1
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 MARCH 31, 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 May 11, 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 May 11, 2001, all of the 110 outstanding Common Shares of Southern
California Water Company are owned by American States Water Company.
2
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
March 31, 2001 and December 31, 2000 2 - 3
Consolidated Statements of Income of American States Water Company
for the Three Months Ended March 31, 2001 and March 31, 2000 4
Consolidated Statements of Income of American States Water Company
for the Twelve Months Ended March 31, 2001 and March 31, 2000 5
Consolidated Statements of Cash Flow of American States Water Company
for The Three Months Ended March 31, 2001 and March 31, 2000 6
Consolidated Balance Sheets of Southern California Water Company as of
March 31, 2001 and December 31, 2000 7 - 8
Consolidated Statements of Income of Southern California Water Company for
the Three Months Ended March 31, 2001 and March 31, 2000 9
Consolidated Statements of Income of Southern California Water Company for
the Twelve Months Ended March 31, 2001 and March 31, 2000 10
Consolidated Statements of Cash Flow of Southern California Water
Company for the Three Months Ended March 31, 2001 and March 31, 2000 11
Notes to Financial Statements 12 - 14
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operation 15 - 34
Item 3: Quantitative and Qualitative Disclosures About Market Risks 34
PART II OTHER INFORMATION
Item 1: Legal Proceedings 34 - 37
Item 2: Changes in Securities 38
Item 3: Defaults Upon Senior Securities 38
Item 4: Submission of Matters to a Vote of Security Holders 38
Item 5: Other Information 38
Item 6: Exhibits and Reports on Form 8-K 39
i
3
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
4
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(Unaudited)
(in thousands)
UTILITY PLANT, at cost
Water ........................................................ $ 611,991 $ 608,032
Electric ..................................................... 37,632 37,630
--------- ---------
649,623 645,662
Less - Accumulated depreciation .............................. (177,951) (173,367)
--------- ---------
471,672 472,295
Construction work in progress ................................ 44,258 36,801
--------- ---------
515,930 509,096
--------- ---------
OTHER PROPERTY AND INVESTMENTS ................................. 24,894 25,222
--------- ---------
CURRENT ASSETS
Cash and cash equivalents .................................... 7,673 5,808
Accounts receivable -
Customers, less reserves of $542 in 2001 and $510 in 2000 .. 8,041 10,481
Other ...................................................... 5,040 5,233
Unbilled revenue ............................................. 9,986 11,363
Materials and supplies, at average cost ...................... 1,157 1,116
Supply cost balancing accounts ............................... 17,412 11,145
Prepayments and other ........................................ 3,736 4,085
Accumulated deferred income taxes - net ...................... 338 3,249
--------- ---------
53,383 52,480
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets ................................ 17,186 17,705
Other deferred charges ....................................... 12,979 12,143
--------- ---------
30,165 29,848
--------- ---------
TOTAL ASSETS $ 624,372 $ 616,646
========= =========
The accompanying notes are an integral part of these financial statements.
2
5
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(Unaudited)
(in thousands)
CAPITALIZATION
Common shareholders' equity ......................... $192,543 $192,723
Preferred shares .................................... 1,600 1,600
Preferred shares subject to mandatory
redemption requirements ........................... 320 320
Long-term debt ...................................... 196,294 176,452
-------- --------
390,757 371,095
-------- --------
CURRENT LIABILITIES
Notes payable to banks .............................. 35,000 45,000
Long-term debt and preferred shares
due within one year ............................... 735 735
Accounts payable .................................... 10,688 11,857
Taxes payable ....................................... 3,211 5,585
Accrued interest .................................... 3,842 1,783
Other accrued liabilities ........................... 13,021 15,257
-------- --------
66,497 80,217
-------- --------
OTHER CREDITS
Advances for construction ........................... 69,085 69,230
Contributions in aid of construction ................ 39,802 39,670
Accumulated deferred income taxes - net ............. 51,468 51,131
Unamortized investment tax credits .................. 3,130 3,156
Regulatory tax-related liability .................... 1,806 1,817
Other ............................................... 1,827 330
-------- --------
167,118 165,334
-------- --------
TOTAL CAPITALIZATION AND LIABILITIES $624,372 $616,646
======== ========
The accompanying notes are an integral part of these financial statements.
3
6
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2001 2000
-------- --------
(in thousands, except
per share amounts)
OPERATING REVENUES
Water ........................................... $ 36,145 $ 34,587
Electric ........................................ 3,957 4,011
Other ........................................... 189 151
-------- --------
40,291 38,749
-------- --------
OPERATING EXPENSES
Water purchased ................................. 6,492 7,555
Power purchased for pumping ..................... 1,530 1,461
Power purchased for resale ...................... 8,733 1,975
Groundwater production assessment ............... 1,473 2,253
Supply cost balancing accounts .................. (7,267) (1,067)
Other operating expenses ........................ 4,128 3,887
Administrative and general expenses ............. 6,580 5,913
Depreciation .................................... 4,484 3,802
Maintenance ..................................... 2,213 2,557
Taxes on income ................................. 2,713 2,412
Other taxes ..................................... 1,989 1,799
-------- --------
33,068 32,547
-------- --------
Operating income ................................ 7,223 6,202
OTHER INCOME/(LOSS) ................................. (186) 13
-------- --------
Income before interest charges .................. 7,037 6,215
INTEREST CHARGES .................................... 3,920 3,320
-------- --------
NET INCOME .......................................... 3,117 2,895
DIVIDENDS ON PREFERRED SHARES ....................... (21) (22)
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS .......... $ 3,096 $ 2,873
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ....... 10,080 8,958
Basic Earnings Per Common Share ..................... $ 0.31 $ 0.32
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES ........... 10,171 N/A
Fully Diluted Earnings Per Share .................... $ 0.30 N/A
Dividends Declared Per Common Share ................. $ 0.325 $ 0.32
The accompanying notes are an integral part of these financial statements.
4
7
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
TWELVE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
--------- ---------
(in thousands, except
per share amounts)
OPERATING REVENUES
Water ......................................... $ 170,353 $ 162,068
Electric ...................................... 14,312 13,475
Other ......................................... 837 495
--------- ---------
185,502 176,038
--------- ---------
OPERATING EXPENSES
Water purchased ............................... 40,529 36,751
Power purchased for pumping ................... 7,579 7,413
Power purchased for resale .................... 17,422 7,903
Groundwater production assessment ............. 6,710 7,713
Supply cost balancing accounts ................ (12,572) (1,065)
Other operating expenses ...................... 16,986 15,942
Administrative and general expenses ........... 26,805 28,128
Depreciation .................................. 16,021 13,942
Maintenance ................................... 9,937 10,218
Taxes on income ............................... 15,428 13,490
Other taxes ................................... 7,330 6,741
--------- ---------
152,175 147,176
--------- ---------
Operating income .............................. 33,327 28,862
OTHER INCOME/(LOSS) ............................... (298) 446
--------- ---------
Income before interest charges ................ 33,029 29,308
INTEREST CHARGES .................................. 14,721 13,288
--------- ---------
NET INCOME ........................................ 18,308 16,020
DIVIDENDS ON PREFERRED SHARES ..................... (85) (87)
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ........ $ 18,223 $ 15,933
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ..... 9,658 8,958
Basic Earnings Per Common Share ................... $ 1.89 $ 1.78
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES ......... 9,700 N/A
Fully Diluted Earnings Per Share .................. $ 1.88 N/A
Dividends Declared Per Common Share ............... $ 1.290 $ 1.280
The accompanying notes are an integral part of these financial statements.
