10-K 1 a69945e10-k.txt FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION REGISTRANT AND STATE OF INCORPORATION IRS EMPLOYER FILE NO. ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO. ------------------ ---------------------------------------------- --------------------- 333-47647 American States Water Company 95-4676679 (A California corporation) 630 East Foothill Boulevard San Dimas, California 91773-9016 909-394-3600 000-01121 Southern California Water Company 95-1243678 (A California corporation) 630 East Foothill Boulevard San Dimas, California 91773-9016 909-394-3600
Securities registered pursuant to Section 12(b) of the Act:
AMERICAN STATES WATER COMPANY COMMON SHARES, $2.50 STATED VALUE NEW YORK STOCK EXCHANGE ----------------------------------------- ----------------------------------------- Title of Each Class Name of Each Exchange On Which Registered
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. American States Water Company Yes [X] No [ ] Southern California Water Company Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] The aggregate market value of the total voting stock held by non-affiliates of American States Water Company was approximately $301,654,000 on February 22, 2001. The closing price per Common Share on that date, as quoted in the Western Edition of The Wall Street Journal, was $30.00. Voting Preferred Shares of American States Water Company, for which there is no established market, were valued on February 22, 2001 at $1,764,000 based on a yield of 4.76%. As of February 22, 2001, the number of Common Shares of American States Water Company, $2.50 Stated Value, outstanding was 10,079,629. As of that same date, American States Water Company owned all 100 outstanding Common Shares of Southern California Water Company. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement will be subsequently filed with the Securities and Exchange Commission as to Part III, Item Nos. 10, 11, 12 and 13, in each case as specifically referenced herein. 2 AMERICAN STATES WATER COMPANY AND SOUTHERN CALIFORNIA WATER COMPANY FORM 10-K INDEX
Page No. -------- PART I Item 1: Business 1 Item 2: Properties 2 - 3 Item 3: Legal Proceedings 3 - 5 Item 4: Submission of Matters to a Vote of Security Holders 5 PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 6 Item 6: Selected Financial Data 7 Item 7: Management's Discussion and Analysis of Financial Conditions and Results of Operation 7 - 23 Item 7A: Quantitative and Qualitative Disclosures About Market Risk 23 Item 8: Financial Statements and Supplementary Data 24 -48 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 49 PART III Item 10: Directors and Executive Officers of Registrant 49 Item 11: Executive Compensation 49 Item 12: Security Ownership of Certain Beneficial Owners and Management 49 Item 13: Certain Relationships and Related Transactions 49 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K 49 - 56 Signature(s) 57 - 58
3 ITEM 1. BUSINESS This annual report on Form 10-K is a combined report being filed by two separate Registrants: American States Water Company (hereinafter "AWR") and Southern California Water Company (hereinafter "SCW"). References in this report to "Registrant" are to AWR and SCW, collectively, unless otherwise specified. SCW makes no representations as to the information contained in this report relating to AWR and its subsidiaries, other than SCW. GENERAL AWR, 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 water service regions and one electric customer service area operating within 75 communities in 10 counties in the State of California and provides water service in 21 customer service areas. Region I incorporates 7 customer service areas in northern and central California; Region II has 4 customer service areas located in Los Angeles; Region III incorporates 10 water customer service areas. SCW also provides electric service to the City of Big Bear Lake and surrounding areas in San Bernardino County through its Bear Valley electric service division. 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. Chaparral City Water Company (CCWC) is an Arizona public utility company serving approximately 11,000 customers in the town of Fountain Hills, Arizona and a portion of the City of Scottsdale, Arizona (SIC No. 4941). 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. SCW served 245,174 water customers and 21,484 electric customers at December 31, 2000, or a total of 266,658 customers, compared with 265,267 total customers at December 31, 1999. CCWC served 11,063 water customers as of December 31, 2000. ASUS has approximately 90,000 accounts under contract. 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 anticipated to close during the third quarter of 2001. COMPETITION The businesses of SCW and CCWC are substantially free from direct and indirect competition with other public utilities, municipalities and other public agencies. AWR's other subsidiary, ASUS, actively competes with other investor-owned utilities, other third party providers of water and wastewater services, and governmental entities on the basis of price and quality of service. EMPLOYEE RELATIONS SCW had 489 employees as of December 31, 2000 as compared to 492 at December 31, 1999. Seventeen positions in SCW's Bear Valley Electric customer service area are covered by a collective bargaining union agreement, which expires in 2002, with the International Brotherhood of Electrical Workers. Fifty-six positions in SCW's Region II ratemaking district are covered by a collective bargaining unit agreement, which expires in 2001, with the Utility Workers of America. SCW has no other unionized employees. CCWC had 10 employees as of December 31, 2000, all of whom are non-unionized. 1 4 ITEM 2 - PROPERTIES FRANCHISES AND CONDEMNATION OF PROPERTIES SCW holds franchises from incorporated communities and counties, which it serves. SCW holds certificates of public convenience and necessity granted by the CPUC in each of the ratemaking districts it serves. SCW's certificates, franchises and similar rights are subject to alteration, suspension or repeal by the respective governmental authorities having jurisdiction. CCWC holds certificates of public convenience and necessity granted by the ACC for the areas in which it serves. CCWC's certificates, franchises and similar rights are subject to alteration, suspension or repeal by the respective governmental authorities having jurisdiction. The laws of the State of California and the State of Arizona provide for the acquisition of public utility property by governmental agencies through their power of eminent domain, also known as condemnation. Registrant has not been, within the last three years, involved in activities related to the condemnation of any of its water customer service areas or in its Bear Valley Electric customer service area. ELECTRIC PROPERTIES SCW's electric properties are all located in the Big Bear area of San Bernardino County in California. As of December 31, 2000, SCW operated 28.7 miles of overhead 34.5 kv transmission lines, 0.6 miles of underground 34.5 kv transmission lines, 173.6 miles of 4.16 kv or 2.4 kv distribution lines, 42.3 miles of underground cable and 14 sub-stations. Neither AWR nor SCW own any generating plants. OFFICE BUILDINGS Registrant's general offices are housed in a single-story office building located in San Dimas, California. The land and the building are owned by SCW. SCW also owns and occupies certain facilities housing regional, district and customer service offices while other such facilities are housed in leased premises. CCWC owns its primary office space. WATER PROPERTIES As of December 31, 2000, SCW's physical properties consisted of water transmission and distribution systems which included 2,704 miles of pipeline together with services, meters and fire hydrants and approximately 428 parcels of land, generally less than 1 acre each, on which are located wells, pumping plants, reservoirs and other water utility facilities, including five surface water treatment plants. As of December 31, 2000, SCW owned 276 wells. Certain wells have been removed from service due to water quality problems. See the section entitled "Environmental Matters" in Management's Discussion and Analysis. All wells are equipped with pumps with an aggregate capacity of approximately 203 million gallons per day. SCW has 65 connections to the water distribution facilities of the Metropolitan Water District of Southern California (MWD) and other municipal water agencies. SCW's storage reservoirs and tanks have an aggregate capacity of approximately 103 million gallons. SCW owns no dams in its customer service areas. The following table provides, in greater detail, selected water utility plant of SCW for each of its water ratemaking districts: 2 5
Pumps Distribution Reservoirs Facilities ------------------------ ------------------------------------------- --------------------- District Well Booster Mains Services Hydrants Tanks Capacity ------------------------------------------------------------------------------------------------------------------------------ Arden Cordova 27 17 482,640 13,769 1,375 3 4,000 Barstow 22 37 873,310 8,458 1,012 14 8,025 Bay Point 3 12 161,504 4,900 343 7 4,046 Calipatria 0 8 139,180 1,149 84 8 13,241 Claremont 26 35 712,035 10,533 1,179 15 8,082 Clearlake 0 13 193,098 2,073 122 4 883 Desert 18 20 752,671 3,216 577 11 1,475 Los Osos 8 10 201,408 3,191 168 8 1,422 Metro 59 63 4,875,192 98,315 7,855 37 24,411 Ojai 5 11 234,329 2,781 348 5 1,494 Orange 36 38 2,220,903 41,082 4,591 14 11,755 San Dimas 11 38 1,198,261 15,758 865 15 10,149 San Gabriel 20 8 549,435 11,767 788 3 1,520 Santa Maria 31 25 961,851 12,742 777 9 3,076 Simi 2 23 503,642 12,890 874 8 8,250 Wrightwood 8 5 216,809 2,550 76 7 1,546 ------------------------------------------------------------------------------------------------------------------------------ Total 276 363 14,276,268 245,174 21,034 168 103,375
Capacity is measured in thousands of gallons; Mains are in feet. As of December 31, 2000, CCWC's physical properties consisted of water transmission and distribution systems, which included 180 miles of pipeline, together with services, meters, fire hydrants, wells, reservoirs with a combined storage capacity of 7.2 million gallons and other water utility facilities including a surface water treatment plant, which treats water from the Central Arizona Project (CAP). MORTGAGE AND OTHER LIENS As of December 31, 2000, SCW had no mortgage debt outstanding, and their properties were free of any encumbrances or liens securing indebtedness. As of December 31, 2000, substantially all of the utility plant of CCWC was pledged to secure its Industrial Development Authority Bonds. The Bond Agreement, among other things, (i) requires CCWC to maintain certain financial ratios, (ii) restricts CCWC's ability to incur debt and make liens, sell, lease or dispose of assets, or merge with another corporation, and (iii) restricts the payment of dividends. As of December 31, 2000, neither AWR nor ASUS had any debt outstanding. ITEM 3 - LEGAL PROCEEDINGS WATER QUALITY-RELATED LITIGATION SCW is a defendant in fourteen lawsuits involving claims pertaining to water quality. Eleven 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 3 6 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 served on June 18, 1999. SCW was named as a defendant, along with the City of Pomona, California and Xerox Corporation in the matter styled Adejare, et al. v. Southern California Water Company, et al. (Case No. 9), filed on July 22, 1999 in Los Angeles Superior Court which seeks recovery for wrongful death, battery and fraudulent concealment (the Adejare Matter). Plaintiffs seek damages, including general and special damages according to proof, punitive and exemplary damages, as well as attorney's fees, costs of suit and other unspecified relief. In December 1997 SCW was named a defendant in the matter of Nathaniel Allen, Jr., et al. v. Aerojet-General Corporation, et al. (Case No. 10), which was filed in Sacramento Superior Court. The complaint makes claims based on wrongful death, personal injury, property damage as a result of nuisance and trespass, medical monitoring, and diminution of property values (the Allen Matter). Plaintiffs allege that SCW and other defendants have delivered water to plaintiffs which allegedly is, or has been in the past, contaminated with a number of chemicals, including TCE, PCE, carbon tetrachloride, perchlorate, Freon-113, hexavalent chromium and other, unnamed, chemicals. SCW filed Demurrers and Motion to Strike in this matter on June 5, 1998. A stay of all proceeding in the Allen matter is in effect pending the outcome of the California Supreme Court's proceeding in the Hartwell case. In March 1998, SCW was named a defendant in the matter of Daphne Adams, et al. v. Aerojet General, et al. (Case No. 11) that was filed in Sacramento Superior Court (the Adams Matter). The complaint makes claims based on negligence, strict liability, trespass, public nuisance, private nuisance, negligence per se, absolute liability for ultrahazardous activity, fraudulent concealment, violation of California Business and Professions Code section 17200 et seq., intentional infliction of emotional distress, intentional spoilage of evidence, negligent destruction of evidence needed for prospective civil litigation, wrongful death and medical monitoring. Plaintiffs seek damages, including general, punitive and exemplary damages, as well as attorney's fees, costs of suit, injunctive and restitutionary relief, disgorged profits and civil penalties, medical monitoring according to proof and other unspecified relief. SCW filed its Demurrers and Motion to Strike in this matter on June 5, 1998. A stay of all proceedings in the Adams Matter is in effect pending the outcome of the California Supreme Court's proceeding in the Hartwell case. In May 2000, SCW was named a defendant in the matter of Wallace Andrew Pennington, et al. v. Aerojet General, et al. (Case No. 12) that was filed in Sacramento Superior Court (the Pennington Matter). The complaint makes claims based on negligence, intentional infliction of emotional distress, strict liability, public liability for ultra hazardous activity and fraudulent concealment. Plaintiffs allege that SCW and other defendants knowingly operated and maintained wells, which provided contaminated drinking water to the surrounding communities. Plaintiffs seek damages, including general, punitive and exemplary damages, as well as attorney's fees, costs of suit, special damages, according to proof of medical bills and lost wages and lost income as occasioned by personal injury and plaintiff's inability to pursue employment, and other unspecified relief. All counsels in the Pennington matter have agreed to a stay in this matter, pending the outcome of the Hartwell case. 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 4 7 liability for ultrahazardous activity, fraudulent concealment, conspiracy/fraudulent concealment, battery and unfair business practices on behalf of plaintiffs (the 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 light of the breadth of plaintiffs' claims in these matters, the lack of factual information regarding plaintiffs' claims and injuries, if any, and the fact that no discovery has yet been completed, SCW is unable at this time to determine what, if any, potential liability it may have with respect to these claims. Registrant believes there are no merits to these claims and intends to vigorously defend against them. SCW is subject to self-insured retention provisions in its applicable insurance policies and has either expensed the self-insured amounts or has reserved against payment of these amounts as appropriate. SCW's various insurance carriers have, to date, provided reimbursement for costs incurred for defense against these lawsuits. ORDER INSTITUTING INVESTIGATION (OII) In March 1998, the CPUC issued an OII to regulated water utilities in the state of California, including SCW. The purpose of the OII was to determine whether existing standards and policies regarding drinking water quality adequately protect the public health and whether those standards and policies were being uniformly complied with by those water utilities. On November 2, 2000, a final decision from the CPUC concluded that the Commission has the jurisdiction to regulate the service of water utilities with respect to the health and safety of that service; that DOHS requirements governing drinking water quality adequately protect the public health and safety; and that regulated water utilities, including SCW, have satisfactorily complied with past and present drinking water quality requirements. 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 December 31, 2000, approximately $2,381,000 has been recorded in the memorandum accounts. SCW filed an Advice Letter on December 26, 2000 for recovery of approximately $1,800,000, in expenses that were incurred on or before August 31, 2000. Management 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. 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. See Note 8 to the "Notes to Financial Statements". ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise. 5 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION RELATING TO COMMON SHARES - Common Shares of American States Water Company are traded on the New York Stock Exchange (NYSE) under the symbol AWR. The high and low NYSE prices on the Common Shares for each quarter during the past two years were:
STOCK PRICES ----------------------- HIGH LOW -------- -------- 2000 First Quarter $36.2500 $26.0000 Second Quarter 32.2500 27.8100 Third Quarter 31.7500 25.0000 Fourth Quarter 37.9375 29.1875 1999 First Quarter $30.0000 $23.5625 Second Quarter 29.2500 22.1875 Third Quarter 37.1250 28.3750 Fourth Quarter 39.7500 31.7500
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON SHARES - As of February 9, 2001, there were 3,495 holders of record of Common Shares of American States Water Company. AWR owns all of the Common Shares of SCW, CCWC and ASUS. (c) FREQUENCY AND AMOUNT OF ANY DIVIDENDS DECLARED AND DIVIDEND RESTRICTIONS For the last three years, Registrant has paid dividends on its Common Shares on March 1, June 1, September 1 and December 1. The following table lists the amount of dividends paid on Common Shares of American States Water Company for the last two years:
2000 1999 ------ ------ First Quarter $0.320 $0.320 Second Quarter 0.320 0.320 Third Quarter 0.320 0.320 Fourth Quarter 0.325 0.320 ------ ------ Total $1.285 $1.280
Neither AWR, ASUS nor SCW is subject to any contractual restriction on its ability to pay dividends. CCWC is subject to contractual restrictions on its ability to pay dividends. 6 9 ITEM 6. SELECTED FINANCIAL DATA
(in thousand, except per share amounts) 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- INCOME STATEMENT INFORMATION Total Operating Revenues $ 183,960 $ 173,421 $ 148,060 $ 153,755 $ 151,529 Total Operating Expenses 151,653 144,907 122,999 130,297 128,100 Operating Income 32,307 28,514 25,061 23,458 23,429 Other Income (99) 532 769 758 531 Interest Charges 14,122 12,945 11,207 10,157 10,500 Net Income 18,086 16,101 14,623 14,059 13,460 Preferred Dividends 86 88 90 92 94 Earnings Available for Common Shareholders $ 18,000 $ 16,013 $ 14,533 $ 13,967 $ 13,366 Basic Earnings per Common Share $ 1.92 $ 1.79 $ 1.62 $ 1.56 $ 1.69 Dividends Declared per Common Share $ 1.29 $ 1.28 $ 1.26 $ 1.25 $ 1.23 Average Shares Outstanding 9,380 8,958 8,858 8,957 7,891 Average Number of Diluted Shares Outstanding 9,411 N/A N/A N/A N/A Fully Diluted Earnings per Common Share $ 1.91 N/A N/A N/A N/A BALANCE SHEET INFORMATION Total Assets $ 616,646 $ 533,181 $ 484,671 $ 457,074 $ 430,922 Common Shareholders' Equity 192,723 158,846 154,299 151,053 146,766 Long-Term Debt 176,452 167,363 120,809 115,286 107,190 Preferred Shares - Not subject to Mandatory 1,600 1,600 1,600 1,600 1,600 Preferred Shares - Mandatory Redemption 320 360 400 440 480 Total Capitalization $ 371,095 $ 328,169 $ 277,108 $ 268,379 $ 256,036 Book Value per Common Share $ 19.12 $ 17.73 $ 17.23 $ 16.86 $ 16.52 OTHER INFORMATION Ratio of Earnings to Fixed Charges 3.35% 3.27% 3.21% 3.35% 3.26% Ratio of Earnings to Total Fixed Charges 3.31% 3.23% 3.17% 3.30% 3.21% Return on Average Common Equity 10.5% 10.2% 9.6% 9.5% 10.7%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Unless specifically noted, the following discussion and analysis provides information on AWR's consolidated operations and assets. For the twelve months ended December 31, 2000, there is no material difference between the consolidated operations and assets of AWR and the operations and assets of SCW. FORWARD-LOOKING INFORMATION Certain matters discussed in this report (including the documents incorporated herein by reference) are forward-looking statements intended to qualify for the "safe harbor" from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as 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. 7 10 RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000 AND 1999 Basic earnings per common share in 2000 increased by 7.3% to $1.92 per share as compared to $1.79 per share for the comparable period of 1999. The increase in the recorded results primarily reflects higher revenues at SCW during 2000, as is more fully discussed below. For the year ended December 31, 2000, fully diluted earnings were $1.91 per share. Registrant had no dilutive shares outstanding in 1999. Water operating revenues increased by 5.7% in 2000 to $168.8 million from the $159.7 million reported in 1999. The increase was due to three factors (i) a 3.0% increase in water sales to customers of SCW, (ii) increased water rates authorized by the CPUC for certain of SCW's water customers, and (iii) additional sales from CCWC. New rates in four customer service areas and implementation of regional rates in the customer service areas that comprise SCW's Region III were effective June 27, 2000. Additional increases in 2000 reflected the general rate case step and attrition increases for a number of SCW's ratemaking areas effective 2000. See the section entitled "Regulatory Matters" for more information. Electric operating revenues of $14.4 million were 7.7% higher in 2000 as compared to 1999 due to a 6.8% increase in kilowatt-hour sales, primarily by residential and industrial customers. Other revenues rose from $390,000 in 1999 to $799,000 in 2000 due to higher management fees from increased non-regulated activities with existing contracts of Registrant's ASUS unit. Purchased water costs in 2000 increased by 15.2% to $41.6 million as compared to $36.1 million in 1999 due to a 9.6% increase in volumes purchased. The increase was also affected by a total of $1.6 million in refunds from the Water Replenishment District of Southern California (WRD) received during 1999. There were no similar refunds received in 2000. Costs of power purchased for resale to customers in SCW's Bear Valley Electric division in 2000 increased by 50.7% to $10.7 million from the $7.1 million recorded in 1999 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 run-up in costs. See the sections entitled "Regulatory Matters" and "Electric Energy Situation in California" for more information. Costs of power purchased for pumping increased slightly by 1.6% to $7.5 million in 2000 as compared to $7.4 million recorded in 1999, chiefly as a result of an increase in energy costs, the effect of which was partially offset by a decrease in pumped groundwater in SCW's water supply mix. Groundwater production assessments increased by 4.2% to $7.5 million in 2000 from $7.2 million in 1999 due primarily to increased costs for excess pumping in SCW's San Gabriel and San Dimas customer service areas to meet summer demands. A negative entry for the provision for supply cost balancing accounts reflects an under-collection of previously incurred supply costs. Conversely, a positive entry for the provision for supply cost balancing accounts reflects recovery of previously under-collected supply costs. SCW has a higher net under-collected position in 2000 than in 1999 reflecting the increased energy costs in SCW's Bear Valley electric service area, the aggregate effect of which was partially offset by new water rates effective during 2000, authorized to collect previously incurred supply costs in SCW's various water customer service areas, as well as the WRD refunds during 1999 as discussed previously. See the section entitled "Regulatory Matters" for more information. The balancing account mechanism insulates earnings from changes in the unit cost of supply costs, which are outside of the immediate control of SCW. However, the balancing account is not designed to insulate earnings against changes in the actual water supply mix as compared to that mix authorized for recovery in rates. In 2000, SCW's overall water supply mix improved slightly over that mix authorized in rates due to additional well production capability coming on-line during the year. There is no assurance that the favorable mix can be sustained in future periods since actual 8 11 results are affected by availability and quality of water, both purchased and produced from SCW's wells. See the section entitled "Water Supply" for more information. Other operating expenses increased by 7.4% from the $15.6 million recorded in 1999 reflecting increased costs for water treatment, and increased labor and billing costs due to additional billing and customer service contracts obtained by ASUS. Administrative and general expenses decreased by 8.7% to $26.1 million in 2000 from $28.6 million recorded in 1999. The decrease is due primarily to booking reduced reserves for litigation in 2000 and a reduction in pension expenses. See the section entitled "Legal Proceedings" in Part I for more information. Depreciation expense in 2000 increased by 11.7% to $15.3 million reflecting the effects of recording approximately $50 million in net plant additions during 1999, depreciation on which began in 2000. Maintenance expense increased to $10.3 million in 2000 compared to the recorded $9.8 million in 1999 due principally to increased maintenance on SCW's water supply sources and maintenance of water mains. Taxes on income increased by approximately 13.5% to $15.1 million in 2000 as compared to the $13.3 million in 1999 due primarily to a 15.2% increase in pre-tax income, the effect of which was partially offset by slightly lower effective tax rate. Property and other tax expense increased by 7.6% in 2000 to $7.1 million due to higher property valuation, increased franchise fees associated with higher revenues, and increased payroll taxes due to increased labor costs. The loss of $99,000 in other income recorded for 2000 is related to the effect of recording amortization and interest expenses, starting January 2000, on SCW's entitlement in the State Water Project. See Note 8 of the "Notes to Financial Statements" for more information. In 2000, interest expense increased by 9.3% to $14.1 million from the $12.9 million recorded in 1999 due to additional short-term borrowing at higher rates, incurred by SCW to temporarily fund its capital expenditures. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999 AND 1998 Basic earnings per Common Share in 1999 increased by 10.5% to $1.79 per share as compared to $1.62 per share for the comparable period of 1998. Registrant had no dilutive securities outstanding during 1998 and 1999, therefore basic and fully diluted earnings per share are the same. The increase in the recorded results primarily reflects higher revenues at SCW during 1999 as is more fully discussed below. Water operating revenues increased by 18.5% in 1999 to $159.7 million from the $134.8 million reported in 1998. Water sales volumes in 1999 were 9.0% higher than 1998 due primarily to the much drier and warmer weather conditions throughout Southern California in 1999 than in 1998. Additional increases in revenues were due to the general rate increases in six of SCW's customer service areas effective January 1, 1999, which were applicable to 65% of SCW's water customers. Electric operating revenues of $13.3 million were 1.0% higher in 1999 as compared to 1998 due to a 1.3% increase in kilowatt-hour sales, primarily by industrial power users. The sales increase was partially offset by the lower billing rates of industrial customers relative to residential customers. Other revenues increased from $65,000 to $390,000 in 1999 due to increased management fees resulting from new ASUS service contracts established in the year and increased activities with existing contracts. Purchased water costs in 1999 increased to $36.1 million as compared to $30.8 million in 1998 due to a 12.1% increase in volumes purchased. The increase also reflects reduced reimbursements in 1999 from potentially responsible parties related to groundwater contamination in SCW's Culver City customer service area of approximately $570,000, compared with reimbursements of $1.7 million in 1998. 9 12 Costs of power purchased for resale in 1999 to customers in SCW's Bear Valley Electric division increased by 42.0% to $7.1 million from the $5.0 million recorded in 1998 due primarily to additional energy demand charges from the energy supplier serving SCW's Bear Valley Electric Service unit in 1999. 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 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 run-up in costs. See the sections entitled "Regulatory Matters" and "Electric Energy Situation in California" for more information. Costs of power purchased for pumping increased by 5.5% to $7.4 million in 1999 chiefly as a result of an increase in pumped groundwater in SCW's water supply mix due to increased sales volumes. Groundwater production assessments decreased by 5.3% to $7.2 million in 1999 from $7.6 million in 1998 due to reduced quantity rates in SCW's Metropolitan 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. In 1999, recovery of previously under-collected supply costs was lower than 1998 due to the previously discussed increase in energy demand charges, the effect of which was partially offset by new rates effective January 1999 authorized to implement new supply costs and to increase collection of previously under-collected costs. The balancing account mechanism insulates earnings from changes in the unit cost of supply costs that are outside of the immediate control of SCW. However, the balancing account is not designed to insulate earnings against changes in the actual water supply mix for water operation as compared to that mix authorized for recovery in rates. In 1999, SCW's overall water supply mix improved favorably over that mix authorized in rates resulting in additional income. There is no assurance that the favorable mix can be sustained in future periods since actual results are affected by availability and quality of water, both purchased and produced from SCW's wells. Other operating expenses increased by 7.8% from the $14.5 million recorded in 1998 due to increased costs for water treatment, and higher uncollectible provisions as a result of increased revenues. Administrative and general expenses increased by 30.0% to $28.6 million in 1999 from the $22.0 million recorded in 1998. The increase is due to costs associated with various acquisition projects, increased employee benefit costs, and additional amounts reserved for certain legal proceedings. In 1999, maintenance expense increased to the $9.8 million level compared to the recorded $7.3 million in 1998 due principally to increased maintenance on Registrant's water supply sources, and costs incurred on main replacements. The wet weather conditions during the first part of 1998 also hampered planned maintenance activities, thereby reducing maintenance expense in 1998. Depreciation expense in 1999 increased by 8.9% to $13.7 million reflecting the effects of recording approximately $38.2 million in net plant additions during 1998, depreciation on which began in 1999. Taxes on income increased by approximately 31.7% to $13.3 million in 1999 as compared to the $10.1 million in 1998 due to a 24.5% increase in pre-tax income and a higher effective tax rate in 1999 resulting from the turn-around of depreciation related temporary differences, the benefits of which were previously flowed-through for ratemaking purposes. Property and other taxes increased by 7.2% in 1999 to $6.6 million due primarily to increased franchise fees resulting from higher revenues, and increased payroll taxes from higher wages and additional personnel. Other income decreased by 30.8% in 1999 due primarily to the flow-through of tax benefits related to refinancing of long-term debt in December 1998 for which there were no similar benefits in 1999. Interest expense increased by 15.5% to $12.9 million primarily due to the issuance of $40 million in long-term debt in January 1999, partially offset by the retirement of $10 million of 10.10% Notes in December 1998. 