UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No.     )

Filed by the Registrant   x

Filed by a Party other than the Registrant   o

Check the appropriate box:

SOUTHWEST WATER COMPANY

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

o             No fee required.

x             Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1)            Title of each class of securities to which transaction applies:

common stock, $0.01 par value per share, of SouthWest Water Company

(2)            Aggregate number of securities to which transaction applies:

24,935,919 shares of common stock, consisting of 27,526,569 shares of common stock outstanding as of April 22, 2010, less 2,700,000 shares of common stock held by the acquiring person, plus the anticipated issuance of 109,350 shares of common stock pursuant to options granted under the 2006 Equity Incentive Plan, the Second Amended and Restated Stock Option Plan, and the Amended and Restated Stock Option Plan for Non-Employee Directors with exercise prices below $11.00 that are eligible to be cashed out in the merger.

(3)            Per unit price or other underlying value of transaction computed pursuant to the Securities and Exchange Act of 1934, as amended, (the “Exchange Act”) Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

$11.00 per share of common stock.

(4)            Proposed maximum aggregate value of transaction:

$273,264,966, calculated as the sum of (A) the product of the 24,826,569 shares of common stock outstanding as of April 22, 2010 that are not held by the acquiring person multiplied by $11.00 per share and (B) the product of the

options to purchase 109,350 shares of common stock outstanding as of April 22, 2010 with exercise prices below $11.00 multiplied by $1.58 per share (which is the difference between $11.00 and the weighted average exercise price per share).

(5)            Total fee paid:

$19,484, determined based upon multiplying $0.00007130 by the proposed maximum aggregate value of transaction of $273,264,966.

o             Fee paid previously with preliminary materials.

o             Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously.  Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

(1)            Amount Previously Paid:

(2)            Form, Schedule or Registration Statement No.:

(3)            Filing Party:

(4)            Date Filed:

Dear Stockholder:

We cordially invite you to attend the annual meeting of stockholders of SouthWest Water Company (the “Company”), to be held on [___], 2010 at [__   _], Pacific Time, at the [__   _] located at [                               ], Los Angeles, California (the “Annual Meeting”).  Please see the map on page [___] for directions.  Holders of record of the Company’s common stock and Series A preferred stock at the close of business on [___], 2010 will be entitled to vote at the Annual Meeting or any adjournment or postponement of the Annual Meeting.

On March 2, 2010, we entered into an Agreement and Plan of Merger (the “merger agreement”) with SW Merger Acquisition Corp. (“Parent”) and SW Merger Sub Corp. (“Merger Sub”).  Parent and Merger Sub are entities controlled by IIF Subway Investment LP and Water Asset Management, LLC.  At the Annual Meeting, we will ask you to adopt the merger agreement.  If the merger contemplated by the merger agreement (the “merger”) is completed, the Company will become a wholly-owned subsidiary of Parent and you will be entitled to receive $11.00 in cash, without interest and less any applicable withholding taxes, for each share of common stock that you own.  We cannot complete the merger unless all of the conditions to closing are satisfied, including the adoption of the merger agreement by the affirmative vote of a majority of the combined voting power of the outstanding common stock and Series A preferred stock as of [        ], 2010, voting together as a single class.

A special committee of our board of directors, composed entirely of independent directors, reviewed and considered the terms and conditions of the merger.  This special committee unanimously determined that the merger, the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests of the Company and our stockholders, and recommended that our board of directors approve the merger agreement and resolve to recommend that our stockholders adopt the merger agreement.  Our board of directors thereafter unanimously determined that the merger, the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests of the Company and our stockholders, approved the merger agreement and recommended that our stockholders adopt the merger agreement.

At the Annual Meeting, we will also ask you to vote on the election of directors and the ratification of the selection of our independent public accountants. We are also asking you to expressly grant the authority to vote your shares to adjourn the Annual Meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the Annual Meeting to adopt the merger agreement.

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE:

·       “FOR” THE ADOPTION OF THE MERGER AGREEMENT;

·       “FOR” THE ELECTION OF THE BOARD OF DIRECTOR NOMINEES;

·       “FOR” THE RATIFICATION OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY’S INDEPENDENT PUBLIC ACCOUNTANTS FOR THE YEAR ENDING DECEMBER 31, 2010; AND

·       IF NECESSARY, TO ADJOURN THE ANNUAL MEETING FOR THE PURPOSE OF SOLICITING ADDITIONAL PROXIES TO VOTE IN FAVOR OF ADOPTING THE MERGER AGREEMENT.

YOUR VOTE IS IMPORTANT

In the materials accompanying this letter, you will find a Notice of Annual Meeting of Stockholders, the 2010 Annual Report, a Proxy Statement relating to the actions to be taken by our stockholders at the Annual Meeting and a proxy card.  The Proxy Statement includes important information about the merger agreement and the merger and the other matters to be considered at the Annual Meeting.  We encourage you to read the entire Proxy Statement, including its annexes, carefully.

All of our stockholders are cordially invited to attend the Annual Meeting in person.  Whether or not you plan to attend the Annual Meeting, please complete, sign, date and return your proxy card in the enclosed envelope or appoint a proxy over the Internet or by telephone as instructed in these materials.  It is important that your shares be represented and voted at the Annual Meeting.  If you attend the Annual Meeting, you may vote in person as you wish, even though you have previously returned your proxy card or appointed a proxy over the Internet or by telephone.

On behalf of our board of directors, I thank you for your support and urge you to vote “FOR” the adoption of the merger agreement, “FOR” the election of the director nominees named in the Proxy Statement, and “FOR” the other matters being considered at the Annual Meeting.

Sincerely ,

Mark A. Swatek

President and Chief Executive Officer

Los Angeles, California

[______], 2010

The Proxy Statement is dated [__   _] , 2010, and is first being mailed to stockholders of SouthWest Water Company on or about [__   _] , 2010.

SOUTHWEST WATER COMPANY
624 S. Grand Avenue, Suite 2900
Los Angeles, California 90017-3782
(213) 929-1800

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON [__   _] , 2010

Dear SouthWest Water Stockholder :

You are cordially invited to attend the Annual Meeting of Stockholders of SouthWest Water Company, a Delaware corporation (the “Company”), that will be held on [__   _], 2010 at [__   _], Pacific Time, at the [__   _] located at [__   _], Los Angeles, California (the “Annual Meeting”), for the following purposes:

1.              to consider and vote upon a proposal to adopt the Agreement and Plan of Merger dated as of March 2, 2010 (the “merger agreement”), among SW Merger Acquisition Corp., SW Merger Sub Corp. and SouthWest Water Company, a copy of which is attached as Annex A to the Proxy Statement accompanying this notice;

2.              to elect directors;

3.              to ratify the selection of PricewaterhouseCoopers LLP as the Company’s independent public accountants for the fiscal year ending December 31, 2010;

4.              to vote to adjourn the Annual Meeting, if necessary, for the purpose of soliciting additional proxies to vote in favor of adoption of the merger agreement; and

5.              to consider such other business that may properly come before the Annual Meeting.

Stockholders of record at the close of business on [__   _], 2010 (the “Record Date”) are entitled to notice of and to vote at the Annual Meeting and any adjournment or postponement of the meeting.

Your vote is important.  Whether or not you plan to attend the Annual Meeting, we urge you to submit your proxy by telephone or over the Internet.  These are quick and cost effective ways for you to submit your proxy.  If you would prefer to vote by mail, please sign, date and return the enclosed proxy card in the postage-paid envelope provided.  Please review the instructions on the proxy card for each of these voting options.  If you return an executed proxy, and then attend the meeting, you may revoke your proxy and vote in person.  Attendance at the meeting will not by itself revoke a proxy.

No person has been authorized to give any information or to make any representations other than those set forth in the Proxy Statement in connection with the solicitation of proxies made hereby, and, if given or made, such information must not be relied upon as having been authorized by the Company or any other person.

By Order of the Board of Directors

William K. Dix

Vice President, General Counsel and Secretary

Los Angeles, California

[__   _], 2010

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON [__   _] , 2010.

This Proxy Statement and the accompanying Annual Report are available at  www.swwc.com

Among other things, this Proxy Statement contains information regarding:

·       The date, time and location of the meeting;

·       A list of the matters being submitted to the stockholders; and

·       Information concerning voting in person.

THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT.  ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

Cautionary Note Regarding Forward-Looking Statements

This Proxy Statement contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act, 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 in this Proxy Statement that are not clearly historical in nature are forward-looking, including statements regarding whether and when the merger is expected to close, whether conditions to the merger will be satisfied, the effect of the merger on our business and operating results, and all other statements regarding our intent, plans, beliefs, expectations or those of our directors or officers.  Words such as “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.  However, not all forward-looking statements contain such identifying words.

These forward-looking statements are based on our current expectations and are subject to a number of risks, uncertainties and assumptions, including those pertaining to the merger, which could cause actual events and developments to differ materially from those described in these forward-looking statements. These risks, uncertainties and assumptions that could cause actual events and developments to differ from these forward-looking statements include the risks detailed elsewhere in this Proxy Statement and in our periodic reports filed with the Securities and Exchange Commission (“SEC”), including our most recent Forms 8-K, 10-Q and 10-K.  See “Other Matters—Where You Can Find More Information” at page __.

These statements are only predictions, and we can give no assurance that they will prove to be correct.  You should not place undue reliance on these forward-looking statements.  In light of the significant uncertainties inherent in the forward-looking statements included in this Proxy Statement, you should not consider the inclusion of such information as a representation by us or anyone else that we will achieve such results or developments.  The statements made in this Proxy Statement represent our views as of the date of this Proxy Statement, and it should not be assumed that these statements will remain accurate as of any future date.  We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

This proxy statement (this “Proxy Statement”) is furnished by and on behalf of the board of directors (the “Board”) of SouthWest Water Company, a Delaware corporation (“SouthWest Water,” the “Company,” “we,” “us,” or “our”), in connection with its solicitation of proxies to be voted at the Annual Meeting to be held on [__   _], 2010 (the “Annual Meeting”), beginning at [__   _], Pacific Time, at the [__   _], [__   _], Los Angeles, California for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders. This Proxy Statement and enclosed proxy card is first being mailed on or about [__   _] to the Company’s stockholders of record as of [__   _], 2010 (the “Record Date”).

The “Summary of the Merger” and the “Questions and Answers About the Merger and Annual Meeting” that follow summarize the material information in this Proxy Statement.  We encourage you to carefully read this entire Proxy Statement and the other documents to which this Proxy Statement refers you for a more complete understanding of the matters being considered at the Annual Meeting.

In addition, you may obtain additional business and financial information about SouthWest Water Company from the Annual Report accompanying this Proxy Statement or by following the instructions in “Where You Can Find More Information” beginning on page [  ].  All information contained in this Proxy Statement was prepared and supplied by SouthWest Water Company, except for the descriptions of the businesses of SW Merger Acquisition Corp. (“Parent”) and SW Merger Sub Corp. (“Merger Sub”) under the heading “Summary of the Merger—The Parties to the Merger,” which descriptions were supplied by these companies.

At the Annual Meeting, you are being asked to vote on the adoption of an Agreement and Plan of Merger dated as of March 2, 2010 (the “merger agreement”), among the Company, Parent and Merger Sub.  Parent and Merger Sub are jointly owned by IIF Subway Investment LP (“IIF Subway”) and USA Water Services, LLC (“Water Services”).  Upon consummation of the transaction contemplated by the merger agreement, Merger Sub will merge with and into the Company (the “merger”).  The Company will be the surviving corporation in the merger (the “surviving corporation”) and will become a wholly-owned subsidiary of Parent.

The following provides a summary of various aspects of the merger that you are asked to consider in connection with Proposal 1, which is more fully described elsewhere in this Proxy Statement.  We have included page references in parentheses to the subheadings appearing below to direct you to more complete descriptions of the matters presented below such subheadings in this Proxy Statement (except that the subheading “Long-Term Infrastructure Investment” presented below contains a full description of that investment).  A copy of the merger agreement is attached to this Proxy Statement as Annex A .  You are encouraged to read the merger agreement, as it is the legal document that governs the merger.

The Merger (Page __)

The proposed transaction is the acquisition of the Company by Parent, an entity jointly owned by IIF Subway and Water Services, pursuant to the merger agreement.  Upon consummation of the merger, the Company will be the surviving corporation and will become a wholly-owned subsidiary of Parent.  Upon completion of the merger, you will receive $11.00 in cash (the “merger consideration”), without interest and less applicable withholding taxes, for each share of our common stock that you own (unless you properly demand and perfect statutory appraisal rights in compliance with all of the procedures under the Delaware General Corporation Law).

