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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
COMMISSION REGISTRANT AND STATE OF INCORPORATION IRS EMPLOYER
FILE NO. ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO.
- ------------------ ---------------------------------------------- ---------------------
333-47647 American States Water Company 95-4676679
(A California corporation)
630 East Foothill Boulevard
San Dimas, California 91773-9016
909-394-3600
000-01121 Southern California Water Company 95-1243678
(A California corporation)
630 East Foothill Boulevard
San Dimas, California 91773-9016
909-394-3600
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 $345,539,000 on March 1, 2002.
The closing price per Common Share on that date, as quoted in the Western
Edition of The Wall Street Journal, was $34.35. Voting Preferred Shares of
American States Water Company, for which there is no established market, were
valued on March 1, 2002 at $1,972,000 based on a yield of 4.16%. As of March 1,
2002, 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.
AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-K
INDEX
Page No.
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PART I
Item 1: Business 1
Item 2: Properties 1 - 2
Item 3: Legal Proceedings 3 - 4
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 5 - 6
Item 6: Selected Financial Data 6
Item 7: Management's Discussion and Analysis of Financial Conditions and
Results of Operation 6 - 26
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 26
Item 8: Financial Statements and Supplementary Data 27 - 53
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 54
PART III
Item 10: Directors and Executive Officers of Registrant 54
Item 11: Executive Compensation 54
Item 12: Security Ownership of Certain Beneficial Owners and Management 54
Item 13: Certain Relationships and Related Transactions 54
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K 54 - 61
Signature(s) 62
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 principal investment
is the stock of SCW. SCW is a California public utility company engaged 31,
2001, compared with 11,063 customers at December 31, 2000. ASUS has
approximately 90,000 accounts under contract.
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 481 employees as of December 31, 2001 as compared to 489 at
December 31, 2000. Seventeen positions in SCW's Bear Valley Electric customer
service area are covered by a collective bargaining 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 agreement, which expires in 2004, with the Utility Workers of
America. SCW has no other unionized employees.
CCWC had 11 employees as of December 31, 2001, all of whom are
non-unionized.
ITEM 2 - PROPERTIES
FRANCHISES AND CONDEMNATION OF PROPERTIES
SCW holds certificates of public convenience and necessity granted by
the CPUC in each of the ratemaking districts it serves. CCWC holds certificates
of public convenience and necessity granted by the ACC for the areas in which it
serves. CCWC's certificates and similar rights are subject to alteration,
suspension or repeal by the respective governmental authorities having
jurisdiction. Both SCW and CCWC hold franchises, easements and rights of way
pursuant to the terms of agreements that must periodically be renewed. These
agreements are also subject to suspension or termination in certain
circumstances if SCW or CCWC, as applicable, violate the terms of these
agreements.
The laws of the State of California and the State of Arizona provide for
the acquisition of public utility property by governmental agencies through the
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, 2001, 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 any of its
subsidiaries own electric 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.
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WATER PROPERTIES
As of December 31, 2001, SCW's physical properties consisted of water
transmission and distribution systems which included 2,719 miles of pipeline
together with services, meters and fire hydrants and approximately 430 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, 2001, SCW owned 280 wells. Certain wells have been
removed from service due to water quality problems. For further information, see
the section entitled "Environmental Matters" included in Part II, Item 7 in
Management's Discussion and Analysis of Financial Condition and Results of
Operation. All wells are equipped with pumps with an aggregate capacity of
approximately 203 million gallons per day. SCW has 57 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:
Pumps Distribution Facilities Reservoirs
---------------- --------------------------------- ----------------
District Well Booster Mains Services Hydrants Tanks Capacity
- ------------- ----- ------- --------- -------- -------- ----- --------
Arden Cordova 27 15 485,152 14,106 1,196 3 4,000
Barstow 23 36 873,311 8,449 1,013 14 8,025
Bay Point 3 12 161,504 4,900 343 7 4,046
Calipatria 0 8 139,180 1,164 84 8 13,241
Claremont 24 32 714,370 10,663 1,185 15 8,082
Clearlake 0 13 194,298 2,087 75 4 883
Desert 17 20 760,707 3,278 590 11 1,475
Los Osos 11 9 201,528 3,204 169 8 1,422
Metro 71 75 4,926,733 98,816 8,005 32 23,940
Ojai 5 12 235,073 2,789 350 5 1,494
Orange 30 36 2,226,961 41,308 4,606 15 11,900
San Dimas 11 38 1,197,744 15,809 870 15 10,149
San Gabriel 18 8 549,437 11,813 791 3 1,520
Santa Maria 31 24 961,368 12,776 778 8 3,076
Simi 2 23 512,167 13,063 890 8 8,250
Wrightwood 7 5 217,263 2,574 81 7 1,546
--- --- ---------- ------- ------ --- -------
Total 280 366 14,356,796 246,799 21,026 163 103,049
Capacity is measured in thousands of gallons. Mains are in feet.
As of December 31, 2001, 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 7.05 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, 2001, SCW had no mortgage debt outstanding, and its
properties were free of any encumbrances or liens securing indebtedness.
As of December 31, 2001, substantially all of the utility plant of CCWC
was pledged to secure its Industrial Development Authority Bonds. The Bond
Agreement, among other things, restricts CCWC's ability to incur debt and make
liens, sell, lease or dispose of assets, or merge with another corporation, and
pay dividends.
As of December 31, 2001, neither AWR nor ASUS had any mortgage debt or
liens securing indebtedness outstanding.
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ITEM 3 - LEGAL PROCEEDINGS
WATER QUALITY-RELATED LITIGATION
SCW is a defendant in twenty lawsuits involving claims pertaining to water
quality. Seventeen of the lawsuits involve customer service areas located in Los
Angeles County in the southern portion of the State of California that have been
filed in Los Angeles Superior Court: Adler v. Southern California Water Company,
et al., Case No. BC169892, Santamaria v. Suburban Water Systems, et al., Case
No. CIV180894, Georgianna v. Dominguez et al. v. Southern California Water
Company, et al., Case No. G021657, Anderson, et al. v. Suburban Water Company,
et al., Case No. KC028524, Abarca, et al. v. City of Pomona, et al., Case No.
K027795, Celi, et al. v. San Gabriel Valley Water Company, Case No. GC020622,
Boswell et al. v. Suburban Water Systems, et al., Case No. KC027318, Demciuc et
al. v. Suburban Water Systems, et al., Case No. C028732, Adejare, et al. v.
Southern California Water Company, Case No. KC031096, Almelia Brooks, et al. v.
Suburban Water System, et al., Case No. KC032915, Lori Alexander, et al. v.
Suburban Water Systems, et al., Case No. KC031130, David Arnold, et al. v. City
of Pomona, et al., Case No. KC034636, Gilda Ambrose-Dubre, et al. v. City of
Pomona, et al., Case No. KC032906, Melissa Garrity Alvarado, et al. v. Suburban
Water Systems et al., Case No. KC034953 , Charles Alexander, et al. v. City of
Pomona, et al., Case No KC035526, Criner, et al. v. San Gabriel Valley Water
Company, et al., Case No. GC021658, and Donerson, et al. v. City of Pomona, et
al., Case No. KC035987. The lawsuits filed in Los Angeles County Superior Court
are based on the allegations that SCW and the other defendants have provided and
continue to provide plaintiffs with contaminated water from wells located in an
area of the San Gabriel Valley that has been designated a federal superfund
site, that the maintenance of this contaminated well water has resulted in
contamination of the soil, subsurface soil and surrounding air with
trichloroethylene ("TCE"), perchloroethene ("PCE"), carbon tetrachloride and
other solvents and that plaintiffs have been injured and their property damaged
as a result. Three of the lawsuits involve a customer service area located in
Sacramento County in northern California that have been filed in Sacramento
County Superior Court: Nathaniel Allen, Jr. v. Aerojet-General Corporation, et
al., Case No. 97AS06295, Daphne Adams, et al. v. Aerojet-General Corporation, et
al., Case No. 98AS01025, and Wallace Andrew Pennington et al. v. Aerojet-General
Corporation, et al., Case No. 00AS02622. The lawsuits filed in Sacramento County
Superior Court are based on the allegations that SCW and other defendants have
delivered water to plaintiffs that is contaminated with a number of chemicals,
including, TCE, PCE, carbon tetrachloride, perchlorate, Freon-113, hexavalent
chromium and other unnamed chemicals and that plaintiffs have been injured and
their property damaged as a result.
On September 1, 1999, the Court of Appeals in San Francisco held that
the CPUC had preemptive jurisdiction over regulated public utilities with
respect to water quality matters and ordered dismissal of a series of these
lawsuits. On October 11, 1999, one group of plaintiffs appealed this decision to
the California Supreme Court. On February 4, 2002, the California Supreme Court
concluded that (i) the CPUC had preemptive jurisdiction over claims seeking
injunctive relief and claims based on the theory that a public utility regulated
by the CPUC provided unsafe drinking water even though it had complied with
federal and state drinking water standards, but (ii) the CPUC did not have
preemptive jurisdiction over damage claims based on allegations of violations of
federal and state drinking water standards by public utilities regulated by the
CPUC. As a result, damage claims based on allegations of violations of federal
and state drinking water standards may proceed while the other claims must be
dismissed.
In light of the breadth of plaintiffs' claims, the lack of factual
information regarding plaintiff's claims and injuries, if any, the impact of the
California Supreme Court decision on plaintiffs' claims 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. Based upon
the information currently available to it, Registrant believes that these claims
are without merit and intends to vigorously defend these claims.
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
above the self-insured amounts for defense against these lawsuits, subject to a
reservation of rights.
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 the California
3
Department of Health Services' requirements governing drinking water quality
adequately protect the public health and safety; and that regulated water
utilities, including SCW, have satisfactorily complied with past and present
drinking water quality requirements.
The CPUC had previously authorized establishment of memorandum accounts
to capture expenses related to the OII. Under the memorandum account procedure,
SCW may recover litigation costs from ratepayers to the extent authorized by the
CPUC. The CPUC has not yet authorized SCW to recover any of its litigation
costs. As of December 31, 2001, SCW had recorded a net of $888,700 in this
memorandum account. Management believes that these expenses will be fully
recovered but is unable to predict when, or if, the CPUC will authorize recovery
of all or any of the costs.
OTHER WATER QUALITY 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 Corporation (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 these proceedings.
The CPUC has authorized memorandum accounts to allow for recovery of
costs incurred by SCW in prosecuting the suits filed against CRWQCB and Aerojet
from customers, less any recovery from the defendants or others. As of December
31, 2001, approximately $6,640,000 has been recorded in the memorandum accounts.
The CPUC has authorized SCW to increase rates, effective April 28, 2001, for
recovery over a six-year period of approximately $1,800,000, in expenses that
were incurred on or before August 31, 2000. SCW will continue to file additional
Advice Letters to recover the remaining costs. Management believes these costs
are recoverable but cannot give assurance that the CPUC will ultimately allow
recovery of all or any of the remaining costs through rates.
On April 25, 2001, Registrant filed a lawsuit against all the
potentially responsible parties, who stored, transported and dispensed gasoline
containing methyl tertiary butyl ether (MTBE) in underground storage tanks,
pipelines or other related infrastructure. MTBE contaminated water existing in
areas of the basin from which SCW has pumped water through its Charnock Well
Field. As a result, SCW ceased operation of its Charnock Well Field in October
1996. Registrant has reached an agreement in this matter that assigns the
prosecution of litigation against the potentially responsible parties to the
City of Santa Monica, California (Santa Monica). As part of the agreement and in
exchange for an assignment payment, Santa Monica will prosecute the case against
the potentially responsible parties. Registrant expects that Santa Monica will
sign the agreement by the end of the first quarter of 2002.
ELECTRIC SERVICE LITIGATION
SCW has been, in conjunction with the Southern California Edison
(Edison) unit of Edison International, planning to upgrade transmission
facilities to 115kv (the 115kv Project) in order to meet increased energy and
demand requirements for SCW's Bear Valley Electric Service area. On December 27,
2000, SCW filed a lawsuit against Edison for declaratory relief and seeking
damages for breach of contract as a result of delays in the 115kv Project.
Subsequently Edison filed a cross-complaint against SCW for breach of contract,
anticipatory breach, and quantum meruit. Registrant has discussed various
settlement options with Edison regarding this matter. However, management cannot
predict the likely outcome of this matter.
OTHER LITIGATION
Registrant is also subject to ordinary routine litigation incidental to
its business. Other than as disclosed above, no legal proceedings are pending,
except such incidental litigation, to which Registrant is a party or of which
any of its properties is the subject, which are believed to be material. For
further information, see Note 8 to the "Notes to Financial Statements in Part
II, Item 8 in Financial Statements and Supplementary Data.
4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
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 intra-day high and low NYSE
prices on the Common Shares for each quarter during the past two years were:
STOCK PRICES
----------------------
HIGH LOW
-------- --------
2001
First Quarter $ 37.38 $ 28.75
Second Quarter 34.00 28.50
Third Quarter 39.60 32.40
Fourth Quarter 38.00 32.20
2000
First Quarter $ 36.25 $ 26.00
Second Quarter 32.25 27.81
Third Quarter 31.75 25.00
Fourth Quarter 37.94 29.19
APPROXIMATE NUMBER OF HOLDERS OF COMMON SHARES -
As of February 22, 2002, there were 3,404 holders of record of Common
Shares of American States Water Company. AWR owns all of the authorized and
outstanding Common Shares of SCW, CCWC and ASUS.
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:
2001 2000
------- --------
First Quarter $ 0.325 $ 0.320
Second Quarter 0.325 0.320
Third Quarter 0.325 0.320
Fourth Quarter 0.325 0.325
------- --------
Total $ 1.300 $ 1.285
Neither AWR nor ASUS is subject to any contractual restriction on its
ability to pay dividends. SCW's maximum ability to pay dividends is restricted
by certain Note Agreements to the sum of $21 million plus 100% of consolidated
net income plus the aggregate net cash proceeds received from capital stock
offerings or other instruments convertible into capital stock.
The ability of AWR, ASUS and SCW to pay dividends is also restricted by
California law. Under restrictions of the California tests, approximately $74.5
million, $0 and $72.7 million of retained earnings, respectively, for AWR, ASUS
and SCW was available to pay dividends to Common Shareholders at December 31,
2001.
5
CCWC is subject to contractual restrictions on its ability to pay
dividends. CCWC's maximum ability to distribute dividends is limited to
maintenance of no more than 55% debt in the capital structure for the quarter
immediately preceding the distribution. The ability of CCWC to pay dividends is
also restricted by Arizona law. Under restrictions of the Arizona tests,
approximately $3.2 million was available to pay dividends to Common Shareholders
at December 31, 2001.
For the year ended December 31, 2001, AWR paid $13.2 million in common
and preferred dividends to shareholders. For the year ended December 30, 2000.
