months ended June 30, 2004 from $46.3 million during the same period of 2003.   These operating expenses were approximately 90% of Services Group revenues for the six months ended June 30, 2004 and 88% of revenues for the same period of 2003. The increases were due primarily to the following:

 

1.               Approximately $1.2 million of the increase was due to increased activity under our construction management contract with the CVWD.

 

2.               Approximately $0.8 million of the increase was due to costs to provide service under our new contract with the City of Pascagoula, Mississippi.

 

3.               Operating expenses for utility billing and collection contracts increased approximately $0.6 million due to an increase in installation of utility metering equipment and the purchase of approximately 136,000 customer units which were acquired during the second quarter of 2004.

 

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These increases were partially offset by reductions of operating expenses as the company responded to a general decrease in activity in its Texas base of operations.   Higher than average precipitation has limited or delayed our ability to perform billable services and construction during 2004 as noted above.

 

Operating expenses – utility group

 

Operating expenses—utility group represented approximately 55% and 64% of revenues from utility operations for the six months ended June 30, 2004 and 2003, respectively.  The decrease in operating expenses as a percentage of revenue was due to the aforementioned increase in Utility Group revenues, which was primarily due to an increase in rates at our California and Texas utilities. Operating expenses for our Utility Group increased approximately $0.5 million, or 3%, to $16.2 million during the six months ended June 30, 2004 from $15.7 million during the comparable period of 2003.

 

Water production costs at our California utility decreased approximately 20% from $232 per acre foot for the six months ended June 30, 2003 to $195 per acre foot for the six months ended June 30, 2004.  This decrease resulted from a shift from higher cost purchased water toward less expensive produced water from our own wells.  This increased water production related to two new wells which were not available during the six months ended June 30, 2003.  The percentage of water produced from our own wells was 51% and 29% during the six months ended June 30, 2004 and 2003, respectively. Depreciation expense at our California utility decreased approximately $0.4 million to $1.8 million for the six months ended June 30, 2004 from $1.4 million for the six months ended June 30, 2003.  The decrease was due to an extension in the estimated useful lives of certain utility assets, this extension was reviewed and accepted by the CPUC in conjunction with the California utility’s June  2003 rate case.

 

However the effects of the change in the mix of water produced versus purchased and the reduction in depreciation expense were partially offset by increased utility plant maintenance and repair costs and increased energy costs.

 

Operating expenses at our New Mexico and Texas utilities increased during the six months ended June 30, 2004 as compared to the comparable period of 2003. The increase was primarily due to a increase in volume and in the number of connections served by our New Mexico and Texas utilities.

 

Selling, general and administrative expenses

 

Selling, general and administrative costs increased approximately $1.8 million, or 16%, to $13.0 million for the six months ended June 30, 2004 from $11.2 million during the same period of the prior year.  Selling, general and administrative expenses as a percentage of revenues increased to 15% for the six months ended June 30, 2004 from 14% during the six months ended June 30, 2003.  The increase was due to the increased size and complexity of our operations.  In particular, the change was due to:

 

1.               Increases in insurance costs, audit fees, legal fees, facilities costs and benefits costs for administrative employees, and

 

2.               Our efforts to prepare for and comply with the Sarbanes Oxley Act of 2002 and related regulations.

 

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Other Income (Expense)

 

Interest Expense

 

The major components of interest expense for six months ended June 30, 2004 and 2003 are as follows:

 

		For the Six Months Ended June 30,
		2004			2003
		(in thousands)
Interest expense - convertible subordinate debentures		$	642		$	676
Interest expense - bank lines of credit		412			351
Interest expense - mortgage bonds and bank term loan		985			1,161
Interest expense - other		327			316
Total interest expense before capitalized interest		2,366			2,504
Capitalized interest		(213		)	(198		)
Total interest expense		$	2,153		$	2,306

 

The decrease in total interest expense is primarily due to a reduction in our long-term debt.  Average long-term debt outstanding was $78.2 million and $71.2 million for the six months ended June 30, 2003 and 2004, respectively.  Proceeds from our March 2004 stock offering were used to pay down our line of credit balances.  Interest rates on these lines are significantly lower than our other debt and the reduction of the line of credit debt had the effect of increasing the weighted average interest rate subsequent to the stock offering in the second quarter of 2004.  The effect of the decrease in average debt outstanding was partially offset by an increase in our weighted average interest rate from 5.9% during the six months ended June 30, 2003 to 6.0% during the six months ended June 30, 2004.