The Parties to the Merger (Page __)

SouthWest Water Company

One Wilshire Building

624 South Grand Avenue, Suite 2900

Los Angeles, CA  90017

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Our principal business activity is to operate and maintain water and wastewater infrastructure systems. Through our operating subsidiaries, we own 144 systems and operate hundreds more under contract to cities, utility districts and private companies.  We were incorporated in California in 1954 and reincorporated in Delaware in 1988. We maintain our corporate offices in Los Angeles, California.

SW Merger Acquisition Corp.

245 Park Avenue, 2 nd  Floor

New York, NY  10167

Parent is a Delaware corporation owned by IIF Subway and Water Services, which are sponsored by JPMorgan IIF Acquisitions LLC (“IIF LLC”) and Water Asset Management, LLC (“WAM”), respectively.  Parent was formed solely for the purpose of entering into the merger agreement and consummating the transactions contemplated by the merger agreement (and also to make the $16,200,000 investment in the Company described below under “—Long-Term Infrastructure Investment”).  Parent has not conducted any activities to date, other than activities incidental to its formation, as contemplated by the merger agreement and in connection with its investment in the Company.

SW Merger Sub Corp.

245 Park Avenue, 2 nd  Floor

New York, NY  10167

Merger Sub is a Delaware corporation and a wholly-owned subsidiary of Parent. Merger Sub was formed solely for the purpose of entering into the merger agreement and consummating the transactions contemplated by the merger agreement.  It has not conducted any activities to date other than activities incidental to its formation and in connection with the transactions contemplated by the merger agreement.

When the Merger Will be Completed (Page __)

We are working to complete the merger as soon as possible.  In the event of the adoption of the merger agreement by our stockholders, we anticipate that the primary remaining condition to completion of the merger will be obtaining all consents, approvals, orders and authorizations from all state public utility commissions, state public service commissions, departments of public health, departments of health, and similar state regulatory bodies necessary to provide Parent with the material benefits contemplated by the merger agreement and to timely complete the merger.  We currently expect to complete the merger before March 2011.

Effects of the Merger (Page __)

The effective time of the merger will occur at the time that we file a certificate of merger with the Secretary of State of the State of Delaware (or such later time as provided in the certificate of merger).  At the effective time of the merger, Merger Sub will merge with and into the Company.  The Company will survive the merger (which we refer to as the “surviving corporation”) and continue to exist after the merger as a wholly-owned subsidiary of Parent.  All of the Company’s and Merger Sub’s property, rights, privileges, powers and franchises, and all of their debts, liabilities, obligations, restrictions, disabilities and duties, will become those of the surviving corporation.  Following completion of the merger, the Company’s current stockholders, other than Parent and its affiliates, will cease to have any ownership interest in the Company or rights as Company stockholders.  Therefore, such current stockholders of the Company will not participate in any future earnings or growth of the Company and will not benefit from any appreciation in value of the Company.  Following completion of the merger, Merger Sub’s certificate of incorporation and bylaws will be the certificate of incorporation and bylaws of the surviving corporation.

Treatment of Company Securities in the Merger (Page __)

Company Common Stock

At the effective time of the merger, each share of our common stock issued and outstanding immediately prior to the effective time of the merger will automatically be canceled and will cease to exist and will be converted into the right to receive the merger consideration of $11.00 in cash, without interest and less applicable withholding taxes (except for shares for which statutory appraisal rights are properly demanded and perfected in compliance with all of the procedures under the Delaware General Corporation Law).

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Company Preferred Stock

On or prior to the effective time of the merger, each issued and outstanding share of our Series A preferred stock will be redeemed for cash in accordance with the terms thereof.

Company Stock Purchase Warrants

At the effective time of the merger, each outstanding warrant to acquire our common stock that has not been exercised will be canceled and will not represent the right to acquire any shares of our common stock or to receive any merger consideration.

Company Stock Options

At the effective time of the merger, each outstanding option (including performance accelerated stock options), whether or not vested or exercisable, to acquire our common stock will become fully vested and will be canceled and will cease to represent the right to purchase shares of our common stock, and thereafter will represent the right to receive an amount in cash, without interest and less applicable withholding taxes, equal to the product of the number of shares of our common stock subject to each option as of the effective time of the merger, multiplied by the excess, if any, of $11.00 over the exercise price per share of such option.  Each option that has an exercise price per share equal to or in excess of $11.00 will be canceled for no consideration.

Company Stock-Based Awards

The Company Stock-Based awards relate to performance shares. Performance shares are phantom stock designed to link to specific balance sheet performance of the Company.  They have a three year term and give a participant the right to receive a cash award at the end of three years, based on the achievement of predetermined performance objectives.  Performance share value is variable, and may payout at, above, or below target.  In the event of poor performance, if the minimum goals are not achieved, the performance shares will not have any value or payout.

At the effective time of the merger, the performance shares granted under our stock plans, whether or not vested or exercisable, will become fully vested and will be canceled and converted into the right to receive the merger consideration (less, if applicable, the amount of any other reduction pursuant to the terms of such performance shares), without interest and less applicable withholding taxes, if any, required to be withheld with respect to such payment.  However, based on expected performance, the Company believes that the stated performance metrics will not meet minimum goals and, therefore, the performance shares will have no value.

Restricted Shares

At the effective time of the merger, each share of restricted stock granted under our stock plans (including performance contingent restricted stock), the restrictions of which have not lapsed immediately prior to the effective time of the merger, will become fully vested and will be converted into the right to receive the merger consideration of $11.00 in cash, without interest and less applicable withholding taxes, if any, required to be withheld with respect to such payment.

Convertible Subordinated Debentures

The 6.85% convertible subordinated debentures will remain as outstanding obligations of the surviving corporation until they are converted or redeemed.  From and after the effective time of the merger, a holder of our convertible subordinated debentures may convert the debentures into the amount of cash which the holder would have had immediately after the merger if the holder had converted the debentures immediately before the merger.  Accordingly, the debentures will become convertible into $11.00 cash for each share of common stock into which they are convertible.  The debentures are currently convertible, at the option of the holder, into shares of our common stock at a conversion price of $11.018.  We may redeem the debentures at any time, in whole or in part, at a redemption price of 100% of the principal amount.

Dissenting Shares (Page __)

Our shares of common stock that are outstanding immediately prior to the effective time of the merger and that are held by holders who have neither voted in favor of the adoption of the merger agreement nor consented thereto in writing and who have properly demanded in writing appraisal for such shares before the taking of the vote on the adoption of the merger agreement at the Annual Meeting in accordance with the Delaware General Corporation Law, will not be converted into, or represent the right to receive, $11.00 per share in cash, without interest and less any applicable withholding taxes.  Instead, the holders of these shares will be entitled to receive the fair value of such dissenting shares held by them as long as such holders have not failed to perfect or not effectively withdrawn or lost

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their rights to appraisal under the Delaware General Corporation Law. The fair value of such shares of common stock as determined in accordance with the Delaware General Corporation Law may be more or less than, or the same as, the merger consideration of $11.00 in cash for each share to be paid to stockholders who do not exercise appraisal rights.  Annex C to this Proxy Statement contains a copy of the Delaware statute relating to stockholders’ appraisal rights.

Exchange and Payment Procedures (Page __)

Promptly after the effective time of the merger, the surviving corporation will cause to be mailed a letter of transmittal and instructions to each stockholder of record.  The letter of transmittal and instructions will tell such stockholders, among other things, how to surrender their stock certificates or book-entry shares in exchange for the merger consideration.  Such stockholders should not return their stock certificates with the enclosed proxy card, and should not forward their stock certificates to the paying agent without a letter of transmittal.  If your shares are held in “street name” by your broker, bank or other nominee, you will not receive a letter of transmittal and you will automatically receive the merger consideration in exchange for your shares of our common stock held through your broker, bank or other nominee, unless you properly demand and perfect your statutory appraisal rights in compliance with all of the procedures under the Delaware General Corporation Law.

No Solicitation of Transactions (Page __)

The merger agreement restricts our ability to solicit or engage in discussions or negotiations with third parties regarding specified transactions involving the Company.  Notwithstanding these restrictions, under certain limited circumstances required for our Board to comply with its fiduciary duties, our Board may respond to an unsolicited, written, bona fide proposal for a competing transaction, change its recommendation that our stockholders adopt the merger agreement, terminate the merger agreement, and enter into an agreement with respect to a superior proposal after paying the termination fee specified in the merger agreement.

Conditions to Closing (Page __)

Before we can complete the merger, a number of conditions must be satisfied.  These include:

·       our stockholders must have adopted the merger agreement;

·       no governmental authority has taken action that seeks to make the merger illegal or otherwise restricts, prevents or prohibits the consummation of the merger;

·       the waiting periods applicable to the consummation of the merger under the Hart-Scott-Rodino Antitrust Improvements Act (“HSR Act”) must have expired or been terminated;

·       the material regulatory consents and approvals required to consummate the merger must have been obtained and become final;

·       the parties’ representations and warranties in the merger agreement must meet certain accuracy requirements as specified in the merger agreement;

·       each of the parties must perform its covenants under the merger agreement in all material respects; and

·       each member of our Board must have resigned.

Other than the conditions pertaining to our stockholders’ adoption of the merger agreement, the absence of governmental action restricting the consummation of the merger, termination of any waiting period under the HSR Act and the receipt of regulatory consents and approvals, either the Company on the one hand, or Parent and Merger Sub on the other hand, may elect to waive conditions to the other parties’ respective performance and complete the merger.

Financing (Page__)

Under the terms of the merger agreement, the completion of the merger is not subject to Parent securing financing to fund the payment of cash to our common stockholders in the merger.  IIF LLC and WAM have executed equity commitment letters (which are subject to certain conditions and exceptions as provided in such letters) pursuant to which they have agreed with Parent to make cash investments of $275,743,000 and $27,574,300, respectively, in Parent to be used to enable Parent to fund the cash payable to our common stockholders in the merger.  The IIF LLC equity commitment letter alone provides for a cash investment in Parent adequate to fund the entire aggregate cash amount payable to our common stockholders in the merger.

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Termination of the Merger Agreement (Page __)

The merger agreement may be terminated and the merger may be abandoned at any time prior to the effective time of the merger:

o       by the mutual written consent of us and Parent;

o       by either us, on the one hand, or Parent or Merger Sub, on the other hand, if:

·       our stockholders do not adopt the merger agreement;

·       any governmental authority takes an action that permanently restrains, enjoins or otherwise prohibits the consummation of the merger; or

·       the merger has not been consummated within 12 months following the date of the merger agreement (the “end date”), provided that this end date will be extended to 18 months following the date of the merger agreement to allow for the receipt of certain material regulatory approvals, and for up to an additional 60 days if any waiting period for any of these regulatory approvals has not expired (or earlier to the time of expiration of such waiting period), if all other conditions to the obligations of the parties to effect the merger will have been satisfied or will be capable of being satisfied.

o       by Parent, if:

·       we breach in any material respect any of our representations or warranties, or we fail to perform in any material respect any of our covenants that would result in certain conditions to closing not being satisfied, subject to a cure period of the lesser of 30 days or the number of days remaining before the end date, provided that Parent or Merger Sub are not then in breach of the merger agreement such that certain conditions to closing relating to their representations, warranties or covenants would not be satisfied;

·       our Board changes its recommendation that our stockholders adopt the merger agreement and/or recommends a competing transaction;

·       in the event a tender offer or exchange offer for our common stock is commenced, and our Board recommends that stockholders tender their shares or within a specified time period our Board fails to recommend against the offer and reaffirm the merger agreement;

·       we enter into a letter of intent or agreement relating to a competing transaction; or

·       we or our Board publicly announce an intention to do any of the foregoing.

o       by the Company, if:

·       Parent or Merger Sub breach in any material respect any of their representations or warranties or fail to perform in any material respect any of their covenants that would result in certain conditions to closing not being satisfied, subject to a cure period of the lesser of 30 days or the number of days remaining before the end date, provided that we are not then in breach of the merger agreement such that certain conditions to closing relating to our representations, warranties or covenants would not be satisfied;

·       our Board changes its recommendation that our stockholders adopt the merger agreement and/or recommends a competing transaction that is or is reasonably likely to lead to a superior proposal, provided that in the context of such a competing transaction we must fully comply with the provisions restricting solicitation in the merger agreement and give Parent the opportunity to make an offer to us so that the superior proposal no longer constitutes a superior proposal (as described in more detail in this Proxy Statement and in the merger agreement); or

·       the merger is not consummated as a result of Parent’s and Merger Sub’s failure to effect the merger and at the time all of the conditions to Parent’s and Merger Sub’s obligations to effect the merger will have been satisfied (other than such conditions that, by their nature, cannot be satisfied until the closing of the merger), and Parent and Merger Sub have failed to consummate the merger within 10 business days after we have delivered notice of such failure.

