SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
COMMISSION REGISTRANT AND STATE OF INCORPORATION IRS EMPLOYER
FILE NO. ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO.
---------------------- ------------------------------------- ------------------
333-47647 American States Water Company 95-4676679
(A California Corporation)
630 East Foothill Boulevard
San Dimas, California 91773-9016
909-394-3600
000-01121 Southern California Water Company 95-1243678
(A California Corporation)
630 East Foothill Boulevard
San Dimas, California 91773-9016
909-394-3600
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
American States Water Company Yes [X] No [ ]
Southern California Water Company Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 5, 2001, the number of Common Shares outstanding, No Par Value
with Stated Value of $2.50, of American States Water Company was 10,079,629 all
of which are listed on the New York Stock Exchange.
As of November 5, 2001, all of the 110 outstanding Common Shares of Southern
California Water Company are owned by American States Water Company.
AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-Q
INDEX
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1: Financial Statements............................................................. 1
Consolidated Balance Sheets of American States Water Company as of
September 30, 2001 and December 31, 2000......................................... 2-3
Consolidated Statements of Income of American States Water Company for the
Three Months Ended September 30, 2001 and September 30, 2000..................... 4
Consolidated Statements of Income of American States Water Company for the
Nine Months Ended September 30, 2001 and September 30, 2000...................... 5
Consolidated Statements of Income of American States Water Company for the
Twelve Months Ended September 30, 2001 and September 30, 2000.................... 6
Consolidated Statements of Cash Flow of American States Water Company for the
Nine Months Ended September 30, 2001 and September 30, 2000...................... 7
Consolidated Balance Sheets of Southern California Water Company as of
September 30, 2001 and December 31, 2000......................................... 8-9
Consolidated Statements of Income of Southern California Water Company for
the Three Months Ended September 30, 2001 and September 30, 2000................. 10
Consolidated Statements of Income of Southern California Water Company for the
Nine Months Ended September 30, 2001 and September 30, 2000...................... 11
Consolidated Statements of Income of Southern California Water Company for the
Twelve Months Ended September 30, 2001 and September 30, 2000.................... 12
Consolidated Statements of Cash Flow of Southern California Water Company for
the Nine Months Ended September 30, 2001 and September 30, 2000.................. 13
Notes to Financial Statements.................................................... 14-17
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operation..................................................................... 18-36
Item 3: Quantitative and Qualitative Disclosures About Market Risks...................... 36
PART II OTHER INFORMATION
Item 1: Legal Proceedings................................................................ 36-40
Item 2: Changes in Securities............................................................ 40
Item 3: Defaults Upon Senior Securities.................................................. 41
Item 4: Submission of Matters to a Vote of Security Holders.............................. 41
Item 5: Other Information................................................................ 41
Item 6: Exhibits and Reports on Form 8-K................................................. 41
i
PART I
ITEM 1. FINANCIAL STATEMENTS
General
The basic financial statements included herein have been prepared by
Registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations, although Registrant believes that the disclosures are adequate to
make the information presented not misleading. In the opinion of management, all
adjustments necessary for a fair statement of results for the interim period
have been made.
It is suggested that these financial statements be read in conjunction
with the financial statements and notes thereto in the latest Annual Report on
Form 10-K of American States Water Company.
Filing Format
This quarterly report on Form 10-Q is a combined report being filed by
two separate Registrants: American States Water Company (hereinafter "AWR") and
Southern California Water Company (hereinafter "SCW"). For more information,
please see Note 1 to the Notes to Financial Statements and the heading entitled
General in Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operation. References in this report to "Registrant" are to AWR
and SCW, collectively unless otherwise specified. SCW makes no representations
as to the information contained in this report relating to AWR and its
subsidiaries, other than SCW.
1
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------- ---------
(in thousands)
UTILITY PLANT, at cost
Water .......................................................... $ 625,654 $ 608,032
Electric ....................................................... 37,952 37,630
--------- ---------
663,606 645,662
Less - Accumulated depreciation ................................ (186,970) (173,367)
--------- ---------
476,636 472,295
Construction work in progress .................................. 53,043 36,801
--------- ---------
529,679 509,096
--------- ---------
OTHER PROPERTY AND INVESTMENTS ................................... 24,710 25,222
--------- ---------
CURRENT ASSETS
Cash and cash equivalents ...................................... 7,931 5,808
Accounts receivable -
Customers, less reserves of $862 in 2001 and $510 in 2000 .... 13,827 10,481
Other ........................................................ 4,695 5,233
Unbilled revenue ............................................... 15,127 11,363
Materials and supplies, at average cost ........................ 1,295 1,116
Supply cost balancing accounts ................................. 22,625 11,145
Prepayments and other .......................................... 3,193 4,085
Accumulated deferred income taxes - net ........................ -- 3,249
--------- ---------
68,693 52,480
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets .................................. 16,272 17,705
Other deferred charges ......................................... 14,730 12,143
--------- ---------
31,002 29,848
--------- ---------
TOTAL ASSETS ......................................... $ 654,084 $ 616,646
========= =========
The accompanying notes are an integral part of these financial statements.
2
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------- --------
(in thousands)
CAPITALIZATION
Common shareholders' equity ..................... $200,465 $192,723
Preferred shares ................................ 1,600 1,600
Preferred shares subject to mandatory
redemption requirements ....................... 320 320
Long-term debt .................................. 195,994 176,452
-------- --------
398,379 371,095
-------- --------
CURRENT LIABILITIES
Notes payable to banks .......................... 38,000 45,000
Long-term debt and preferred shares
due within one year ........................... 735 735
Accounts payable ................................ 18,272 11,857
Taxes payable ................................... 9,010 5,585
Accrued interest ................................ 4,057 1,783
Other accrued liabilities ....................... 16,822 15,257
-------- --------
86,896 80,217
-------- --------
OTHER CREDITS
Advances for construction ....................... 68,320 69,230
Contributions in aid of construction ............ 41,384 39,670
Accumulated deferred income taxes - net ......... 52,294 51,131
Unamortized investment tax credits .............. 3,080 3,156
Regulatory tax-related liability ................ 1,784 1,817
Other ........................................... 1,947 330
-------- --------
168,809 165,334
-------- --------
TOTAL CAPITALIZATION AND LIABILITIES .... $654,084 $616,646
======== ========
The accompanying notes are an integral part of these financial statements.
3
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
-------- --------
(in thousands, except
per share amounts)
OPERATING REVENUES
Water ........................................ $ 55,412 $ 51,510
Electric ..................................... 3,807 3,493
Other ........................................ 191 245
-------- --------
59,410 55,248
-------- --------
OPERATING EXPENSES
Water purchased .............................. 12,791 13,594
Power purchased for pumping .................. 3,367 2,509
Power purchased for resale ................... 4,758 3,213
Groundwater production assessment ............ 1,697 1,524
Supply cost balancing accounts ............... (2,920) (1,865)
Other operating expenses ..................... 4,398 4,322
Administrative and general expenses .......... 6,956 6,210
Depreciation ................................. 4,486 3,666
Maintenance .................................. 1,767 2,226
Taxes on income .............................. 6,739 6,291
Other taxes .................................. 1,999 1,767
-------- --------
46,038 43,457
-------- --------
Operating income ............................. 13,372 11,791
OTHER INCOME/(LOSS) .............................. (53) 108
-------- --------
Income before interest charges ............... 13,319 11,899
INTEREST CHARGES ................................. 3,865 3,681
-------- --------
NET INCOME ....................................... 9,454 8,218
DIVIDENDS ON PREFERRED SHARES .................... (21) (22)
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ....... $ 9,433 $ 8,196
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .... 10,080 9,516
Basic Earnings Per Common Share .................. $ 0.94 $ 0.86
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES ........ 10,171 9,562
Fully Diluted Earnings Per Share ................. $ 0.93 $ 0.86
Dividends Declared Per Common Share .............. $ 0.325 $ 0.32
The accompanying notes are an integral part of these financial statements.
4
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
--------- ---------
(in thousands, except
per share amounts)
OPERATING REVENUES
Water ........................................ $ 138,052 $ 128,185
Electric ..................................... 10,940 10,660
Other ........................................ 579 580
--------- ---------
149,571 139,425
--------- ---------
OPERATING EXPENSES
Water purchased .............................. 29,941 32,472
Power purchased for pumping .................. 6,793 5,559
Power purchased for resale ................... 15,106 6,792
Groundwater production assessment ............ 5,124 5,797
Supply cost balancing accounts ............... (11,480) (3,299)
Other operating expenses ..................... 13,034 12,553
Administrative and general expenses .......... 22,474 18,122
Depreciation ................................. 13,463 11,275
Maintenance .................................. 6,066 7,371
Taxes on income .............................. 13,577 12,004
Other taxes .................................. 5,865 5,260
--------- ---------
119,963 113,906
--------- ---------
Operating income ............................. 29,608 25,519
OTHER INCOME/(LOSS) .............................. (223) 67
--------- ---------
Income before interest charges ............... 29,385 25,586
INTEREST CHARGES ................................. 11,761 10,553
--------- ---------
NET INCOME ....................................... 17,624 15,033
DIVIDENDS ON PREFERRED SHARES .................... (63) (64)
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ....... $ 17,561 $ 14,969
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .... 10,080 9,145
Basic Earnings Per Common Share .................. $ 1.74 $ 1.64
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES ........ 10,171 9,171
Fully Diluted Earnings Per Share ................. $ 1.73 $ 1.63
Dividends Declared Per Common Share .............. $ 0.975 $ 0.96
The accompanying notes are an integral part of these financial statements.
5
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
TWELVE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
--------- ---------
(in thousands, except
per share amounts)
OPERATING REVENUES
Water ........................................ $ 178,662 $ 168,205
Electric ..................................... 14,645 14,066
Other ........................................ 799 730
--------- ---------
194,106 183,001
--------- ---------
OPERATING EXPENSES
Water purchased .............................. 39,061 41,669
Power purchased for pumping .................. 8,744 7,812
Power purchased for resale ................... 18,977 8,761
Groundwater production assessment ............ 6,816 7,447
Supply cost balancing accounts ............... (14,553) (3,318)
Other operating expenses ..................... 17,227 16,977
Administrative and general expenses .......... 30,489 26,179
Depreciation ................................. 17,528 14,655
Maintenance .................................. 8,975 11,296
Taxes on income .............................. 16,700 13,954
Other taxes .................................. 7,747 6,906
--------- ---------
157,711 152,338
--------- ---------
Operating income ............................. 36,395 30,663
OTHER INCOME/(LOSS) .............................. (389) 189
--------- ---------
Income before interest charges ............... 36,006 30,852
INTEREST CHARGES ................................. 15,330 13,790
--------- ---------
NET INCOME ....................................... 20,676 17,062
DIVIDENDS ON PREFERRED SHARES .................... (84) (86)
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ....... $ 20,592 $ 16,976
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .... 10,080 9,098
Basic Earnings Per Common Share .................. $ 2.04 $ 1.87
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES ........ 10,160 9,117
Fully Diluted Earnings Per Share ................. $ 2.03 $ 1.86
Dividends Declared Per Common Share .............. $ 1.30 $ 1.28
The accompanying notes are an integral part of these financial statements.
6
AMERICAN STATES WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
-------- --------
(in thousands)
CASH FLOWS FROM -
Operating Activities:
Net income ........................................... $ 17,624 $ 15,033
Adjustments for non-cash items:
Depreciation and amortization ........................ 13,463 11,856
Deferred income taxes and investment tax credits ..... 5,736 3,008
Other - net .......................................... (1,116) (1,220)
Changes in assets and liabilities:
Accounts receivable .................................. (3,346) (2,230)
Prepayments .......................................... 892 368
Supply cost balancing accounts ....................... (11,480) (3,298)
Accounts payable ..................................... 6,415 (577)
Taxes payable ........................................ 3,425 2,666
Unbilled revenue ..................................... (3,576) (2,815)
Other ................................................ 5,753 1,692
-------- --------
Net Cash Provided .................................. 33,790 24,483
-------- --------
Investing Activities:
Construction expenditures ............................... (33,799) (33,275)
-------- --------
Net Cash Used ..................................... (33,799) (33,275)
-------- --------
Financing Activities:
Issuance of securities ................................. 20,000 28,057
Receipt of advances and contributions .................. 3,934 1,866
Repayments of long-term debt, net of
redemption of preferred shares ....................... (449) (280)
Refunds on advances for construction .................. (4,463) (2,817)
Changes in notes payable to banks ...................... (7,000) (7,000)
Common and preferred dividends paid .................... (9,890) (9,018)
-------- --------
Net Cash Provided ................................. 2,132 10,808
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents ..... 2,123 2,016
Cash and Cash Equivalents, Beginning of period ........... 5,808 2,189
-------- --------
Cash and Cash Equivalents, End of period ................. $ 7,931 $ 4,205
======== ========
The accompanying notes are an integral part of these financial statements.
7
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------- ---------
(in thousands)
UTILITY PLANT, at cost
Water ........................................................... $ 588,457 $ 570,836
Electric ........................................................ 37,952 37,630
--------- ---------
626,409 608,466
Less - Accumulated depreciation ................................. (177,915) (165,002)
--------- ---------
448,494 443,464
Construction work in progress ................................... 52,376 36,605
--------- ---------
500,870 480,069
--------- ---------
OTHER PROPERTY AND INVESTMENTS .................................... 9,513 9,711
--------- ---------
CURRENT ASSETS
Cash and cash equivalents ....................................... 3,417 1,545
Accounts receivable -
Customers, less reserves of $846 in 2001, and $498 in 2000 .... 13,142 10,071
Other ......................................................... 4,580 5,097
Intercompany receivable ......................................... 488 376
Unbilled revenue ................................................ 14,847 11,363
Materials and supplies, at average cost ......................... 1,209 1,039
Supply cost balancing accounts .................................. 22,625 11,145
Prepayments and other ........................................... 3,089 3,756
Accumulated deferred income taxes - net ......................... -- 3,256
--------- ---------
63,397 47,648
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets ................................... 16,272 17,705
Other deferred charges .......................................... 13,905 11,396
--------- ---------
30,177 29,101
--------- ---------
TOTAL ASSETS ............................................ $ 603,957 $ 566,529
========= =========
The accompanying notes are an integral part of these financial statements.