5
8
AMERICAN STATES WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- -------
(in thousands)
CASH FLOWS FROM -
Operating Activities:
Net income ......................................... $ 3,117 $ 2,895
Adjustments for non-cash items:
Depreciation and amortization ..................... 4,484 3,948
Deferred income taxes and investment tax credits .. 3,730 127
Other - net ....................................... (776) (2,744)
Changes in assets and liabilities:
Accounts receivable ............................... 2,440 3,468
Prepayments ....................................... 349 280
Supply cost balancing accounts .................... (6,267) (1,067)
Accounts payable .................................. (1,169) (4,183)
Taxes payable ..................................... (2,374) 2,179
Unbilled revenue .................................. 1,565 1,232
Other ............................................. 1,530 (274)
-------- -------
Net Cash Provided ............................... 6,629 5,861
-------- -------
Investing Activities:
Construction expenditures ............................ (11,236) (9,850)
-------- -------
Net Cash Used .................................. (11,236) (9,850)
-------- -------
Financing Activities:
Issuance of securities .............................. 20,000 --
Receipt of advances and contributions ............... 368 3,173
Repayments of long-term debt, net of
redemption of preferred shares .................... (158) (32)
Refunds on advances for construction ............... (442) (459)
Changes in notes payable to banks ................... (10,000) 4,000
Common and preferred dividends paid ................. (3,296) (2,888)
-------- -------
Net Cash Provided .............................. 6,472 3,794
-------- -------
Net Increase (Decrease) in Cash and Cash Equivalents .. 1,865 (195)
Cash and Cash Equivalents, Beginning of period ........ 5,808 2,189
-------- -------
Cash and Cash Equivalents, End of period .............. $ 7,673 $ 1,994
======== =======
The accompanying notes are an integral part of these financial statements.
6
9
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(Unaudited)
(in thousands)
UTILITY PLANT, at cost
Water ......................................................... $ 574,794 $ 570,836
Electric ...................................................... 37,632 37,630
--------- ---------
612,426 608,466
Less - Accumulated depreciation ............................... (169,355) (165,002)
--------- ---------
443,071 443,464
Construction work in progress ................................. 43,931 36,605
--------- ---------
487,002 480,069
--------- ---------
OTHER PROPERTY AND INVESTMENTS .................................. 9,645 9,711
--------- ---------
CURRENT ASSETS
Cash and cash equivalents ..................................... 2,982 1,545
Accounts receivable -
Customers, less reserves of $530 in 2001, and $498 in 2000 .. 7,557 10,071
Other ....................................................... 4,966 5,097
Intercompany receivable ....................................... -- 376
Unbilled revenue .............................................. 9,799 11,363
Materials and supplies, at average cost ....................... 1,080 1,039
Supply cost balancing accounts ................................ 17,412 11,145
Prepayments and other ......................................... 3,456 3,756
Accumulated deferred income taxes - net ....................... 348 3,256
--------- ---------
47,600 47,648
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets ................................. 17,186 17,705
Other deferred charges ........................................ 12,209 11,396
--------- ---------
29,395 29,101
--------- ---------
TOTAL ASSETS $ 573,642 $ 566,529
========= =========
The accompanying notes are an integral part of these financial statements.
7
10
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(Unaudited)
(in thousands)
CAPITALIZATION
Common shareholders' equity .............................. $189,436 $164,808
Long-term debt ........................................... 187,027 167,062
-------- --------
376,463 331,870
-------- --------
CURRENT LIABILITIES
Notes payable to banks ................................... 14,000 45,000
Long-term debt and preferred shares due within one year .. 275 275
Accounts payable ......................................... 10,398 11,203
Intercompany payable ..................................... 7 4,746
Taxes payable ............................................ 3,249 5,675
Accrued interest ......................................... 3,680 1,722
Other accrued liabilities ................................ 12,821 13,512
-------- --------
44,430 82,133
-------- --------
OTHER CREDITS
Advances for construction ................................ 57,889 58,195
Contributions in aid of construction ..................... 39,773 39,642
Accumulated deferred income taxes - net .................. 49,920 49,569
Unamortized investment tax credits ....................... 2,951 2,973
Regulatory tax-related liability ......................... 1,806 1,817
Other .................................................... 410 330
-------- --------
152,749 152,526
-------- --------
TOTAL CAPITALIZATION AND LIABILITIES $573,642 $566,529
======== ========
The accompanying notes are an integral part of these financial statements.
8
11
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2001 2000
-------- --------
($ in thousands, except
per share amounts)
OPERATING REVENUES
Water ........................................... $ 34,805 $ 34,587
Electric ........................................ 3,957 4,011
-------- --------
38,762 38,598
-------- --------
OPERATING EXPENSES
Water purchased ................................. 6,348 7,555
Power purchased for pumping ..................... 1,473 1,461
Power purchased for resale ...................... 8,733 1,975
Groundwater production assessment ............... 1,473 2,253
Supply cost balancing accounts .................. (7,267) (1,067)
Other operating expenses ........................ 3,898 3,830
Administrative and general expenses ............. 6,314 5,781
Depreciation .................................... 4,173 3,802
Maintenance ..................................... 2,147 2,553
Taxes on income ................................. 2,592 2,430
Other taxes ..................................... 1,897 1,798
-------- --------
31,781 32,371
-------- --------
Operating income ................................ 6,981 6,227
OTHER INCOME/(LOSS) ................................. (209) 13
-------- --------
Income before interest charges .................. 6,772 6,240
INTEREST CHARGES .................................... 3,844 3,320
-------- --------
NET INCOME .......................................... 2,928 2,920
DIVIDENDS ON PREFERRED SHARES ....................... -- --
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS .......... $ 2,928 $ 2,920
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ....... 100 100
Basic Earnings Per Common Share ..................... $ 29,280 $ 29,200
Dividends Declared Per Common Share ................. $ 33,000 $ 32,000
The accompanying notes are an integral part of these financial statements.
9
12
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
TWELVE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
--------- ---------
($ in thousands, except
per share amounts)
OPERATING REVENUES
Water ......................................... $ 167,747 $ 162,068
Electric ...................................... 14,312 13,475
--------- ---------
182,059 175,543
--------- ---------
OPERATING EXPENSES
Water purchased ............................... 40,242 36,751
Power purchased for pumping ................... 7,454 7,413
Power purchased for resale .................... 17,422 7,903
Groundwater production assessment ............. 6,710 7,713
Supply cost balancing accounts ................ (12,572) (1,065)
Other operating expenses ...................... 16,372 15,777
Administrative and general expenses ........... 26,081 27,536
Depreciation .................................. 15,457 13,942
Maintenance ................................... 9,785 10,210
Taxes on income ............................... 15,043 13,588
Other taxes ................................... 7,137 6,737
--------- ---------
149,131 146,505
--------- ---------
Operating income .............................. 32,928 29,038
OTHER INCOME ...................................... (362) 423
--------- ---------
Income before interest charges ................ 32,566 29,461
INTEREST CHARGES .................................. 14,874 13,290
--------- ---------
NET INCOME ........................................ 17,692 16,171
DIVIDENDS ON PREFERRED SHARES ..................... -- --
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ........ $ 17,692 $ 16,171
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ..... 100 100
Basic Earnings Per Common Share ................... $ 176,920 $ 161,710
Dividends Declared Per Common Share ............... $ 130,000 $ 121,500
The accompanying notes are an integral part of these financial statements.