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Termination Fees and Expenses (Page __)

Each party to the merger agreement will pay its own expenses, except as follows:

o       We will share equally with Parent the filing fee required under the HSR Act.

o       We are required to pay Parent a termination fee of approximately $8,200,000 (which would equal 3% of the amount payable by Parent to our stockholders under the terms of the merger agreement) if the merger agreement is terminated:

·       by Parent due to our breach of the non-solicitation provisions included in the merger agreement or if our Board withholds, withdraws or modifies its recommendation that our stockholders adopt the merger agreement;

·       by us or Parent because our Board changes its recommendation that our stockholders adopt the merger agreement and/or recommends a competing transaction;

·       by Parent because, in the event of the commencement of a tender or exchange offer, our Board recommends that our stockholders tender their shares or fails to recommend against the offer and reaffirm the merger agreement; or

·       by Parent because we enter into any letter of intent or agreement relating to a competing transaction prior to the termination of the merger agreement.

o       In the event that a competing transaction is communicated to us and not withdrawn, and prior to or within 18 months following termination of the merger agreement we consummate a competing transaction, then we are required to pay Parent a termination fee of approximately $8,200,000 (which would equal 3% of the amount payable by Parent to our stockholders under the terms of the merger agreement) if the merger agreement is terminated:

·       by us or Parent if our stockholders did not adopt the merger agreement; or

·       by Parent if Parent terminated the merger agreement due to our breach of the merger agreement, other than by reason of our breach of the non-solicitation provisions contained in the merger agreement, our breach of the provisions contained in the merger agreement permitting our Board to withhold, withdraw or modify its recommendation that our stockholders adopt the merger agreement under specified circumstances, or our breach of the representations and warranties in the merger agreement that would arise as of the date of the closing of the merger.

o       We are required to reimburse Parent for its expenses related to the merger agreement and merger up to $3,000,000 if (i) the merger agreement is terminated by Parent or Merger Sub because we breached any of our representations, warranties or covenants that would result in conditions to closing not being satisfied (other than our breach of the non-solicitation provisions contained in the merger agreement, our breach of the provisions contained in the merger agreement permitting our Board to withhold, withdraw or modify its recommendation that our stockholders adopt the merger agreement under specified circumstances, or our breach of our representations or warranties that would arise as of the closing of the merger), or (ii) the merger agreement is terminated by us or Parent because our stockholders did not adopt the merger agreement.  The payment of such expenses will be credited against any further obligation we may have to pay a termination fee.

o       Parent is required to reimburse us for our expenses related to the merger agreement and merger up to $3,000,000 if the merger agreement is terminated by us because Parent or Merger Sub breached any of their representations, warranties or covenants that would result in conditions to closing the merger not being satisfied (other than breaches of Parent’s and Merger Sub’s representations and warranties that would arise as of the closing of the merger).  The payment of such expenses will be credited against any further obligation of Parent to pay the reverse termination fee described below.

o       If we terminate the merger agreement as a result of Parent’s and Merger Sub’s failure to effect the merger and at the time all of the conditions to effecting the merger have been satisfied (other than only the conditions to our obligation to effect the merger), and Parent and Merger Sub fail to consummate the merger within 10 business days after we have delivered notice of such failure, then we may elect either:

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·       to pursue monetary damages against Parent, provided that Parent’s maximum aggregate liability for such damages will not exceed $40,000,000 (provided that we will not be permitted to pursue any equitable remedies, including specific performance); or

·       to receive from Parent a reverse termination fee of approximately $13,600,000 (5% of the amount payable by Parent to our stockholders under the terms of the merger agreement).

Long-Term Infrastructure Investment

As contemplated pursuant to a binding letter of intent executed at the time of signing the merger agreement, on March 16, 2010 the Company and Parent entered into a Securities Purchase Agreement and Investor Rights Agreement (collectively, the “Investment Agreements”).  Pursuant to the Investment Agreements, Parent purchased 2,700,000 shares of our common stock (the “Purchased Stock”) at a price of $6.00 per share, for an aggregate purchase price of $16,200,000.  As permitted under the terms of the Investment Agreements, the Company applied the proceeds derived from the sale of the Purchased Stock to debt reduction and/or capital expenditures, debt redemption and working capital purposes.  The Investment Agreements entitle the Parent to appoint a designee to serve on the Board (which right the Parent has not exercised to date), and also to certain registration rights with respect to the Purchased Stock in the event of the termination of the merger agreement.  The Investment Agreements restrict the Parent’s ability to sell or otherwise transfer the Purchased Stock prior to the earlier of (i) the consummation of the merger and (ii) the termination of the merger agreement in some circumstances.  Except as contemplated by the merger agreement, the Parent and Merger Sub are also prohibited from acquiring any additional shares of the Company’s common stock until the termination of the merger agreement.

As the offering and sale of the Purchased Stock pursuant to the Investment Agreements was not registered under the Securities Act of 1933 or applicable state securities laws, the Purchased Stock may not be offered or sold in the United States absent registration or an applicable exemption from such registration requirements.  This disclosure is being made pursuant to and in accordance with Rule 135c under the Securities Act of 1933 and does not constitute an offer to sell or a solicitation of an offer to buy the Purchased Stock.

Other Important Considerations

·               Recommendation of the Special Committee .  A special committee of our Board, comprised entirely of independent directors (the “Special Committee”), was authorized by the Board to, among other things, explore strategic alternatives to enhance stockholder value.  See “The Merger—Background of the Merger.”  The Special Committee unanimously determined that the merger, the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests of the Company and our stockholders, recommended the submission of the merger and the merger agreement to our Board and recommended that our Board (1) approve the merger agreement, (2) submit the merger and merger agreement to our stockholders for adoption; and (3) resolve to recommend the adoption of the merger agreement by our stockholders.  See “The Merger—Reasons for the Merger and Recommendation of the Board of Directors” beginning on page [  ].

·               Recommendation of the Board .  Our Board, acting upon the unanimous recommendation of the Special Committee, unanimously recommends that our stockholders vote  “FOR”  the adoption of the merger agreement, and  “FOR”  the adjournment of the Annual Meeting, if necessary, to solicit additional proxies to vote in favor of adoption of the merger agreement.  See “The Merger—Reasons for the Merger and Recommendation of the Board of Directors” beginning on page [  ].

·               Reasons for the Merger .  For a discussion of the material factors considered by the Special Committee and our Board in reaching their conclusions and the reasons why the Special Committee and our Board determined that the merger, the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests of the Company and our stockholders, see “The Merger—Reasons for the Merger and Recommendation of the Board of Directors” beginning on page [  ].

·               Share Ownership of Directors and Executive Officers .  See “Security Ownership of Certain Beneficial Owners and Management” beginning on page [  ].

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·               Interests of Our Directors and Executive Officers in the Merger .  In considering the recommendation of the Special Committee and our Board in favor of the adoption of the merger agreement, you should be aware that there are provisions of the merger agreement and the merger that will result in certain benefits to our Board and executive officers that are different from, or in addition to, the benefits received by our stockholders generally.  These benefits include potential payments under Change of Control Severance Agreements in the event of termination of employment by the Company without “cause” or resignation by the executive officer for “good reason” (as each is defined in the applicable Change of Control Severance Agreement), the cash payment of bonuses under retention agreements for remaining employed by the Company for 90 days following consummation of the merger or upon termination for other than cause, the continuation of certain indemnification and insurance arrangements, the election to receive deferred compensation balances distributed in the form of a lump sum payment within 60 days after the event of a change in control and the full vesting of restricted stock (including performance contingent restricted stock), performance shares and stock options (as with all other holders of options).  See “The Merger—Interests of Our Directors and Executive Officers in the Merger” beginning on page [  ].

·               Opinion of Wells Fargo Securities .  On March 1, 2010, Wells Fargo Securities, LLC (“Wells Fargo Securities”) rendered its opinion to the Special Committee (which was subsequently confirmed in writing by delivery of a written opinion), that, as of March 1, 2010, and subject to the factors and assumptions set forth therein, the merger consideration to be received in cash by the holders of our common stock (other than any common stock held by the Company, Merger Sub, Parent, and any direct or indirect subsidiary of Parent or the Company (the “excluded shares”)) in the merger pursuant to the merger agreement was fair, from a financial point of view, to such holders.  See “The Merger—Opinion of Financial Advisor” beginning on page [  ].

The full text of Wells Fargo Securities’ written opinion, dated March 2, 2010, is included as Annex B to this Proxy Statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Wells Fargo Securities in preparing its opinion.  We encourage our stockholders to carefully read the full text of Wells Fargo Securities’ written opinion.

·               Regulatory Matters .  The merger agreement requires us, Parent and Merger Sub to use reasonable best efforts to take, or cause to be taken, all actions that are necessary, proper and advisable to consummate and make effective the merger, including the obtaining of necessary actions, consents, approvals, orders and authorizations from governmental authorities.  This includes any government clearances or approvals required to close the merger under the HSR Act, and the rules promulgated thereunder.  We filed the notification required by the HSR Act on April 23, 2010.  Additionally, the merger will require regulatory approvals or, in certain instances, advance notification in the various states in which the Company operates its regulated utilities.  See “The Merger—Regulatory Matters” beginning on page [  ].

·               Tax Consequences .  The merger will be a taxable transaction for U.S. federal income tax purposes if you are a U.S. person, as defined under “The Merger—Material U.S. Federal Income Tax Consequences of the Merger.”  If you are a U.S. person, your receipt of cash in exchange for your shares of common stock in the merger generally will cause you to recognize a gain or loss measured by the difference, if any, between the cash you receive in the merger, determined before the deduction of any applicable withholding taxes, and your adjusted tax basis in your shares of common stock.  Under U.S. federal income tax law, you will be subject to information reporting on cash received in the merger unless an exemption applies.  Backup withholding may also apply with respect to cash you receive in the merger, unless you provide proof of an applicable exemption or a correct taxpayer identification number and otherwise comply with the applicable requirements of the backup withholding rules.  You should consult your own tax advisor for a full understanding of how the merger will affect your U.S. federal, state and local and/or foreign taxes and, if applicable, the tax consequences of the receipt of

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cash in connection with the termination of, and full payment for, your options to purchase shares of common stock and the acceleration of vesting of restricted stock.  See “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page [  ].

·               Market Price of Our Common Stock .  Our common stock is listed on the NASDAQ Global Select Market under the ticker symbol “SWWC.”  The $11.00 per share merger consideration represents a premium of 55.6% to the $7.07 per share closing price of our common stock on March 2, 2010, the last full trading day prior to the announcement of the merger agreement.

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1.         Q:     What is the purpose of the Annual Meeting?

A:     At our Annual Meeting, we are asking stockholders to consider and vote upon matters described in the Notice of Annual Meeting of Stockholders. In addition, management will report on the performance of the Company and respond to questions from stockholders.

2.         Q:     What information is contained in these materials?

A:     The information included in this Proxy Statement relates to the proposals to be voted on at the Annual Meeting, the voting process, the compensation of our Board and our most highly paid officers or named executive officers, and certain other required information. SouthWest Water’s 2009 Annual Report, proxy card and a return envelope are also enclosed.

3.         Q:     What proposals will be voted on at the Annual Meeting?

A:     There are four proposals to be voted on at the Annual Meeting:

·        Adoption of the merger agreement (for information about this proposal, see page  [  ] );

·        Election of six persons to serve as directors (for information about this proposal, see page  [  ] );

·        Ratification of the selection of PricewaterhouseCoopers LLP as the Company’s independent public accountants for the fiscal year ending December 31, 2010 (for information about this proposal, see page  [  ] ) ; and

·        Adjournment of the Annual Meeting, if necessary, for the purpose of soliciting additional proxies to vote in favor of adoption of the merger agreement  (for information about this proposal, see page  [  ] ).

If any other matters are properly presented at the Annual Meeting for consideration, the persons named in the proxy will have discretion to vote on these matters in accordance with their best judgment.

4.         Q:     What is the quorum requirement for the Annual Meeting?

A:     The presence at the meeting, in person or by proxy, of the holders of a majority of the eligible votes on the Record Date will constitute a quorum, permitting business to be conducted at the Annual Meeting. Proxies received, but marked as abstentions, and broker non-votes ( i.e. , shares that are not voted by a broker, bank or other nominee that is the record holder of the shares because it is not instructed to vote by the actual owner of the shares and does not have discretionary authority to vote such shares) will be included in the calculation of the number of votes considered to be present at the meeting. Under the rules that govern brokers who are voting shares held in street name, brokers have discretion to vote those shares on routine matters but not on non-routine matters.  Routine matters include the ratification of independent public accountants.  Non-routine matters include adoption of the merger agreement, election of directors and adjournment of the meeting if necessary.