10 13 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 will be invested in SCW. As of December 31, 2000, 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 December 31, 2000, no amount was outstanding under this facility. SCW funds the majority of its operating expenses, payments on its debt, and dividends on its outstanding Common Shares through internal sources. Internal sources of cash flow are provided primarily by retention of a portion of earnings, amortization of deferred charges, and depreciation expense. Internal cash generation is influenced by factors such as weather patterns, environmental regulation, litigation, changes in supply costs, and timing of rate relief. See the sections entitled "Risk Factors" and "Electric Energy Situation in California" for more information. Because of the seasonal nature of its water and electric operations, SCW utilizes its short-term borrowing capacity to finance current operating expenses, including the expenses for its Bear Valley Electric customer service area. See the section entitled "Electric Energy Situation in California" for more information. The aggregate short-term borrowing capacity available to SCW under its three bank lines of credit was $60 million as of December 31, 2000, of which a total of $45 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. At December 31, 2000, $20 million was available for issuance by SCW as long-term debt under a Registration Statement filed in 1998. In January 2001, SCW issued the remaining $20 million of long-term debt 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. CCWC funds the majority of its operating expenses, payments on its debt and dividends, if any, through internal sources. CCWC also relies on external sources, including long-term debt, contributions-in-aid-of-construction, advances for construction and install-and-convey advances, to fund the majority of its construction expenditures. ASUS funds its operating expenses primarily through contractual management fees. ELECTRIC ENERGY SITUATION IN CALIFORNIA The electric energy environment in California has changed as a result of the December 1995 CPUC decision on restructuring of California's electric utility industry and state legislation passed in 1996. On September 23, 1996, the State of California enacted legislation, California Assembly Bill 1890 as amended by California Senate Bill 477, to provide a transition to a competitive market structure, which was expected to provide competition and customer choice, beginning January 1, 1998, with all consumers ultimately participating by 2002. SCW's Bear Valley electric customer service area was exempted by the CPUC from compliance with most of the provisions of the CPUC order and the state legislation. On January 17, 2001, the Governor of the State of California proclaimed a state of emergency in California due to shortages of electricity available to certain of California's utilities resulting in blackouts, the unanticipated and dramatic increases in electricity prices and the insufficiency of electricity available from certain of California's utilities to prevent disruption of electric service in California. The reasons for the high cost of energy are under investigation but are reported to include, among other things, limited supply caused by a lack of investment in new power plants to meet growth in demand, planned and unplanned outages of power plants, 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, 11 14 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 repowering 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 division 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 service division 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 response to the potential for rising electricity costs, 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 service division at a price of $35.50 per MW. This contract expires April 30, 2001. Dynegy also procured electric energy requirements above the 12 MW forward purchase contract. The average minimum load at SCW's Bear Valley electric service division has been approximately 12 MW. The average winter load has been 18 MW with a winter peak of 30 MW when the snowmaking machines at the ski resorts are operating. Electric energy prices in California have risen rather steadily since the passage of the CPUC's electric restructuring decision, although the rate of increase in cost has accelerated in recent months. During 1999, SCW incurred approximately $2.5 million more in electric energy costs than were included in current rates for electric service. During 2000, an additional $5.7 million was incurred. As of December 31, 2000, SCW had approximately $8.6 million of under-collected electric energy costs included in the electric balancing account. 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. The CPUC has not yet issued a decision in that filing. SCW will file another Advice Letter for recovery of the additional under-collected amount as well as adjustment in base rates to recover over two years estimated electric power costs on a current basis. Management 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. See the section entitled "Regulatory Matters" for more information. In January 2001, SCW filed Advice Letters to increase the costs of purchased power included in base water rates for each of its ratemaking districts. These filings resulted from the 10% increase in electric rates that Southern California Edison and Pacific Gas & Electric Company were authorized to implement by the CPUC. Management believes that these filings 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 a number of options including (i) renegotiation of the block forward purchase of electric energy, (ii) purchase of electric energy from on-site generation facilities installed by a third party and (iii) 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 division. Management believes that these solutions in whole or in part represent significant savings for customers relative to reliance on spot purchases in the open market. Management further believes that costs incurred are 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. CONSTRUCTION PROGRAM SCW maintains an ongoing distribution main replacement program throughout its customer service areas, based on the priority of leaks detected, fire protection enhancement and a reflection of the underlying replacement schedule. In addition, SCW upgrades its electric and water supply facilities in accordance with industry standards, local requirements and 12 15 CPUC requirements. SCW's Board of Directors has approved anticipated net capital expenditures of approximately $50.4 million for 2001. Of this amount, approximately $13 million is subject to CPUC approval of an advice letter filing. Absent such approval, this amount would be included in the next general rate case filing for SCW's Region II. AWR, CCWC and ASUS have no material capital commitments. However, ASUS actively seeks opportunities to own, lease or operate water and wastewater systems for governmental entities, which may involve significant capital commitments. 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 regulation by the ACC. Rates that SCW and CCWC are authorized to charge are determined by the CPUC and the ACC, respectively, in general rate cases and are derived using rate base, cost of service and cost of capital, as projected for a future test year in California and using an historical test year, as adjusted in Arizona. Rates charged to customers vary according to customer class and rate jurisdiction and are generally set at levels allowing for all prudently incurred costs, including a return on rate base sufficient to pay principal and interest on debt securities, preferred stock distributions and a reasonable rate of return on equity. Rate base generally consists of the original cost of utility plant in service, plus certain other assets, such as working capital and inventory, less accumulated depreciation on utility plant in service, deferred income tax liabilities and certain other deductions. Balancing account adjustments for purchased water and power are permitted in California, but generally not Arizona. Neither AWR nor ASUS are regulated by the CPUC. The CPUC does, however, regulate certain transactions between SCW and its affiliates. The ACC also regulates certain transactions between CCWC and its affiliates. The 22 customer service areas (CSAs) of SCW are grouped into 9 water districts and 1 electric district for ratemaking purposes. Water rates vary among the 9 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 and other operating cost increases 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. The following table lists information on estimated annual rate changes during 2000, 1999, and 1998.
($ in 000's) Supply Balancing General Cost Account and Step Advice Year Offset Amortization Increases Letters Total --------------------------------------------------------------------------- 2000 $ 0 $(1,474) $ 6,973 $ 1,040 $ 6,539 1999 $ 23 $ 1,349 $15,175 $ 657 $17,204 1998 $ 786 $(2,852) $ 3,590 $ 713 $ 2,237
GRC step increase for SCW's Region II and General Office Allocation step increases for the Arden-Cordova, Bay Point, Simi Valley and Santa Maria CSAs were effective beginning January, 2000. Step increase for Ojai became effective April 23, 2000. Attrition increases for Arden-Cordova and Bay Point CSAs were also in effect beginning January 2000. Effective June 27, 2000, SCW was authorized by the CPUC to implement new increased rates for four water ratemaking districts in SCW's Region III and to combine tariff schedules into regional rates for the customer service areas that make up SCW's Region III. Despite the delay in obtaining CPUC approval of these rates, which resulted in a loss of approximately $1.4 million in revenues for the six months ended June 30, 2000, the new rates generated approximately $2.5 million in additional revenues during the third and fourth quarters of 2000. 13 16 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. A CPUC Order authorizing SCW to increase rates by $830,000 per year went in effect on October 24, 2000 for recovery of capital expenditures associated with Y2K readiness, not already included in Registrant's water rates. See the section entitled "Year 2000 Issue" for more information. In October 2000, the CPUC approved SCW's application to provide water and wastewater services to a new housing development located in Orange County, California. An advice letter seeking recovery of approximately $2.4 million in under-collected supply costs for SCW's Bear Valley Electric service area has been filed with the CPUC. SCW has also filed for recovery of increased costs of electric power incurred to pump water for its water customers. See the section entitled "Electric Energy Situation in California" for more information. On July 6, 2000, the CPUC concluded its Order Instituting Rulemaking on its own motion to set rules and to provide guidelines for privatization and excess capacity as it relates to investor owned water companies, including Registrant. The CPUC's order establishes a mechanism for sharing gross revenues, after pass-through of certain expenses, between customers of SCW and shareholders of Registrant. The order also requires water utilities, including Registrant, to file an advice letter with the CPUC for approval of services that utilize, in whole or in part, assets or employees reflected in the utility's revenue requirements. 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 decision on the Company's application is anticipated during the second quarter of 2001, which could result in $1.6 million write-up. Recovery of the costs associated with the plant was included in the general rate increase application for SCW's Clearlake service area. 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. Management 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. SCW believes that the recovery of these costs are probable 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. 14 17 On January 26, 2001, the CPUC Staff, SCW and Peerless Water Co., a privately owned water company in Bellflower, California, signed a Settlement Agreement, which recommends approval of the proposed acquisition by SCW of Peerless. A final decision from the CPUC is anticipated by the second 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 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. 15 18 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 new administration has put a temporary hold on the ruling and AWR is unable to predict if or when the rule will be officially released. 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. 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 16 19 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. 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 17 20 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. Matters Relating to SCW's Yorba Linda System The compound, MTBE, has been detected in three wells serving SCW's Yorba Linda system. Two of the wells are standby wells and the third well has not shown MTBE above the DOHS secondary standard of 5.0 ppb at this time. SCW has constructed an interconnection with the MWD to provide for additional supply in the event the third well experienced levels of detection in excess of the DOHS standard. SCW has met with the Regional Water Quality Control Board, the Orange County Water District, the City of Anaheim, the DOHS and three potentially responsible parties (PRP's) to define the extent of the MTBE contamination plume and assess the contribution from the PRP's. The PRP's have voluntarily initiated a work plan for regional investigation. While there have not been significant disruptions to the water supply in Yorba Linda at this point in time, no assurances can be given that MTBE contamination will not increase in the future. Bear Valley Electric SCW has been, in conjunction with the Southern California Edison unit of Edison International, planning to upgrade transmission facilities to 115kv (the 115kv Project) in order to meet increased energy and demand requirements. The 115kv Project is subject to an environmental impact report (EIR) and delays in approval of the EIR may impact service in SCW's Bear Valley Electric Service 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 Bear Valley Electric, in exchange for a long-term purchase contract have approached SCW. Management 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. WATER SUPPLY During 2000, SCW supplied a total of 88,055,900 CCF of water. Of this amount, approximately 55.3% came from pumped sources and 42.7% was purchased from others, principally the MWD. The remaining amount was supplied by the Bureau of Reclamation (the Bureau) under a no-cost contract. During 1999, SCW supplied 85,327,800 CCF of water, 58.2% of which came from pumped sources, 40.2% was purchased, and the remainder was supplied by the Bureau. The MWD is a water district organized under the laws of the State of California for the purpose of delivering imported water to areas within its jurisdiction. 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 (CAP). In response, MWD has taken a number of steps to secure additional storage capacity and to increase available water supplies, by effecting transfers of water rights from other sources. SCW's water supply and revenues are significantly affected by changes in meteorological conditions. After being buffeted by the weather extremes of the El Nino/La Nina Southern Oscillation phenomena, weather in SCW's service areas has returned to normal weather patterns. The October 1999 to September 2000 precipitation season was near normal. However due to lower than normal precipitation in the last three months of 2000, the California Department of Water Resources (DWR) has issued an early indication in January 2001 that if the trend continues, allocation of water to state water project contractors, including MWD, could be lowered. The allocation process in California depends on the Sierra snow pack and other sources of water and can vary significantly as the winter season progresses. January and February 2001 brought significant precipitation. For the water year to end of January 2001, precipitation was 19.9" or 61% of normal, which was higher than the historical average of 40% of normal. Reservoir storage statewide as of the end of January 2001 is 107% of historical storage level. The MWD, in response to DWR's early indication, has publicly assured consumers that it is well prepared to help the region through one or more dry years. In order to meet anticipated needs, MWD has in the ten years since the 18 21 state's last drought invested billions of dollars in water conservation programs, and water recycling, storage and infrastructure programs. Foremost among the safeguards is Diamond Valley Reservoir, a 4,500 acre reservoir in southwest Riverside County. Capable of holding 800,000 acre-feet or 269 billion gallons, the reservoir is currently more than half full. Although overall groundwater conditions remain at adequate levels, 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. CCWC obtains its water supply from three operating wells and from Colorado River water delivered by the CAP. The majority of CCWC's water supply is obtained from its CAP allocation and well water is used for peaking capacity in excess of treatment plant capability, during treatment plant shutdown, and to keep the well system in optimal operating condition. CCWC has an Assured Water Supply designation, by decision and order of the Arizona Department of Water Resources, providing in part that, subject to its requirements, CCWC currently has a sufficient supply of ground water and CAP water which is physically, continuously and legally available to satisfy current and committed demands of its customers, plus at least two years of predicted demands, for 100 years. 