 

In the second quarter of 2003, we recognized a $720,000 pretax gain on the sale of surplus land at our California utility.

 

Provision for Income Taxes

 

Our effective income tax rates were approximately 37% for the six months ended June 30, 2004 and 2003.

 

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Liquidity and Capital Resources

 

Following is a summary of the primary sources and uses of cash during the six months ended June 30, 2004 and 2003:

 

		Six Months Ended June 30,
		2004			2003
		(in thousands)
Sources of cash
Net income, net of adjustments to reconcile net income to cash		$	6,886		$	6,350
Net proceeds from public and private sales of stock		20,573			10,988
Contributions in aid of construction, LUE fees and
capital improvement reimbursements		5,060			4,157
Proceeds from sale leaseback transactions		78			1,102
Proceeds from disposition of land		—			741
Net other sources of cash		288			43
		32,885			23,381
Uses of cash
Changes in assets and liabilities, net of effects of acquisitions:		(3,638		)	(7,212		)
Net repayment of lines of credit and long-term debt		(10,194		)	(6,111		)
Additions to property, plant and equipment		(11,217		)	(9,179		)
Purchase of minority interest in subsidiary		(2,900		)	—
Purchase of businesses		(4,063		)	—
Dividends paid		(1,576		)	(1,141		)
		(33,588		)	(23,643		)
Net decrease in cash and cash equivalents		$	(703	)	$	(262	)

 

In March 2004, we completed a public offering of 1,610,000 shares of our common stock. The 1,610,000 shares were sold at $13.58 per share and our net proceeds were approximately $20.6 million.  We used proceeds from this offering to reduce amounts outstanding under our lines of credit.  In May 2003, we completed a private placement of 1,477,000 shares of newly issued common stock to select institutional investors. Gross proceeds from the private placement were approximately $11 million.

 

Contributions in Aid of Construction (CIAC) represent contributions in the form of cash, services or property received from developers, governmental agencies, municipalities or individuals for the purpose of constructing utility plant. We collected more CIAC during the six months ended June 30, 2004 than the same period of the previous year due to an increase in the construction of plant equipment during the 2004 period as compared to the 2003 period.  The effect of increased construction was partially offset by a reduction in payments received as part of a settlement agreement relating to ground water contamination at our California utility.  The settlement agreement provided for contributions for the construction of new wells and interconnections with nearby water sources.  These contributions were approximately $0.2 million and $2.2 million during the six month ended June 30, 2004 and 2003, respectively.

 

Our liquidity is influenced primarily by cash flows from operations and by capital expenditures at our Utility Group for the addition, replacement and renovation of water and wastewater utility facilities. The following table summarizes our activity for additions to property, plant and equipment during the six months ended June 30, 2004 and 2003:

 

		Six Months Ended June 30,
		2004			2003
		(in thousands)
Company-financed additions		$	6,179		$	5,022
Capital improvement reimbursements		169			2,182
Contributions paid for by developers		4,869			1,975
Net cash used in investing activities		11,217			9,179
Property contributed by developers		2,349			3,629
Total additions to property, plant and equipment		$	13,566		$	12,808

 

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Our capital resources are used for debt service on our bonds and debentures and are also influenced by investments we make in new business ventures, including the acquisition of companies and acquisition of contract operations. We have historically generated reasonably stable operating cash flows.

 

In December 2003, we agreed to purchase the minority interest in Master Tek, a subsidiary. The settlement payout of approximately $2.9 million was made in January 2004.   During the six months ended June 30, 2004 we acquired the customer account lists of certain utility billing and collection firms for approximately $5.5 million, consisting of $4.1 million in cash and $1.4 million in notes payable.