AWR paid $12.3 million in common and preferred dividends to shareholders.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share amounts
and ratios) 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
INCOME STATEMENT INFORMATION
Total Operating Revenues $197,514 $183,960 $173,421 $148,060 $153,755
Total Operating Expenses 160,822 151,653 144,907 122,999 130,297
Operating Income 36,692 32,307 28,514 25,061 23,458
Other Income (Loss) (510) (99) 532 769 758
Interest Charges 15,735 14,122 12,945 11,207 10,157
Net Income 20,447 18,086 16,101 14,623 14,059
Preferred Dividends 84 86 88 90 92
Earnings Available for Common Shareholders $20,363 $18,000 $16,013 $14,533 $13,967
Basic Earnings per Common Share $2.02 $1.92 $1.79 $1.62 $1.56
Dividends Declared per Common Share $1.30 $1.29 $1.28 $1.26 $1.25
Average Shares Outstanding 10,080 9,380 8,958 8,858 8,957
Average Number of Diluted Shares
Outstanding 10,171 9,411 N/A N/A N/A
Fully Diluted Earnings per Common Share $2.00 $1.91 N/A N/A N/A
BALANCE SHEET INFORMATION
Total Assets $683,764 $616,646 $533,181 $484,671 $457,074
Common Shareholders' Equity 199,982 192,723 158,846 154,299 151,053
Long-Term Debt 245,692 176,452 167,363 120,809 115,286
Preferred Shares-Not Subject to Mandatory 1,600 1,600 1,600 1,600 1,600
Preferred Shares-Mandatory Redemption 280 320 360 400 440
Total Capitalization $447,554 $371,095 $328,169 $277,108 $268,379
Book Value per Common Share $19.84 $19.12 $17.73 $17.23 $16.86
OTHER INFORMATION
Ratio of Earnings to Fixed Charges 3.26x 3.35x 3.27x 3.21x 3.35x
Ratio of Earnings to Total Fixed Charges 3.23x 3.31x 3.23x 3.17x 3.30x
Return on Average Common Equity 10.4% 10.5% 10.2% 9.6% 9.5%
Earnings Before Interest and Taxes $51,561 $47,335 $42,391 $35,960 $34,046
Earnings Before Interest, Taxes,
Depreciation and Amortization $69,512 $62,674 $56,041 $48,498 $44,998
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, 2001, there is generally no material difference
between the consolidated operations and assets of AWR and the operations and
assets of SCW. However, where necessary, the following discussion and analysis
includes references specific to AWR's other subsidiaries - CCWC and ASUS.
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
6
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.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
Basic earnings per common share in 2001 increased by 5.2% to $2.02 per
share as compared to $1.92 per share for the comparable period of 2000. The
increases in the recorded results primarily reflect the impact of various rate
increases authorized by the Public Utilities Commission of the State of
California (CPUC) for SCW, additional revenues generated by CCWC since the
acquisition in October 2000, improvement in operating margins and, to some
extent Registrant's Cash Preservation Plan (CPP) discussed below. For the year
ended December 31, 2001, fully diluted earnings were $2.00 per share as compared
to $1.91 per share for the comparable period of 2000. For further information,
see the section entitled "Liquidity and Capital Resources" included in Part II,
Item 7 in Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Water operating revenues increased by 7.5% in 2001 to $181.5 million
from the $168.8 million reported in 2000 due to increases in water rates
authorized by the CPUC, and an additional $6.3 million in revenues generated by
CCWC. New rates, representing an annualized increase of $3.1 million, in the
customer service areas that comprise SCW's Region I were implemented during
2001. Rate increases, representing an annualized increase of $2.9 million, for
SCW's Region II and rate increases for SCW's Region III, representing an
annualized increase of $3.9 million, were also implemented at various times
during 2001. The additional revenues generated by rate increases were partially
offset by a 3.4% reduction in water sales throughout most of SCW's customer
service areas in 2001 due to relatively mild weather. For further information,
see the section entitled "Regulatory Matters" included in Part II, Item 7 in
Management's Discussion and Analysis of Financial Condition and Results of
Operation.
Electric revenues increased by 6.3% to $15.3 million in 2001 as compared
to $14.4 million in 2000. The increases reflected a rate increase of 12.5%
effective May 24, 2001 and an additional 14.8% increase effective August 23,
2001 authorized by the CPUC to recover previously under-collected energy costs.
The increases were partially offset by a decrease of 5.3% in kilowatt-hour
consumption, primarily due to heavier winter snows experienced in SCW's service
area in 2001, which decreased the use of snow making machines at ski resorts in
the area. For further information, see the sections entitled "Regulatory
Matters" and "Electric Energy Situation in California" in Part II, Item 7 in
Management's Discussion and Analysis of Financial Condition and Results of
Operation.
Purchased water costs in 2001 decreased by 9.6% to $37.6 million as
compared to $41.6 million in 2000 reflecting a decrease in purchased water
volume resulting from both lower sales and less purchased water in Registrant's
supply mix, as well as refunds received from Registrant's wholesale water
suppliers during 2001 of approximately $770,000. There was no similar refund in
2000. Purchased water expense at CCWC was approximately $497,000.
Costs of power purchased for pumping increased by 27.7% to $9.6 million
in 2001 as compared to $7.5 million recorded in 2000, due to the rate increases
implemented by SCW's energy suppliers pursuant to CPUC decisions, and increased
pumped water in SCW's supply mix. In 2001, the CPUC approved SCW's Advice
Letters to increase revenues by approximately $1.4 million annually to recover
the costs of purchased power for its water ratemaking districts. For further
information, see the sections entitled "Regulatory Matters" and "Electric Energy
Situation in California" included in Part II, Item 7 in Management's Discussion
and Analysis of Financial Condition and Results of Operation. During 2001, CCWC
incurred approximately $423,000 in power costs used for pumping.
In 2001, SCW's overall water supply mix improved over the mix authorized
in rates due to additional well production capability coming on-line during the
year. Changes in actual supply mix as compared to that authorized in rates can
favorably or unfavorably impact earnings. 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
7
SCW's wells. For further information, see the section entitled "Water Supply"
included in Part II, Item 7 in Management's Discussion and Analysis of Financial
Condition and Results of Operation.
Costs of power purchased for resale to customers in SCW's Bear Valley
Electric division in 2001 increased by 84.1% to $19.7 million from the $10.7
million recorded in 2000 due primarily to significant increases in wholesale
market prices for energy in the State of California. The increase was partially
offset by a one-time sale of energy on the spot market that resulted in a
$644,000 gain in April 2001. The sale of excess energy on the spot market
resulted from a one-month overlap of energy purchase agreements. For further
information, see the sections entitled "Liquidity and Capital Resources",
"Regulatory Matters" and "Electric Energy Situation in California" included in
Part II, Item 7 in Management's Discussion and Analysis of Financial Condition
and Results of Operation.
Groundwater production assessments decreased by 9.3% to $6.8 million in
2001 from $7.5 million in 2000. The decrease occurred principally in SCW's San
Gabriel and San Dimas customer service areas due to lower administrative
assessments levied against production for the water year 2001 as compared with
the previous year, and a credit of $440,000 recorded in the fourth quarter of
2001 for the sale of groundwater in the Chino Basin. There was no such sale in
2000.
A positive entry for the provision for supply cost balancing accounts
reflects recovery of previously under-collected supply costs. Conversely, a
negative entry for the provision for supply cost balancing accounts reflects an
under-collection of previously incurred supply costs. The negative entries for
2001 primarily reflect untimely-recovery of electric power costs discussed
previously. At December 31, 2001, Registrant had a net under-collected position
of $25.8 million in both its water and electric balancing accounts primarily due
to the increases in energy costs. For further information, see the sections
entitled "Accounting for Supply Costs", "Liquidity and Capital Resources",
"Regulatory Matters" and "Electric Energy Situation in California" included in
Part II, Item 7 in Management's Discussion and Analysis of Financial Condition
and Results of Operation.
Other operating expenses increased by 3.0% in 2001 to $17.2 million as
compared with $16.7 million in 2000 due primarily to operating expenses at CCWC,
offset by the effects of the CPP at SCW that reduced or deferred a number of
expense items.
Administrative and general expenses increased by 34.5% to $35.1 million
in 2001 from $26.1 million recorded in 2000 reflecting (i) reserves of $7.9
million established for potential non-recovery of electric power costs incurred
to serve customers at SCW's Bear Valley Electric customer service area, (ii)
increased reserves for self-insured worker's compensation liabilities, and (iii)
additional costs from CCWC. The reserves were established to offset future
impacts to earnings in the event that SCW was unable to fully recover all of its
purchased power costs through rates. For further information, see the sections
entitled "Regulatory Matters" and "Electric Energy Situation in California" in
Part II, Item 7 in the Management's Discussion and Analysis of Financial
Condition and Results of Operation and Note 7 of "Notes to Financial Statements"
included in Part II, Item 8 in Financial Statements and Supplementary Data.
Depreciation expense in 2001 increased by 17.6% to $18.0 million
reflecting, among other things, the effects of recording approximately $40.1
million in net plant additions at SCW during 2000, depreciation on which began
in January 2001, and additional depreciation associated with CCWC's plant. In
addition, amortization of goodwill, which represents the difference between the
purchase price of the common equity of CCWC and CCWC's book equity at the time
of closing, began October 2000. Pursuant to FASB No. 142, Goodwill and Other
Intangible Assets, amortization of this goodwill, which was $331,073 in 2001,
will cease on January 1, 2002. AWR has concluded that this goodwill is not
impaired.
As compared to 2000, maintenance expense decreased by 16.5% to $8.6
million due primarily to the implementation of Registrant's CPP in April 2001 to
control costs and temporarily to limit capital and maintenance expenditures
principally to those projects that were believed necessary to meet public safety
and health requirements or otherwise provide for continued service pending CPUC
approval of rate increases that would permit SCW to begin recovery of power
costs incurred during California's energy crisis. The CPP impacted both the
electric and water businesses of SCW. Management estimates that the CPP, through
deferral of capital expenditures alone, reduced cash expenditures in 2001 by
approximately $20 million. The CPP will remain in effect until SCW receives
approval to increase electric rates pursuant to the terms of a settlement
agreement. For further information, see the sections entitled "Electric Energy
Situation in California" and "Regulatory Matters" included in Part II, Item 7 in
Management's Discussion and Analysis of Financial Condition and Results of
Operation.
Taxes on income increased slightly by 2.0% to $15.4 million in 2001 as
compared to $15.1 million in 2000 due primarily to an approximately 9.1%
increase in pre-tax operating income, the effect of which was partially offset
by a lower effective tax rate.
8
Property and other tax expense increased by 7.0% in 2001 to $7.6 million
reflecting principally increased property taxes due to higher property valuation
assessments, and additional property and payroll taxes at CCWC.
The loss recorded in other income for 2001 was due principally to the
write-off of expenses associated with the termination of the acquisition of
Peerless Water Co. The loss also reflects the effects of recording amortization
and interest expenses, starting January 2000, on SCW's 500 acre-foot entitlement
in the State Water Project (SWP). During the fourth quarter of 2001, SCW signed
an agreement with a property developer requiring an assured water supply to
complete construction of a development. Under the terms of this Agreement, the
developer will reimburse SCW for the costs related to 350 acre-feet of SCW's SWP
entitlement.
Interest expense increased by 11.3% in 2001 to $15.7 million as compared
to $14.1 million recorded in 2000 due to (i) short-term borrowing to fund
capital expenditures, (ii) the issuance of $20 million in long-term debt by SCW
in January 2001, (iii) the issuance of $50 million in long-term debt by SCW in
December 2001, and (iv) the inclusion of long-term debt at Registrant's CCWC
unit.
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
securities 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. For further information, see the section
entitled "Regulatory Matters" included in Part II, Item 7 in Management's
Discussion and Analysis of Financial Condition and Results of Operation.
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.
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.
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
9
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. For
further information, see the sections entitled "Regulatory Matters" and
"Accounting for Supply Costs" included in Part II, Item 7 in Management's
Discussion and Analysis of Financial Condition and Results of Operation.
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. For further information, see Part I, Item 3 in Legal Proceedings.
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 a 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. For further information, see
Note 8 of the "Notes to Financial Statements" included in Part II, Item 8 in
Financial Statements and Supplementary Data.
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.
ACCOUNTING FOR SUPPLY COSTS
As permitted by the CPUC prior to November 29, 2001, SCW maintained
water and electric supply balancing accounts to account for under-collections
and over-collections of revenues designed to recover such costs. Costs were
recorded in income and charged to balancing accounts when such costs were
incurred. The balancing accounts were reversed when such costs were recovered
through rate adjustments or through refunds of previously incurred costs. SCW
accrued interest on its supply cost balancing accounts at the rate prevailing
for 90-day commercial paper. CCWC does not maintain a supply cost balancing
account.
On November 29, 2001, the CPUC ordered water utilities with existing
water supply balancing accounts to cease booking amounts to such accounts. In
its place, water utilities are now required to establish a memorandum account
that works in a manner similar to the balancing account. As a result, the income
statements of SCW will no longer include entries reflecting differences between
actual unit water supply costs included in rates and actual water supply costs.
SCW will not be entitled to recover any deferred costs for providing water
service unless it is within its general rate case cycle and is earning less than
its authorized rate of return on a weather normalized basis. As a result, any
changes in water supply costs as well as any future authorized revenue increases
for supply expenses may directly impact earnings. SCW may not be able to recover
the under-collection of supply costs if it is earning a rate of return in excess
of that allowed. SCW had a net under-collection position of $3.4 million in its
water supply balancing account at December 31, 2001 compared to $2.5 million and
$2.0 million at December 31, 2000 and December 31, 1999, respectively.
Electric power costs incurred by SCW's Bear Valley Electric division
will continue to be charged to a balancing account pursuant to the methodology
in effect prior to November 29, 2001. The amount of the under-collection in the
electric balancing account has increased from $2.8 million at December 31, 1999,
to $8.6 million at December 31, 2000 and $22.4 million at December 31, 2001. 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
10
run-up of costs. For further information, see the sections entitled "Regulatory
Matters" and "Electric Energy Situation in California" included in Part II, Item
7 in Management's Discussion and Analysis of Financial Condition and Results of
Operation.
LIQUIDITY AND CAPITAL RESOURCES
AWR
AWR funds its operating expenses and pays dividends on its outstanding
Common and Preferred Shares primarily through dividends from its subsidiaries,
principally SCW. AWR has a Registration Statement on file with the Securities
and Exchange Commission (SEC) for issuance, from time to time, of up to $60
million in Common Shares, Preferred Shares and/or debt securities. As of
December 31, 2001, approximately $31.1 million remained for issuance under this
Registration Statement. During 2001, AWR maintained a $25 million credit
facility, $20 million of which was outstanding at December 31, 2001. This credit
facility expired on January 2, 2002 although AWR expects to enter into a new
credit facility in the second quarter of 2002 in the amount of $75 million.
SCW
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. For
further information, see the sections entitled "Risk Factors" and "Electric
Energy Situation in California" included in Part II, Item 7 in Management's
Discussion and Analysis of Financial Condition and Results of Operation.
SCW also relies on external sources, including equity investments from
AWR, long-term debt, contributions-in-aid-of-construction, advances for
construction and install-and-convey advances, to fund the majority of its
construction expenditures. In January 2001, SCW issued $20 million of long-term
debt in a public offering with the proceeds used to reduce then outstanding bank
borrowing. On March 30, 2001, AWR made an additional $25 million equity
investment in SCW. On November 14, 2001, SCW filed a Registration Statement with
the SEC for issuance, from time to time, of up to $100 million in debt
securities. In December 2001, SCW issued $50 million of long-term debt under
this Registration Statement that initially reduced bank borrowing incurred to
fund capital expenditures and power purchase costs.
Because of the seasonal nature of its water and electric operations, SCW
utilizes its short-term borrowing capacity to finance current operating
expenses, including expenses for purchased power distributed through its Bear
Valley Electric customer service area. SCW has short-term revolving credit lines
totaling an aggregate of $47 million. Of the aggregate amount, $13 million
expires in May 2002, $10 million expires in July 2002 and $24 million expires in
August 2002. SCW does not intend to enter into any new short-term revolving
credit lines in 2002.
CCWC
CCWC funds the majority of its operating expenses, payments on its debt
and dividends, if any, through internal sources. CCWC also relies on external
sources, including long-term debt, contributions-in-aid-of-construction,
advances for construction and install-and-convey advances, to fund the majority
of its construction expenditures.
ASUS
ASUS funds its operating expenses primarily through contractual
management fees.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
In addition to contractual maturities, Registrant has certain debt
instruments that contain annual sinking fund or other principal payments.
Registrant believes that it will be able to refinance debt instruments at their
maturity through public issuance, or private placement, of debt or equity.
Annual principal payments are generally made from cash flow from operations.
11
The following table reflects Registrant's contractual obligations and
commitments to make future payments pursuant to contracts as of December 31,
2001. All obligations and commitments are obligations and commitments of SCW
unless otherwise noted.