10
13
SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- -------
(in thousands)
CASH FLOWS FROM -
Operating Activities:
Net income ........................................ $ 2,928 $ 2,920
Adjustments for non-cash items:
Depreciation and amortization ..................... 4,173 3,948
Deferred income taxes an investment tax credits ... 3,745 106
Other - net ....................................... (768) (1,574)
Changes in assets and liabilities:
Accounts receivable ............................... 2,514 2,996
Prepayments ....................................... 300 280
Supply cost balancing accounts .................... (6,267) (1,067)
Accounts payable .................................. (4,739) (3,982)
Intercompany Payable .............................. (805) (39)
Taxes payable ..................................... (2,426) 2,198
Unbilled revenue .................................. 1,564 1,232
Other ............................................. 1,733 (1,070)
-------- -------
Net Cash Provided ............................... 1,952 5,948
-------- -------
Investing Activities:
Construction expenditures ............................ (11,106) (9,850)
-------- -------
Net Cash Used .................................. (11,106) (9,850)
-------- -------
Financing Activities:
Issuance of securities .............................. 45,000 --
Receipt of advances and contributions ............... 368 3,173
Repayments of long-term debt, net of
redemption of preferred shares .................... (35) (18)
Refunds on advances for construction ............... (442) (459)
Changes in notes payable to banks ................... (31,000) 4,000
Common and preferred dividends paid ................. (3,300) (3,200)
-------- -------
Net Cash Provided (Used) ....................... 10,591 3,496
-------- -------
Net Increase (Decrease) in Cash and Cash Equivalents .. 1,437 (406)
Cash and Cash Equivalents, Beginning of period ........ 1,545 2,020
-------- -------
Cash and Cash Equivalents, End of period .............. $ 2,982 $ 1,614
======== =======
The accompanying notes are an integral part of these financial statements.
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14
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). AWR has no material assets
other than the common stock of Southern California Water Company (SCW). 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 additional 45,657 common shares on January 2, 2001. A fully
diluted earnings per share is shown as a result.
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, and,
failing that, sale of its 500 acre-foot entitlement in SWP. SCW believes
that its full investment and on-going costs associated with its
ownership will be fully recovered. See the section entitled "Rates and
Regulation" for more information.
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. See the section entitled "Rates and Regulation" for more
information.
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. Recovery or refund of such
over/under collections are recorded in income when received from
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
12
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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 March 31, 2001, SCW had
an aggregate under-collection of $17.4 million in its water and electric
balancing accounts. Of this total amount, approximately $15.1 million is
related to purchased power costs at SCW's Bear Valley Electric customer
service area. This is a result of the differences between wholesale
purchased power costs, which have averaged approximately $0.28 per
kilowatt-hour during the last few months, and the $0.024 per
kilowatt-hour currently authorized in rates for collection of purchased
power costs from customers. In May 2000, SCW filed an Advice Letter with
the CPUC for recovery of approximately $2.4 million in under-collected
power costs over a five-year period. A draft resolution was issued in
April 2001 by the CPUC recommending an overall rate increase of 12.5% to
recover the under-collection of $2.4 million, with a condition of
conducting a subsequent audit on the electric balancing account. A final
order is expected in the second quarter of 2001. 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. The CPUC has yet to act
on this application. Registrant believes that the recovery of these
amounts is probable but is unable to predict when, or if, the CPUC will
authorize recovery of all or any of these expenses. 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. SCW has received approval from the
CPUC to increase rates to its water customers to recover costs
associated with increased costs for pumping. See the sections entitled
"Liquidity and Capital Resources", "Electric Energy Situation in
California" and "Regulatory Matters" for more information. CCWC, subject
to regulation by the Arizona Corporation Commission (ACC), does not
maintain balancing accounts and increases in costs are 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 March 31, 2001, Registrant has
$13,122,000 in goodwill included in Other Property and Investments. The
amount represents the difference between the purchased 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.
7. 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 March 31, 2001
- ---------------------------------------------------------------------------------------
SCW
-------------------- CCWC Non- Consolidated
Water Electric Water Regulated AWR
-----------------------------------------------------
Operating revenues $ 34,805 $ 3,957 $ 1,340 $189 $ 40,291
Operating income before income
taxes 8,306 1,267 318 45 9,936
Identifiable assets 460,321 26,681 28,928 -- 515,930
Depreciation expense 3,812 361 311 -- 4,484
Capital additions $ 11,032 $ 565 $ 130 -- $ 11,727
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(dollars in thousands) For The Three Months Ended March 31, 2000
- ---------------------------------------------------------------------------------------
SCW
-------------------- CCWC Non- Consolidated
Water Electric Water Regulated AWR
-----------------------------------------------------
Operating revenues $ 34,587 $ 4,011 N.A. $ 151 $ 38,749
Operating income before income
taxes 7,240 1,417 N.A. (43) 8,614
Identifiable assets 429,740 25,903 N.A. -- 455,643
Depreciation expense 3,452 350 N.A. -- 3,802
Capital additions $ 9,890 $ 577 N.A. -- $ 10,467
(dollars in thousands) For The Twelve Months Ended March 31, 2001
- ---------------------------------------------------------------------------------------
SCW
-------------------- CCWC Non- Consolidated
Water Electric Water Regulated AWR
-----------------------------------------------------
Operating revenues $167,747 $14,312 $2,606 $ 837 $185,502
Operating income before income
taxes 43,600 4,371 615 169 48,755
Identifiable assets 460,321 26,681 28,928 -- 515,930
Depreciation expense 14,048 1,409 564 -- 16,021
Capital additions $ 44,625 $ 2,291 $ 327 -- $ 47,243
(dollars in thousands) For The Twelve Months Ended March 31, 2000
- ---------------------------------------------------------------------------------------
SCW
-------------------- CCWC Non- Consolidated
Water Electric Water Regulated AWR
-----------------------------------------------------
Operating revenues $162,068 $13,475 N.A. $ 495 $176,038
Operating income before income
taxes 39,022 3,604 N.A. (274) 42,352
Identifiable assets 429,740 25,903 N.A. -- 455,643
Depreciation expense 12,586 1,356 N.A. -- 13,942
Capital additions $ 48,078 $ 2,278 N.A. -- $ 50,356
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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;
and legislative, regulatory and other circumstances affecting anticipated
revenues and costs.
GENERAL
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 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. All electric energy sold by SCW to
customers in its Bear Valley Electric CSA was purchased under an energy
brokerage contract with Sempra Energy Corporation from March 26, 1996 to May 1,
1999, then with Illinova Energy Partners (Illinova) from May 1, 1999 to April
30, 2000, and with Dynegy Energy Services (Dynegy) since May 1, 2000 as a result
of the merger of Dynegy and Illinova. In response to the rising electricity
costs, SCW entered into a five-year, block forward purchase contract with Mirant
Americas Energy Marketing, LP for 15 megawatts (MW's) of electric energy at a
price of $95 per MW from April 1, 2001 to December 31, 2006. See the section
entitled "Electric Energy Situation in California" for more information.
SCW served 245,412 water customers and 21,515 electric customers at
March 31, 2001, or a total of 266,927 customers, compared with 265,397 total
customers at March 31, 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 93.6% and
90.1% of total water revenues for the three and twelve months ended March 31,
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2001, respectively, as compared to 96.3% and 90.9% for the three and twelve
months ended March 31, 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 11,208 customers as of March
31, 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 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. The transaction, if approved
by the CPUC, is not anticipated to close before the end of the third quarter of
2001.