8
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------- --------
(in thousands)
CAPITALIZATION
Common shareholders' equity ................................. $196,594 $164,808
Long-term debt .............................................. 186,851 167,062
-------- --------
383,445 331,870
-------- --------
CURRENT LIABILITIES
Notes payable to banks ...................................... 18,000 45,000
Long-term debt and preferred shares due within one year ..... 275 275
Accounts payable ............................................ 17,884 11,203
Intercompany payable ........................................ -- 4,746
Taxes payable ............................................... 9,129 5,675
Accrued interest ............................................ 3,862 1,722
Other accrued liabilities ................................... 16,600 13,512
-------- --------
65,750 82,133
-------- --------
OTHER CREDITS
Advances for construction ................................... 57,705 58,195
Contributions in aid of construction ........................ 41,160 39,642
Accumulated deferred income taxes - net ..................... 50,761 49,569
Unamortized investment tax credits .......................... 2,905 2,973
Regulatory tax-related liability ............................ 1,784 1,817
Other ....................................................... 447 330
-------- --------
154,762 152,526
-------- --------
TOTAL CAPITALIZATION AND LIABILITIES ................ $603,957 $566,529
======== ========
The accompanying notes are an integral part of these financial statements.
9
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
-------- --------
($ in thousands, except
per share amounts)
OPERATING REVENUES
Water .......................................... $ 53,674 $ 51,509
Electric ....................................... 3,807 3,493
-------- --------
57,481 55,002
-------- --------
OPERATING EXPENSES
Water purchased ................................ 12,620 13,594
Power purchased for pumping .................... 3,222 2,508
Power purchased for resale ..................... 4,758 3,213
Groundwater production assessment .............. 1,697 1,524
Supply cost balancing accounts ................. (2,920) (1,865)
Other operating expenses ....................... 4,105 4,235
Administrative and general expenses ............ 6,679 6,224
Depreciation ................................... 4,176 3,666
Maintenance .................................... 1,730 2,216
Taxes on income ................................ 6,664 6,225
Other taxes .................................... 1,886 1,765
-------- --------
44,617 43,305
-------- --------
Operating income ............................... 12,864 11,697
OTHER INCOME/(LOSS) ................................ (81) (51)
-------- --------
Income before interest charges ................. 12,783 11,646
INTEREST CHARGES ................................... 3,513 3,681
-------- --------
NET INCOME ......................................... 9,270 7,965
DIVIDENDS ON PREFERRED SHARES ...................... -- --
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ......... $ 9,270 $ 7,965
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ...... 110 100
Basic Earnings Per Common Share .................... $ 84,273 $ 79,650
Dividends Declared Per Common Share ................ $ 33,000 $ 33,000
The accompanying notes are an integral part of these financial statements.
10
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
--------- ---------
($ in thousands, except
per share amounts)
OPERATING REVENUES
Water ........................................... $ 133,313 $ 128,185
Electric ........................................ 10,940 10,660
--------- ---------
144,253 138,845
--------- ---------
OPERATING EXPENSES
Water purchased ................................. 29,616 32,472
Power purchased for pumping ..................... 6,509 5,559
Power purchased for resale ...................... 15,106 6,792
Groundwater production assessment ............... 5,124 5,797
Supply cost balancing accounts .................. (11,480) (3,299)
Other operating expenses ........................ 12,226 12,325
Administrative and general expenses ............. 21,642 17,815
Depreciation .................................... 12,532 11,275
Maintenance ..................................... 5,910 7,348
Taxes on income ................................. 13,243 11,997
Other taxes ..................................... 5,575 5,254
--------- ---------
116,003 113,335
--------- ---------
Operating income ................................ 28,250 25,510
OTHER INCOME/(LOSS) ................................. (303) (92)
--------- ---------
Income before interest charges .................. 27,947 25,418
INTEREST CHARGES .................................... 10,936 10,553
--------- ---------
NET INCOME .......................................... 17,011 14,865
DIVIDENDS ON PREFERRED SHARES ....................... -- --
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS .......... $ 17,011 $ 14,865
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ....... 106 100
Basic Earnings Per Common Share ..................... $ 160,481 $ 148,650
Dividends Declared Per Common Share ................. $ 96,509 $ 96,000
The accompanying notes are an integral part of these financial statements.
11
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
TWELVE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2001 2000
--------- ---------
($ in thousands, except
per share amounts)
OPERATING REVENUES
Water ........................................... $ 172,658 $ 168,205
Electric ........................................ 14,645 14,066
--------- ---------
187,303 182,271
--------- ---------
OPERATING EXPENSES
Water purchased ................................. 38,594 41,669
Power purchased for pumping ..................... 8,393 7,812
Power purchased for resale ...................... 18,977 8,761
Groundwater production assessment ............... 6,816 7,447
Supply cost balancing accounts .................. (14,553) (3,318)
Other operating expenses ........................ 16,205 16,679
Administrative and general expenses ............. 29,375 25,657
Depreciation .................................... 16,343 14,655
Maintenance ..................................... 8,753 11,270
Taxes on income ................................. 16,127 13,998
Other taxes ..................................... 7,358 6,901
--------- ---------
152,388 151,531
--------- ---------
Operating income ................................ 34,915 30,740
OTHER INCOME ........................................ (351) 31
--------- ---------
Income before interest charges .................. 34,564 30,771
INTEREST CHARGES .................................... 14,733 13,790
--------- ---------
NET INCOME .......................................... 19,831 16,981
DIVIDENDS ON PREFERRED SHARES ....................... -- --
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS .......... $ 19,831 $ 16,981
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ....... 104 100
Basic Earnings Per Common Share ..................... $ 190,683 $ 169,810
Dividends Declared Per Common Share ................. $ 131,359 $ 126,000
The accompanying notes are an integral part of these financial statements.
12
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
-------- --------
(in thousands)
CASH FLOWS FROM -
Operating Activities:
Net income ........................................... $ 17,011 $ 14,865
Adjustments for non-cash items:
Depreciation and amortization ........................ 12,532 11,856
Deferred income taxes an investment tax credits ...... 5,780 3,015
Other - net .......................................... (1,204) 36
Changes in assets and liabilities:
Accounts receivable .................................. (3,071) (2,233)
Prepayments .......................................... 667 368
Supply cost balancing accounts ....................... (11,480) (3,298)
Accounts payable ..................................... 6,681 (675)
Intercompany Payable ................................. (4,858) 27,257
Taxes payable ........................................ 3,454 2,558
Unbilled revenue ..................................... (3,484) (2,815)
Other ................................................ 5,575 1,588
-------- --------
Net Cash Provided .................................. 27,603 52,522
-------- --------
Investing Activities:
Construction expenditures ............................... (33,333) (33,274)
-------- --------
Net Cash Used ..................................... (33,333) (33,274)
-------- --------
Financing Activities:
Issuance of securities ................................. 45,000 --
Receipt of advances and contributions .................. 3,934 1,866
Repayments of long-term debt, net of
redemption of preferred shares ....................... (206) (280)
Refunds on advances for construction .................. (3,896) (2,817)
Changes in notes payable to banks ...................... (27,000) (7,000)
Common and preferred dividends paid .................... (10,230) (9,600)
-------- --------
Net Cash Provided (Used) .......................... 7,602 (17,831)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents ..... 1,872 1,417
Cash and Cash Equivalents, Beginning of period ........... 1,545 2,020
-------- --------
Cash and Cash Equivalents, End of period ................. $ 3,417 $ 3,437
======== ========
The accompanying notes are an integral part of these financial statements.
13
AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
American States Water Company (AWR), incorporated in 1998, is the parent
company of Southern California Water Company (SCW), American States Utility
Services, Inc. (ASUS) and Chaparral City Water Company (CCWC). More than 90% of
AWR's assets consist of the common stock of Southern California Water Company.
SCW is a public utility company engaged principally in the purchase, production,
distribution and sale of water, and the distribution and sale of electric energy
in several mountain communities. Unless otherwise stated in this report, the
term Registrant applies to both AWR and SCW, collectively.
1. For a summary of significant accounting policies and other information
relating to these interim financial statements, reference is made to pages
37 through 46 of the Form 10-K, incorporated in the 2000 Annual Report to
Shareholders of AWR, under the caption "Notes to Financial Statements."
2. Basic earnings per common share are calculated pursuant to SFAS No. 128 -
Earnings per Share - and are based on the weighted average number of
common shares outstanding during each period and net income after
deducting preferred dividend requirements. Under the American States Water
Company 2000 Stock Incentive Plan, stock options representing 45,657
common shares were granted to certain eligible employees on May 1, 2000,
and stock options representing an additional 45,657 common shares were
granted on January 2, 2001. As a result, fully diluted earnings per share
amounts are shown.
3. On April 22, 1999, the California Public Utilities Commission (CPUC)
issued an order denying SCW's application seeking approval of its recovery
through rates of costs associated with its participation in the Coastal
Aqueduct Extension of the State Water Project (SWP). SCW's participation
in the SWP commits it to a 40-year entitlement with a value of
approximately $9.5 million. SCW's investment in SWP is currently included
in Other Property and Investments. The remaining balance of the related
liability of approximately $7 million is recorded as other long-term debt.
SCW intends to recover its investment in SWP through contributions from
developers on a per-lot or other basis, or sale of its 500 acre-foot
entitlement in SWP. In October 2001, SCW entered into an agreement with a
developer, which obligates the developer to make payments to SCW in
exchange for SCW's reservation and dedication of up to 350 acre-feet per
year of the SWP entitlement. SCW believes that its full investment and
on-going costs associated with its ownership will be fully recovered.
4. New water rates with an annual increase of approximately $2.5 million for
seven ratemaking districts in SCW's Region I were implemented in January
2001. SCW's application to combine the seven ratemaking customer service
areas (CSAs) into one regional rate was, however, denied by the CPUC. Step
increases of approximately $1.7 million for CSAs in SCW's Region III were
also effective in January 2001. An attrition increase of approximately
$2.8 million for Region II was in effect from February 2001. There are no
active regulatory proceedings affecting CCWC or its operations.
5. As permitted by the CPUC, SCW maintains water and electric supply cost
balancing accounts to account for under-collections and over-collections
of revenues designed to recover such costs. Recoveries or refunds of such
over/under collections are recorded in income when received from
14
customers and charged to balancing accounts when such costs are incurred.
The balancing accounts are reversed when such costs are recovered through
rate adjustments.
As previously disclosed in Registrant's Form 10-K for the year ended
December 31, 2000, SCW, like other California utilities, has experienced
rapid increases in the price of electric energy. As of September 30, 2001,
SCW had an aggregate under-collection of $22.6 million in its water and
electric balancing accounts. Of this total amount, approximately $19.9
million is related to purchased power costs at SCW's Bear Valley Electric
customer service area (BVE). This is a result of the differences between
wholesale purchased power costs, which have averaged approximately $0.15
per kilowatt-hour during the first nine months of this year, and the
$0.024 per kilowatt-hour (KWh) currently authorized in rates for
collection of purchased power costs from customers. On May 24, 2001, the
CPUC approved SCW's Advice Letter filed in May 2000 for recovery over a
five-year period of approximately $2.4 million in under-collected power
costs, which resulted in an overall rate increase of 12.5% for customers
of BVE, and imposed a condition of conducting a subsequent audit on the
electric balancing account. SCW filed a second Advice Letter on April 9,
2001 for recovery over a five-year period of an additional
under-collection of $8.7 million. On August 23, 2001, the CPUC approved
the Advice Letter, which resulted in an additional rate increase of 14.8%
to BVE's customers. On August 17, 2001, SCW filed an application with the
CPUC to seek recovery of $0.095 per KWh for electric energy purchased
pursuant to a five-year, fixed cost contract with Mirant Americas Energy
Marketing, LP. (Mirant). The application, if approved, will result in an
additional rate increase of approximately 50%. Registrant believes that
the recovery of this amount is probable but is unable to predict when, or
if, the CPUC will authorize recovery of all or any of these expenses. SCW
will continue to file additional Advice Letters to recover the differences
between actual wholesale power costs and the amounts currently recovered
through rates. Registrant also believes that timely actions by the CPUC to
authorize SCW to recover past and future power costs are necessary to
avoid any material adverse effect on SCW's financial condition.
In March 2001, the CPUC approved SCW's first filing for recovery of
increased costs of electric power incurred to pump water for its water
customers. In April 2001, SCW filed additional Advice Letters by
ratemaking areas to increase water rates by approximately $2.3 million
company-wide to cover additional electric base rate increases, authorized
recently by the CPUC for the Southern California Edison Company and the
Pacific Gas and Electric Company. On October 25, 2001, the CPUC approved
an increase of $297,000 in rates for SCW's Claremont CSA to collect the
electric base rate increases. The remaining Advice Letters are scheduled
to be on Commission's agenda on November 8, 2001. See the sections
entitled "Liquidity and Capital Resources," "Electric Energy Situation in
California," and "Regulatory Matters" for information on actions being
taken by SCW to recover these costs.
CCWC, subject to regulation by the Arizona Corporation Commission (ACC),
does not maintain balancing accounts and increases in costs are normally
recovered through general rate case applications.
6. On October 2000, AWR completed the acquisition of the common stock of CCWC
for an aggregate value of $31.2 million, including assumption of
approximately $12 million in debt. As of September 30, 2001, Registrant
has $12,815,000 in goodwill included in Other Property and Investments.
The amount represents the difference between the purchase price of the
common equity of CCWC and CCWC's book equity at the time of closing and is
being amortized over a period of 40 years. Amortization will cease on
January 1, 2002 pursuant to SFAS No. 142.
7. In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 eliminates
15
the pooling-of-interests method of accounting, effective September 30,
2001. After that, all business combinations will be recorded under the
purchased method of accounting (record goodwill for excess of costs over
the net assets acquired). SFAS No. 142 requires that companies cease
amortizing goodwill, effective January 1, 2002. Goodwill initially
recognized after September 30, 2001, will not be amortized. Goodwill on
the balance sheet at September 30, 2001 will be amortized until January 1,
2002. Under SFAS No. 142, goodwill will be tested for impairment using a
fair-value approach when events or circumstances occur indicating that
impairment might exist. A benchmark assessment for goodwill is also
required within six months of the date of adoption of SFAS No. 142.
Registrant is assessing the impact on future financial reporting related
to both past and future transactions, but believes that adoption of this
statement will not have a significant impact on its financial position or
results of operation.
8. AWR has three principal business units: water and electric distribution
units, through its SCW subsidiary, a water service utility operation
conducted through its Chaparral City Water Company (CCWC) unit, and a
non-regulated activity unit through the American States Utilities
Services, Inc. (ASUS) subsidiary. All activities of SCW currently are
geographically located within California. All activities of CCWC are
located in the state of Arizona. Both SCW and CCWC are regulated
utilities. On a stand-alone basis, AWR has no material assets other than
its investments in its subsidiaries. The tables below set forth
information relating to SCW's water and electric operating segments, CCWC,
and non-regulated businesses, consisting of ASUS and AWR corporate
expenses. Included in the amounts set forth, certain assets, revenues and
expenses have been allocated. The identifiable assets are net of
respective accumulated provisions for depreciation.
(dollars in thousands) For The Three Months Ended September 30, 2001
------------------------------------------------------------------------------------------------
SCW
-------------------- CCWC Non- Consolidated
Water Electric Water Regulated AWR
---------- --------- ------ --------- ------------
Operating revenues $53,674 $ 3,807 $1,738 $191 $59,410
Operating income before income
taxes 19,064 464 611 (28) 20,111
Identifiable assets 473,698 27,172 28,809 -- 529,679
Depreciation expense 3,814 362 310 -- 4,486
Capital additions $10,850 $820 $254 -- $11,924
(dollars in thousands) For The Three Months Ended September 30, 2000
------------------------------------------------------------------------------------------------
SCW
-------------------- CCWC Non- Consolidated
Water Electric Water Regulated AWR
---------- --------- ------ --------- ------------
Operating revenues $51,509 $3,493 N/A $246 $55,248
Operating income before income N/A
taxes 16,705 1,217 160 18,082
Identifiable assets 444,924 26,089 N/A -- 471,013
Depreciation expense 3,316 350 N/A -- 3,666
Capital additions $11,214 $624 N/A -- $11,838
(dollars in thousands) For The Nine Months Ended September 30, 2001
------------------------------------------------------------------------------------------------
SCW
-------------------- CCWC Non- Consolidated
Water Electric Water Regulated AWR
---------- --------- ------ --------- ------------
Operating revenues $133,313 $10,940 $4,739 $579 $149,571
Operating income before income
taxes 40,715 778 1,624 68 43,185
Identifiable assets 473,698 27,172 28,809 -- 529,679
Depreciation expense 11,448 1,084 931 -- 13,463
Capital additions $33,040 $1,882 $471 -- $35,393
16
(dollars in thousands) For The Nine Months Ended September 30, 2000
------------------------------------------------------------------------------------------------
SCW
-------------------- CCWC Non- Consolidated
Water Electric Water Regulated AWR
---------- --------- ------ --------- ------------
Operating revenues $128,185 $10,660 N/A $580 $139,425
Operating income before income N/A
taxes 34,161 3,346 16 37,523
Identifiable assets 444,924 26,089 N/A -- 471,013
Depreciation expense 10,224 1,051 N/A -- 11,275
Capital additions $31,197 $1,536 N/A -- $32,733
(dollars in thousands) For The Twelve Months Ended September 30, 2001
--------------------------------------------------------------------------------------------------
SCW
-------------------- CCWC Non- Consolidated
Water Electric Water Regulated AWR
---------- --------- ------ --------- ------------
Operating revenues $172,658 $14,645 $6,004 $799 $194,106
Operating income before income
taxes 49,090 1,952 1,923 130 53,095
Identifiable assets 473,698 27,172 28,809 -- 529,679
Depreciation expense 14,909 1,434 1,185 -- 17,528
Capital additions $45,325 $2,650 $667 -- $48,642
(dollars in thousands) For The Twelve Months Ended September 30, 2000
--------------------------------------------------------------------------------------------------
SCW
-------------------- CCWC Non- Consolidated
Water Electric Water Regulated AWR
---------- --------- ------ --------- ------------
Operating revenues $168,205 $14,066 N/A $730 $183,001
Operating income before income N/A
taxes 40,881 3,857 (121) 44,617
Identifiable assets 444,924 26,089 N/A -- 471,013
Depreciation expense 13,268 1,387 N/A -- 14,655
Capital additions $45,311 $2,173 N/A -- $47,484
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING INFORMATION
Certain matters discussed in this report (including the documents
incorporated herein by reference) are forward-looking statements intended to
qualify for the "safe harbor" from liability established by the Private
Securities Litigation Reform Act of 1995. These forward-looking statements can
generally be identified as such because the context of the statement will
include words such as Registrant "believes," "anticipates," "expects" or words
of similar import. Similarly, statements that describe Registrant's future
plans, objectives, estimates or goals are also forward-looking statements. Such
statements address future events and conditions concerning capital expenditures,
earnings, litigation, rates, water quality and other regulatory matters,
adequacy of water supplies, the California energy crisis, liquidity and capital
resources, opportunities related to operations and maintenance of water systems
owned by governmental entities and other utilities and providing related
services, and accounting matters. Actual results in each case could differ
materially from those currently anticipated in such statements, by reason of
factors such as utility restructuring, including ongoing local, state and
federal activities; future economic conditions, including changes in customer
demand and changes in water and energy supply cost; future climatic conditions;
litigation developments; and legislative, regulatory and other circumstances
affecting anticipated revenues and costs. See the section entitled "Risk
Factors" for more information.
GENERAL
American States Water Company (AWR), incorporated in 1998, is engaged in
the business of holding, for investment, the stock primarily of utility
companies. AWR's primary investment is the stock of Southern California Water
Company (SCW). SCW is a California public utility company engaged principally in
the purchase, production, distribution and sale of water (SIC No. 4941). SCW
also distributes electricity in one customer service area (SIC No. 4911). SCW is
regulated by the California Public Utilities Commission (CPUC) and was
incorporated on December 31, 1929 under the laws of the State of California.
SCW is organized into three regions and one electric customer service area
(CSA) operating within 75 communities in 10 counties in the State of California
and provides water service in 21 CSAs. Region I incorporates 7 CSAs in northern
and central California; Region II has 4 CSAs located in Los Angeles; Region III
incorporates 10 water CSA's. SCW also provides electric service to the City of
Big Bear Lake and surrounding areas in San Bernardino County. See the section
entitled "Electric Energy Situation in California" for more information.
SCW served 246,396 water customers and 21,665 electric customers at
September 30, 2001, or a total of 268,061 customers, compared with 266,318 total
customers at September 30, 2000.
SCW's utility operations exhibit seasonal trends. Although SCW's water
utility operations have a diversified customer base, revenues derived from
commercial and residential water customers accounted for approximately 87.1%,
89.0% and 91.1% of total water revenues for the three, nine and twelve months
ended September 30, 2001, respectively, as compared to 87.1%, 89.3% and 90.7%
for the three, nine and twelve months ended September 30, 2000, respectively.
AWR also owns two other subsidiaries. American States Utility Services,
Inc. (ASUS) contracts to lease, operate and maintain water and wastewater
systems owned by others and to provide related services, such as billing and
meter reading, to approximately 90,000 accounts. Chaparral City Water Company
(CCWC) is an Arizona public utility company serving 11,438 customers as of
September 30, 2001 in the town of Fountain Hills, Arizona and a portion of the
City of Scottsdale, Arizona. The Arizona Corporation Commission (ACC) regulates
CCWC. AWR completed the acquisition of the common stock of CCWC on
18
October 10, 2000 for an aggregate value of $31.2 million, including assumption
of approximately $12 million in debt. Neither AWR nor ASUS is regulated by
either the CPUC or the ACC.
ACQUISITION OF PEERLESS WATER CO.
In December 1999, Registrant agreed to acquire Peerless Water Co., a
privately owned water company in Bellflower, California, subject to satisfaction
of certain conditions, including CPUC approval. The number of Common Shares to
be issued will be determined at the closing, but will in no event be greater
than 131,036 shares nor less than 107,538 shares. A proposed decision issued on
October 5, 2001 by the Administrative Law Judge assigned to the case denied the
transaction on the basis that it was not in the public interest. The final CPUC
decision is anticipated in the fourth quarter of 2001. SCW intends to vigorously
oppose the proposed decision.
RESULTS OF OPERATION
Basic earnings per common share for the three months ended September 30,
2001 increased by 9.3% to $0.94 per share as compared to $0.86 per share for the
comparable period last year. Basic earnings for the nine months ended September
30, 2001 increased by 6.1% to $1.74 per share from $1.64 per share for the same
period of last year. As compared to the twelve months ended September 30, 2000,
basic earnings increased by 10.7% to $2.07 per share from $1.87 per share. The
increases in the recorded results primarily reflect the impact of various rate
increases authorized by the CPUC for SCW, additional revenues generated by CCWC
since the acquisition and various reasons as discussed below and, to some extent
Registrant's Cash Preservation Plan (CPP). Fully diluted earnings per share for
the three, nine and twelve months ended September 30, 2001 are $0.93, $1.73 and
$2.06 per share, respectively, as compared to $0.86, $1.63 and $1.86 per share
for the comparable periods of 2000. See the section entitled "Liquidity and
Capital Resources" for more information.
As compared to the same periods ended September 30, 2000, water operating
revenues increased by 7.6%, 7.7% and 6.2% for the three, nine and twelve months
ended September 30, 2001, respectively, due to the increases in rates authorized
by the CPUC, and additional revenues generated by CCWC. New rates in the
customer service areas that comprise SCW's Region I were effective January 2,
2001. Attrition increases for SCW's Metropolitan customer service area and step
increases for SCW's Region III were also in effect in the first quarter of 2001.
The additional revenues generated by rate increases were partially offset by a
reduction of 4.5%, 4.5% and 4.7% in water sales, respectively, for the three,
nine and twelve months ended September 30, 2001 to customers of SCW due to
relatively mild weather this year. See the section entitled "Regulatory Matters"
for more information.
Electric revenues increased by 9.0% and 2.6% and 4.1%, respectively, for
the three, nine and twelve months ended September 30, 2001 as compared to the
same periods ended September 30, 2000. The increases reflected a rate increase
of 12.5% effective May 24, 2001 and an additional 14.8% increase effective
August 23, 2001 authorized by the CPUC to recover previous under-collected
energy costs. The three-month and nine-month increases in electric revenues were
also partially offset by a decrease of 5% and 3% in usage, respectively, for the
three and nine months ended September 30, 2001. The decreases in sales were due
to energy conservation efforts by all classes of customers, and more winter
snows experienced in SCW's service area during the first quarter of this year,
which decreased the use of snow making machines at ski resorts in the area. See
the section entitled "Regulatory Matters" and "Electric Energy Situation in
California" for more information.
Purchased water costs decreased by 5.9%, 7.8% and 6.3%, respectively, for
the three, nine and twelve months ended September 30, 2001 as compared to the
same periods ending in 2000 reflecting a decrease in purchased water volume
resulting from both lower sales and less purchased water in Registrant's supply
mix.
19
Cost of power purchased for pumping increased by 34.2%, 22.2% and 11.9%
for the three, nine and twelve months ended September 30, 2001, respectively,
due to the rate increases implemented by SCW's energy suppliers pursuant to CPUC
decisions, and increased pumped water in SCW's supply mix. On March 27, 2001,
the CPUC approved SCW's Advice Letters to increase revenues by approximately
$762,000 annually to recover the costs of purchased power for its water
ratemaking districts. Another Advice Letter to increase water rates by
approximately $2.3 million annually to recover additional electric power
increases was filed in April 2001, and is pending CPUC approval. See the section
entitled "Regulatory Matters" and "Electric Energy Situation in California" for
more information.
As compared to the three, nine and twelve months ended September 30, 2000,
costs of power purchased for resale to customers in SCW's Bear Valley Electric
customer service area increased by 48.1%, 122.4% and 116.6%, respectively, due
primarily to significant increases in wholesale market prices for energy in the
State of California. For the nine and twelve month comparisons, the increases
were partially offset by a one-time sale of energy on the spot market that
resulted in a $644,000 gain in April 2001. The sale of excess energy on the spot
market resulted from a one-month overlap of energy purchase agreements.
Effectively all of the increase in electric power costs has been included in the
electric supply cost balancing account that, as described below, partially
insulates earnings from the effects of the significantly increased power costs,
unless recovery of these costs is disallowed. The CPUC approved an overall rate
increases on May 24, 2001 and August 23, 2001, respectively, to recover
approximately $11.1 million in the aggregate in under-collected power costs
incurred prior to March 31, 2001 over a five-year period. An application to
increase electric rates by approximately $8.7 million annually were filed with
the CPUC on August 17, 2001 to recover the $95 per megawatt contract with Mirant
Americas Energy Marketing, LP. SCW intends to continue to file additional Advice
Letters to recover the differences between actual wholesale power costs and the
costs recovered through previously approved rates. Due to the nature of the
regulatory process, there is a risk of disallowance of full recovery of costs or
additional delays in the recovery of costs during any period in which there has
been a substantial escalation in costs. See the sections entitled "Liquidity and
Capital Resources", "Regulatory Matters" and "Electric Energy Situation in
California" for more information.
Groundwater production assessments for the three months ended September
30, 2001 increased by 11.4% as compared to the same period in 2000 reflecting an
adjustment made in the third quarter of 2000 to previously over-accrued
groundwater production assessments; there was no such adjustment in 2001. For
the nine and twelve months ended September 30, 2001, groundwater production
assessments decreased by 11.6% and 8.5%, respectively, as compared to the same
periods in 2000. The decreases incurred principally in SCW's San Gabriel and San
Dimas customer service areas due to lower administrative assessments levied
against production for the water year ended June 30, 2001.
A positive entry for the provision for supply cost balancing accounts
reflects recovery of previously under-collected supply costs. Conversely, a
negative entry for the provision for supply cost balancing accounts reflects an
under-collection of previously incurred supply costs. The negative entries for
the three, nine and twelve months ended September 30, 2001 primarily reflect
untimely-recovery of electric power costs discussed previously. At September 30,
2001, Registrant had a net under-collected position of $22.6 million in both its
water and electric balancing accounts primarily due to the increases in energy
costs. See the sections entitled "Liquidity and Capital Resources", "Regulatory
Matters" and "Electric Energy Situation in California" for more information.
Other operating expenses increased by 1.8%, 3.8% and 1.5% for the three,
nine and twelve months ended September 30, 2001, respectively, as compared to
the same periods of last year. The increases were primarily due to additional
costs related to the inclusion of CCWC.
20
Administrative and general expenses increased by 12.0%, 24.0% and 16.5%,
respectively, for the three, nine and twelve months ended September 30, 2001 as
compared to the same periods ended September 30, 2000 reflecting (i) additional
costs and reserves associated with SCW's Bear Valley Electric customer service
area in response to the energy situation in California, including possible
disallowances of past costs included in the balancing account as well as an
adverse settlement with SCW's energy provider, (ii) increased reserves for
self-insured worker's compensation liabilities, and (iii) additional costs from
CCWC.
Depreciation expense increased by 22.4%, 19.4% and 19.6%, respectively,
for the three, nine and twelve months ended September 30, 2001 reflecting, among
other things, the effects of recording approximately $40.1 million in net plant
additions at SCW during 2000, depreciation on which began in January 2001, and
additional depreciation associated with CCWC's plant. In addition, amortization
of goodwill, which represents the difference between the purchase price of the
common equity of CCWC and CCWC's book equity at the time of closing, began
October 2000. Amortization of this goodwill will cease effective January 1,
2002. However, pursuant to FASB No. 142, Registrant will conduct an annual
impairment test. Management believes that adoption of this statement will not
have a significant impact on its financial position or results of operation.
As compared to the three, nine and twelve months ended September 30, 2000,
maintenance expense decreased by 20.6%, 17.7% and 20.5%, respectively, due
primarily to the implementation of Registrant's CPP in April 2001. Registrant
anticipates the maintenance expenditures at SCW will increase significantly in
the fourth quarter of 2001 as compared to the fourth quarter of 2000. See the
sections entitled "Liquidity and Capital Resources", "Electric Energy Situation
in California" and "Regulatory Matters" for more information.
Taxes on income increased by 7.1%, 13.1% and 19.7%, respectively, as
compared to the three, nine and twelve months ended September 30, 2000, due to
an increase in pre-tax operating income of 12.8%, 16.5% and 22.5%, respectively,
for the comparable periods ended September 30, 2001, offset partially by a lower
effective tax rate.
Other taxes increased by 13.1%, 11.5% and 12.2%, respectively, for the
three, nine and twelve months ended September 30, 2001, respectively, as
compared to the same periods last year reflecting principally increased property
taxes due to higher property valuation assessments, and additional property and
payroll taxes at CCWC.
The loss recorded in other income for the three, nine and twelve months
ended September 30, 2001 was due principally to the effects of recording
amortization and interest expenses, starting January 2000, on SCW's 500
acre-foot entitlement in the State Water Project, and higher expenses associated
with increased non-regulated activities. SCW anticipates signing an agreement
during the fourth quarter of 2001 that will shift responsibility for payment of
costs related to 350 acre-feet of its entitlement to a non-related third party.
Interest expense increased by 5%, 11.4% and 11.2%, respectively, for the
three, nine and twelve months ended September 30, 2001 as compared to the three,
nine and twelve months ended September 30, 2000 due to (i) short-term borrowing,
incurred by AWR to fund the acquisition of CCWC, (ii) the issuance of $20
million in long-term debt by SCW in January 2001 and (iii) the inclusion of
long-term debt at Registrant's CCWC unit.
LIQUIDITY AND CAPITAL RESOURCES
AWR funds its operating expenses and pays dividends on its outstanding
Common and Preferred Shares primarily through dividends from its subsidiaries,
principally SCW. AWR has a Registration Statement on file with the Securities
and Exchange Commission (SEC) for issuance, from time to time,
21
of up to $60 million in Common Shares, Preferred Shares and/or debt securities.
On August 16, 2000, AWR issued 1,107,000 Common Shares at $26.125 per share
under this Registration Statement. Net proceeds from the offering have been used
to fund a portion of the purchase price of CCWC and to invest in additional
shares of SCW. As of September 30, 2001, approximately $31,074,000 remained for
issuance under this Registration Statement. AWR completed the acquisition of the
common stock of CCWC on October 10, 2000 for an aggregate value of $31.2
million, including assumption of approximately $12 million in debt.
AWR maintains a credit facility with a $25 million aggregate borrowing
capacity. At September 30, 2001, $20 million was outstanding under this
facility.
SCW funds the majority of its operating expenses, payments on its debt,
and dividends on its outstanding Common Shares through internal sources.
Internal sources of cash flow are provided primarily by retention of a portion
of earnings, amortization of deferred charges, and depreciation expense.
Internal cash generation is influenced by factors such as weather patterns,
environmental regulation, litigation, changes in supply costs, and timing of
rate relief. See the sections entitled "Risk Factors" and "Electric Energy
Situation in California" for more information.
Because of the seasonal nature of its water and electric operations, SCW
utilizes its short-term borrowing capacity to finance current operating
expenses, including expenses for purchased power distributed through its Bear
Valley Electric customer service area. SCW has experienced increased costs for
electric energy, particularly during the fourth quarter of 2000, and continuing
throughout 2001. At December 31, 2000, SCW had under-collected its electric
power costs by approximately $8.6 million. During the three quarters of 2001,
SCW incurred $11.3 million more in purchased power costs than it was authorized
to recover in current rates. SCW also has an additional $2.7 million of
under-collected supply costs in its water business.
CPUC approval has been obtained to increase electric rates to recover
$11.1 million in under-collected electric power costs over a five-year period.
CPUC approval has also been obtained to recover approximately $1,059,000
annually of costs for purchased power for its water ratemaking districts.
Applications are pending before the CPUC for additional rate increases to
recover under-collected and increased power costs from SCW's electric and water
customers. See the sections entitled "Electric Energy Situation in California"
and "Regulatory Matters". SCW's under-collected position for purchased power
relative to its Bear Valley Electric Service division could reach approximately
$23 million by the end of 2001 if the CPUC does not timely authorize recovery of
costs associated with the new power purchase agreement. Registrant believes that
timely regulatory approval of these applications by the CPUC is necessary to
avoid any material adverse impact on SCW's liquidity and financial condition.
Registrant implemented a Cash Preservation Plan (CPP) in April 2001 to
control costs and temporarily to limit capital and maintenance expenditures
principally to those projects that are believed necessary to meet public safety
and health requirements or otherwise provide for continued service pending CPUC
approval of rate increases that will permit SCW to begin recovery of power costs
incurred during California's energy crisis. The CPP impacts both the electric
and water businesses of SCW. Management anticipates that the CPP, through
deferral of capital expenditures alone, could reduce cash expenditures through
April 2002 by as much as $20 million. See the sections entitled "Electric Energy
Situation in California" and "Regulatory Matters" for more information.
The aggregate short-term borrowing capacity available to SCW under its
three bank lines of credit was $60 million as of September 30, 2001, of which a
total of $18 million was then outstanding. SCW routinely employs short-term bank
borrowing as an interim-financing source.
22
SCW also relies on external sources, including equity investments from
AWR, long-term debt, contributions-in-aid-of-construction, advances for
construction and install-and-convey advances, to fund the majority of its
construction expenditures. In January 2001, SCW issued the remaining $20 million
of long-term debt under a Registration Statement filed in 1998 with the proceeds
used to reduce then outstanding bank borrowing. SCW anticipates filing, before
year-end 2001, a Registration Statement with the SEC for issuance, from time to
time, of up to $100 million in debt securities. The net proceeds from the sale
of these securities will be used for general public utility purposes as
authorized by the CPUC. On March 30, 2001, AWR purchased an additional $25
million equity investment in SCW.
CCWC funds the majority of its operating expenses, payments on its debt
and dividends, if any, through internal sources. CCWC also relies on external
sources, including long-term debt, contributions-in-aid-of-construction,
advances for construction and install-and-convey advances, to fund the majority
of its construction expenditures.
ASUS funds its operating expenses primarily through contractual management
fees.
ELECTRIC ENERGY SITUATION IN CALIFORNIA
The electric energy environment in California has changed as a result of
the December 1995 CPUC decision on restructuring of California's electric
utility industry and state legislation passed in 1996. On September 23, 1996,
the State of California enacted legislation, California Assembly Bill 1890 as
amended by California Senate Bill 477, to provide a transition to a competitive
market structure, which was expected to provide competition and customer choice,
beginning January 1, 1998, with all consumers ultimately participating by 2002.
SCW's Bear Valley electric customer service area was exempted by the CPUC from
compliance with most of the provisions of the CPUC order and the state
legislation.
On January 17, 2001, the Governor of the State of California proclaimed a
state of emergency in California due to shortages of electricity available to
certain of California's utilities (resulting in blackouts), the unanticipated
and dramatic increases in electricity prices and the insufficiency of
electricity available from certain of California's utilities to prevent
disruption of electric service in California. The reasons for the high cost of
energy are under investigation but are reported to include, among other things,
limited supply caused by a lack of investment in new power plants to meet growth
in demand, planned and unplanned outages of power plants, decreased availability
of hydroelectric power from the Pacific Northwest due to lower than usual
precipitation and higher demand for electricity in the region, transmission line
constraints, increased prices for natural gas, the fuel used in many of the
power plants serving the region, and an uncertain power market.
Recently, legislation has been enacted and executive orders issued,
designed to encourage and accelerate the construction of additional power plants
and the re-powering and updating of existing power plants to increase the supply
of electricity in the State. A number of investigations have also been
instituted as to the causes of the California energy situation and numerous
pieces of legislation have been introduced at the California Legislature to deal
with different aspects of the situation. The long-term impact of these
legislative initiatives on SCW's Bear Valley Electric (BVE) customer service
area is difficult to predict. For the short-term, however, management expects
energy costs to remain high and to continue to be volatile.
On July 25, 2001, the Federal Energy Regulatory Commission (FERC)
established the scope and methodology for calculating refunds related to
transactions in the spot markets operated by the California Independent System
Operator Corporation (Cal-ISO) and the California Power Exchange Corporation
(Cal-PX) during the period October 2, 2000 through June 20, 2001, and ordered
evidentiary hearings for the purpose of determining the amount of such refunds.
SCW is a party to these proceedings, but has not
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been a direct participant in either the Cal-ISO or Cal-PX markets. SCW does not
believe that these proceedings or any other proceedings currently pending before
FERC will result in any reduction in SCW's under-collected power costs in the
near term, if at all.
All electric energy sold by SCW to customers in its BVE customer service
area is purchased from others. Historically, SCW purchased electric energy from
the Southern California Edison (SCE) unit of Edison International. However, in
order to keep electric power costs as low as possible, SCW entered into an
energy brokerage contract with Sempra Energy Corporation (Sempra). SCW purchased
electric energy for its BVE customer service area from Sempra during the period
beginning March 26, 1996 through April 30, 1999. SCW changed energy brokers to
Illinova Energy Partners (Illinova) beginning May 1, 1999 through April 30,
2000, and with Dynegy Power Marketing, Inc. (Dynegy) since May 1, 2000, when
Dynegy acquired Illinova.
In May 2000, SCW entered into a one-year, block forward purchase contract
with Dynegy for 12 megawatts (MW's) of electric energy for its BVE customer
service area at a price of $35.50 per MW hour (MWh). This contract expired April
30, 2001.
SCW entered into a five-year, block forward purchase contract with Mirant
Americas Energy Marketing, LP (Mirant) to supply its BVE customer service area
with 15 MW's of electric energy at a price of $95 per MWh beginning April 1,
2001 through December 31, 2006. SCW also finalized an agreement with Pinnacle
West Capital Corporation on June 14, 2001 for an additional 8 MW's of electric
energy to meet BVE's peak winter demands. The contract provides for pricing of
$75 per MWh from November 1, 2001 to March 31, 2002, $48 per MWh from November
1, 2002 to March 31, 2003, and $36 per MWh from November 1, 2003 to March 31,
2004. The average minimum load at SCW's Bear Valley Electric customer service
area has been approximately 12 MW's. The average winter load has been 18 MW's
with a winter peak of 38 MW's when the snowmaking machines at the ski resorts
are operating. Under the terms of a contract with Dynegy that expires on April
30, 2002, Dynegy has agreed to procure electric energy for SCW in excess of the
amounts it has purchased under the forward block purchase contracts previously
described, to sell excess energy purchased by SCW under the terms of these
contracts and to act as scheduling coordinator for SCW. SCW has withheld payment
on $3.4 million invoiced by Dynegy for the period December 20, 2000 through
February 20, 2001, pending resolution of certain disputes. Most of this amount
is included in the electric supply cost balancing account.
Demand for energy in SCW's Bear Valley Electric customer service area
generally has been increasing. However, the ability of SCW to deliver purchased
power to these customers is limited by the ability of the transmission
facilities owned by Southern California Edison Company ("Edison") to transmit
this power. See section entitled "Legal Proceedings" for a discussion of
litigation between Edison and SCW regarding Edison's obligations to upgrade
these transmission facilities. In order to meet these increasing energy demands,
SCW is considering, in addition to the renegotiated block forward purchase of
electric energy, a number of options including (i) the purchase of electric
energy from on-site generation facilities installed by a third party, (ii) the
use of portable generation, and (iii) the installation of generation owned by
Registrant. Each of these options is expected to result in further increases in
electric energy prices for customers of SCW's BVE customer service area.
WATER SUPPLY
For the three months ended September 30, 2001, SCW supplied a total of
26,962,000 ccf of water as compared to 27,829,000 ccf for the three months ended
September 30, 2000. Of the total 26,962,000 ccf of water supplied during the
third quarter of 2001, approximately 53.8% came from pumped sources and 43.6%
was purchased from others, principally the Metropolitan Water District of
Southern California (MWD) and its member agencies. The remaining 2.6% of total
supply came from the United States Bureau
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of Reclamation (the Bureau). For the three months ended September 30, 2000,
51.6%, 46.2% and 2.2% was supplied from pumped sources, purchased from MWD and
the Bureau, respectively.
For the nine months ended September 30, 2001, SCW supplied a total of
65,384,000 ccf of water, 58.2% of which came from pumped sources, 40.0% was
purchased and the remaining amount was supplied by the Bureau. During the nine
months ended September 30, 2000, SCW produced 68,325,000 ccf of water. Of this
amount 55.3% came from pumped sources, 43.0% was purchased and the remainder was
provided by the Bureau.
During the twelve months ended September 30, 2001, SCW supplied 84,538,000
ccf of water as compared to 89,289,000 ccf supplied during the twelve months
ended September 30, 2000. During the twelve months ended September 30, 2001,
pumped sources provided 57.9% of total supply, 40.0% was purchased from MWD and
its member agencies. The remaining 2.1% of total supply came from the United
States Bureau of Reclamation (the Bureau) under a no-cost contract. For the
twelve months ended September 30, 2000, 55.9%, 42.6% and 1.5%, respectively, was
supplied from pumped sources, purchased from MWD and the Bureau.
The MWD is a water district organized under the laws of the State of
California for the purpose of delivering imported water to areas within its
jurisdiction. Registrant has 57 connections to the water distribution facilities
of MWD and other municipal water agencies. MWD imports water from two principal
sources: the Colorado River and the State Water Project (SWP). Available water
supplies from the Colorado River and the SWP have historically been sufficient
to meet most of MWD's requirements and MWD's supplies from these sources are
anticipated to remain adequate through 2001. MWD's import of water from the
Colorado River is expected to decrease in future years due to the requirements
of the Central Arizona Project (CAP). In response, MWD has taken a number of
steps to secure additional storage capacity and to increase available water
supplies, by effecting transfers of water rights from other sources.
Registrant's water supply and revenues are significantly affected, both in
the short-run and the long run, by changes in meteorological conditions. Water
year 2001 was California's first dry year following six years of wet to average
conditions. Storage in most of the State's major reservoirs was above average at
the beginning of the water year, reflecting prior wet conditions. As of
September 30, 2001 statewide water storage in reservoirs is 66% of capacity that
is 96% of normal for this time of year. The impacts of a dry 2001 were minimized
for most other large water systems by generally good storage in reservoirs and
groundwater basins. Although overall groundwater conditions remain at adequate
levels in most of SCW's operating areas, certain of SCW's groundwater supplies
have been affected to varying degrees by various forms of contamination which,
in some cases, have caused increased reliance on purchased water in its supply
mix.
Likewise the Colorado River was in a surplus (wet) condition in water year
2001. The April-July inflow to Lake Powell is forecast to be 5.6 million
acre-feet, which is 72% of average. The May 2001 snow pack in the Upper Colorado
River basin was 78% of average.
CCWC obtains its water supply from three operating wells and from Colorado
River water delivered by the CAP. The majority of CCWC's water supply is
obtained from its CAP allocation and well water is used for peaking capacity in
excess of treatment plant capability, during treatment plant shutdown, and to
keep the well system in optimal operating condition. CCWC has an Assured Water
Supply designation, by decision and order of the Arizona Department of Water
Resources, providing in part that, subject to its requirements, CCWC currently
has a sufficient supply of ground water and CAP water which is physically,
continuously and legally available to satisfy current and committed demands of
its customers, plus at least two years of predicted demands, for 100 years.
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Notwithstanding such a designation, CCWC's water supply may be subject to
interruption or reduction, in particular owing to interruption or reduction of
CAP water. In the event of interruption or reduction of CAP water, CCWC can
currently rely on its well water supplies for short-term periods. However, in
any event, the quantity of water CCWC supplies to some or all of its customers
may be interrupted or curtailed, pursuant to the provisions of its tariffs.
REGULATORY MATTERS
SCW is subject to regulation by the CPUC, which has broad powers with
respect to service and facilities, rates, classifications of accounts, valuation
of properties, the purchase, disposition and mortgaging of properties necessary
or useful in rendering public utility service, the issuance of securities, the
granting of certificates of convenience and necessity as to the extension of
services and facilities and various other matters. CCWC is subject to similar
regulation by the ACC.
AWR and ASUS are not regulated by the CPUC. The CPUC does, however,
regulate certain transactions between SCW and its non-regulated affiliates.
The 22 customer service areas (CSAs) of SCW are grouped into 16 water
districts and 1 electric district for ratemaking purposes. Water rates vary
among the 16 ratemaking districts due to differences in operating conditions and
costs. SCW monitors operations on a regional basis in each of these districts so
that applications for rate changes may be filed, when warranted. Under the
CPUC's practices, rates may be increased by three methods: general rate case
increases (GRC's), offsets for certain expense increases and advice letter
filings related to certain plant additions. GRC's are typically for three-year
periods, which include step increases for the second and third year. Rates are
based on a forecast of expenses and capital costs. GRC's have a typical
regulatory lag of one year. Offset rate increases typically have a two to four
month regulatory lag.
New water rates with an annual increase of approximately $2.5 million for
seven ratemaking districts in SCW's Region I were implemented in January 2001.
SCW's application to combine the seven ratemaking CSAs into one regional rate
was, however, denied by the CPUC. Step increases of approximately $1.7 million
for CSAs in SCW's Region III were also effective in January 2001. An attrition
increase of approximately $2.8 million for Region II was in effect from February
2001.
On October 25, 2001, SCW was authorized to collect $488,000 over a
two-year period to amortize the under-collection in its San Dimas supply expense
balancing account. SCW had an aggregate under-collection of $2.7 million in its
water balancing account as of September 30, 2001.
As of September 30, 2001, SCW had accrued approximately $19.9 million in
under-collected purchased power costs included in the electric balancing
account. In May 2000, SCW filed an Advice Letter with the CPUC for recovery over
a five-year period of approximately $2.4 million in under-collected power costs
and removal of a negative amortization authorized by the CPUC in 1997. The CPUC
issued a final order on May 24, 2001 authorizing an overall rate increase of
12.5%, with a condition of conducting a subsequent audit on the expenses
included in the electric balancing account.
On August 23, 2001, the CPUC also approved a second Advice Letter filed by
SCW on April 9, 2001 seeking recovery, over five years, of an additional
under-collection of $8.7 million for energy costs. Rates in SCW's BVE customer
service area have increased by approximately 14.8% as a result.
On May 11, 2001, SCW filed with the CPUC for an additional increase in
electric rates to recover energy costs under the purchase agreement with Mirant.
SCW subsequently withdrew the Advice Letter and filed an application on August
17, 2001 with the CPUC, along with a motion requesting immediate recovery of
these costs, subject to refund after completion of the review process. The CPUC,
in the
26
process of reviewing the application, rejected SCW's motion for immediate
recovery. The application, if approved, will result in an additional electric
rate increase of approximately 50%. SCW expects to continue to file additional
Advice Letters to recover differences between actual electric power costs and
amounts recovered through electric rates. SCW believes that timely regulatory
actions to authorize SCW to recover its past and future power costs are
necessary to avoid any material adverse effect on SCW's liquidity and financial
condition. The schedule agreed to by the parties in this proceeding is
abbreviated from the normal time frame in order to address this situation as
expeditiously as possible. A final decision in this matter is expected during
the second quarter of 2002, although management is unable to predict when or if
the CPUC will authorize recovery of any or all of the costs related to the
contracts. See the sections entitled "Liquidity and Capital Resources" and
"Electric Energy Situation in California" for more information.
In March 2001, the CPUC approved SCW's filing for recovery of increased
costs of electric power incurred to pump water for its water customers. In April
2001, SCW filed additional Advice Letters by ratemaking areas to increase water
rates by approximately $2.3 million company-wide to recover additional electric
base rate increases, authorized recently by the CPUC for the Southern California
Edison Company and the Pacific Gas and Electric Company. On October 25, 2001,
the CPUC approved an increase of $297,000 in rates for SCW's Claremont CSA to
collect the electric base rate increases. The remaining Advice Letters are
scheduled to be on Commission's agenda on November 8, 2001. CPUC staff has
drafted a proposed resolution, also on November 8, 2001 agenda, that would limit
SCW's ability to timely recover increased supply costs from its water customers.
In essence, SCW would not be entitled to recover any deferred costs unless SCW
was earning less than its authorized rate of return or otherwise filed for
recovery of deferred supply costs in a general rate case application. SCW
intends to vigorously oppose the proposed decision and does not expect that
approval of this proposal would have a material impact in its results of
operation or liquidity due to the balancing account mechanism. See the section
entitled "Electric Energy Situation in California" for more information.
Hearings before the CPUC have concluded on SCW's application to include an
additional $1.6 million in rate base for a water treatment facility in SCW's
Clearlake service area. In 1993, the CPUC disallowed the entire $1.6 million and
Registrant wrote off the entire amount. A draft decision issued on March 30,
2001 by the CPUC allows SCW to include $500,000 of the $1.6 million in the
regulated rate base. An alternate draft decision issued by one of the CPUC
Commissioners proposes to deny the application. An administrative Law Judge
subsequently reopened the proceeding in August 2001. A final order is not
anticipated until the second quarter of 2002.
On April 22, 1999, the CPUC issued an order denying SCW's application
seeking approval of its recovery through rates of costs associated with its
participation in the Coastal Aqueduct Extension of the State Water Project
(SWP). SCW's participation in the SWP commits it to a 40-year entitlement. SCW's
investment of approximately $9.5 million in SWP is currently included in Other
Property and Investments. The remaining balance of the related liability of
approximately $7 million is recorded as other long-term debt. SCW intends to
recover its investment in SWP either through contributions from developers on a
per-lot or other basis, or from the sale of its 500 acre-foot entitlement in
SWP. In October 2001, SCW entered into an agreement with a developer, which
obligates the developer to make payments to SCW in exchange for SCW's
reservation and dedication of up to 350 acre-feet per year of the SWP
entitlement. SCW believes that its full investment and on-going costs associated
with its ownership will be fully recovered.
On December 26, 2000, SCW filed an Advice Letter with the CPUC, in
accordance with a prior CPUC resolution authorizing such a filing, seeking
recovery of approximately $1,800,000 in expenses associated with its lawsuits
against Aerojet General Corporation and the Department of Water Resources of the
State of California. An order, issued April 28, 2001, authorized SCW to recover
these costs from customers in SCW's Arden-Cordova customer service area over a
six-year period.
27
On January 26, 2001, the CPUC Staff, SCW and Peerless Water Co., a
privately owned water company in Bellflower, California, signed a Settlement
Agreement, which recommends approval of the proposed acquisition by SCW of
Peerless. A proposed decision issued on October 5, 2001 by the Administrative
Law Judge denied the transaction based on findings that it was not in the public
interest. The final CPUC decision is anticipated in the fourth quarter of 2001.
SCW intends to vigorously oppose the proposed decision.
There are no active regulatory proceedings affecting CCWC or its
operations.
ENVIRONMENTAL MATTERS
1996 Amendments to Federal Safe Drinking Water Act
On August 6, 1996, amendments (the 1996 SDWA amendments) to the Safe
Drinking Water Act (the SDWA) were signed into law. The 1996 SDWA revised the
1986 amendments to the SDWA with a new process for selecting and regulating
contaminants. The U. S. Environmental Protection Agency (EPA) can only regulate
contaminants that may have adverse health effects, are known or likely to occur
at levels of public health concern, and the regulation of which will provide "a
meaningful opportunity for health risk reduction." The EPA has published a list
of contaminants for possible regulation and must update that list every five
years. In addition, every five years, the EPA must select at least five
contaminants on that list and determine whether to regulate them. The new law
allows the EPA to bypass the selection process and adopt interim regulations for
contaminants in order to address urgent health threats. Current regulations,
however, remain in place and are not subject to the new standard-setting
provisions. The DOHS, acting on behalf of the EPA, administers the EPA's program
in California.
The 1996 SDWA amendments allow the EPA for the first time to base primary
drinking water regulations on risk assessment and cost/benefit considerations
and on minimizing overall risk. The EPA must base regulations on best available,
peer-reviewed science and data from best available methods. For proposed
regulations that involve the setting of maximum contaminant levels (MCL's), the
EPA must use, and seek public comment on, an analysis of quantifiable and
non-quantifiable risk-reduction benefits and costs for each such MCL.
SCW and CCWC currently test their wells and water systems according to
requirements listed in the SDWA. Water from wells found to contain levels of
contaminants above the established MCL's is treated to reduce contaminants to
acceptable levels before it is delivered to customers.
Since the SDWA became effective, SCW has experienced increased operating
costs for testing to determine the levels, if any, of the constituents in SCW's
sources of supply and additional expense to lower the level of any contaminants
in order to meet the MCL standards. Such costs and the costs of controlling any
other contaminants may cause SCW to experience additional capital costs as well
as increased operating costs.
AWR is currently unable to predict the ultimate impact that the 1996 SDWA
amendments might have on the financial position or results of operation of its
regulated utility subsidiaries. The CPUC and ACC ratemaking processes provide
SCW and CCWC with the opportunity to recover prudently incurred capital and
operating costs associated with water quality. Management believes that such
incurred costs will be authorized for recovery by the CPUC and ACC, as
appropriate.
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Proposed Enhanced Surface Water Treatment Rule
On July 29, 1994, the EPA proposed an Enhanced Surface Water Treatment
Rule (ESWTR), which would require increased surface-water treatment to decrease
the risk of microbial contamination. The EPA has proposed several versions of
the ESWTR for promulgation. The version selected for promulgation will be
determined based on data collected by certain water suppliers and forwarded to
the EPA pursuant to EPA's Information Collection Rule, which requires such water
suppliers to monitor microbial and other contaminants in their water supplies
and to conduct certain tests in respect of such contaminants. The EPA has
adopted an Interim ESWTR applicable only to systems serving greater than 10,000
persons. On April 10, 2000, EPA published the proposed Long Term 1 Enhanced
Surface Water Treatment Rule and Filter Backwash Rule (LT1FBR) in the Federal
Register. This proposed rule will apply to each of SCW's five surface water
treatment plants and the CCWC's surface water treatment plant. It basically
extends the requirements of the ESWTR to systems serving less than 10,000
persons and will require some systems to institute changes to the return of
recycled filter backwash flows within the treatment process to reduce the
effects of recycled water on compromising microbial control. Registrant is
presently unable to predict the ultimate impact of the LT1FBR, but it is
anticipated that all five SCW's plants and the CCWC's plant will achieve
compliance within the three year to five-year time frames identified by EPA.
Regulation of Disinfection/Disinfection By-Products
SCW and CCWC are also subject to the new regulations concerning
disinfection/disinfection by-products (DBP's), Stage I of which regulations were
effective in November 1998 with full compliance required by 2002. Stage I
requires reduction of trihalomethane contaminants from 100 micrograms per liter
to 80 micrograms per liter. Two of SCW's systems are immediately impacted by
this rule. SCW implemented modifications to the treatment process in its Bay
Point and Cordova systems. It is anticipated that both systems will be in full
compliance by 2001. A third SCW plant will require treatment modifications in
order to comply with this rule. SCW is preparing to conduct studies in
Calipatria to determine the best treatment methods to comply with this rule.
It is anticipated that the EPA will adopt Stage II rules pertaining to
DBP's by year-end 2001. The EPA is not allowed to use the new cost/benefit
analysis provided for in the 1996 SDWA amendments for establishing the Stage II
rules applicable to DBP's but may utilize the regulatory negotiating process
provided for in the 1996 SDWA amendments to develop the Stage II rule. The final
rule is expected by 2002.
Ground Water Rule
On May 10, 2000, the EPA published the proposed Ground Water Rule (GWR),
which establishes multiple barriers to protect against bacteria and viruses in
drinking water systems that use ground water. The proposed rule will apply to
all U.S. public water systems that use ground water as a source. The proposed
GWR includes system sanitary surveys conducted by the state to identify
significant deficiencies; hydrogeologic sensitivity assessments for
undisinfected systems, source water microbial monitoring by systems that do not
disinfect and draw from hydrogeologically sensitive aquifer or have detected
fecal indicators within the system's distribution system; corrective action; and
compliance monitoring for systems which disinfect to ensure that they reliably
achieve 4-log (99.99%) inactivation or removal of viruses. The GWR is scheduled
to be issued as a final regulation in 2002. While no assurance can be given as
to the nature and cost of any additional compliance measures, if any, SCW and
CCWC do not believe that such regulations will impose significant compliance
costs, since they already currently engage in disinfection of their groundwater
systems.
29
Regulation of Radon and Arsenic
The regulation on arsenic was published in January 2001 with a new federal
standard of 10 parts per billion (ppb). Compliance with an MCL of 10 ppb will
require implementation of wellhead treatment remedies for eight affected wells
in SCW's system and three wells in CCWC's system. However, the EPA subsequently
withdrew the pending arsenic standard for a sixty-day review to seek independent
reviews of both the science behind the standard and of the cost estimates to
communities of implementing the rule. On October 31, 2001, EPA announced that
the arsenic standard in drinking water will be 10 parts per ppb. The effective
date for utilities to comply with the standard will be January 2006. It is still
not clear what will happen between now and the current effective date of the
arsenic regulation of February 22, 2002. No further actions by EPA would simply
make this regulation become effective as of that date.
The EPA has proposed new radon regulations following a National Academy of
Sciences risk assessment and study of risk-reduction benefits associated with
various mitigation measures. The National Academy of Sciences study is in
agreement with much of EPA's original findings but has slightly reduced the
ingestion risk initially assumed by EPA. EPA established an MCL of 300 Pico
Curies per liter based on the findings and has also established an alternative
MCL of 4000 Pico Curies per liter, based upon potential mitigation measures for
overall radon reduction. It is our understanding that the United States Office
of Management and Budget has sent the radon rule back to EPA for
reconsideration. The final rule was expected to be effective in August 2000, but
has been delayed by the new administration. SCW and CCWC currently monitor their
wells for radon in order to determine the best treatment appropriate for
affected wells.
Voluntary Efforts to Exceed Minimum Surface Water Treatment Requirements
SCW is a voluntary member of the EPA's "Partnership for Safe Water", a
national program designed to further protect the public from diseases caused by
cryptosporidium and other microscopic organisms. As a volunteer in the program,
SCW commits to exceed minimum operating requirements governing surface water
treatment, optimize surface water treatment plant operations and ensure that its
surface water treatment facilities are performing as efficiently as possible.
Fluoridation of Water Supplies
SCW is subject to State of California Assembly Bill 733, which requires
fluoridation of water supplies for public water systems serving more than 10,000
service connections. Although the bill requires affected systems to install
treatment facilities only when public funds have been made available to cover
capital and operating costs, the bill requires the CPUC to authorize cost
recovery through rates should public funds for operation of the facilities, once
installed, become unavailable in future years.
Matters Relating to SCW's Arden-Cordova System
In January 1997, SCW was notified that ammonium perchlorate in amounts
above the state-determined action level had been detected in three of its wells
serving its Rancho-Cordova system. Aerojet-General Corp. has, in the past, used
ammonium perchlorate in their processing as an oxidizer of rocket fuels. SCW
took the three wells detected with ammonium perchlorate out of service at that
time. Although neither the EPA nor the DOHS has established a drinking water
standard for ammonium perchlorate, DOHS has established an action level of 18
parts per billion (ppb) which required SCW to notify customers in its
Rancho-Cordova customer service area of detection of ammonium perchlorate in
amounts in excess of this action level. In April 1997, SCW found ammonium
perchlorate in three additional wells and, at that time, removed those wells
from service until it was determined that the levels were below the
state-determined action level. Those wells were returned to service. SCW
periodically monitors these wells to determine that levels of perchlorate are
below the action level currently in effect.
30
In February 1998, SCW was informed that nitrosodimethylamine (NDMA) had
been detected in amounts in excess of the EPA reference dosage for health risks
in four of its wells in its Rancho-Cordova system. The wells have been removed
from service. Another well was also removed from service in September 1999 due
to the contamination. NDMA is an additional by-product from the production of
rocket fuel and it is believed that such contamination is related to the
activities of Aerojet-General Corp. Aerojet-General Corp. has reimbursed SCW for
constructing a pipeline to interconnect with the City of Folsom water system to
provide an alternative source of water supply in SCW's Rancho-Cordova customer
service area and has reimbursed SCW for costs associated with the drilling and
equipping of two new wells. As of September 30, 2001, Aerojet-General Corp. has
previously reimbursed SCW $4.5 million of the approximately $15 million in costs
SCW has incurred. The remainder of the costs is subject to further
reimbursement, including interest. Reimbursements received from Aerojet-General
Corp. will reduce SCW's utility plant and costs of purchased water.
On October 25, 1999, SCW filed a lawsuit against the California Regional
Water Quality Control Board (CRWQCB) alleging that the CRWQCB has willfully
allowed portions of the Sacramento County Groundwater Basin to be injected with
chemical pollution that is contaminating the underground water supply in SCW's
Rancho Cordova customer service area. In a separate case, also filed on October
25, 1999, SCW sued Aerojet General Corp. for causing the contamination. On March
22, 2000 Aerojet General Corp. filed a cross complaint against SCW for
negligence and constituting a public nuisance. SCW is unable to determine at
this time what, if any, potential liability it may have with respect to the
cross complaint, but intends to vigorously defend itself against these
allegations. Management cannot predict the outcome of these proceedings. See the
section entitled "Legal Proceedings" for more information.
Matters Relating to SCW's Culver City System
The compound, methyl tertiary butyl ether (MTBE), an oxygenate used in
reformulated fuels, has been detected in the Charnock Basin, located in the city
of Santa Monica and within SCW's Culver City customer service area. At the
request of the Regional Water Quality Control Board, the City of Santa Monica
and the California Environmental Protection Agency, SCW removed two of its wells
in the Culver City system from service in October 1996 to help in efforts to
avoid further spread of the MTBE contamination plume. Neither of these wells has
been found to be contaminated with MTBE. SCW is purchasing water from the
Metropolitan Water District of Southern California (MWD) at an increased cost to
replace the water supply formerly pumped from the two wells removed from
service.
Pursuant to an agreement with SCW in December 1998, two of the potentially
responsible parties (the Participants) have reimbursed SCW's legal and
consulting costs related to this matter and for increased costs incurred by SCW
in purchasing replacement water. However, a notice of termination from the
Participants to the settlement agreement was received in October 1999 claiming
overpayments for replacement water in excess of SCW's water rights. No
assurances can be given that future negotiations will result in complete
restoration of SCW's water rights or that continued reimbursement of SCW's costs
will be forthcoming.
On September 22, 1999, the U.S. EPA and the Los Angeles Regional Water
Quality Control Board ordered Shell Oil Company, Shell Oil Products Company and
Equilon Enterprises LLC to provide replacement drinking water to both SCW and
the City of Santa Monica due to MTBE contamination of the Charnock Sub-Basin
drinking water. The EPA has ordered Shell Oil to reimburse SCW for water
replacement costs. The agencies are continuing to investigate the causes of MTBE
pollution and intend to ensure that all responsible parties contribute to its
clean up although SCW is unable to predict the outcome of the EPA's enforcement
efforts.
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On April 25, 2001, Registrant filed a lawsuit against all the potentially
responsible parties for polluting and contaminating water existing in areas of
the Sub-Basin from which SCW has pumped water through its Charnock Well Field.
Management cannot predict the likely outcome of this proceeding.
Matters Relating to SCW's Yorba Linda System
The compound, MTBE, has been detected in three wells serving SCW's Yorba
Linda system. Two of the wells are standby wells and the third well has not
shown MTBE above the DOHS secondary standard of 5.0 ppb at this time. SCW has
constructed an interconnection with the MWD to provide for additional supply in
the event the third well experienced levels of detection in excess of the DOHS
standard.
SCW has met with the Regional Water Quality Control Board, the Orange
County Water District, the City of Anaheim, the DOHS and three potentially
responsible parties (PRP's) to define the extent of the MTBE contamination plume
and assess the contribution from the PRP's. The PRP's have voluntarily initiated
a work plan for regional investigation. While there have not been significant
disruptions to the water supply in Yorba Linda at this point in time, no
assurances can be given that MTBE contamination will not increase in the future.
SECURITY ISSUES
Since the tragic events of September 11, 2001, water utilities, including
Registrant, have been advised to increase security at key facilities in order to
avoid contamination of water supplies and other disruptions of service.
Registrant has implemented a number of steps to address this concern, including
the engagement of a security firm to develop further protection measures.
Although Registrant has not experienced any material increase in costs related
to these measures, management is unable to predict what, if any, additional
measures will be implemented and what such measures may cost. Registrant will
address its concerns regarding recovery of significant costs with the CPUC and
the ACC, although management is unable to predict if these regulatory bodies
will authorize recovery of any or all of these costs.
RISK FACTORS
You should carefully read the risks described below and other information
in this Form 10-Q in order to understand certain of the risks of our business.
OUR LIQUIDITY, AND IN CERTAIN CIRCUMSTANCES, EARNINGS, COULD BE ADVERSELY
AFFECTED BY THE INCREASE IN ELECTRICITY PRICES IN CALIFORNIA.
Under California law, we are permitted to file for a rate increase to
recover electric power costs not being recovered in current rates. Increases in
electric power costs generally have no direct impact on profit margins, but do
affect cash flows and can therefore impact the amount of our capital resources.
Electric power costs have increased substantially in California since April
2000. As of September 30, 2001, SCW had accrued $19.9 million in unrecovered
power costs in its water and electric balancing accounts
We have been funding these power costs from our short-term borrowing
facilities. In addition, in April 2001, the Company implemented a Cash
Preservation Plan to control costs and temporarily to limit capital and
maintenance expenditures. SCW has filed Advice Letters to recover the
under-collection of power costs in its water and electric balancing accounts and
intends to continue to do so until such time as its actual power costs are being
fully recovered in rates. However, due to the nature of the regulatory process,
there is a risk of disallowance of full recovery of supply costs during any
period in which there has been a substantial run-up in these costs. Any material
disallowance of purchased power costs could have a material adverse impact on
cash flow and earnings. In addition, we believe that timely action by
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the CPUC to authorize the recovery of these costs is necessary to avoid a
material adverse effect on SCW's financial condition. Delays in obtaining
regulatory approval or disallowance of recovery of costs could also affect SCW's
ability to pay dividends to AWR. AWR's ability to pay dividends on its Common
Shares is dependent upon the payment of dividends by SCW.
The Company has established reserves for its Bear Valley Electric division
for possible disallowance of the recovery of past power costs included in the
supply cost balancing account arising out of the California electric crisis as
well as amounts currently in dispute with our energy supplier.
THE BALANCING ACCOUNT MECHANISM, ALTHOUGH APPLICABLE TO WATER SUPPLY
COSTS, DOES NOT INSULATE THE COMPANY'S EARNINGS FROM CHANGES IN WATER SUPPLY
MIX.
We recover certain water supply costs through a balancing account
mechanism. Water supply costs include the cost of purchased water and power and
groundwater production assessments. The balancing account is not, however,
designed to insulate SCW's earnings against changes in supply mix. As a result,
SCW may not recover increased costs due to increased use of purchased water,
which is generally more expensive than groundwater, through the balancing
account mechanism.
SIGNIFICANT CLAIMS HAVE BEEN ASSERTED AGAINST US IN WATER QUALITY
LITIGATION.
SCW has been sued in nineteen water quality related lawsuits alleging personal
injury and property damage as a result of the delivery of water that was
allegedly contaminated involving multiple plaintiffs and defendants. Sixteen of
the lawsuits involve plaintiffs who receive water from the San Gabriel Basin in
Los Angeles County. The other lawsuits involve plaintiffs in Sacramento County.
On September 1, 1999, the First District Court of Appeal in San Francisco held
that the CPUC had preemptive jurisdiction over regulated utilities and ordered
dismissal of a series of these lawsuits, including seven of the lawsuits against
SCW. On October 1, 1999, one group of plaintiffs appealed this decision to the
California Supreme Court, which has accepted the petition. A hearing date before
the California Supreme Court is scheduled on November 7, 2001 in Sacramento. The
lawsuits not involved in the appeal are currently inactive pending the decision
of the California Supreme Court.
In March 1998, the CPUC issued an Order Instituting Investigation as a
result of water quality lawsuits being filed against water utilities in
California. On November 2, 2000, the CPUC issued a final order concluding that
the CPUC has jurisdiction to regulate the service of water utilities with
respect to the health and safety of that service; that DOHS requirements
governing drinking water quality adequately protect the public health and
safety; and that regulated water utilities, including SCW, have satisfactorily
complied with past and present drinking water quality requirements.
If the California Supreme Court upholds the dismissal of the lawsuits, it
is not known whether the plaintiffs will seek recourse through new legislation,
or through the CPUC, and what effect if any, this may have on us. If the
California Supreme Court permits these lawsuits to proceed, the lawsuits will be
tried on the merits.
The CPUC has authorized a memorandum account for legal expenses incurred
by water utilities, including SCW, in the water quality lawsuits. Under the
memorandum account procedure, SCW may recover litigation costs from ratepayers
to the extent authorized by the CPUC. The CPUC has not yet authorized SCW to
recover any of its litigation costs. As of September 30, 2001, SCW had incurred
$888,700 in this memorandum account.
OUR OPERATING COSTS HAVE INCREASED AND ARE EXPECTED TO CONTINUE TO
INCREASE AS A RESULT OF GROUNDWATER CONTAMINATION.
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SCW's operations have been impacted by groundwater contamination in
certain of its service territories. We have taken a number of steps to address
this contamination, including the removal of wells from service, the
construction of water treatment facilities and securing alternatives sources of
supply from other areas not affected by the contamination.
In some cases, we have been reimbursed for our costs by potentially
responsible parties. In other cases, we have taken legal action against parties
that we believe to be potentially responsible for the contamination.
Certain government officials have suggested that water producers, such as
SCW and CCWC, may have liability under certain environmental statutes if their
pumping operations affect the movement of the contamination. SCW has been
required to remove certain wells from service because its pumping activities
might affect the movement of contamination in other service areas. Currently,
neither the Environmental Protection Agency nor any other governmental agency
has identified the Company or, to our knowledge, any other water producer, as a
potentially responsible party. We cannot assure you, however, that SCW or CCWC
will not be identified as a potentially responsible party in the future. Our
future results of operations could be adversely affected if either SCW or CCWC
is required to pay clean-up costs and is not allowed to recover such costs in
rates.
ENVIRONMENTAL REGULATION HAS INCREASED, AND IS EXPECTED TO CONTINUE TO
INCREASE, OUR OPERATING COSTS.
SCW and CCWC are subject to increasingly stringent environmental
regulations that will result in increasing capital and operating costs. These
regulations include:
- The 1996 amendments to the Safe Drinking Water Act that require
increased testing and treatment of water to reduce specified
contaminants to maximum contaminant levels
- Approved regulations requiring increased surface-water treatment to
decrease the risk of microbial contamination; these regulations will
affect SCW's five surface water treatment plants and one CCWC plant
- Additional regulation of disinfection/disinfection byproducts
expected to be adopted before the end of 2002; these regulations
will potentially affect two of SCW's systems
- Additional regulations expected to be adopted in 2001 requiring
disinfection of certain groundwater systems
- Currently pending regulation of arsenic and radon
- California customer requirements to fluoridate public water systems
serving over 10,000 customers
SCW and CCWC may be able to recover costs incurred to comply with these
regulations through the ratemaking process for their regulated systems. We may
also be able to recover certain of these costs under our contractual
arrangements with municipalities. In certain circumstances, we may be able to
recover costs from parties responsible or potentially responsible for
contamination.
THE ADEQUACY OF OUR WATER SUPPLIES DEPENDS UPON A VARIETY OF FACTORS
BEYOND OUR CONTROL.
The adequacy of our water supplies varies from year to year depending upon
a variety of factors, including:
- Rainfall
- The amount of water stored in reservoirs
- The amount of water used by our customers and others
- Water quality, and
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- Legal limitations on use
Population growth and increases in the amount of water used have increased
limitations on use to prevent over-drafting of groundwater basins. The import of
water from the Colorado River, one of SCW's important sources of supply, is
expected to decrease in future years due to the requirements of the Central
Arizona Project ("CAP"). We have also taken wells out of service due to
groundwater contamination.
CCWC obtains its water supply from operating wells and from the Colorado
River through the CAP. CCWC's water supply may be subject to interruption or
reduction if there is an interruption or reduction in CAP water.
Water shortages may affect us in a variety of ways:
- They adversely affect supply mix by causing us to rely on more
expensive purchased water
- They adversely affect operating costs
- They may result in an increase in capital expenditures for building
pipelines to connect to alternative sources of supplies and
reservoirs and other facilities to conserve or reclaim water
We may be able to recover increased operating and construction costs for
our regulated systems through the ratemaking process. We may also be able to
recover certain of these costs under the terms of our contractual agreements
with municipalities. In certain circumstances, we may recover these costs from
third parties that may be responsible, or potentially responsible, for
groundwater contamination.
OUR EARNINGS ARE GREATLY AFFECTED BY WEATHER DURING DIFFERENT SEASONS.
The demand for water and electricity varies by season. Therefore, the
results of operations for one period may not indicate results to be expected in
another period. For instance, most water consumption occurs during the third
quarter of each year when weather tends to be hot and dry. On warm days, use of
water by residential and commercial customers may be significantly greater than
on cold days because of the increased use of water for outdoor landscaping.
Likewise the demand for electricity in our Big Bear service area is greatly
affected by winter snows. An increase in winter snows reduces the use of snow
making machines at ski resorts in the Big Bear area and, as a result reduces
electric revenues.
Variability of weather from normal temperatures or changes in snow or
rainfall can materially impact results of operations. As a result, weather has
been and will continue to be one of the dominant factors in our financial
performance.
OUR BUSINESS IS HEAVILY REGULATED AND, AS A RESULT DECISIONS BY REGULATORY
AGENCIES AND CHANGES IN LAWS AND REGULATIONS CAN SIGNIFICANTLY AFFECT OUR
BUSINESS.
Our revenues depend substantially on the rates that we are permitted to
charge our customers and our ability to recover our costs in these rates,
including the ability to recover the costs of purchased water, groundwater
assessments and electric power costs in rates. In April 1999, the CPUC denied
our request to recover through rates the costs associated with our participation
in the Coastal Aqueduct Extension of the State Water Project. We also have an
application pending before the CPUC to include an additional $1.6 million in
rate base for a water treatment plant in SCW's Clearlake service area that was
previously disallowed by the CPUC in 1993. In addition, we have applications
pending to acquire the Peerless Water Co. and to recover additional amounts in
our water and electric balancing accounts.
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We have been adversely affected by electric restructuring in California
and the escalation of energy costs attributable thereto. The California
Department of Water Resources has attempted to alleviate the crisis by
purchasing electricity for Pacific Gas and Electric Company, Southern California
Edison Company and San Diego Gas and Electric Company, but does not purchase any
electricity for our Bear Valley electric division. FERC has taken certain
actions intended to stabilize the energy market in the West and has ordered
evidentiary proceedings for the purpose of determining the amount of refunds
that may be due to direct participants in the Cal-ISO and Cal-PX markets. We are
not direct participants in these markets. We therefore do not believe that this
or any of the other proceedings currently pending before FERC will result,
either directly or indirectly, in any reduction in SCW's under collected power
costs in the near term, if at all.
OUR BUSINESS REQUIRES SIGNIFICANT CAPITAL EXPENDITURES.
The utility business is capital intensive. On an annual basis, we spend
significant sums for additions to or replacement of property, plant and
equipment. During calendar years 2000, 1999 and 1998, we spent $45,786,000,
$51,578,000 and $45,269,000, respectively, for these purposes. Our budgeted
capital expenditures for calendar year 2001 for these purposes are approximately
$50,400,000. Actual expenditures for 2001 are expected to be lower because of
the cash preservation plan adopted by the Company to conserve cash temporarily
during the electric energy crisis.
We obtain funds for these capital projects from operations, contributions
by developers and others and advances from developers (which must be repaid). We
also periodically borrow money or issue equity for these purposes. We maintain
bank lines of credit that we can use for these purposes. We cannot assure you
that these sources will continue to be adequate or that the costs of funds will
remain at levels permitting us to remain profitable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Registrant has no derivative financial instruments, financial instruments
with significant off-balance sheet risks or financial instruments with
concentrations of credit risk. The disclosure required is, therefore, not
applicable.
PART II
ITEM 1. LEGAL PROCEEDINGS
SCW is a defendant in nineteen lawsuits involving claims pertaining to
water quality. Sixteen of the lawsuits involve customer service areas located in
Los Angeles County in the southern portion of the State of California; three of
the lawsuits involve a customer service area located in Sacramento County in
northern California.
On September 1, 1999, the First District Court of Appeal in San Francisco, in a
published opinion entitled Hartwell Corporation v. The Superior Court of Ventura
County (Hartwell), held that the CPUC had preemptive jurisdiction over regulated
public utilities and ordered dismissal of a series of lawsuits pertaining to
water quality filed against water utilities, including SCW. Seven lawsuits
against SCW have been ordered for dismissal by the state Court of Appeals -- the
Adler (Case No. 1), Santamaria (Case No. 2), Anderson (Case No. 3), Dominguez
(Case No. 4), Celi (Case No. 5), Boswell (Case No. 6), and Demciuc (Case No. 7)
Matters. On October 11, 1999, one group of plaintiffs appealed to the California
Supreme Court, which has accepted the case. A hearing date before the California
Supreme Court on the Hartwell cases is scheduled on November 7, 2001 in
Sacramento. Management is unable to predict the
36
outcome of this proceeding but, in any event, does not anticipate a decision
prior to the fourth quarter of 2001.
On December 3, 1998, SCW was named as a defendant in a complaint in
multiple counts, styled Abarca, et al. v. City of Pomona, et al. (Case No. 8),
filed in Los Angeles Superior Court which seeks recovery for negligence,
wrongful death, strict liability, permanent trespass, continuing trespass,
continuing nuisance, permanent nuisance, negligence per se, absolute liability
for ultrahazardous activity, fraudulent concealment, conspiracy/fraudulent
concealment, battery and unfair business practices on behalf of 383 plaintiffs
(the Abarca Matter). Plaintiffs seek damages, including general and special
damages according to proof, punitive and exemplary damages, as well as
attorney's fees, costs of suit and other unspecified relief.
SCW was named as a defendant, along with the City of Pomona, California
and Xerox Corporation in the matter styled Adejare, et al. v. Southern
California Water Company, et al. (Case No. 9), filed on July 22, 1999 in Los
Angeles Superior Court which seeks recovery for wrongful death, battery and
fraudulent concealment (the Adejare Matter). Plaintiffs seek damages, including
general and special damages according to proof, punitive and exemplary damages,
as well as attorney's fees, costs of suit and other unspecified relief.
In December 1997 SCW was named a defendant in the matter of Nathaniel
Allen, Jr., et al. v. Aerojet-General Corporation, et al. (Case No. 10), which
was filed in Sacramento Superior Court. The complaint makes claims based on
wrongful death, personal injury, property damage as a result of nuisance and
trespass, medical monitoring, and diminution of property values (the Allen
Matter). Plaintiffs allege that SCW and other defendants have delivered water to
plaintiffs which allegedly is, or has been in the past, contaminated with a
number of chemicals, including TCE, PCE, carbon tetrachloride, perchlorate,
Freon-113, hexavalent chromium and other, unnamed, chemicals. SCW filed
Demurrers and Motion to Strike in this matter on June 5, 1998. A stay of all
proceeding in the Allen matter is in effect pending the outcome of the
California Supreme Court's proceeding in the Hartwell case.
In March 1998, SCW was named a defendant in the matter of Daphne Adams, et
al. v. Aerojet General, et al. (Case No. 11) that was filed in Sacramento
Superior Court (the Adams Matter). The complaint makes claims based on
negligence, strict liability, trespass, public nuisance, private nuisance,
negligence per se, absolute liability for ultrahazardous activity, fraudulent
concealment, violation of California Business and Professions Code section 17200
et seq., intentional infliction of emotional distress, intentional spoilage of
evidence, negligent destruction of evidence needed for prospective civil
litigation, wrongful death and medical monitoring. Plaintiffs seek damages,
including general, punitive and exemplary damages, as well as attorney's fees,
costs of suit, injunctive and restitutionary relief, disgorged profits and civil
penalties, medical monitoring according to proof and other unspecified relief.
SCW filed its Demurrers and Motion to Strike in this matter on June 5, 1998. A
stay of all proceedings in the Adams Matter is in effect pending the outcome of
the California Supreme Court's proceeding in the Hartwell case.
In May 2000, SCW was named a defendant in the matter of Wallace Andrew
Pennington, et al. v. Aerojet General, et al. (Case No. 12) that was filed in
Sacramento Superior Court (the Pennington Matter). The complaint makes claims
based on negligence, intentional infliction of emotional distress, strict
liability, public liability for ultra hazardous activity and fraudulent
concealment. Plaintiffs allege that SCW and other defendants knowingly operated
and maintained wells, which provided contaminated drinking water to the
surrounding communities. Plaintiffs seek damages, including general, punitive
and exemplary damages, as well as attorney's fees, costs of suit, special
damages, according to proof of medical bills and lost wages and lost income as
occasioned by personal injury and plaintiff's inability to pursue employment,
and other unspecified relief. All counsels in the Pennington matter have agreed
to a stay in this matter, pending the outcome of the Hartwell case.
37
In April 2000, SCW was named a defendant in the matter of Almelia Brooks,
et al. v. Suburban Water Sys., et al. (Case No. 13) that was filed in Los
Angeles Superior Court which seeks recovery for negligence, wrongful death,
strict liability, permanent trespass, continuing trespass, continuing nuisance,
permanent nuisance, negligence per se, absolute liability for ultrahazardous
activity, fraudulent concealment, conspiracy/fraudulent concealment, battery and
unfair business practices on behalf of plaintiffs (the Brooks Matter).
Plaintiffs seek damages, including general and special damages according to
proof, punitive and exemplary damages, as well as attorney's fees, costs of suit
and other unspecified relief. SCW was served in October 2000. Management is
unable to predict the outcome of this proceeding.
In August 1999, SCW was named a defendant in the matter of Lori Alexander,
et al. v. Suburban Water Sys., et al. (Case No. 14) that was filed in Los
Angeles Superior Court which seeks recovery for negligence, wrongful death,
strict liability, permanent trespass, continuing trespass, continuing nuisance,
permanent nuisance, negligence per se, absolute liability for ultrahazardous
activity, fraudulent concealment, conspiracy/fraudulent concealment, battery and
unfair business practices on behalf of plaintiffs (the L. Alexander Matter).
Plaintiffs seek damages, including general and special damages according to
proof, punitive and exemplary damages, as well as attorney's fees, costs of suit
and other unspecified relief. SCW was served in October 2000. Management is
unable to predict the outcome of this proceeding.
In December 2000, SCW was named a defendant in the matter of David Arnold,
et al. v. City of Pomona, et al. (Case No. 15) that was filed in Los Angeles
Superior Court which seeks recovery for negligence, wrongful death, strict
products liability, continuing trespass, permanent trespass, continuing
nuisance, permanent nuisance, negligence per se, absolute liability for
ultrahazardous activity, fraudulent concealment, conspiracy/fraudulent
concealment, battery and unfair business practices on behalf of plaintiffs (the
Arnold Matter). Plaintiffs seek damages, including general and special damages
according to proof, punitive and exemplary damages, as well as attorney's fees,
costs of suit and other unspecified relief. SCW was served in May 2001.
Management is unable to predict the outcome of this proceeding.
In December 2000, SCW was named a defendant in the matter of Gilda
Ambrose-Dubre, et al. v. City of Pomona, et al. (Case No. 16) that was filed in
Los Angeles Superior Court which seeks recovery for negligence, strict products
liability, continuing trespass, permanent trespass, continuing nuisance,
permanent nuisance, negligence per se, absolute liability for ultrahazardous
activity, fraudulent concealment, civil conspiracy/fraudulent concealment,
battery and unfair business practices on behalf of plaintiffs (the Ambrose-Dubre
Matter). Plaintiffs seek damages, including general and special damages
according to proof, punitive and exemplary damages, as well as attorney's fees,
costs of suit and other unspecified relief. SCW was served in May 2001.
Management is unable to predict the outcome of this proceeding.
In January 2001, SCW was named a defendant in the matter of Melissa
Garrity Alvarado, et al. v. Suburban Water Systems, et al. (Case No. 17) that
was filed in Los Angeles Superior Court which seeks recovery for negligence,
survival of personal injuries, wrongful death, strict liability, negligence per
se, absolute liability for ultrahazardous activity, fraudulent concealment,
conspiracy/fraudulent concealment, battery and unfair business practices on
behalf of plaintiffs (the Alvarado Matter). Plaintiffs seek damages, including
general and special damages according to proof, punitive and exemplary damages,
as well as attorney's fees, costs of suit and other unspecified relief. SCW was
served in May 2001. Management is unable to predict the outcome of this
proceeding.
In March 2001, SCW was named a defendant in the matter of Charles
Alexander, et al. v. City of Pomona, et al. (Case No. 18) that was filed in Los
Angeles Superior Court which seeks recovery for negligence, wrongful death,
strict products liability, continuing trespass, permanent trespass, continuing
nuisance, permanent nuisance, negligence per se, absolute liability for
ultrahazardous activity, fraudulent concealment, civil conspiracy/fraudulent
concealment, battery and unfair business practices on behalf of plaintiffs (the
C. Alexander Matter). Plaintiffs seek damages, including general and special
damages
38
according to proof, punitive and exemplary damages, as well as attorney's fees,
costs of suit and other unspecified relief. SCW was served in May 2001.
Management is unable to predict the outcome of this proceeding.
In May 2001, SCW was named a defendant in the matter of Jennifer V.
Williams and Lee Wright, et al. v. City of Pomona, et al. (Case No. 19) that was
filed in Los Angeles Superior Court which seeks recovery for negligence, strict
products liability, continuing trespass, permanent trespass, continuing
nuisance, permanent nuisance, negligence per se, absolute liability for
ultrahazardous activity, fraudulent concealment, civil conspiracy/fraudulent
concealment, battery and unfair business practices on behalf of plaintiffs (the
J. Williams Matter). Plaintiffs seek damages, including general and special
damages according to proof, punitive and exemplary damages, as well as
attorney's fees, costs of suit and other unspecified relief. Management is
unable to predict the outcome of this proceeding.
In light of the breadth of plaintiffs' claims in these matters, the lack
of factual information regarding plaintiffs' claims and injuries, if any, and
the fact that no discovery has yet been completed, SCW is unable at this time to
determine what, if any, potential liability it may have with respect to these
claims. Registrant believes there are no merits to these claims and intends to
vigorously defend against them.
SCW is subject to self-insured retention provisions in its applicable
insurance policies and has either expensed the self-insured amounts or has
reserved against payment of these amounts as appropriate. SCW's various
insurance carriers have, to date, provided reimbursement for costs incurred for
defense against these lawsuits.
ORDER INSTITUTING INVESTIGATION (OII)
In March 1998, the CPUC issued an OII to regulated water utilities in the
state of California, including SCW. The purpose of the OII was to determine
whether existing standards and policies regarding drinking water quality
adequately protect the public health and whether those standards and policies
were being uniformly complied with by those water utilities. On November 2,
2000, a final decision from the CPUC concluded that the Commission has the
jurisdiction to regulate the service of water utilities with respect to the
health and safety of that service; that DOHS requirements governing drinking
water quality adequately protect the public health and safety; and that
regulated water utilities, including SCW, have satisfactorily complied with past
and present drinking water quality requirements.
The CPUC had previously authorized establishment of memorandum accounts to
capture expenses related to OII. Under the memorandum account procedure, SCW may
recover litigation costs from ratepayers to the extent authorized by the CPUC.
The CPUC has not yet authorized SCW recover any of its litigation costs. As of
September 30, 2001, SCW had incurred a net of $888,700 in this memorandum
account. Management believes that these expenses will be fully recovered but is
unable to predict when, or if, the CPUC will authorize recovery of all or any of
the costs.
OTHER LITIGATION
On October 25, 1999, SCW filed a lawsuit against the California Central
Valley Regional Water Quality Control Board (CRWQCB) alleging that the CRWQCB
has willfully allowed portions of the Sacramento County Groundwater Basin to be
injected with chemical pollution that is destroying the underground water supply
in SCW's Rancho Cordova customer service area. Management cannot predict the
likely outcome of this proceeding.
In a separate case, also filed on October 25, 1999, SCW sued Aerojet
General Corp. for causing the contamination of the Sacramento County Groundwater
Basin. On March 22, 2000 Aerojet General Corp. filed a cross complaint against
SCW for negligence and constituting a public nuisance. Registrant
39
is unable to determine at this time what, if any, potential liability it may
have with respect to the cross complaint, but intends to vigorously defend
itself against these allegations. Management cannot predict the likely outcome
of this proceeding.
The CPUC has authorized memorandum accounts to allow for recovery of costs
incurred by SCW in prosecuting these cases from customers, less any recovery
from the defendants or others. As of September 30, 2001, approximately
$5,313,500 has been recorded in the memorandum accounts. The CPUC has authorized
SCW to increase rates, effective April 28, 2001, for recovery over a six-year
period of approximately $1,800,000, in expenses that were incurred on or before
August 31, 2000. SCW will continue to file additional Advice Letters to recover
the remaining costs. Management believes these costs are recoverable but cannot
give assurance that the CPUC will ultimately allow recovery of all or any of the
remaining costs through rates.
On April 25, 2001, Registrant filed a lawsuit against all the potentially
responsible parties, who stored, transported and dispensed gasoline containing
methyl tertiary butyl ether (MTBE) in underground storage tanks, pipelines or
other related infrastructure. Said MTBE polluted and contaminated water existed
in areas of the Sub-Basin from which SCW has pumped water through its Charnock
Wall Field. As a result thereof, SCW ceased operation of its Charnock Well Field
in October 1996. Management cannot predict the likely outcome of this
proceeding.
SCW has been, in conjunction with the Southern California Edison (Edison)
unit of Edison International, planning to upgrade transmission facilities to
115kv (the 115kv Project) in order to meet increased energy and demand
requirements for SCW's Bear Valley Electric Service area. On December 27, 2000,
SCW filed a lawsuit against Edison for declaratory relief and seeking damages
for breach of contract as a result of delays in the 115kv Project. Subsequently
Edison filed a cross-complaint against SCW for breach of contract, anticipatory
breach, quantum meruit and common counts. Registrant has discussed various
settlement options with Edison regarding this matter. However, management cannot
predict the likely outcome of either the negotiations or the lawsuits.
Registrant is also subject to ordinary routine litigation incidental to
its business. Other than as disclosed above, no legal proceedings are pending,
except such incidental litigation, to which Registrant is a party or of which
any of its properties is the subject, which are believed to be material.
ITEM 2. CHANGES IN SECURITIES
As of September 30, 2001, earned surplus amounted to $75,027,000. As of
September 30, 2001, there were no retained earnings restricted, under any of
SCW's debt instruments, as to the payment of cash dividends on Common Shares.
Delays in obtaining approval of the CPUC for recovery of energy costs in rates
or disallowance of the recovery of such costs could affect SCW's ability to pay
dividends to AWR. AWR's ability to pay dividends on its Common Shares is
dependent upon the payment of dividends from SCW. CCWC is subject to contractual
restrictions on its ability to pay dividends.
There are 493,039 and 63,411 Common Shares authorized but un-issued under
the DRP and the 401(k) Plan, respectively, at September 30, 2001. Shares
reserved for the 401(k) Plan are in relation to company matching contributions
and for investment purposes by participants.
There are 250,000 Common Shares reserved for issuance under Registrant's
2000 Stock Incentive Plan. Under the Plan, stock options representing a total of
91,647 Common Shares upon exercise were granted to certain eligible employees on
May 1, 2000 and January 2, 2001.
40
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted during the second quarter of the fiscal year
covered by this report to a vote of security holders through the solicitation of
proxies or otherwise.
ITEM 5. OTHER INFORMATION
On October 30, 2001, the Board of Directors of Registrant declared a
regular quarterly dividend of $0.325 per common share. The dividend will be paid
December 1, 2001 to shareholders of record as of the close of business on
November 6, 2001. In other actions, the Board of Directors declared regular
quarterly dividends of $0.25 per share, $0.265625 per share and $0.3125 per
share on its 4%, 4-1/4% and 5% Cumulative Preferred Shares, respectively.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
There are no Exhibits during the period covered by the report.
Registrant filed a Form 8-K with the Securities and Exchange Commission on
May 25, 2001, disclosing the CPUC order to increase rates at the Bear Valley
Electric customer service area to recover $2.4 million in deferred electric
power costs over a five-year period. Included as an exhibit to the form 8-K was
the press release issued by Registrant on May 25, 2001 for the announcement.
Registrant filed another Form 8-K with the Securities and Exchange
Commission on August 24, 2001, which disclosed that the CPUC authorized an
increase in rates at the Bear Valley Electric customer service area to recover
$8.7 million in deferred electric power costs over a five-year period. Included
as an exhibit to the form 8-K was the press release issued by Registrant on
August 23, 2001 for the announcement.
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer and chief financial officer.
AMERICAN STATES WATER COMPANY
and its subsidiary
SOUTHERN CALIFORNIA WATER COMPANY
By: /s/ McClellan Harris III
------------------------------------
McClellan Harris III
Vice President-Finance,
Chief Financial Officer,
Treasurer and Secretary
By: /s/ Linda J. Matlick
------------------------------------
Linda J. Matlick
Controller
Southern California Water Company
Dated: November 5, 2001
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