UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2008
or
o
Transition report pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 0-8176
(Exact name of registrant as specified in its charter)
Delaware
|
|
95-1840947
|
(State or other jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or organization)
|
|
Identification Number)
|
One Wilshire Building
624 South Grand Avenue, Suite 2900
Los Angeles, California 90017-3782
(Address of principal executive offices, including zip code)
(213) 929-1800
(Registrants telephone, including area code)
None
(Former name, former address and former fiscal year, if changed since
last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
o
No
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (Check one):
Large accelerated filer
o
|
|
|
Accelerated
filer
x
|
Non-Accelerated filer
o
|
|
|
Smaller
reporting company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Act). Yes
o
No
x
Indicate
the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date.
Class
|
|
Outstanding as of May 2, 2008
|
Common Stock, $.01 par value per share
|
|
24,467,595 shares
|
PART I
FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
SouthWest Water Company:
We have reviewed the accompanying condensed
consolidated balance sheet of SouthWest Water Company and its subsidiaries as
of March 31, 2008, and the related condensed consolidated statements of
income, changes in stockholders equity and cash flows for the three-month
period ended March 31, 2008. This interim financial information is the
responsibility of the Companys management.
We conducted our review in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any
material modifications that should be made to the accompanying condensed
consolidated interim financial information for it to be in conformity with
accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
May 9, 2008
1
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
March 31,
|
|
December 31,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,216
|
|
$
|
2,950
|
|
Accounts receivable, net
|
|
27,736
|
|
26,005
|
|
Assets held for sale
|
|
15,895
|
|
16,013
|
|
Other current assets
|
|
16,839
|
|
16,617
|
|
Total current assets
|
|
62,686
|
|
61,585
|
|
|
|
|
|
|
|
Property, Plant and Equipment, Net:
|
|
|
|
|
|
Regulated utilities
|
|
425,060
|
|
399,146
|
|
Non-regulated operations
|
|
20,050
|
|
18,757
|
|
Total property, plant and equipment, net
|
|
445,110
|
|
417,903
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
Goodwill
|
|
17,349
|
|
17,349
|
|
Intangible assets
|
|
2,443
|
|
2,539
|
|
Other assets
|
|
16,360
|
|
17,033
|
|
|
|
$
|
543,948
|
|
$
|
516,409
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,350
|
|
$
|
14,930
|
|
Liabilities related to assets held for sale
|
|
4,297
|
|
4,297
|
|
Current portion of long-term debt
|
|
1,938
|
|
1,937
|
|
Other current liabilities
|
|
23,298
|
|
25,020
|
|
Total current liabilities
|
|
37,883
|
|
46,184
|
|
|
|
|
|
|
|
Other Liabilities and Deferred Credits:
|
|
|
|
|
|
Long-term debt
|
|
181,869
|
|
145,353
|
|
Deferred income taxes
|
|
28,672
|
|
28,102
|
|
Advances for construction
|
|
9,364
|
|
9,210
|
|
Contributions in aid of construction
|
|
114,789
|
|
115,442
|
|
Other liabilities and deferred credits
|
|
13,245
|
|
12,924
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
Preferred stock
|
|
458
|
|
458
|
|
Common stock
|
|
244
|
|
243
|
|
Additional paid-in capital
|
|
146,080
|
|
145,072
|
|
Retained earnings
|
|
11,262
|
|
13,336
|
|
Accumulated other comprehensive income
|
|
82
|
|
85
|
|
Total stockholders equity
|
|
158,126
|
|
159,194
|
|
|
|
|
|
|
|
|
|
$
|
543,948
|
|
$
|
516,409
|
|
See accompanying notes to condensed consolidated financial statements.
2
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(In thousands, except per share data)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
Utility Group
|
|
$
|
22,341
|
|
$
|
20,034
|
|
Services Group
|
|
28,422
|
|
27,835
|
|
Total revenues
|
|
50,763
|
|
47,869
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Utility Group operating expenses
|
|
13,441
|
|
11,809
|
|
Services Group operating expenses
|
|
25,910
|
|
24,442
|
|
Selling, general and administrative
expenses
|
|
9,605
|
|
8,530
|
|
Total expenses
|
|
48,956
|
|
44,781
|
|
|
|
|
|
|
|
Operating income
|
|
1,807
|
|
3,088
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
Interest expense
|
|
(2,361
|
)
|
(1,854
|
)
|
Interest income
|
|
122
|
|
135
|
|
Other, net
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
Income (loss) from continuing operations
before income taxes
|
|
(432
|
)
|
1,320
|
|
Provision (benefit) for income taxes
|
|
(118
|
)
|
480
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
(314
|
)
|
840
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of
tax
|
|
(287
|
)
|
(226
|
)
|
|
|
|
|
|
|
Net income (loss)
|
|
(601
|
)
|
614
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
(6
|
)
|
(6
|
)
|
|
|
|
|
|
|
Net income (loss) applicable to common
stockholders
|
|
$
|
(607
|
)
|
$
|
608
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.01
|
)
|
$
|
0.03
|
|
Loss from discontinued operations
|
|
(0.01
|
)
|
|
|
Net income (loss) applicable to common
stockholders
|
|
$
|
(0.02
|
)
|
$
|
0.03
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.01
|
)
|
$
|
0.03
|
|
Loss from discontinued operations
|
|
(0.01
|
)
|
|
|
Net income (loss) applicable to common
stockholders
|
|
$
|
(0.02
|
)
|
$
|
0.03
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
Basic
|
|
24,385
|
|
23,882
|
|
Diluted
|
|
24,385
|
|
24,214
|
|
See accompanying notes to condensed consolidated financial statements.
3
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Preferred Stock
|
|
Common Stock
|
|
Additional
|
|
|
|
Compre
|
|
Total
|
|
|
|
Number of
|
|
|
|
Number of
|
|
|
|
Paid-in
|
|
Retained
|
|
hensive
|
|
Stockholders
|
|
(In thousands)
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Income
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2007
|
|
9
|
|
$
|
458
|
|
24,268
|
|
$
|
243
|
|
$
|
145,072
|
|
$
|
13,336
|
|
$
|
85
|
|
$
|
159,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
(601
|
)
|
|
|
(601
|
)
|
Other
comprehensive income, net of tax: Amortization of actuarial net gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
(3
|
)
|
Comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(604
|
)
|
Stock issuance
under dividend reinvestment and stock purchase plans
|
|
|
|
|
|
65
|
|
|
|
761
|
|
|
|
|
|
761
|
|
Share-based
compensation expense
|
|
|
|
|
|
116
|
|
1
|
|
233
|
|
|
|
|
|
234
|
|
Debenture
conversions
|
|
|
|
|
|
1
|
|
|
|
14
|
|
|
|
|
|
14
|
|
Cash dividends
declared
|
|
|
|
|
|
|
|
|
|
|
|
(1,473
|
)
|
|
|
(1,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
March 31, 2008
|
|
9
|
|
$
|
458
|
|
24,450
|
|
$
|
244
|
|
$
|
146,080
|
|
$
|
11,262
|
|
$
|
82
|
|
$
|
158,126
|
|
See accompanying notes to condensed consolidated financial statements.
4
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Cash flows from operating activities of
continuing operations:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(601
|
)
|
$
|
614
|
|
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
|
|
|
|
|
|
Loss from discontinued operations, net of
tax
|
|
287
|
|
226
|
|
Depreciation and amortization
|
|
3,642
|
|
2,904
|
|
Deferred income taxes
|
|
569
|
|
350
|
|
Share-based compensation expense
|
|
234
|
|
408
|
|
Changes in assets and liabilities, net of
effects of acquisitions:
|
|
|
|
|
|
Accounts receivable
|
|
(1,731
|
)
|
1,907
|
|
Other current assets
|
|
3,031
|
|
2,431
|
|
Other assets
|
|
(2,708
|
)
|
(509
|
)
|
Accounts payable
|
|
(6,795
|
)
|
(5,092
|
)
|
Other current liabilities
|
|
(1,065
|
)
|
(2,425
|
)
|
Other liabilities
|
|
37
|
|
(1,241
|
)
|
Other, net
|
|
(44
|
)
|
(27
|
)
|
Net cash used in operating activities
|
|
(5,144
|
)
|
(454
|
)
|
|
|
|
|
|
|
Cash flows from investing activities of
continuing operations:
|
|
|
|
|
|
Acquisitions of businesses, net of cash
acquired
|
|
(23,330
|
)
|
(558
|
)
|
Additions to property, plant and equipment
|
|
(7,960
|
)
|
(8,077
|
)
|
Proceeds from sales of equipment
|
|
9
|
|
33
|
|
Net cash used in investing activities
|
|
(31,281
|
)
|
(8,602
|
)
|
|
|
|
|
|
|
Cash flows from financing activities of
continuing operations:
|
|
|
|
|
|
Revolving lines of credit:
|
|
|
|
|
|
Borrowings
|
|
121,500
|
|
7,500
|
|
Repayment of $100 million revolving line of
credit
|
|
(84,500
|
)
|
|
|
Capital improvement reimbursements
|
|
795
|
|
865
|
|
Proceeds from stock option and stock
purchase plans
|
|
761
|
|
1,409
|
|
Contributions in aid of construction
|
|
227
|
|
485
|
|
Excess tax benefit from stock options
exercised
|
|
|
|
380
|
|
Dividends paid
|
|
(1,473
|
)
|
(1,389
|
)
|
Deferred financing costs
|
|
(527
|
)
|
(3
|
)
|
Repayment of advances for construction
|
|
(488
|
)
|
(204
|
)
|
Payments on long-term debt
|
|
(439
|
)
|
(308
|
)
|
Net cash provided by financing activities
|
|
35,856
|
|
8,735
|
|
|
|
|
|
|
|
Cash flows from discontinued operations:
|
|
|
|
|
|
Operating activities
|
|
(165
|
)
|
(643
|
)
|
Investing activities
|
|
|
|
(317
|
)
|
Financing activities
|
|
|
|
|
|
Net cash used in discontinued operations
|
|
(165
|
)
|
(960
|
)
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
(734
|
)
|
(1,281
|
)
|
Cash and cash equivalents at beginning of
year
|
|
2,950
|
|
4,294
|
|
Cash and cash equivalents at end of period
|
|
$
|
2,216
|
|
$
|
3,013
|
|
See
accompanying notes to condensed consolidated financial statements.
5
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Summary
of Significant Accounting Policies
Basis of Presentation
These condensed consolidated interim
financial statements are unaudited. SouthWest Water Company (the Company)
believes the interim financial statements are presented on a basis consistent
with the audited financial statements and include all adjustments necessary for
a fair presentation of the financial condition, results of operations and cash
flows for such interim periods. All of these adjustments are normal recurring
adjustments.
Preparation of these condensed consolidated
financial statements in conformity with U.S. generally accepted accounting
principles (GAAP) requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Certain information and disclosures normally
included in financial statements prepared in accordance with GAAP have been
omitted in accordance with Securities and Exchange Commissions rules and
regulations for interim financial reporting. These condensed consolidated
interim financial statements should be read in conjunction with the audited
financial statements and related notes included in the Companys 2007 Annual
Report on Form 10-K. The Companys businesses are seasonal because they
are affected by weather. As a result, operating results for interim periods do
not necessarily predict the operating results for any other interim period or
for the full year.
The condensed consolidated financial
statements as of March 31, 2008 and for the three-month period ended March 31,
2008 have been reviewed by PricewaterhouseCoopers LLP, an independent
registered public accounting firm. Their report (dated May 9, 2008) is
included on page 1 on this report. The report of PricewaterhouseCoopers
LLP states that they did not audit and they do not express an opinion on that
unaudited financial information. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. PricewaterhouseCoopers LLP is not subject to
the liability provisions of Section 11 of the Securities Act of 1933 for
their report on the unaudited financial information because that report is not
a report or a part of the registration statement prepared or certified by
PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
Change in Presentation
Effective January 1, 2008, the Company
launched the first phase of its financial reporting reengineering process by
implementing a fully integrated financial module throughout the entire company.
As a result, the methodology of capturing and reporting operating versus
general and administrative expenses as well as the classification of expenses
between business segments has changed. As permitted by SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information
,
prior year amounts have not been reclassified to conform to the 2008
presentation because the information is not available and the cost to develop
it would be excessive.
Reclassifications have also been made to
prior years financial statement presentation with respect to a component of
the business the Company is holding for sale as a discontinued operation (Note
3).
Comprehensive Income (Loss)
Comprehensive income (loss) includes changes
in equity that are excluded from net income (loss), such as the unfunded
portion of the Companys executive retirement plan. Comprehensive income (loss)
was $(604,000) and $616,000 for the three months ended March 31, 2008 and
2007, respectively.
6
Note 1. Summary
of Significant Accounting Policies (Continued)
Accounting Pronouncement Adopted During 2008
SFAS No. 157
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157).
This statement defines fair value, establishes a framework for using fair value
to measure assets and liabilities, and expands disclosures about fair value
measurements. The statement applies when other statements require or permit the
fair value measurement of assets and liabilities. This statement does not
expand the use of fair value measurement. In February 2008, the FASB
issued FASB Staff Position No. 157-2,
Effective Date of FASB
Statement No. 157
(FSP 157-2). FSP 157-2 delays the
effective date of SFAS No. 157 for certain non-financial assets and
liabilities to fiscal years beginning after November 15, 2008.
The Company adopted SFAS No. 157 as
required on January 1, 2008 for all financial assets and liabilities, and
this statement did not have a material impact on the Companys consolidated
results of operations or consolidated financial position. The Company is
currently assessing the potential effect of SFAS No. 157 on all
non-financial assets and liabilities.
SFAS No. 159
The Company adopted SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159) effective January 1, 2008. The Company did not elect the
fair value option for any of its existing financial assets and liabilities. The
adoption of this statement did not have a material impact on the Companys
consolidated results of operations or consolidated financial position.
Recent Accounting Pronouncements
SFAS No. 141(R)
In December 2007, the FASB issued
Statement No. 141 (revised 2007),
Business Combinations
(SFAS 141(R)). SFAS 141(R) changes the accounting for acquisitions
specifically eliminating the step acquisition model, changing the recognition
of contingent consideration at the time of acquisition, disallowing the
capitalization of transaction costs and changes when restructurings related to
acquisitions can be recognized. The statement is effective for fiscal years
beginning on or after December 15, 2008 and will only impact the
accounting for acquisitions that are made after adoption. Adoption of SFAS 141(R) will
impact the Companys accounting for future business combinations in that all
transactions costs will be expensed as incurred and contingent consideration,
if present, will be recorded upon acquisition.
SFAS No. 160
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(SFAS 160). SFAS 160
introduces significant changes in the accounting and reporting for business
acquisitions and noncontrolling interest in a subsidiary. SFAS 160 also changes
the accounting for and reporting for the deconsolidation of a subsidiary.
Companies are required to adopt the new standard for fiscal years beginning
after January 1, 2009. The Company is evaluating the impact of this
standard and currently does not expect it to have a significant impact on its
financial position, results of operations or cash flows.
7
Note 1. Summary
of Significant Accounting Policies (Continued)
SFAS No. 161
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activitiesan amendment of
FASB Statement No. 133 (SFAS 161). This statement amends SFAS No. 133
by requiring enhanced disclosures about a companys derivative instruments and
hedging activities, but does not change the scope of, or accounting under, SFAS
No. 133. SFAS No. 161 requires increased qualitative, quantitative
and credit-risk disclosures about the entitys derivative instruments and
hedging activities. SFAS 161 is effective for the Companys fiscal year
beginning January 1, 2009. We are evaluating the potential impact of this
statement.
Note 2. Acquisition
On January 31, 2008, the Company
acquired substantially all of the assets of a wastewater collection system and
related treatment plant in Birmingham, Alabama. The purchase price was $23.3
million in cash which the Company borrowed under its revolving line of credit.
The acquisition was accounted for as a purchase and the assets acquired have
been recorded at their estimated fair values, consisting of $20.8 million of
utility plant and $2.5 million of land, based upon preliminary valuations. The
Company expects to finalize the purchase price allocation during 2008.
The consolidated financial statements reflect
the financial position and results of operations of the acquired utility
subsequent to its acquisition date. Unaudited pro forma consolidated results of
operations are presented in the table below for the three months ended March 31,
2008 and 2007 as if the acquisition had occurred as of the beginning of each
period presented.
|
|
Pro Forma for the
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
51,170
|
|
$
|
49,071
|
|
Income (loss) from continuing operations
|
|
(263
|
)
|
944
|
|
Income (loss) from continuing operations
applicable to common stockholders
|
|
(269
|
)
|
938
|
|
Net income (loss) applicable to common
stockholders
|
|
(556
|
)
|
712
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
From continuing operations applicable to
common stockholders:
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
$
|
0.04
|
|
Diluted
|
|
(0.01
|
)
|
0.04
|
|
Net income (loss) applicable to common stockholders:
|
|
|
|
|
|
Basic
|
|
(0.02
|
)
|
0.03
|
|
Diluted
|
|
(0.02
|
)
|
0.03
|
|
The pro forma results of operations are not
necessarily indicative of the results that would have been achieved had the
acquisition occurred as of the dates indicated or to project the results of
operations for any future periods. The above information reflects adjustments
for historical revenues and expenses prior to the acquisition, as well as
incremental operating, general and administrative, depreciation, interest and
income tax expense based on the estimated fair value of assets acquired and
additional indebtedness in connection with the acquisition.
8
Note 3. Assets
Held for Sale
During 2007, the Company committed to a plan
to sell its wholesale water and wastewater operations in Texas and believes it
can consummate the sales during 2008. As a result, the Company has classified
the assets and related liabilities as held for sale in the accompanying
consolidated balance sheet and the results of operations and cash flows for
these operations are reflected as discontinued operations for all periods
presented. The following tables summarize the financial position and results of
operations of these operations included in the condensed consolidated financial
statements.
|
|
March 31,
|
|
December 31,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Assets held for sale:
|
|
|
|
|
|
Accounts receivable
|
|
$
|
89
|
|
$
|
81
|
|
Other current assets
|
|
168
|
|
167
|
|
Property, plant and equipment, net
|
|
14,708
|
|
14,833
|
|
Other assets
|
|
930
|
|
932
|
|
Assets held for sale
|
|
15,895
|
|
16,013
|
|
|
|
|
|
|
|
Liabilities related to assets held for
sale:
|
|
|
|
|
|
Accounts payable
|
|
29
|
|
31
|
|
Deferred revenue
|
|
4,268
|
|
4,266
|
|
Liabilities related to assets held for sale
|
|
4,297
|
|
4,297
|
|
Net assets held for sale
|
|
$
|
11,598
|
|
$
|
11,716
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
190
|
|
$
|
205
|
|
Expenses
|
|
292
|
|
350
|
|
|
|
|
|
|
|
Operating loss
|
|
(102
|
)
|
(145
|
)
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
Interest expense
|
|
(299
|
)
|
(216
|
)
|
Interest income
|
|
6
|
|
5
|
|
|
|
|
|
|
|
Pretax loss
|
|
(395
|
)
|
(356
|
)
|
Income tax benefit
|
|
108
|
|
130
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(287
|
)
|
$
|
(226
|
)
|
In accordance with EITF 87 24,
Allocation of Interest to Discontinued Operation
(EITF 87
24), as amended, interest expense reflects interest on debt that the Company
is required to repay as a result of the sale. In addition, and also in
accordance with EITF 87 24, costs and expenses exclude the allocation of
general corporate overhead.
9
Note 4. Long-Term
Debt
Long-term debt consists of the following as
of March 31, 2008 and December 31, 2007:
|
|
March 31,
|
|
December 31,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
88,000
|
|
$
|
51,000
|
|
|
|
|
|
|
|
6.85% convertible subordinated debentures
due 2021
|
|
12,034
|
|
12,053
|
|
|
|
|
|
|
|
$ 30
million capital lease facility
|
|
4,376
|
|
4,582
|
|
|
|
|
|
|
|
Term Loans:
|
|
|
|
|
|
Monarch Utilities, Inc.:
|
|
|
|
|
|
7.37% fixed rate term loan due 2022
|
|
10,844
|
|
11,037
|
|
5.77% fixed rate term loan due 2022
|
|
746
|
|
759
|
|
6.10% fixed rate term loan due 2031
|
|
20,000
|
|
20,000
|
|
|
|
|
|
|
|
First Mortgage Bonds:
|
|
|
|
|
|
Suburban Water Systems:
|
|
|
|
|
|
9.09% series B first mortgage bond due 2022
|
|
8,000
|
|
8,000
|
|
5.64% series D first mortgage bond due 2024
|
|
15,000
|
|
15,000
|
|
6.30% series E first mortgage bond due 2026
|
|
10,000
|
|
10,000
|
|
New Mexico Utilities, Inc.:
|
|
|
|
|
|
6.10% series C first mortgage bond due 2024
|
|
12,000
|
|
12,000
|
|
|
|
|
|
|
|
Economic Development Revenue Bonds:
|
|
|
|
|
|
ECO Resources, Inc.:
|
|
|
|
|
|
5.5% series 1998A due 2008
|
|
115
|
|
115
|
|
6.0% series 1998A due 2018
|
|
1,810
|
|
1,810
|
|
|
|
|
|
|
|
Acquisition-related indebtedness and other
|
|
154
|
|
176
|
|
Total long-term debt payment obligations
|
|
183,079
|
|
146,532
|
|
Unamortized Monarch term loan fair value
adjustments
|
|
728
|
|
758
|
|
Total long-term debt
|
|
183,807
|
|
147,290
|
|
Less current portion of long-term debt
|
|
(1,938
|
)
|
(1,937
|
)
|
Long-term debt, less current portion
|
|
$
|
181,869
|
|
$
|
145,353
|
|
On February 15, 2008, the Company
entered into a credit agreement with several lenders including Bank of America,
as lender and Administrative Agent, KeyBank, CoBank, U.S. Bank, JPMorgan Chase
Bank, Comerica Bank, Bank of the West, Citibank and Union Bank of California.
The credit agreement provides for a $150.0 million revolving credit facility.
The Company may elect to increase the amount of the credit facility by an
amount not to exceed $75.0 million during the term of the agreement provided
certain conditions are met. The Company is subject to commitment fees under the
facility as well as the maintenance of customary financial ratios, cash flow
results and other restrictive covenants. Proceeds from the initial $84.5
million borrowing under the credit agreement were used to repay borrowings
under the Companys prior $100.0 million revolving line of credit which was
terminated upon repayment at which time unamortized deferred financing costs
totaling $268,000 were written off.
The revolving line of credit commitment ends
on February 15, 2013 (if not renewed or extended), at which time all
borrowings must be repaid. Borrowings under the credit facility bear interest,
at the Companys option, based on a margin either over the LIBOR rate or under
the prime rate. The margins vary depending upon the Companys consolidated debt
to equity ratio. Currently, the applicable margins are 0.750% over the LIBOR
rate or 0.25% under the prime rate. The weighted-average annual interest rates
on all credit facility borrowings outstanding were 3.85% as of March 31,
2008 and 5.74% as of December 31, 2007.
10
Note 4. Long-Term
Debt (Continued)
The Company had irrevocable standby letters
of credit in the amount of $2.0 million issued and outstanding under its
revolving credit facility as of March 31, 2008, reducing available
borrowings under the credit facility to $60.0 million as of that date.
Note 5. Commitments
and Contingencies
Legal Proceedings
New Mexico Utilities, Inc.Sewer Rates
and Return Flow Credits
New Mexico Utilities, Inc. (NMUI), one
of the Companys wholly-owned regulated utilities, has an agreement with the
Albuquerque Bernalillo County Water Utility Authority, a political subdivision
of the State of New Mexico (the Water Authority), whereby the Water Authority
treats the effluent from NMUIs wastewater collection system for a fee. The
treated effluent is returned to the Rio Grande Underground Basin, creating
return flow credits. Return flow credits supplement NMUIs existing water
rights, enabling it to pump additional water from the basin.
In August 2004, the Water Authority
increased the fee charged to NMUI, using a different formula than had been used
to calculate fee increases in prior years. The Company believes the increase
violates the terms of a written agreement between the parties. Subsequently,
the Water Authority also claimed ownership of the return flow credits. The
Company filed a Complaint for Declaratory Judgment in the Second Judicial
District Court, County of Bernalillo, State of New Mexico (the Court),
requesting that the Court settle these disputes. In a letter ruling dated May 2,
2007, the Court ruled that the Water Authority could use a new formula to set
fees for NMUI. The Company filed a motion for reconsideration and that motion
was denied on October 2, 2007. The matter has now been set for trial in
the fall of 2008. The Court has not ruled on whether the new rate was
appropriate; has made no determination as to any amount NMUI may owe to the
Water Authority, or ruled on the ownership of the return flow credits.
In September 2007, NMUI received a $0.7
million retroactive billing adjustment from the Water Authority covering the
period from August 2003 through April 2006 for the volume of wastewater
it believes NMUI discharged into the treatment system versus the amount
reported by NMUI. The amounts reported by NMUI were based on a calculation
methodology that had been agreed to by both parties and used for approximately
30 years. NMUI is contesting the billing adjustment.
Although the Company cannot give any
assurances as to the ultimate resolution of these matters, the Company does not
believe that it is probable it will be required to pay the disputed fees and
related late payment penalties, which totaled $6.2 million as of March 31,
2008, and has not recognized a reserve for any potential liabilities in the
accompanying consolidated financial statements. In addition, should the Court rule against
NMUI, the New Mexico Public Regulation Commission has indicated its support of
NMUIs proposal that it be permitted to establish a regulatory asset for any
amounts paid, including legal fees and late payment penalties, and recover that
asset prospectively through a rate surcharge to its customers. The Company is
unable to predict the impact the resolution of the return flow credits
ownership dispute will have on its consolidated financial statements.
On February 26, 2008, the Company was
made aware of a Claim of Lien filed by the Water Authority against NMUI in
the sum of $5.8 million, allegedly for the amount of delinquent sewer charges
at the time of filing. This lien is related to the above described matters
currently being litigated in New Mexico State Court.
11
Note 5. Commitments
and Contingencies (Continued)
New Mexico Utilities, Inc.Condemnation
Proceedings
In addition, on January 19, 2007, the
Water Authority and the City of Rio Rancho, a home-rule municipal
corporation, as Petitioners, filed a Petition for Condemnation against NMUI and
others, as Defendants, in the Court (the Petition). The Petition seeks to
acquire, by condemnation, all of the assets of NMUI, including all real
property, through the stated power of eminent domain. The Petition also alleges
that the Petitioners need to acquire the NMUI assets for the public purposes of
providing water and wastewater services to NMUI customers and that the
acquisition of NMUI is necessary, appropriate and in the public interest. The
Company is contesting the Petition and the matter is scheduled for trial in the
April 2009. If the Company does not prevail, the Petitioners must pay fair
market value for the utility as determined by the Court, based on appraisals.
NMUI and the Petitioners do not agree on the value of the assets which the
Petitioners seek to condemn. While it is too early to predict the outcome of
this matter, the Company believes that if the Court were to determine the fair
market value of NMUI, it would exceed its recorded net book value as of March 31,
2008.
Other Matters
The Company and its subsidiaries are also
involved in other routine legal and administrative proceedings arising during
the ordinary course of business. The Company believes the ultimate disposition
of such matters will not have a material adverse effect on its business,
consolidated financial position, results of operations or cash flows.
Investigations
On May 5, 2005, one of the Companys
operating subsidiaries received a subpoena to provide records to a grand jury.
The requested records relate to the operations of the San Simeon wastewater
treatment plant in California for the period January 2002 to the date of
the subpoena. The subsidiary has operated this facility since September 2004.
The facility was also served with search warrants executed by the EPA. The
Company cooperated fully with the investigation and the investigation was
closed without further action in February 2008.
On May 18, 2005, the EPA executed a
search warrant at the Companys Texas-based testing laboratory and on July 20,
2006 the laboratory received a subpoena to provide additional records and
information to a grand jury. The Company is cooperating fully with the
investigation and has provided the records requested. There have been no
further significant developments since July 20, 2006.
The Company received a letter dated January 28,
2008 from the California State Water Resources Control Board Office of
Enforcement (the Board). The letter indicates that the Board has conducted an
investigation of the operations of a subsidiary of the Company with respect to
various California wastewater treatment facilities which are operated, but not
owned, by the subsidiary. The Board alleges that the subsidiary has violated
certain provisions of the California Water Code and may be subject to civil
administrative liability in excess of $15.0 million, and possible
administrative action against the subsidiarys status as a contract operator in
California. The Company is undertaking its own internal review of the
allegations and while, at this time, the Company believes that the summary
allegations cannot be substantiated, it cannot currently predict what, if any,
actions may be taken by the Board or the effect those actions may have on its
financial position, results of operations or cash flows. The Company is working
cooperatively with the Board in an effort to favorably resolve this issue. No
amounts have been accrued related to any potential fines, penalties or other
liabilities.
12
Note 5. Commitments
and Contingencies (Continued)
Settlement Agreement Liability
In 2006, the Company negotiated a settlement
agreement with a municipality relating to possible fines and penalties for
specified violations occurring during the time the Company operated the
municipalitys wastewater system. The Companys maximum payment obligation is
capped at $0.7 million under the agreement provided that total fines and
penalties levied do not exceed a specified amount. The water quality control
board has levied fines and penalties exceeding the amount contemplated by the
settlement agreement.
The Company believes there are convincing
arguments for negotiating a reduction in the amounts levied but elected to
accrue the $0.7 million maximum amount contemplated by the settlement
agreement. The water quality control board has preliminarily agreed that the
fines and penalties may be substantially reduced from the amounts originally
levied, however, the Company has not received final notice of this action. As a
result, $0.7 million remains accrued as of March 31, 2008.
Commitments Under Long-Term Service Contracts
The Company operates a reverse osmosis water
treatment plant owned by the Capistrano Valley Water District (CVWD) under a
twenty-year operating agreement. The agreement contains three guarantees
related to the performance of the Company and its subsidiary during the term of
the agreement. The agreement provides for the Company to pay liquidated damages
in the event it fails to perform for reasons other than those caused by uncontrollable
circumstances, as such term is defined in the agreement.
During the term of the agreement, the Company
may be liable for liquidated damages relating to any lost payments from a financial
assistance agreement CVWD has with a state water agency, up to a maximum of
$1.4 million per contract year. The Company has also made guarantees to CVWD
with respect to the quantity of finished water produced by the facility. In the
event the actual number of acre feet of finished water delivered is less than
the water delivery guarantee, the Company is required to pay liquidated damages
of approximately $600 per acre foot of shortfall, up to a maximum of 15.8 acre
feet per day. Finally, the Company has made guarantees with respect to seven
measurable finished water quality standards. Liquidated damages for failure to
meet these quality standards range from $100 to $400 per day per failed quality
standard (up to a maximum of $2,800 per day), depending on the number of
violations per contract year. The CVWD has not asserted any claims for
liquidated damages pursuant to these guarantees through the date of this
report.
As part of the financing for this project,
the CVWD sold insured municipal bonds. The Company entered into an agreement
with the bond insurer to guarantee the Companys performance under the service
contract, subject to certain liability caps to the bond insurer in the event of
a default. During the twenty-year operation of the facility, such liability
caps will not exceed an amount equal to $4.0 million plus an amount no greater
than the replacement cost of the actual reverse osmosis filtration unit within
the facility, estimated to be approximately $1.5 million.
Water Supply Commitment
One of the Companys regulated utilities has
a water supply contract providing for the purchase of water to supplement its
own water supply. The agreement requires the Company to purchase minimum
quantities of water annually at a specified price. The price is subject to
annual adjustment for production cost increases incurred by the seller. The
minimum quantity is also subject to adjustment based on average actual water
purchases over a moving two-year period, but the minimum will not be reduced
below a specified threshold. As of March 31, 2008, the minimum annual
purchase commitment is $0.5 million through 2024.
13
Note 6. Earnings
Per Share
The following table is a reconciliation of
the numerators (income) and denominators (shares) used in both the basic and
diluted earnings per share calculations.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(In thousands, except per share data)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
NumeratorsNet income (loss) applicable to
common stockholders:
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(314
|
)
|
$
|
840
|
|
Less preferred stock dividends
|
|
(6
|
)
|
(6
|
)
|
Income (loss) from continuing operations
applicable to common stockholders
|
|
(320
|
)
|
834
|
|
Loss from discontinued operations
|
|
(287
|
)
|
(226
|
)
|
Net income (loss) applicable to common
stockholders
|
|
$
|
(607
|
)
|
$
|
608
|
|
|
|
|
|
|
|
DenominatorsWeighted average common shares
outstanding:
|
|
|
|
|
|
Basic weighted average common shares
outstanding
|
|
24,385
|
|
23,882
|
|
Plus shares issued on assumed exercise of
stock options and warrants
|
|
|
|
332
|
|
Diluted weighted average common shares
outstanding
|
|
24,385
|
|
24,214
|
|
The difference between reported basic and
diluted earnings per share is the effect of stock options that, under the
treasury share method, give rise to potentially dilutive common shares. The
Company incurred a loss during the three months ended March 31, 2008. As a
result, options to purchase 249,000 shares of common stock are considered
antidilutive and therefore are not included in the computation of diluted loss
per share for this period.
As described in Note 4, the Company has $12.0
million of 6.85% fixed-rate convertible subordinate debentures outstanding as
of March 31, 2008. The debentures are convertible into common stock at any
time prior to maturity, unless previously redeemed, at a conversion price of
$11.018 per share which totals 1.1 million shares as of March 31, 2008. At
such time as the assumed conversion of the debentures has a dilutive effect on
earnings per share, the debentures will be included in the calculation of
diluted earnings per share after adjusting net income for the after-tax effect
of the debenture interest expense.
Note 7. Consolidated
Statements of Cash Flows
The following information supplements the
Companys consolidated statements of cash flows.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
2,598
|
|
$
|
1,801
|
|
Income taxes paid (refunded), net
|
|
1,546
|
|
(724
|
)
|
|
|
|
|
|
|
Components of cash paid for acquisitions:
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
23,330
|
|
$
|
565
|
|
Liabilities assumed
|
|
|
|
(7
|
)
|
Cash paid for acquisitions
|
|
$
|
23,330
|
|
$
|
558
|
|
|
|
|
|
|
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
Non-cash contributions in aid of construction
and advances for construction conveyed to Company by developers
|
|
$
|
|
|
$
|
89
|
|
Debentures converted into common stock
|
|
19
|
|
153
|
|
14
Note 8. Dividend
Reinvestment and Direct Stock Purchase Plan (DRIP / DSPP)
The Company has a dividend reinvestment and
stock purchase plan that gives common stockholders the option of receiving
their dividends in cash or in common stock at a discount from prevailing market
prices (DRIP). The plan also permits existing stockholders to purchase
additional common stock, up to a maximum of $10,000 per month, at a discount (DSPP);
new investors may participate in the plan, subject to a $250 minimum initial
investment. The Company may, at its sole discretion, permit purchases above the
$10,000 stated maximum. The discounts may range from 0% to 5%, as determined
from time to time by the Company. The DRIP and DSPP discounts offered by the
Company are 5% for the DRIP and 0% for the DSPP as of March 31, 2008. As
of March 31, 2008, there are 3.7 million shares authorized for issuance
under the plan of which 0.9 million shares remain available for issuance.
Note 9. Employee
Retirement Plan
The Company has a non-qualified supplemental
executive retirement plan (SERP) for certain key executive officers for the
purpose of providing supplemental income benefits to plan participants or their
survivors upon retirement or death. There is only one remaining participant in
SERP and that individual has reached retirement age and is not receiving any
further increases. The plan measurement date is December 31 of each year.
The following table details the components of the net periodic benefit costs:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
|
|
$
|
|
|
Interest cost
|
|
15
|
|
16
|
|
Amortization of actuarial (gains) losses
|
|
(5
|
)
|
(19
|
)
|
Amortization of prior service costs
|
|
|
|
22
|
|
Net periodic benefit costs
|
|
$
|
10
|
|
$
|
19
|
|
The sole remaining participant in the plan
has reached retirement age and the plan provides that no additional benefits
accrue upon reaching retirement age.
Note 10. Segment
Information
The Companys businesses are segmented into
two operating groups: the Utility Group and the Services Group. Each segment is
a strategic business unit that offers different services. They are managed
separately since each business requires different operating and growth
strategies. The accounting policies of the segments are described in the
summary of significant accounting policies in Note 1 to the audited financial
statements included in the Companys 2007 Form 10-K.
The Utility Group owns and operates public
water and wastewater utilities in Alabama, California, Mississippi, New Mexico,
Oklahoma and Texas. State and federal agencies issue regulations regarding
standards of water quality, safety, environmental and other matters which
affect these operations. In the regulated utility subsidiaries, the rates that
they charge for water and wastewater services are established by state or local
regulatory authorities. The service areas in which the Utility Group operates
constitute monopolies with allowable rates determined by state or local
regulatory agencies.
15
Note 10.
Segment
Information (Continued)
The Services Group operates and
manages water and wastewater treatment facilities in ten states, primarily
Alabama, California, Colorado, Georgia, Mississippi, New Mexico, South Dakota
and Texas, owned by cities, public agencies, municipal utility districts,
private entities and investor-owned utilities, including some of the companies
in the Utility Group. The Services Group also provides construction and
construction management services, certified water and wastewater laboratory
testing services, and public works services. The Services Group, while subject
to certain environmental standards, is not regulated in its pricing, marketing
or rates of return.
The following tables present information
about the operations of each segment for the three months ended March 31, 2008
and 2007.
(In thousands)
|
|
Utility
Group
|
|
Services
Group(1)
|
|
Corporate (2)
|
|
Eliminations(3)
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated customers
|
|
$
|
22,341
|
|
$
|
27,299
|
|
$
|
|
|
$
|
|
|
$
|
49,640
|
|
Intersegment (1) (3)
|
|
|
|
6,339
|
|
|
|
(5,216
|
)
|
1,123
|
|
Total revenues
|
|
22,341
|
|
33,638
|
|
|
|
(5,216
|
)
|
50,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Operating expensesunaffiliated customers
|
|
13,441
|
|
25,910
|
|
|
|
|
|
39,351
|
|
Operating expensesintersegment (3)
|
|
|
|
5,216
|
|
|
|
(5,216
|
)
|
|
|
Selling, general and administrative
|
|
2,521
|
|
1,652
|
|
5,432
|
|
|
|
9,605
|
|
Total expenses
|
|
15,962
|
|
32,778
|
|
5,432
|
|
(5,216
|
)
|
48,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
6,379
|
|
860
|
|
(5,432
|
)
|
|
|
1,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(1,716
|
)
|
49
|
|
(694
|
)
|
|
|
(2,361
|
)
|
Interest income
|
|
98
|
|
22
|
|
2
|
|
|
|
122
|
|
Income (loss) from continuing operations before
income taxes
|
|
$
|
4,761
|
|
$
|
931
|
|
$
|
(6,124
|
)
|
$
|
|
|
$
|
(432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated customers
|
|
$
|
20,034
|
|
$
|
26,316
|
|
$
|
|
|
$
|
|
|
$
|
46,350
|
|
Intersegment (1) (3)
|
|
|
|
7,220
|
|
|
|
(5,701
|
)
|
1,519
|
|
Total revenues
|
|
20,034
|
|
33,536
|
|
|
|
(5,701
|
)
|
47,869
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Operating expensesunaffiliated customers
|
|
11,809
|
|
24,442
|
|
|
|
|
|
36,251
|
|
Operating expensesintersegment (3)
|
|
|
|
5,701
|
|
|
|
(5,701
|
)
|
|
|
Selling, general and administrative
|
|
2,461
|
|
2,692
|
|
3,377
|
|
|
|
8,530
|
|
Total expenses
|
|
14,270
|
|
32,835
|
|
3,377
|
|
(5,701
|
)
|
44,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
5,764
|
|
701
|
|
(3,377
|
)
|
|
|
3,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(1,278
|
)
|
(350
|
)
|
(226
|
)
|
|
|
(1,854
|
)
|
Interest income
|
|
4
|
|
110
|
|
21
|
|
|
|
135
|
|
Other income (expense)
|
|
(64
|
)
|
|
|
15
|
|
|
|
(49
|
)
|
Income (loss) from continuing operations before
income taxes
|
|
$
|
4,426
|
|
$
|
461
|
|
$
|
(3,567
|
)
|
$
|
|
|
$
|
1,320
|
|
See accompanying notes to the segment
information following these tables.
16
Note 10.
Segment Information
(Continued)
Notes
(1)
Some companies in the Services Group provide
construction, operations and maintenance services to companies in the Utility
Group and recognize a profit on those services. In accordance with
SFAS 71, the Company does not eliminate the intersegment profit recognized
on these services because the Company believes the sales price is reasonable
and it is probable that, through the rate making process, future Utility Group
revenue approximately equal to the sales price will result from the regulated
utilities use of the services. The Company does, however, eliminate the
Services Groups revenues from affiliated customers to the extent of its cost. Consequently,
Services Group revenues reflected in the condensed consolidated statements of
income include intersegment gross profits as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(In thousands, except per share data)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Services Group revenues:
|
|
|
|
|
|
From unaffiliated customers
|
|
$
|
27,299
|
|
$
|
26,316
|
|
Intersegment profits
|
|
1,123
|
|
1,519
|
|
Total revenues
|
|
$
|
28,422
|
|
$
|
27,835
|
|
(2)
Consists of costs that include headquarters expenses
and any corporate functional departments whose costs are not allocated to our
reportable segments. Corporate and other assets reflect corporate headquarters
assets, excluding investments in and receivables from subsidiaries.
(3)
Reflects the elimination of Services Group revenues
derived from the Utility Group, to the extent of costs as described in (1) above.
In addition, a company in the Utility Group provides services to a company in
the Services Group. Intersegment revenues and expenses, including all profit,
associated with these services are fully eliminated upon consolidation.
17
ITEM 2.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL
NOTE ABOUT FORWARD-LOOKING STATEMENTS
Managements Discussion and Analysis of
Financial Condition and Results of Operations (MD&A) is intended to help
the reader understand the results of operations and financial condition of
SouthWest Water Company. This MD&A also contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. All statements contained
herein that are not clearly historical in nature are forward-looking, and the
words anticipate, believe, belief, expect, estimate, project, plan,
intend, continue, predict, may, will, should, strategy, will
likely result, will likely continue, and similar expressions are generally
intended to identify forward-looking statements. Forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from our historical experience and our present expectations or
projections. A detailed discussion of these and other risks and uncertainties
that could cause actual results and events to differ materially from such
forward-looking statements is included in the section entitled Item 1A. Risk
Factors in our 2007 Annual Report on Form 10-K. Caution should be taken
not to place undue reliance on any such forward-looking statements since such
statements speak only as of the date when made. Other than as required by
applicable law, we undertake no obligation to publicly update or revise forward-looking
statements whether as a result of new information, future events, or otherwise.
The MD&A is intended to help the reader
understand the results of operations, financial condition and cash flows of
SouthWest Water Company and is provided as a supplement to, and should be read
in conjunction with, our condensed consolidated financial statements and the
accompanying notes to the financial statements included in this report.
OVERVIEW
SouthWest Water Company provides a broad
range of services including water production, treatment and distribution;
wastewater collection and treatment; utility billing and collection; utility
infrastructure construction management; and public works services. We own
regulated public utilities and also serve cities, utility districts and private
companies under contract. Our subsidiaries are segmented into two operating
groups: our Utility Group and our Services Group.
Utility Group
Our Utility Group owns public water and
wastewater utilities in Alabama, California, New Mexico, Oklahoma and Texas
and, beginning in February 2007, Mississippi. Except for our California
utility, our utilities are operated by companies in our Services Group, which
we describe below. State and federal agencies issue regulations regarding standards
of water quality, safety, environmental and other matters which affect these
operations. The rates that our regulated utility subsidiaries charge for water
and wastewater usage are established by state or local authorities.
Utility Group revenues reflect fees earned
for the production and distribution of water and the collection and treatment
of sewage for residential, business, industrial and public authority use. The
groups operating expenses reflect the costs associated with purchasing, producing
and distributing water, collecting and treating wastewater, salaries, wages and
employee benefits, facilities costs, supplies and equipment, repairs and
maintenance, professional fees and other costs.
Services Group
Our Services Group operates our contract
service businesses in which we operate and maintain water and wastewater
facilities owned by cities, public agencies, municipal utility districts,
private entities and investor-owned utilities, including most of our own
utilities. Our Services Group operates primarily in Alabama, California,
Colorado, Georgia, Mississippi, New Mexico, South Dakota and Texas. While state
and federal agencies issue regulations
18
regarding standards of water quality, safety,
environmental and other matters which affect these operations, our Services
Groups pricing is not subject to regulation.
Services Group revenues reflect fees earned
for water and wastewater facility operations and maintenance services,
equipment maintenance and repair, sewer pipeline cleaning, billing and
collection services, public works and state-certified water and wastewater
laboratory analysis. Our Services Group also facilitates the design,
construction, project management and operating aspects of various water and
wastewater projects. The groups operating expenses reflect salaries, wages and
employee benefits, facilities costs, supplies and equipment, repairs and
maintenance, professional fees and other costs. Most work performed by the Services
Group is required to be performed by state licensed and certified technicians.
Some companies in our Services Group provide
construction, operations and maintenance services to our Utility Group and
recognize a profit on those services. In accordance with SFAS No. 71,
Accounting for the Effects of Certain Types of
Regulation
(SFAS 71), we do not eliminate the Services Groups
profit because management believes the sales price is reasonable and it is
probable that, through the rate making process, future Utility Group revenue
approximately equal to the sales price will result from the regulated utilities
use of the services. We do, however, eliminate revenues to the extent of the
related costs in the consolidated financial statements in accordance with the
guidance provided in SFAS 71.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses
consist of costs related to personnel, facilities, insurance, consulting and
professional services, which support our sales, marketing, human resources,
finance and administration functions for the entire company.
Effects of
Inflation
For our Utility Group, recovery for the
effects of inflation through higher rates is dependent upon receiving adequate
and timely rate increases. For our Service Group, most of our contacts have
provisions for rate increases tied to the rate of inflation. However, rate
increases are not retroactive and often lag increases in costs caused by
inflation. During periods of moderate inflation, as has been experienced in
recent years, the effects of inflation have had an impact on our results of
operations.
Acquisitions,
Assets Held for Sale and Dispositions
Our financial position, results of operations
and cash flows have been affected by our history of acquisitions. Our most
recent significant acquisitions, which affect the comparability of the
historical financial condition and results of operations described in the
MD&A, are:
Utility Group:
·
a northern Mississippi-based water and wastewater
utility serving approximately 275 water connections and servicing approximately
355 wastewater connections through four collection systems in February 2007;
·
two San Antonio, Texas-based water utilities
serving approximately 2,600 connections in May 2007;
·
a Madison County, Alabama-based wastewater
collection and treatment system servicing approximately 120 connections in November 2007;
·
a Birmingham, Alabama-based wastewater collection
and treatment system servicing approximately 4,100 residential and commercial
connections in January 2008.
During 2007, we committed to a plan to sell a
wholesale water and wastewater operation in Texas and believe the sale can be
consummated during 2008. As a result of this decision, the operation is
classified as a discontinued operation in our consolidated financial statements
and the discussion below reflects only continuing operations for all periods.
19
New Mexico
Eminent Domain Condemnation Proceedings
In 2007, the Albuquerque Bernalillo County
Water Utility Authority and the City of Rio Rancho, New Mexico, filed a
Petition for Condemnation (the Petition) against our New Mexico regulated
utility, New Mexico Utilities, Inc. (NMUI). The Petition seeks to
acquire, by condemnation, all of the assets of NMUI, including all real
property, through the alleged power of eminent domain. The Petition also
alleges that the Petitioners need to acquire the utility assets for the public
purposes of providing water and wastewater services to customers and that the acquisition of NMUI is
necessary, appropriate and in the public interest. We believe we have defenses
to the Action which we intend to vigorously assert. If we do not prevail, the
Petitioners must pay fair market value as determined by the court, based on
appraisals. NMUI and the Petitioners do not agree on the value of the assets
which the Petitioners seek to condemn. While it is too early to predict the
outcome of this matter, the Company believes that if the Court were to
determine the fair market value of NMUI, it would exceed its recorded net book
value as of March 31, 2008. For additional information on this matter, see
Note 5 to the condensed consolidated financial statements included in this
report.
BUSINESS
OUTLOOK
The water and wastewater industry generates
annual revenues in excess of $70 billion in the United States. Both services
are primarily owned by government municipalities. Growing regulatory complexity
and escalating water quality awareness has led to a dwindling supply of
low-cost potable water. The market is characterized by an aging and
deteriorating municipal infrastructure and there is minimal state and federal
government funding available to upgrade these systems to meet the higher
standards. The EPA estimates that an investment of $750 billion to $1.0
trillion may be needed over the next 20 years to meet the higher standards.
These factors lead us to a very positive outlook for growth in our industry as
more government entities look to the private sector to help them meet these
challenges.
We intend to grow our market share of this
industry by focusing on both increasing the number of utilities we own and on
increasing the dollars generated by operating and maintaining government-owned
utilities. Our long-term strategic plan is to increase our profitability
through acquisitions and organic growth in both our Utility Group and our
Services Group.
The Utility Group growth strategy focuses on
strategically located acquisitions, organic customer growth and actively
managed rate proceedings. We look to acquire strategic utilities located within
our geographic footprint, thereby expanding our presence in a region and
gaining economies of scale. We also look to acquire utilities in population
growth areas. Historically, our utilities in population growth areas experience
new development in their service areas which generates organic growth through
increased customer connections. To achieve and maintain a reasonable rate of
return on investments in our capital assets, we manage rate proceedings through
our relationships with public utility commissions.
The Services Group growth strategy focuses on
expanding our client base, making strategic acquisitions and providing
peripheral services such as construction of infrastructure, billing and
collection services, customer care/call centers, meter replacement and
laboratory analysis of water and wastewater samples. By pursuing new operations
and maintenance contracts with cities, municipalities and private owners of water
and wastewater utilities within our geographic footprint, we expand our
presence in a region and gain economies of scale. We look to expand the scope
of our contracts with current clients by adding additional services such as
billing and collections and providing capital improvement project management
services. An opportunity unique to our business model is that it includes an
integrated strategy in which the Services Group provides construction and
operation and maintenance services to our Utility Group. This provides us with
economies of scale. We also continue to pursue acquisitions of small, strategic
service companies that expand our geographic presence and give us knowledge of
the regions water and wastewater needs. This local knowledge positions us for
growth both in the service as well as the utility side of the business as
municipalities look to form public/private partnerships or to sell their
utility assets. This was demonstrated in March 2005 by our acquisition of
Novus Utilities, a contract operations business in Alabama which gave us local
knowledge and relationships in the region. This positioning in turn led to the
acquisition of three wastewater utilities, one in September 2005, a second
in November 2007 and the third in January 2008.
20
RESULTS
OF OPERATIONS
Change in
Presentation
Effective January 1, 2008, we launched
the first phase of our financial reporting reengineering process by
implementing a fully integrated financial module throughout the entire company.
As a result, the methodology of capturing and reporting operating versus
general and administrative expenses as well as the classification of expenses
between business segments has changed. As permitted by SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information
,
prior year amounts have not been reclassified to conform to the 2008
presentation because the information is not available and the cost to develop
it would be excessive.
Reclassifications have also been made to
prior years financial statement presentation with respect to a component of
the business we are holding for sale as a discontinued operation.
Three months
ended March 31, 2008 Compared to 2007
Revenues.
Revenues
increased $2.9 million, or 6.0%, to $50.8 million for the quarter ended March 31,
2008 from $47.9 million for the same period during the prior year. By segment,
revenues changed as follows:
|
|
Three Months Ended
|
|
|
|
Percent of Revenues
|
|
|
|
March 31,
|
|
Increase
|
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Group
|
|
$
|
22,341
|
|
$
|
20,034
|
|
$
|
2,307
|
|
44.0
|
%
|
41.9
|
%
|
Services Group
|
|
28,422
|
|
27,835
|
|
587
|
|
56.0
|
%
|
58.1
|
%
|
Total
|
|
$
|
50,763
|
|
$
|
47,869
|
|
$
|
2,894
|
|
100.0
|
%
|
100.0
|
%
|
Utility
Group.
Revenues increased $2.3 million, or 11.5%,
to $22.3 million for the quarter ended March 31, 2008, from $20.0 million
for the same period during the prior year. The increase was primarily due to
the following:
·
a $1.8 million increase primarily resulting from
a fourth quarter 2007 interim rate increase at one of our Texas utilities; and
·
a $1.0 million increase at our Alabama utilities
primarily resulting from the first quarter, 2008 acquisition of a wastewater
treatment plant in the Birmingham, Alabama area; and
·
a $0.4 million increase resulting from utility
acquisitions in San Antonio, Texas and northern Mississippi in 2007; offset by
·
a $0.9 million decrease at our California utility
related to lower consumption as a result of wetter weather compared to the
prior year.
Services
Group.
Revenues increased $0.6 million, or 2.1%,
to $28.4 million for the quarter ended March 31, 2008 from $27.8 million
for the same period during the prior year. The increase in revenues was
primarily due to the following:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
|
|
Increase
|
|
Percent of Revenues
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated customers
|
|
$
|
27,299
|
|
$
|
26,316
|
|
$
|
983
|
|
81.2
|
%
|
78.5
|
%
|
Intersegment revenues
|
|
6,339
|
|
7,220
|
|
(881
|
)
|
18.8
|
%
|
21.5
|
%
|
Total revenues
|
|
33,638
|
|
33,536
|
|
102
|
|
100.0
|
%
|
100.0
|
%
|
Intersegment cost eliminations
|
|
(5,216
|
)
|
(5,701
|
)
|
485
|
|
|
|
|
|
Total
|
|
$
|
28,422
|
|
$
|
27,835
|
|
$
|
587
|
|
|
|
|
|
Revenues from unaffiliated customers increased
$1.0 million, or 3.7%, to $27.3 million for the quarter ended March 31,
2008 from $26.3 million for the same period during the prior year. The increase
in revenues was primarily due to increased business activity combined with our
ongoing efforts to review our contracts and increase prices.
21
Intersegment revenues from our Utility Group
decreased by $0.9 million, or 12.2%, to $6.3 million for the quarter ended March 31,
2008 from $7.2 million for the same period during the prior year. The decrease
in revenues resulted from a decrease in construction projects in part due to a
slow down in housing construction, and less project work performed by our
Services Group on behalf of our utilities in New Mexico and Texas. This was offset by increased activity at our
Alabama operations related to the first quarter, 2008 acquisition of a
wastewater treatment plant in Birmingham, Alabama.
Direct Operating
Expenses.
Direct operating expenses increased $3.1
million, or 8.6%, to $39.4 million for the quarter ended March 31, 2008
from $36.3 million for the same period during the prior year as follows:
|
|
Three Months Ended
|
|
|
|
Percent of Revenues (1)
|
|
|
|
March 31,
|
|
Increase
|
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Group
|
|
$
|
13,441
|
|
$
|
11,809
|
|
$
|
1,632
|
|
60.2
|
%
|
58.9
|
%
|
Services Group
|
|
25,910
|
|
24,442
|
|
1,468
|
|
91.2
|
%
|
87.8
|
%
|
Total
|
|
$
|
39,351
|
|
$
|
36,251
|
|
$
|
3,100
|
|
77.5
|
%
|
75.7
|
%
|
(1)
Utility Group and Services
Group direct operating expenses are computed as a percent of their respective
revenues. Total direct operating expenses are computed as a percentage of total
revenues.
Utility
Group.
Direct operating expenses increased $1.6
million, or 13.8%, to $13.4 million for the quarter ended March 31, 2008,
from $11.8 million for the same period during the prior year. The increase in
direct operating expenses was primarily due to the following:
·
a $0.8 million increase at our Alabama utilities
primarily resulting from the first quarter 2008 acquisition of a wastewater
treatment plant in the Birmingham, Alabama area;
·
a $0.8 million increase at our Texas and New
Mexico utilities in depreciation expense, contract operation fees, and sewage
treatment expenses as well as costs associated with improving our information
technology support to provide better customer service; and
·
a $0.2 million increase in expenses resulting
from our San Antonio, Texas and northern Mississippi utility acquisitions;
offset by
·
a $0.2 million decrease in costs at our
California utility principally resulting from decreased consumption offset by
higher production-related costs.
Direct operating expenses were 60.2% and
58.9% of related revenues for the quarter ended March 31, 2008 and 2007, respectively.
Services
Group.
Direct operating expenses increased $1.5
million, or 6.0%, to $25.9 million for the quarter ended March 31, 2008
from $24.4 million for the same period during the prior year. The increase in
direct operating expenses was due to the following:
·
a $1.0 million increase related to the change in
methodology of capturing direct operating versus selling, general and
administrative expenses; and
·
a $0.5 million increase in direct costs
associated with increased business activity.
Direct operating expenses as a percentage of
the related revenues increased 3.4% to 91.2% for the quarter ended March 31,
2008 compared to 87.8% for the same period during the prior year.
Gross Profit.
Gross
profit, which we define as the difference between revenues and the related
direct operating expenses, decreased $0.2 million, or 1.8%, to $11.4 million
for the quarter ended March 31, 2008 from $11.6 million for the same
period during the prior year as follows:
22
|
|
Three Months Ended
|
|
|
|
Percent of Revenues (1)
|
|
|
|
March 31,
|
|
Increase
|
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Group
|
|
$
|
8,900
|
|
$
|
8,225
|
|
$
|
675
|
|
39.8
|
%
|
41.1
|
%
|
Services Group
|
|
2,512
|
|
3,393
|
|
(881
|
)
|
8.8
|
%
|
12.2
|
%
|
Total
|
|
$
|
11,412
|
|
$
|
11,618
|
|
$
|
(206
|
)
|
22.5
|
%
|
24.3
|
%
|
(1)
Utility Group and Services
Group gross profit is computed as a percent of their respective revenues after
intersegment eliminations. Total gross profit is computed as a percentage of
total revenues.
Utility
Group.
Gross profit was 39.8% and 41.1% of related
revenues for the quarter ended March 31, 2008 and 2007, respectively.
Services
Group.
Gross profit for the quarter ended March 31,
2008 and 2007 was comprised of the following:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
Increase
|
|
Percent of Revenues (1)
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on sales to:
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated customers
|
|
$
|
1,389
|
|
$
|
1,874
|
|
$
|
(485
|
)
|
5.1
|
%
|
7.1
|
%
|
Affiliated customers (intersegment)
|
|
1,123
|
|
1,519
|
|
(396
|
)
|
17.7
|
%
|
21.0
|
%
|
Total
|
|
$
|
2,512
|
|
$
|
3,393
|
|
$
|
(881
|
)
|
7.5
|
%
|
10.1
|
%
|
(1)
Gross profit is computed as a
percent of the respective revenues before intersegment eliminations.
Services Group gross profit on revenues from
unaffiliated customers decreased by $0.5 million, or 25.9%, to $1.4 million for
the quarter ended March 31, 2008 from $1.9 million for the same period
during the prior year. Gross profit as a percent of revenues for 2008 decreased
to 5.1% compared to 7.1% for the same period for the prior year primarily due
to the change in methodology of capturing direct operating versus selling,
general and administrative expense.
Services Group gross profit on revenues from
our Utility Group decreased by $0.4 million, or 26.1% to $1.1 million for the
quarter ended March 31, 2008 from $1.5 million for the same period during
the prior year. The decrease is related to a slow down in construction work
performed for our Texas utilities, offset by an increase in contract operations
work related to the Alabama wastewater facility purchased during the first
quarter of 2008.
The Services Group supports three distinctly
different customer bases; Texas Municipal Utility Districts or MUDs, municipal
clients through operations and maintenance contracts, and SouthWest Waters own
Utility Group. We want to accelerate our performance improvements and therefore
we have refocused this Group in 2008 along these business lines to better serve
the unique demands of each customer base, to focus our business development
efforts for each market and to eliminate structural redundancies that may exist
today.
Selling,
General and Administrative Expenses.
Selling,
general and administrative expenses increased $1.1 million, or 12.6%, to
$9.6 million for the quarter ended March 31, 2008 compared to $8.5 million
for the same period during the prior year as follows:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
Increase
|
|
Percent of Revenues (1)
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Group
|
|
$
|
2,521
|
|
$
|
2,461
|
|
$
|
60
|
|
11.3
|
%
|
12.3
|
%
|
Services Group
|
|
1,652
|
|
2,692
|
|
(1,040
|
)
|
5.8
|
%
|
9.7
|
%
|
Corporate
|
|
5,432
|
|
3,377
|
|
2,055
|
|
|
|
|
|
Total
|
|
$
|
9,605
|
|
$
|
8,530
|
|
$
|
1,075
|
|
18.9
|
%
|
17.8
|
%
|
(1)
Utility Group and Services
Group expenses are computed as a percent of their respective revenues. Total
expenses are computed as a percentage of total revenues.
23
Selling, general and administrative expenses
are relatively fixed in nature and do not fluctuate significantly with changes
in revenues. That being said, we have implemented a new financial system, and
re-evaluated the way we allocate our SG&A expenses. This re-evaluation
primarily affected the Services Group by lowering its SG&A costs and
increasing its Operating expenses. The Utility Group and Corporate SG&A
expenses were not significantly affected by this re-evaluation.
Corporate expenses increased $2.0 million to
$5.4 million for the period ending March 31, 2008 compared to $3.4 million
for the same period in the prior year primarily as a result of $0.8 million increase
in costs incurred related to our Cornerstone project, which commenced during
the second quarter of 2007; $0.7 million increase in professional fees
associated with evaluating a strategic business opportunity that did not
materialize, in part, because of changes in the market conditions; and $0.3
million of other temporary increases associated with business process
reengineering projects.
The Cornerstone project is a company-wide
initiative to reengineer our business processes and integrate our information
systems onto a single platform across the entire company utilizing
state-of-the-art systems and technology. Our existing systems are standalone
legacy systems that were in place when we acquired many of our companies. These
individual standalone systems are costly to operate and maintain and make the
consolidation and sharing of data between the various platforms labor-intensive
and time-consuming. The financial module of the integrated platform became
operational on January 1, 2008 and is performing as expected.
We are investing in this new technology to
enable us to gather and disseminate information on a more timely basis at
reduced costs thereby improving customer service and enhancing operational
efficiencies. Although expenditures related to the information technology
hardware and software portions of this initiative are capitalized, certain
costs are expensed as incurred. We expect we will be able to recover a portion
of our Cornerstone investment through the rates charged by our owned utility
companies due to the customer service enhancements and we also believe the rest
of the investment will result in cost savings in the Services Group, resulting
in improved margins.
Other Income
(Expense).
Other expenses increased $0.5 million, or
26.6% to $2.2 million for the quarter ended March 31, 2008, compared to
$1.8 million for the same period during the prior year as follows:
|
|
|
|
|
|
(Increase)
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
Decrease
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(2,361
|
)
|
$
|
(1,854
|
)
|
$
|
(507
|
)
|
Interest income
|
|
122
|
|
135
|
|
(13
|
)
|
Other, net
|
|
0
|
|
(49
|
)
|
49
|
|
Total
|
|
$
|
(2,239
|
)
|
$
|
(1,768
|
)
|
$
|
(471
|
)
|
Interest
Expense.
Interest expense increased by $0.5
million, or 27.3% to $2.4 million for the quarter ended March 31, 2008
from $1.9 million compared to the same period during the prior year. The major
components of interest expense were as follows:
(In thousands)
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
Mortgage bonds and bank term loans
|
|
$
|
1,217
|
|
$
|
1,190
|
|
$
|
27
|
|
Revolving lines of credit
|
|
936
|
|
660
|
|
276
|
|
Convertible subordinated debentures
|
|
204
|
|
215
|
|
(11
|
)
|
Other indebtedness and deferred financing
cost amortization
|
|
163
|
|
197
|
|
(34
|
)
|
Total interest incurred
|
|
2,520
|
|
2,262
|
|
258
|
|
Write-off of unamortized financing costs in
connection with refinancing
|
|
268
|
|
|
|
268
|
|
Less capitalized interest
|
|
(128
|
)
|
(192
|
)
|
64
|
|
Less interest related to discontinued operations
|
|
(299
|
)
|
(216
|
)
|
(83
|
)
|
Total interest expense
|
|
$
|
2,361
|
|
$
|
1,854
|
|
$
|
507
|
|
24
The increase in revolving line of credit
interest is caused by higher borrowing levels related to financing capital spending
in 2007 and 2008, including the capital and expense portions of our Cornerstone
project, and the first quarter 2008 $23.3 million acquisition of the Alabama
wastewater treatment facility. The write-off of unamortized deferred financing
costs is associated with our $100.0 million revolving credit facility we
refinanced with a new $150.0 million facility in the first quarter of 2008. The
average balance of interest-bearing debt outstanding increased to $165.5
million during the quarter ended March 31, 2008 compared to $133.6 million
for the prior year.
The weighted average annual interest rate on
total borrowings was approximately 6.0% for the quarter ended March 31,
2008 and 6.5% for the same period in the prior year.
Interest
Income.
Interest income was constant at $0.1
million for the quarters ended March 31, 2008 and 2007.
Provision for Income
Taxes.
Our effective consolidated income tax rate on
combined continuing and discontinued operations was 27% for the quarter ended March 31,
2008 compared to 36% for 2007. In 2008, we reported a consolidated pre-tax
loss. The lower effective rate in 2008 is caused by state income taxes reducing
the expected overall income tax benefit at a more normalized 36% to 37%
effective rate.
Loss from
Discontinued Operations.
Loss from discontinued operations, net of tax, which pertains to our
wholesale water and wastewater business we elected to sell, was $0.3 million
for the quarter ended March 31, 2008, compared to $0.2 million for the
same period during the prior year.
ACCOUNTING
PRONOUNCEMENTS ADOPTED DURING 2008
SFAS No. 157
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157).
This statement defines fair value, establishes a framework for using fair value
to measure assets and liabilities, and expands disclosures about fair value
measurements. The statement applies when other statements require or permit the
fair value measurement of assets and liabilities. This statement does not
expand the use of fair value measurement. In February 2008, the FASB
issued FASB Staff Position No. 157-2,
Effective Date of FASB
Statement No. 157
(FSP 157-2). FSP 157-2 delays the
effective date of SFAS No. 157 for certain non-financial assets and
liabilities to fiscal years beginning after November 15, 2008.
We adopted SFAS No. 157 as required on January 1,
2008 for all financial assets and liabilities, and this statement did not have
a material impact on the Companys consolidated results of operations or
consolidated financial position. The Company is currently assessing the
potential effect of SFAS No. 157 on all non-financial assets and
liabilities.
SFAS No. 159
We adopted SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159) effective January 1, 2008. We did not elect the fair
value option for any of our existing financial assets and liabilities. The
adoption of this statement did not have a material impact on the consolidated
results of operations or consolidated financial position.
25
RECENT
ACCOUNTING PRONOUNCEMENTS
SFAS No. 141(R)
In December 2007, the FASB issued
Statement No. 141 (revised 2007),
Business Combinations
(SFAS 141(R)). SFAS 141(R) changes the accounting for acquisitions
specifically eliminating the step acquisition model, changing the recognition
of contingent consideration at the time of acquisition, disallowing the
capitalization of transaction costs and changes when restructurings related to
acquisitions can be recognized. The statement is effective for fiscal years
beginning on or after December 15, 2008 and will only impact the
accounting for acquisitions that are made after adoption. Adoption of
SFAS 141(R) will impact our accounting for future business
combinations in that all transactions costs will be expensed as incurred and
contingent consideration, if present, will be recorded upon acquisition.
SFAS No. 159
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
(SFAS 159). This statement permits companies to choose to measure many
financial instruments and other specified items at fair value. This statement
is effective for our fiscal year beginning January 1, 2008 and will be
applied prospectively. We believe the adoption of this new statement will not
have a material impact on our consolidated financial statements.
SFAS No. 160
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(SFAS 160). SFAS 160
introduces significant changes in the accounting and reporting for business
acquisitions and noncontrolling interest in a subsidiary. SFAS 160 also changes
the accounting for and reporting for the deconsolidation of a subsidiary.
Companies are required to adopt the new standard for fiscal years beginning
after January 1, 2009. We are evaluating the impact of this standard and
currently do not expect it to have a significant impact on our financial
position, results of operations or cash flows.
SFAS No. 161
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activitiesan amendment of
FASB Statement No. 133 (SFAS 161). This statement amends SFAS No. 133
by requiring enhanced disclosures about a companys derivative instruments and
hedging activities, but does not change the scope of, or accounting under, SFAS
No. 133. SFAS No. 161 requires increased qualitative, quantitative
and credit-risk disclosures about the entitys derivative instruments and
hedging activities. SFAS 161 is effective for our fiscal year beginning January 1,
2009. We are evaluating the potential impact of this statement.
26
LIQUIDITY
AND CAPITAL RESOURCES
Our overall objectives with respect to
liquidity and capital resources are to:
·
generate sufficient operating cash
flows to service our debt and tax obligations, fund capital improvements and
organic growth, and pay dividends to our stockholders;
·
utilize our credit facility for major
capital improvements and to manage seasonal cash needs;
·
obtain external financing for major
acquisitions; and
·
maintain approximately equal levels
of debt and equity consistent with the investor-owned water utility industry.
Our statements of cash flows are summarized
as follows:
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(5,144
|
)
|
$
|
(454
|
)
|
$
|
(4,690
|
)
|
Investing activities
|
|
(31,281
|
)
|
(8,602
|
)
|
(22,679
|
)
|
Financing activities
|
|
35,856
|
|
8,735
|
|
27,121
|
|
Total continuing operations
|
|
(569
|
)
|
(321
|
)
|
(248
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
Operating activities
|
|
(165
|
)
|
(643
|
)
|
478
|
|
Investing activities
|
|
|
|
(317
|
)
|
317
|
|
Total discontinued operations
|
|
(165
|
)
|
(960
|
)
|
795
|
|
Increase (decrease) in cash and cash
equivalents
|
|
$
|
(734
|
)
|
$
|
(1,281
|
)
|
$
|
547
|
|
Cash Flows From Operating Activities of
Continuing Operations.
Net cash used in operating
activities was $5.1 million for the three months ended March 31, 2008
versus $0.5 million for the same period last year. Operational aspects of our
businesses that affected working capital in 2008 versus 2007 are highlighted
below:
·
increased level of vendor payments in
2008 for goods and services received during the fourth quarter of 2007; and
·
an increase in receivables as a
result of increased revenues generated by our Texas utilities due, in part, to
rate increases.
Cash Flows From Investing Activities of
Continuing Operations.
Cash used in investing
activities totaled $31.3 million for the three months ended March 31, 2008
compared to $8.6 million for the same period during the prior year as follows:
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by investing
activities:
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash
acquired
|
|
$
|
(23,330
|
)
|
$
|
(558
|
)
|
$
|
(22,772
|
)
|
Additions to property, plant and equipment
|
|
(7,960
|
)
|
(8,077
|
)
|
117
|
|
Proceeds from sales of equipment
|
|
9
|
|
33
|
|
(24
|
)
|
Net cash used in investing activities
|
|
$
|
(31,281
|
)
|
$
|
(8,602
|
)
|
$
|
(22,679
|
)
|
27
The principal reason for the increase was the
January 2008 acquisition of a Birmingham, Alabama wastewater collection
system and treatment plant for $23.3 million in cash. The following table
summarizes additions to property, plant and equipment additions for 2008 and
2007.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Company-financed additions
|
|
$
|
6,938
|
|
$
|
6,727
|
|
Capital improvement reimbursements
|
|
514
|
|
865
|
|
Cash contributions received in aid of
construction
|
|
508
|
|
485
|
|
Total cash additions to property, plant and
equipment
|
|
7,960
|
|
8,077
|
|
Non-cash contributions in aid of
construction
|
|
|
|
89
|
|
Total additions to property, plant and
equipment
|
|
$
|
7,960
|
|
$
|
8,166
|
|
Capital projects primarily relate to the
expansion, replacement and renovation of our water and wastewater systems,
particularly at our California, Texas and New Mexico utilities and, in 2008,
include $1.9 million of expenditures related to our Cornerstone project.
Contributions in Aid of Construction (CIAC) represent contributions in the
form of cash, services or property received from developers, governmental
agencies, municipalities or individuals for the purpose of constructing utility
plant and is not refundable.
In 2008, we expect to spend approximately
$29.2 million on cash additions, principally within our Utility Group, expect
to receive $0.4 million of CIAC, and expect to finance an additional $14.0
million of Cornerstone-related expenditures with our capital lease facility
resulting in total expected additions to property, plant and equipment of approximately
$43.6 million.
Cash Flows From Financing Activities of
Continuing Operations.
During the three months ended March 31,
2008, we financed our growth through a broad range of capital initiatives:
·
borrowed $37.0 million under our
revolving line of credit;
·
received $1.0 million of capital
improvement reimbursements and contributions in aid of construction; and
·
received $0.8 million of proceeds
from our share-based equity incentive plans and stock purchase plans.
Revolving line of borrowings were primarily
used to fund our investing activities and, to a lesser extent, to fund
operations. Additional borrowing availability under our revolving credit
facility was $60.0 million as of March 31, 2008.
During the three months ended March 31,
2008, we paid dividends totaling $1.4 million and our quarterly dividend rate
is currently $0.06 per common share.
In February 2008, we entered into a new
credit agreement with several lenders including Bank of America, as lender and
Administrative Agent, KeyBank, CoBank, U.S. Bank, JPMorgan Chase Bank, Comerica
Bank, Bank of the West, Citibank and Union Bank of California. The credit
agreement provides for a $150.0 million revolving credit facility. We may elect
to increase the amount of the credit facility by an amount not to exceed $75.0
million during the term of the agreement provided certain conditions are met.
The new credit agreement is more fully described in Note 4 to the condensed
consolidated financial statements included in this report.
The new revolving line of credit commitment
ends on February 15, 2013 and our $100.0 million credit facility was
cancelled upon repayment with an initial borrowing under the $150.0 million
facility.
28
CONTRACTUAL
OBLIGATIONS
The following table summarizes our known
contractual obligations to make future cash payments as of March 31, 2008,
as well as an estimate of the periods during which these payments are expected
to be made.
|
|
Years Ending December 31,
|
|
|
|
|
|
Remainder
|
|
2009
|
|
2011
|
|
2013
|
|
|
|
|
|
of
|
|
and
|
|
and
|
|
and
|
|
(In thousands)
|
|
Total
|
|
2008
|
|
2010
|
|
2012
|
|
Beyond
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (1):
|
|
|
|
|
|
|
|
|
|
|
|
Bank line of credit (2)
|
|
$
|
88,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
88,000
|
|
Mortgage bonds (3)
|
|
45,000
|
|
|
|
|
|
|
|
45,000
|
|
Bank term loans (4)
|
|
31,590
|
|
617
|
|
1,646
|
|
1,645
|
|
27,682
|
|
Convertible subordinated debentures (5)
|
|
12,034
|
|
|
|
|
|
|
|
12,034
|
|
Capital lease obligations (6)
|
|
4,376
|
|
631
|
|
1,790
|
|
1,955
|
|
|
|
Economic development revenue bonds (7)
|
|
1,925
|
|
115
|
|
245
|
|
280
|
|
1,285
|
|
Notes payable and other (8)
|
|
154
|
|
140
|
|
14
|
|
|
|
|
|
Total long-term debt
|
|
183,079
|
|
1,503
|
|
3,695
|
|
3,880
|
|
174,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of advances for construction (9)
|
|
10,297
|
|
957
|
|
1,366
|
|
864
|
|
7,110
|
|
Water purchase commitment (10)
|
|
7,512
|
|
345
|
|
920
|
|
920
|
|
5,327
|
|
Operating lease obligations
|
|
29,278
|
|
5,096
|
|
9,514
|
|
5,207
|
|
9,461
|
|
Total obligations as of March 31, 2008
(11)
|
|
$
|
230,166
|
|
$
|
7,901
|
|
$
|
15,495
|
|
$
|
10,871
|
|
$
|
195,899
|
|
(1)
Excludes interest payments,
which are described in the following notes. The terms of the long-term debt are
more fully described in the notes to the condensed consolidated financial
statements included in this report and in our 2007 Annual Report on Form 10-K.
(2)
The bank lines of credit bear
interest at variable rates and therefore the amount of future interest payments
are uncertain. Borrowings bear interest, at our option, based on a margin
either: a) over the LIBOR rate; or b) under the prime rate. The margins vary
based on our consolidated debt to equity ratio. The weighted-average annual
interest rate on our bank line of credit borrowings was 3.85% as of March 31,
2008.
(3)
Interest on the mortgage
bonds is fixed at a weighted-average annual interest rate of 6.52% and is
payable semiannually.
(4)
Interest on the bank term
loans is fixed at a weighted-average annual interest rate of 6.53% and is
payable semiannually.
(5)
Interest on the convertible
debentures is fixed at a 6.85% annual rate and is payable quarterly. The
debentures are convertible, at the option of the holder, into shares of our
common stock at any time prior to their maturity.
(6)
Interest on the capital lease
obligations is imputed at a weighted-average annual interest rate of 4.43% and
is payable monthly.
(7)
Interest on the economic
development bonds is fixed at a weighted-average annual interest rate of 5.97%
and is payable semiannually.
(8)
Interest is payable either
monthly or quarterly at rates ranging from 5.0% to 8.0% per year.
(9)
Advances for construction are
non-interest bearing.
(10)
Reflects the minimum annual
contractual commitment to purchase water through 2024. The amount is subject to
increases in future periods for production costs increases and may also
increase, but not decrease, if average actual usage exceeds a specified amount.
(11)
Excludes preferred stock
dividend obligations. Preferred stockholders are entitled to receive annual
dividends of $2.625 per share and there are 9,156 shares of preferred stock
currently outstanding. The preferred stock is redeemable by the Company at any
time for $52.00 per share and, from time to time, we have elected to repurchase
shares offered to us by preferred stockholders at prices less than $52.00 per
share.
FINANCIAL
CONDITION AND LIQUIDITY
As of March 31, 2008, we had $24.8
million of working capital and $5.1 million of operating lease obligations
payable during the remainder of 2008. As of March 31, 2008, we also had
$60.0 million of additional borrowings available under our line of credit
facility, which expires on February 15, 2013. In addition to our line of
credit, we also have $25.4 million of capital available under our $30.0 million
capital lease facility. Our California and New Mexico mortgage bond indentures
also permit the issuance of an additional $92.1 million of first mortgage bonds
as of March 31, 2008. However, the terms of our credit facility do
not permit additional first mortgage bond indebtedness without prior consent
from the credit facility lenders. The mortgage bond indentures also limit the
amount of cash and property dividends our California and New Mexico utilities
may pay to the parent company to fund its payment obligations. Dividends have
averaged $4.2 million to $5.2 million per year and are less than the aggregate
cumulative
29
dividend restriction threshold by $50.6
million as of March 31, 2008. We were in compliance with all loan
agreement covenants during the three months ended March 31, 2008.
We also have on file a registration statement
with the Securities and Exchange Commission, which is effective for the
issuance of up to $50.0 million aggregate principal amount of common stock,
debt securities and warrants. To date we have issued approximately $43.6 million
of common stock under the shelf registration.
We believe that our expected operating cash
flows, together with borrowings under our credit facility ($60.0 million of
which was available as of March 31, 2008 and expires on February 15,
2013) and $25.4 million available under our capital lease facility will be
sufficient to meet our operating expenses, working capital and capital
expenditure requirements as well as our debt service and other contractual
obligations for the next twelve months. However, our ability to comply with
debt financial covenants, pay principal or interest and refinance our debt
obligations will depend on our future operating performance as well as
competitive, legislative, regulatory, business and other factors beyond our
control.
CERTAIN
CONTRACTUAL COMMITMENTS AND INDEMNITIES
We operate a reverse osmosis water treatment
plant owned by the Capistrano Valley Water District (CVWD) under a
twenty-year operating agreement. The agreement contains three guarantees
related to our performance during the term of the agreement. The agreement
provides for us to pay liquidated damages in the event we fail to perform for
reasons other than those caused by uncontrollable circumstances, as such term
is defined in the agreement.
During the term of the agreement, we may be
liable for liquidated damages relating to any lost payments from a financial
assistance agreement CVWD has with a state water agency, up to a maximum of
$1.4 million per contract year. We have also made guarantees to CVWD with
respect to the quantity of finished water produced by the facility. In the
event the actual number of acre feet of finished water delivered is less than
the water delivery guarantee, we are required to pay liquidated damages of
approximately $600 per acre foot of shortfall, up to a maximum of 15.8 acre
feet per day. Finally, we have made guarantees with respect to seven measurable
finished water quality standards. Liquidated damages for failure to meet these
quality standards range from $100 to $400 per day per failed quality standard
(up to a maximum of $2,800 per day), depending on the number of violations per
contract year. The CVWD has not asserted any claims for liquidated damages
pursuant to these guarantees through the date of this report.
As part of the financing for this project,
the CVWD sold insured municipal bonds. We entered into an agreement with the
bond insurer to guarantee our performance under the service contract, subject
to certain liability caps to the bond insurer in the event of a default. During
the twenty-year operation of the facility, such liability caps will not exceed
an amount equal to $4.0 million plus an amount no greater than the replacement
cost of the actual reverse osmosis filtration unit within the facility, estimated
to be approximately $1.5 million.
OFF-BALANCE
SHEET ARRANGEMENTS
Through the date of this report, we did not
have any relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. In addition, we do not engage in trading activities involving
non-exchange traded contracts. We are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in these
relationships. We do not have relationships or transactions with persons or
entities that derive benefits from their non-independent relationship with our
subsidiaries or us.
We lease some of our equipment and office
facilities under operating leases which are deemed to be off-balance sheet
arrangements. Our future operating lease payment obligations are more fully
described under the caption Contractual Obligations above.
30
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of March 31, 2008, we had $183.8
million of long-term variable and fixed-rate debt. We are exposed to market
risk based on changes in prevailing interest rates.
Market risk related to our variable-rate debt
is estimated as the potential decrease in pre-tax earnings resulting from an
increase in interest rates. We have $88.0 million of long-term debt that bears
interest at variable rates based on either the prime rate or LIBOR rate. Our
variable-rate debt had a weighted average annual interest rate of 3.85% as of March 31,
2008. A hypothetical one percent (100 basis points) increase in the average
annual interest rates charged on our variable-rate debt would reduce our
pre-tax earnings by approximately $0.9 million per year.
Our fixed-rate debt, which has a carrying
value of $95.8 million, has a fair value of $97.9 million as of March 31, 2008.
Market risk related to our fixed-rate debt is deemed to be the potential
increase in fair value resulting from a decrease in prevailing interest rates.
Our fixed-rate debt had a weighted average annual interest rate of 6.5% as of March 31,
2008. A hypothetical ten percent decrease in annual interest rates, from 6.5%
to 5.9%, would increase the fair value of our fixed-rate debt by approximately
$5.8 million.
We do not use derivative financial
instruments to manage or reduce these risks although we may do so in the
future. We do not enter into derivatives or other financial instruments for
trading or speculative purposes.
ITEM 4.
CONTROLS AND PROCEDURES
DISCLOSURE
CONTROLS AND PROCEDURES
Under the supervision and with the
participation of our management, including the Chief Executive Officer and
Chief Financial Officer, we have evaluated the effectiveness of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of
the end of the period covered by this report. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures are effective. There were no changes in our
internal control over financial reporting during the quarter ended March 31, 2008
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were changes, as described below, in
our internal control over financial reporting (as that term is defined in Rules 13a-15(f) or
15d-15(f) under the Exchange Act) during the quarter to which this report
relates that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
During the first quarter of 2008, we
implemented a series of Oracle financial modules, including a new general
ledger and chart of accounts as well as a new accounts payable system and new
consolidations and financial reports. The implementation of these ERP modules
resulted in changes to our financial reporting controls and procedures, with
such changes being identified during the design and implementation of the
modules. Therefore, as appropriate, we are modifying the design and documentation
of internal control process and procedures relating to the new system to
supplement and complement existing internal controls over financial reporting.
The system changes were undertaken to integrate systems and consolidate
information, and were not undertaken in response to any actual or perceived
deficiencies in our internal control over financial reporting.
31
PART II OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
Information required by this Item 1 is
contained in Note 5 to the condensed consolidated financial statements, Part I,
Item 1 of this report, under the captions Legal Proceedings and Investigations.
The text under those captions is incorporated by reference into this Item 1.
ITEM
1A.
RISK FACTORS
There have been no material changes in our
risk factors, except as noted below, since we last reported under Part I,
Item 1A, in our Annual Report on Form 10-K for the year ended December 31,
2007.
Capital Market Transactions
Because of a late Form 8-K filing, we
will loose our eligibility to use Form S-3 Registration Statements to
register securities which, in turn, will adversely affect our ability to access
capital markets to finance our capital requirements for the next twelve months.
We may also be required to suspend our Dividend Reinvestment and Direct Stock
Purchase Plans for a period of time.
We were unable to timely file a Current
Report on Form 8-K (the Form 8-K) related to our January 2008
acquisition of the assets of a sewer system and related wastewater treatment
plant (commonly referred to as the Riverview System). This failure was due to
our inability to provide the audited financial statements for the Riverview
System required by the Securities Exchange Act of 1934 (the Exchange Act).
The independent accountants we retained to perform the audit were unable to
express an opinion of the historical cost of the assets acquired because the
prior owners did not retain sufficient historical transactional records to
support the recorded values. We have been in contact with the Securities and
Exchange Commission (SEC) and plan to file the required Form 8-K with
alternate audited financial information, per our discussions with the SEC, by
the end of May 2008.
The late filing of the Form 8-K has
adversely affected our eligibility to use Registration Statements on Form S-3
for registration of our securities with the SEC. Use of Form S-3 requires,
among other things, that the issuer be current and timely in its reports under
the Exchange Act for at least twelve months. Because of our inability to use Form S-3,
we will have to meet more demanding requirements to register additional
securities, which will make it more difficult for us to effect public offering
transactions, and our range of available financing alternatives could also be
narrowed. It is also likely we will be required to suspend our Dividend
Reinvestment and Direct Stock Purchase Plans after the filing of our 2008 Form 10-K
until we regain Form S-3 eligibility twelve months after the filing of the
Form 8-K because we will not be in a position to file a registration
statement covering those shares prior to regaining Form S-3 eligibility.
ITEMS
1A, 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM
6.
EXHIBITS
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
|
15
|
*
|
Letter regarding unaudited interim financial information from
Independent Registered Public Accounting Firm
|
|
|
|
31.1
|
*
|
Certification of Principal Executive Officer Pursuant to Section 302
of the Sarbanes Oxley Act of 2002
|
|
|
|
31.2
|
*
|
Certification of Principal Financial Officer Pursuant to Section 302
of the Sarbanes Oxley Act of 2002
|
|
|
|
32.1
|
*
|
Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes Oxley Act of 2002
|
|
|
|
32.2
|
*
|
Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes Oxley Act of 2002
|
*
Filed herewith
32
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereto duly authorized.
|
SOUTHWEST WATER COMPANY (REGISTRANT)
|
|
|
|
|
Dated: May 12, 2008
|
/s/ CHERYL L. CLARY
|
|
Cheryl L. Clary
|
|
Chief Financial Officer
|
33
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