RESULTS OF OPERATION
Basic earnings per common share for the three months ended March 31,
2001 decreased by 3.1% to $0.31 per share as compared to $0.32 per share for the
comparable period last year. The decrease in the recorded results primarily
reflects the impact of reduced water sales at SCW as well as the dilutive
effects from additional common shares issued in August 2000. Basic earnings for
the twelve months ended March 31, 2001 increased by 6.2% to $1.89 per share as
compared to $1.78 per share for the twelve months ended March 31, 2000
reflecting various reasons as discussed below. Fully diluted earnings per share
for the three and twelve months ended March 31, 2001 are $0.31 and $1.88 per
share, respectively. Registrant had no dilutive securities outstanding in the
same periods of 2000 and, accordingly, diluted earnings per share are not
applicable for those periods.
As compared to the same periods ended March 31, 2000, water operating
revenues increased by 4.5% and 5.1% for the three and twelve months ended March
31, 2001, respectively, due to (i) the increases in rates authorized by the
CPUC, (ii) a decrease of 5.2% in water sales for the three months ended March
31, 2001 and an increase of 1.2% in water sales for the twelve months ended
March 31, 2001 to customers of SCW, and (iii) 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. See the section entitled "Regulatory Matters" for more
information.
Kilowatt-hour sales of electricity decreased by 1.1% for the three
months ended March 31, 2001 as compared to the same periods ended March 31, 2000
resulting in a 1.3% decrease in electric operating revenues. The decrease in
sales was due principally to more winter snows experienced in Registrant's
service area during the first quarter of this year, which decreased the use of
snow making machines at ski resorts in the area. As compared to the twelve
months ended March 31, 2000, kilowatt-hour sales increased by 6.0% due to
increase in commercial and residential usage. As a result, electric operating
revenues for the twelve months ended March 31, 2001 increased by 6.2%.
Other revenues increased by 25.2% and 69.1% for the three and twelve
months ended March 31, 2001, respectively, due to new ASUS service contracts and
increased activities with existing contracts.
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Purchased water costs decreased by 14.1% for the three months ended
March 31, 2001 as compared to the same period ending in 2000 reflecting a
decrease of 9.5% in purchased water volume resulting from lower sales and less
purchased water in Registrant's supply mix. As compared to the twelve months
ended March 31, 2000, purchased water costs increased by 10.3% reflecting
increases of 6.3% in purchased water volume, and a total of $1.6 million in
refunds from the Water Replenishment District of Southern California (WRD)
received during twelve months ended March 31, 2000. There were no similar
refunds received during the same periods ended March 31, 2001.
Cost of power purchased for pumping increased by 4.7% and 2.2% for the
three and twelve months ended March 31, 2001, respectively due to the interim
surcharge implemented by Registrant's energy supplier based on the CPUC's
decision on January 4, 2001. On March 27, 2001, the CPUC approved SCW's Advice
Letters to increase the costs of purchased power included in base water rates
for its ratemaking districts to reflect the increase from its energy supplier.
See the section entitled "Regulatory Matters" and "Electric Energy Situation in
California" for more information.
As compared to the three months and twelve months ended March 31, 2000,
costs of power purchased for resale to customers in SCW's Bear Valley Electric
customer service area increased by 291.5% and 107.8%, respectively, due
primarily to significant increases in wholesale market prices for energy in the
State of California. Most of this increase 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. 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 assessment for the three months and twelve months
ended March 31, 2001 decreased by 34.6% and 13.0%, respectively, as compared to
the same period in 2000 primarily due to timing differences in accruing costs
for excess pumping in SCW's San Gabriel and San Dimas customer service areas.
A positive entry for the provision for supply cost balancing accounts
reflects recovery of previously under-collected supply costs. Conversely, a
negative entry for the provision for supply cost balancing accounts reflects an
under-collection of previously incurred supply costs. Registrant currently has a
net under-collected position in both its water and electric balancing accounts.
A net under-collection of balancing accounts for the three and twelve months
ended March 31, 2001 reflects previously discussed increases in energy costs and
excess pumping penalty accruals. The twelve-month comparison was partially
offset by the WRD refunds for the period ended March 31, 2000 as discussed
previously.
Other operating expenses increased by 6.2% and 6.5% for the three and
twelve months ended March 31, 2001, respectively, as compared to the same
periods of last year. The increases were primarily due to additional costs
incurred by CCWC and increases in labor and billing costs due to additional
billing and customer service contracts obtained by ASUS.
Administrative and general expenses increased by 11.3% for the three
months ended March 31, 2001 as compared to the same period ended March 31, 2000
reflecting increased reserve for worker's compensation, outside services
associated with SCW's Bear Valley Electric customer service area in response to
the energy situation in California, and additional costs from CCWC. As compared
to the twelve months ended March 31, 2001, the expenses decreased by 4.7% due
primarily to booking reduced reserves for litigation in 2000 and a reduction in
pension expenses. See the section entitled "Legal Proceedings" for more
information.
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20
Depreciation expense increased by 17.9% and 14.9%, respectively, for the
three and twelve months ended March 31, 2001 reflecting, among other things, the
effects of recording approximately $55.7 million in net plant additions during
2000, depreciation on which began in January 2001. 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.
As compared to the three and twelve months ended March 31, 2000,
maintenance expense decreased by 13.5% and 2.8%, respectively, due to decreased
maintenance on Registrant's water supply sources and maintenance of water mains
during the first quarter of 2001.
Taxes on income increased by 12.5% and 14.4%, respectively, as compared
to the three and twelve months ended March 31, 2000. It was due to an increase
in pre-tax operating income of 13.7% and 17.1%, respectively, for the comparable
periods ended March 31, 2001. The twelve-month comparison was also affected by a
lower effective tax rate for the period ended March 31, 2001.
Other taxes increased by 10.6% and 8.7%, respectively, for the three and
twelve months ended March 31, 2001, respectively, as compared to the same
periods last year reflecting principally increased property taxes due to higher
property valuation assessments and additional properties at CCWC since October
2000.
The loss in other income recorded for the three and twelve months ended
March 31, 2001 was due to the effect of recording amortization and interest
expenses, starting January 2000, on SCW's entitlement in the State Water
Project, and higher expenses associated with increased activities in
Registrant's non-regulated ventures.
Interest expense increased by 18.1% and 10.8%, respectively, for the
three and twelve months ended March 31, 2001 as compared to the three and twelve
months ended March 31, 2000 due to (i) additional short-term borrowing at higher
rates, incurred by SCW to temporarily fund its capital expenditures, (ii) the
issuance of $20 million in long-term debt in January 2001 and (iii) additional
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 principally through dividends from SCW. AWR has a
Registration Statement on file with the Securities and Exchange Commission (SEC)
for issuance, from time to time, of up to $60 million in Common Shares,
Preferred Shares and/or debt securities. 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 invest in SCW. As of March 31, 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 revolving credit facility with a $25 million aggregate
borrowing capacity. At March 31, 2001, $21 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,
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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 first
quarter of 2001. At December 31, 2000, SCW had under-collected its electric
power costs by approximately $8.6 million. During the first quarter of 2001, SCW
incurred $6.5 million more in purchased power costs than it was authorized to
recover in current rates. At March 31, 2001, SCW had accrued a total
under-collection of electric power costs in its Bear Valley Electric customer
service area of $15.1 million.