 

We augment our operating cashflow needs with borrowings under our lines of credit.   On June 30, 2004, we had working capital of approximately $9.9 million with available cash and cash-equivalent balances of approximately $1.9 million (excluding restricted cash balances). On June 30, 2004 we had aggregate lines of credit totaling $40.0 million consisting of three separate unsecured lines of credit from three commercial banks. On April 13, 2004, we obtained a firm commitment from two of our commercial banks to expand our lines of credit by an additional $30 million to $70 million in the aggregate and to extend the maturity of our two existing lines from September 2005 to September 2006.  The expansion of our lines of credit was finalized in July 2004.  These increases provided us with additional funds to consummate the Monarch transaction.  Our total borrowing availability under lines of credit was approximately $62.5 million on June 30, 2004 and $12.0 million immediately following the Monarch transaction.  The additional borrowing available under our current commercial lines of credit is limited by financial covenants that restrict additional borrowing to an amount no greater than the remaining unused credit line amount.

 

We continuously seek opportunities to increase our cash flow through either improving cash flow from operations or reducing our interest cost. We have not historically experienced difficulty in obtaining financing or refinancing existing debt. We expect to continue to seek such opportunities in the future to the extent such opportunities are available to us.

 

Off-Balance Sheet Arrangements

 

We do not have any material off-balance sheet arrangements, other than leases that have been treated as operating leases in accordance with U.S. GAAP.

 

Debt Obligations

 

Following is a summary of our debt obligations and commitments due in the remaining six months of 2004 and in the following specified periods thereafter.  Amounts represent the expected cash payments (principal and interest) related to our long-term debt and do not include any fair value adjustments or bond premiums or discounts.

 

					Years Ending December 31,
		2004			2005			2006			2007			2008 and thereafter				Total
		(in thousands)
Long-term debt
Bank lines of credit		$	—		$	—		$	7,009		$	—		$	—			$	7,009
Bank term loan		250			500			500			500			$	7,375			9,125
Economic development revenue bonds		90			95			100			105			1,925				2,315
Mortgage bonds (1)		900			900			13,500			—			$	8,000			23,300
Convertible subordinate debentures (2)		—			—			—			—			17,496				17,496
Notes payable		1,506			1,959			1,378			386			406				5,635
Advances for construction		180			180			180			180			6,483				7,203
		$	2,926		$	3,634		$	22,667		$	1,171		$	41,685			$	72,083

 

(1)          We expect to issue new mortgage backed bonds in the second half of 2004.  The proceeds will be used to repay approximately $7.3 million of bonds due in 2006.  We expect to refinance the remaining $6.2 million of bonds, due in 2006.

 

(2)          The convertible subordinate debentures are due in 2021.  There are no intermediate material put rights attached to the debentures.

 

In January 2003, we expanded one of our lines of credit from one of our commercial banks by $3.4 million. This facility was utilized to issue a standby letter of credit in that amount as collateral for performance under a contract to design and construct a reverse osmosis water treatment facility and associated wells. This standby letter of credit is in force for the estimated two-year construction period of the project. Upon acceptance of the completed project, expected in the latter portion of this year, the standby letter of credit and the related credit facility will be terminated.

 

We anticipate that our available lines of credit borrowing capacity and cash flows generated from operations will be sufficient to fund our activities during the next 12 months. If we were unable to renew our existing lines of credit or if we were unable to execute

 

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additional financing alternatives, our capital spending and any future acquisitions would be reduced, eliminated or delayed.

 

We expect to maintain our lines of credit in the normal course of business. Each of the line of credit agreements contains certain financial covenants. During the six months ended June 30, 2004, we were in compliance with all applicable covenants under each of the line of credit agreements.

 

In addition to our lines of credit, we have excess borrowing capacity under our first mortgage bond indentures of approximately $79.2 million as of June 30, 2004.

 

On December 29, 2003, we filed a shelf registration statement with the Securities and Exchange Commission for the issuance from time to time of up to $50 million aggregate principal amount of common stock, debt securities and warrants.  As of June 30, 2004, we had approximately $28 million available under this shelf registration.  We may offer additional securities under the shelf registration statement at any time.

 

Critical Accounting Policies

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The significant accounting policies that we believe are important to fully understanding and evaluating our reported financial results include the following:

 

•                  Revenue recognition,

•                  Valuation of long-lived and intangible assets,

•                  Accounting for regulated business in accordance with SFAS 71,

•                  Stock-based compensation, and

•                  Deferred costs.