5.         Q:     What is the voting requirement to approve each of the proposals?

A:     For Proposal 1 (Adoption of the Merger Agreement), the affirmative vote of a majority of the combined voting power of the outstanding common stock and Series A preferred stock, voting together as a single class, is required to adopt the merger agreement.  Abstentions and broker non-votes will have the same effect as votes “AGAINST” this proposal.

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For Proposal 2 (Election of Directors), each nominee who receives a majority of the votes cast by the holders of shares present and entitled to vote at the Annual Meeting will be elected a director to serve until the next annual meeting of stockholders in 2011 and until a successor has been elected and qualified.  A failure to vote and broker non-votes will have no effect on the election of directors.

For Proposal 3 (Ratification of Independent Public Accountants), the affirmative vote of a majority of the votes cast by the holders of shares present and entitled to vote at the Annual Meeting is required to ratify the selection of our independent public accountants.  Abstentions will have no effect on the vote on this proposal. This is a routine matter upon which brokers have the discretion to vote without receiving voting instructions from the actual owner of the shares.

For Proposal 4 (Adjournment of the Annual Meeting), the affirmative vote of a majority of the votes cast by the holders of shares present and entitled to vote at the Annual Meeting is required to approve adjourning the Annual Meeting.  Abstentions and broker non-votes will have no effect on the vote on this proposal.

6.         Q:     What will happen to SouthWest Water as a result of the Merger?

A:     Upon the completion of the merger, we will cease to be a publicly-traded company and will become a wholly-owned subsidiary of Parent.  Our stockholders, other than Parent and its affiliates, will no longer have any interest in our future earnings or growth.  Following consummation of the merger, the registration of our common stock and our reporting obligations with respect to our common stock under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), will be terminated.  In addition, upon completion of the merger, shares of our common stock will no longer be listed on any stock exchange, including the NASDAQ Global Select Market, or quotation system.

7.         Q:     What will happen to my shares of SouthWest Water common stock after the merger?

A:     Upon the completion of the merger, each outstanding share of SouthWest Water common stock, other than shares held by SouthWest Water, Parent, Merger Sub, or any of their respective subsidiaries, and shares held by stockholders who perfect their appraisal rights, will automatically be canceled and will be converted into the right to receive the merger consideration of $11.00 in cash, without interest and less any applicable withholding taxes.

8.         Q:     Will I own any shares of SouthWest Water common stock or Parent stock after the merger?

A:     No.  You will be paid cash for your shares of SouthWest Water common stock.  Our stockholders will not have the option to receive shares of Parent stock in exchange for their shares instead of cash.

9.         Q:     What happens to SouthWest Water restricted stock, stock options and performance shares in the merger?

A:     Upon the consummation of the merger, all shares of restricted stock (including performance contingent restricted stock) will fully vest and such shares will be converted into the right to receive $11.00 in cash, without interest and less applicable taxes and all outstanding stock options to acquire SouthWest Water common stock will become fully vested and will then be canceled.  In consideration for the cancellation of the options, the holder of any such option will receive an amount equal to the number of shares of SouthWest Water common stock underlying the option multiplied by the amount (if any) by which $11.00 exceeds the exercise price for each share of SouthWest Water common stock underlying the options, without interest and less any applicable withholding taxes.  If the exercise price of the option is equal to or exceeds $11.00, the holder of such option will not be entitled to any merger consideration.  The performance shares will become fully vested and will be canceled and converted into the right to receive the merger consideration (less, if applicable, the amount of any other reduction pursuant to the terms of such performance shares), without interest and less applicable withholding taxes, if any, required to be withheld with respect to such payment.  However, based on expected performance, the Company believes that the stated performance metrics will not meet minimum goals and, therefore, the performance shares will have no value.

10.       Q:     Will the merger be taxable to me?

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A:     Generally, yes.  For U.S. federal income tax purposes, SouthWest Water stockholders, other than SouthWest Water and Parent, that are U.S. persons (as defined under “The Merger—Material U.S. Federal Income Tax Consequences of the Merger”), will recognize a taxable gain or loss as a result of the merger measured by the difference, if any, between $11.00 per share and their adjusted tax basis in that share.  This gain or loss will be a long-term capital gain or loss if the U.S. person has held its SouthWest Water shares more than one year as of the effective time of the merger.  For a discussion of tax-related implications, see “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page [  ].

11.       Q:     Does our Board recommend that stockholders adopt the merger agreement?

A:     Yes.  The Special Committee, reviewed and considered the terms and conditions of the merger and the merger agreement.  The Special Committee unanimously determined that the merger, the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests of the Company and our stockholders and recommended that our Board approve the merger agreement and resolve to recommend that our stockholders adopt the merger agreement.  Our Board then unanimously determined that the merger, the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests of the Company and our stockholders, and approved the merger agreement.  Our Board unanimously recommends that our stockholders adopt the merger agreement.

12.       Q:     When do you expect the merger to be completed?

A:     We are working toward completing the merger as quickly as possible, but we cannot predict the exact timing of when the merger will be completed.  We currently expect the merger to be completed before March 2011.  In addition to obtaining stockholder approval, all other closing conditions must be satisfied or waived, including approval of the regulatory authorities of several states where we own regulated utilities. However, we cannot assure you that all conditions to the merger will be satisfied or, if satisfied, the date by which they will be satisfied.

13.       Q:     When will I receive the merger consideration for my shares of SouthWest Water common stock?

A:     At the effective time of the merger, the merger will be completed, and thereafter stockholders of record will receive written instructions, including a letter of transmittal, which will explain how to exchange their shares for the merger consideration of $11.00 in cash, without interest and less any applicable withholding taxes, for each share of SouthWest Water common stock that they own.  When such stockholders properly complete and return the required documentation described in the written instructions to the letter of transmittal, they will promptly receive from the paying agent a payment of the merger consideration for their shares. If your shares are held in a brokerage account or by a bank or other nominee, and unless you properly demand and perfect your statutory appraisal rights, your account will be automatically credited with the merger consideration in exchange for your shares, and it will not be necessary for you to submit any documentation.

14.       Q:     Should I send in my stock certificates now?

A:     No.  The letter of transmittal described in this Proxy Statement will provide instructions to you about when and where to send your stock certificates.

15.       Q:     Am I entitled to appraisal rights?

A:     Yes.  Under Delaware law, you have the right to seek appraisal of the fair value of your shares as determined by a Delaware court if the merger is completed, but only if you do not vote in favor of adopting the merger agreement and comply with the other Delaware law procedures.

16.       Q:     Who can attend the Annual Meeting?

A:     Our stockholders, Company representatives and Company guests can attend our Annual Meeting. Admission to the meeting depends on how your stock ownership is recorded. If your stock is registered with our transfer agent, American Stock Transfer and Trust Company, LLC (“AST” and/or “transfer agent”), all you need is proof of identify; no proof of ownership is needed. If your stock is held in the name of a broker, bank or other nominee and you plan to attend the Annual Meeting, please obtain proof of ownership, such

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as a current brokerage account statement or certification from your broker.

17.       Q:     Who can vote at this Annual Meeting?

A:     Owners of SouthWest Water common stock or Series A preferred stock at the close of business on the Record Date are entitled to vote their shares at the Annual Meeting. As of that date, there were [__________] shares of common stock outstanding and 9,156 shares of Series A preferred stock outstanding. On each matter properly brought before the Annual Meeting, common stock will be entitled to one vote per share, and Series A preferred stock will be entitled to five votes per share. The combined total number of eligible votes is [__________] shares.

18.       Q:     What is the difference for purposes of voting between holding shares as a stockholder of record and as a beneficial owner?

A:     Most stockholders hold their shares through a broker, bank or other nominee rather than directly in their own name. As summarized below, there are some distinctions between shares held of record and those owned beneficially.

Stockholder of record

If your shares are registered directly in your name with AST, you are considered the stockholder of record, and these proxy materials are being sent directly to you by SouthWest Water.  As the stockholder of record, you have the right to submit your voting proxy directly to SouthWest Water or to vote in person at the Annual Meeting.  SouthWest Water has enclosed a proxy card for your use. You may also vote over the Internet or by telephone as described below under “How can I vote my shares without attending the Annual Meeting?”

Beneficial owner of shares held in street name

If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in street name, and these proxy materials are being forwarded to you by your broker, bank or nominee that is considered, with respect to those shares, the stockholder of record.  As the beneficial owner, you have the right to direct your broker on how to vote and are also invited to attend the Annual Meeting.  Because you are not the stockholder of record, you may not vote these shares in person at the Annual Meeting unless you obtain a signed proxy from the record holder ( e.g.,  your broker) giving you the right to vote the shares in person.  Your broker, bank or nominee has enclosed a voting instruction card for you to use in directing the broker, bank or nominee how to vote your shares.  Most stockholders may also vote over the Internet or by telephone, as described below under “How can I vote my shares without attending the Annual Meeting?”

19.       Q:     How can I vote my shares in person at the Annual Meeting?

A:     Shares held directly in your name as the stockholder of record may be voted in person at the Annual Meeting.  If you choose to do so, please bring the enclosed proxy card or proof of identification.  Even if you plan to attend the Annual Meeting, we recommend that you vote your shares in advance as described below so that your vote will be counted if you later decide not to attend the Annual Meeting.  Shares held beneficially in street name may be voted in person by you only if you obtain a signed proxy from the record holder ( e.g.,  your broker) giving you the right to vote the shares in person.

20.       Q:     How can I vote my shares without attending the Annual Meeting?

A:     If you are a stockholder of record, you may submit a proxy over the Internet or by telephone, by following the instructions included with your proxy card.  You may also complete and properly sign the accompanying proxy card and return it to AST and it will be voted according to your instructions.  If you hold shares beneficially in street name, you may vote by submitting voting instructions to your broker, bank or other nominee.  A large number of banks and brokerage firms are participating in the ADP Investor Communications Services online program, which provides eligible stockholders who hold their shares in street name to vote over the Internet or by telephone.  If your bank or brokerage firm is participating in ADP’s program, your voting form will provide applicable instructions. Please refer to the voting instructions

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below and those included on your proxy card or, for shares held beneficially in street name, the voting instruction card provided by your broker, bank or other nominee.  The deadline for voting over the Internet and by telephone is 11:59 p.m., Eastern Time, on [__   _], 2010.  If you vote over the Internet or by telephone, do not return your proxy card.

Over the Internet — The website for Internet voting for stockholders of record is http://www.proxyvoting.com/swwc . As with telephone voting, you can confirm that your instructions have been recorded. You can also request electronic delivery of future proxy materials with Internet voting. Most stockholders who hold shares beneficially in street name and live in the United States or Canada may vote by going to the site specified on the voting instruction card provided by their broker, bank or other nominee.

By Telephone — Stockholders of record of who live in the United States or Canada may submit proxies by following the “Vote by Phone” instructions on their proxy card. Most stockholders who hold shares beneficially in street name and live in the United States or Canada may vote by phone by calling the number specified on the voting instruction card provided by their broker, bank or other nominee.

By Mail — Stockholders of record may submit proxies by completing, signing and dating their proxy card and mailing it in the accompanying pre-addressed envelope. Stockholders who hold shares beneficially in street name may vote by mail by completing, signing and dating the voting instruction card provided by their broker, bank or other nominee and mailing it in the accompanying pre-addressed envelope.

21.       Q:     Can I change my vote after I submit a proxy?

A:     As a stockholder of record, you may revoke your proxy at any time before it is voted at the Annual Meeting by doing any of the following:

·        Granting a new proxy relating to the same shares and bearing a later date;

·        Attending the Annual Meeting and voting in person.  Attendance at the Annual Meeting will not, by itself, revoke your proxy.  In order to revoke your proxy you must vote at the Annual Meeting; or

·        If your shares are held in the name of a broker, bank or other nominee, you may change your vote by submitting new voting instructions to your broker, bank or other record holder.  You must contact your broker, bank or other record holder to find out how to do so.

22.       Q:     Who will count the votes?

A:     The inspector of election, a representative of AST, will be present at the Annual Meeting and will count the votes.

23.       Q:     Where can I find the voting results of the Annual Meeting?

A:     We intend to announce preliminary voting results at the Annual Meeting and publish final results by filing a Form 8-K with the SEC.

24.       Q:     What does it mean if I receive more than one proxy or voting instruction card?

A:     It means your shares are registered differently or are in more than one account. Please provide voting instructions for each proxy and voting instruction card you receive.