($ in thousands) Payments/Commitments Due by Period(1)
----------------------------------------------------------------
Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years
-------- ---------------- --------- --------- -------------
Notes/Debentures(2) $185,600 -- $12,500 -- $173,100
Private Placement Notes(3) 28,000 -- -- -- 28,000
Tax-Exempt Obligations(4) 20,820 87 285 218 20,231
Other Debt Instruments(5) 2,644 174 584 451 1,435
Bank Debt(6) 20,000 20,000 -- -- --
Preferred Shares(7) 1,920 1,920 -- -- --
Other Commitments(8) 50,072 -- -- -- --
Chaparral City Water Company(9) 9,388 499 1,684 620 6,585
TOTAL $318,444 $22,680 $15,053 $1,289 $229,351
- ----------
(1) Excludes interest, dividends, commitment and facility fees.
(2) The Notes and Debentures are issued under an Indenture dated as of September
1, 1993. The Notes and Debentures do not contain any financial covenants that
Registrant believes to be material or cross default provisions.
(3) The private placement notes are issued pursuant to the terms of Note
Agreements with substantially similar terms. The Note Agreements contain
restrictions on the payment of dividends, minimum interest coverage requirements
and a negative pledge. For a further discussion of the dividend restrictions,
see the sections entitled "Frequency and Amount of Any Dividends Declared and
Dividend Restrictions" included in Part II, Item 5 in Market for Registrant's
Common Equity and Related Stockholder Matters. Pursuant to the Note Agreements,
SCW must maintain a minimum interest coverage ratio of two times interest
expense. SCW does not currently have any outstanding mortgages or other
encumbrances on its properties.
(4) Consists of obligations under a loan agreement supporting $8 million in debt
issued by the California Pollution Control Financing Authority, $6 million in
obligations supporting $6 million in certificates of participation issued by the
Three Valleys Municipal Water District and $7 million of obligations incurred by
SCW with respect to its 500 acre foot entitlement to water from the State Water
Project. Except as described below, these obligations do not contain any
financial covenants believed to be material to Registrant or any cross default
provisions. SCW's obligations with respect to the certificates of participation
issued by the Three Valleys Municipal Water District are supported by a letter
of credit issued by Bank of America. SCW has reimbursement obligations to Bank
of America that incorporate by reference SCW's obligations to Bank of America
under its short-term revolving credit line with Bank of America discussed below
in paragraph (6). The letter of credit expires on July 31, 2002. The letter of
credit may be drawn if SCW has not obtained a replacement letter of credit prior
to the expiration of this letter of credit. SCW has entered into an agreement
with a developer for 350 acre-feet of its entitlement to water from the State
Water Project. For further information, see the section entitled "Regulatory
Matters-Disallowance of Costs" included in Part II, Item 7 in Management's
Discussion and Analysis of Financial Condition and Results of Operation.
(5) Consists of $1.6 million outstanding under a fixed rate obligation incurred
to fund construction of water storage and delivery facilities with the Three
Valleys Municipal Water District, $0.6 million outstanding under a variable rate
obligation incurred to fund construction of water delivery facilities with the
Three Valleys Municipal Water District and an aggregate of $0.4 million
outstanding under capital lease obligations. These obligations do not contain
any financial covenants believed to be material to Registrant or any cross
default provisions.
(6) Consists of $20 million outstanding under a term loan facility for AWR that
expired on January 2, 2002.
(7) AWR intends to redeem or repurchase all of its outstanding Preferred Shares
during the first quarter of 2002.
(8) Other commitments consists of $47 million available for borrowing by SCW at
December 31, 2001 under short-term revolving credit loans $13 million expiring
in May 2002, $10 million expiring in July 2002 and $24 million expiring in July
2002, a $2,513,813 irrevocable letter of credit that expires on April 30, 2002
for its self-insured workers
12
compensation plan, an amount of $296,000 with respect to a $6,296,000
irrevocable letter of credit issued by Bank of America to support the
certificates of participation of Three Valleys Municipal Water District (the
other $6,000,000 is reflected under tax-exempt obligations) that expires on
November 15, 2003, an irrevocable letter of credit in the amount of $250,000
that expires on October 1, 2002 for the deductible in Registrant's business
automobile insurance policy and outstanding performance bonds of $12,500 to
secure performance under franchise agreements with governmental agencies. None
of these obligations contain any financial covenants believed to be material to
Registrant or any cross default provisions.
(9) Consists of $8.1 million of obligations under a loan agreement supporting
Industrial Development Revenue Bonds due in 2006 and a $1.3 million repayment
obligation to the United States Bureau of Reclamation. The loan agreement
contains provisions that establishes a maximum of 65% debt in the capital
structure, limits cash distributions when the percentage of debt in the capital
structure exceeds 55% and requires a debt service coverage ratio of two times.
The Bureau of Reclamation obligation does not contain any financial covenants
believed to be material to Registrant or any cross default provisions.
Under the terms of its power purchase contracts with Mirant Americas
Energy Marketing, LP and Pinnacle West Capital Corporation, SCW is required to
post security, at the request of the seller, if SCW is in default under the
terms of the contract and the future value of the contract is greater than the
future value of contracts of a similar term on the date of default. SCW will be
in default under the terms of these contracts if its debt is rated less than
BBB- by Standard & Poor's Ratings Service ("S&P") or Fitch, Inc. ("Fitch") or
less than Baa3 by Moody's Investor Services, Inc ("Moody's"). SCW currently has
a rating of A+ by S&P and A2 by Moody's. Fitch does not rate SCW.
S&P debt ratings range from AAA (highest rating possible) to D
(obligation is in default). Moody's debt ratings range from Aaa (best quality)
to C (lowest quality). Securities ratings are not recommendations to buy, sell
or hold a security and is subject to change or withdrawal at any time by the
rating agency.
ELECTRIC ENERGY SITUATION IN CALIFORNIA
BACKGROUND INFORMATION
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 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 Federal Energy Regulatory
Commission ("FERC") also implemented a number of changes to the tariff for the
California Independent Operator System ("Cal ISO") beginning in December 15,
2000 in an attempt to stabilize the market. The reasons for the high cost of
energy are under investigation but are reported to include, among other things,
limited supply caused by a lack of investment in new power plants to meet growth
in demand, planned and unplanned outages of power plants, decreased availability
of hydroelectric power from the Pacific Northwest due to lower than usual
precipitation and higher demand for electricity in the region, transmission line
constraints, increased prices for natural gas, the fuel used in many of the
power plants serving the region, and a dysfunctional power market.
Spot market prices dropped dramatically in the summer of 2001 and
continue to remain low. A number of factors could, however, result in a
substantial increase in spot market prices and the prices of long term contracts
for power and capacity. The mitigation measures taken by FERC expire on
September 30, 2002 despite the fact that there continues to be insufficient
generation resources in California and throughout the West, transmission line
constraints, constraints on natural gas pipeline capacity and a dysfunctional
power market. In addition, the Cal ISO has proposed a number of market reforms,
such as the imposition of an available capacity obligation ("ACAP") on all
load-serving entities. The purpose of the ACAP obligation is to ensure that all
load-serving entities have sufficient power resources to meet their maximum
possible load. If an ACAP obligation of the type proposed by Cal ISO is adopted,
SCW could be required to procure substantial additional power and capacity. The
cost of procuring this additional power and capacity
13
could have a material adverse impact on SCW if SCW is not permitted to recover
the costs of procuring this additional power and capacity from its ratepayers on
a timely basis.
POWER SUPPLY ARRANGEMENTS
All electric energy sold by SCW to customers in its BVE customer service
area is purchased from others. Historically, SCW purchased electric energy from
the Southern California Edison 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. SCW purchased electric energy
for its BVE customer service area from Sempra during the period beginning March
26, 1996 through April 30, 1999.
In May 1999, SCW entered into a one-year block forward purchase contract
with Illinova Energy Partners for 12 megawatts (MWs) of power at a price of
$28.00 per MW hour (MWh). In May 2000, SCW entered into a one-year, block
forward purchase contract with Dynegy Power Marketing, Inc. (DYPM) for 12 MWs of
electric energy for its BVE customer service area at a price of $35.50 per MWh.
This contract expired April 30, 2001.
SCW entered into a five-year, block forward purchase contract with
Mirant Marketing to supply its BVE customer service area with 15 MWs of electric
energy at a price of $95 per MWh beginning April 1, 2001 through December 31,
2006. On December 20, 2001, SCW filed a complaint with FERC seeking to reduce
the amount charged by Mirant Marketing under the terms of this contract due to
the dysfunctional power market. Management is unable to predict what if any
action FERC will take with respect to this complaint.
In June 2001, SCW executed an agreement with Pinnacle West Capital for
an additional 8 MWs of electric energy to meet BVE's peak winter demands. The
contract provides for pricing of $75 per MWh from November 1, 2001 to March 31,
2002, $48 per MWh from November 1, 2002 to March 31, 2003, and $36 per MWh from
November 1, 2003 to March 31, 2004. The average minimum load at SCW's Bear
Valley Electric customer service area has been approximately 12 MWs. The average
winter load has been 18 MWs with a winter peak of 38 MWs when the snowmaking
machines at the ski resorts are operating. Under the terms of a contract with
DYPM that expires on April 30, 2002, DYPM has agreed to provide electric energy
to SCW in excess of the amounts it has purchased under the forward block
purchase contracts previously described, to sell excess energy purchased by SCW
under the terms of these contracts, if requested by SCW, and to act as
scheduling coordinator for SCW. However, SCW has entered into a separate
agreement to have Automated Power Exchange, Inc. act as its scheduling
coordinator and will not utilize the services of DYPM. SCW has withheld payment
on $3.4 million invoiced by DYPM for the period December 20, 2000 through
February 20, 2001, pending resolution of certain disputes. Based on information
available to it, Registrant expects the amount in dispute to increase due to
additional amounts billed by DYPM.
TRANSMISSION CONSTRAINTS
Demand for energy in SCW's Bear Valley Electric customer service area
generally has been increasing. However, the ability of SCW to deliver purchased
power to these customers is limited by the ability of the transmission
facilities owned by Southern California Edison Company to transmit this power.
For further information, see Legal Proceedings in Part I for a discussion of
litigation between Edison and SCW regarding Edison's obligations to upgrade
these transmission facilities. In order to meet these increasing energy demands,
SCW is considering a number of options including (i) the purchase of electric
energy from on-site generation facilities installed by a third party, (ii) the
use of portable generation, and (iii) the installation of generation owned by
SCW. Each of these options may result in further increases in electric energy
prices for customers of SCW's BVE customer service area.
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 CPUC requirements.
SCW's Board of Directors has approved anticipated net capital expenditures of
approximately $55.4 million for 2002. Approved capital expenditures may be
limited pending final CPUC approval of the settlement agreement regarding
recovery of electric power costs at SCW's Bear Valley electric division. For
further information, see the section entitled "Rate Matters-Changes in Rates"
included in Part II, Item 7 in Management's Discussion and Analysis of Financial
Condition and Results of Operation.
14
CCWC has a net capital budget of $1.4 million for 2002. AWR 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
RATE REGULATION
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 public 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. Adjustments for purchased water and
power are permitted in California, to a certain extent, but generally not
Arizona. For further information, see the section entitled "Accounting for
Supply Costs" included in Part II, Item 7 in Management's Discussion and
Analysis of Financial Condition and Results of Operation.
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 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: (i) general rate case
increases (GRC's), (ii) offsets for certain expense increases including but not
limited to electricity supply cost offset and balancing account amortization,
and (iii) 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 and advice letter filings typically have a two
to four month regulatory lag.
CHANGES IN RATES
The following table lists information on estimated annual rate changes
approved by the CPUC during 2001, 2000 and 1999.
($ in 000's) Supply Balancing General
Cost Account and Step Advice
Year Offset Amortization Increases Letters Total
---- ------- ------------ --------- ------- -------
2001 $ 1,364 $ 4,422 $ 6,943 $ 595 $13,324
2000 -- (1,474) 6,973 1,040 6,539
1999 $ 23 $ 1,349 $15,175 $ 657 $17,204
New water rates with an annual increase of approximately $2.5 million
for seven ratemaking districts in SCW's Region I were implemented in January
2001. SCW's application to combine the seven ratemaking customer service areas
into one regional rate was, however, denied by the CPUC. Step increases of
approximately $1.7 million for the customer service areas 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.
15
As of December 31, 2001, SCW had accrued approximately $22.4 million in
under-collected purchased power costs included in the electric balancing
account. In May 2000, SCW filed an Advice Letter with the CPUC for recovery over
a five-year period of approximately $2.4 million in under-collected power costs
and removal of a negative amortization authorized by the CPUC in 1997. The CPUC
issued a final order on May 24, 2001 authorizing an overall rate increase of
12.5%, with a condition of conducting a subsequent audit on the expenses
included in the electric balancing account. The audit has been conducted and
provided to the CPUC.
On August 23, 2001, the CPUC also approved a second Advice Letter filed
by SCW on April 9, 2001 seeking recovery, over five years, of an additional
under-collection of $8.7 million for energy costs. Rates in SCW's BVE customer
service area have increased by approximately 14.8% as a result.
On May 11, 2001, SCW filed with the CPUC for an additional increase in
electric rates to recover energy costs under the purchase agreement with Mirant
Marketing. SCW subsequently withdrew the Advice Letter and filed an application
on August 17, 2001 with the CPUC, along with a motion requesting immediate
recovery of these costs, subject to refund after completion of the review
process. The CPUC rejected SCW's motion for immediate recovery.
On February 8, 2002, a settlement agreement among SCW, all intervening
parties and the Office of Ratepayer Advocates ("ORA") was filed with the CPUC
that will permit SCW to recover $77 per MWh of purchased power costs through
rates. SCW will only be allowed to include up to a weighted annual energy
purchase cost of $77 per MWh each year for 10 years in its balancing account. To
the extent SCW's actual average annual weighted cost for purchased power is less
than $77 per MWh, the differential will recover amounts included in the electric
supply balancing account. Conversely, to the extent that actual average annual
weighted costs for power purchased exceed the $77 per MWh amount, SCW will not
be able to include these amounts in its balancing account and such amounts will
be expensed against income. SCW has established approximately $7.9 million in
reserves as of December 31, 2001 against potential non-recovery of electric
power costs. In addition, the settlement extended the previously approved
surcharges for an additional five years to allow SCW an opportunity to collect
amounts remaining in its electric cost balancing account. The proposed
settlement also requires SCW to pursue its complaint filed with FERC in which
SCW has requested FERC to reduce the prices in its power purchase contract with
Mirant Marketing due to the dysfunctional power market that existed at the time
the agreement was signed. A final decision in this matter is expected during the
second quarter of 2002. Management believes the CPUC will support the settlement
agreement, but is unable to predict when or if the CPUC will authorize recovery
of any or all of the costs agreed to in the settlement. For further information,
see the sections entitled "Liquidity and Capital Resources" and "Electric Energy
Situation in California" included in Part II, Item 7 in Management's Discussion
and Analysis of Financial Condition and Results of Operation.
In March 2001, the CPUC approved SCW's Advice Letters to increase costs
of purchased power incurred to pump water for its water customers by $761,351
included in base water rates for each of its ratemaking districts. In April
2001, SCW filed additional Advice Letters by ratemaking areas to increase water
rates by approximately $2.3 million company-wide to recover additional electric
base rate increases, authorized recently by the CPUC for the Southern California
Edison Company and the Pacific Gas and Electric Company. The CPUC approved in
the fourth quarter of 2001 increases of approximately $672,900 in base water
rates. For further information, see the section entitled "Electric Energy
Situation in California" included in Part II, Item 7 in Management's Discussion
and Analysis of Financial Condition and Results of Operation.
The remaining Advice Letters filed by SCW to recover increased power
costs used for pumping were rejected by the CPUC due to the change in procedures
for collections of water supply costs on November 29, 2001. See the section
entitled "Accounting for Supply Costs" included in Part II, Item 7 in
Management's Discussion and Analysis of Financial Condition and Results of
Operation.