 

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which require management’s judgment in selecting among available GAAP alternatives. Our senior management has reviewed these critical accounting policies and related disclosures with our audit committee.

 

Revenue recognition

 

Water utility revenues are recognized when water is delivered to customers. At the end of an accounting period, estimated amounts for unbilled revenues are accrued for water usage since the previous billing period.

 

Revenues for contract operations are billed based on a monthly fee to provide a specific level of service as outlined in each individual contract. We generally bill for additional services provided beyond the scope of the base contract on a time-and-materials basis as such services are rendered.

 

Revenues for construction projects are recorded using the percentage-of-completion method of accounting. The percentage of completion method recognizes revenue and income as work progresses on a project based on the expected total project costs and the expected total project revenues. This method is based on an estimate of the revenue and income earned to date, less the revenue and income recognized in earlier periods. If management anticipates we will ultimately suffer a loss on a construction project, the entire estimated loss is recorded in the period such a determination is made.

 

We provide design, build and operation services under time-and-material and fixed-price contracts, which may extend up to 20 or more years.

 

Revenues for utility billing and collecting services are recognized and billed at the end of the month in which services are performed. Revenues for installation of utility billing and collection equipment are accounted for using the percentage-of-completion method.

 

If a contract involves the provision of a single product or service, revenue is generally recognized when the product or service is provided and the amount becomes billable. If services are provided evenly during the contract term but service billings are irregular, revenue is recognized on a straight-line basis over the contract term.

 

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If a contract involves the provision of multiple products or services (elements), total estimated contract revenue is allocated to each element based on the relative fair value of each service, provided the services qualify for separation under Emerging Issues Task Force (EITF) 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. The amount of revenue allocated to each services is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is then recognized for each element as described above for single-element contracts, except revenue recognized on a straight-line basis for a non-construction service will not exceed amounts currently billable unless the excess revenue is recoverable from the client upon any contract termination event. If the amount of revenue allocated to a construction service is less than its relative fair value, costs to deliver such service, limited to the difference between allocated revenue and the relative fair value, are deferred and amortized over the contract term. If total construction service costs are estimated to exceed the relative fair value for the construction service contained in a multiple-element arrangement, then a provision for the estimated loss is made in the period in which the loss first becomes apparent.

 

Valuation of long-lived and intangible assets

 

Our acquisitions have been accounted for using the purchase method of accounting. In accordance with SFAS No. 144, Accounting for the Impairment of or Disposal of Long-Lived Assets, we assess intangible assets and other long-lived assets for recoverability whenever events or changes in circumstances indicate that their carrying value may not be recoverable through the estimated undiscounted future cash flows resulting from the use of the assets. If we determine that the carrying value of intangible assets or other long-lived assets may not be recoverable, we measure impairment by using the projected discounted cash-flow method in accordance with Statement No. 144.

 

We have made acquisitions in the past that resulted in recording goodwill and intangible assets. In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually. For intangible assets with definite useful lives, SFAS No. 142 requires amortization over their estimated useful lives. SFAS No. 142 became effective for fiscal years beginning after December 15, 2001. At June 30, 2004, other assets include approximately $22.0 million of goodwill, which was no longer subject to amortization beginning in 2002. There were no impairment charges to goodwill as of June 30, 2004 and no events have occurred during the six months ended June 30, 2004 that indicated diminution in the value of recorded goodwill.

 

Under the provisions of SFAS No. 141, Business Combinations, we identified approximately $0.2 million of intangible contract costs in connection with our acquisition of Aqua Services and approximately $1.1 million of intangible contract costs in connection with our acquisition of OpTech. We are amortizing these intangible contract costs over a period of four years, which is the average estimated life of the contracts.

 

During 2004, we acquired approximately 136,000 utility billing and collection units at a cost of approximately $5.5 million. Substantially all of the purchase price was allocated to the account lists and the resulting intangible assets will be amortized over eight years.