In order to assure a reliable source of supply and mitigate spot
market purchases of electric energy, SCW has entered into a five-year agreement
for the purchase of 15 megawatts of electric energy at a price of $95 per
megawatt. On May 11, 2001, SCW filed an application with the CPUC for inclusion
in rates of the energy purchased under this agreement. Recovery of these costs
will results in a cost of energy in rates of $0.095 per kilowatt-hour as
compared to the current cost of approximately $0.024 per kilowatt-hour currently
in rates. Less than full recovery of these costs could result in as much as an
additional under-collection of approximately $10.7 million for the remainder of
calendar 2001. Less than full recovery of these costs would further adversely
impact SCW's liquidity. SCW's under-collected position for purchased power
relative to its Bear Valley Electric Service division could reach approximately
$26 million by the end of 2001 if the CPUC does not timely authorize recovery of
both past electric power costs as well as costs associated with the new power
purchase agreement. Registrant believes that timely regulatory actions by the
CPUC to authorize SCW to recover its past and future power costs are necessary
to avoid any material adverse impact on SCW's liquidity and financial condition.
Registrant has implemented a Cash Preservation Plan (CPP) to control
costs and to limit capital expenditures principally to those projects that are
believed necessary to meet public safety and health requirements or otherwise
provide for continued service. The CPP impacts both the electric and water
business of SCW. Management anticipates that the CPP, through deferral of
capital expenditures alone, could reduce cash expenditures in 2001 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 March 31, 2001, of which a
total of $14 million was then outstanding. SCW routinely employs short-term bank
borrowing as an interim-financing source prior to funding capital expenditures
on a long-term basis as previously discussed.
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 bank borrowing. During 2001, SCW anticipates filing a
Registration Statement with the SEC for issuance, from time to time, of
additional debt securities. On March 30, 2001, AWR purchased an additional $25
million 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.
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22
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, lower than usual
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 and increased prices for natural gas, the fuel
used in many of the power plants serving the region.
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 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.
All electric energy sold by SCW to customers in its Bear Valley Electric
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 Bear Valley Electric
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. The change to Dynegy is a result of
the merger between Dynegy and 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 Bear
Valley electric customer service area at a price of $35.50 per MW. This contract
expired April 30, 2001. Dynegy also procured electric energy requirements above
the 12 MW forward purchase contract.
In response to the potential for continued increases in electricity
costs, SCW entered into a five-year, block forward purchase contract with Mirant
Americas Energy Marketing, LP (Mirant) to supply its Bear Valley Electric
customer service area with 15 MW's of electric energy at a price of $95 per MW
beginning April 1, 2001 through December 31, 2006. The average minimum load at
SCW's Bear Valley
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23
Electric customer service area has been approximately 12 MW's. The average
winter load has been 18 MW's with a winter peak of 30 MW's when the snowmaking
machines at the ski resorts are operating.
Although electric energy prices in California have risen rather
steadily since the passage of the CPUC's electric restructuring decision, the
rate of increase in cost has accelerated since the third quarter of 2000. At
December 31, 2000, SCW had under-collected its electric power costs by
approximately $8.6 million. During the first quarter of 2001, SCW incurred $6.5
million more in purchased power costs than it was authorized to recover in
current rates. As of March 31, 2001, approximately $15.1 million in
under-collected energy costs is included in the electric balancing account. SCW
protested certain amounts billed to it by the energy provider and, subsequently,
withheld payment on approximately $3.4 million in electric power invoices. SCW
has reached a settlement in principle with the energy provider that resolves all
matters in dispute. SCW anticipates signing the agreement during the second
quarter of 2001. Please see the section entitled "Regulatory Matters" for more
information.
In May 2000, SCW filed an Advice Letter with the CPUC for recovery of
approximately $2.4 million in then under-collected power costs over a five-year
period. A draft resolution was issued in April 2001 by the CPUC recommending an
overall rate increase of 12.5% to recover the under-collection of $2.4 million,
with a condition of conducting a subsequent audit on the electric balancing
account. A final order is expected in the second quarter of 2001. SCW filed
another Advice Letter on April 9, 2001 for recovery over five years of the
additional under-collected amount of $8.7 million for energy payments made
through March 31, 2001. Approval of this filing would result in an additional
increase in revenues of approximately 13.2%. Registrant believes that the
recovery of these amounts 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. On May
11, 2001, SCW filed with the CPUC for authority to increase revenues by
approximately an additional 55.4% to recover the costs of electric energy
supplied under the agreement with Mirant. Registrant believes that timely
regulatory actions by the CPUC 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. See the section entitled "Regulatory Matters"
for more information.
On March 27, 2001, the CPUC approved SCW's Advice Letters to increase
the costs of purchased power by $761,351 included in base water rates for each
of its ratemaking districts. These filings resulted from the 10% increase in
electric rates that the Southern California Edison Company (Edison) and Pacific
Gas & Electric Company (PG&E) were authorized to implement by the CPUC. In April
2001, an Advice Letter to increase water rates by approximately $2.3 million
company-wide to cover additional base rate increases, authorized recently by the
CUPC to Edison and PG&E, was filed. Management believes that it will be approved
but is unable to predict when, or if, the CPUC will authorize recovery of all or
any of these expenses. See the section entitled "Regulatory Matters" for more
information.
In a continuing effort to control the escalation of electric energy
costs for SCW's Bear Valley Electric division, 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 and (ii) the use of portable generation to
avoid peak energy prices. Each of these options is expected to result in
increased electric energy prices for customers of SCW's Bear Valley Electric
customer service area. Registrant believes that these solutions in whole or in
part represent significant savings for customers relative to reliance on spot
purchases in the open market. Registrant further believes that costs incurred
should be recoverable from customers although it can give no assurance that the
CPUC will ultimately allow recovery of all or any of the costs through rates.
Registrant has implemented a Cash Preservation Plan (CPP) to control
costs and to limit capital expenditures to principally those capital projects
that are believed necessary for health and safety of the
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public and for the continued provision of service. The CPP affects both the
water and electric businesses of SCW.
WATER SUPPLY
For the three months ended March 31, 2001, SCW supplied a total of
15,588,000 ccf of water as compared to 16,652,000 ccf for the three months ended
March 31, 2000. Of the total 15,588,000 ccf of water supplied during the first
quarter of 2001, approximately 64.2% came from pumped sources and 35.8% was
purchased from others, principally the Metropolitan Water District of Southern
California (MWD) and its member agencies. For the three months ended March 31,
2000, 60.9%, and 39.1% was supplied from pumped sources and purchased from MWD,
respectively.
During the twelve months ended March 31, 2001, SCW supplied 86,375,000
ccf of water as compared to 85,862,000 ccf supplied during the twelve months
ended March 31, 2000. During the twelve months ended March 31, 2001, pumped
sources provided 56.1% of total supply, 41.9% was purchased from MWD and its
member agencies. The remaining 2.0% of total supply came from the United States
Bureau of Reclamation (the Bureau) under a no-cost contract. For the twelve
months ended March 31, 2000, 58.0%, 40.4% and 1.6%, 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 65 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. 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. The
water supply for 2001 should be adequate with shortages only in the northeastern
part of the State and major Delta exports. Statewide precipitation from October
2000 to March 2001 was 75% of normal. The snow pack now stands at 85% of normal.