DISALLOWANCE OF COSTS
In 1993, the CPUC disallowed $1.6 million of costs incurred in
construction of a water treatment facility in SCW's Clearlake customer service
area and Registrant wrote off the disallowed amount at that time. Based on new
water quality standards, in 2000, SCW re-applied to the CPUC for inclusion of
the disallowed amount in rate base. A draft decision issued on March 30, 2001 by
the CPUC allows SCW to include $500,000 of the $1.6 million in the regulated
rate base, although an alternate draft decision issued by one of the CPUC
Commissioners proposed to deny the relief sought by SCW in its application. An
Administrative Law Judge subsequently reopened the proceeding in August 2001
requiring additional information. A final order is not anticipated until the
second quarter of 2002.
16
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 500
acre-foot 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. In
October 2001, SCW entered into an agreement with a developer, which obligates
the developer to make payments to SCW in exchange for SCW's reservation and
dedication of up to 350 acre-feet per year of the SWP entitlement for a
five-year period. SCW intends to recover its remaining investment from other
developers or through a sale of its remaining entitlement. SCW believes that its
full investment and on-going costs associated with its ownership will be
recovered.
OTHER REGULATORY MATTERS
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 transaction, however, was
denied by the CPUC on November 29, 2001. As a result, the acquisition agreement
with Peerless Water Co. has been terminated.
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 to base primary drinking water
regulations on risk assessment and cost/benefit considerations and on minimizing
overall risk. The EPA must base regulations on best available, peer-reviewed
science and data from best available methods. For proposed regulations that
involve the setting of maximum contaminant levels (MCL's), the EPA must use, and
seek public comment on, an analysis of quantifiable and non-quantifiable
risk-reduction benefits and costs for each such MCL.
SCW and CCWC currently test their wells and water systems according to
requirements listed in the SDWA. Water from wells found to contain levels of
contaminants above the established MCL's is treated to reduce contaminants to
acceptable levels before it is delivered to customers or the wells are shut
down.
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.
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 and expected future
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
17
water suppliers and forwarded to the EPA pursuant to EPA's Information
Collection Rule, which requires such water suppliers to monitor microbial and
other contaminants in their water supplies and to conduct certain tests in
respect of such contaminants. The EPA has adopted an Interim ESWTR applicable
only to systems serving greater than 10,000 persons. On April 10, 2000, EPA
published the proposed Long Term 1 Enhanced Surface Water Treatment Rule and
Filter Backwash Rule (LT1FBR) in the Federal Register. This proposed rule will
apply to each of SCW's five surface water treatment plants and the CCWC's
surface water treatment plant. It basically extends the requirements of the
ESWTR to systems serving less than 10,000 persons and will require some systems
to institute changes to the return of recycled filter backwash flows within the
treatment process to reduce the effects of recycled water on compromising
microbial control. Registrant is presently unable to predict the ultimate impact
of the LT1FBR, but it is anticipated that all plants will achieve compliance
within the three year to five-year time frames identified by EPA.
REGULATION OF DISINFECTANT/DISINFECTION BY-PRODUCTS
SCW and CCWC are also subject to regulations concerning
disinfectant/disinfection by-products (DBP's). Stage I of the regulations were
effective in November 1998 with full compliance required by 2002. Stage I
requires reduction of trihalomethane contaminants from 100 micrograms per liter
to 80 micrograms per liter. Two of SCW's systems are immediately impacted by
this rule. SCW implemented modifications to the treatment process in its Bay
Point and Cordova systems. Both systems were in full compliance by the end of
2001. A third SCW plant will require treatment modifications in order to comply
with this rule. SCW is conducting studies to determine the best treatment
methods to comply with this rule.
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 in
2002.
GROUND WATER RULE
On May 10, 2000, the EPA published the proposed Ground Water Rule (GWR),
which establishes multiple barriers to protect against bacteria and viruses in
drinking water systems that use ground water. The proposed rule will apply to
all U.S. public water systems that use ground water as a source. The proposed
GWR includes system sanitary surveys conducted by the state to identify
significant deficiencies; hydrogeologic sensitivity assessments for
undisinfected systems, source water microbial monitoring by systems that do not
disinfect and draw from hydrogeologically sensitive aquifer or have detected
fecal indicators within the system's distribution system; corrective action; and
compliance monitoring for systems which disinfect to ensure that they reliably
achieve 4-log (99.99%) inactivation or removal of viruses. The GWR is scheduled
to be issued as a final regulation in 2002. While no assurance can be given as
to the nature and cost of any additional compliance measures, if any, SCW and
CCWC do not believe that such regulations will impose significant compliance
costs, since they already currently engage in disinfection of their groundwater
systems.
REGULATION OF RADON AND ARSENIC
The regulation on arsenic was published in January 2001 with a new
federal standard of 10 parts per billion (ppb). Compliance with an MCL of 10 ppb
will require implementation of wellhead treatment remedies for eight affected
wells in SCW's system and three wells in CCWC's system. However, the EPA
subsequently withdrew the pending arsenic standard for a sixty-day review to
seek independent reviews of both the science behind the standard and of the cost
estimates to communities of implementing the rule. On October 31, 2001, EPA
announced that the arsenic standard in drinking water would be 10 parts per ppb.
The effective date for utilities to comply with the standard will be January
2006. It is still not clear what will happen between now and the current
effective date of the arsenic regulation of February 22, 2002. No further
actions by EPA would simply make this regulation become effective as of that
date.
The EPA has proposed new radon regulations following a National Academy
of Sciences risk assessment and study of risk-reduction benefits associated with
various mitigation measures. The National Academy of Sciences study is in
agreement with much of EPA's original findings but has slightly reduced the
ingestion risk initially assumed by EPA. EPA established an MCL of 300 Pico
Curies per liter based on the findings and has also established an alternative
MCL of 4000 Pico Curies per liter, based upon potential mitigation measures for
overall radon reduction. It is our understanding that the United States Office
of Management and Budget has sent the radon rule back to EPA for
reconsideration. The final rule was expected to be effective in August 2000, but
has been delayed. SCW and CCWC currently monitor their wells for radon in order
to determine the best treatment appropriate for affected wells.
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VOLUNTARY EFFORTS TO EXCEED MINIMUM SURFACE WATER TREATMENT REQUIREMENTS
SCW is a voluntary member of the EPA's "Partnership for Safe Water", a
national program designed to further protect the public from diseases caused by
cryptosporidium and other microscopic organisms. As a volunteer in the program,
SCW commits to exceed minimum operating requirements governing surface water
treatment, optimize surface water treatment plant operations and ensure that its
surface water treatment facilities are performing as efficiently as possible.
FLUORIDATION OF WATER SUPPLIES
SCW is subject to State of California Assembly Bill 733, which requires
fluoridation of water supplies for public water systems serving more than 10,000
service connections. Although the bill requires affected systems to install
treatment facilities only when public funds have been made available to cover
capital and operating costs, the bill requires the CPUC to authorize cost
recovery through rates should public funds for operation of the facilities, once
installed, become unavailable in future years.
AMMONIUM PERCHLORATE ACTION LEVEL ACTIVITIES
The California Department of Health Services (DOHS) recently reduced the
action level for ammonium perchlorate. Although neither the EPA nor the DOHS
have established a drinking water standard for ammonium perchlorate. In January
1997 DOHS established an action level of 18 parts per billion (ppb). Action
levels are advisory in nature and are not enacted into law. In January 2002, SCW
was informed that DOHS has reduced the action level from 18 ppb to a level of 4
ppb, based upon new reference dosage for health risk information from EPA. SCW
has removed eight wells from service in four separate systems since they
contained ammonium perchlorate in amounts in excess of this reduced action
level. SCW is continuing to periodically monitor all its wells to determine that
levels of perchlorate are below the action level currently in effect.
MATTERS RELATING TO SCW'S ARDEN-CORDOVA SYSTEM
In January 1997, SCW was notified that ammonium perchlorate in amounts
above the state-determined action level had been detected in three of its wells
serving its Rancho-Cordova system. Aerojet-General Corp. has, in the past, used
ammonium perchlorate in oxidizing rocket fuels. SCW took the three wells
detected with ammonium perchlorate in excess of the 1997 action levels out of
service. 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 ammonium perchlorate are below the action level currently in effect.
In January 2002, SCW was informed that DOHS was reducing the action level from
18 ppb to 4 ppb and subsequently removed three wells from service since they
contained ammonium perchlorate in amounts in excess of this reduced action
level.
In February 1998, SCW was informed that nitrosodimethylamine (NDMA) had
been detected in amounts in excess of the EPA reference dosage for health risks
in four of its wells in its Rancho-Cordova system. The wells have been removed
from service. An additional well was also removed from service in September 1999
due to the contamination and another well was removed from service in January
2002. The DOHS established an initial action level of 2 parts per trillion
(ppt). In February 2002, DOHS increased the action level to 10 ppt. Management
is investigating the impact, if any, that the increase in the action level may
have on its abilities to put certain wells back into service. NDMA is an
additional by-product from the production of rocket fuel and it is believed that
such contamination is related to the activities of Aerojet. Aerojet has
reimbursed SCW for constructing a pipeline to interconnect with the City of
Folsom water system to provide an alternative source of water supply in SCW's
Rancho-Cordova customer service area and has reimbursed SCW for costs associated
with the drilling and equipping of two new wells. As of December 31, 2001,
Aerojet had previously reimbursed SCW $4.5 million of the approximately $17
million in costs SCW has incurred. The remainder of the costs is subject to
further reimbursement, including interest. Reimbursements received from Aerojet
will reduce SCW's utility plant and costs of purchased water.
For further information regarding litigation related to contamination of
ground water in Sacramento County, see the section entitled "Other Water Quality
Litigation" included in Part I, Item 3 in Legal Proceedings.
19
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
have 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.
MATTERS RELATING TO THE CHARNOCK BASIN
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 Basin
drinking water. The EPA has ordered Shell Oil to reimburse SCW for water
replacement costs. The agencies are continuing to investigate the causes of MTBE
pollution and intend to ensure that all responsible parties contribute to its
clean up. SCW is unable to predict the outcome of the EPA's enforcement efforts.
On April 25, 2001, Registrant filed a lawsuit against all the
potentially responsible parties, who stored, transported and dispensed gasoline
containing methyl tertiary butyl ether (MTBE) in underground storage tanks,
pipelines or other related infrastructure. MTBE polluted and contaminated water
existed in areas of the basin from which SCW has pumped water through its
Charnock Well Field. As a result, SCW ceased operation of its Charnock Well
Field in October 1996. Registrant has reached an agreement in this matter that
assigns the prosecution of litigation against the potentially responsible
parties to the City of Santa Monica, California (Santa Monica). As part of the
agreement and in exchange for an assignment payment, Santa Monica will prosecute
the case against the potentially responsible parties. Registrant expects that
Santa Monica will sign the agreement by the end of the first quarter of 2002.
For further information, see section entitled "Other Water Quality Litigation"
included in Part I, Item 3 in Legal Proceedings.
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 experiences levels of detection in excess of the DOHS
standard.
SCW has met with the Regional Water Quality Control Board, the Orange
County Water District, the City of Anaheim, the DOHS and three potentially
responsible parties (PRP's) to define the extent of the MTBE contamination plume
and assess the contribution from the PRP's. The PRP's have voluntarily initiated
a work plan for regional investigation. While there have not been significant
disruptions to the water supply in Yorba Linda at this point in time, no
assurances can be given that MTBE contamination will not increase in the future.
SECURITY ISSUES
Since the tragic events of September 11, 2001, water utilities,
including Registrant, have been advised to increase security at key facilities
in order to avoid contamination of water supplies and other disruptions of
service. Registrant has implemented a number of steps to address this concern,
including the engagement of a security firm to develop further protection
measures and an ongoing review of new industry and regulatory agency security
measures. Although Registrant has not experienced any material increase in costs
related to these measures, management is unable to predict what, if any,
additional measures will be implemented and what such measures may cost.
Registrant intends to seek recovery of any such
20
costs from the CPUC and the ACC. Management is unable to predict if these
regulatory bodies will authorize recovery of any or all of these costs.
WATER SUPPLY
SCW'S WATER SUPPLY
During 2001, SCW supplied a total of 84,103,000 CCF of water. Of this
amount, approximately 58.5% came from pumped sources and 39.6% was purchased
from others, principally the MWD. The Bureau of Reclamation (the Bureau)
supplied the remaining amount under a no-cost contract. During 2000, SCW
supplied 87,439,000 CCF of water, 55.7% of which came from pumped sources, 42.4%
was purchased, and the Bureau supplied the remainder.
SCW's water supply and revenues are significantly affected by changes in
meteorological conditions. For the water year ending in September of 2001,
California precipitation was at 75% of normal levels with the biggest deficits
in Northern California. Southern California experienced only slightly less
precipitation than normal, 92% for South Coast and 104% for Central Coast. In
January of 2001 statewide reservoirs were at 107% of normal levels.
For 2002 statewide the numbers should be much the same albeit reversed
with Northern California returning to normal precipitation levels and Southern
California entering a slightly dryer and warmer weather pattern. Statewide from
October to December precipitation was 130% of normal and reservoirs in January
of 2002 were at 95% of normal. As of January 22, 2002, snow pack water content
was 105% of average with the North at 110%, Central at 105%, and Southern
California at 100%.
In the Pacific where the El Nino/Southern Oscillation (ENSO) is formed,
near average, sea surface temperature (SST) conditions are predicted through
March 2002, followed by slightly warmer than normal SST from mid-March through
June. Should the SST warming trend continue, the later half of 2002 could see a
mild El Nino effect with associated increases in precipitation for areas of the
Southwestern part of the United States.
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. For further information, see Part
I, Item 3 in Legal Proceedings.
The MWD is a water district organized under the laws of the State of
California for the purpose of delivering imported water to areas within its
jurisdiction. Registrant has 57 connections to the water distribution facilities
of MWD and other municipal water agencies. MWD imports water from two principal
sources: the Colorado River and the State Water Project (SWP). Available water
supplies from the Colorado River and the SWP have historically been sufficient
to meet most of MWD's requirements and MWD's supplies from these sources are
anticipated to remain adequate through 2002. 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. Foremost
among the safeguards is Diamond Valley Reservoir, a reservoir in southwest
Riverside County. Capable of holding 800,000 acre-feet (AF) or 269 billion
gallons, the reservoir is currently more than half full.
CCWC'S WATER SUPPLY
The Colorado River flow has been low. For the 2001 water year 6,929,200
AF of water flowed into Lake Powell from the Colorado River, which is only 52%
of normal. However the Lake itself is currently at 75% of capacity, which is 95%
of normal for the end of December 2001. If the SST warming trend continues, it
is likely that precipitation will return to normal levels over the 2002 water
year. In December 2001 there was 279,700 AF of water flow into Lake Powell from
the Colorado River, which is 75% of average. The snow pack water content in the
upper Colorado River Basin was 70% of normal as of January 31, 2002. The
National Weather service expects that normal seasonal rain and snow should
gradually improve water supply in Registrant's water service areas.
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
21
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 operations conducted through its CCWC subsidiary, and
non-utility activities conducted 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. All activities of ASUS
are conducted in California and 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. For further information, see Note 11 to the
"Notes to Financial Statements" included in Part II, Item 8 in Financial
Statements and Supplementary Data.
RISK FACTOR SUMMARY
You should carefully read the risks described below and other
information in this Form 10-K in order to understand certain of the risks of our
business.
OUR LIQUIDITY, AND IN CERTAIN CIRCUMSTANCES, EARNINGS, COULD BE ADVERSELY
AFFECTED BY INCREASES IN ELECTRICITY PRICES IN CALIFORNIA.