 

Accounting for regulated businesses

 

Our regulated businesses, which include our utilities in California, New Mexico and Texas, are required to be accounted for under the provisions of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, which specifies certain revenue, expense and balance sheet treatment as required by each state regulatory authority. Each state authority establishes rates which are intended to permit each utility to recover its costs and earn a reasonable rate of return. Each utility may file and process general rate applications on a periodic basis. Since the established rates may be in effect for several years, our utilities attempt to anticipate cost increases and apply for rates sufficient to permit recovery of those cost increases when incurred, where permitted by state law.

 

Our Services Group has contracted with our utilities in Texas and New Mexico to perform operating services, maintenance, and construction work, and to manage capital projects. These contracts were established utilizing terms and conditions equivalent to prevailing industry rates for similar work performed by our Services Group for non-affiliated customers. In accordance with SFAS No. 71, our Services Group recognizes profit from work performed and does not eliminate the intercompany profit when the contract sales price is reasonable and it is probable that the costs and capital will be recoverable by the utility through the rate-making process. Accordingly, the intercompany profit, for construction as well as operations and maintenance services, and the related receivables and payables, on such work have not been eliminated in the accompanying condensed consolidated financial statements. However, all revenue in excess of profits has been eliminated in consolidation.

 

Beginning in December 2001, our water utility has recognized all water costs as incurred. Currently the differences between actual and CPUC-adopted water production costs are expensed as incurred. These differences are tracked in a memorandum account and we will attempt to recover these expenses in future rate hearings.

 

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Our California water utility recorded a balancing account receivable in the amount of approximately $2.3 million, representing the difference between actual water production costs incurred and CPUC-adopted water production costs. Historically, the CPUC allowed such balancing accounts in the income statements of water utilities, with a corresponding liability or asset on the balance sheet.  On July 8, 2004, the CPUC issued a decision that allows our water utility in California to increase rates to collect approximately $3.0 million. We expect this amount will be billed and collected within the next 24 to 36 months.   The $0.7 million increase in the balancing account receivable will be recorded in July 2004.

 

Stock-Based Compensation

 

In 2002, we adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, which requires valuation of stock options issued based upon an option pricing model and recognition of this value as an expense over the period in which the options vest. In accordance with the provisions of SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123, we elected to recognize stock-based compensation using the retroactive restatement method. Under this change in accounting method, we restated our consolidated financial statements for periods prior to 2002 to reflect stock-based compensation expense under a fair value based accounting method for all options granted, modified or settled in fiscal years beginning after December 15, 1994.

 

We use the Black-Scholes option valuation model to estimate the fair value of our stock options. This option valuation model was developed for use in estimating the fair value of traded options that do not have vesting restrictions and that are fully transferable. Option valuation models require subjective assumptions such as the expected future volatility of the stock price. Because the stock options we grant have characteristics that are significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the calculated results, in management’s opinion, the stock option valuation models, including Black-Scholes, may not necessarily provide an exact measure of the fair value of employee stock options.

 

Stock Dividends and Splits

 

We effected a 4-for-3 stock split in the form of a stock dividend on January 1, 2004. All per share amounts and numbers of shares outstanding reflect this dividend.

 

Deferred Costs

 

We defer certain costs incurred in anticipation of future contract sales.  These costs include but are not limited to the costs of mobilization, engineering, architectural, or other services incurred on the basis of commitments or other indications of interest in negotiating a contract.  Costs to make, buy or use assets in connection with anticipated contracts are also included.  We subsequently amortize these deferred contract acquisition costs on a straight-line basis over the remaining original contract term unless revenue patterns indicate a more accelerated method is appropriate. Deferred contract costs net of accumulated amortization are included in other assets. The recoverability of all long-lived assets associated with a particular contract, including deferred contract costs, is analyzed on a periodic basis. If long-lived assets are determined to be impaired, impairment is recognized for the amount by which the carrying value of the long-lived assets exceeds the fair value of those assets.  Costs incurred on failed contract proposals are expensed immediately.