25.       Q:     What are the costs of proxy distribution and solicitation and who pays for them?

A:     We will bear the entire cost of this solicitation of proxies, including the preparation, assembly, printing and mailing of this Proxy Statement, the proxy card and any additional solicitation material that we may provide to stockholders. Copies of solicitation material will be provided to brokerage firms, fiduciaries and custodians holding shares in their names that are beneficially owned by others so that they may forward the solicitation

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material to beneficial owners.  We will request these brokers and other custodians, nominees and fiduciaries to forward proxy solicitation material to the beneficial owners of shares that the brokers and other custodians, nominees and fiduciaries hold of record.  We will reimburse brokerage firms, fiduciaries and custodians for their reasonable out-of-pocket expenses.  In addition, we have retained Morrow & Co., LLC (“Morrow”) to act as a proxy solicitor for the Annual Meeting. We have agreed to pay Morrow $7,500, plus reasonable out-of-pocket expenses, for proxy solicitation services. The original solicitation of proxies by mail may be supplemented by solicitation by telephone, facsimile and other means by our directors, officers and employees.  No additional compensation will be paid to our directors, officers or employees for their solicitation of proxies.

26.       Q:     What happens if I sell my shares of SouthWest Water common stock before the Annual Meeting or the effective time of the merger?

A:     The Record Date for stockholders entitled to vote is earlier than the date of the Annual Meeting and the expected effective time of the merger.  If you transfer your shares of SouthWest Water common stock after the Record Date but before the Annual Meeting or the effective time of the merger, you will, unless special arrangements are made, retain your right to vote at the Annual Meeting but will transfer the right to receive the merger consideration to the person to whom you transfer your shares.  In addition, if you sell your shares prior to the Annual Meeting or prior to the effective time of the merger, you will not be eligible to exercise your appraisal rights in respect of the merger.  For a more detailed discussion of your appraisal rights and the requirements for perfecting your appraisal rights, see “The Merger—Appraisal Rights” beginning on page [  ].

27.       Q:     Who can help answer my questions?

A:     If you would like additional copies, without charge, of this Proxy Statement or if you have questions about the merger, including the procedures for voting your shares, you should contact us or our proxy solicitor, Morrow, as follows:

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At the Annual Meeting you are being asked to vote to adopt the merger agreement.  The proposed transaction is the acquisition of the Company by Parent, an entity jointly owned by IIF Subway and Water Services, which are sponsored by JPMorgan IIF Acquisitions LLC (“IIF LLC”) and Water Asset Management, LLC (“WAM”), respectively, pursuant to the merger agreement among the Company, Parent and Merger Sub.  Upon completion of the merger, Merger Sub, a wholly-owned subsidiary of Parent, will merge with and into the Company.  The Company will be the surviving corporation in the merger and will become a wholly-owned subsidiary of Parent.  Upon completion of the merger, you will receive $11.00 in cash (the “merger consideration”), without interest and less any applicable withholding taxes, for each share of our common stock that you own (unless you properly demand and perfect statutory appraisal rights in compliance with all of the procedures under Delaware law).

Background of the Merger

Our Board and senior management periodically review our business strategy and strategic alternatives, including potential acquisitions.  Unsolicited inquiries regarding the possible acquisition of the Company or various business units have been received over the last several years.  Except as specified below, none of these inquiries resulted in more than preliminary discussions or involved our sharing of nonpublic information.  For reference purposes, various parties with which we have had discussions are denoted “FB” for financial buyers and “SB” for strategic buyers throughout this “Background of the Merger” section.

In the latter part of 2007, the Company received an unsolicited expression of interest from a financial buyer (“FB-A”) about a possible acquisition of the Company.  On November 5, 2007, our Board formed a special committee, which consisted entirely of independent directors and was chaired by Richard G. Newman, to consider and evaluate this expression of interest and any other alternatives reasonably available to the Company.  This special committee subsequently engaged Wells Fargo Securities, LLC (formerly Wachovia Capital Markets, LLC) as its independent financial advisor and also engaged independent legal counsel.  We entered into a confidentiality agreement with, provided confidential information to and conducted negotiations with FB-A, but these discussions were terminated in February 2008 when it appeared that mutually satisfactory terms could not be reached, after which this special committee ceased to exist.

During September 2008, the U.S. equity markets declined substantially in response to the bankruptcy of Lehman Brothers and the economic and financial crisis.  The trading price of our common stock declined significantly during this period.  On October 15, 16 and 17, 2008, the Board met to engage in strategic planning.  Among other matters, the Board discussed our business prospects and challenges, possible purchase opportunities, and the alternative of a sale of the Company to a strategic or a financial buyer.

Shortly thereafter, contact was made with another company in the industry (“SB-A”) that from time to time had expressed an interest in entering into discussions with the Company, and a confidentiality agreement was signed.

On November 10, 2008, we announced a delay in the filing of our quarterly report on Form 10-Q for the quarter ended September 30, 2008, and our intention to restate our prior period financial statements.  This led to our receipt of delinquency letters from NASDAQ due to the failure to timely file our periodic reports with the SEC, and the need to seek an amendment to our bank credit facility.  There was also a further substantial decline in the trading price of our common stock.

On December 3, 2008, representatives of Wells Fargo Securities made a presentation to the Financial Planning and Investment Committee of the Board, which was chaired by Mr. Newman and consisted entirely of independent directors.  The presentation included a financial analysis of potential values of the Company and certain of its components, the strategic alternatives that might be available to the Company and the potential impact of the restatement on these alternatives in the near term.

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At a meeting of our Board on December 10, 2008, outside counsel discussed various issues with respect to receiving proposals regarding a potential sale of the Company and reviewed with the members of the Board their fiduciary duties.  In executive session, Mr. Newman reported to the Board on the recent meetings and activities of the Financial Planning and Investment Committee.  At a meeting of the Financial Planning and Investment Committee later that day, Mr. Swatek, our Chief Executive Officer and Chairman of the Board, stated that SB-A had requested a meeting, and the Committee decided that he should attend the meeting with an outside director.  On December 12, 2008, the meeting took place with representatives of SB-A to discuss its previously expressed interest in the Company.

On December 19, 2008, the Company received an unsolicited letter from WAM to the effect that it had formed a joint venture with another company and would like to meet to discuss matters of common interest, including the potential acquisition of the Company by the joint venture.

Our Board met on December 23, 2008 to discuss the letter from WAM.  The Board decided that Mr. Swatek would respond to WAM by letter to the effect that the Company would be willing to meet, but was not currently for sale,  and that an outside director would also participate in the meeting.  Representatives of DLA Piper LLP (“DLA Piper), counsel to the Company, advised the Board as to their fiduciary duties under these circumstances.  The Board also discussed with counsel the timing and process for establishing a committee to explore strategic alternatives.

On January 15, 2009, Mr. Swatek and Thomas Iino, an independent member of our Board, met with representatives of WAM and its joint venture partner.  WAM again expressed its interest in pursuing an acquisition of the Company.

On January 16, 2009, SB-A sent us a nonbinding expression of interest for an acquisition of the Company, with a request for a period of exclusivity.

Our Board met on January 21, 2009 to discuss, among other things, the nonbinding expression of interest from SB-A, as well as the process for responding.  Outside counsel again advised our Board as to its fiduciary duties regarding such a proposal and answered questions by the directors.  The Board determined that it would be in the best interests of the Company and our stockholders to form the Special Committee comprised solely of independent directors for the purpose of reviewing and advising our Board on matters relating to these expressions of interest in a transaction with the Company.  Thomas Iino, William D. Jones and Geoffrey C. Ketcham were selected as the members of this Special Committee.

The Special Committee met immediately after the Board meeting and selected Mr. Iino as its chair.  The Special Committee determined that it would meet with representatives of Wells Fargo Securities about rendering assistance in the evaluation of any inquiries and proposals to acquire the Company and other potential strategic alternatives available to the Company, and would retain independent counsel to advise the Special Committee.  The Special Committee considered that Wells Fargo Securities had advised the former special committee of the Board beginning in 2007 in its discussions with FB-A and that its representatives were knowledgeable about both the Company and our industry.  All members of the Special Committee attended this meeting, as well as each of the other meetings of the Special Committee either in person or by teleconference.

On January 26, 2009, Mr. Ketcham resigned as a director and, as of January 27, 2009, Donovan D. Huennekens was appointed to fill the vacancy on the Special Committee resulting from Mr. Ketcham’s resignation.

On January 30, 2009, WAM sent us a letter stating that it would like to submit an offer to acquire the Company at a meeting to be held at the earliest convenient date in March.  Because of the developments discussed below, that meeting never occurred.

At a meeting of the Special Committee on February 4, 2009, attended by Mr. Swatek and representatives of Wells Fargo Securities, Mr. Swatek commented on management’s financial forecast.  The representatives of Wells Fargo Securities then presented a preliminary analysis of strategic alternatives available to the Company.  The Special Committee and representatives of Wells Fargo Securities discussed the next steps to be taken with respect to the indication of interest received from SB-A.  Mr. Swatek and the representatives of Wells Fargo Securities left the meeting, and the Special Committee interviewed a representative of Locke Lord Bissell & Liddell LLP (“Locke Lord”) to be its independent legal counsel.  The Special Committee subsequently determined to engage Locke Lord as its independent legal counsel.

Management received calls from two other strategic buyers, one on January 23, 2009 (“SB-B”) and the other on

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February 4, 2009 (“SB-C”), inquiring about our willingness to discuss a transaction.  SB-C followed up with a letter dated February 24, 2009 expressing an interest in pursuing discussions to purchase the Company.

At a meeting of the Special Committee held on February 9, 2009, which was also attended by Mr. Swatek and representatives of Wells Fargo Securities and Locke Lord, the representatives of Wells Fargo Securities reported to the Special Committee on the status of the various inquiries and discussions about a transaction with the Company.  In light of these inquiries and discussions, the Special Committee determined to recommend to our Board that the scope of the Special Committee’s responsibilities be expanded.  Mr. Swatek updated the Special Committee on various issues faced by the Company, including the status of the restatement and discussions concerning the amendment of the Company’s bank credit facility. Representatives of Wells Fargo Securities discussed with the Special Committee that a controlled bidding process might be undertaken for the purpose of identifying the degree of interest of selected parties in an acquisition of the Company, as one of the strategic alternatives to be considered. The Special Committee also discussed a plan for communicating with SB-A.  The Special Committee then reviewed the terms of an engagement letter with Wells Fargo Securities and, after further discussion, approved entering into the engagement letter with certain modifications.  It was later signed by the Company, Wells Fargo Securities and Mr. Iino, as chair of the Special Committee.  The Special Committee also approved the engagement of Richards, Layton & Finger, P.A. (“RLF”) as Delaware counsel to the Special Committee.

At a meeting of our Board on February 12, 2009, which was attended by all the members our Board and representatives of Wells Fargo Securities and Locke Lord, Mr. Iino briefed the Board on the actions undertaken by the Special Committee.  Mr. Iino stated that representatives of Wells Fargo Securities made a presentation to the Special Committee with respect to potential strategic alternatives available to the Company.  He also addressed the options for responding to SB-A’s expression of interest.  Representatives of Wells Fargo Securities briefed the Board on the status of discussions with the financial advisor for SB-A and presented a preliminary financial analysis of the Company and a preliminary analysis of the potential strategic alternatives available to the Company.

At the conclusion of this discussion, the Board determined to engage in a bidding process in an effort to identify strategic and financial buyers that might have an interest in a transaction.  The Board discussed the value of conducting a confidential process in light of the potential disruption that public disclosure would have on the Company and its employees and customers, and the desire to retain flexibility to terminate the process and possibly engage in an alternative strategy.  The Board then expanded the authority of the Special Committee to, among other things, explore strategic alternatives for enhancing stockholder value, review and evaluate the advisability of a business combination, establish procedures for negotiation and solicitation of proposals, negotiate the terms of a definitive agreement, recommend action to our Board, and determine whether any definitive agreement is fair to, and in the best interests of, the Company and our stockholders.  The Board determined that each member of the Special Committee would receive a one-time retainer of $2,500 and a per-meeting fee of $1,000, and that the chair would receive an additional $2,500 as a one-time retainer.

The Special Committee met on February 17, 2009, with Mr. Swatek and representatives of Wells Fargo Securities and Locke Lord present.  The representatives of Wells Fargo Securities updated the Special Committee on the status of discussions with SB-A, including that, at the direction of the Special Committee, they had communicated to SB-A that we would not agree to an exclusive arrangement and that the Special Committee would be engaging in a competitive process to explore strategic alternatives.  The Special Committee discussed the status of the other inquiries received to date.  The Special Committee then reviewed a list that the representatives of Wells Fargo Securities had prepared of those parties, both strategic and financial, including SB-A, SB-B, SB-C, FB-A and WAM, that might have an interest in engaging in a transaction with the Company.  The Wells Fargo Securities representatives explained their process for selecting the financial buyers that were most likely to have an interest in engaging in a transaction with the Company.  The Special Committee made preliminary decisions with respect to the parties on the list and discussed the conduct and timing of the process in relation to other events and management’s availability.