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. BUSINESS SEGMENTS AWR currently has three principal business units: water service and electric distribution utility operations conducted through its SCW subsidiary, water service utility operation conducted through its CCWC subsidiary, and non-regulated activities through its ASUS subsidiary. All activities of SCW currently are geographically located within the State of 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. See Note 11 to the "Notes to Financial Statements". YEAR 2000 ISSUE Registrant has had no Y2K incidents, business disruptions, failures or legal proceedings. There have been no actual or anticipated effects or changes to Registrant's operating trends or revenue patterns as a result of the transition. Not all Y2K problems were necessarily expected to surface in 2000. Registrant does not have, and may never fully have, sufficient information about the Y2K exposure of third parties to adequately predict the risks posed by them to Registrant. If the third parties later discover any Y2K problems that are not remedied, resulting problems could include temporary loss of utility services and disruption of water supplies. Costs related to Y2K incurred by SCW are recovered through water rates. The CPUC has authorized an increase in rates of $830,000 per year, effective October 24, 2000. See Note 13 to the "Notes to Financial Statements". 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 fourteen 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 19 22 - 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 - 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 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 authorized SCW to recover any of its litigation costs. As of December 31, 2000, Registrant had incurred $887,500 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: 20 23 - 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 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 run-up in costs. 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 - an advice letter filed to recover the under-collection of supply costs for SCW's Bear Valley Electric service division 21 24 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 as of the end of January 2001 is 107% of historical storage level. and the outlook for water supply in the near term is generally favorable. Population growth and increases in the amount of water used have, however, increased limitations on use to prevent 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. 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: - 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 December 31, 2000, 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. 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 expires on April 30, 2001 and we expect renewal of this agreement will cost significantly more. 22 25 In a continuing effort to control the escalation of electric energy costs for SCW's Bear Valley Electric division, we are considering a number of options including (i) renegotiation of the block forward purchase of electric energy, (ii) purchase of electric energy from on-site generation facilities installed by a third party and (iii) 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 division. 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. We further believe that costs incurred are recoverable from customers. We cannot give assurance that the CPUC will ultimately allow recovery of all or any of the costs through rates. ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, which establishes a new model for accounting for derivative and hedging activities, and supersedes and amends a number of existing standards. This statement as amended was adopted effective January 1, 2000 and has not had material impact on financial position or results of operation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Registrant has no derivative financial instruments, financial instruments with significant off-balance sheet risks or financial instruments with concentrations of credit risk. The disclosure required is, therefore, not applicable. 23 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA American States Water Company Consolidated Balance Sheets - December 31, 2000 and 1999 Consolidated Statements of Capitalization - December 31, 2000 and 1999 Consolidated Statements of Income - for the years ended December 31, 2000, 1999, and 1998 Consolidated Statements of Changes in Common Shareholders' Equity - for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows - for the years ended December 31, 2000, 1999 and 1998 Southern California Water Company Balance Sheets - December 31, 2000 and 1999 Statements of Capitalization - December 31, 2000 and 1999 Statements of Income - for the years ended December 31, 2000, 1999 and 1998 Statements of Changes in Common Shareholders' Equity - for the years ended December 31, 2000, 1999 and 1998 Statements of Cash Flows - for the years ended December 31, 2000, 1999 and 1998 Notes to Financial Statements Report of Independent Public Accountants 24 27 AMERICAN STATES WATER COMPANY CONSOLIDATED BALANCE SHEETS
December 31, (in thousands) 2000 1999 ------------------------------------------------------------------------------------------------- ASSETS UTILITY PLANT, AT COST Water $ 608,032 $ 532,007 Electric 37,630 36,349 ------------------------- 645,662 568,356 Less - Accumulated depreciation (173,367) (151,733) ------------------------- 472,295 416,623 Construction work in progress 36,801 32,972 ------------------------- Net utility plant 509,096 449,595 ------------------------- OTHER PROPERTY AND INVESTMENTS 25,222 10,583 CURRENT ASSETS Cash and cash equivalents 5,808 2,189 Accounts receivable-Customers, less reserves of $510 in 2000; 10,481 10,135 $487 in 1999 Other account receivable 5,233 4,347 Unbilled revenue 11,363 11,345 Materials and supplies, at average cost 1,116 1,153 Supply cost balancing accounts 11,145 4,774 Prepayments 4,085 4,851 Accumulated deferred income taxes - net 3,249 5,546 ------------------------- Total current assets 52,480 44,340 ------------------------- DEFERRED CHARGES Unamortized debt expense and redemption premium 7,190 6,811 Regulatory tax-related assets 17,705 19,941 Other 4,953 1,911 ------------------------- Total deferred charges 29,848 28,663 ------------------------- TOTAL ASSETS $ 616,646 $ 533,181 =========================
The accompanying notes are an integral part of these financial statements 25 28 AMERICAN STATES WATER COMPANY CONSOLIDATED BALANCE SHEETS
December 31, (in thousands) 2000 1999 ----------------------------------------------------------------------------------- CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholders' equity $192,723 $158,846 Preferred Shares 1,600 1,600 Preferred Shares - mandatory redemption 320 360 Long-term debt 176,452 167,363 ---------------------- Total capitalization 371,095 328,169 ---------------------- CURRENT LIABILITIES Notes payable to banks 45,000 21,000 Long-term debt and Preferred Shares - current 735 340 Accounts payable 11,857 13,777 Taxes payable 5,585 5,432 Accrued interest 1,783 1,584 Other 15,257 12,832 ---------------------- Total current liabilities 80,217 54,965 ---------------------- OTHER CREDITS Advances for construction 69,230 57,485 Contributions in aid of construction 39,670 38,895 Accumulated deferred income taxes - net 51,131 48,302 Unamortized investment tax credits 3,156 3,064 Regulatory tax-related liability 1,817 1,861 Other 330 440 ---------------------- Total other credits 165,334 150,047 ---------------------- TOTAL CAPITALIZATION AND LIABILITIES $616,646 $533,181 ======================
The accompanying notes are an integral part of these financial statements 26 29 AMERICAN STATES WATER COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31, (in thousands) 2000 1999 -------------------------------------------------------------------------------------------- COMMON SHAREHOLDERS' EQUITY: Common Shares, no par value, $2.50 stated value Authorized 30,000,000 shares Outstanding 10,079,629 in 2000 and 8,957,671 in 1999 $ 25,199 $ 22,394 Additional paid-in capital 100,239 74,937 Earnings reinvested in the business 67,285 61,515 ------------------------- 192,723 158,846 ------------------------- PREFERRED SHARES: $25 PAR VALUE Authorized 64,000 shares Outstanding 32,000 shares, 4% Series 800 800 Outstanding 32,000 shares, 4 1/4% Series 800 800 ------------------------- 1,600 1,600 ------------------------- PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION Requirements: $25 par value Authorized and outstanding 14,400 shares in 2000 and 16,000 shares in 1999, 5% Series 360 400 Less: Preferred Shares to be redeemed within one year (40) (40) ------------------------- 320 360 LONG-TERM DEBT 5.82% notes due 2003 12,500 12,500 6.64% notes due 2013 1,100 1,100 6.80% notes due 2013 2,000 2,000 8.50% fixed rate obligation due 2013 1,714 1,798 Variable rate obligation due 2014 6,000 6,000 Variable rate obligation due 2018 622 650 6.87% notes due 2023 5,000 5,000 7.00% notes due 2023 10,000 10,000 7.55% notes due 2025 8,000 8,000 7.65% notes due 2025 22,000 22,000 5.50% notes due 2026 7,950 8,000 6.81% notes due 2028 15,000 15,000 6.59% notes due 2029 40,000 40,000 9.56% notes due 2031 28,000 28,000 4% to 4.85% serial bonds due 2007 1,480 - 5.20% term bonds due 2011 1,000 - 5.40% term bonds due 2022 4,610 - 4.65% term bonds due 2006 215 - 5.30% term bonds due 2022 1,015 - 3.34% repayment contract due 2006 1,530 - State Water Project due 2035 6,949 7,028 Other 462 587 ------------------------- 177,147 167,663 ------------------------- Less: Current maturities (695) (300) ========================= 176,452 167,363 ========================= TOTAL CAPITALIZATION $ 371,095 $ 328,169 =========================
The accompanying notes are an integral part of these financial statements 27 30 AMERICAN STATES WATER COMPANY CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts) For the years ended December 31, 2000 1999 1998 --------------------------------------------------------------------------------------------------- OPERATING REVENUES Water $ 168,795 $ 159,693 $ 134,794 Electric 14,366 13,338 13,201 Other 799 390 65 ----------------------------------------- Total operating revenues 183,960 173,421 148,060 ----------------------------------------- OPERATING EXPENSES Water purchased 41,592 36,143 30,833 Power purchased for resale 10,664 7,119 5,013 Power purchased for pumping 7,509 7,394 7,009 Groundwater production assessment 7,489 7,170 7,567 Supply cost balancing accounts (6,371) (473) 28 Other operating expenses 16,748 15,594 14,459 Administrative and general expenses 26,135 28,600 21,987 Depreciation 15,339 13,650 12,538 Maintenance 10,280 9,799 7,311 Taxes on income 15,127 13,345 10,130 Property and other taxes 7,141 6,566 6,124 ----------------------------------------- Total operating expenses 151,653 144,907 122,999 ----------------------------------------- OPERATING INCOME 32,307 28,514 25,061 ----------------------------------------- OTHER INCOME Total other income - net (99) 532 769 ----------------------------------------- Income before interest charges 32,208 29,046 25,830 ----------------------------------------- INTEREST CHARGES Interest on long-term debt 11,623 11,294 9,612 Other interest and amortization of debt expense 2,499 1,651 1,595 ----------------------------------------- Total interest charges 14,122 12,945 11,207 ----------------------------------------- NET INCOME 18,086 16,101 14,623 Dividends on Preferred Shares (86) (88) (90) ----------------------------------------- EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 18,000 $ 16,013 $ 14,533 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 9,380 8,958 8,958 BASIC EARNINGS PER COMMON SHARE $ 1.92 $ 1.79 $ 1.62 WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 9,411 N/A N/A FULLY DILUTED EARNINGS PER COMMON SHARE $ 1.91 N/A N/A
The accompanying notes are an integral part of these financial statements 28 31 AMERICAN STATES WATER COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Common Shares Earnings -------------------- Additional Reinvested Number Paid-in in the (in thousands) of Shares Amount Capital Business ---------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1997 8,958 $ 22,394 $ 74,937 $ 53,722 Add: Net Income 14,623 Deduct: Dividends on Preferred Shares 90 Dividends on Common Shares - $1.26 per share 11,287 -------------------------------------------------- BALANCES AT DECEMBER 31, 1998 8,958 $ 22,394 $ 74,937 $ 56,968 Add: Net Income 16,101 Deduct: Dividends on Preferred Shares 88 Dividends on Common Shares - $1.28 per share 11,466 -------------------------------------------------- BALANCES AT DECEMBER 31, 1999 8,958 $ 22,394 $ 74,937 $ 61,515 Add: Net Income 18,086 Issuance of Common Shares for public 1,107 2,768 24,924 offering Issuance of Common Shares, others 15 37 378 Deduct: Dividends on Preferred Shares 86 Dividends on Common Shares - $1.28 per share 8,954 Dividends on Common Shares - $1.285 per share 3,276 -------------------------------------------------- BALANCES AT DECEMBER 31, 2000 10,080 $ 25,199 $100,239 $ 67,285 ==================================================
The accompanying notes are an integral part of these financial statements. 29 32 AMERICAN STATES WATER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) For the years ended December 31, ----------------------------------------------------------------------------------------------------- 2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 18,086 $ 16,101 $ 14,623 Adjustments for non-cash items: Depreciation and amortization 15,339 14,364 15,368 Deferred income taxes and investment tax credits 5,848 2,440 5,241 Other - net (1,043) 1,066 1,394 Changes in assets and liabilities: Customer receivables (616) (1,555) (769) Prepayments 915 1,037 1,688 Supply cost balancing accounts (6,371) (474) (14) Accounts payable (2,567) 3,559 (1,552) Taxes payable 153 (468) (3,215) Unbilled revenue (18) (2,042) (197) Accrued Interest 199 179 (463) Other - net 862 4,803 1,097 -------------------------------------- Net cash provided 30,787 39,010 33,201 -------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (45,758) (57,823) (43,623) Acquisition of Chaparral City Water Company Stock (18,484) - - Acquisition of Water Rights (1,653) - - -------------------------------------- Net cash used (65,895) (57,823) (43,623) -------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Securities 28,107 47,028 15,000 Receipt of advances for and contributions 2,512 5,300 3,381 Refunds on advances for constructions (2,961) (2,957) (2,651) Retirement or repayments of long-term debt and redemption of Preferred Shares - net (616) (435) (9,488) Net change in notes payable to banks 24,000 (17,000) 12,000 Common and preferred dividends paid (12,315) (11,554) (11,386) -------------------------------------- Net cash provided 38,727 20,382 6,856 -------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,619 1,569 (3,566) Cash and Cash Equivalents, Beginning of Year 2,189 620 4,186 -------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,808 $ 2,189 $ 620 -------------------------------------- TAXES AND INTEREST PAID: Income taxes paid $ 9,430 $ 12,137 $ 5,430 Interest paid $ 14,379 $ 11,834 $ 11,391 -------------------------------------- NON-CASH TRANSACTIONS: Property installed by developers and conveyed to Company $ 2,570 $ 4,096 $ 1,797 Assumption of Chaparral's long-term debt and non-current portion of Customer Deposit $ 11,425 N/A N/A ======================================