 

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RISK FACTORS

 

The following factors, which are described more fully in our 2003 Annual Report, represent risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could affect forward-looking statements relating to the resolution of the reportable condition with respect to internal controls discussed in Item 4 below and Item 9A of our 2003 Annual Report, include among other things: our ability to fully resolve the deficiencies during 2004; our ability to identify and retain qualified and experienced financial personnel at the Services Group; our ability to design and maintain policies and procedures which enable us to avoid any reoccurrence of the matters which gave rise to the reportable condition; and our ability to implement policies and procedures including documentation that meets the internal control over financial reporting requirements of the rules adopted by the Securities and Exchange Commission pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. See “Risk Factors” in our 2003 Annual Report for further disclosure related to risk factors:

 

Risks Related to Our Common Stock

 

•                  Our outstanding indebtedness may adversely affect our financial condition and the value of our common stock.

 

•                  We are a holding company that depends on cash flow from our subsidiaries to meet our obligations.

 

•                  The market price of our shares of common stock could be volatile.

 

•                  Our results could fall below the expectations of market analysts or investors.

 

Risks Related to Our Business

 

Risk factors that affect our Services Group operations

 

•                  Weather conditions can affect the financial results of our Services Group.

 

•                  We operate in a competitive market with low operating margins.

 

•                  Our revenue growth depends on our ability to enter into new, and maintain our existing, operating contracts with cities, agencies and municipal utility districts.

 

•                  Our business depends on trained, qualified employees.

 

•                  Events such as hurricanes, floods, tornadoes and terrorist activities may adversely affect our results of operations.

 

•                  Services Group contracts for the design and construction of water and wastewater projects may expose us to certain completion and performance risks.

 

•                  We use third party equipment and subcontractors.

 

•                  Our Services Group is subject to environmental and water quality risks.

 

•                  We operate a large fleet of vehicles that could expose us to liabilities.

 

•                  Our operating costs may rise faster than our revenues.

 

•                  Our operating contracts may be canceled, reducing our revenues and backlog.

 

Risk Factors that affect our Utility Group operations

 

•                  Weather conditions can affect the financial results of our Utility Group.

 

•                  Changes in the regulatory environment, may adversely affect our results of operations.

 

•                  We may discover additional sources of contamination of our water sources which may adversely affect our operations.  We may not recover costs incurred or revenues lost due to such contamination from parties responsible or from rate payers.

 

•                  We own assets in areas subject to natural disasters.

 

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•                  We are subject to regulatory and environmental risks and may not be able to provide an adequate supply of water to our customers.

 

•                  We need access to capital to continue to invest in our utility assets.

 

Other Risk Factors

 

•                  Our capital resources may restrict our ability to operate and expand our business.

 

•                  If we continue to grow, we may fail to effectively manage our growth or we may fail to effectively manage the growth we have experienced.

 

•                  Our business may be affected by the general economic conditions of real estate development in the United States.

 

•                  We are subject to increasing costs of producing products and services.

 

•                  Our operations are subject to certain risks due to their location.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We have certain indebtedness that is subject to variable rate interest. As a result, Southwest Water’s interest expense is affected by changes in the general level of interest rates. The interest expense we pay on our line of credit borrowings and certain term loans is determined based upon a rate formula that fluctuates with short-term LIBOR rates and cannot exceed the banks’ prime rate minus one-quarter percent.

 

We completed a $20.0 million, 20-year convertible subordinate debenture offering in July 2001, which bears a fixed interest rate of 6.85% per annum. The proceeds were used to pay down certain variable rate indebtedness. Our long-term debentures were sold with a fixed interest rate, and are not subject to market fluctuation of interest rates.

 

Item 4. Controls and Procedures

 

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As reported in our 2003 Annual Report, in March 2004, management, in consultation with our independent accountants, identified deficiencies in certain aspects of the monitoring and analysis components of the internal control procedures in our Services Group segment which constituted a reportable condition (as defined in AU 325, Communication of Internal Control Related Matters Noted in An Audit of the AICPA Professional Standards). These identified deficiencies impacted the quality and timeliness of the reporting and reconciliation of certain transactions in the Services Group. The matters involving the reportable condition have been discussed in detail among management, the audit committee of our board of directors, and our independent accountants. The identified deficiencies did not require any restatement of our consolidated financial statements for any prior period.