At a meeting of the Special Committee on February 23, 2009, Mr. Iino and the representative of Locke Lord reported on a conversation they had with representatives of Wells Fargo Securities about a call with the investment banker for SB-A.  The Special Committee was later joined by Mr. Swatek, William K. Dix, our Vice President and General Counsel, and representatives of Wells Fargo Securities.  The Special Committee reviewed and agreed on a proposed timeline, with the recommendation that it provide for some slippage and that dates be included for other known key events affecting the Company, such as the timing for filing its periodic reports with the SEC and milestones in the restatement process.  The Special Committee then discussed the proposed list of the potential bidders and determined which of those bidders Wells Fargo Securities should contact. The Special Committee also discussed potential alternative transactions available to the Company.  This latter discussion continued at a meeting of the Special

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Committee on February 25, 2009.

From March 2, 2009 through March 4, 2009, 11 parties selected by the Special Committee were contacted by representatives of Wells Fargo Securities, including SB-A, SB-B, SB-C, FB-A and WAM, to determine whether they would have an interest in a possible transaction.  Nine of the parties contacted (excluding FB-A) expressed an interest, and they were provided with a form of confidentiality agreement.  Six (including SB-A, SB-B and SB-C) were strategic buyers and three (including WAM) were financial buyers.  Between March 10, 2009 and March 25, 2009, representatives of Locke Lord negotiated the terms of confidentiality agreements, including standstill provisions, with these parties.  The Company entered into confidentiality agreements with WAM and each of the other potential buyers, except for one financial buyer (“FB-B”) that was unwilling at that time to enter into a confidentiality agreement or to move forward in the bidding process.

Mr. Iino informed our Board at a meeting on March 13, 2009 of the communications that had taken place with SB-A and the other actions that had been taken by the Special Committee and representatives of Wells Fargo Securities in initiating a bidding process.

Following the execution of confidentiality agreements, management provided separate presentations to each of the potential bidders between March 17, 2009 and March 26, 2009 on the operational and financial aspects of the Company, with representatives of Wells Fargo Securities attending each presentation.  The presentation with WAM took place on March 26, 2009.  After these presentations, representatives of Wells Fargo Securities received additional questions from the parties and on behalf of the Special Committee coordinated with management to provide responses to these inquiries.

The Special Committee met on March 25, 2009, and representatives of Wells Fargo Securities updated the Special Committee on the status of the bidding process, including the management presentations that had taken place and preparations for an electronic data room for due diligence information and documents.  Mr. Iino then briefed our Board on the status of the process at a meeting of our Board that evening.  Our Board also discussed a potential timeline for the bidding process.

On April 1, 2009, Wells Fargo Securities sent an initial bid process letter, which was reviewed by and reflected comments of the Special Committee members and Locke Lord, to the eight parties that had signed confidentiality agreements (including two strategic buyers (“SB-D” and “SB-E”) that were acting jointly), outlining the procedures for the submission of preliminary, nonbinding indications of interest for the acquisition of all our outstanding common stock and inviting them to submit these indications of interest on or before April 10, 2009.

On April 2, 2009, the investment banker for another financial buyer (“FB-C”) inquired of Wells Fargo Securities whether it could enter into the process.  On the basis of the information available on FB-C, Mr. Iino authorized representatives of Wells Fargo Securities to allow it to enter the process so long as it could meet the timeline set forth in the initial bid process letter.  FB-C entered into a confidentiality agreement with the Company on April 5, 2009.

A meeting of the Special Committee was held on April 8, 2009, which was attended by all the members of the Board, Mr. Dix and representatives of Wells Fargo Securities and Locke Lord.  Mr. Iino stated that the purpose of the meeting was to provide the Board with a sum-of-the-parts analysis of the Company in anticipation of the receipt of preliminary indications of interest.  This analysis would deal with how the values of the various operations might be unlocked in one or more asset sales and whether the sum of the value of the parts of the enterprise might be greater than the value of the whole from the stockholders’ perspective.  Representatives of Wells Fargo Securities summarized various methodologies for determining the value of these separate operations, and the representative of Locke Lord advised the Special Committee as to the potential income tax implications of various alternative transactions.  The Board discussed possible differences that might be ascribed by the parties to certain business units and whether there might be opportunities to match various parties in the bidding process to these business units, thus maximizing the combined valuations.

Preliminary indications of interest were received by representatives of Wells Fargo Securities from seven parties on April 10, 2009, which were communicated to the Special Committee.  One of the financial buyers that was initially contacted in March chose not to submit an indication of interest.  One of the indications of interest was submitted jointly by SB-D and SB-E.  Of the other six, four were submitted by strategic buyers (SB-A, SB-B and SB-C and one by another strategic buyer), and two by financial buyers (FB-C and WAM).  Three of the transactions proposed were for 100% cash consideration; one was for cash, securities or a combination of both; two were for cash with a willingness to consider or explore equity or a combination of cash and equity; and one was entirely for stock.  The

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indication of interest submitted by WAM included an indicative price range from $9.00 to $11.00, and no other indication of interest included an indicative price of $11.00 or more.  The closing price of our common stock on April 9, 2009 was $5.44.

The Special Committee reviewed the preliminary indications of interest at a meeting on April 13, 2009.  Representatives of Wells Fargo Securities summarized the indications of interest received from each of the bidders, and the Special Committee discussed each of these indications of interest, including the indicative prices, type of consideration, timing, advisors engaged by the bidders, authorizations and approvals required and notable assumptions.  The Special Committee discussed a general strategy to deal with those submitting indications of interest in terms of eliciting additional information and attempting to enhance their indicative prices.  The Special Committee determined that its decision as to which bidders to admit to a second round would then be made after additional calls with each of the bidders had taken place.  Mr. Swatek, David Stanton, then our Chief Operating Officer, and Mr. Dix joined the meeting to share their observations and knowledge about those submitting preliminary indications of interest.

On April 16, 2009, the Special Committee met to discuss the results of follow up calls made to the bidders by representatives of Wells Fargo Securities at the direction of the Special Committee.  The representatives of Wells Fargo Securities updated the Special Committee on the status of discussions with the bidders, including their indicative price ranges and the areas of operations to which the bidders ascribed the most value.  As consideration in the form of stock had been included in several of the indications of interest, a representative of Locke Lord described the likely structure of such a transaction.  The Special Committee reached a consensus as to the bidders to be admitted into a second round based largely on indicative prices and deferred its decision about SB-A and SB-B pending further conversations that representatives of Wells Fargo Securities would have with them as to their pricing.  The representatives of Wells Fargo Securities then presented to the Special Committee an updated analysis of potential strategic alternatives available to the Company.

At a meeting of the Special Committee on April 22, 2009, Mr. Iino summarized for the Special Committee his discussion on a conference call the previous afternoon with the representatives of Wells Fargo Securities with respect to the Special Committee’s consideration of the inclusion of several bidders in a second round of the bidding process.  One financial buyer had indicated a desire to remain in the process, and the Special Committee deferred its decision on whether SB-A should be admitted to the second round of the bidding process.

Mr. Iino updated the Board on the Special Committee’s activities at a meeting on May 1, 2009, that included the anticipated range of indicative prices and transaction structure based on the subsequent calls with the bidders made by representatives of Wells Fargo Securities on behalf of the Special Committee.

On May 4, 2009, the Special Committee met and decided to delay the opening of the electronic data room in order to permit management to focus on completion of the restatement and an amendment of the bank credit facility.  The electronic data room was opened on May 29, 2009, with the due diligence information and documents available at that time, and was subsequently populated with additional information and documents during the course of the bidding process, including information and documents that had been requested by the bidders.

Representatives of Wells Fargo Securities were contacted by FB-B on May 19, 2009 about the possibility of reentering the bidding process.  On May 20, 2009, FB-B submitted its comments on the Company’s form of confidentiality agreement.

The Special Committee met on June 10, 2009 and discussed (i) certain issues relating to the information to be included in the data room at that time, and (ii) the timing for filing and distribution of our annual report on Form 10-K for the year ended December 31, 2008.  The Special Committee also considered the possible admission of FB-B into the process.  After consideration of the background and some information about FB-B’s resources and investments, the Special Committee directed representatives of Wells Fargo Securities to seek additional information about its renewed interest and how the Company might fit with its investment strategy.  The Company entered into a confidentiality agreement with FB-B on June 17, 2009.

On July 9, 2009, we filed with the SEC our annual report on Form 10-K for the year ended December 31, 2008, with restated financial statements.

At a meeting of the Special Committee on July 15, 2009, Mr. Iino and a representative of Locke Lord reported on a telephone call they had with representatives of Wells Fargo Securities to the effect that a preliminary indication of

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interest was expected from FB-B by July 20, 2009.  Mr. Iino was authorized by the Special Committee to have Wells Fargo Securities inform FB-B that it could continue in the process, assuming that the pricing in its indication of interest would be competitive with that of the other bidders that had been allowed to continue in the second round of the bidding process.

Representatives of Wells Fargo Securities were advised on July 16, 2009 that FB-C was withdrawing from the process.  On that same day, representatives of Wells Fargo Securities informed the Special Committee that they had received an unsolicited inquiry from two strategic buyers that were interested in working together to pursue a transaction with the Company.  The Special Committee authorized representatives of Wells Fargo Securities to discuss the process with them to determine their interest level and ability to complete a transaction.

The next day, SB-B advised representatives of Wells Fargo Securities that it had revised its indicative pricing and would like to be readmitted into the process.  Representatives of Wells Fargo Securities advised the Special Committee of this discussion later the same day.

On July 20, 2009, representatives of Wells Fargo Securities were contacted by IIF LLC inquiring about whether it might be included in the process and informed the Special Committee of IIF LLC’s interest.  On the same day, Wells Fargo Securities received an indication of interest from FB-B proposing a cash purchase of the Company’s stock.  The indicative price was at the lower end of the range of those set forth in the indications of interest received on April 10, 2009.

On July 21, 2009, representatives of Wells Fargo Securities, at the Special Committee’s direction, had a discussion with the strategic buyers that had contacted them on July 16, 2009 regarding their interest in the Company and reported the content of the discussion to the Special Committee later that same day.  In light of the Board’s later decision to delay the process, no action was taken by the Special Committee with respect to this inquiry.

At a meeting held July 23, 2009, the Special Committee discussed management’s concerns over the impact that the bidding process was having on management’s time and the Company’s resources that had to be devoted to operating the business and preparing the delinquent filings of quarterly financial reports.

At the request of the Special Committee, a meeting of the Board was convened on July 25, 2009, with all members of the Board in attendance.  Mr. Iino advised the Board that the purpose of the meeting was to update them on the bidding process and to discuss management’s concerns.  He informed the Board of the ranges of indicative pricing and some of the particular areas of inquiry by the bidders.  He added that several additional parties had approached representatives of Wells Fargo Securities about participating.  Mr. Swatek informed the Board that the filing of the Form 10-Qs for the first and second quarters of 2009 had been delayed, and that an amendment of the bank credit facility was being negotiated to provide more time for these filings to occur.  He stated that, given the Company’s resources, it would be very difficult to continue with the bidding process and run operations concurrently.  The Board had an extensive discussion of issues surrounding continuation of the process, including the delay in filing the quarterly reports on Form 10-Q and other activities.  At the conclusion of this discussion, the Board directed the Special Committee to delay the process until we were current in our SEC filings and other operational issues could be dealt with which the Board believed would reduce potential uncertainties in the bid process.  The Board determined that the bid process would be discussed in more detail at a Board meeting scheduled for July 31, 2009.

The Special Committee met again on July 29, 2009.  Mr. Iino reported on a meeting with senior management that he and Mr. Huennekens had attended.  Mr. Iino advised the Special Committee that, following Mr. Swatek’s description of the background of the process, the group had discussed the performance and prospects of the Company on a stand-alone basis and the effect the process was having on the business, and Mr. Iino advised them that the bidding process was being undertaken as part of the Special Committee’s evaluation of strategic alternatives that would be in the best interests of our stockholders.  The Wells Fargo Securities representatives reported on the status of the bidding process, including the level of activity by the parties, their retention of advisors and the tasks ahead, and discussed the potential impact of a delay on the process and potential bidder reaction.  The Special Committee also discussed the situation with respect to specific participants in the process, and whether there was a viable alternative to delaying or terminating the process.