Reservoirs throughout the state are close to or exceeding average storage levels
for this time of year. Statewide reservoir storage is near average for this time
of year. Storage gains in the coming months are likely to be less than normal,
and therefore statewide storage is expected to fall below average by summer.
Except for the northeastern part of the State and major Delta exports, water
supplies are expected to be adequate this year. 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 water outlook is good. The April-July inflow
to Lake Powell is forecast to be 6.5 million Acre-feet, which is 84% of average.
The March 2001 snow pack in the Upper Colorado River basin was 80% 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,
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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.
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.
As of March 31, 2001, SCW had accrued approximately $15.1 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.
A draft resolution was issued in April 2001 by the CPUC recommending an overall
rate increase of 12.5% to recover the under-collection of $2.4 million, with a
condition of conducting a subsequent audit on the expenses included in the
electric balancing account. This matter is to expected to come before the CPUC
on May 24, 2001.
SCW filed a second Advice Letter on April 9, 2001 seeking recovery,
over five years, of an additional under-collection of $8.7 million for energy
costs. If approved, electric rates would increase by an additional 13.2%. SCW
believes that the recovery of these amounts is probable but is unable to predict
when, or if, the CPUC will authorize recovery of all or any of these expenses.
SCW expects to continue to file additional Advice Letters to recover differences
between actual electric power costs and amounts recovered through electric
rates.
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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.
If approved, electric rates in the Bear Valley Electric customer service area
would increase by approximately 55.4%. 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. 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 a second Advice Letter 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. Registrant believes that the proposed
increase will be authorized but is currently unable to predict when the CPUC may
issues its order in this matter. 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. SCW's application demonstrated that the
previously disallowed portion of the treatment plant is now fully "used and
useful" and is providing service to customers. 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. Recovery of the costs associated with the plant was
included in the general rate increase application for SCW's Clearlake service
area. A final order is anticipated in the second quarter of 2001.
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.
On November 2, 2000, a final decision from the CPUC concluded that the
CPUC has the authority to regulate the service of water utilities with respect
to the health and safety of that service; that the Department of Health Services
of the State of California (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. SCW has filed for recovery of $879,000 in
expenses associated with this matter. Registrant believes that these costs are
recoverable although it can give no assurance that the CPUC will ultimately
allow recovery of all or any of the costs through rates. See the section
entitled "Legal Proceedings" in Part I for more information.
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.
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
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proposed acquisition by SCW of Peerless. A final decision from the CPUC is not
anticipated prior to the third quarter of 2001.
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 cost 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.
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
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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 recycle filter backwash flows within the treatment
process to reduce the effects of recycle 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 2001. 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.
The EPA will adopt Stage II rules pertaining to DBP's by summer of 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 2001. 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 engages in disinfection of their groundwater
systems.
Regulation of Radon and Arsenic
The final 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
recently 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. Registrant is unable to
predict if or when the rule will be officially released.
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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 27
wells serving its Arden-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
Arden-Cordova customer service area of detection of ammonium perchlorate in
amounts in excess of this action level. In April 1997, SCW found ammonium
perchlorate in three additional wells and, at that time, removed those wells
from service until it was determined that the levels were below the
state-determined action level. Those wells were returned to service. SCW
periodically monitors these wells to determine that levels of perchlorate are
below the action level currently in effect.
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 Arden-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(s) of water supply in SCW's Arden-Cordova customer
service area and has reimbursed SCW for costs associated with the drilling and
equipping of two new wells. As of December 31, 2000, Aerojet-General Corp. has
previously reimbursed SCW $4.5 million.
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The remainder of the costs is subject to further reimbursement, including
interest. The reimbursement from Aerojet-General Corp. reduces 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.
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.
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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.
Bear Valley Electric Customer Service Area
SCW has been, in conjunction with the Southern California Edison unit of
Edison International, planning to upgrade transmission facilities to 115kv (the
115kv Project) in order to meet increased energy and demand requirements. The
115kv Project is subject to an environmental impact report (EIR) and delays in
approval of the EIR may impact service in SCW's Bear Valley Electric customer
service area. SCW has, however, taken other measures, that will be enacted on an
emergency basis, to meet load growth and mitigate delays in approval of the EIR.
In addition, third parties willing to construct gas-fired generating facilities,
sufficient to meet the peaking and future capacity needs of the Bear Valley
Electric customer service area, in exchange for a long-term purchase contract
have approached SCW. Registrant is unable at this time to predict if such an
arrangement will be economically beneficial to customers or if the generating
facility can meet all environmental requirements. See the section entitled
"Electric Energy Situation in California" for more information.
RISK FACTOR SUMMARY
This section (written in plain English to comply with certain SEC
Standards) summarizes certain risks of our business that may affect our future
financial results. We also periodically file with the Securities and Exchange
Commission documents that include more information on these risks. It is
important for investors to read these documents.
Litigation
SCW has been sued in eighteen water-quality related lawsuits:
- a suit filed on April 24, 1997 alleging personal injury and property
damage as a result of the delivery of contaminated water from wells
located in an area of the San Gabriel Valley that has been designated
a federal superfund site
- a suit filed on July 29, 1997 alleging personal injury and property
damage as a result of the delivery contaminated of water; few of our
systems are located in the geographical area covered by this suit
- a suit filed on December 8, 1997 alleging personal injury and
property damage as a result of the delivery of contaminated water in
SCW's Arden-Cordova service area
- a suit filed on February 2, 1998 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has been
designated a superfund site
- a suit filed on February 4, 1998 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has been
designated a superfund site
- a suit filed in March 2, 1998 alleging personal injury and property
damage as a result of the delivery of contaminated water in SCW's
Arden-Cordova service area
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- a suit filed on June 29, 1998 alleging personal injury and property
damage as a result of the delivery of contaminated water from wells
located in an area of the San Gabriel Valley that has been designated
a superfund site
- two suits filed on July 30, 1998 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has been
designated a superfund site
- a suit filed on December 3, 1998 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has been
designated a superfund site
- a suit filed on July 22, 1999 alleging personal injury and property
damage as a result of the delivery of contaminated water from wells
located in an area of the San Gabriel Valley that has been designated
a superfund site
- a suit filed on May 16, 2000 alleging personal injury and property
damage as a result of the delivery of contaminated water in SCW's
Arden-Cordova service area
- a suit filed on April 13, 2000 alleging personal injury and property
damage as a result of the delivery of contaminated water from wells
located in an area of the San Gabriel Valley that has been designated
a superfund site
- a suit filed on August 5, 1999 alleging personal injury and property
damage as a result of the delivery of contaminated water from wells
located in an area of the San Gabriel Valley that has been designated
a superfund site
- two suits filed on December 1, 2000 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has been
designated a superfund site
- a suit filed on January 23, 2001 alleging personal injury and
property damage as a result of the delivery of contaminated water
from wells located in an area of the San Gabriel Valley that has been
designated a superfund site
- a suit filed on March 30, 2001 alleging personal injury and property
damage as a result of the delivery of contaminated water from wells
located in an area of the San Gabriel Valley that has been designated
a superfund site
On September 1, 1999, the First District Court of Appeal in San
Francisco, held that the CPUC had preemptive jurisdiction over regulated public
utilities and ordered dismissal of a series of lawsuits against water utilities,
including seven of the lawsuits against SCW. On October 11, 1999 one group of
plaintiffs appealed the decision to the California Supreme Court, which has
accepted the petition. Management cannot predict the outcome of the proceeding.