 

As discussed in our 2003 Annual Report, management is implementing changes which we expect will rectify the those deficiencies during 2004.  In the quarter ended June 30, 2004 we made changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting, including:

 

•                  We have increased the number and capability of the Services Group accounting staff;

 

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•                  We have implemented more formal procedures in our internal review processes;

 

•                  Our audit committee approved the engagement of a professional internal audit firm.

 

We are continuing to identify and implement improvements in our control environment.  We believe the aforementioned changes, implemented during the three months ended June 30, 2004, have enhanced our internal controls over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Southwest Water and a subsidiary have been named as defendants in several lawsuits alleging various injuries as a result of water contamination in the San Gabriel Valley Main Basin. The California Supreme Court ruled in February 2002 that the plaintiffs cannot challenge the adequacy of the water quality standards established by California Department of Health Services (DOHS). The plaintiffs may sue and collect damages from CPUC-regulated water companies only by proving that water delivered did not meet these water quality standards. The California Supreme Court directed that the cases be sent to a trial court for further proceedings. At this time a number of cases, including those involving Southwest, have been consolidated before a single judge. Southwest Water requested defense and indemnification from its liability insurance carriers for these lawsuits. Several of the liability insurance carriers have absorbed the costs of defense of the lawsuits. After discovery, the plaintiffs admitted that they could not prove any violation of DOHS water quality standards by Southwest. On August 4, 2004 the case against Southwest Water was dismissed.

 

Southwest Water and its subsidiaries are subject to litigation arising in the ordinary course of operations. We believe the ultimate resolution of such matters will not materially adversely affect our financial position, results of operations or cash flows.

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

Proposal 1.                                  To elect three persons as Class III Directors to a three-year term and until their successors are duly elected and qualified.

 

		H. Frederick Christie		Anton C. Garnier		Peter J. Moerbeek
Votes “For”		11,823,889		11,977,443		11,977,420
Votes to “Withhold Authority”		565,197		411,643		411,666

 

Proposal 2.                                  To approve an amendment to the Company’s Amended and Restated Certificate of Incorporation increasing the number of authorized shares of common stock from 25,000,000 shares to 75,000,000 shares.

 

Votes “For”— 10,205,224 shares

Votes “Against”— 2,013,512 shares

Votes “Abstained”— 170,350 shares

 

Proposal 3.                            To approve an amendment to the Amended and Restated Stock Option Plan for Non-Employee Directors, which includes an increase of 250,000 shares authorized for issuance under the plan, an increase of 5,000 shares to the initial and annual stock option grants to non-employee directors (“Non-Employee Directors”) and a four-year extension to the term of the plan.

 

Votes “For”— 4,775,775 shares

Votes “Against”— 2,570,500 shares

Votes “Abstained”— 397,581 shares

Broker “Non-Vote”— 4,645,230 shares

 

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Item 5. Other Information

 

None

 

Item 6. Exhibits and Reports on Form 8-K

 

(a)                      Exhibits:

 

10.1		Amendment No. 2 to Amended and Restated Bylaws of Southwest Water Company.
10.2		Certificate of Amendment of Restated Certificate of Incorporation of Southwest Water Company.
10.3		Amended and Restated Stock Option Plan for Non-Employee Directors of Southwest Water Company.
10.4		Amendment to the Amended and Restated Stock Option Plan for Non-Employee Directors of Southwest Water Company.
10.5		Amended and Restated Credit Agreement between Southwest Water Company and Bank of America, N.A. July 7, 2004.
10.6		Certificate of Amendment of Restated Certificate of Incorporation of Southwest Water Company and Union Bank of California, N.A. July 7, 2004.
31.1		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b)                         Reports on Form 8-K:

 

On May 11, 2004, we filed a Current Report on Form 8-K furnishing an earnings release with respect to our financial results for the three months ended March 31, 2004.

 

On May 3, 2004, we filed a Current Report on Form 8-K furnishing a press release announcing our definitive agreement to acquire regulated water and wastewater utility companies from Tecon Water Holdings, L.P.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	SOUTHWEST WATER COMPANY
	(Registrant)
Dated:  August 6, 2004	/s/ RICHARD J. SHIELDS
	Richard J. Shields Chief Financial Officer (Principal Financial Officer)

 

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