This subject was discussed further at a meeting of the Board on July 31, 2009, with all the members of the Board in attendance.  Mr. Iino reported on the meeting that he and Mr. Huennekens attended with management.  Mr. Iino advised the Board that the management group discussed their view of the future performance and prospects of the Company on a stand-alone basis and also the effect the process was having on the business.  Representatives of DLA

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Piper and Locke Lord then joined the meeting to answer questions of the Board about delaying or terminating the process, following which representatives of Wells Fargo Securities joined the meeting to discuss the potential impact of a delay on the process and potential bidder reaction.  It was management’s position that the process should be delayed until at least the third quarter Form 10-Q was filed and a financial forecast had been presented to the Board.  The Board then discussed the matter further and, in executive session, determined that the process would be delayed until the third quarter Form 10-Q was filed, at which time the Board would evaluate its available courses of action regarding the bidding process.

The Special Committee met on August 7, 2009 to discuss communication of this decision to the participants in the bidding process.  The Special Committee also discussed various other issues, including admitting IIF LLC into the bidding process, as well as admitting SB-B, which had asked to rejoin the process after not being admitted to the second round.  Because of the delay in the process, a decision on the admission of these parties was deferred.  At a meeting of our Board held later that day, Mr. Iino reported on the Special Committee meeting, and the Board decided that Messrs. Iino and Swatek should contact the parties and inform them of the delay in the bidding process.

Our quarterly report on Form 10-Q for the quarter ended March 31, 2009 was filed with the SEC on August 26, 2009 and our quarterly report on Form 10-Q for the quarter ended June 30, 2009 was filed with the SEC on September 18, 2009.

On October 23, 2009, following our annual meeting of stockholders, the composition of the Special Committee was changed by the Board.   Thomas Iino and William D. Jones remained on the Special Committee, and Bruce C. Edwards, who joined the Board on August 10, 2009, and Mr. Newman were added as members.  Mr. Iino continued as chair of the Special Committee.

The Special Committee met on October 29, 2009, which was attended by H. Frederick Christie, Chairman of the Board of the Company, one of the other directors, Mr. Swatek, representatives of Wells Fargo Securities and a representative of Locke Lord.  The purpose of the meeting was to discuss the strategy for pursuing strategic alternatives going forward in light of the earlier discussion by the Board and concerns over keeping in the process parties that did not appear to be in a price range that the Special Committee might consider acceptable.  The Special Committee discussed how best to deal with the parties that had submitted preliminary indications of interest, including requesting the bidders to reconsider their previous pricing levels.  Representatives of Wells Fargo Securities stated that, in light of the delay in the bidding process, it may be appropriate to ask the parties to reaffirm their interest and indicate whether their indicative pricing could be increased, and to make further inquiry as to the viability of some of the indications of interest.  The Special Committee decided that a final decision on the strategic review process should be deferred several weeks until the strategic planning meeting of the Board and a review of revised financial projections.

On November 2, 2009, representatives of Wells Fargo Securities received an updated indication of interest from FB-B.  The indicative price was toward the middle of the range of those included in the indications of interest received on April 10, 2009.

We filed our quarterly report on Form 10-Q for the quarter ended September 30, 2009 with the SEC on November 9, 2009, at which time we became current in our SEC periodic reporting requirements.

On November 23, 2009, representatives of Wells Fargo Securities, at the direction of the Special Committee, invited seven parties (including SB-A, SB-B, SB-C, SB-D, SB-E, FB-B and WAM) to submit updated indications of interest by December 9, 2009.

On December 4, 2009, representatives of Wells Fargo Securities were advised that representatives of IIF LLC would be attending a meeting that had been scheduled with WAM for December 7, 2009.  At that meeting, which was also attended by Mr. Iino, WAM and IIF LLC described their proposed involvement in the process as a consortium for the purpose of making a joint proposal to acquire the Company.

On December 9, 2009, updated indications of interest were submitted by seven parties, including the updated indication of interest that had been submitted by FB-B.  An unsolicited indication of interest was also received on December 10, 2009 from another strategic buyer (“SB-F”).  All eight of these indications of interest were for 100% of our stock.  Two were joint proposals, one from SB-D and SB-E and the other from IIF LLC and WAM.  Of the updated indications of interest received from strategic buyers, one was for cash or a combination of cash and stock, one was for cash, securities or a combination of both and one was entirely for stock.  In its updated indication of interest, IIF

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LLC/WAM requested an exclusivity period of 60 days to complete due diligence, arrange committed debt financing, reach a definitive agreement and develop plans or approaches to regulatory and other issues.  None of the indicative prices in these updated indications of interest exceeded $11.00 per share.  The closing price of our common stock on December 9, 2009 was $6.25.

On December 14, 2009, the Special Committee met to review, compare and discuss these indications of interest received from the various bidders, including the unsolicited indication of interest from SB-F.  The Special Committee asked the representatives of Wells Fargo Securities to discuss with each of those participating in the bidding whether there was any flexibility in their pricing, the timing and certainty of a transaction, their required due diligence and the status of their internal approval processes.  The Special Committee also decided to admit SB-F into the bidding process, and the Company entered into a confidentiality agreement with SB-F on December 18, 2009.

The Special Committee continued this discussion of the updated indications of interest at a meeting on December 16, 2009.  Wells Fargo Securities summarized for the Special Committee the status of discussions with the various bidders and presented a preliminary financial analysis of the Company.  Mr. Swatek provided his observations about how the strategic parties were viewed in the industry and his perception of their ability to close a transaction.  After Mr. Swatek and the representatives of Wells Fargo Securities left the meeting, the Special Committee considered which parties should be invited to continue in the process.  Following that meeting, the Special Committee members determined, largely on the basis of indicative pricing and certainty of closing, to invite SB-B, SB-D, SB-E, SB-F and IIF LLC/WAM to continue with due diligence.  Subsequently, the Special Committee members agreed to include SB-C and FB-B because they appeared to have some flexibility in their indicative pricing on the basis of further discussions with representatives of Wells Fargo Securities.

On December 18, 2009, Wells Fargo Securities, on behalf of the Special Committee, communicated with all participants about the decision to proceed with the bidding and outlined the process going forward, including the timing for populating the electronic data room, completion of the due diligence process and the receipt of final bids.

At the request of SB-F, a meeting with its representatives took place on December 21, 2009 that was attended by Mr. Swatek, Mr. Stanton, Mr. Iino and representatives of Wells Fargo Securities.  SB-F requested the meeting in order to familiarize those present with its operations and the nature of its interest in the Company, and to gauge the commitment of the Special Committee to the process going forward.

During the week of January 4, 2010, representatives of Wells Fargo Securities began scheduling due diligence meetings with Company management and site visits that began on January 25, 2010.  In addition, the electronic data room was reopened on January 8, 2010 and populated with additional information and documents, and representatives of Wells Fargo Securities, on behalf of the Special Committee, coordinated and responded to various requests for information.

At a meeting of the Special Committee on January 26, 2010, Mr. Swatek reported on telephone conversations he and representatives of Wells Fargo Securities had with the participants in the bidding process about the departure of Mr. Stanton, who had by then become our Chief Financial Officer.  The Special Committee then received an update on the process, including the status of the electronic data room and site visits that had taken place.  A representative of Locke Lord summarized a draft merger agreement that had been prepared to distribute to the parties, copies of which had been distributed to the Special Committee members, along with a summary of certain provisions, in advance of the meeting.  This discussion included the structure of the transaction, the “no shop” and fiduciary termination provisions, the Company’s rights in the event of nonperformance of the buyer and the circumstances in which termination fees would be paid and expenses reimbursed.  The Locke Lord and RLF representatives described the ranges of legally permissible alternatives with respect to some of these issues.  The draft merger agreement, as revised to reflect the comments of the Special Committee members, was made available to the bidders through the electronic data room on January 31, 2010.

At the request of WAM and IIF LLC, Mr. Iino, Mr. Christie and a representative of Wells Fargo Securities met with representatives of WAM and IIF LLC on February 1, 2010 to discuss the financial ability of WAM and IIF LLC to close a transaction with the Company.

On February 3, 2010, SB-F advised representatives of Wells Fargo Securities that it was withdrawing from the bidding process.

At the direction of the Special Committee , representatives of Wells Fargo Securities prepared a bid process letter

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regarding the submission of final, definitive proposals to acquire the Company, which was reviewed by and reflected comments of the Special Committee members and Locke Lord.  On February 10, 2010, representatives of Wells Fargo Securities, on behalf of the Special Committee, invited SB-B, SB-C, SB-D, SB-E, FB-B and IIF LLC/WAM to submit by February 24, 2010 final, definitive proposals to acquire 100% of our outstanding stock for cash.  The letter requested that the proposals include a valuation of the Company’s outstanding stock and discuss how the transactions would be financed, the status of their due diligence reviews, any conditions, the proposed timing, the status of authorization and approvals and a detailed mark-up of the form of merger agreement that had been provided.  These parties were also asked to provide their plans for obtaining regulatory approvals, as well as their regulatory plans for the 36 months following closing, and any alternative transaction structures or arrangements they would be willing to consider to improve transaction certainty, including their willingness to acquire portions of the business prior to receiving regulatory approvals in all jurisdictions.

The site visits were completed on February 11, 2010, and thereafter representatives of Wells Fargo Securities, on behalf of the Special Committee, continued to coordinate and respond to various requests for additional information.

Messrs. Iino and Swatek, together with Ben Smith, who had replaced Mr. Stanton as our Chief Financial Officer, and a representative of Wells Fargo Securities met with representatives of FB-B at their request on February 18, 2010 so that they could meet with management in advance of submitting their proposal.

On Wednesday, February 24, 2010, the Special Committee received definitive proposals from IIF LLC/WAM, FB-B, SB-D and SB-E, the latter two of which had previously acted jointly.  SB-B and SB-C informed representatives of Wells Fargo Securities that they had decided not to submit proposals.  The IIF LLC/WAM proposal was for a cash merger at $11.00 per share, together with a purchase shortly following execution of a definitive merger agreement of newly-issued shares representing 9.9% of our common stock on a fully-diluted basis.  FB-B proposed a cash merger at a lesser price than the IIF LLC/WAM offer and, concurrently with signing a definitive merger agreement, a $20 million investment in newly-issued shares at a per share price based on the lesser of 95% of the 30-day volume-weighted average price as of the market close or $6.25.  Each of these proposals was accompanied by a mark-up of the form of merger agreement that had been provided.  SB-D and SB-E had previously proposed acquiring the entire Company jointly, even though they each had an interest only in separate operations.  Instead of approaching the acquisition on a joint basis, SB-D submitted a proposal to acquire our California utility for cash and SB-E submitted a proposal to acquire our regulated Texas assets for cash.  The closing price of our common stock on February 24, 2010 was $6.80.

The Special Committee met on Friday, February 26, 2010.  The members of the Special Committee reviewed and discussed with Locke Lord and representatives of Wells Fargo Securities a comparison of the proposals that had been prepared by Wells Fargo Securities and a matrix prepared by Locke Lord comparing the mark-ups received from IIF LLC/WAM and from FB-B of the form of merger agreement.  The Special Committee engaged in a detailed discussion of the proposals submitted by IIF LLC/WAM and FB-B, both of which had completed due diligence, had no financing contingencies and included proposed equity investments.  The Special Committee compared these proposals and considered certain aspects that had been discussed between representatives of Wells Fargo Securities and the bidders following submission of their proposals.  The Special Committee also discussed the potential benefit to the Company from the proposed equity investments.

The Special Committee reviewed a summary of the asset purchase proposals received from SB-D and SB-E that had been prepared by representatives of Wells Fargo Securities.  The Special Committee noted that one of the proposals contemplated a period of continued due diligence.  As the consideration to be received by our stockholders from these transactions appeared to be far below that which would be received from either of the other two proposals, the Special Committee decided to concentrate on the proposals submitted by IIF LLC/WAM and FB-B.

A representative of Manatt Phelps & Phillips, LLP, our California regulatory counsel, provided advice as to timing and likelihood of obtaining approval of a transaction from the California Public Utilities Commission.  Counsel indicated that a purchase by a financial buyer should not be an adverse factor, and in fact might reduce the time involved in obtaining approval, and that an equity investment by a buyer might also be a positive factor.

The Special Committee determined that a list of major deal points on the mark-up of the form of merger agreement submitted by IIF LLC/WAM be sent to IIF LLC/WAM and their advisors in an attempt to determine how much flexibility they had on these key issues, and that they be asked to provide a term sheet on the proposed equity investment and confirm that IIF LLC and its affiliates will commit to funding the entire transaction.  Because $11.00 was at the top of the range in WAM’s initial indication of interest, was $1.00 per share above the indicative price in IIF LLC/WAM’s updated indication of interest submitted in December, was above the price proposed by FB-B and compared favorably

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with most of the valuation levels suggested by the financial analysis that the Special Committee had reviewed, the Special Committee determined that it would be preferable to seek to improve the terms of IIF LLC/WAM’s mark-up of the form of merger agreement, particularly those terms that would enhance the certainty of closing, rather than to seek a higher per share price.  Once the Special Committee knew IIF LLC/WAM’s position on these key terms, it would seek to obtain a better price and improved terms of the merger agreement from FB-B, particularly those terms that the Special Committee believed would add greater certainty to closing.