The accompanying notes are an integral part of these financial statements. 30 33 SOUTHERN CALIFORNIA WATER COMPANY BALANCE SHEETS
December 31, (in thousands) 2000 1999 ------------------------------------------------------------------------------------------------- ASSETS UTILITY PLANT, AT COST Water $ 570,836 $ 532,007 Electric 37,630 36,349 ------------------------- 608,466 568,356 Less - Accumulated depreciation (165,002) (151,733) ------------------------- 443,464 416,623 Construction work in progress 36,605 32,972 ------------------------- Net utility plant 480,069 449,595 ------------------------- OTHER PROPERTY AND INVESTMENTS 9,711 10,233 ------------------------- CURRENT ASSETS Cash and cash equivalents 1,545 2,020 Accounts receivable-Customers, less reserves of $498 in 2000; 10,071 10,135 $487 in 1999 Other 5,097 4,275 Intercompany receivable 376 - Unbilled revenue 11,363 11,345 Materials and supplies, at average cost 1,039 1,153 Supply cost balancing accounts 11,145 4,774 Prepayments 3,756 4,851 Accumulated deferred income taxes - net 3,256 5,573 ------------------------- Total current assets 47,648 44,126 ------------------------- DEFERRED CHARGES Regulatory tax-related assets 17,705 19,941 Other 11,396 8,599 ------------------------- Total deferred charges 29,101 28,540 ------------------------- TOTAL ASSETS $ 566,529 $ 532,494 =========================
The accompanying notes are an integral part of these financial statements 31 34 SOUTHERN CALIFORNIA WATER COMPANY BALANCE SHEETS
December 31, (in thousands) 2000 1999 --------------------------------------------------------------------------------- CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholders' equity $164,808 $160,023 Long-term debt 167,062 167,363 ---------------------- Total capitalization 331,870 327,386 ---------------------- CURRENT LIABILITIES Notes payable to banks 45,000 21,000 Long-term debt and preferred shares - current 275 340 Accounts payable 11,203 13,615 Intercompany payable 4,746 4 Taxes payable 5,675 5,700 Accrued interest 1,722 1,584 Other 13,512 12,818 ---------------------- Total current liabilities 82,133 55,061 ---------------------- OTHER CREDITS Advances for construction 58,195 57,485 Contributions in aid of construction 39,642 38,895 Accumulated deferred income taxes - net 49,569 48,302 Unamortized investment tax credits 2,973 3,064 Regulatory tax-related liability 1,817 1,861 Other 330 440 ---------------------- Total other credits 152,526 150,047 ====================== TOTAL CAPITALIZATION AND LIABILITIES $566,529 $532,494 ======================
The accompanying notes are an integral part of these financial statements 32 35 SOUTHERN CALIFORNIA WATER COMPANY STATEMENTS OF CAPITALIZATION
December 31, (in thousands) 2000 1999 ------------------------------------------------------------------------ COMMON SHAREHOLDERS' EQUITY: Common shares, no par value Outstanding 100 in 1998 and 1999 $ 98,391 $ 98,391 Additional paid-in capital - - Earnings reinvested in the business 66,417 61,632 ------------------------- 164,808 160,023 ------------------------- LONG-TERM DEBT 5.82% notes due 2003 12,500 12,500 6.64% notes due 2013 1,100 1,100 6.80% notes due 2013 2,000 2,000 8.50% fixed rate obligation due 2013 1,714 1,798 Variable rate obligation due 2014 6,000 6,000 Variable rate obligation due 2018 622 649 6.87% notes due 2023 5,000 5,000 7.00% notes due 2023 10,000 10,000 7.55% notes due 2025 8,000 8,000 7.65% notes due 2025 22,000 22,000 5.50% notes due 2026 7,950 8,000 6.81% notes due 2028 15,000 15,000 6.59% notes due 2029 40,000 40,000 9.56% notes due 2031 28,000 28,000 State Water Project due 2035 6,949 7,028 Other 462 588 ------------------------- 167,297 167,663 Less: Current maturities (235) (300) ------------------------- 167,062 167,363 ------------------------- TOTAL CAPITALIZATION $ 331,870 $ 327,386 =========================
The accompanying notes are an integral part of these financial statements 33 36 SOUTHERN CALIFORNIA WATER COMPANY STATEMENTS OF INCOME
($ in thousand, except per share amounts) For the years ended December 31, 2000 1999 1998 --------------------------------------------------------------------------------------------------- OPERATING REVENUES Water $ 167,529 $ 159,693 $ 134,794 Electric 14,366 13,338 13,201 ----------------------------------------- Total operating revenues 181,895 173,031 147,995 ----------------------------------------- OPERATING EXPENSES Water purchased 41,450 36,145 30,833 Power purchased for resale 10,664 7,119 5,013 Power purchased for pumping 7,442 7,394 7,009 Groundwater production assessment 7,489 7,170 7,567 Supply cost balancing accounts (6,371) (473) 28 Other operating expenses 16,306 15,475 14,434 Administrative and general expenses 25,545 28,077 21,884 Depreciation 15,086 13,516 12,270 Maintenance 10,191 9,794 7,311 Taxes on income 14,881 13,473 10,360 Property and other taxes 7,037 6,563 6,124 ----------------------------------------- Total operating expenses 149,720 144,253 122,833 ----------------------------------------- OPERATING INCOME 32,175 28,778 25,162 ----------------------------------------- OTHER INCOME Total other income - net (140) 509 1,231 ----------------------------------------- Income before interest charges 32,035 29,287 26,393 ----------------------------------------- INTEREST CHARGES Interest on long-term debt 11,512 11,294 9,612 Other interest and amortization of debt expense 2,838 1,651 1,595 ----------------------------------------- Total interest charges 14,350 12,945 11,207 ----------------------------------------- NET INCOME 17,685 16,342 15,186 Dividends on Preferred Shares - - (46) EARNINGS AVAILABLE FOR COMMON SHAREHOLDER $ 17,685 $ 16,342 $ 15,140 BASIC EARNINGS PER COMMON SHARE $ 176,850 $ 163,420 $ 151,400 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 100 100 100
The accompanying notes are an integral part of these financial statements. All information has been adjusted to reflect formation of holding company in 1998. 34 37 SOUTHERN CALIFORNIA WATER COMPANY STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Common Shares Earnings --------------------- Additional Reinvested Number Paid-in in the (in thousands) of Shares Amount Capital Business ------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1997 8,958 $ 22,394 $ 74,937 $ 53,722 Add: Transfer Preferred Shares & Investments 1,060 Transfer Preferred Shares & Investments 75,997 (75,997) Net Income 15,186 Deduct: Dividends on Preferred Shares 46 Dividends on Common Shares - $.63 per share for 8,957,671 shares 5,643 Dividends on Common Shares - $58,890 per share for 100 shares 5,889 -------------------------------------------------- BALANCES AT DECEMBER 31, 1998 100 $ 98,391 - $ 57,330 Add: Net Income 16,342 Deduct: Dividends on Common Shares - $30,900 per share 3,090 Dividends on Common Shares - $30,500 per share 3,050 Dividends on Common Shares - $29,000 per share 2,900 Dividends on Common Shares - $30,000 per share 3,000 -------------------------------------------------- BALANCES AT DECEMBER 31, 1999 100 $ 98,391 - $ 61,632 Add: Net Income 17,685 Deduct: Dividends on Common Shares - $32,000 per share 3,200 Dividends on Common Shares - $31,000 per share 3,100 Dividends on Common Shares - $33,000 per share 3,300 Dividends on Common Shares - $33,000 per share 3,300 ================================================== BALANCES AT DECEMBER 31, 2000 100 $ 98,391 - $ 66,417 ==================================================
The accompanying notes are an integral part of these financial statements 35 38 SOUTHERN CALIFORNIA WATER COMPANY STATEMENTS OF CASH FLOWS
For the years ended December 31, (in thousands) 2000 1999 1998 ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 17,685 $ 16,342 $ 15,185 Adjustments for non-cash items: Depreciation and amortization 15,086 14,229 15,100 Deferred income taxes and investment tax credits 5,685 2,430 5,224 Other - net (479) 1,308 1,077 Changes in assets and liabilities: Customer receivables 64 (1,640) 1,046 Prepayments 1,095 (1,137) 660 Supply cost balancing accounts (6,371) (474) (14) Accounts payable (2,412) 3,561 (1,716) Taxes payable (25) (447) (2,968) Unbilled revenue (18) (2,042) (197) Accrued Interest 138 179 (463) Other - net 4,352 7,074 362 -------------------------------------- Net cash provided 34,800 39,383 33,296 -------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (45,560) (57,823) (43,623) -------------------------------------- Net cash used (45,560) (57,823) (43,623) -------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Debt Securities - 47,028 15,000 Receipt of advances for and contributions in aid of construction 2,512 3,883 3,381 Refunds on advances for construction (2,961) (1,540) (2,651) Repayments of long-term debt and redemption of Preferred Shares - net (366) (395) (9,488) Net change in notes payable to banks 24,000 (17,000) 12,000 Common and preferred dividends paid (12,900) (12,040) (11,577) -------------------------------------- Net cash provided 10,285 19,936 6,665 -------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (475) 1,496 (3,662) Cash and Cash Equivalents, Beginning of Year 2,020 524 4,186 -------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,545 $ 2,020 $ 524 -------------------------------------- TAXES AND INTEREST PAID: Income taxes paid $ 9,152 $ 12,241 $ 5,430 Interest paid $ 14,120 $ 11,834 $ 11,391 -------------------------------------- NON-CASH TRANSACTIONS: Property installed by developers and conveyed to Company $ 2,570 $ 4,096 $ 1,797 ======================================
The accompanying notes are an integral part of these financial statements. 36 39 NOTES TO FINANCIAL STATEMENTS American States Water Company (AWR) is the parent company of Southern California Water Company (SCW), American States Utility Services, Inc. (ASUS) and Chaparral City Water Company (CCWC). SCW is a public utility engaged principally in the purchase, production, distribution and sale of water as well as in the distribution of electricity in several California mountain communities. The California Public Utilities Commission (CPUC) regulates SCW's water and electric business including properties, rates, services, facilities and other matters. CCWC is an Arizona public utility company regulated by The Arizona Corporation Commission (ACC) serving approximately 11,000 customers in the town of Fountain Hills, Arizona and a portion of the City of Scottsdale, Arizona. 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. ASUS performs non-regulated, water related services and operations on a contract basis. There is no regulatory oversight of ASUS or AWR. The consolidated financial statements include the accounts of AWR, SCW, ASUS and CCWC. AWR's assets and revenues are primarily those of SCW. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of AWR and its wholly owned subsidiaries SCW, ASUS and CCWC and are collectively referred to as Registrant. Inter-company transactions and balances have been eliminated. The preparation of these financial statements required the use of certain estimates by management in determining Registrant's assets, liabilities, revenues and expenses. The utility subsidiaries, SCW and CCWC, have incurred various costs and received various credits reflected as regulatory assets and liabilities. Accounting for such costs and credits as regulatory assets and liabilities is in accordance with Statement of Financial Accounting Standards No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). This statement sets forth the application of generally accepted accounting principles for those companies whose rates are established by or are subject to approval by an independent third-party regulator. Under SFAS 71, utility companies defer costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that those costs and credits will be recognized in the rate making process in a period different from the period in which they would have been reflected in income by an unregulated company. These deferred regulatory assets and liabilities are then reflected in the income statement in the period in which the same amounts are reflected in the rates charged for service. Property and Depreciation: SCW and CCWC capitalize, as utility plant, the cost of additions and replacements of retirement units. Such cost includes labor, material and certain indirect charges. Depreciation is computed on the straight-line, remaining-life basis. For the years 2000, 1999, and 1998 the aggregate provisions for depreciation for SCW approximated 2.6%, 2.5% and 2.5% of the beginning of the year depreciable plant, respectively. The aggregate provision for depreciation for CCWC is 2.5% for each of the same three years. At December 31, 2000, Registrant has $13,179,000 in goodwill included in Other Property and Investments. This amount represents the difference between the purchase price of the common equity of CCWC and CCWC's book equity at the time of closing and is being amortized over a period of 40 years. Interest: Interest is generally not capitalized for financial reporting purposes, as such procedure is not followed for ratemaking purposes. Revenues: Revenues include amounts billed to customers and unbilled revenues representing amounts to be billed for usage from the last meter reading date to the end of the accounting period. Basic Earnings Per Common Share: Basic Earnings per Common Share are based upon the weighted average number of Common Shares outstanding and net income after deducting preferred dividend requirements. Fully Diluted Earnings Per Common Share: Diluted Earnings Per Common Share are based upon the weighted average number of Common Shares including both outstanding and potential shares issuable in connection with stock options granted under Registrant's 2000 Stock Incentive Plan, and net income after deducting preferred dividend requirements. Supply Cost Balancing Accounts: As permitted by the CPUC, Registrant maintains water and electric supply cost balancing accounts for SCW to account for under-collections and over-collections of revenues designed to recover such costs. Recoverability of such costs is recorded in income and charged to balancing accounts when such costs are 37 40 incurred. The balancing accounts are reversed when such costs are recovered through rate adjustments. Registrant accrues interest on its supply cost balancing accounts at the rate prevailing for 90-day commercial paper. Registrant does not maintain a Supply Cost Balancing Account for CCWC. Debt Issue Expense and Redemption Premiums: Original debt issue expenses are amortized over the lives of the respective issues. Premiums paid on the early redemption of debt, which is reacquired through refunding, are deferred and amortized over the life of the debt issued to finance the refunding. The redemption premium on debt reacquired without refunding is amortized over the remaining period the debt would have been outstanding. Other Credits: Advances for construction represent amounts advanced by developers, which are generally refundable at rates ranging from 10% to 22% of the revenue received from the installations for which funds were advanced or in equal annual installments over periods of time ranging from 10 to 40-year periods. Contributions-in-aid of construction are similar to advances, but require no refunding and are amortized over the useful lives of the related property. Cash and Cash Equivalents: For purposes of the Statements of Cash Flows, cash and cash equivalents include short-term cash investments with an original maturity of three months or less. Financial Instrument Risk: Registrant does not carry any financial instruments with off-balance sheet risk nor does its operations result in concentrations of credit risk. Fair Value of Financial Instruments: The table below estimates the fair value of each represented class of financial instrument held by Registrant. For cash and cash equivalents, accounts receivable and short-term debt, the carrying amount is used. Otherwise, rates available to Registrant at December 31, 2000 and 1999 for debt with similar terms and remaining maturities were used to estimate fair value for long-term debt. Changes in the assumptions will produce differing results.