In March 1998, the CPUC issued an Order Instituting Investigation (the
OII) as a result of these types of suits being filed against water utilities in
California. On November 2, 2000, CPUC issued a final order concluding that the
CPUC 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 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
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authorized SCW to recover any of its litigation costs. As of March 31, 2001,
Registrant had incurred $888,000 in the OII-related memorandum account.
Environmental Regulation
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 minimum containment 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's 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
- regulation of arsenic issued in January 2001 and potential regulation
of radon
- new California 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 our regulated systems. We may
also be able to recover certain of these costs under our contractual
arrangements with municipalities. In certain circumstances, we may recover costs
from parties responsible or potentially responsible for contamination.
Rates and Regulation
SCW is subject to regulation by the CPUC. CCWC is subject to regulation
by the ACC. AWR and ASUS are not directly subject to CPUC regulation. The CPUC
may, however, regulate transactions between SCW and AWR, including the manner in
which overhead costs are allocated between SCW and AWR and the pricing of
services rendered by SCW to AWR. The ACC also regulates certain transactions
between CCWC and its affiliates.
SCW's revenues depend substantially on the rates that it is permitted to
charge its customers. SCW may increase rates in three ways:
- by filing for a general rate increase
- by filing for recovery of certain expenses
- by filing an "advice letter" for certain plant additions or other
operating cost increases, thereby increasing rate base
In addition, SCW recovers certain water supply costs through a balancing
account mechanism. Supply costs include the cost of purchased water and power
and groundwater production assessments. The balancing account mechanism is
intended to insulate SCW's earnings from changes in water supply costs that are
beyond SCW's control. The balancing account is not, however, designed to
insulate SCW's earnings against changes in supply mix. As a result, SCW may not
recover increased costs due to increased use of purchased water through the
balancing account mechanism. In addition, balancing account adjustments, if
authorized by the CPUC, may result in either increases or decreases in revenues
attributable to supply costs incurred in prior periods, depending upon whether
there has been an under-collection or
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over-collection of supply costs. CCWC is not permitted to recover these types of
costs through a balancing account mechanism.
There has been a substantial increase in the costs of purchased power in
recent months. 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 sub-section entitled "California Energy Situation" for more
information.
There are also a number of matters pending before the CPUC that may
affect our future financial results. These matters include:
- an advice letter filed by SCW seeking recovery of cost associated
with various water quality litigations
- an advice letter filed to recover the previous disallowed portion of
a water treatment facility in SCW's Clearlake service area
- advice letters filed to recover the under-collection of supply costs
for SCW's Bear Valley Electric customer service area
- an advice letter filed to increase water rates to cover additional
costs for purchased power implemented by SCW's energy suppliers
- an advice letter filed to increase electric rates to cover additional
costs for electric energy purchased pursuant to a five-year contract
Adequacy of Water Supplies
The adequacy of water supplies varies from year to year depending upon a
variety of factors, including:
- rainfall
- the amount of water stored in reservoirs
- the amount used by our customers and others
- water quality, and
- legal limitations on use.
Reservoir storage statewide is at average storage levels for this time
of year, and is expected to fall below average by summer. In general, water
supplies are expected to be adequate this year. Population growth and increases
in the amount of water used have, however, 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 also have in recent years taken wells out of service due to water
quality problems.
CCWC obtains its water supply from three 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 could be caused by the above factors and may affect us
in several ways:
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- they adversely affect supply mix by causing Registrant 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. As of March 31, 2001, Aerojet General Corp. has previously
reimbursed us approximately $4.5 million for costs associated with the cleanup
of the groundwater supply for our Arden-Cordova System and for the increased
costs of purchasing water and developing new sources of groundwater supply. On
October 25, 1999, we sued the California Regional Water Quality Control Board
(CRWQCB) alleging that it has willfully allowed portions of the Sacramento
County Groundwater Basin to be injected with chemical pollution that is
contaminating the underground water supply in our Rancho Cordova customer
service area. In a separate lawsuit, also filed on October 25, 1999, we sued
Aerojet General Corp. for causing the contamination. On March 22, 2000 Aerojet
General Corp. filed a cross complaint against us for negligence and constituting
a public nuisance. We cannot predict the outcome of these lawsuits but we will
defend ourselves against these allegations.
Two potentially responsible parties on matters relating to the clean-up
and purchase of replacement water in the Charnock Basin, located in the cities
of Santa Monica and Culver City, have previously reimbursed us for replacement
water and certain legal and consulting expenses. The Charnock Basin is in our
Culver City customer service area. On April 25, 2001, SCW 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.
California Energy Situation
The Governor of the State of California has proclaimed a state of
emergency in California due to shortages of electricity available to certain of
California's utilities and the dramatic increases in electricity prices. A
number of investigations have 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. We are
unable to predict the long-term impact of these legislative initiatives. In the
short-term, we expect energy costs to remain high and to continue to be
volatile. We have been able to partially reduce the effect of these higher
energy costs by entering into a long-term contract with Dynegy for 12 MW of
electric energy for its Bear Valley Electric division. This contract expired on
April 30, 2001.
In a continuing effort to control the escalation of electric energy
costs for SCW's Bear Valley Electric division, in March 2000, SCW reached an
agreement with Mirant Americas Energy Marketing, LP to purchase 15 MW of
electric energy at $95 per MW for a period of five years. We are also
considering options including (i) the purchase of electric energy from on-site
generation facilities installed by a third party, and (ii) the use of portable
generation to avoid peak energy prices. Each of these options is expected to
result in increased electric energy prices for customers of SCW's Bear Valley
Electric customer service area. We believe that these solutions in whole or in
part represent significant savings for customers as compared to reliance on spot
purchases in the open market.
As of March 31, 2001, there was approximately $15.1 million of
under-collected electric power costs included in the electric balancing account.
In May 2000, we filed an Advice Letter with the CPUC
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seeking recovery over a five-year period of approximately $2.4 million in
under-collected power costs. We also filed another Advice Letter on April 9,
2001 for recovery over five years of an additional under-collected amount of
$8.7 million for energy payments made through March 31, 2001. We believe that
recovery of these amounts is probable but are unable to predict when, or if, the
CPUC will authorize recovery of all or any of these expenses. We expect to
continue to file additional Advice Letters to recover the for growing disparity
between the soaring wholesale power costs and the rates authorized to collect
from customers. On May 11, 2001, we filed an advice letter with the CPUC to
increase rates to recover the higher energy costs under the new purchase
agreement. If the CPUC does not take action on our various applications in the
near future, the under-collected position could reach approximately $26 million
by end of 2001. We believe that timely regulatory actions by the CPUC to
authorize SCW to recover past and future power costs are necessary to avoid any
material adverse effect on our liquidity and financial condition.
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 eighteen lawsuits involving claims pertaining to
water quality. Fifteen 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. See the section entitled "Risk Factor Summary" of
Management's Discussion and Analysis of Financial Conditions and Results of
Operation for more information.
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.
Management is unable to predict the 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
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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.
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
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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 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 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.
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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.
On December 26, 2000, SCW filed an Advice Letter with the CPUC seeking
recovery of $879,000 in deferred expense incurred during the OII. The CPUC had
previously authorized establishment of memorandum accounts to capture such
expenses. 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 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 March 31, 2001, approximately
$3,133,000 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. 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.
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.