Under California law, we are permitted to file for a rate increase to
recover electric power costs not being recovered in current rates. Increases in
electric power costs generally have no direct impact on profit margins, unless
recovery of these costs is disallowed, but do affect cash flows and can
therefore impact the amount of our capital resources. Electric power costs
increased substantially in California during the fall of 2000 until the summer
of 2001. As of December 31, 2001, SCW had accrued $22.4 million in unrecovered
power costs in its electric balancing accounts. FERC mitigation measures are
expected to expire on September 30, 2002. In addition, Cal ISO has proposed a
number of market reforms that could require SCW to procure substantial
additional power and/or capacity. This could result in an increase in the level
and volatility of electric prices in California.
We have been funding these power costs from our short-term borrowing
facilities. In addition, in April 2001, the Company implemented a Cash
Preservation Plan to control costs and temporarily to limit capital and
maintenance expenditures. SCW has filed Advice Letters to recover the
under-collection of power costs in its water and electric balancing accounts and
intends to continue to do so until such time as its actual power costs are being
fully recovered in rates. However, due to the nature of the regulatory process,
there is a risk of disallowance of full recovery of supply costs during any
period in which there has been a substantial run-up in these costs. Any material
disallowance of purchased power costs could have a material adverse impact on
cash flow and earnings. In addition, we believe that timely action by the CPUC
to authorize the recovery of these costs is necessary to avoid a material
adverse effect on SCW's financial condition. Delays in obtaining regulatory
approval or disallowance of recovery of costs could also affect SCW's ability to
pay dividends to AWR. AWR's ability to pay dividends on its Common Shares is
dependent upon the payment of dividends by SCW.
We have reached a settlement with the CPUC Staff and all other
intervening parties that would authorize us to included $0.077 per kilowatt-hour
(KWh) in rates to recover our electric power costs. If our actual annual costs
exceed this amount, we cannot recover the excess and the amount will be expensed
against income. If our actual annual energy costs are less that $0.077 per KWh,
we can use this difference to collect amounts previously included in the
balancing account. We are unable to predict if the CPUC will approve the
settlement and, if the settlement is approved, whether or not the CPUC will
implement new rates.
The Company has established approximately $7.9 million in reserves for
its Bear Valley Electric division for possible non-recovery of power costs
included in the electricity supply cost balancing accounts.
22
CHANGES IN WATER SUPPLY COSTS, EITHER UNIT COST CHANGE OR SUPPLY MIX
CHANGE, WILL DIRECTLY IMPACT THE COMPANY'S EARNINGS.
Prior to November 29, 2001, we recovered certain water supply costs
through a balancing account mechanism. Water supply costs include the cost of
purchased water and power and groundwater production assessments. The balancing
account was not, however, designed to insulate SCW's earnings against changes in
supply mix. As a result, SCW was not permitted to recover increased costs due to
increased use of purchased water, which is generally more expensive than
groundwater, through the balancing account mechanism.
On November 29, 2001, the CPUC ordered SCW to suspend the use of all
current water balancing account, and instead started a memorandum account for
each offsettable expense of purchased water, purchased power and pump tax for
its water service areas. We may recover certain water supply costs based on the
memorandum account if we are within our rate case cycle and we are not earning
an amount in excess of our authorized rate of return. SCW may not otherwise
recover increased costs due to increased unit cost. Additionally, changes in
water supply costs compared to the authorized amount, as well as any future
authorized offset increases may directly affect our earnings.
SIGNIFICANT CLAIMS HAVE BEEN ASSERTED AGAINST US IN WATER QUALITY
LITIGATION.
SCW and others have been sued in twenty water quality related lawsuits
alleging personal injury and property damage as a result of the delivery of
water that was allegedly contaminated. Seventeen of the lawsuits involve
plaintiffs who received water from the San Gabriel Basin in Los Angeles County.
The other lawsuits involve plaintiffs in Sacramento County.
In March 1998, the CPUC issued an Order Instituting Investigation as a
result of water quality lawsuits being filed against water utilities in
California. On November 2, 2000, the CPUC issued a final order concluding that
the CPUC has jurisdiction to regulate the service of water utilities with
respect to the health and safety of that service; that DOHS requirements
governing drinking water quality adequately protect the public health and
safety; and that regulated water utilities, including SCW, have satisfactorily
complied with past and present drinking water quality requirements.
On February 5, 2002, the California Supreme Court ruled that water
utilities regulated by the CPUC may be sued for damages based on allegations
that the utility failed to comply with federal and state safe drinking water
requirements. As a result, plaintiffs may proceed on their claims against SCW to
the extent that these claims are based on violations of federal and state law.
SCW is unable to predict the outcome of any of this litigation or the
extent to which it will be able to recover its litigation costs from ratepayers
or other third parties.
OUR OPERATING COSTS HAVE INCREASED AND ARE EXPECTED TO CONTINUE TO
INCREASE AS A RESULT OF GROUNDWATER CONTAMINATION.
SCW's operations have been impacted by groundwater contamination in
certain of its service territories. We have taken a number of steps to address
this contamination, including the removal of wells from service, the
construction of water treatment facilities and securing alternatives sources of
supply from other areas not affected by the contamination.
In some cases, potentially responsible parties have reimbursed us for
our costs. In other cases, we have taken legal action against parties that we
believe to be potentially responsible for the contamination.
Certain government officials have suggested that water producers, such
as SCW and CCWC, may have liability under certain environmental statutes if
their pumping operations affect the movement of the contamination. SCW has been
required to remove certain wells from service because its pumping activities
might affect the movement of contamination in other service areas. Currently,
neither the Environmental Protection Agency nor any other governmental agency
has identified the Company or, to our knowledge, any other water producer, as a
potentially responsible party. We cannot assure you, however, that SCW or CCWC
will not be identified as a potentially responsible party in the future. Our
future results of operations could be adversely affected if either SCW or CCWC
is required to pay clean-up costs and is not allowed to recover such costs in
rates.
23
ENVIRONMENTAL REGULATION HAS INCREASED, AND IS EXPECTED TO CONTINUE TO
INCREASE, OUR OPERATING COSTS.
SCW and CCWC are subject to increasingly stringent environmental
regulations that will result in increasing capital and operating costs. These
regulations include:
- The 1996 amendments to the Safe Drinking Water Act that
require increased testing and treatment of water to
reduce specified contaminants to maximum contaminant
levels
- Approved regulations requiring increased surface-water
treatment to decrease the risk of microbial
contamination; these regulations will affect SCW's five
surface water treatment plants and one CCWC plant
- Additional regulation of disinfection/disinfection
byproducts expected to be adopted before the end of
2002; these regulations will potentially affect two of
SCW's systems
- Additional regulations expected to be adopted requiring
disinfection of certain groundwater systems
- Currently pending regulation of arsenic and radon
- California customer requirements to fluoridate public
water systems serving over 10,000 customers
- Reduction in the action level for ammonium perchlorate
to 4 ppb in 2002; we have removed 8 wells from service
due to the presence ammonium perchlorate above action
levels.
SCW and CCWC may be able to recover costs incurred to comply with these
regulations through the ratemaking process for their regulated systems. We may
also be able to recover certain of these costs under our contractual
arrangements with municipalities. In certain circumstances, we may be able to
recover costs from parties responsible or potentially responsible for
contamination.
THE ADEQUACY OF OUR WATER SUPPLIES DEPENDS UPON A VARIETY OF FACTORS
BEYOND OUR CONTROL.
The adequacy of our water supplies varies from year to year depending
upon a variety of factors, including:
- Rainfall
- Availability of Colorado River water
- The amount of water stored in reservoirs
- The amount of water used by our customers and others
- Water quality, and
- Legal limitations on use
Population growth and increases in the amount of water used have
increased limitations on use to prevent over-drafting of groundwater basins. The
import of water from the Colorado River, one of SCW's important sources of
supply, is expected to decrease in future years due to the requirements of the
Central Arizona Project ("CAP"). We have also taken wells out of service due to
groundwater contamination.
CCWC obtains its water supply from operating wells and from the Colorado
River through the CAP. CCWC's water supply may be subject to interruption or
reduction if there is an interruption or reduction in CAP water.
Water shortages may affect us in a variety of ways:
- They adversely affect supply mix by causing us to rely
on more expensive purchased water
- They adversely affect operating costs
- They may result in an increase in capital expenditures
for building pipelines to connect to alternative sources
of supplies and reservoirs and other facilities to
conserve or reclaim water
We may be able to recover increased operating and construction costs for
our regulated systems through the ratemaking process. We may also be able to
recover certain of these costs under the terms of our contractual agreements
with municipalities. In certain circumstances, we may recover these costs from
third parties that may be responsible, or potentially responsible, for
groundwater contamination.
24
OUR EARNINGS ARE GREATLY AFFECTED BY WEATHER DURING DIFFERENT SEASONS.
The demand for water and electricity varies by season. Therefore, the
results of operations for one period may not indicate results to be expected in
another period. For instance, most water consumption occurs during the third
quarter of each year when weather tends to be hot and dry. On warm days, use of
water by residential and commercial customers may be significantly greater than
on cold days because of the increased use of water for outdoor landscaping.
Likewise the demand for electricity in our Big Bear service area is greatly
affected by winter snows. An increase in winter snows reduces the use of snow
making machines at ski resorts in the Big Bear area and, as a result reduces
electric revenues.
Variability of weather from normal temperatures or changes in snow or
rainfall can materially impact results of operations. As a result, weather has
been and will continue to be one of the dominant factors in our financial
performance.
OUR BUSINESS IS HEAVILY REGULATED AND, AS A RESULT, DECISIONS BY
REGULATORY AGENCIES AND CHANGES IN LAWS AND REGULATIONS CAN SIGNIFICANTLY AFFECT
OUR BUSINESS.
Our revenues depend substantially on the rates that we are permitted to
charge our customers and our ability to recover our costs in these rates,
including the ability to recover the costs of purchased water, groundwater
assessments and electric power costs in rates. In April 1999, the CPUC denied
our request to recover through rates the costs associated with our participation
in the Coastal Aqueduct Extension of the State Water Project. We also have an
application pending before the CPUC to include an additional $1.6 million in
rate base for a water treatment plant in SCW's Clearlake service area that was
previously disallowed by the CPUC in 1993. In addition, we have an application
pending to recover our current energy costs.
We have been adversely affected by electric restructuring in California
and the escalation of energy costs attributable thereto. The California
Department of Water Resources has attempted to alleviate the crisis by
purchasing electricity for Pacific Gas and Electric Company, Southern California
Edison Company and San Diego Gas and Electric Company, but does not purchase any
electricity for our Bear Valley electric division. FERC has taken certain
actions intended to stabilize the energy market in the West. These mitigation
measures expire on September 30, 2002. Registrant is unable to predict what
impact the expiration of these measures will have on electric prices.
Cal ISO expects to propose additional market reforms that may
substantially increase the costs of SCW. This could have a material adverse
impact on SCW if SCW is unable to recover these increased costs from its
ratepayers.
SCW has filed a complaint with FERC seeking a reduction of the rates in
its power purchase contract with Mirant Marketing to a just and reasonable
price. Registrant is unable to predict the outcome of this proceeding. SCW has
also filed an Advice Letter with the CPUC seeking to recover the costs of its
power supply costs previously incurred and expected to be incurred under its
contracts with Mirant Marketing and Pinnacle West Capital. SCW has reached a
settlement regarding the recovery of a substantial portion of these costs. This
settlement has not yet been approved by the CPUC.
OUR BUSINESS REQUIRES SIGNIFICANT CAPITAL EXPENDITURES.
The utility business is capital intensive. On an annual basis, we spend
significant sums for additions to or replacement of property, plant and
equipment. During calendar years 2001, 2000 and 1999, we spent $50,253,000,
$45,982,000, and $51,578,000, respectively, for these purposes. Our budgeted
capital expenditures for calendar year 2002 for these purposes are approximately
$56,774,000.
We obtain funds for these capital projects from operations,
contributions by developers and others and advances from developers (which must
be repaid). We also periodically borrow money or issue equity for these
purposes. We maintain bank lines of credit that we can use for these purposes.
We cannot assure you that these sources will continue to be adequate or that the
cost of funds will remain at levels permitting us to remain profitable.
ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
25
eliminates the pooling-of-interests method of accounting, effective June 30,
2001. After that, all business combinations will be recorded under the purchased
method of accounting (record goodwill for excess of costs over the net assets
acquired). SFAS No. 142 requires that companies cease amortizing goodwill,
effective January 1, 2002. Goodwill initially recognized after June 30, 2001,
will not be amortized. Goodwill on the balance sheet at June 30, 2001 will be
amortized until January 1, 2002. Under SFAS No. 142, goodwill will be tested for
impairment using a fair-value approach when events or circumstances occur
indicating that impairment might exist. A benchmark assessment for goodwill is
also required within six months of the date of adoption of SFAS No. 142.
Registrant has determined that goodwill, $12,285,000 at December 31, 2001,
associated with its acquisition of CCWC is not impaired and effective January 1,
2002 has ceased amortizing this goodwill. In 2001, $331,073 was amortized
against the goodwill.
In June of 2001, the Financial Accounting Standards Board issued SFAS
No. 143, "Accounting for Asset Retirement Obligations," on the accounting for
obligations associated with the retirement of long-lived assets. SFAS 143
requires a liability to be recognized in the financial statements for retirement
obligations meeting specific criteria. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. Registrant believes that adoption of this
statement will not have a significant impact on its financial position or
results of operation.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144
requires that one accounting model be used for long-lived assets to be disposed
of by sale and broadens discontinued operations to include more disposal
transactions. Operating losses of discontinued operations are recognized in the
period in which they occur, instead of accruing future operating losses before
they occur. Registrant is assessing the impact on future financial reporting
related to both past and future transactions, but believes that adoption of this
statement will not have a significant impact on its financial position or
results of operation.
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 except for the block-forward purchase power
contracts that meet the normal purchase exception rule under FASB 133,
"Accounting for Derivative Instruments and Hedging Activities." Under the terms
of its power purchase contracts with Mirant Marketing and Pinnacle West Capital,
SCW is required to post security, at the request of the seller, if SCW is in
default under the terms of the contract. For further information, see the
section entitled "Contractual Obligations and Other Commitments" included in
Part II, Item 7 in Management's Discussion and Analysis of Financial Condition
and Results of Operation.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
American States Water Company
Consolidated Balance Sheets - December 31, 2001 and 2000
Consolidated Statements of Capitalization - December 31, 2001
and 2000
Consolidated Statements of Income - for the years ended December
31, 2001, 2000 and 1999
Consolidated Statements of Changes in Common Shareholders'
Equity - for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows - for the years ended
December 31, 2001, 2000 and 1999
Southern California Water Company
Balance Sheets - December 31, 2001 and 2000
Statements of Capitalization - December 31, 2001 and 2000
Statements of Income - for the years ended December 31, 2001,
2000 and 1999
Statements of Changes in Common Shareholders' Equity - for the
years ended December 31, 2001, 2000 and 1999
Statements of Cash Flows - for the years ended December 31,
2001, 2000 and 1999
Notes to Financial Statements
Report of Management
Report of Independent Public Accountants
27
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands) 2001 2000
--------- ---------
ASSETS
UTILITY PLANT, AT COST
Water $ 645,185 $ 608,032
Electric 38,525 37,630
--------- ---------
683,710 645,662
Less - Accumulated depreciation (190,656) (173,367)
--------- ---------
493,054 472,295
Construction work in progress 46,788 36,801
--------- ---------
Net utility plant 539,842 509,096
--------- ---------
OTHER PROPERTY AND INVESTMENTS 24,104 25,222
CURRENT ASSETS
Cash and cash equivalents 30,496 5,808
Accounts receivable-Customers, less reserves of $972 in 2001;
$510 in 2000 10,557 10,481
Other account receivable 5,306 5,233
Unbilled revenue 12,141 11,363
Materials and supplies, at average cost 970 1,116
Supply cost balancing accounts 25,826 11,145
Prepayments 2,493 4,085
Accumulated deferred income taxes - net -- 3,249
--------- ---------
Total current assets 87,789 52,480
--------- ---------
DEFERRED CHARGES
Unamortized debt expense and redemption premium 7,540 7,190
Regulatory tax-related assets 15,843 17,705
Other 8,646 4,953
--------- ---------
Total deferred charges 32,029 29,848
--------- ---------
TOTAL ASSETS $ 683,764 $ 616,646
========= =========
The accompanying notes are an integral part of these financial statements
28
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands) 2001 2000
-------- --------
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity $199,982 $192,723
Preferred Shares 1,600 1,600
Preferred Shares - mandatory redemption 280 320
Long-term debt 245,692 176,452
-------- --------
Total capitalization 447,554 371,095
-------- --------
CURRENT LIABILITIES
Notes payable to banks 20,000 45,000
Long-term debt and Preferred Shares - current 800 735
Accounts payable 13,931 11,857
Taxes payable 5,389 5,585
Accrued interest 1,945 1,783
Other 21,571 15,257
-------- --------
Total current liabilities 63,636 80,217
-------- --------
OTHER CREDITS
Advances for construction 69,436 69,230
Contributions in aid of construction 43,723 39,670
Accumulated deferred income taxes - net 53,444 51,131
Unamortized investment tax credits 2,882 3,156
Regulatory tax-related liability 1,773 1,817
Other 1,316 330
-------- --------
Total other credits 172,574 165,334
-------- --------
TOTAL CAPITALIZATION AND LIABILITIES $683,764 $616,646
======== ========
The accompanying notes are an integral part of these financial statements
29
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
(In thousands) 2001 2000
--------- ---------
COMMON SHAREHOLDERS' EQUITY:
Common Shares, no par value, $2.50 stated value
Authorized 30,000,000 shares
Outstanding 10,079,629 in 2001 and 10,079,629 in 2000 $ 25,199 $ 25,199
Additional paid-in capital 100,239 100,239
Earnings reinvested in the business 74,544 67,285
--------- ---------
199,982 192,723
--------- ---------
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: $25 PAR VALUE, 5% SERIES
Authorized and outstanding 12,800 shares in 2001 and 14,400 shares
in 2000 320 360
Less: Preferred Shares to be redeemed within one year (40) (40)
--------- ---------
280 320
LONG-TERM DEBT
Notes/Debentures:
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
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
6.81% notes due 2028 15,000 15,000
6.59% notes due 2029 40,000 40,000
7.875% notes due 2030 20,000 --
7.23% notes due 2031 50,000 --
Private Placement Notes:
9.56% notes due 2031 28,000 28,000
Tax-Exempt Obligations:
5.50% notes due 2026 7,950 7,950
Variable rate obligation due 2014 6,000 6,000
State Water Project due 2035 6,870 6,949
Other Debt Instruments:
8.50% fixed rate obligation due 2013 1,630 1,714
Variable rate obligation due 2018 589 622
Capital Lease Obligations 425 462
Chaparral City Water Company:
4% to 4.85% serial bonds due 2007 1,295 1,480
5.20% term bonds due 2011 1,000 1,000
5.40% term bonds due 2022 4,610 4,610
4.65% term bonds due 2006 185 215
5.30% term bonds due 2022 1,015 1,015
3.34% repayment contract due 2006 1,283 1,530
--------- ---------
246,452 177,147
--------- ---------
Less: Current maturities (760) (695)
--------- ---------
245,692 176,452
--------- ---------
TOTAL CAPITALIZATION $ 447,554 $ 371,095
========= =========
The accompanying notes are an integral part of these financial statements
30
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
(in thousands, except per share amounts) 2001 2000 1999
--------- --------- ---------
OPERATING REVENUES
Water $ 181,474 $ 168,795 $ 159,693
Electric 15,251 14,366 13,338
Other 789 799 390
--------- --------- ---------
Total operating revenues 197,514 183,960 173,421
--------- --------- ---------
OPERATING EXPENSES
Water purchased 37,609 41,592 36,143
Power purchased for resale 19,662 10,664 7,119
Power purchased for pumping 9,592 7,509 7,394
Groundwater production assessment 6,847 7,489 7,170
Supply cost balancing accounts (14,681) (6,371) (473)
Other operating expenses 17,162 16,748 15,594
Administrative and general expenses 35,108 26,135 28,600
Depreciation 17,951 15,339 13,650
Maintenance 8,640 10,280 9,799
Taxes on income 15,379 15,127 13,345
Property and other taxes 7,553 7,141 6,566
--------- --------- ---------
Total operating expenses 160,822 151,653 144,907
--------- --------- ---------
OPERATING INCOME 36,692 32,307 28,514
--------- --------- ---------
OTHER INCOME
Total other income - net (510) (99) 532
--------- --------- ---------
Income before interest charges 36,182 32,208 29,046
--------- --------- ---------
INTEREST CHARGES
Interest on long-term debt 13,497 11,623 11,294
Other interest and amortization of debt expense 2,238 2,499 1,651
--------- --------- ---------
Total interest charges 15,735 14,122 12,945
--------- --------- ---------
NET INCOME 20,447 18,086 16,101
Dividends on Preferred Shares (84) (86) (88)
--------- --------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 20,363 $ 18,000 $ 16,013
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 10,080 9,380 8,958
BASIC EARNINGS PER COMMON SHARE $ 2.02 $ 1.92 $ 1.79
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 10,171 9,411 N/A
FULLY DILUTED EARNINGS PER COMMON SHARE $ 2.00 $ 1.91 N/A
DIVIDENDS DECLARED PER COMMON SHARE $ 1.30 $ 1.285 $ 1.28
The accompanying notes are an integral part of these financial statements
31
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Common Shares
----------------------- Additional Earnings
Number of Paid-in Reinvested in
(in thousands) Shares Amount Capital the Business
-------- -------- ---------- --------------
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 offering 1,107 2,768 24,924
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
Add:
Net Income 20,447
Deduct:
Dividends on Preferred Shares 84
Dividends on Common Shares - $1.30 per share 13,104
-------- -------- -------- --------
BALANCES AT DECEMBER 31, 2001 10,080 $ 25,199 $100,239 $ 74,544
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
32
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(in thousands) 2001 2000 1999
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,447 $ 18,086 $ 16,101
Adjustments for non-cash items:
Depreciation and amortization 17,951 15,339 14,364
Deferred income taxes and investment tax credits 7,106 5,848 2,440
Other - net (383) (1,043) 1,066
Changes in assets and liabilities:
Customer receivables (76) (616) (1,555)
Prepayments 1,592 915 1,037
Supply cost balancing accounts (14,681) (6,371) (474)
Accounts payable 2,074 (2,567) 3,559
Taxes payable (196) 153 (468)
Unbilled revenue (778) (18) (2,042)
Accrued Interest 162 199 179
Other - net 6,387 862 4,803
-------- -------- --------
Net cash provided 39,605 30,787 39,010
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (48,149) (45,758) (57,823)
Acquisition of Chaparral City Water Company Stock -- (18,484) --
Acquisition of Water Rights -- (1,653) --
-------- -------- --------
Net cash used (48,149) (65,895) (57,823)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Securities 70,000 28,107 47,028
Receipt of advances for and contributions in aid of
construction 6,841 2,512 5,300
Refunds on advances for construction (4,686) (2,961) (2,957)
Retirement or repayments of long-term debt
and redemption of Preferred Shares -- net (735) (616) (435)
Net change in notes payable to banks (25,000) 24,000 (17,000)
Common and preferred dividends paid (13,188) (12,315) (11,554)
-------- -------- --------
Net cash provided 33,232 38,727 20,382
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 24,688 3,619 1,569
Cash and Cash Equivalents, Beginning of Year 5,808 2,189 620
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 30,496 $ 5,808 $ 2,189
-------- -------- --------
TAXES AND INTEREST PAID:
Income taxes paid $ 7,089 $ 9,430 $ 12,137
Interest paid $ 15,634 $ 14,379 $ 11,834
-------- -------- --------
NON-CASH TRANSACTIONS:
Property installed by developers and conveyed to Company $ 2,104 $ 2,570 $ 4,096
Assumption of Chaparral's long-term debt and non-current
portion of Customer Deposit N/A $ 11,425 N/A
======== ======== ========
The accompanying notes are an integral part of these financial statements.
33
SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
December 31,
(in thousands) 2001 2000
--------- ---------
ASSETS
UTILITY PLANT, AT COST
Water $ 607,988 $ 570,836
Electric 38,525 37,630
--------- ---------
646,513 608,466
Less - Accumulated depreciation (181,371) (165,002)
--------- ---------
465,142 443,464
Construction work in progress 46,042 36,605
--------- ---------
Net utility plant 511,184 480,069
--------- ---------
OTHER PROPERTY AND INVESTMENTS 9,446 9,711
--------- ---------
CURRENT ASSETS
Cash and cash equivalents 26,079 1,545
Accounts receivable-Customers, less reserves of $951 in 2001;
$498 in 2000 10,228 10,071
Other 5,202 5,097
Inter-company receivable -- 376
Unbilled revenue 11,940 11,363
Materials and supplies, at average cost 883 1,039
Supply cost balancing accounts 25,826 11,145
Prepayments 2,310 3,756
Accumulated deferred income taxes - net -- 3,256
--------- ---------
Total current assets 82,468 47,648
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets 15,843 17,705
Other 15,433 11,396
--------- ---------
Total deferred charges 31,276 29,101
--------- ---------
TOTAL ASSETS $ 634,374 $ 566,529
========= =========
The accompanying notes are an integral part of these financial statements
34
SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
December 31,
(in thousands) 2001 2000
-------- --------
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity $196,107 $164,808
Long-term debt 236,804 167,062
-------- --------
Total capitalization 432,911 331,870
-------- --------
CURRENT LIABILITIES
Notes payable to banks -- 45,000
Long-term debt and preferred shares - current 300 275
Accounts payable 13,548 11,203
Inter-company payable 26 4,746
Taxes payable 5,599 5,675
Accrued interest 1,877 1,722
Other 21,320 13,512
-------- --------
Total current liabilities 42,670 82,133
-------- --------
OTHER CREDITS
Advances for construction 58,570 58,195
Contributions in aid of construction 43,493 39,642
Accumulated deferred income taxes - net 52,075 49,569
Unamortized investment tax credits 2,882 2,973
Regulatory tax-related liability 1,773 1,817
Other -- 330
-------- --------
Total other credits 158,793 152,526
-------- --------
TOTAL CAPITALIZATION AND LIABILITIES $634,374 $566,529
======== ========
The accompanying notes are an integral part of these financial statements
35
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF CAPITALIZATION
December 31,
(in thousands) 2001 2000
--------- ---------
COMMON SHAREHOLDERS' EQUITY:
Common shares, no par value
Outstanding 100 in 2000 and 110 in 2001 $ 123,391 $ 98,391
Earnings reinvested in the business 72,716 66,417
--------- ---------
196,107 164,808
--------- ---------
LONG-TERM DEBT
Notes/Debentures:
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
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
6.81% notes due 2028 15,000 15,000
6.59% notes due 2029 40,000 40,000
7.875% notes due 2030 20,000 --
7.23% notes due 2031 50,000 --
Private Placement Notes:
9.56% notes due 2031 28,000 28,000
Tax-Exempt Obligations:
5.50% notes due 2026 7,950 7,950
Variable rate obligation due 2014 6,000 6,000
State Water Project due 2035 6,870 6,949
Other Debt Instruments:
8.50% fixed rate obligation due 2013 1,630 1,714
Variable rate obligation due 2018 589 622
Capital Lease Obligations 425 462
--------- ---------
237,064 167,297
Less: Current maturities (260) (235)
--------- ---------
236,804 167,062
--------- ---------
TOTAL CAPITALIZATION $ 432,911 $ 331,870
========= =========
The accompanying notes are an integral part of these financial statements
36
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
For the years ended December 31,
($ in thousand, except per share amounts) 2001 2000 1999
--------- --------- ---------
OPERATING REVENUES
Water $ 175,204 $ 167,529 $ 159,693
Electric 15,251 14,366 13,338
--------- --------- ---------
Total operating revenues 190,455 181,895 173,031
--------- --------- ---------
OPERATING EXPENSES
Water purchased 37,112 41,450 36,145
Power purchased for resale 19,662 10,664 7,119
Power purchased for pumping 9,169 7,442 7,394
Groundwater production assessment 6,847 7,489 7,170
Supply cost balancing accounts (14,681) (6,371) (473)
Other operating expenses 16,111 16,306 15,475
Administrative and general expenses 33,929 25,545 28,077
Depreciation 16,710 15,086 13,516
Maintenance 8,411 10,191 9,794
Taxes on income 15,066 14,881 13,473
Property and other taxes 7,089 7,037 6,563
--------- --------- ---------
Total operating expenses 155,425 149,720 144,253
--------- --------- ---------
OPERATING INCOME 35,030 32,175 28,778
--------- --------- ---------
OTHER INCOME
Total other income - net (624) (140) 509
--------- --------- ---------
Income before interest charges 34,406 32,035 29,287
--------- --------- ---------
INTEREST CHARGES
Interest on long-term debt 13,015 11,512 11,294
Other interest and amortization of debt expense 1,562 2,838 1,651
--------- --------- ---------
Total interest charges 14,577 14,350 12,945
--------- --------- ---------
NET INCOME 19,829 17,685 16,342
EARNINGS AVAILABLE FOR COMMON SHAREHOLDER $ 19,829 $ 17,685 $ 16,342
BASIC EARNINGS PER COMMON SHARE $ 185,318 $ 176,850 $ 163,420
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 107 100 100
DIVIDENDS DECLARED PER COMMON SHARE $ 123,000 $ 129,000 $ 120,400
The accompanying notes are an integral part of these financial statements.
37
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Common Shares
----------------------- Additional Earnings
Number of Paid-in Reinvested in
(in thousands) Shares Amount Capital the Business
-------- -------- ---------- --------------
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
Add:
Net Income 19,829
Issuance of Common Shares 10 25,000 --
Deduct:
Dividends on Common Shares - $33,000 per share 3,300
Dividends on Common Shares - $30,000 per share 3,300
Dividends on Common Shares - $33,000 per share 3,630
Dividends on Common Shares - $30,000 per share 3,300
BALANCES AT DECEMBER 31, 2001 110 $123,391 -- $72,716
====== ======= ====== =======
The accompanying notes are an integral part of these financial statements
38
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF CASH FLOWS
For the years ended December 31,
(in thousands) 2001 2000 1999
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,829 $ 17,685 $ 16,342
Adjustments for non-cash items:
Depreciation and amortization 16,710 15,086 14,229
Deferred income taxes and investment tax credits 7,489 5,685 2,430
Other - net (2,225) (479) 1,308
Changes in assets and liabilities:
Customer receivables (157) 64 (1,640)
Prepayments 1,446 1,095 (1,137)
Supply cost balancing accounts (14,681) (6,371) (474)
Accounts payable 2,345 (2,412) 3,561
Taxes payable (76) (25) (447)
Unbilled revenue (577) (18) (2,042)
Accrued Interest 155 138 179
Other - net 3,515 4,352 7,074
-------- -------- --------
Net cash provided 33,773 34,800 39,383
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (47,598) (45,560) (57,823)
-------- -------- --------
Net cash used (47,598) (45,560) (57,823)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Securities 95,000 -- 47,028
Receipt of advances for and contributions in aid of
construction 6,241 2,512 3,883
Refunds on advances for construction (4,119) (2,961) (1,540)
Repayments of long-term debt (233) (366) (395)
Net change in notes payable to banks (45,000) 24,000 (17,000)
Common dividends paid (13,530) (12,900) (12,040)
-------- -------- --------
Net cash provided 38,359 10,285 19,936
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24,534 (475) 1,496
Cash and Cash Equivalents, Beginning of Year 1,545 2,020 524
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 26,079 $ 1,545 $ 2,020
-------- -------- --------
TAXES AND INTEREST PAID:
Income taxes paid $ 6,602 $ 9,152 $ 12,241
Interest paid $ 14,461 $ 14,120 $ 11,834
-------- -------- --------
NON-CASH TRANSACTIONS:
Property installed by developers and conveyed to
Company $ 2,104 $ 2,570 $ 4,096
======== ======== ========
The accompanying notes are an integral part of these financial statements.
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 in
California. SCW also distributes 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 a public utility 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 direct regulatory oversight by either the CPUC or
the ACC 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 of AWR include the accounts of AWR
and its wholly owned subsidiaries SCW, ASUS and CCWC (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 2001, 2000 and 1999 the
aggregate provisions for depreciation for SCW approximated 2.6%, 2.6% 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, 2001, Registrant had $12,285,000 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 was being amortized over a period of 40 years. Pursuant to
FASB No. 142, Goodwill and Other Intangible Assets, AWR has concluded that this
goodwill is not impaired at December 31, 2001. As a result, amortization of this
goodwill will cease effective January 1, 2002. AWR is required to reassess
impairment annually.
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 estimated 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 shares potentially issued in connection with stock options
granted under Registrant's 2000 Stock Incentive Plan, and net income after
deducting preferred dividend requirements. At December 31, 2001 and 2000,
respectively, there were 91,647 and 45,657 options outstanding.
40
Supply Cost Balancing Accounts: As permitted by the CPUC prior to
November 29, 2001, Registrant maintained water and electric supply cost
balancing accounts for SCW to account for under-collections and over-collections
of revenues designed to recover such costs. Costs were recorded in income and
charged to balancing accounts when such costs were incurred. The balancing
accounts were reversed when such costs were recovered through rate adjustments.
Registrant accrued interest on its supply cost balancing accounts at the rate
prevailing for 90-day commercial paper. On November 29, 2001, the CPUC issued a
resolution ordering that water utilities with existing balancing accounts cease
booking amounts into these accounts. In its place, the CPUC required water
utilities to start a new memorandum account that would work in a manner similar
to the balancing account to track the under-collection or over-collection of
supply costs for its water utility service areas. In accordance with this
resolution, all supply costs will be accounted for and included in the income
statement, just as is the case currently. However, the income statements will
not include entries in the income statement reflecting the differences between
actual unit supply costs included in rates and those actually experienced by SCW
for its water utility service areas. Amounts included in deferred costs
(balancing accounts) in the balance sheet will continue to be included in such
accounts for SCW's Bear Valley Electric division for recovery at a later date in
accordance with the pre-November 29, 2001 procedure applicable to both its water
and electric supply balancing accounts. SCW, will not be entitled to recover any
deferred costs for its water utility service areas unless (i) the utility is
within its general rate case cycle and (ii) it is earning less than its
authorized rate of return on a weather normalized means test basis. 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. For CCWC, advances for construction represents amounts advanced by
developers which are refundable over 10 to 20 years. Refund amounts under the
contracts are based on annual revenues from the extensions.
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 except for the block-forward purchase power
contracts. Under the terms of its power purchase contracts with Mirant Americas
Energy Marketing, LP (Mirant Marketing) and Pinnacle West Capital Corporation
(Pinnacle West Capital), SCW is required to post security, at the request of the
seller, if SCW is in default under the terms of the contract and the future
value of the contract is greater than the future value of contracts of a similar
term on the date of default. SCW will be in default under the terms of these
contracts if its debt is rated less than BBB- by Standard & Poor's Ratings
Service ("S&P") or Fitch, Inc. ("Fitch") or less than Baa3 by Moody's Investor
Services, Inc ("Moody's"). SCW currently has a rating of A+ by S & P and A2 by
Moody's. Fitch does not rate SCW. These block-forward purchase power contracts
meet the normal purchase exception rule under FASB No.133, "Accounting for
Derivative Instruments and Hedging Activities."
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, 2001
and 2000 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.
41
2001 2000
------------------------------ ---------------------------------
(dollars in thousands) Carrying amount Fair value Carrying amount Fair value
--------------- ---------- --------------- -----------
Financial assets:
Cash $30,496 $30,496 $5,808 $5,808
Accounts receivable 28,004 28,004 27,077 27,077
Financial liabilities:
Short-term debt 20,000 20,000 45,000 45,000
Long-term debt $246,452 $260,274 $177,147 $186,475
----------------- -------------- ----------------- ----------------
NOTE 2 - CAPITAL STOCK
All of the series of Preferred Shares outstanding at December 31, 2001
are redeemable at the option of AWR. At December 31, 2001, 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, plus 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, 2001
is $40,000 each year. AWR intends to redeem or repurchase all of its outstanding
Preferred Shares during the first quarter of 2002.
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 were invested in SCW. As of December 31, 2001,
approximately $31,080,000 remained for issuance under this Registration
Statement.
For the year ended December 31, 2001 and December 31, 1999, all shares
issued under Registrant's Common Share Purchase and Dividend Reinvestment Plan
(DRP) and the 401(k) Plan were purchased on the open market. For the year ended
December 31, 2000, Registrant issued 6,961 and 7,997 Common Shares under
Registrant's DRP and 401(k) Plan, respectively. There are 493,039 and 63,411
Common Shares authorized but unissued under the DRP and the 401(k) Plan,
respectively, at December 31, 2001. Shares reserved for the 401(k) Plan are in
relation to Company matching contributions and for investment purposes by
participants.
There are 250,000 Common Shares reserved for issuance under Registrant's
"2000 Stock Incentive Plan." Under the Plan, stock options representing, 45,657
and 45,999 Common Shares upon exercise were granted to certain eligible
employees on May 1, 2000 and January 2, 2001, respectively. The following table
sets forth information with respect to all options granted. The fair value for
each option granted was determined on the date of grant using the Black-Scholes
model.
December 31, 2001 2000
------------ --------------- --------------
Exercise Price/share $34.81 $31.25
Expiration date January 1, 2011 April 30, 2010
Risk-free rate of return 5.7% 6.5%
Dividend yield 4.2% 4.0%
Expected volatility 30.5% 28.4%
Fair value/share $10.90 $9.89
One-third of the stock options granted become excisable on each of the
first three anniversaries of the grant date, but may be exercised earlier if
there is a change in control of the Company. No options were exercised at
December 31, 2001.
SCW and CCWC are subject to contractual restrictions on their ability to
pay dividends. Dividends in the amount of $13,530,00 and $12,900,000 were paid
by SCW in 2001 and 2000, respectively. Dividends in an amount of $1,003,000 were
distributed to AWR in 2001 by CCWC. There were no dividends distributed from
CCWC to AWR in 2000.
42
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 event. 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 of the Rights, is in the best
interest of AWR's shareholders. Therefore, the board of directors may, at its
option, redeem the Rights at a redemption price of $0.01 per Right.
NOTE 3 - BANK DEBT
AWR maintained a non-revolving credit facility with a $25 million
aggregate borrowing capacity in 2001. At December 31, 2001, $20 million was
outstanding under this facility. It was subsequently paid off on January 2,
2002. The aggregate short-term borrowing capacity available to SCW under its
three bank lines of credit was $47 million as of December 31, 2001, of which no
amount 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.
Registrant's short-term borrowing activities for the last three years
were as follows:
December 31,
(in thousands, except percent) 2001 2000 1999
------- ------- -------
Balance Outstanding at December 31, $20,000 $45,000 $21,000
Interest Rate at December 31, 2.82% 7.19% 7.35%
Average Amount Outstanding $34,748 $38,531 $8,775
Weighted Average Annual Interest Rate 4.65% 7.11% 5.11%
Maximum Amount Outstanding $50,000 $50,000 $21,000
------- ------- -------
There were no short-term borrowing activities at ASUS or CCWC.
NOTE 4 - LONG TERM DEBT
In January 2001, $20 million of Series C Medium Term Notes were sold
with net proceeds from the issuance initially used to repay short-term bank
borrowings and, after that, to fund construction expenditures. In 2001 SCW filed
a Registration Statement for issuance from time to time of up to $100 million in
debt securities. SCW issued $50 million in long-term debt in December 2001. The
net proceeds were used to repay short-term bank borrowings, with the remaining
proceeds used to refund certain existing long-term debt obligations, and for
payments for construction, completion,
43
extension or improvement of facilities. 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, and (ii) restricts
CCWC's ability to incur additional debt, make liens, sell, lease or dispose of
assets, merge with another corporation, and pay dividends.
SCW has posted an Irrevocable Letter of Credit, which expires April 30,
2002 in the amount of $2,513,183 with an annual fee of 0.75% 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 November 15, 2003, 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 0.65%,
which expires in October 1, 2002, in the amount of $250,000 as security for the
deductible in the Company's business automobile insurance policy.
Annual maturities of all long-term debt, including capitalized leases,
amount to $759,867, $13,300,444, $849,286, $903,262 and $662,768 for the five
years ending December 31, 2002 through 2006, 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, 2001 and 2000 were:
December 31,
--------------------------
(dollars in thousands) 2001 2000
------- -------
Deferred tax assets:
Other $14,934 $14,969
-------- --------
14,934 14,969
-------- --------
Deferred tax liabilities
Depreciation (48,064) (46,540)
Other property related (8,178) (8,728)
Other non-property related (2,666) (4,480)
Balancing accounts (9,470) (3,103)
-------- --------
(68,378) (62,851)
-------- --------
Accumulated deferred income taxes - net $(53,444) $(47,882)
-------- --------
44
The current and deferred components of income tax expense are as
follows:
December 31,
---------------------------------
(dollars in thousands) 2001 2000 1999
------- ------- -------
Current
Federal $5,312 $7,991 $9,360
State 1,612 2,242 2,799
------- ------- -------
Total current tax expense 6,924 10,233 12,159
------- ------- -------
Deferred - Federal and State:
Accelerated depreciation 3,376 3,556 3,405
Balancing accounts 6,436 2,863 (207)
Advances and contributions -- -- --
California privilege year franchise tax (1,015) (1,216) (970)
Other (657) (392) (664)
------- ------- -------
Total deferred tax expense 8,140 4,811 1,564
------- ------- -------
Total income tax expense 15,064 15,044 13,723
------- ------- -------
Income taxes included in operating expenses 15,379 15,127 13,345
Income taxes included in other income and
expenses - net (315) (83) 378
------- ------- -------
Total income tax expense $15,064 $15,044 $13,723
======= ======= =======
Additional information regarding taxes on income is set forth in the following
table:
December 31,
---------------------------------
(dollars in thousands, except percent) 2001 2000 1999
------- ------- -------
Federal taxes on pre-tax income at
statutory rates $12,426 $11,595 $10,438
Increase (decrease) in taxes resulting
from:
State income tax expense 2,900 2,722 2,605
Depreciation 1,424 1,424 1,184
Federal benefit of state taxes (1,015) (953) (912)
Adjustments to prior years' provisions (686) 101 433
Payment of premium on redemption 66 66 66
Other - net (51) 89 (91)
------- ------- -------
Total income tax expense $15,064 $15,044 $13,723
------- ------- -------
Pre-tax income $35,511 $33,130 $29,824
------- ------- -------
Effective income tax rate 42.4% 45.4% 46.0%
------- ------- -------
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
45
and have been recorded as a regulatory asset for recovery over a 20-year period.
The unamortized balance at December 31, 2001 was approximately $452,100.
At December 30, 2001, Registrant had 740 participants in the Plan, 74 of
these are employees covered by collective bargaining agreements, the earliest of
which expires in 2002. 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, 2001 and
2000:
Pension Benefits Other Benefits
------------------ ------------------
(dollars in thousands) 2001 2000 2001 2000
------- ------- ------ ------
CHANGE IN BENEFIT OBLIGATION:
Benefit Obligation at beginning of year $40,521 $35,513 $4,585 $4,431
Service Cost 1,868 1,530 115 103
Interest Cost 2,877 2,649 335 313
Actuarial Loss/(Gain) (81) 2,164 159 (32)
Plan Amendment 105 -- -- --
Benefits Paid (1,460) (1,335) (255) (230)
------- ------- ------ ------
Benefit Obligation at end of year $43,830 $40,521 $4,939 $4,585
CHANGES IN PLAN ASSETS:
Fair Value of Plan Assets at $45,105 $47,776 $2,058 $1,760
beginning of year
Actual Return of Plan Assets (1,641) (1,336) (78) 70
Employer Contributions -- -- 468 458
Benefits Paid (1,460) (1,335) (256) (230)
------- ------- ------ ------
Fair Value of Plan Assets at end of year $42,004 $45,105 $2,192 $2,058
RECONCILIATION OF FUNDED STATUS:
Funded Status ($1,826) $4,583 ($2,748) ($2,528)
Unrecognized Transition Obligation -- -- 5,449 5,868
Unrecognized Net Loss/(Gain) 2,137 (2,969) (1,218) (1,704)
Unrecognized Prior Service Cost 372 311 (2,829) (3,028)
------- ------- ------ ------
Prepaid/(Accrued) Pension Cost $683 $1,925 ($1,345) ($1,392)
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
DECEMBER 31:
Discount Rate 7.25% 7.25% 7.25% 7.25%
Long-term Rate of Return 8.00% 8.00% 8.00% 8.00%
Salary Assumption 4.00% 4.00% -- --
Medical Cost Trend Rate -- -- 8.50% 6.00%
A sliding scale for assumed health care cost increase was used for both
periods, starting at 6% in 2000 then remaining at 8.5% in 2001 graded down 1/2
percentage point each year to 5% after 7 years.
The components of net periodic post-retirement benefits cost for 2001
and 2000 are as follows:
Pension Benefits Other Benefits
---------------- ---------------
(dollars in thousands) 2001 2000 2001 2000
------ ------ ---- ----
COMPONENTS OF NET PERIODIC BENEFITS
COST
Service Cost $1,868 $1,530 $115 $103
Interest Cost 2,877 2,649 335 313
Actual Return on Plan Assets 1,641 1,336 78 (70)
Net Amortization (5,144) (5,448) (106) 23
------ ------ ---- ----
Net Periodic Pension Cost $1,242 $67 $422 $369
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:
46
1-Percentage- 1-Percentage-
(dollars in thousands) Point Increase Point Decrease
-------------- --------------
Effect on Total of Service and Interest Cost
Components $12 ($10)
Effect on Postretirement Benefit Obligation $171 ($152)
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 2001, 2000 and 1999, totaled
$953,938, $968,019, and $920,340, respectively.
NOTE 7 - BUSINESS RISKS AND COMMITMENTS
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 2001, which is about the same
percentage as in 2000. 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 39.6% of 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 at 95% of normal in January of 2002. The Metropolitan Water
District of Southern California has publicly assured consumers that it is well
prepared to help the region through one or more dry years.
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. For the 2001 water year 6,929,200 AF of water flowed into Lake
Powell from the Colorado River, which is only 52% of normal. However the Lake
itself is currently at 95% of normal level at the end of 2001.
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. SCW's Bear Valley
electric customer service area was exempted by the CPUC from compliance with
most of the provisions of the CPUC order and the state legislation.
On January 17, 2001, the Governor of the State of California proclaimed
a state of emergency in California due to shortages of electricity available to
certain of California's utilities (resulting in blackouts), the unanticipated
and dramatic increases in electricity prices and the insufficiency of
electricity available from certain of California's utilities to prevent
disruption of electric service in California. The reasons for the high cost of
energy are under investigation but are reported to include, among other things,
limited supply caused by a lack of investment in new power plants to meet growth
in demand, planned and unplanned outages of power plants, decreased availability
of hydroelectric power from the Pacific Northwest due to lower than usual
precipitation and higher demand for electricity in the region, transmission line
constraints, increased prices for natural gas, the fuel used in many of the
power plants serving the region, and a dysfunctional power market.
All electric energy sold by SCW to customers in its BVE customer service
area is purchased from others. In response to the potential for rising
electricity costs, SCW entered into block forward purchase contracts with
various parties over time. In March 2001, SCW entered into a five-year, block
forward purchase contract with Mirant Americas Energy Marketing, LP (Mirant
Marketing) to supply its BVE customer service area with 15 MWs of electric
energy at a price of $95 per MWh beginning April 1, 2001 through December 31,
2006. SCW has filed a complaint with the Federal Energy Regulatory Commission
seeking to reduce the rates in the Mirant Marketing contract to a just and
reasonable price. In June 2001, SCW executed a three-year, block forward
purchase agreement with Pinnacle West Capital
47
Corporation for an additional 8 MWs of electric energy to meet BVE's peak winter
demands at a price of $75 per MWh for the first year, $48 per MWh for the second
year and $36 per MWh for the third year. The average minimum load at SCW's Bear
Valley Electric customer service area has been approximately 12 MWs. The average
winter load has been 18 MWs with a winter peak of 38 MWs when the snowmaking
machines at the ski resorts are operating
On February 8, 2002, a settlement agreement among SCW, all intervening
parties and the Office of Ratepayer Advocates ("ORA") was filed with the CPUC
that will permit SCW to recover $77 per MWh of purchased power costs through
rates. SCW will only be allowed to include up to a weighted annual energy
purchase cost of $77 per MWh each year for 10 years in its balancing account. To
the extent SCW's actual average annual weighted cost for purchased power is less
than $77 per MWh, the differential will recover amounts included in the electric
supply balancing account. Conversely, to the extent that actual average annual
weighted costs for power purchased exceed the $77 per MWh amount, SCW will not
be able to include these amounts in its balancing account and such amounts will
be expensed against income. SCW has established approximately $7.9 million in
reserves as of December 31, 2001 against potential non-recovery of electric
power costs. In addition, the settlement extended the previously approved
surcharges for an additional five years to allow SCW an opportunity to collect
amounts remaining in its electric cost balancing account. The proposed
settlement also requires SCW to pursue its complaint filed with FERC in which
SCW has requested FERC to reduce the prices in its power purchase contract with
Mirant Marketing to just and reasonable prices. A final decision in this matter
is expected during the second quarter of 2002. Management believes the CPUC will
support the settlement agreement, but is unable to predict when or if the CPUC
will authorize recovery of any or all of the costs agreed to in the settlement.
For further information, see the sections entitled "Liquidity and Capital
Resources" and "Electric Energy Situation in California" included in Part II,
Item 7 in Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Demand for energy in SCW's Bear Valley Electric customer service area
generally has been increasing. However, the ability of SCW to deliver purchased
power to these customers is limited by the ability of the transmission
facilities owned by Southern California Edison Company to transmit this power.
In order to meet these increasing energy demands, SCW is considering a number of
options including (i) the purchase of electric energy from on-site generation
facilities installed by a third party, (ii) the use of portable generation, and
(iii) the installation of generation owned by Registrant. Each of these options
is expected to result in further increases in electric energy prices for
customers of SCW's BVE customer service area.
NOTE 8 - CONTINGENCIES
SCW has been named as a defendant in twenty lawsuits that allege that
SCW and others delivered unsafe water to their customers. Plaintiffs in these
actions seek damages, including general, special, and punitive damages,
according to proof at trial, as well as attorney's fees on certain causes of
action, costs of suit, and other unspecified relief. Seventeen 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 these
lawsuits. On October 11, 1999, one group of plaintiffs appealed the decision to
the California Supreme Court.
On February 4, 2002, the California Supreme Court concluded that (i) the
CPUC had preemptive jurisdiction over claims seeking injunctive relief and
claims based on the theory that a public utility regulated by the CPUC provided
unsafe drinking water even though it had complied with federal and state
drinking water standards, but (ii) the CPUC did not have preemptive jurisdiction
over damage claims alleging violations of federal and state drinking water
standards by public utilities regulated by the CPUC. As a result, damage claims
based on allegations of violations of federal and state drinking water standards
may proceed while the other claims must be dismissed. In light of the breadth of
plaintiffs' claims, the lack of factual information regarding plaintiffs' claims
and injuries, if any, the impact of the California Supreme Court decision on
plaintiff's claims 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 claims based on allegations of violation of federal and state
drinking water standards.
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.
48
In a separate case, also filed on October 25, 1999, SCW sued
Aerojet-General Corporation (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 the cases against CRWQCB and Aerojet from
customers, less any recovery from the defendants or others. As of December 31,
2001, approximately $6,640,000 has been recorded in the memorandum accounts. The
CPUC has authorized SCW to increase rates, effective April 28, 2001, for
recovery over a six-year period of approximately $1,800,000, in expenses that
were incurred on or before August 31, 2000. SCW will continue to file additional
Advice Letters to recover the remaining costs. Management believes these costs
are recoverable but cannot give assurance that the CPUC will ultimately allow
recovery of all or any of the remaining costs through rates.
On April 25, 2001, Registrant filed a lawsuit against all the
potentially responsible parties, who stored, transported and dispensed gasoline
containing methyl tertiary butyl ether (MTBE) in underground storage tanks,
pipelines or other related infrastructure. MTBE contaminated water exists in
areas of the basin from which SCW has pumped water through its Charnock Well
Field. As a result, SCW ceased operation of its Charnock Well Field in October
1996. Registrant has reached an agreement in this matter that assigns the
prosecution of litigation against the potentially responsible parties to the
City of Santa Monica, California (Santa Monica). As part of the agreement and in
exchange for an assignment payment, Santa Monica will prosecute the case against
the potentially responsible parties. Registrant expects that Santa Monica will
sign the agreement by the end of the first quarter of 2002.
SCW has been, in conjunction with the Southern California Edison
(Edison) unit of Edison International, planning to upgrade transmission
facilities to 115kv (the 115kv Project) in order to meet increased energy and
demand requirements for SCW's Bear Valley Electric Service area. On December 27,
2000, SCW filed a lawsuit against Edison for declaratory relief and seeking
damages for breach of contract as a result of delays in the 115kv Project.
Subsequently Edison filed a cross-complaint against SCW for breach of contract,
anticipatory breach and quantum meruit. Registrant has discussed various
settlement options with Edison regarding this matter. However, management cannot
predict the likely outcome of either the negotiations or the lawsuits.
Under the terms of an energy purchase contract with Dynegy Power
Marketing, Inc. (DYPM) that expires on April 30, 2002, DYPM has agreed to
provide electric energy to SCW in excess of the amounts it has purchased under
the forward block purchase contracts previously described, to sell excess energy
purchased by SCW under the terms of these contracts, if requested by SCW, and to
act as scheduling coordinator for SCW. However, SCW has entered into a separate
agreement for Automated Power Exchange, Inc. to act as its scheduling
coordinator and will not utilize the services of DYPM. SCW has withheld payment
on $3.4 million invoiced by DYPM for the period December 20, 2000 through
February 20, 2001, pending resolution of certain disputes. Most of this amount
is included in the electric supply cost balancing account. Based on information
available to it, Registrant expects the amount in dispute to increase.
Management believes that proper insurance coverage and reserves are in
place to insure against property, general liability and workers' compensation
claims incurred in the ordinary course of business.
NOTE 9 - CONSTRUCTION PROGRAM
Registrant's 2002 construction budget provides for gross expenditures of
approximately $64.5 million; $8.7 million of this amount is to be obtained from
developers and others. CCWC has a net capital budget of $1.4 million for 2002.
AWR and ASUS have no 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 2001 represent both SCW and CCWC. Provisions in 2000 and 1999
represent SCW only.
49
December 31,
--------------------------------
(dollars in thousands) 2001 2000 1999
------ ---- ----
Balance at beginning of year $510 $487 $403
Provision charged to expense 1,033 630 852
Accounts written off, net of recoveries (571) (607) (768)
------ ---- ----
Balance at end of year $972 $510 $487
------ ---- ----
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. All
activities of ASUS are conducted in California and 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.
(dollars in thousands) Year Ended December 31, 2001
-----------------------------------------------------------------------------------
SCW
--------------------------
CCWC Non- Consolidated
Water Electric Water Regulated* AWR
-------- -------- -------- ---------- ------------
Operating revenues $175,204 $ 15,251 $ 6,270 $ 789 $197,514
Operating income
before income taxes 54,037 (3,941) 1,915 60 52,071
Identifiable assets 484,002 27,182 28,658 -- 539,842
Depreciation expense 15,264 1,446 1,241 -- 17,951
Capital additions $ 47,447 $ 2,256 $ 550 -- $ 50,253
(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 $ 2,303 $ 196 -- $ 45,982
(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
- ----------
* Includes amounts from ASUS and AWR parent.
50
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.
(in thousands,
except per share Basic Earnings
Amounts) Operating Revenues Operating Income Net Income per Share
------------------ ---------------- ---------------- ---------------
2001 2000 2001 2000 2001 2000 2001 2000
-------- -------- ------- ------- ------- ------- ----- -----
First Quarter $ 40,291 $ 38,749 $ 7,223 $ 6,202 $ 3,117 $ 2,895 $0.31 $0.32
Second Quarter 49,870 45,428 9,013 7,525 5,053 3,919 0.50 0.44
Third Quarter 59,410 55,248 13,372 11,791 9,454 8,218 0.94 0.86
Fourth Quarter 47,943 44,535 7,084 6,788 2,823 3,053 0.28 0.30
-------- -------- ------- ------- ------- ------- ----- -----
Year $197,514 $183,960 $36,692 $32,307 $20,447 $18,086 $2.02 $1.92
-------- -------- ------- ------- ------- ------- ----- -----
51
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
- ------------------ ------------------------
Floyd E. Wicks McClellan Harris III
President, Chief Executive Officer Chief Financial Officer,
Vice President - Finance,
Treasurer and Corporate Secretary
March 4, 2002
52
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 its
subsidiaries, and the balance sheets and statements of capitalization of
Southern California Water Company (California corporations), as of December 31,
2001 and 2000, 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, 2001 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, 2001 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 financial statements referred to above present
fairly, in all material respects, the financial position of American States
Water Company and its subsidiaries, and Southern California Water Company, as of
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
- --------------------------
Arthur Andersen LLP
Los Angeles, California
February 14, 2002
53
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) No Reports of Form 8-K were filed during the fourth quarter of
2001.
(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.
3.2.1 Amended and Restated By-laws of Southern California
Water Company.
54
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, 2000.
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.
10.4 Second Sublease dated October 5, 1984 between Southern
California Water Company and Three Valleys Municipal
Water District incorporated herein by reference to
Registrant's Registration Statement on Form S-2.
Registration No. 33-5151.
10.5 Note Agreement dated as of May 15, 1991 between Southern
California Water Company and Transamerica Occidental
Life Insurance Company incorporated herein by reference
to Registrant's Form 10-Q with respect to the quarter
ended June 30, 1991. Commission File No. 000-01121.
10.6 Schedule of omitted Note Agreements, dated May 15, 1991,
between Southern California Water Company and
Transamerica Annuity Life Insurance Company, and
Southern California Water Company and First Colony Life
Insurance Company incorporated herein by reference to
Registrant's Form 10-Q with respect to the quarter ended
June 30, 1991. Commission File No. 000-01121.
10.7 Loan Agreement between California Pollution Control
Financing Authority and Southern California Water
Company, dated as of December 1, 1996 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
55
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, 2000.(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.
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, 2000.(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, 2000.(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,
2000.(2)
10.17 American States Water Company Annual Incentive Plan as
amended April 23, 2001.(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.
10.20 Delivery Agreement between Central Arizona Water
Conservation District and Chaparral City Water Company,
dated as of December 6, 1984.
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.
10.22 Energy Transaction Confirmation with Mirant Americas
Energy Marketing, LP.
10.23 Power Purchase Agreement between Southern California
Water Company and Pinnacle West Capital Corporation.
10.24 Western Systems Power Pool Agreement
10.25 Automated Power Exchange Master Service and
Participation Agreement.(1)
56
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
57
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE
To American States Water Company:
We have audited in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements included in this
Form 10-K, and have issued our report thereon dated February 14, 2002. 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, and 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 14, 2002
58
AMERICAN STATES WATER COMPANY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF PARENT
CONDENSED BALANCE SHEETS
December 31,
(in thousands) 2001 2000
--------- ---------
ASSETS
Cash and equivalents $ 523 $ 294
Other current assets 244 4,738
--------- ---------
Total current assets 767 5,032
Investments in subsidiaries 220,706 189,383
Other deferred debits 115 121
--------- ---------
Total assets $ 221,588 $ 194,536
========= =========
LIABILITIES AND CAPITALIZATION
Notes payable to banks $ 20,000 $ --
Accounts payable 7 5
Other current liabilities (281) (112)
--------- ---------
Total current liabilities 19,726 (107)
Common shareholders' equity 199,982 192,723
Preferred shares 1,880 1,920
--------- ---------
Total capitalization 201,862 194,643
Total liabilities and capitalization $ 221,588 $ 194,536
========= =========
59
CONDENSED STATEMENTS OF INCOME
December 31,
(in thousands except per share amount) 2001 2000
-------- --------
Operating Revenue And Other Income -- --
Operating Expenses $ 403 $ (206)
-------- --------
Income (Loss) Before Equity in Earnings of Subsidiaries (403) 206
Equity in Earnings of Subsidiaries 20,850 17,880
-------- --------
Net Income 20,447 18,086
Dividends on Preferred Shares (84) (86)
-------- --------
Earnings Available For Common Shareholders $ 20,363 $ 18,000
-------- --------
Weighted Average Number of Common Shares Outstanding 10,080 9,380
-------- --------
Basic Earnings Per Common Share $ 2.02 $ 1.92
-------- --------
Weighted Average Number of Diluted Common Shares Outstanding 10,171 9,411
-------- --------
Fully Diluted Earnings per Common Share $ 2.00 $ 1.91
-------- --------
60
CONDENSED STATEMENTS OF CASH FLOWS
December 31,
(in thousands) 2001 2000
-------- --------
Cash Flows From Operating Activities $ 18,457 $ 13,075
-------- --------
Cash Flows Used in Investing Activities (25,000) (24,340)
-------- --------
-------- --------
Cash Flows From in Financing Activities 6,772 11,390
-------- --------
Increase in Cash and Equivalents 229 125
Cash and Equivalents at Beginning of Period 294 169
-------- --------
Cash and Equivalents at the End of Period $ 523 $ 294
-------- --------
Cash dividends received from Southern California Water Company and
Chaparral City Water Company $ 13,530 $ 12,900
-------- --------
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN STATES WATER COMPANY
and its subsidiary
SOUTHERN CALIFORNIA WATER COMPANY
By: s/ McCLELLAN HARRIS III .
------------------------------------
McClellan Harris III
Vice President - Finance,
Treasurer, Chief Financial
Officer and Secretary
Date: March 4, 2002
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: March 4, 2002
- ----------------------------------------
Lloyd E. Ross
Chairman of the Board and Director
s/ FLOYD E. WICKS . March 4, 2002
- ----------------------------------------
Floyd E. Wicks
Principal Executive Officer;
President, CEO and Director
s/ McCLELLAN HARRIS III . March 4, 2002
- ----------------------------------------
McClellan Harris III
Principal Financial and Accounting
Officer; CFO, VP - Finance,
Treasurer and Secretary
s/ LINDA J. MATLICK . March 4, 2002
- ----------------------------------------
Linda J. Matlick
Controller - Southern California
Water Company
s/ JAMES L. ANDERSON . March 4, 2002
- ----------------------------------------
James L. Anderson, Director
s/ JEAN E. AUER . March 4, 2002
- ----------------------------------------
Jean E. Auer, Director
s/ N. P. DODGE, JR . March 4, 2002
- ----------------------------------------
N. P. Dodge, Jr., Director
s/ ANNE M. HOLLOWAY . March 4, 2002
- ----------------------------------------
Anne M. Holloway, Director
s/ ROBERT F. KATHOL . March 4, 2002
- ----------------------------------------
Robert F. Kathol, Director
62