2000 1999 ------------------------------------------------------------------------------- (dollars in thousands) Carrying amount Fair value Carrying amount Fair value --------------------------------------------------------------------------------------------------------------- Financial assets: Cash $ 5,808 $ 5,808 $ 2,189 $ 2,189 Accounts receivable 27,077 27,077 25,827 25,827 Financial liabilities: Short-term debt 45,000 45,000 21,000 21,000 Long-term debt $ 177,147 $ 186,475 $ 167,663 $ 161,843 -------------------------------------------------------------------------------
NOTE 2 - CAPITAL STOCK All of the series of Preferred Shares outstanding at December 31, 2000 are redeemable at the option of AWR. At December 31, 2000, the redemption price per share for each series of $25 Preferred Shares was $27.00, $26.50 and $25.25 for the 4%, 4 1/4% and 5% Series, respectively. To each of the redemption prices must be added accrued and unpaid dividends to the redemption date. The $25 Preferred Shares, 5% Series, are subject to mandatory redemption provisions of 1,600 shares per year. The annual aggregate mandatory redemption requirement for this Series for the five years subsequent to December 31, 2000 is $40,000 each year. AWR has a Registration Statement on file with the 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 shares under this Registration Statement. Net proceeds from this sale were used to fund a portion of the purchase price of CCWC and will be invested in SCW. As of December 31, 2000, approximately $31,080,000 remained for issuance under this registration statement. For the year ended December 31, 2000, Registrant also issued 6,961 and 7,997 Common Shares under Registrant's Common Share Purchase and Dividend Reinvestment Plan (DRP) and the 401(k) Plan. There are 493,039 and 63,411 Common Shares authorized but unissued under the DRP and the 401(k) Plan, respectively, at December 31, 2000. For the years ended December 31, 1999 and December 31, 1998, all shares issued under Registrant's Common Share Purchase and Dividend Reinvestment Plan (DRP) and the 401(k) Plan were purchased on the open market. Shares 38 41 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 45,657 Common Shares upon exercise were granted to certain eligible employees on May 1, 2000. As of December 31, 2000 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 were no dividends distributed from CCWC to AWR in 2000. In 1998, the Board of Directors adopted a Shareholder Rights Plan (Rights Plan) and authorized a dividend distribution of one right (a Right) to purchase 1/1000th of Junior Participating Preferred Share for each outstanding Common Share. The Rights Plan became effective in September 1998 and will expire in September 2008. The Rights Plan is designed to provide shareholders' protection and to maximize shareholder value by encouraging a prospective acquirer to negotiate with the board. Each Right represents a right to purchase 1/1000th of Junior Participating Preferred Share at the price of $120, subject to adjustment (the Purchase Price). Each Junior Participating Preferred Share is entitled to receive a dividend equal to 1000 times any dividend paid on each Common Share and 100 votes per share in any shareholder election. The Rights become exercisable upon occurrence of a Distribution Date. A Distribution Date event occurs if (i) any person accumulates 15% of the then outstanding Common Shares, (ii) any person presents a tender offer which caused the person's ownership level to exceed 15% and the board determines the tender offer not to be fair to AWR's shareholders, or (iii) the board determines that a shareholder maintaining a 15% interest in the Common shares could have an adverse impact on AWR or could attempt to pressure AWR to repurchase the holder's shares at a premium. Until the occurrence of a Distribution Date, each Right trades with the Common Share and is not separately transferable. When a Distribution Date occurs, AWR would distribute separately Rights Certificates to Common Shareholders and the Rights would subsequently trade separate from the Common Shares and each holder of a Right, other than the acquiring person whose Rights will thereafter be void, will have the right to receive upon exercise at its then current Purchase Price that number of Common Shares having a market value of two times the Purchase Price of the Right. If AWR merges into the acquiring person or enters into any transaction that unfairly favors the acquiring person or disfavors AWR's other shareholders, the Right becomes a right to purchase Common Shares of the acquiring person having market value of two times the Purchase Price. The board of directors may determine that, in certain circumstances, a proposal, which would cause a Distribution Date, is in the best interest of AWR's shareholders. Therefore, the board of directors may, at its option, redeem the Rights at a redemption price of $0.01 per Right. NOTE 3 - COMPENSATING BALANCES AND BANK DEBT AWR maintains a revolving credit facility with a $25 million aggregate borrowing capacity. At December 31, 2000, no amount was outstanding under this facility. The aggregate short-term borrowing capacity available to SCW under its three bank lines of credit was $60 million as of December 31, 2000, of which a total of $45 million was outstanding. There were no compensating balances required. Loans can be obtained at the option of Registrant and bear interest at rates based on floating prime borrowing rates or at money market rates. SCW's short-term borrowing activities for the last three years were as follows:
December 31, ----------------------------------- (in thousands, except percent) 2000 1999 1998 ------------------------------------------------------------------------------ Balance Outstanding at December 31, $45,000 $21,000 $38,000 Interest Rate at December 31, 7.19% 7.35% 5.86% Average Amount Outstanding $38,531 $ 8,775 $19,309 Weighted Average Annual Interest Rate 7.11% 5.11% 6.78% Maximum Amount Outstanding $50,000 $21,000 $39,000 -----------------------------------
39 42 There were no short-term borrowing activities at AWR parent or any of its other subsidiaries. NOTE 4 - LONG TERM DEBT In March 1998, SCW sold the remaining $15 million under its Series B Medium Term Note Program and in December 1998, SCW redeemed all of its outstanding 10.10% Notes. In January 1999, $40 million of Series C Medium Term Notes were sold. In January 2001, the remaining $20 million of Series C Medium Term Notes were sold. The funds resulting from the issuances were used initially to repay short-term bank borrowings and, after that, to fund construction expenditures. SCW has no mortgage debt, and leases and other similar financial arrangements are not material. CCWC has long-term Industrial Development Authority Bonds (IDA Bonds) and a repayment contract due 2006. Substantially all of the utility plant of CCWC is pledged to secure its IDA Bonds. The Bond Agreement, among other things, (i) requires CCWC to maintain certain financial ratios, (ii) restricts CCWC's ability to incur debt and make liens, sell, lease or dispose of assets, merge with another corporation, and (iii) restricts the payment of dividends. SCW has posted an Irrevocable Letter of Credit, which expires April 30, 2001 in the amount of $750,000 with an annual fee of 0.6% as security for its self-insured workers' compensation plan. SCW has also provided an Irrevocable Letter of Credit with a fee of 0.9%, which expires July 31, 2002, in the amount of $6,296,000 to a trustee with respect to the variable rate obligation issued by the Three Valleys Municipal Water District. Additionally, in November 2000, SCW posted an Irrevocable Letter of Credit with an annual fee of 2.0%, which expires in October 1, 2001, in the amount of $250,000 as security for the deductible in the company's new Business Auto insurance policy. Annual maturities of all long-term debt, including capitalized leases, amount to $698,799, $749,787, $13,290,644, $839,486 and $893,362 for the five years ending December 31, 2001 through 2005, respectively. NOTE 5 - TAXES ON INCOME Registrant provides deferred income taxes for temporary differences under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), for certain transactions which are recognized for income tax purposes in a period different from that in which they are reported in the financial statements. The most significant items are the tax effects of accelerated depreciation, the supply cost balancing accounts and advances for and contributions-in-aid-of-construction. SFAS No. 109 also requires that rate-regulated enterprises record deferred income taxes for temporary differences accorded flow-through treatment at the direction of a regulatory commission. The resulting deferred tax assets and liabilities are recorded at the expected cash flow to be reflected in future rates. Since the CPUC has consistently permitted the recovery of previously flowed-through tax effects, SCW has established regulatory liabilities and assets offsetting such deferred tax assets and liabilities. Deferred investment tax credits are being amortized to other income ratably over the lives of the property, giving rise to the credits. The significant components of deferred tax assets and deferred tax liabilities, as reflected in the balance sheets, and the accumulated net deferred income tax liabilities at December 31, 2000 and 1999 were:
December 31, ----------------------- (dollars in thousands) 2000 1999 -------------------------------------------------------------------- Deferred tax assets: Balancing accounts $ 3,103 $ (175) State tax effect 146 5,721 ----------------------- 3,249 5,546 ----------------------- Deferred tax liabilities Depreciation (46,540) (44,939) Advances and contributions 14,969 15,862 Other property related (8,728) (10,007) Other non-property related (9,270) (9,218) ----------------------- (49,569) (48,302) ----------------------- Accumulated deferred income taxes - net $(46,320) $(42,756) -----------------------
40 43 The current and deferred components of income tax expense are as follows:
December 31, -------------------------------------- (dollars in thousands) 2000 1999 1998 ---------------------------------------------------------------------------------------------------- Current Federal $ 7,991 $ 9,360 $ 5,219 State 2,242 2,799 1,727 -------------------------------------- Total current tax expense 10,233 12,159 6,946 -------------------------------------- Deferred - Federal and State: Accelerated depreciation 3,556 3,405 3,319 Balancing accounts 2,863 (207) 6 Advances and contributions - - - California privilege year franchise tax (1,216) (970) (544) Other (392) (664) (398) -------------------------------------- Total deferred tax expense 4,811 1,564 2,383 -------------------------------------- Total income tax expense 15,044 13,723 9,329 -------------------------------------- Income taxes included in operating expenses 15,127 13,345 10,130 Income taxes included in other income and expenses - net (83) 378 (801) -------------------------------------- Total income tax expense $ 15,044 $ 13,723 $ 9,329 --------------------------------------
Additional information regarding taxes on income is set forth in the following table:
December 31, ---------------------------------------- (dollars in thousands, except percent) 2000 1999 1998 ------------------------------------------------------------------------------------------------ Federal taxes on pre-tax income at statutory rates $ 11,595 $ 10,438 $ 8,470 Increase (decrease) in taxes resulting from: State income tax expense 2,722 2,605 1,654 Depreciation 1,424 1,184 944 Federal benefit of state taxes (953) (912) (579) Adjustments to prior years' provisions 101 433 (97) Payment of premium on redemption 66 66 (813) Other - net 89 (91) (250) ---------------------------------------- Total income tax expense $ 15,044 $ 13,723 $ 9,329 ---------------------------------------- Pre-tax income $ 33,130 $ 29,824 $ 23,952 ---------------------------------------- Effective income tax rate 45.4% 46.0% 38.9% ----------------------------------------
NOTE 6 - EMPLOYEE BENEFIT PLANS Registrant maintains a pension plan (the Plan) that provides eligible employees (those age 21 and older, with one year of service) monthly benefits upon retirement based on average salaries and length of service. The normal retirement benefit is equal to 2% of the five highest consecutive years average earnings multiplied by the number of years of credited service, up to a maximum of 40 years, reduced by a percentage of primary social security benefits. There is also an early retirement option. Annual contributions are made to the Plan, which comply with the funding requirements of the Employee Retirement Income Security Act (ERISA). Registrant also provides all active employees medical, dental and vision care benefits through a medical insurance plan. Eligible employees who retired prior to age 65, and/or their spouses, were able to retain the benefits under the active plan until reaching age 65. Eligible employees upon reaching age 65, and those employees retiring at or after age 65, and/or their spouses, receive coverage through a Medicare supplement insurance policy paid for by Registrant subject to an annual cap limit. The CPUC has issued a decision, which provides for the recovery in rates of tax-deductible contributions made to a separate trust fund. In accordance with that decision, Registrant established two separate trusts in 1995, one for those retirees who were subject to a collective bargaining agreement and another for all other retirees. Registrant's funding policy is to contribute annually an amount at least equal to the revenues authorized to be collected through rates for post-retirement benefit costs. Post-retirement benefit costs for 1993, 1994 and 1995 were estimated at a total of $1.6 million 41 44 and have been recorded as a regulatory asset for recovery over a 20-year period. The unamortized balance at December 31, 2000 was approximately $539,500. At December 30, 1999, Registrant had 728 participants in the Plan, 61 of these are employees covered by collective bargaining agreements, the earliest of which expires in 2001. The following table sets forth the Plan's funded status and amounts recognized in Registrant's balance sheets and the components of net pension cost and accrued post-retirement liability at December 31, 2000 and 1999:
Pension Benefits Other Benefits -------------------------------------------------------- (dollars in thousands) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------ CHANGE IN BENEFIT OBLIGATION: Benefit Obligation at beginning of year $ 35,513 $ 38,572 $ 4,431 $ 4,363 Service Cost 1,530 1,963 103 125 Interest Cost 2,649 2,538 313 305 Actuarial Loss/(Gain) 2,164 (6,255) (32) (171) Benefits Paid (1,335) (1,305) (230) (191) -------------------------------------------------------- Benefit Obligation at end of year $ 40,521 $ 35,513 $ 4,585 $ 4,431 CHANGES IN PLAN ASSETS: Fair Value of Plan Assets at beginning $ 47,776 $ 39,541 $ 1,760 $ 1,442 of year Actual Return of Plan Assets (1,336) 8,277 70 25 Employer Contributions - 1,264 458 484 Benefits Paid (1,335) (1,305) (230) (191) -------------------------------------------------------- Fair Value of Plan Assets at end of year $ 45,105 $ 47,777 $ 2,058 $ 1,760 RECONCILIATION OF FUNDED STATUS: Funded Status $ 4,583 $ 12,263 $ (2,528) $ (2,671) Unrecognized Transition Obligation - 57 5,868 6,288 Unrecognized Net Loss/(Gain) (2,969) (10,683) (1,704) (1,869) Unrecognized Prior Service Cost 311 355 (3,028) (3,228) -------------------------------------------------------- Prepaid/(Accrued) Pension Cost $ 1,925 $ 1,992 $ (1,392) $ (1,480) WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31: Discount Rate 7.25% 7.75% 7.25% 7.75% Long-term Rate of Return 8.00% 8.00% 8.00% 8.00% Salary Assumption 4.00% 4.00% - -
A sliding scale for assumed health care cost increases was used for both periods, starting at 7% in 1999 and then remaining at 6% thereafter. The components of net periodic post-retirement benefits cost for 2000 and 1999 are as follows:
Pension Benefits Other Benefits ------------------------------------------------- (dollars in thousands) 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------- COMPONENTS OF NET PERIODIC BENEFITS COST Service Cost $ 1,530 $ 1,963 $ 103 $ 125 Interest Cost 2,649 2,538 313 305 Actual Return on Plan Assets 1,336 (8,277) (70) (25) Net Amortization (5,448) 5,207 23 58 ------------------------------------------------- Net Periodic Pension Cost $ 67 $ 1,431 $ 369 $ 463
42 45 Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage-Point 1-Percentage-Point (dollars in thousands) Increase Decrease --------------------------------------------------------------------------------------------------- Effect on Total of Service and Interest Cost Components $ 12 $ (11) Effect on Postretirement Benefit Obligation $ 181 $ (160)
Registrant has a 401(k) Investment Incentive Program under which employees may invest a percentage of their pay, up to a maximum investment prescribed by law, in an investment program managed by an outside investment manager. Company contributions to the 401(k) are based upon a percentage of individual employee contributions and, for 2000, 1999 and 1998, totaled $968,019, $920,340, and $874,113, respectively. NOTE 7 - BUSINESS RISKS AND CONCENTRATION OF SALES Registrant's utility operations are engaged in supplying water and electric service to the public. Registrant is required to provide service and grant credit to customers within its defined service areas. Although Registrant has a diversified base of residential, industrial and other customers, revenues derived from commercial and residential water customers accounted for approximately 91% of total water revenues in 2000 and 90% in 1999. Registrant faces additional risks associated with weather conditions, adequacy and quality of water supplies, regulatory decisions, pronouncements and laws, water-related litigation, general business conditions and condemnation. Approximately 43% of the SCW's water supply is purchased from wholesalers of imported water, with the remainder produced from company wells. The long-term availability of imported water supplies is dependent upon, among other things, drought conditions throughout the state, increases in population, water quality standards and legislation that may potentially reduce water supplies. Reservoir storage statewide is down at the end of 2000 from year ago levels. The California Department of Water Resources has issued an early indication in January 2001 that if the trend of lower than normal precipitation continues, allocation of water to state water project contractors, including Metropolitan Water District (MWD), could be curtailed. The MWD, however, has publicly assured consumers that it is well prepared to help the region through one or more dry years. January and February 2001 brought significant precipitation that contributed to return the reservoir levels to normal. CCWC has a long-term water supply contract with the Central Arizona Water Conservation District through September 2043 and is entitled to take 6,978 acre feet of water per year from the Central Arizona Project (CAP). 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 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. 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. There has been a substantial increase in the costs of purchased power in recent months. 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 repowering 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 division is difficult to predict. For the short-term, however, management expects energy costs to remain high and to continue to be volatile. 43 46 In response to the potential for rising electricity costs, 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 service division at a price of $35.50 per MW. This contract expires April 30, 2001. Dynegy also procured electric energy requirements above the 12 MW forward purchase contract. The average minimum load at SCW's Bear Valley electric service division has been approximately 12 MW. The average winter load has been 18 MW with a winter peak of 30 MW when the snowmaking machines at the ski resorts are operating. In a continuing effort to control the escalation of electric energy costs for SCW's Bear Valley Electric division, SCW is considering a number of options including (i) renegotiation of the block forward purchase of electric energy, (ii) purchase of electric energy from on-site generation facilities installed by a third party and (iii) 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 division. Management believes that these solutions in whole or in part represent significant savings for customers relative to reliance on spot purchases in the open market. Management further believes that costs incurred are recoverable from customers, although 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 run-up in costs. NOTE 8 - CONTINGENCIES 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 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. SCW has been named as a defendant in fourteen lawsuits that allege that SCW delivered contaminated water to its customers. Plaintiffs in these actions seek damages, including general, special, and punitive damages, according to proof of trial, as well as attorney's fees on certain causes of action, costs of suit, and other unspecified relief. Eleven of the lawsuits involve customer service areas located in Los Angeles County in the southern portion of California; three of the lawsuits involve a customer service area located in Sacramento County in northern California. On September 1, 1999, the 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 pertaining to water quality filed against water utilities, including SCW. Seven out of fourteen lawsuits against SCW had been ordered for dismissal by the state Court of Appeals. On October 11, 1999, one group of plaintiffs appealed the decision 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. In light of the breadth of plaintiff's claims, the lack of factual information regarding plaintiff's claims and injuries, if any, the fact that no discovery has yet been completed, SCW is unable to determine at this time what, if any, potential liability it may have with respect to these claims. SCW intends to vigorously defend itself against these allegations. Management cannot predict the outcome of these proceedings and if SCW were found liable, SCW would pursue recovery through its insurance coverage providers. In response to those lawsuits and similar actions, in March 1998 the CPUC issued an Order Instituting Investigation (OII) directed to all Class A and B water utilities in California, including SCW, into whether existing standards and policies regarding drinking water quality adequately protect the public health and whether those standards and policies are being uniformly complied with by those water utilities. The OII notes the constitutional and statutory jurisdiction of the CPUC and the California Department of Health Services (DOHS) to establish and enforce adherence to water quality standards for water delivered by utilities to their customers and, in the case of the CPUC, to establish rates which permit water utilities to furnish water that meets the established water quality standards at prices which are both affordable and that allow the utility to earn a reasonable return on its investment. On November 2, 2000, a final decision from the CPUC concludes that, among other things, 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. 44 47 Management believes that proper insurance coverage and reserves are in place to insure against anticipated property, general liability and workers' compensation claims. 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 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. (Aerojet) for causing the contamination of the Sacramento County Groundwater Basin. On March 22, 2000, Aerojet 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 December 31, 2000, approximately $3,268,000 has been recorded in the memorandum accounts. SCW filed an Advice Letter on December 26, 2000 for recovery of costs incurred on or before August 31, 2000 in accordance with CPUC approved procedures. The filing was to recover approximately $1,800,000 for costs associated with lawsuits against Aerojet and the CRWQCB, and $879,000 for OII. Management 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. NOTE 9 - CONSTRUCTION PROGRAM Registrant's 2001 construction budget provides for gross expenditures of approximately $57 million, $5 million is to be obtained from developers and others. Of this amount, approximately $13 million is subject to CPUC approval of an advice letter filing. Absent such approval, this amount would be included in the next general rate case filing for SCW's Region II. ASUS and CCWC do not have material capital commitments; however, ASUS actively seeks opportunities to own, lease or operate municipal water and wastewater systems, which may involve significant capital commitments. NOTE 10 - ALLOWANCE FOR DOUBTFUL ACCOUNTS The table below presents Registrant's provision for doubtful accounts charged to expense and accounts written off, net of recoveries. Provisions included in 2000 represent both SCW and CCWC. Provisions in 1999 and 1998 represent SCW only.
December 31, ----------------------------- (dollars in thousands) 2000 1999 1998 -------------------------------------------------------------------------- Balance at beginning of year $ 487 $ 403 $ 466 Provision charged to expense 630 852 631 Accounts written off, net of recoveries (607) (768) (694) ----------------------------- Balance at end of year $ 510 $ 487 $ 403 -----------------------------
Neither AWR parent nor ASUS have established any provision for doubtful accounts. NOTE 11 - BUSINESS SEGMENTS AWR has three principal business units: water and electric distribution units, through its SCW subsidiary, a water service utility operation conducted through its CCWC unit, and a non-regulated activity unit through the 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 operating segments, CCWC and non-regulated businesses. 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. 45 48
(dollars in thousands) Year Ended December 31, 2000 ---------------------------------------------------------------------------------------------- SCW ------------------------ CCWC Non- Consolidated Water Electric Water Regulated* AWR ----------------------------------------------------------------- Operating revenues $167,529 $ 14,366 $ 1,266 $ 799 $183,960 Operating income before income taxes 42,542 4,520 292 80 47,434 Identifiable assets 453,538 26,531 29,027 - 509,096 Depreciation expense 13,685 1,401 253 - 15,339 Capital additions $ 43,483 $ 2,107 $ 193 - $ 45,786
(dollars in thousands) Year Ended December 31, 1999 ----------------------------------------------------------------------------------------------- SCW ---------------------- CCWC Non- Consolidated Water Electric Water Regulated* AWR ------------------------------------------------------------------ Operating revenues $159,693 $ 13,338 N/A $ 390 $173,421 Operating income before income taxes 38,430 3,821 N/A (392) 41,859 Identifiable assets 423,870 25,725 N/A - 449,595 Depreciation expense 12,172 1,344 N/A 134 13,650 Capital additions $ 49,405 $ 2,173 N/A - $ 51,578
(dollars in thousands) Year Ended December 31, 1998 ----------------------------------------------------------------------------------------------- SCW ----------------------- CCWC Non- Consolidated Water Electric Water Regulated* AWR ------------------------------------------------------------------ Operating revenues $134,794 $ 13,201 N/A $ 65 $148,060 Operating income before income taxes 31,675 3,847 N/A (331) 35,191 Identifiable assets 389,772 24,981 N/A - 414,753 Depreciation expense 10,630 1,640 N/A 268 12,538 Capital additions $ 37,109 $ 2,116 N/A - $ 39,225
* Includes amounts from ASUS and AWR parent. NOTE 12 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The quarterly financial information presented below is unaudited. The business of Registrant is of a seasonal nature and it is management's opinion that comparisons of basic earnings for the quarter periods do not reflect overall trends and changes in Registrant's operations.
Basic Earnings (in thousands, Operating Revenues Operating Income Net Income per Share except per share ---------------------- ---------------------- ---------------------- ---------------------- amounts) 2000 1999 2000 1999 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------ First Quarter $ 38,749 $ 36,132 $ 6,202 $ 5,854 $ 2,895 $ 2,977 $ 0.32 $ 0.33 Second Quarter 45,428 42,116 7,525 7,251 3,919 4,406 0.44 0.49 Third Quarter 55,248 51,597 11,791 10,266 8,218 6,690 0.86 0.74 Fourth Quarter 44,535 43,576 6,788 5,143 3,053 2,028 0.30 0.23 ---------------------------------------------------------------------------------------------------------- Year $183,960 $173,421 $ 32,307 $ 28,514 $ 18,086 $ 16,101 $ 1.92 $ 1.79 ----------------------------------------------------------------------------------------------------------
NOTE 13 - YEAR 2000 READINESS UPDATE Registrant has no Y2K incidents, business disruptions, failures or legal proceedings to report. There were no actual or anticipated effects or changes to Registrant's operating trends or revenue patterns as a result of the millennium turnover. Not all Y2K problems were necessarily expected to surface in early 2000. Registrant does not have, and may never fully have, sufficient information about the Y2K exposure of third parties to adequately predict the risks posed by them to Registrant. If the third parties later discover any Y2K problems that are not remedied, resulting problems could include loss of utility services and disruption of water supplies. Costs incurred to address Y2K issues are recovered through water rates. The CPUC has authorized an increase in rates of $830,000 per year, effective October 24, 2000. 46 49 REPORT OF MANAGEMENT The consolidated financial statements contained in the annual report were prepared by the management of American States Water Company, which is responsible for their integrity and objectivity. The consolidated financial statements were prepared in accordance with generally accepted accounting principles and include, where necessary, amounts based upon management's best estimates and judgments. All other financial information in the annual report is consistent with the consolidated financial statements and is also the responsibility of management. Registrant maintains systems of internal control, which are designed to help safeguard, the assets of Registrant and provide reasonable assurance that accounting and financial records can be relied upon to generate accurate financial statements. These systems include the hiring and training of qualified personnel, appropriate segregation of duties, delegation of authority and an internal audit function, which has reporting responsibility to the Audit Committee of the board of directors. The Audit Committee, composed of three outside directors, exercises oversight of management's discharge of its responsibilities regarding the systems of internal control and financial reporting. The committee periodically meets with management, the internal auditor and the independent accountants to review the work and findings of each. The committee also reviews the qualifications of, and recommends to the board of directors, a firm of independent accountants. The independent accountants, Arthur Andersen LLP, have performed an audit of the consolidated financial statements in accordance with generally accepted auditing standards. Their audit gave consideration to Registrant's system of internal accounting control as a basis for establishing the nature, timing and scope of their work. The result of their work is expressed in their Report of Independent Public Accountants. s/ Floyd E. Wicks s/ McClellan Harris III ------------------------------- --------------------------------- President, Chief Executive Officer Chief Financial Officer, Vice President - Finance, Treasurer and Corporate Secretary February 28, 2001 47 50 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and the Board of Directors of American States Water Company: We have audited the accompanying consolidated balance sheets and statements of capitalization of American States Water Company and the balance sheets and statements of capitalization of Southern California Water Company (California corporations), as of December 31, 2000 and 1999 and the related consolidated statements of income, changes in common shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000 of American States Water Company and the related statements of income, changes in common shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000 of Southern California Water Company. These financial statements are the responsibility of the Registrant's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American States Water Company and its subsidiary, Southern California Water Company, as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. s/ Arthur Andersen LLP ------------------------------- Arthur Andersen LLP Los Angeles, California February 16, 2001 48 51 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information responsive to Part III, Item 10 is included in the Proxy Statement, to be filed by Registrant with the Commission pursuant to Regulation 14A, under the captions therein entitled "Election of Directors" and "Executive Officers - Experience, Security Ownership and Compensation" and is incorporated herein by reference pursuant to General Instruction G(3). ITEM 11. EXECUTIVE COMPENSATION Information responsive to Part III, Item 11 is included in the Proxy Statement, to be filed by Registrant with the Commission pursuant to Regulation 14A, under the captions therein entitled "Election of Directors" and "Executive Officers - Experience, Security Ownership and Compensation" and "Performance Graph" and is incorporated herein by reference pursuant to General Instruction G(3). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information responsive to Part III, Item 12 is included in the Proxy Statement, to be filed by Registrant with the Commission pursuant to Regulation 14A, under the captions therein entitled "Election of Directors" and "Executive Officers - Experience, Security Ownership and Compensation" and is incorporated herein by reference pursuant to General Instruction G(3). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information responsive to Part III, Item 13 is included in the Proxy Statement, to be filed by Registrant with the Commission pursuant to Regulation 14A, under the captions therein entitled "Election of Directors" and is incorporated herein by reference pursuant to General Instruction G(3). PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Reference is made to the Financial Statements incorporated herein by reference to Part II, Item 8 hereof. 2. All required schedules may be found in the Financial Statements and Notes to Financial Statements incorporated herein by reference to Part II, Item 8 hereof or at the conclusion of this Item. Schedules II, III, IV, and V are omitted as they are not applicable. (b) Registrant filed a Form 8-K with the Securities and Exchange Commission on August 11, 2000, which indicated that Registrant had agreed to issue up to 1,000,000 of its Common Shares pursuant the terms of an Underwriting Agreement dated August 10, 2000. Included as exhibits to the form 8-K were Underwriting Agreement dated August 10, 2000 among the Registrant and the underwriters, and Opinion of O'Melveny & Myers LLP as to the validity of the Common Shares. There were no financial statements filed with this Form 8-K. 49 52 (c) Exhibits - 3.1 By-Laws of American States Water Company incorporated herein by reference to Registrant's Form 8-K, dated November 2, 1998. Commission File No. 333-47647. 3.2 By-laws of Southern California Water Company incorporated by reference to Registrant's Form 10-K for the year ended December 31, 1998. Commission File No. 001-14431. 3.3 Amended and Restated Articles of Incorporation of American States Water Company incorporated herein by reference to Registrant's Form 8-K, dated November 2, 1998. Commission File No. 333-47647. 3.3.1 Certificate of Amendment of Amended and Restated Articles of Incorporation, dated August 25, 1998, of American States Water Company incorporated by reference to Registrant's Form 10-K for the year ended December 31, 1998. Commission File No. 001-14431. 3.3.2 Certificate of Amendment of Amended and Restated Articles of Incorporation of American States Water Company, dated August 25, 1999 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1999. 3.3 Restated Articles of Incorporation of Southern California Water Company incorporated herein by reference to Registrant's Form 8-K, dated January 20, 1999. Commission File No. 000-01121. 4.1 Amended and Restated Rights Agreement, dated January 25, 1999, by and between American States Water Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent incorporated by reference to Registrant's Form 10-K for the year ended December 31, 1998. Commission File No. 001-14431. 4.2 Indenture, dated September 1, 1993 between Southern California Water Company and Chemical Trust Company of California incorporated herein by reference to Registrant's Form 8-K. Registration No. 33-62832. 10.1 Agreement of Merger dated as of June 25, 1998 by and among Southern California Water Company, SCW Acquisition Corp. and American States Water Company incorporated herein by reference to Registrant's Form 8-K, dated July 1, 1998. Commission File No. 333-47647. 10.2 Deferred Compensation Plan for Directors and Executives incorporated herein by reference to Registrant's Registration Statement on Form S-2. Registration No. 33-5151. (2) 10.3 Reimbursement Agreement, dated September 1, 2000, between Southern California Water Company and Bank of America, N.A. incorporated herein. (1) 10.4 Second Sublease dated October 5, 1984 between Southern California Water Company and Three Valleys Municipal Water District incorporated herein by reference to Registrant's Registration Statement on Form S-2. Registration No. 33-5151. 10.5 Note Agreement dated as of May 15, 1991 between Southern California Water Company and Transamerica Occidental Life Insurance Company incorporated herein by reference to Registrant's Form 10-Q with respect to the quarter ended June 30, 1991. Commission File No. 000-01121. 10.6 Schedule of omitted Note Agreements, dated May 15, 1991, between Southern California Water Company and Transamerica Annuity Life Insurance Company, and Southern California Water Company and First Colony Life Insurance Company incorporated herein by reference to 50 53 Registrant's Form 10-Q with respect to the quarter ended June 30, 1991. Commission File No. 000-01121. 10.7 Loan Agreement between California Pollution Control Financing Authority and Southern California Water Company, dated as of December 1, 1996 incorporated by reference to Registrant's Form 10-K for the year ended December 31, 1998. Commission File No. 001-14431. 10.8 Agreement for Financing Capital Improvement dated as of June 2, 1992 between Southern California Water Company and Three Valleys Municipal Water District incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1992. Commission File No. 000-01121. 10.9 Water Supply Agreement dated as of June 1, 1994 between Southern California Water Company and Central Coast Water Authority incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1994. Commission File No. 000-01121. 10.10 Amended and Restated Retirement Plan for Non-Employee Directors of American States Water Company, dated as of October 25, 1999, incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1999. (2) 10.11 Dividend Reinvestment and Common Share Purchase Plan incorporated herein by reference to American States Water Company Rule 424 (b) (3) filing dated October 27, 1999. Commission File No. 333-88979. 10.12 Key Executive Long-Term Incentive Plan incorporated herein by reference to Registrant's 1995 Proxy Statement, Commission File No.00 0-01121. (2) 10.13 Energy Management Services Agreement between Southern California Water Company and Dynegy Power Marketing. (1) 10.14 Amended and Restated Change in Control Agreements, dated as of October 25, 1999, between American States Water Company, Southern California Water Company and certain executives incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1999. (2) 10.15 Amended and Restated Change in Control Agreements, dated as of October 25, 1999, between Southern California Water Company and certain executives incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1999. (2) 10.16 Southern California Water Company Pension Restoration Plan incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1999. (2) 10.17 American States Water Company Annual Incentive Plan incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1999. (2) 10.18 American States Water Company 2000 Stock Incentive Plan. Commission File No. 333-39482. (2) 10.19 Loan and Trust Agreement between The Industrial Development Authority of The County of Maricopa, Chaparral City Water Company and Bank One, Arizona, NA,, dated as of December 1, 1997. (1) 10.20 Delivery Agreement between Central Arizona Water Conservation District and Chaparral City Water Company, dated as of December 6, 1984. (1) 51 54 10.21 Repayment Contract between the United States Bureau of Reclamation and Chaparral City Water Company, dated as of December 6, 1984 for construction of a delivery and storage system to transport CAP water. (1) 21. Subsidiaries of Registrant incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1998. Commission File No. 001-14431. 23. Consent of Independent Public Accountants. (1) (d) None. --------------------- (1) Filed concurrently herewith (2) Management contract or compensatory arrangement 52 55 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE To American States Water Company: We have audited in accordance with generally accepted auditing standards in the United States, the consolidated financial statements included in this Form 10-K, and have issued our report thereon dated February 16, 2001. Our audits of the consolidated financial statements were made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The supplemental schedule listed in Part IV of this Form 10-K is the responsibility of American States Water Company's management, is presented for purposes of complying with the Securities and Exchange Commission's rules, and is not part of the basic consolidated financial statements. This supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. s/ Arthur Andersen LLP ------------------------------- Arthur Andersen LLP Los Angeles, California February 16, 2001 53 56 AMERICAN STATES WATER COMPANY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF PARENT CONDENSED BALANCE SHEETS
December 31, (in thousands) 2000 1999 ---------------------------------------------------------------------------- ASSETS Cash and equivalents $ 294 $ 169 Other current assets 4,738 4,003 ------------------------- Total current assets 5,032 4,172 Investments in subsidiaries 189,383 160,370 Other deferred debits 121 123 ------------------------- Total assets $ 194,536 $ 164,665 ========================= LIABILITIES AND CAPITALIZATION Accounts payable $ 5 $ 4,116 Other current liabilities (112) (257) ------------------------- Total current liabilities (107) 3,859 Common shareholders' equity 192,723 158,846 Preferred shares 1,920 1,960 ------------------------- Total capitalization 194,643 160,806 Total liabilities and capitalization $ 194,536 $ 164,665 =========================
54 57 CONDENSED STATEMENTS OF INCOME
December 31, (in thousands except per share amount) 2000 1999 ----------------------- Operating Revenue And Other Income - $ 23 Operating Expenses $ (206) 85 ----------------------- Income (Loss) Before Equity in Earnings of Subsidiaries 206 (62) Equity in Earnings of Subsidiaries 17,880 16,163 ----------------------- Net Income 18,086 16,101 Dividends on Preferred Shares (86) (88) ----------------------- Earnings Available For Common Shareholders $ 18,000 $ 16,013 ----------------------- Weighted Average Number of Common Shares Outstanding 9,380 8,958 ----------------------- Basic Earnings Per Common Share $ 1.92 $ 1.79 ----------------------- Weighted Average Number of Diluted Common Shares Outstanding 9,411 N/A ----------------------- Fully Diluted Earnings per Common Share $ 1.91 N/A -----------------------
55 58 CONDENSED STATEMENTS OF CASH FLOWS
December 31, (in thousands) 2000 1999 ------------------------------------------------------------------------------------------- Cash Flows From Operating Activities $ 13,075 $ 11,666 ----------------------- Cash Flows Used in Investing Activities (24,340) - ----------------------- ----------------------- Cash Flows Used in Financing Activities 11,390 (11,593) ----------------------- Increase (Decrease) in Cash and Equivalents 125 73 Cash and Equivalents at Beginning of Period 169 96 ----------------------- Cash and Equivalents at the End of Period $ 294 $ 169 ----------------------- Cash dividends received from Southern California Water Company $ 12,900 $ 12,040 -----------------------
56 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN STATES WATER COMPANY and its subsidiary SOUTHERN CALIFORNIA WATER COMPANY By : s/ McCLELLAN HARRIS III ------------------------------- McClellan Harris III Vice President - Finance, Treasurer, Chief Financial Officer and Secretary Date: February 28, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated. s/ LLOYD E. ROSS Date: February 28, 2001 ---------------------------------------------- Lloyd E. Ross Chairman of the Board and Director s/ FLOYD E. WICKS February 28, 2001 ---------------------------------------------- Floyd E. Wicks Principal Executive Officer; President, CEO and Director s/ McCLELLAN HARRIS III February 28, 2001 ---------------------------------------------- McClellan Harris III Principal Financial and Accounting Officer; CFO, VP - Finance, Treasurer and Secretary s/ LINDA J. MATLICK February 28, 2001 ---------------------------------------------- Linda J. Matlick Controller - Southern California Water Company s/ JAMES L. ANDERSON February 28, 2001 ---------------------------------------------- James L. Anderson, Director s/ JEAN E. AUER February 28, 2001 ---------------------------------------------- Jean E. Auer, Director
57 60 s/ N. P. DODGE, JR February 28, 2001 ---------------------------------------------- N. P. Dodge, Jr., Director s/ ANNE M. HOLLOWAY February 28, 2001 ---------------------------------------------- Anne M. Holloway, Director s/ ROBERT F. KATHOL February 28, 2001 ---------------------------------------------- Robert F. Kathol, Director
58 61 EXHIBIT INDEX 3.1 By-Laws of American States Water Company incorporated herein by reference to Registrant's Form 8-K, dated November 2, 1998. Commission File No. 333-47647. 3.2 By-laws of Southern California Water Company incorporated by reference to Registrant's Form 10-K for the year ended December 31, 1998. Commission File No. 001-14431. 3.3 Amended and Restated Articles of Incorporation of American States Water Company incorporated herein by reference to Registrant's Form 8-K, dated November 2, 1998. Commission File No. 333-47647. 3.3.1 Certificate of Amendment of Amended and Restated Articles of Incorporation, dated August 25, 1998, of American States Water Company incorporated by reference to Registrant's Form 10-K for the year ended December 31, 1998. Commission File No. 001-14431. 3.3.2 Certificate of Amendment of Amended and Restated Articles of Incorporation of American States Water Company, dated August 25, 1999 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1999. 3.3 Restated Articles of Incorporation of Southern California Water Company incorporated herein by reference to Registrant's Form 8-K, dated January 20, 1999. Commission File No. 000-01121. 4.1 Amended and Restated Rights Agreement, dated January 25, 1999, by and between American States Water Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent incorporated by reference to Registrant's Form 10-K for the year ended December 31, 1998. Commission File No. 001-14431. 4.2 Indenture, dated September 1, 1993 between Southern California Water Company and Chemical Trust Company of California incorporated herein by reference to Registrant's Form 8-K. Registration No. 33-62832. 10.1 Agreement of Merger dated as of June 25, 1998 by and among Southern California Water Company, SCW Acquisition Corp. and American States Water Company incorporated herein by reference to Registrant's Form 8-K, dated July 1, 1998. Commission File No. 333-47647. 10.2 Deferred Compensation Plan for Directors and Executives incorporated herein by reference to Registrant's Registration Statement on Form S-2. Registration No. 33-5151. (2) 10.3 Reimbursement Agreement, dated September 1, 2000, between Southern California Water Company and Bank of America, N.A. incorporated herein. (1) 10.4 Second Sublease dated October 5, 1984 between Southern California Water Company and Three Valleys Municipal Water District incorporated herein by reference to Registrant's Registration Statement on Form S-2. Registration No. 33-5151. 10.5 Note Agreement dated as of May 15, 1991 between Southern California Water Company and Transamerica Occidental Life Insurance Company incorporated herein by reference to Registrant's Form 10-Q with respect to the quarter ended June 30, 1991. Commission File No. 000-01121. 10.6 Schedule of omitted Note Agreements, dated May 15, 1991, between Southern California Water Company and Transamerica Annuity Life Insurance Company, and Southern California Water Company and First Colony Life Insurance Company incorporated herein by reference 62 to Registrant's Form 10-Q with respect to the quarter ended June 30, 1991. Commission File No. 000-01121. 10.7 Loan Agreement between California Pollution Control Financing Authority and Southern California Water Company, dated as of December 1, 1996 incorporated by reference to Registrant's Form 10-K for the year ended December 31, 1998. Commission File No. 001-14431. 10.8 Agreement for Financing Capital Improvement dated as of June 2, 1992 between Southern California Water Company and Three Valleys Municipal Water District incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1992. Commission File No. 000-01121. 10.9 Water Supply Agreement dated as of June 1, 1994 between Southern California Water Company and Central Coast Water Authority incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1994. Commission File No. 000-01121. 10.10 Amended and Restated Retirement Plan for Non-Employee Directors of American States Water Company, dated as of October 25, 1999, incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1999. (2) 10.11 Dividend Reinvestment and Common Share Purchase Plan incorporated herein by reference to American States Water Company Rule 424 (b) (3) filing dated October 27, 1999. Commission File No. 333-88979. 10.12 Key Executive Long-Term Incentive Plan incorporated herein by reference to Registrant's 1995 Proxy Statement, Commission File No.00 0-01121. (2) 10.13 Energy Management Services Agreement between Southern California Water Company and Dynegy Power Marketing. (1) 10.14 Amended and Restated Change in Control Agreements, dated as of October 25, 1999, between American States Water Company, Southern California Water Company and certain executives incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1999. (2) 10.15 Amended and Restated Change in Control Agreements, dated as of October 25, 1999, between Southern California Water Company and certain executives incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1999. (2) 10.16 Southern California Water Company Pension Restoration Plan incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1999. (2) 10.17 American States Water Company Annual Incentive Plan incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1999. (2) 10.18 American States Water Company 2000 Stock Incentive Plan. Commission File No. 333-39482. (2) 10.19 Loan and Trust Agreement between The Industrial Development Authority of The County of Maricopa, Chaparral City Water Company and Bank One, Arizona, NA,, dated as of December 1, 1997. (1) 10.20 Delivery Agreement between Central Arizona Water Conservation District and Chaparral City Water Company, dated as of December 6, 1984. (1) 63 10.21 Repayment Contract between the United States Bureau of Reclamation and Chaparral City Water Company, dated as of December 6, 1984 for construction of a delivery and storage system to transport CAP water. (1) 21. Subsidiaries of Registrant incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1998. Commission File No. 001-14431. 23. Consent of Independent Public Accountants. (1) (d) None. --------------------- (1) Filed concurrently herewith (2) Management contract or compensatory arrangement