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ITEM 2. CHANGES IN SECURITIES
As of March 31, 2001, earned surplus amounted to $78,715,000. As of
March 31, 2001, there were no retained earnings restricted, under any of SCW's
debt instruments, as to the payment of cash dividends on Common Shares. 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 March 31, 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On or about March 19, 2001, common and preferred shareholders of AWR
were mailed a Notice of Annual Meeting and a Proxy Statement. Shareholders were
requested to vote their shares for two items:
1. The election of a slate of three Class I directors to serve for a
two-year term expiring at the end of the Annual Meeting of Shareholders
in 2003, or until their successors are chosen and qualified. The
following table presents the results of the election presented at the
Annual Meeting of Shareholders held on April 24, 2001:
Name "For" "Withheld"
- ---------------------- ---------------- ---------------
James L. Anderson 99.06% 0.94%
Anne R. Holloway 99.03% 0.97%
Floyd E. Wicks 86.28% 13.72%
2. Ratification of the appointment of Arthur Andersen LLP (AA-LLP) as the
Company's independent public accountants. The result of the voting are
presented in the table below:
--------------------------------------------------------------------------
Proposal "For" "Against" "Abstain"
-------------------------- ----------- ------------ ------------
Ratification of
Appointment of AA-LLP 98.25% 1.04% 0.71%
--------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
On April 23, 2001, the Board of Directors of Registrant declared a
regular quarterly dividend of $0.325 per common share. The dividend will be paid
June 1, 2001 to shareholders of record as of the close of business on May 8,
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
10.22 Energy Transaction Confirmation with Mirant Americas Energy
Marketing, LP.
No Reports of Form 8-K were filed during the period covered by this report.
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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: May 14, 2001
40
1
EXHIBIT 10.22
MIRANT AMERICAS ENERGY MARKETING, LP
TRANSACTION CONFIRMATION
Date: March 19, 2001
To: Southern California Water Company
The following shall confirm the agreement reached on March 16, 2001 between
Mirant Americas Energy Marketing, LP ("Mirant") and Southern California Water
Company.
- -----------------------------------------------------------------------------------------------------------
Buyer: Southern California Water Company Seller: Mirant Americas Energy Marketing, LP
630 E. Foothill Blvd. 1155 Perimeter Center West
San Dimas, CA 91773-9016 Suite 130
Atlanta, GA 30338
Attn: Attn: Confirms Department
Phone: (909) 394-7427 Phone: (678) 579-5000
Fax: (909) 394-7427 Fax: (678) 579-5755
Reference #: Reference #: 695257
Scheduling: Scheduling: (678) 579-3009
- -----------------------------------------------------------------------------------------------------------
Quantity (MW): 15 Quantity (MWhrs): 423,600
Price (S/MW?): 95.00 Type of energy: CAISO Energy
Start date: April 1, 2001 End date: December 31, 2006
Day of Week: Mon-Sat - Peak hours Hours: HE 0700 - 2200 PPT
Including NERC Holidays
- -----------------------------------------------------------------------------------------------------------
Delivery Point: SP 15
Scheduling: Power deliveries shall be scheduled with the California Independent System Operator
(CAISO) as a Schedule Coordinator to Schedule Coordinator transaction. Scheduling
timelines shall be consistent with ISO tariffs, protocols, operating procedures, and
scheduling practices.
Special Provisions: "CAISO Energy" means with respect to a Transaction, a Product under which the Seller
shall sell and the Buyer shall purchase a quantity of energy equal to the hourly
quantity without Ancillary Services (as defined in the Tariff) that is or will be
scheduled as a schedule coordinator to schedule coordinator transaction pursuant
to the applicable tariff and protocol provisions of the California Independent System
Operator ("CAISO") (as amended from time to time, the "Tariff") for which the only
excuse for failure to deliver or receive is an "Uncontrollable Force" (as defined
in the Tariff).
Enabling Agreement: WSPP governed by Utah Law, Effective 02/01/2001 as may be amended from time to time.
Other: If the above accurately reflects your understanding of our agreement, please indicate
your approval by signing a copy of this letter and returning it via fax to Mirant
Americas Energy Marketing. Failure to object to the terms in this letter or respond
within two business days shall be deemed acceptance.
- -----------------------------------------------------------------------------------------------------------
Southern California Water Company Mirant Americas Energy Marketing, LP
by Mirant Americas Development, Inc., its general partner
By: /s/ JOEL A. DICKSON By: /s/ [Signature Illegible]
------------------------------------------ -----------------------------------------------------
Name: Joel A. Dickson Name:
Title: Vice President Title:
All dollar figures are in US Dollars.
2
MIRANT AMERICAS ENERGY MARKETING, LP
TRANSACTION CONFIRMATION
Date: March 19, 2001
To: Southern California Water Company
The following shall confirm the agreement reached on March 16, 2001 between
Mirant Americas Energy Marketing, LP ("Mirant") and Southern California Water
Company.
- -----------------------------------------------------------------------------------------------------------
Buyer: Southern California Water Company Seller: Mirant Americas Energy Marketing, LP
630 E. Foothill Blvd. 1155 Perimeter Center West
San Dimas, CA 91773-9016 Suite 130
Atlanta, GA 30338
Attn: Attn: Confirms Department
Phone: (909) 394-7427 Phone: (678) 579-5000
Fax: (909) 394-7427 Fax: (678) 579-5755
Reference #: Reference #: 695088
Scheduling: Scheduling: (678) 579-3009
- -----------------------------------------------------------------------------------------------------------
Quantity (MW): 15 Quantity (MWhrs): 332,760
Price (S/MW?): 95.00 Type of energy: CAISO Energy
Start date: April 1, 2001 End date: December 31, 2006
Day of Week: 6x8 Off Peak M-Sat 8 hrs, Sun & Hours: HE 0100 - 0600 & HE 2300 -
Hol 24 2400 PPT
Including NERC Holidays
- -----------------------------------------------------------------------------------------------------------
Delivery Point: SP 15
Scheduling: Power deliveries shall be scheduled with the California Independent System Operator
(CAISO) as a Schedule Coordinator to Schedule Coordinator transaction. Scheduling
timelines shall be consistent with ISO tariffs, protocols, operating procedures, and
scheduling practices
Special Provisions: "CAISO Energy" means with respect to a Transaction, a Product under which the Seller
shall sell and the Buyer shall purchase a quantity of energy equal to the hourly
quantity without Ancillary Services (as defined in the Tariff) that is or will be
scheduled as a schedule coordinator to schedule coordinator transaction pursuant
to the applicable tariff and protocol provisions of the California Independent System
Operator ("CAISO") (as amended from time to time, the "Tariff") for which the only
excuse for failure to deliver or receive is an "Uncontrollable Force" (as defined
in the Tariff).
Enabling Agreement: WSPP governed by Utah Law, Effective 02/01/2001 as may be amended from time to time.
Other: If the above accurately reflects your understanding of our agreement, please indicate
your approval by signing a copy of this letter and returning it via fax to Mirant
Americas Energy Marketing. Failure to object to the terms in this letter or respond
within two business days shall be deemed acceptance.
- -----------------------------------------------------------------------------------------------------------
Southern California Water Company Mirant Americas Energy Marketing, LP
by Mirant Americas Development, Inc., its general partner
By: /s/ JOEL A. DICKSON By: /s/ [Signature Illegible]
------------------------------------------ -----------------------------------------------------
Name: Joel A. Dickson Name:
Title: Vice President Title:
