Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
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Quarterly Report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended June 30, 2008
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or
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o
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Transition report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period
from to
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Commission File Number 0-8176
(Exact name of registrant as specified in its charter)
Delaware
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95-1840947
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification Number)
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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
x
No
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer, and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
o
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Accelerated
filer
x
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Non-accelerated
filer
o
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Smaller
reporting company
o
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(Do not check if a smaller
reporting company)
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|
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
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Outstanding as of August 1, 2008
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Common Stock, $.01 par value per share
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24,592,039 shares
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Table of Contents
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
June 30, 2008, and the related condensed consolidated statements of income
for the three-month and six-month periods ended June 30, 2008 and the
related condensed consolidated changes in stockholders equity and cash flows
for the six-month period ended June 30, 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
August 11, 2008
1
Table of Contents
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
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June 30,
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December 31,
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(In
thousands)
|
|
2008
|
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2007
|
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ASSETS
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Current Assets:
|
|
|
|
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Cash and cash equivalents
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$
|
3,883
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$
|
2,950
|
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Accounts receivable, net
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30,180
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26,005
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|
Assets held for sale
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13,655
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16,013
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Other current assets
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17,122
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16,617
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Total current assets
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64,840
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61,585
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Property, Plant and Equipment, Net:
|
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Regulated utilities
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428,091
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399,146
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Non-regulated operations
|
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21,155
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|
18,757
|
|
Total property, plant and equipment, net
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449,246
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417,903
|
|
|
|
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Other Assets:
|
|
|
|
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Goodwill
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17,349
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17,349
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Intangible assets
|
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2,325
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|
2,539
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Other assets
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|
16,036
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17,033
|
|
|
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$
|
549,796
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$
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516,409
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|
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LIABILITIES AND STOCKHOLDERS EQUITY
|
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Current Liabilities:
|
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Accounts payable
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$
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8,097
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$
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14,930
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Liabilities related to assets held for sale
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4,456
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4,297
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Current portion of long-term debt
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1,927
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1,937
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Other current liabilities
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21,125
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25,020
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Total current liabilities
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35,605
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46,184
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Other Liabilities and Deferred Credits:
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Long-term debt
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191,414
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145,353
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Deferred income taxes
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28,331
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28,102
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Advances for construction
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12,824
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9,210
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Contributions in aid of construction
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110,700
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115,442
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Other liabilities and deferred credits
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13,727
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12,924
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Commitments and Contingencies
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|
|
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|
|
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Stockholders Equity:
|
|
|
|
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Preferred stock
|
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458
|
|
458
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|
Common stock
|
|
245
|
|
243
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Additional paid-in capital
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147,418
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145,072
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Retained earnings
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8,995
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13,336
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Accumulated other comprehensive income
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79
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|
85
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|
Total stockholders equity
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157,195
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159,194
|
|
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|
$
|
549,796
|
|
$
|
516,409
|
|
See accompanying notes to condensed consolidated financial statements.
2
Table of Contents
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
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Three Months Ended
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Six Months Ended
|
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June 30,
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June 30,
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(In thousands, except per share data)
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2008
|
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2007
|
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2008
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2007
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Revenues:
|
|
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|
|
|
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Utility Group
|
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$
|
27,484
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$
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23,554
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$
|
49,825
|
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$
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43,588
|
|
Services Group
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29,582
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|
31,342
|
|
58,004
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59,177
|
|
Total revenues
|
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57,066
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54,896
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107,829
|
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102,765
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Expenses:
|
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|
|
|
|
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|
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Utility Group operating expenses
|
|
15,746
|
|
13,207
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|
29,187
|
|
25,016
|
|
Services Group operating expenses
|
|
28,833
|
|
26,730
|
|
54,743
|
|
51,172
|
|
Selling, general and administrative
expenses
|
|
9,113
|
|
9,311
|
|
18,718
|
|
17,841
|
|
Total expenses
|
|
53,692
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|
49,248
|
|
102,648
|
|
94,029
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
3,374
|
|
5,648
|
|
5,181
|
|
8,736
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(2,042
|
)
|
(1,885
|
)
|
(4,403
|
)
|
(3,739
|
)
|
Interest income
|
|
128
|
|
50
|
|
250
|
|
185
|
|
Other, net
|
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4
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|
(12
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)
|
4
|
|
(61
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)
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
income taxes
|
|
1,464
|
|
3,801
|
|
1,032
|
|
5,121
|
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Provision for income taxes
|
|
573
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|
1,380
|
|
455
|
|
1,860
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
891
|
|
2,421
|
|
577
|
|
3,261
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of
tax
|
|
(1,678
|
)
|
(198
|
)
|
(1,965
|
)
|
(424
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
(787
|
)
|
2,223
|
|
(1,388
|
)
|
2,837
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
(6
|
)
|
(6
|
)
|
(12
|
)
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common
stockholders
|
|
$
|
(793
|
)
|
$
|
2,217
|
|
$
|
(1,400
|
)
|
$
|
2,825
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.04
|
|
$
|
0.10
|
|
$
|
0.02
|
|
$
|
0.14
|
|
Loss from discontinued operations
|
|
(0.07
|
)
|
(0.01
|
)
|
(0.08
|
)
|
(0.02
|
)
|
Net income (loss) applicable to common
stockholders
|
|
$
|
(0.03
|
)
|
$
|
0.09
|
|
$
|
(0.06
|
)
|
$
|
0.12
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.04
|
|
$
|
0.10
|
|
$
|
0.02
|
|
$
|
0.13
|
|
Loss from discontinued operations
|
|
(0.07
|
)
|
(0.01
|
)
|
(0.08
|
)
|
(0.01
|
)
|
Net income (loss) applicable to common
stockholders
|
|
$
|
(0.03
|
)
|
$
|
0.09
|
|
$
|
(0.06
|
)
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
24,507
|
|
24,100
|
|
24,444
|
|
23,992
|
|
Diluted
|
|
24,711
|
|
24,386
|
|
24,666
|
|
24,301
|
|
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
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, except per share data)
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
(1,388
|
)
|
|
|
(1,388
|
)
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial net gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
(6
|
)
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issuance under dividend reinvestment
and stock purchase plans
|
|
|
|
|
|
127
|
|
1
|
|
1,426
|
|
|
|
|
|
1,427
|
|
Proceeds from stock options exercised
|
|
|
|
|
|
48
|
|
|
|
335
|
|
|
|
|
|
335
|
|
Stock options tax benefit adjustment
|
|
|
|
|
|
|
|
|
|
(40
|
)
|
|
|
|
|
(40
|
)
|
Share-based compensation expense
|
|
|
|
|
|
114
|
|
1
|
|
612
|
|
|
|
|
|
613
|
|
Debenture conversions
|
|
|
|
|
|
1
|
|
|
|
13
|
|
|
|
|
|
13
|
|
Cash dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock ($1.3125 per share)
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
(12
|
)
|
Common stock ($0.12 per share)
|
|
|
|
|
|
|
|
|
|
|
|
(2,941
|
)
|
|
|
(2,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
9
|
|
$
|
458
|
|
24,558
|
|
$
|
245
|
|
$
|
147,418
|
|
$
|
8,995
|
|
$
|
79
|
|
$
|
157,195
|
|
See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
Six Months Ended
|
|
|
|
June 30,
|
(In thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Cash flows from operating activities of
continuing operations:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,388
|
)
|
$
|
2,837
|
|
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
|
|
|
|
|
|
Loss from discontinued operations, net of
tax
|
|
1,965
|
|
424
|
|
Depreciation and amortization
|
|
7,201
|
|
5,906
|
|
Deferred income taxes
|
|
234
|
|
1,596
|
|
Share-based compensation expense
|
|
613
|
|
863
|
|
Changes in assets and liabilities, net of
effects of acquisitions:
|
|
|
|
|
|
Accounts receivable
|
|
(4,176
|
)
|
(1,831
|
)
|
Other current assets
|
|
782
|
|
3,044
|
|
Other assets
|
|
(2,443
|
)
|
(387
|
)
|
Accounts payable
|
|
(7,055
|
)
|
(3,576
|
)
|
Other current liabilities
|
|
(1,276
|
)
|
59
|
|
Other liabilities
|
|
46
|
|
(1,120
|
)
|
Other, net
|
|
(278
|
)
|
(26
|
)
|
Net cash provided by (used in) operating
activities
|
|
(5,775
|
)
|
7,789
|
|
|
|
|
|
|
|
Cash flows from investing activities of
continuing operations:
|
|
|
|
|
|
Acquisitions of businesses, net of cash
acquired
|
|
(23,330
|
)
|
(6,547
|
)
|
Additions to property, plant and equipment
|
|
(16,129
|
)
|
(18,548
|
)
|
Proceeds from sales of equipment
|
|
179
|
|
41
|
|
Net cash used in investing activities
|
|
(39,280
|
)
|
(25,054
|
)
|
|
|
|
|
|
|
Cash flows from financing activities of
continuing operations:
|
|
|
|
|
|
Revolving lines of credit:
|
|
|
|
|
|
Borrowings
|
|
131,500
|
|
16,000
|
|
Repayment of $100 million revolving line of
credit
|
|
(84,500
|
)
|
|
|
Capital improvement reimbursements
|
|
1,854
|
|
1,628
|
|
Proceeds from stock option and stock
purchase plans
|
|
1,762
|
|
2,186
|
|
Contributions in aid of construction
|
|
363
|
|
556
|
|
Dividends paid
|
|
(2,953
|
)
|
(2,789
|
)
|
Repayment of advances for construction
|
|
(1,140
|
)
|
(356
|
)
|
Payments on long-term debt
|
|
(873
|
)
|
(1,042
|
)
|
Deferred financing costs
|
|
(532
|
)
|
(5
|
)
|
Stock option tax benefit adjustment
|
|
(40
|
)
|
394
|
|
Net cash provided by financing activities
|
|
45,441
|
|
16,572
|
|
|
|
|
|
|
|
Cash flows from discontinued operations:
|
|
|
|
|
|
Operating activities
|
|
575
|
|
(392
|
)
|
Investing activities
|
|
(28
|
)
|
(317
|
)
|
Financing activities
|
|
|
|
|
|
Net cash provided by (used in) discontinued
operations
|
|
547
|
|
(709
|
)
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
933
|
|
(1,402
|
)
|
Cash and cash equivalents at beginning of
year
|
|
2,950
|
|
4,294
|
|
Cash and cash equivalents at end of period
|
|
$
|
3,883
|
|
$
|
2,892
|
|
See
accompanying notes to condensed consolidated financial statements.
5
Table of Contents
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 for the year ended December 31, 2007
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 June 30, 2008 and for the three-month and six-month
periods ended June 30, 2008 have been reviewed by PricewaterhouseCoopers
LLP, an independent registered public accounting firm. Their report (dated August 11,
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).
6
Table of Contents
Note 1. Summary of
Significant Accounting Policies (Continued)
Accounting Pronouncement Adopted During 2008
SFAS No. 157
In September 2006, the Financial
Accounting Standards Board (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
the adoption did not have a material impact on the Companys consolidated
results of operations or 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 financial position.
EITF 06-11
The Company adopted EITF Issue No. 06-11,
Accounting for the Income Tax Benefits of Dividends
on Share-Based Payment Awards
(EITF 06-11) effective January 1,
2008. EITF 06-11 provides that tax benefits associated with dividends on
share-based payment awards be recorded as a component of additional paid-in
capital. Adoption of this standard did not have a material impact on the
Companys consolidated financial position and results of operations.
Recent Accounting Pronouncements
SFAS No. 141(R)
In December 2007, the FASB issued
Statement No. 141 (revised 2007),
Business Combinations
(SFAS 141(R)). SFAS No. 141(R) provides revised guidance on how
acquirers recognize and measure the consideration transferred, identifiable
assets acquired, liabilities assumed, contingencies, noncontrolling interests
and goodwill acquired in a business combination. SFAS No. 141(R) also
requires that transaction costs be expensed as incurred. SFAS No. 141(R) also
expands required disclosures surrounding the nature and financial effects of
business combinations. SFAS No. 141(R) is effective, on a prospective
basis, for the Companys fiscal year beginning January 1, 2009. Upon
adoption, this standard will not have a material impact on our consolidated
financial position and results of operations. However, if the Company
consummates any business combinations after the adoption of SFAS No. 141(R),
the transaction may significantly impact the Companys consolidated financial
position and results of operations as compared to the Companys recent
acquisitions, accounted for under existing GAAP requirements, due to the
changes described above.
7
Table of Contents
Note 1. Summary of
Significant Accounting Policies (Continued)
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. The
Company is required to adopt the new standard for its fiscal year beginning 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 consolidated financial
position or results of operations.
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.
Adoption of this statement will not have a material impact on the Companys
consolidated financial position or results of operations.
SFAS No. 162
In May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting
Principles
(SFAS No. 162). SFAS No. 162 identifies
the sources of accounting principles and the framework for selecting the
principles used in the preparation of financial statements. SFAS No. 162
is effective 60 days following the SECs approval of the Public Company
Accounting Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Pr
inciples. Adoption of this standard will not have a
material impact on the Companys consolidated financial position and results of
operations.
FSP No. 142-3
In April 2008, the FASB issued FSP No. 142-3,
Determination of the Useful Life of Intangible
Assets
(FSP 142-3). FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets
. FSP 142-3 is effective
for the Companys fiscal years beginning January 1, 2009. The Company is
currently assessing the impact of FSP 142-3 on its consolidated financial
position and results of operations.
FSP No. EITF 03-6-1
In June 2008, the FASB issued FSP No. EITF
03-6-1,
Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities
(FSP
EITF 03-6-1). FSP EITF 03-6-1 clarified that all outstanding unvested
share-based payment awards that contain rights to nonforfeitable dividends
participate in undistributed earnings with common shareholders. Awards of this
nature are considered participating securities and the two-class method of
computing basic and diluted earnings per share must be applied. FSP EITF 03-6-1
is effective for the Companys fiscal year beginning January 1, 2009. All
prior period earnings per share data must be adjusted retrospectively to
conform to the provisions of FSP EITF 03-6-1. The Company is currently
assessing the impact of FSP EITF 03-6-1 on its computation of earnings per
share however; it currently believes the impact will not be material.
8
Table of Contents
Note 1. Summary of Significant Accounting
Policies (Continued)
EITF 07-5
In June 2008, the FASB ratified EITF
Issue No. 07-5,
Determining Whether an
Instrument (or an Embedded Feature) Is Indexed to an Entitys Own Stock
(EITF
07-5). EITF 07-5 provides that an entity should use a two step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instruments contingent
exercise and settlement provisions. It also clarifies on the impact of foreign
currency denominated strike prices and market-based employee stock option
valuation instruments on the evaluation. EITF 07-5 is effective for the Companys
fiscal year beginning January 1, 2009. The Company is currently assessing
the impact of EITF 07-5 on its consolidated financial position and results of
operations.
EITF 08-3
In June 2008, the FASB ratified EITF
Issue No. 08-3,
Accounting for Lessees for
Maintenance Deposits Under Lease Arrangements
(EITF 08-3). EITF
08-3 provides guidance for accounting for nonrefundable maintenance deposits.
It also provides revenue recognition accounting guidance for the lessor. EITF
08-3 is effective for the Companys fiscal year beginning January 1, 2009.
The Company is currently assessing the impact of EITF 08-3 on its consolidated
financial position and results of operations.
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 valuations and 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 and six months
ended June 30, 2008 and 2007 as if the acquisition had occurred as of the
beginning of each period presented.
|
|
Unaudited Pro Forma for the
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(In thousands, except per share data)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Total revenues
|
|
$
|
57,066
|
|
$
|
56,269
|
|
$
|
108,236
|
|
$
|
105,340
|
|
Income from continuing operations
|
|
891
|
|
2,597
|
|
628
|
|
3,541
|
|
Income from continuing operations
applicable to common stockholders
|
|
885
|
|
2,591
|
|
616
|
|
3,529
|
|
Net income (loss) applicable to common
stockholders
|
|
(793
|
)
|
2,393
|
|
(1,349
|
)
|
3,105
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
From continuing operations applicable to
common stockholders:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
$
|
0.11
|
|
$
|
0.03
|
|
$
|
0.15
|
|
Diluted
|
|
0.04
|
|
0.11
|
|
0.02
|
|
0.15
|
|
Net income (loss) applicable to common
stockholders:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
(0.03
|
)
|
0.10
|
|
(0.06
|
)
|
0.13
|
|
Diluted
|
|
(0.03
|
)
|
0.10
|
|
(0.05
|
)
|
0.13
|
|
9
Table of Contents
Note 2. Acquisition (Continued)
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 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.
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.
|
|
June 30,
|
|
December 31,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
Assets held for sale:
|
|
|
|
|
|
Accounts receivable
|
|
$
|
205
|
|
$
|
81
|
|
Other current assets
|
|
168
|
|
167
|
|
Property, plant and equipment, net
|
|
12,354
|
|
14,833
|
|
Other assets
|
|
928
|
|
932
|
|
Assets held for sale
|
|
13,655
|
|
16,013
|
|
|
|
|
|
|
|
Liabilities related to assets held for
sale:
|
|
|
|
|
|
Accounts payable
|
|
91
|
|
31
|
|
Deferred revenue
|
|
4,365
|
|
4,266
|
|
Liabilities related to assets held for sale
|
|
4,456
|
|
4,297
|
|
Net assets held for sale
|
|
$
|
9,199
|
|
$
|
11,716
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Revenues
|
|
$
|
174
|
|
$
|
79
|
|
$
|
364
|
|
$
|
284
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
34
|
|
180
|
|
326
|
|
530
|
|
Impairment of long-lived assets
|
|
2,507
|
|
|
|
2,507
|
|
|
|
Total expenses
|
|
2,541
|
|
180
|
|
2,833
|
|
530
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(2,367
|
)
|
(101
|
)
|
(2,469
|
)
|
(246
|
)
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(303
|
)
|
(239
|
)
|
(602
|
)
|
(455
|
)
|
Interest income
|
|
5
|
|
26
|
|
11
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss
|
|
(2,665
|
)
|
(314
|
)
|
(3,060
|
)
|
(670
|
)
|
Income tax benefit
|
|
987
|
|
116
|
|
1,095
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(1,678
|
)
|
$
|
(198
|
)
|
$
|
(1,965
|
)
|
$
|
(424
|
)
|
10
Table of Contents
Note 3. Assets Held for Sale (Continued)
In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
,
intangible and other long-lived assets are assessed for recoverability whenever
events or changes in circumstances indicate that their carrying value may not
be recoverable. In 2007, the Company determined that the carrying value of the
assets may not be recoverable through the sales process and, as a result,
recorded impairment charges aggregating $3.4 million to reduce the carrying
value of the long-lived assets to expected realizable value. As negotiations
with prospective buyers have progressed, the Company determined during the
second quarter of 2008 that an additional $2.5 million impairment charge was
necessary to further reduce the carrying value of the long-lived assets to expected
realizable value. Included in the additional charge is $0.6 million ($0.4
million net of tax) pertaining to an error made when the initial writedown was calculated
in the fourth quarter of 2007. We have evaluated the error in accordance with
the guidance provided in SEC Staff Accounting Bulletin No. 99,
Materiality
, and have determined the error is not material
to any period.
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.
Note 4. Long-Term Debt
Long-term debt consists of the following as
of June 30, 2008 and December 31, 2007:
|
|
June 30,
|
|
December 31,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
98,000
|
|
$
|
51,000
|
|
|
|
|
|
|
|
6.85% convertible subordinated debentures
due 2021
|
|
12,034
|
|
12,053
|
|
|
|
|
|
|
|
$30 million capital lease facility
|
|
4,168
|
|
4,582
|
|
|
|
|
|
|
|
Term Loans:
|
|
|
|
|
|
Monarch Utilities, Inc.:
|
|
|
|
|
|
7.37% fixed rate term loan due 2022
|
|
10,652
|
|
11,037
|
|
5.77% fixed rate term loan due 2022
|
|
732
|
|
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
|
|
134
|
|
176
|
|
Total long-term debt payment obligations
|
|
192,645
|
|
146,532
|
|
Unamortized Monarch term loan fair value
adjustments
|
|
696
|
|
758
|
|
Total long-term debt
|
|
193,341
|
|
147,290
|
|
Less current portion of long-term debt
|
|
(1,927
|
)
|
(1,937
|
)
|
Long-term debt, less current portion
|
|
$
|
191,414
|
|
$
|
145,353
|
|
11
Table of Contents
Note 4. Long-Term Debt (Continued)
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. The prior
agreement was terminated upon repayment at which time $0.3 million of
unamortized deferred financing costs 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 3.34% as of June 30,
2008 and 5.74% as of December 31, 2007.
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 June 30, 2008, reducing available
borrowings under the credit facility to $50.0 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 ABCWUA), whereby the ABCWUA 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 ABCWUA 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 ABCWUA 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 ABCWUA 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 ABCWUA, or ruled on the ownership of the return
flow credits.
In September 2007, NMUI received a $0.7
million retroactive billing adjustment from the ABCWUA 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.
12
Table of Contents
Note 5. Commitments and Contingencies (Continued)
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 $6.8 million as of June 30,
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 (the NMPRC) has issued an
opinion that NMUI 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 NMPRC ruled that
the Company may commence billing its customers for a portion of the sewer fee
increase and hold the collected amounts in escrow, pending a final court
decision. 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 ABCWUA 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.
New Mexico Utilities, Inc.Condemnation
Proceedings
In addition, on January 19, 2007, the
ABCWUA 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 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 June 30, 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.
13
Table of Contents
Note 5. Commitments and Contingencies (Continued)
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 undertook its own internal review
and audit of the allegations made by the Board and met with the Board during
the second quarter of 2008 to discuss its findings from that audit as well as
the corrective compliance actions already taken by the Company prior to
receiving the January 28, 2008 letter. The Board has indicated that it
would be willing to consider settling the matter based on obtaining certain
evidence indicating agreed upon improvements in the Companys compliance
efforts in California have been made.
While, at this time, the Company believes
that many of the summary allegations cannot be substantiated, or are subject to
significant mitigation, and has indicted as much to the Board in a presentation
in July, the Company is working cooperatively with the Board in an effort to
favorably resolve this issue. The Company 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.
Settlement Agreement Liability
In 2006, the Company negotiated a settlement
agreement with the municipality of Rio Vista 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 was capped at $0.7 million under the agreement provided that total
fines and penalties levied do not exceed a specified amount. The Regional Water
Quality Control Board had levied fines and penalties exceeding the amount
contemplated by the settlement agreement. The Company believed there were
convincing arguments for negotiating a reduction in the amounts levied but it
elected to accrue the $0.7 million maximum amount contemplated by the
settlement agreement.
In July 2008, the Company, the
municipality and the Regional Water Quality Control Board reached a final
settlement in this matter resulting in no fines or penalties being levied
against the municipality or the Company. As a result, the $0.7 million accrual
was reversed into income as of June 30, 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.
14
Table of Contents
Note 5. Commitments and Contingencies (Continued)
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 June 30, 2008, the minimum annual
purchase commitment is $0.5 million through 2024.
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
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
NumeratorsNet income applicable to common
stockholders:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
891
|
|
$
|
2,421
|
|
$
|
577
|
|
$
|
3,261
|
|
Less preferred stock dividends
|
|
(6
|
)
|
(6
|
)
|
(12
|
)
|
(12
|
)
|
Income from continuing operations
applicable to common stockholders
|
|
885
|
|
2,415
|
|
565
|
|
3,249
|
|
Loss from discontinued operations
|
|
(1,678
|
)
|
(198
|
)
|
(1,965
|
)
|
(424
|
)
|
Net income (loss) applicable to common
stockholders
|
|
$
|
(793
|
)
|
$
|
2,217
|
|
$
|
(1,400
|
)
|
$
|
2,825
|
|
|
|
|
|
|
|
|
|
|
|
DenominatorsWeighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
outstanding
|
|
24,507
|
|
24,100
|
|
24,444
|
|
23,992
|
|
Plus shares issued on assumed exercise of stock
options and warrants
|
|
204
|
|
286
|
|
222
|
|
309
|
|
Diluted weighted average common shares
outstanding
|
|
24,711
|
|
24,386
|
|
24,666
|
|
24,301
|
|
15
Table of Contents
Note 6. Earnings Per Share (Continued)
As described in Note 4, the Company has $12.0
million of 6.85% fixed-rate convertible subordinate debentures outstanding as
of June 30, 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 June 30, 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. Comprehensive Income (Loss)
Comprehensive income (loss) includes changes
in equity that are excluded from net income (loss) as follows:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net income (loss)
|
|
$
|
(787
|
)
|
$
|
2,223
|
|
$
|
(1,388
|
)
|
$
|
2,837
|
|
Amortization of actuarial net gain on
retirement plan, net of tax
|
|
(3
|
)
|
2
|
|
(6
|
)
|
4
|
|
Comprehensive income (loss)
|
|
$
|
(790
|
)
|
$
|
2,225
|
|
$
|
(1,394
|
)
|
$
|
2,841
|
|
Note 8. Consolidated Statements of Cash Flows
The following information supplements the
Companys consolidated statements of cash flows.
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
3,940
|
|
$
|
4,179
|
|
Income taxes paid (refunded), net
|
|
1,937
|
|
(725
|
)
|
Components of cash paid for acquisitions:
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
23,330
|
|
$
|
7,386
|
|
Liabilities assumed
|
|
|
|
(839
|
)
|
Cash paid for acquisitions
|
|
$
|
23,330
|
|
$
|
6,547
|
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
Non-cash contributions in aid of
construction and advances for construction conveyed to Company by developers
|
|
$
|
|
|
$
|
3,153
|
|
Debentures converted into common stock
|
|
14
|
|
373
|
|
Note 9. 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 June 30, 2008. As of
June 30, 2008, there are 3.7 million shares authorized for issuance under
the plan of which 0.8 million shares remain available for issuance.
16
Table of Contents
Note 10. 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 participant remaining in
the SERP. That individual has reached retirement age and the plan provides that
no additional benefits accrue upon reaching retirement age. The plan
measurement date is December 31
st
of each year. The following
table details the components of the net periodic benefit costs:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Interest cost
|
|
15
|
|
16
|
|
30
|
|
32
|
|
Amortization of actuarial (gains) losses
|
|
(5
|
)
|
(19
|
)
|
(10
|
)
|
(38
|
)
|
Amortization of prior service costs
|
|
|
|
22
|
|
|
|
44
|
|
Net periodic benefit costs
|
|
$
|
10
|
|
$
|
19
|
|
$
|
20
|
|
$
|
38
|
|
Note 11. 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.
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 and six months ended June 30, 2008
and 2007.
17
Table of Contents
Note 11. Segment Information (Continued)
|
|
Utility
|
|
Services
|
|
|
|
|
|
|
|
(In thousands)
|
|
Group
|
|
Group (1
)
|
|
Corporate (2
)
|
|
Eliminations (3
)
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated customers
|
|
$
|
27,484
|
|
$
|
28,884
|
|
$
|
|
|
$
|
|
|
$
|
56,368
|
|
Intersegment (1) (3)
|
|
|
|
6,362
|
|
|
|
(5,664
|
)
|
698
|
|
Total revenues
|
|
27,484
|
|
35,246
|
|
|
|
(5,664
|
)
|
57,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Operating expensesunaffiliated customers
|
|
15,746
|
|
28,833
|
|
|
|
|
|
44,579
|
|
Operating expensesintersegment (3)
|
|
|
|
5,664
|
|
|
|
(5,664
|
)
|
|
|
Selling, general and administrative
|
|
2,537
|
|
1,672
|
|
4,904
|
|
|
|
9,113
|
|
Total expenses
|
|
18,283
|
|
36,169
|
|
4,904
|
|
(5,664
|
)
|
53,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
9,201
|
|
(923
|
)
|
(4,904
|
)
|
|
|
3,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(1,599
|
)
|
(79
|
)
|
(364
|
)
|
|
|
(2,042
|
)
|
Interest income
|
|
83
|
|
41
|
|
4
|
|
|
|
128
|
|
Other income (expense)
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Income (loss) from continuing operations before
income taxes
|
|
$
|
7,689
|
|
$
|
(961
|
)
|
$
|
(5,264
|
)
|
$
|
|
|
$
|
1,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated customers
|
|
$
|
23,554
|
|
$
|
30,456
|
|
$
|
|
|
$
|
|
|
$
|
54,010
|
|
Intersegment (1) (3)
|
|
|
|
7,047
|
|
|
|
(6,161
|
)
|
886
|
|
Total revenues
|
|
23,554
|
|
37,503
|
|
|
|
(6,161
|
)
|
54,896
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Operating expensesunaffiliated customers
|
|
13,207
|
|
26,730
|
|
|
|
|
|
39,937
|
|
Operating expensesintersegment (3)
|
|
|
|
6,161
|
|
|
|
(6,161
|
)
|
|
|
Selling, general and administrative
|
|
1,928
|
|
3,553
|
|
3,830
|
|
|
|
9,311
|
|
Total expenses
|
|
15,135
|
|
36,444
|
|
3,830
|
|
(6,161
|
)
|
49,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
8,419
|
|
1,059
|
|
(3,830
|
)
|
|
|
5,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(1,356
|
)
|
(265
|
)
|
(264
|
)
|
|
|
(1,885
|
)
|
Interest income
|
|
6
|
|
36
|
|
8
|
|
|
|
50
|
|
Other income (expense)
|
|
(39
|
)
|
|
|
27
|
|
|
|
(12
|
)
|
Income (loss) from continuing operations before
income taxes
|
|
$
|
7,030
|
|
$
|
830
|
|
$
|
(4,059
|
)
|
$
|
|
|
$
|
3,801
|
|
See accompanying notes to the segment
information following these tables.
18
Table of Contents
|
|
Utility
|
|
Services
|
|
|
|
|
|
|
|
(In thousands)
|
|
Group
|
|
Group (1
)
|
|
Corporate (2
)
|
|
Eliminations (3
)
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated customers
|
|
$
|
49,825
|
|
$
|
56,183
|
|
$
|
|
|
$
|
|
|
$
|
106,008
|
|
Intersegment (1) (3)
|
|
|
|
12,701
|
|
|
|
(10,880
|
)
|
1,821
|
|
Total revenues
|
|
49,825
|
|
68,884
|
|
|
|
(10,880
|
)
|
107,829
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Operating expensesunaffiliated customers
|
|
29,187
|
|
54,743
|
|
|
|
|
|
83,930
|
|
Operating expensesintersegment (3)
|
|
|
|
10,880
|
|
|
|
(10,880
|
)
|
|
|
Selling, general and administrative
|
|
5,058
|
|
3,324
|
|
10,336
|
|
|
|
18,718
|
|
Total expenses
|
|
34,245
|
|
68,947
|
|
10,336
|
|
(10,880
|
)
|
102,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
15,580
|
|
(63
|
)
|
(10,336
|
)
|
|
|
5,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(3,315
|
)
|
(30
|
)
|
(1,058
|
)
|
|
|
(4,403
|
)
|
Interest income
|
|
181
|
|
63
|
|
6
|
|
|
|
250
|
|
Other income (expense)
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Income (loss) from continuing operations before
income taxes
|
|
$
|
12,450
|
|
$
|
(30
|
)
|
$
|
(11,388
|
)
|
$
|
|
|
$
|
1,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated customers
|
|
$
|
43,588
|
|
$
|
56,772
|
|
$
|
|
|
$
|
|
|
$
|
100,360
|
|
Intersegment (1) (3)
|
|
|
|
14,267
|
|
|
|
(11,862
|
)
|
2,405
|
|
Total revenues
|
|
43,588
|
|
71,039
|
|
|
|
(11,862
|
)
|
102,765
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Operating expensesunaffiliated customers
|
|
25,016
|
|
51,172
|
|
|
|
|
|
76,188
|
|
Operating expensesintersegment (3)
|
|
|
|
11,862
|
|
|
|
(11,862
|
)
|
|
|
Selling, general and administrative
|
|
4,389
|
|
6,245
|
|
7,207
|
|
|
|
17,841
|
|
Total expenses
|
|
29,405
|
|
69,279
|
|
7,207
|
|
(11,862
|
)
|
94,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
14,183
|
|
1,760
|
|
(7,207
|
)
|
|
|
8,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(2,634
|
)
|
(615
|
)
|
(490
|
)
|
|
|
(3,739
|
)
|
Interest income
|
|
10
|
|
146
|
|
29
|
|
|
|
185
|
|
Other income (expense)
|
|
(103
|
)
|
|
|
42
|
|
|
|
(61
|
)
|
Income (loss) from continuing operations before
income taxes
|
|
$
|
11,456
|
|
$
|
1,291
|
|
$
|
(7,626
|
)
|
$
|
|
|
$
|
5,121
|
|
See accompanying notes to the segment
information following these tables.
19
Table of Contents
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
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(In
thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Services Group revenues:
|
|
|
|
|
|
|
|
|
|
From unaffiliated customers
|
|
$
|
28,884
|
|
$
|
30,456
|
|
$
|
56,183
|
|
$
|
56,772
|
|
Intersegment profits
|
|
698
|
|
886
|
|
1,821
|
|
2,405
|
|
Total revenues
|
|
$
|
29,582
|
|
$
|
31,342
|
|
$
|
58,004
|
|
$
|
59,177
|
|
(2)
Consists of costs that include headquarters
expenses and any corporate functional departments whose costs are not allocated
to the 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.
20
Table
of Contents
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, Mississippi, New Mexico, Oklahoma
and Texas. 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
21
Table of Contents
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. In 2008, we eliminated the capital project
work management services offered by our Service Division in Texas. Capital
project management is a critical component of our Texas utility strategy and
therefore will be managed directly by the Utility Group going forward. We are also currently considering making this
change in Alabama, Mississippi and New Mexico.
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 contracts 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
Texas-based water utilities near San Antonio 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
22
Table of Contents
operation in our consolidated financial statements
and the discussion below reflects only continuing operations for all periods.
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, we
believe that if the Court were to determine the fair market value of NMUI, it
would exceed its recorded net book value as of June 30, 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 have
experienced 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. 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.
23
Table of Contents
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 June 30, 2008 Compared to 2007
Revenues.
Revenues
increased $2.2 million, or 4.0%, to $57.1 million for the quarter ended June 30,
2008 from $54.9 million for the same period during the prior year. By segment,
revenues changed as follows:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
Increase
|
|
Percent of Revenues
|
|
(In thousands, except
percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Group
|
|
$
|
27,484
|
|
$
|
23,554
|
|
$
|
3,930
|
|
48.2
|
%
|
42.9
|
%
|
Services Group
|
|
29,582
|
|
31,342
|
|
(1,760
|
)
|
51.8
|
%
|
57.1
|
%
|
Total
|
|
$
|
57,066
|
|
$
|
54,896
|
|
$
|
2,170
|
|
100.0
|
%
|
100.0
|
%
|
Utility
Group.
Revenues increased $3.9 million, or 16.7%,
to $27.5 million for the quarter ended June 30, 2008, from $23.6 million
for the same period during the prior year. The increase was primarily due to
the following:
·
a
$2.0 million increase at our Texas
utilities primarily resulting from a fourth quarter 2007 interim rate increase
at our Monarch utility;
·
a
$1.5 million increase at our Alabama utilities primarily resulting from the
acquisition of a wastewater treatment plant in the Birmingham, Alabama area at
the end of January 2008;
·
a
$0.4 million increase resulting from utility acquisitions near San Antonio,
Texas and in northern Alabama; and
·
a
$0.4 million increase in rates associated with our California utility step
increase put in place in July 2007; offset by
·
$0.4
million in lower revenues due to decreased consumption at our California
utility from the prior year.
Services
Group.
Revenues decreased $1.8 million, or 5.6%,
to $29.6 million for the quarter ended June 30, 2008 from $31.3 million
for the same period during the prior year. The decrease in revenues was
primarily due to the following:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
Increase
|
|
Percent of Revenues
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated customers
|
|
$
|
28,884
|
|
$
|
30,456
|
|
$
|
(1,572
|
)
|
81.9
|
%
|
81.2
|
%
|
Intersegment revenues
|
|
6,362
|
|
7,047
|
|
(685
|
)
|
18.1
|
%
|
18.8
|
%
|
Total revenues
|
|
35,246
|
|
37,503
|
|
(2,257
|
)
|
100.0
|
%
|
100.0
|
%
|
Intersegment cost eliminations
|
|
(5,664
|
)
|
(6,161
|
)
|
497
|
|
|
|
|
|
Total
|
|
$
|
29,582
|
|
$
|
31,342
|
|
$
|
(1,760
|
)
|
|
|
|
|
24
Table of Contents
Revenues from unaffiliated customers
decreased $1.6 million, or 5.2%, to $28.9 million for the quarter ended June 30,
2008 from $30.5 million for the same period during the prior year. The decrease
in revenues was primarily due to the following:
·
a
$2.1 million decrease primarily related to lost contracts in our Texas MUD
business due to increased competition in addition to a decrease in revenues
associated with the slowdown in new housing construction; and
·
a
$0.9 million decrease in revenue related to the shutdown of our electrical
contracting department in Colorado in December 2007; offset by
·
a
$1.4 million increase in our California operations primarily as a result of
increased billable project work related to repairs and maintenance.
Intersegment revenues from our Utility Group
decreased by $0.7 million, or 9.7%, to $6.4 million for the quarter ended June 30,
2008 from $7.0 million for the same period during the prior year. The decrease
in revenues was primarily due to the following:
·
a
$2.1 million decrease in revenue related to capital project work performed on
behalf of our utilities in New Mexico and Texas. This capital project revenue
decrease is related to our decision to have capital project work directly
managed by the Utility Group as previously described in the Services Group
Overview; offset by
·
a
$0.9 million increase attributable to new revenue related to operations,
maintenance and capital project work performed for our Riverview wastewater
treatment plant in Birmingham, Alabama that we acquired in January 2008;
·
a
$0.1 million increase in revenue related to operations, maintenance and capital
project work performed on behalf of our other utilities in Alabama; and
·
a
$0.4 million increase in revenue related to repairs and maintenance services
provided to our Texas Utilities.
Direct Operating
Expenses.
Direct operating expenses increased $4.6
million, or 11.6%, to $44.6 million for the quarter ended June 30, 2008
from $39.9 million for the same period during the prior year as follows:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
Increase
|
|
Percent of Revenues (1)
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Group
|
|
$
|
15,746
|
|
$
|
13,207
|
|
$
|
2,539
|
|
57.3
|
%
|
56.1
|
%
|
Services Group
|
|
28,833
|
|
26,730
|
|
2,103
|
|
97.5
|
%
|
85.3
|
%
|
Total
|
|
$
|
44,579
|
|
$
|
39,937
|
|
$
|
4,642
|
|
78.1
|
%
|
72.8
|
%
|
(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 $2.5
million, or 19.2%, to $15.7 million for the quarter ended June 30, 2008,
from $13.2 million for the same period during the prior year. The increase in
direct operating expenses was primarily due to the following:
·
a
$1.1 million increase at our Alabama utilities primarily resulting from the
acquisition of a wastewater treatment plant in the Birmingham, Alabama area at
the end of January, 2008;
·
a
$0.6 million increase in costs at our California utility principally resulting
from an increase in production costs associated with higher amounts of
purchased water in addition to higher salaries associated with filling vacant
positions and annual wage increases;
·
a
$0.6 million increase at our Texas utilities primarily in depreciation expense,
higher contract operation fees associated with repair and maintenance work and
increased water production costs; and
25
Table of Contents
·
a
$0.2 million increase in expenses resulting from our acquisition near San
Antonio, Texas and in northern Alabama.
Services
Group.
Direct operating expenses increased $2.1
million, or 7.9%, to $28.8 million for the quarter ended June 30, 2008
from $26.7 million for the same period during the prior year. The increase in
direct operating expenses was primarily due to the following:
·
a
$2.1 million increase related to the change in methodology of capturing direct
operating versus selling, general and administrative expenses;
·
a
$1.2 million increase in our California operations associated with increased
billable project work related to repairs and maintenance activities; and
·
a
$1.2 million increase related to legal and other expenses associated with the
investigation by the California State Water Resources Board also described in
Note 5 to the condensed consolidated financial statements; offset by
·
a
$1.0 million decrease primarily related to lost contracts in our Texas MUD
business in addition to a decrease in costs associated with the slowdown in new
housing construction;
·
a
$0.7 million decrease in costs related to the reversal of an accrual for fines
and penalties for various compliance violations as a result of the favorable
settlement of the matter as described in Note 5 to the condensed consolidated
financial statements included in Part I of this report; and
·
a
$0.7 million decrease in costs related to the shutdown of our electrical
contracting department in Colorado in December 2007.
Direct operating expenses as a percentage of
the related revenues increased 12.2% to 97.5% for the quarter ended June 30,
2008 compared to 85.3% for the same period during the prior year. Without the
effect of the reclassification of the SG&A, direct operating costs would
have been 90.4% of revenues for 2008.
Gross Profit.
Gross
profit, which we define as the difference between revenues and the related
direct operating expenses, which includes depreciation and amortization related
to direct operating activities, decreased $2.5 million, or 16.5%, to $12.5
million for the quarter ended June 30, 2008 from $15.0 million for the
same period during the prior year as follows:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
Increase
|
|
Percent of Revenues (1)
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Group
|
|
$
|
11,738
|
|
$
|
10,347
|
|
$
|
1,391
|
|
42.7
|
%
|
43.9
|
%
|
Services Group
|
|
749
|
|
4,612
|
|
(3,863
|
)
|
2.5
|
%
|
14.7
|
%
|
Total
|
|
$
|
12,487
|
|
$
|
14,959
|
|
$
|
(2,472
|
)
|
21.9
|
%
|
27.2
|
%
|
(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 42.7% and 43.9% of related
revenues for the quarter ended June 30, 2008 and 2007, respectively. The
decrease was caused by the higher direct operating expenses described above.
Services
Group.
Gross profit for the quarter ended June 30,
2008 and 2007 was comprised of the following:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
Increase
|
|
Percent of Revenues (1)
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on sales to:
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated customers
|
|
$
|
51
|
|
$
|
3,726
|
|
$
|
(3,675
|
)
|
0.2
|
%
|
12.2
|
%
|
Affiliated customers (intersegment)
|
|
698
|
|
886
|
|
(188
|
)
|
11.0
|
%
|
12.6
|
%
|
Total
|
|
$
|
749
|
|
$
|
4,612
|
|
$
|
(3,863
|
)
|
2.1
|
%
|
12.3
|
%
|
(1)
Gross profit is computed as a percent of the
respective revenues before intersegment eliminations.
26
Table of Contents
Services Group gross profit on revenues from
unaffiliated customers decreased by $3.7 million, or 98.6%, to $0.1 million for
the quarter ended June 30, 2008 from $3.7 million for the same period
during the prior year. Gross profit as a percent of revenues for 2008 decreased
to 0.2% compared to 12.2% for the same period for the prior year. The decrease in gross margin was primarily
due to the following:
·
a
$1.1 million decrease in margin related to lost contracts and the shutdown of
the electrical department in Colorado, net of increased margin from our
California operations;
·
a
$0.5 million net decrease in margin resulting from increased legal fees and
liability accruals related to various compliance matters, offset by the
favorable resolution other compliance matters; and
·
a
$2.1 million increase in direct operating expenses related to our change in
methodology of capturing direct operating versus selling, general and
administrative expenses.
Services Group gross profit on revenues from
our Utility Group decreased by $0.2 million, or 21.2% to $0.7 million for the
quarter ended June 30, 2008 from $0.9 million for the same period during
the prior year. The decrease is related to a the elimination of capital project
work performed on behalf of our Texas utilities offset by increased operations,
maintenance and capital project work performed on behalf of our Alabama utilities.
The Services Group supports three distinctly
different customer bases; Texas Municipal Utility Districts or MUDs, municipal
clients through operations and maintenance contracts, and our 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.
Selling,
General and Administrative Expenses.
Selling,
general and administrative expenses decreased $0.2 million, or 2.1%, to
$9.1 million for the quarter ended June 30, 2008 compared to $9.3 million
for the same period during the prior year as follows:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
Increase
|
|
Percent of Revenues (1)
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Group
|
|
$
|
2,537
|
|
$
|
1,928
|
|
$
|
609
|
|
9.2
|
%
|
8.2
|
%
|
Services Group
|
|
1,672
|
|
3,553
|
|
(1,881
|
)
|
5.7
|
%
|
11.3
|
%
|
Corporate
|
|
4,904
|
|
3,830
|
|
1,074
|
|
|
|
|
|
Total
|
|
$
|
9,113
|
|
$
|
9,311
|
|
$
|
(198
|
)
|
16.0
|
%
|
17.0
|
%
|
(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.
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 Direct
Operating expenses. Corporate SG&A
expenses were not significantly affected by this re-evaluation.
Utility Group expenses increased by $0.6
million for the period ended June 30, 2008 compared to the prior year
primarily due to an increase in information technology expenses associated with
supporting the new infrastructure of our Cornerstone project (described below),
which will assist in enhancing customer service.
Service Group expenses decreased by $1.9
million for the period ended June 30, 2008 compared to the prior year
primarily related to the following:
·
a
$0.2 million increase in costs related to our safety/compliance efforts; offset
by
·
a
$2.1 million decrease in selling, general and administrative expenses related
to managements change in methodology of capturing direct operating versus
selling, general and administrative expense.
27
Table of Contents
Corporate expenses increased $1.1 million to
$4.9 million for the period ended June 30, 2008 compared to $3.8 million
for the same period during the prior year. Our Cornerstone project, which
commenced during the second quarter of 2007 accounts for $0.9 million of the
increase.
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 subsidiaries.
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 $0.1 million, or
3.4%, to $1.9 million for the quarter ended June 30, 2008, compared to
$1.8 million for the same period during the prior year as follows:
|
|
|
|
|
|
(Increase)
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
Decrease
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(2,042
|
)
|
$
|
(1,885
|
)
|
$
|
(157
|
)
|
Interest income
|
|
128
|
|
50
|
|
78
|
|
Other, net
|
|
4
|
|
(12
|
)
|
16
|
|
Total
|
|
$
|
(1,910
|
)
|
$
|
(1,847
|
)
|
$
|
(63
|
)
|
Interest
Expense.
Interest expense increased by $0.2
million, or 8.3%, to $2.0 million for the quarter ended June 30, 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
|
|
$
|
1,212
|
|
$
|
1,193
|
|
$
|
19
|
|
Revolving lines of credit
|
|
911
|
|
789
|
|
122
|
|
Convertible subordinated debentures
|
|
206
|
|
214
|
|
(8
|
)
|
Other indebtedness and deferred financing
cost amortization
|
|
161
|
|
151
|
|
10
|
|
Total interest incurred on indebtedness
|
|
2,490
|
|
2,347
|
|
143
|
|
Less capitalized interest
|
|
(145
|
)
|
(223
|
)
|
78
|
|
Less interest related to discontinued
operations
|
|
(303
|
)
|
(239
|
)
|
(64
|
)
|
Total interest expense
|
|
$
|
2,042
|
|
$
|
1,885
|
|
$
|
157
|
|
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. This was offset by a lower average
interest rate on our line of credit. The average balance of interest-bearing
debt outstanding increased to $188.6 million during the quarter ended June 30,
2008 compared to $141.2 million for the prior year.
The weighted average annual interest rate on
total borrowings was approximately 5.3% for the quarter ended June 30,
2008 and 6.6% for the same period in the prior year.
Interest
Income.
Interest income was constant at $0.1
million for the quarters ended June 30, 2008 and 2007.
Provision for Income
Taxes.
Our effective consolidated income tax rate on
combined continuing and discontinued operations was 34% for the quarter ended June 30,
2008 compared to 36% for 2007. The change is principally caused by the
interaction between the newly enacted Texas franchise tax, which does not
change proportionally with
28
Table of Contents
changes in pre-tax income or loss, and
federal and state income taxes that do change proportionally with to pre-tax
income or losses.
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 $1.7 million
for the quarter ended June 30, 2008, compared to $0.2 million for the same
period in 2007. Included in the net loss is a $2.5 million charge ($1.6 million
net of tax) to further reduce the carrying value of the assets to expected net
realizable value based on the current status of negotiations with prospective
buyers.
Six months
ended June 30, 2008 Compared to 2007
Revenues.
Revenues
increased $5.1 million, or 4.9%, to $107.8 million for the six months ended June 30,
2008 from $102.8 million for the same period during the prior year. By segment,
revenues changed as follows:
|
|
Six months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
Increase
|
|
Percent of Revenues
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Group
|
|
$
|
49,825
|
|
$
|
43,588
|
|
$
|
6,237
|
|
46.2
|
%
|
42.4
|
%
|
Services Group
|
|
58,004
|
|
59,177
|
|
(1,173
|
)
|
53.8
|
%
|
57.6
|
%
|
Total
|
|
$
|
107,829
|
|
$
|
102,765
|
|
$
|
5,064
|
|
100.0
|
%
|
100.0
|
%
|
Utility
Group.
Revenues increased $6.2 million, or 14.3%,
to $49.8 million for the six months ended June 30, 2008, from $43.6
million for the same period during the prior year. The increase was primarily
due to the following:
·
a
$3.9 million increase at our Texas utilities primarily resulting from a fourth
quarter 2007 interim rate increase at our Monarch utilities;
·
a
$2.5 million increase at our Alabama utilities primarily resulting from the
acquisition of a wastewater treatment plant in the Birmingham, Alabama area at
the end of January, 2008;
·
a
$0.7 million increase resulting from utility acquisitions near San Antonio,
Texas and in northern Alabama in 2007; and
·
a
$0.5 million increase in rates associated with our California utility step
increase put in place in July, 2007; offset by
·
a
$1.4 million decrease at our California utility related to lower consumption
compared to the prior year.
Services
Group.
Revenues decreased $1.2 million, or 2.0%,
to $58.0 million for the six months ended June 30, 2008 from $59.2 million
for the same period during the prior year. The decrease in revenues was
primarily due to the following:
|
|
Six months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
Increase
|
|
Percent of Revenues
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated customers
|
|
$
|
56,183
|
|
$
|
56,772
|
|
$
|
(589
|
)
|
81.6
|
%
|
79.9
|
%
|
Intersegment revenues
|
|
12,701
|
|
14,267
|
|
(1,566
|
)
|
18.4
|
%
|
20.1
|
%
|
Total revenues
|
|
68,884
|
|
71,039
|
|
(2,155
|
)
|
100.0
|
%
|
100.0
|
%
|
Intersegment cost eliminations
|
|
(10,880
|
)
|
(11,862
|
)
|
982
|
|
|
|
|
|
Total
|
|
$
|
58,004
|
|
$
|
59,177
|
|
$
|
(1,173
|
)
|
|
|
|
|
Revenues from unaffiliated customers
decreased $0.6 million, or 1.0%, to $56.2 million for the six months ended June 30,
2008 from $56.8 million for the same period during the prior year. The decrease
in revenues was primarily due to the following:
·
a
$1.8 million decrease primarily related to lost contracts due to competition in
our Texas MUD business in addition to a decrease in revenues associated with
the slowdown in new housing construction, offset by a year to date increase in
billable project revenue related to repairs and maintenance; and
29
Table of Contents
·
a
$0.7 million decrease in revenue related to the shutdown of our electrical
contracting department in Colorado in December 2007; offset by
·
a
$1.9 million increase in our California operations primarily as a result of
increased billable project work related to repairs and maintenance.
Intersegment revenues from our Utility Group
decreased by $1.6 million, or 11.0%, to $12.7 million for the six months ended June 30,
2008 from $14.3 million for the same period during the prior year. The decrease
in revenues was primarily due to the following:
·
a
$5.0 million decrease in revenue related to capital project work performed on
behalf of our utilities in New Mexico and Texas. This capital project revenue
decrease is related to our decision to have capital project work directly
managed by the Utility Group as previously discussed in the Services Group
Overview; offset by
·
a
$1.7 million increase attributable to new revenue related to operations,
maintenance and capital project work performed for our Riverview wastewater
treatment plant in Birmingham, Alabama that we acquired in January 2008;
·
a
$0.8 million increase in revenue related to operations, maintenance and capital
project work performed on behalf of our other utilities in Alabama; and
·
a
$0.9 million increase in revenue related to repairs and maintenance services
provided to our Texas Utilities.
Direct Operating
Expenses.
Direct operating expenses increased $7.7
million, or 10.2%, to $83.9 million for the six months ended June 30, 2008
from $76.2 million for the same period during the prior year as follows:
|
|
Six months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
Increase
|
|
Percent of Revenues (1)
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Group
|
|
$
|
29,187
|
|
$
|
25,016
|
|
$
|
4,171
|
|
58.6
|
%
|
57.4
|
%
|
Services Group
|
|
54,743
|
|
51,172
|
|
3,571
|
|
94.4
|
%
|
86.5
|
%
|
Total
|
|
$
|
83,930
|
|
$
|
76,188
|
|
$
|
7,742
|
|
77.8
|
%
|
74.1
|
%
|
(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 $4.2
million, or 16.7%, to $29.2 million for the six months ended June 30,
2008, from $25.0 million for the same period during the prior year. The increase
in direct operating expenses was primarily due to the following:
·
a
$1.9 million increase at our Alabama utilities primarily resulting from the
acquisition of a wastewater treatment plant in the Birmingham, Alabama area at
the end of January, 2008;
·
a
$1.6 million increase in costs at our California utility principally resulting
from an increase in production costs associated with higher amounts of
purchased water in addition to higher salaries associated with filling vacant
positions and annual wage increases;
·
a
$1.5 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
$0.4 million increase in expenses resulting from our utility acquisition near
San Antonio, Texas and in northern Alabama; offset by
·
a
$1.2 million decrease in production costs at our California utility associated
with decreased consumption.
30
Table
of Contents
Services
Group.
Direct operating expenses increased $3.6
million, or 7.0%, to $54.7 million for the six months ended June 30, 2008
from $51.2 million for the same period during the prior year. The increase in
direct operating expenses was due to the following:
·
a
$0.9 million decrease in costs related to the shutdown of our electrical
contracting department in Colorado in December 2007;
·
a
$0.8 million decrease primarily related to lost contracts in our Texas MUD
business in addition to a decrease in costs associated with the slowdown in new
housing construction, offset by increased costs associated with increased
billable revenue for repairs and maintenance; and
·
a
$0.7 million decrease in costs related to the favorable settlement of various
compliance matters described in Note 5 to the condensed consolidated financial
statements; offset by
·
a
$3.1 million increase related to the change in methodology of capturing direct
operating versus selling, general and administrative expenses;
·
a
$1.7 million increase in our California operations associated with increased
billable project work related to repairs and maintenance activities;
·
a
$1.2 million increase related to legal and other expenses associated with the
investigation by the California State Water Resources Board also described in
Note 5.
Direct operating expenses as a percentage of
the related revenues increased 7.9% to 94.4% for the six months ended June 30,
2008 compared to 86.5% for the same period during the prior year. Without the effect of the reclassification of
the SG&A, direct operating costs would have been 89% of revenues for 2008.
Gross Profit.
Gross
profit, which we define as the difference between revenues and the related
direct operating expenses, which includes depreciation and amortization related
to direct operating activities, decreased $2.7 million, or 10.1%, to $23.9
million for the six months ended June 30, 2008 from $26.6 million for the
same period during the prior year as follows:
|
|
Six months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
Increase
|
|
Percent of Revenues (1)
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Group
|
|
$
|
20,638
|
|
$
|
18,572
|
|
$
|
2,066
|
|
41.4
|
%
|
42.6
|
%
|
Services Group
|
|
3,261
|
|
8,005
|
|
(4,744
|
)
|
5.6
|
%
|
13.5
|
%
|
Total
|
|
$
|
23,899
|
|
$
|
26,577
|
|
$
|
(2,678
|
)
|
22.2
|
%
|
25.9
|
%
|
(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 41.4% and 42.6% of related
revenues for the six months ended June 30, 2008 and 2007, respectively.
Services
Group.
Gross profit for the six months ended June 30,
2008 and 2007 was comprised of the following:
|
|
Six months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
Increase
|
|
Percent of Revenues (1)
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on sales to:
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated customers
|
|
$
|
1,440
|
|
$
|
5,600
|
|
$
|
(4,160
|
)
|
2.6
|
%
|
9.9
|
%
|
Affiliated customers (intersegment)
|
|
1,821
|
|
2,405
|
|
(584
|
)
|
14.3
|
%
|
16.9
|
%
|
Total
|
|
$
|
3,261
|
|
$
|
8,005
|
|
$
|
(4,744
|
)
|
4.7
|
%
|
11.3
|
%
|
(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 $4.2 million, or 74.3%, to $1.4 million for
the six months ended June 30, 2008 from $5.6 million for the same period
during the prior year. Gross profit as a percent of revenues for 2008 decreased
to 2.6% compared to 9.9% for the same period for the prior year. The decrease
in gross margin was primarily due to the following:
31
Table of Contents
·
a
$0.6 million decrease in margin related to lost contracts and the shutdown of
the electrical department in Colorado net of increased margin from our
California operations; offset by
·
a
$3.1 million increase in direct operating expenses related to managements
change in methodology of capturing direct operating versus selling, general and
administrative expense; and
·
a
$0.5 million net decrease in margin resulting from increased legal fees and
liability accruals related to various compliance matters, offset by the
favorable resolution other compliance matters.
Services Group gross profit on revenues from
our Utility Group decreased by $0.6 million, or 24.3% to $1.8 million for the
six months ended June 30, 2008 from $2.4 million for the same period
during the prior year. The decrease is related to reduced capital project work
performed on behalf of our Texas utilities offset by increased operations,
maintenance and capital project work performed on behalf of our Alabama
utilities.
The Services Group supports three distinctly
different customer bases; Texas Municipal Utility Districts or MUDs, municipal
clients through operations and maintenance contracts, and our 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 $0.9 million, or 4.9%, to
$18.7 million for the six months ended June 30, 2008 compared to $17.8
million for the same period during the prior year as follows:
|
|
Six months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
Increase
|
|
Percent of Revenues (1)
|
|
(In thousands, except percentages)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Group
|
|
$
|
5,058
|
|
$
|
4,389
|
|
$
|
669
|
|
10.2
|
%
|
10.1
|
%
|
Services Group
|
|
3,324
|
|
6,245
|
|
(2,921
|
)
|
5.7
|
%
|
10.6
|
%
|
Corporate
|
|
10,336
|
|
7,207
|
|
3,129
|
|
|
|
|
|
Total
|
|
$
|
18,718
|
|
$
|
17,841
|
|
$
|
877
|
|
17.4
|
%
|
17.4
|
%
|
(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.
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 direct operating expenses. Corporate SG&A expenses were not
significantly affected by this re-evaluation.
Utility Group expenses increased by $0.7
million for the period ended June 30, 2008 compared to the prior year
primarily due to an increase in information technology expenses associated with
supporting the new infrastructure of the Cornerstone project, (described
below), which will assist in enhancing customer service.
Service Group expenses decreased by $2.9
million for the period ended June 30, 2008 compared to the prior year
primarily related to the following:
·
a
$0.2 million increase in costs related to our safety/compliance efforts; offset
by
·
a
$3.1 million decrease increase in selling, general and administrative expenses
related to managements change in methodology of capturing direct operating
versus selling, general and administrative expenses.
Corporate expenses increased $3.1 million to
$10.3 million for the period ended June 30, 2008 compared to $7.2 million
for the same period in the prior year primarily as a result of $1.8 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 $0.6
million of other temporary increases associated with business process
reengineering projects.
32
Table of Contents
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 subsidiaries.
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
14.8% to $4.1 million for the six months ended June 30, 2008, compared to
$3.6 million for the same period during the prior year as follows:
|
|
|
|
|
|
(Increase)
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
Decrease
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(4,403
|
)
|
$
|
(3,739
|
)
|
$
|
(664
|
)
|
Interest income
|
|
250
|
|
185
|
|
65
|
|
Other, net
|
|
4
|
|
(61
|
)
|
65
|
|
Total
|
|
$
|
(4,149
|
)
|
$
|
(3,615
|
)
|
$
|
(534
|
)
|
Interest
Expense.
Interest expense increased by $0.7
million, or 17.8% to $4.4 million for the six months ended June 30, 2008
from $3.7 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
|
|
$
|
2,429
|
|
$
|
2,383
|
|
$
|
46
|
|
Revolving lines of credit
|
|
1,848
|
|
1,449
|
|
399
|
|
Convertible subordinated debentures
|
|
410
|
|
429
|
|
(19
|
)
|
Other indebtedness and deferred financing
cost amortization
|
|
323
|
|
348
|
|
(25
|
)
|
Total interest incurred on indebtedness
|
|
5,010
|
|
4,609
|
|
401
|
|
Write-off of unamortized financing costs in
connection with refinancing
|
|
268
|
|
|
|
268
|
|
Less capitalized interest
|
|
(273
|
)
|
(415
|
)
|
142
|
|
Less interest related to discontinued
operations
|
|
(602
|
)
|
(455
|
)
|
(147
|
)
|
Total interest expense
|
|
$
|
4,403
|
|
$
|
3,739
|
|
$
|
664
|
|
The increase in our 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
$174.8 million during the six months ended June 30, 2008 compared to
$137.5 million for the prior year.
The weighted average annual interest rate on
total borrowings was approximately 5.7% for the six months ended June 30,
2008 and 6.7% for the same period in the prior year.
Interest
Income.
Interest income increased by $0.1 million,
to $0.3 million, compared to $0.2 million for the six months ended June 30,
2008 and 2007. The increase is cause by higher levels of short-term investments
of excess available cash offset by lower interest rates on such investments.
Provision for Income
Taxes.
Our effective consolidated income tax rate on
combined continuing and discontinued operations was 32% for the six months
ended June 30, 2008 compared to 36% for 2007. The change is principally
caused by the interaction between the newly enacted Texas franchise tax, which
does not change proportionally with
33
Table of Contents
changes in pre-tax income or loss, and
federal and state income taxes that do change proportionally with pre-tax income
or losses.
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 $2.0 million
for the six months ended June 30, 2008, compared to $0.4 million for the
same period during the prior year. Included in the net loss is a $2.5 million
charge ($1.6 million net of tax) to further reduce the carrying value of the
assets to expected net realizable value based on the current status of
negotiations with prospective buyers.
RECENT ACCOUNTING
PRONOUNCEMENTS
See the discussions under the captions Accounting
Pronouncements Adopted During 2008 and Recent Accounting Pronouncements
contained in Note 1 to the condensed consolidated financial statements included
in Part I, Item 1 of this report.
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:
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(5,775
|
)
|
$
|
7,789
|
|
$
|
(13,564
|
)
|
Investing activities
|
|
(39,280
|
)
|
(25,054
|
)
|
(14,226
|
)
|
Financing activities
|
|
45,441
|
|
16,572
|
|
28,869
|
|
Total continuing operations
|
|
386
|
|
(693
|
)
|
1,079
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
Operating activities
|
|
575
|
|
(392
|
)
|
967
|
|
Investing activities
|
|
(28
|
)
|
(317
|
)
|
289
|
|
Total discontinued operations
|
|
547
|
|
(709
|
)
|
1,256
|
|
Increase (decrease) in cash and cash
equivalents
|
|
$
|
933
|
|
$
|
(1,402
|
)
|
$
|
2,335
|
|
Cash Flows From Operating Activities of
Continuing Operations.
Net cash used in operating
activities was $5.8 million for the six months ended June, 2008 versus $7.8
million provided by operating activities for the same period last year.
Operational aspects of our businesses that affected working capital in 2008
versus 2007 are highlighted below:
·
a
$0.8 million increase in receivables resulting from our January 2008
acquisition of a wastewater collection system and treatment plant in the
Birmingham, Alabama area; the seller retained all receivables as of the
acquisition date so the increase relates to the initial, one-time buildup of
receivables as customers pay the seller for the services rendered prior to the
acquisition date;
·
an
increase in receivables because of slower payments by some customers which we
believe may be attributable, in part, to the overall economic downturn; and
34
Table of Contents
·
increased
level of vendor payments in early 2008 for goods and services received during
the fourth quarter of 2007.
Cash Flows From Investing Activities of
Continuing Operations.
Cash used in investing
activities totaled $39.3 million for the six months ended June 30, 2008
compared to $25.1 million for the same period during the prior year as follows:
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by investing
activities:
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash
acquired
|
|
$
|
(23,330
|
)
|
$
|
(6,547
|
)
|
$
|
(16,783
|
)
|
Additions to property, plant and equipment
|
|
(16,129
|
)
|
(18,548
|
)
|
2,419
|
|
Proceeds from sales of equipment
|
|
179
|
|
41
|
|
138
|
|
Net cash used in investing activities
|
|
$
|
(39,280
|
)
|
$
|
(25,054
|
)
|
$
|
(14,226
|
)
|
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.
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Company-financed additions
|
|
$
|
13,912
|
|
$
|
16,364
|
|
Capital improvement reimbursements
|
|
779
|
|
1,628
|
|
Cash contributions received in aid of
construction
|
|
1,438
|
|
556
|
|
Total cash additions to property, plant and
equipment
|
|
16,129
|
|
18,548
|
|
Non-cash contributions in aid of
construction
|
|
|
|
3,153
|
|
Total additions to property, plant and
equipment
|
|
$
|
16,129
|
|
$
|
21,701
|
|
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 $3.6 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
$30.0 million on cash additions, principally within our Utility Group, expect
to receive $0.4 million of CIAC, and expect to finance up to 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 $44.0 million.
Cash Flows From Financing Activities of
Continuing Operations.
During the six months ended June 30,
2008, we financed our growth through a broad range of capital initiatives:
·
borrowed
$47.0 million under our revolving line of credit;
·
received
$2.2 million of capital improvement reimbursements and contributions in aid of
construction; and
·
received
$1.8 million of proceeds from our share-based equity incentive plans and stock
purchase plans.
Revolving lines of credit 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 $50.0
million as of June 30, 2008.
During the six months ended June 30,
2008, we paid dividends totaling $3.0 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
35
Table of Contents
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 of $84.5 million under the
$150.0 million facility.
CONTRACTUAL
OBLIGATIONS
The following table summarizes our known
contractual obligations to make future cash payments as of June 30, 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)
|
|
$
|
98,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
98,000
|
|
Mortgage bonds (3)
|
|
45,000
|
|
|
|
|
|
|
|
45,000
|
|
Bank term loans (4)
|
|
31,384
|
|
411
|
|
1,646
|
|
1,645
|
|
27,682
|
|
Convertible subordinated debentures (5)
|
|
12,034
|
|
|
|
|
|
|
|
12,034
|
|
Capital lease obligations (6)
|
|
4,168
|
|
424
|
|
1,789
|
|
1,955
|
|
|
|
Economic development revenue bonds (7)
|
|
1,925
|
|
115
|
|
245
|
|
280
|
|
1,285
|
|
Notes payable and other (8)
|
|
134
|
|
120
|
|
14
|
|
|
|
|
|
Total long-term debt
|
|
192,645
|
|
1,070
|
|
3,694
|
|
3,880
|
|
184,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of advances for construction (9)
|
|
13,756
|
|
638
|
|
1,366
|
|
864
|
|
10,888
|
|
Water purchase commitment (10)
|
|
7,397
|
|
230
|
|
920
|
|
920
|
|
5,327
|
|
Operating lease obligations
|
|
27,575
|
|
3,393
|
|
9,514
|
|
5,207
|
|
9,461
|
|
Total obligations as of June 30, 2008
(11)
|
|
$
|
241,373
|
|
$
|
5,331
|
|
$
|
15,494
|
|
$
|
10,871
|
|
$
|
209,677
|
|
(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 3.34% as of June 30, 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 6.52% 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 June 30, 2008, we had $29.2 million
of working capital and $3.4 million of operating lease obligations payable
during the remainder of 2008. As of June 30, 2008, we also had $50.0
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
36
Table of Contents
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 $92.6 million of first
mortgage bonds as of June 30, 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 dividend restriction threshold by $51.5 million as of June 30,
2008. We were in compliance with all loan agreement covenants during the six months
ended June 30, 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 ($50.0 million of
which was available as of June 30, 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.
37
Table of Contents
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.
ITEM
3. QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of June 30, 2008, we had $193.3
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 $98.0 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 3.34% as of June 30,
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 $1.0 million per year.
Our fixed-rate debt, which has a carrying
value of $95.3 million, has a fair value of $92.1 million as of June 30, 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 June 30,
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
$5.9 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.
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.
38
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 lose our eligibility to use Form S-3 Registration Statements to
register securities for a period of time which, in turn, will adversely affect
our ability to access capital markets to finance our capital requirements. 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 on the historical cost of the assets acquired because the
prior owners did not retain sufficient historical transactional records to
support the recorded values. We contacted the Securities and Exchange
Commission (SEC) and filed the required Form 8-K with alternate audited
financial information, per our discussions with the SEC, on May 20, 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 on May 20, 2009 (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.
ITEM
4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
The Companys Annual Meeting of Stockholders
was held on May 20, 2008. The total number of shares of the Companys
common and preferred stock issued, outstanding and entitled to vote at the
meeting was 24,480,993 shares of which 20,606,940 were present at the meeting
either in person or by proxy. The following proposals were submitted to
stockholders with the following results:
Proposal 1.
Approval of the Amendment to the Restated
Certificate of Incorporation to eliminate the classified Board of Directors:
·
Votes
For 19,329,464
·
Votes
Against 1,123,914
·
Votes
Abstained 153,557
·
Broker
Non-Votes 5
39
Table of Contents
Proposal 2.
Election of Class I Directors until the
next annual meeting of stockholders:
·
Thomas
Iinovotes For 19,360,018; votes Against 1,186,365: votes Withheld
60,552
·
William
D. Jones votes For 19,351,611; votes Against 1,192,331: votes Withheld
62,993
·
Maureen
A. Kindel votes For 19,334,402; votes Against 1,213,472: votes Withheld
59,061
In addition to the directors elected above,
the following directors term of office continued after the meeting until the
next annual meeting of stockholders:
·
H.
Frederick Christie
·
Linda
Griego
·
Donovan
D. Huennekens
·
Richard
G. Newman
·
Mark
A. Swatek
Proposal 3.
Ratification
of PricewaterhouseCoopers as the Companys independent public accountants:
·
Votes
For 20,281,762
·
Votes
Against 263,800
·
Votes
Abstained 61,378
·
Broker
Non-Votes 0
ITEMS 1A, 2,
3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM
6. EXHIBITS
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
3.1
|
|
Certificate of Amendment to Restated Certificate of Incorporation of
SouthWest Water Company (incorporated by reference to Exhibit 3.1
included in the Companys Form 8 K filed with the Commission on May 22,
2008)
|
|
|
|
3.2.5
|
|
Amendment No. 5 to the Amended and Restated Bylaws of SouthWest
Water Company (incorporated by reference to Exhibit 3.2 included in the
Companys Form 8 K filed with the Commission on May 22, 2008)
|
|
|
|
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
40
Table of Contents
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: August 11, 2008
|
/s/ CHERYL L. CLARY
|
|
Cheryl L. Clary
|
|
Chief Financial Officer
|
41
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