The Special Committee directed Locke Lord to create a list of major deal points on IIF LLC/WAM’s mark-up of the form of merger agreement that had been identified at the meeting and, with representatives of Wells Fargo Securities, to communicate these points to the counsel and financial advisors to IIF LLC/WAM.  On Saturday, February 27th, representatives of Locke Lord and Wells Fargo Securities communicated these deal points to IIF LLC/WAM’s counsel and financial advisors.  Shortly thereafter, the financial advisors to IIF LLC/WAM responded to representatives of Wells Fargo Securities that agreement on these points could readily be reached and they proposed that the process be accelerated.  At a meeting later that afternoon, the Special Committee reviewed the deal points with representatives of Locke Lord and Wells Fargo Securities.  The representatives of Locke Lord informed the Special Committee that these points had been sent to and discussed with IIF LLC/WAM’s counsel and financial advisors, and the representatives of Wells Fargo Securities advised the Special Committee of the responses of IIF LLC/WAM’s financial advisors and their proposal to accelerate negotiations.  The Special Committee directed representatives of Locke Lord and Wells Fargo Securities to push forward in an attempt to resolve the open merger agreement issues with IIF LLC/WAM.

Representatives of Wells Fargo Securities and Locke Lord, and the counsel and financial advisors to IIF LLC/WAM, held a series of conference calls on Saturday, February 27th and Sunday, February 28th to negotiate the remaining open points.  During this period, IIF LLC/WAM prepared a term sheet that further outlined the proposed terms of the equity investment, and a price equal to approximately 95% of the 30 day volume weighted average price of our common stock as of February 26, 2010 was negotiated in discussions between the parties’ financial advisors.  The Special Committee held several additional meetings in the afternoon on February 28th to discuss the progress made in negotiations of the open items and the position to take on these items.

Our Board met on Sunday morning, February 28, 2010, with all members of the Board in attendance. Mr. Iino provided an overview of the recent activities of the Special Committee.  Representatives of Wells Fargo Securities then described for the Board the process in which the Special Committee had selected parties that might be interested in a transaction involving the Company and the extensive due diligence that they had conducted, and summarized for the Board the proposals that had been received.  The representatives of Wells Fargo Securities and Locke Lord then informed the Board of recent developments in discussions with the bidders, the Special Committee’s evaluation of each party’s proposed revisions to the form of merger agreement and additional information concerning the IIF LLC/WAM consortium.  The representatives of Locke Lord then reviewed the material open points in IIF LLC/WAM’s mark-up of the form of merger agreement, the equity commitment letters and the proposed terms for an equity investment.  A representative of Manatt Phelps commented on the regulatory issues, including the anticipated process and timing for seeking approval of the California Public Utilities Commission.  The Board was then informed by the representatives of Wells Fargo Securities of the proposed actions to be taken to resolve the remaining items, as well as plans for seeking the consent of the syndicate of lenders under the Company’s bank credit facility (which was required to enter into any merger agreement), and for communicating with the regulatory authorities and the other bidders.

Contemporaneously with the discussions with IIF LLC and WAM, representatives of Wells Fargo Securities, at the direction of the Special Committee, contacted the financial advisor to FB-B on the afternoon of Sunday, February 28, 2010, and was advised later in the day that FB-B could increase its proposed price, but the high end of the price range indicated was still below the $11.00 proposed by IIF LLC/WAM.  Representatives of Wells Fargo Securities were also informed that at a higher price level FB-B would not have much flexibility in negotiating the terms of its mark-up of the form of merger agreement.

Once it appeared that the major points had been resolved with IIF LLC and WAM, and that FB-B would not be in a position to offer a higher price, IIF LLC/WAM was advised on Sunday, February 28, 2010, that the final draft of the merger agreement that had been negotiated would be submitted to the Special Committee and the Board at meetings to take place on Monday, March 1, 2010.

The Special Committee met late in the afternoon on Monday, March 1, 2010.  Prior to the meeting, the Special Committee was provided with a copy of the merger agreement and a summary of the terms, and a copy of a letter of

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intent relating to the proposed investment was passed out at the meeting. Representatives of Wells Fargo Securities reviewed with the Special Committee the proposal from IIF LLC/WAM, provided a description of each of IIF LLC and WAM, and made a presentation to the Special Committee of its financial analysis of the Company.  After various questions and further discussions among the Special Committee with representatives of Wells Fargo Securities, Locke Lord and RLF, at the request of the Special Committee, representatives of Wells Fargo Securities delivered to the Special Committee its oral opinion, which was subsequently confirmed by delivery of a written opinion dated March 2, 2010, that, as of March 1, 2010, the $11.00 per share merger consideration to be received in cash by the holders of our common stock (other than any common stock held by the Company, Merger Sub, Parent, and any direct or indirect subsidiary of Parent or the Company, or with respect to which the holder has exercised statutory appraisal rights in accordance with the Delaware General Corporation Law (collectively the “excluded shares”)) in the proposed merger pursuant to the merger agreement was fair, from a financial point of view, to such holders.  The full text of the written opinion of Wells Fargo Securities, which is based on and subject to the assumptions made, matters considered and limitations on the review undertaken, is attached as Annex B to this Proxy Statement.

Following these presentations and discussion by the Special Committee, the Special Committee unanimously adopted resolutions declaring the merger, the merger agreement and the transactions contemplated thereby advisable, fair to and in the best interests of the Company and our stockholders; recommending the submission of the merger and merger agreement to our Board; and recommending that our Board approve the merger agreement, submit the merger agreement to our stockholders for adoption and resolve to recommend that our stockholders adopt the merger agreement.

The meeting of the Special Committee was adjourned and a meeting of the full Board was immediately convened, with all members of the Board in attendance.  The Wells Fargo Securities representatives reviewed for the Board the presentation that had been provided to the Special Committee, which included a description of the bidding process, its analysis of the strategic alternatives available to the Company, the due diligence undertaken by the various bidders and the final proposals received from the bidders.  A representative of Locke Lord reviewed with the Board the material terms of the proposed merger, referring to a summary of the terms of the merger agreement that had previously been delivered to the Board with a copy of the merger agreement, and the terms of the proposed equity investment, referring to copies of a binding letter of intent that had been distributed at the meeting.  The representatives of Wells Fargo Securities updated the Board on the financial terms of the funding commitment to be provided by IIF LLC and WAM to close the transaction.  The Board considered and discussed the financial analysis of the Company presented by the representatives of Wells Fargo Securities, including our historic and projected operating results, market performance, stockholder return data, current market expectations of future operating results, historic and projected performance by other water companies, and an analysis of the Company’s valuation and various financial ratios in comparison with comparable companies.  It was noted that the representatives of Wells Fargo Securities had provided to the Special Committee its oral opinion, which was subsequently confirmed in writing dated March 2, 2010, that, as of March 1, 2010, the $11.00 per share merger consideration to be received in cash by the holders of our common stock (other than the excluded shares) in the merger pursuant to the merger agreement was fair, from a financial point of view, to such holders, and that our Board would be entitled to rely on that opinion.

Mr. Iino, as chair of the Special Committee, reported on the recommendation to the Board that had been adopted by the Special Committee.

Following this discussion, the Board unanimously adopted resolutions declaring the merger, the merger agreement and the transactions contemplated thereby advisable, fair to and in the best interests of the Company and our stockholders; approving and adopting the merger agreement; authorizing us to enter into the merger agreement, perform our obligations under the merger agreement and, subject to adoption of the merger agreement by our stockholders, consummate the merger; and recommending that our stockholders adopt the merger agreement.  Our Board separately approved the letter of intent relating to the equity investment, and authorized us to sell and issue 2,700,000 shares of our common stock at a price of $6.00 per share, and to negotiate, execute and deliver definitive agreements in a form substantially consistent with the terms of the letter of intent.

Following the Board meeting, we entered into an exclusivity agreement with IIF LLC and WAM that was to expire at midnight, Eastern time, on Friday, March 5, 2010.  Counsel to the parties continued to finalize the merger agreement and related disclosure schedules throughout Tuesday, March 2, 2010, and into the early morning on Wednesday, March 3, 2010.  Consent by a syndicate under the Company’s credit facility, which was required to enter into the merger agreement, was sought beginning on Monday, March 1, 2010, and obtained on Tuesday, March 2, 2010.  Calls were also made during the afternoon of March 2, 2010 to regulatory authorities in several states advising them of the proposed transaction.

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The merger agreement was finalized early in the morning of Wednesday, March 3, 2010, and was then executed by the Company, Parent and Merger Sub as of March 2, 2010.  On Wednesday morning, March 3, 2010, prior to the opening of trading on the NASDAQ Global Select Market, we issued a press release announcing the merger.

Counsel to the parties drafted and negotiated agreements for the sale and issuance by us to Parent of 2,700,000 shares of our common stock at $6.00 per share, or a total of $16,200,000, which was approved by our Board on March 12, 2010, and the agreements were executed and the sale consummated on March 16, 2010.

Reasons for the Merger and Recommendation of the Board of Directors

Reasons for the Recommendation of the Special Committee

The Special Committee, acting with the advice and assistance of its independent legal and financial advisors, evaluated and negotiated the merger proposal, including the terms and conditions of the merger agreement, with IIF LLC and WAM and their legal and financial advisors.  The Special Committee determined that the merger, the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests of the Company and our stockholders, and recommended submission of the merger and merger agreement to our Board and that our Board (i) approve the merger agreement, (ii) submit the merger agreement to our stockholders for adoption and (iii) resolve to recommend that our stockholders adopt the merger agreement.

In the course of reaching its determination, the Special Committee considered the following substantive factors and potential benefits of the merger, each of which the Special Committee believed supported its decision (which are not listed in any relative order of importance):

·               its belief that the merger is more favorable to our stockholders than the alternative of remaining a stand-alone, independent company, largely because of the Company’s relatively small size, being in competition with a number of significantly larger companies, having limited access to debt and equity financing in a capital-intensive business and having somewhat limited following and research support for its stock;

·               the cost and requirements of being a public company, including the costs and efforts associated with SEC reporting, NASDAQ regulations and fees, insurance costs, the costs and effect of maintaining a board with outside directors, and the required attention to additional regulatory matters and compliance, including the requirements imposed by the Sarbanes Oxley Act of 2002, as well as limitations on the Company’s ability to pursue its strategic plan and take necessary competitive actions while a public company, in light of the potential impact on near- and long-term revenues and earnings;

·               IIF LLC’s and WAM’s investing and transaction experience, their knowledge and experience in the Company’s industry, their reputation and financial capabilities, and the likelihood that the merger would be consummated, supported by IIF LLC’s and WAM’s equity commitment letters pursuant to which they and their affiliates have agreed to make cash investments of $275,800,000 and $27,600,000, respectively, to fund the merger consideration payable to our stockholders;

·               its belief that the merger is more favorable to our stockholders than the potential value that might result from other alternatives available to us, including divestiture by the Company of selected assets or operations, given the potential rewards, risks and uncertainties associated with those alternatives;

·               the vigorous bidding process that was conducted over an extended period and the receipt of indications of interest and proposals from both strategic and financial buyers (see “—Background of the Merger”);

·               the premium to historical trading prices of our common stock represented by the $11.00 merger consideration, which was 55.6% based on the closing price of $7.07 per share on March 2, 2010, the last full trading day prior to the announcement of the merger agreement;

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60.3% based on the average closing price of $6.86 per share for the five-day trading period ended March 2, 2010; and 70.7% based on the average closing price of $6.44 per share for the 30-day trading period ended March 2, 2010;

·               the proposed cash investment by Parent of $16,200,000 for 2,700,000 shares of our common stock at $6.00 per share, which evidences the commitment of IIF LLC and WAM to the Company and does not have to be repaid if the merger is not consummated, and the proceeds of which can be used for debt reduction and/or capital expenditures, debt redemption and working capital;

·               the financial analyses of Wells Fargo Securities presented to the Special Committee and Wells Fargo Securities’ opinion that, as of March 1, 2010, the merger consideration to be received in cash by the holders of our common stock (other than the excluded shares) in the merger pursuant to the merger agreement was fair, from a financial point of view, to such holders. (see “—Opinion of Financial Advisor”);

·               the efforts made by the Special Committee and its legal advisors to negotiate and execute a merger agreement favorable to the Company;

·               the financial and other terms and conditions of the merger agreement as reviewed by the Special Committee were the product of arm’s-length negotiations between the parties;

·               the ability to recover from Parent a termination fee of approximately $13,600,000 or up to $40,000,000 in monetary damages if it fails to consummate the merger under certain circumstances; and

·               the amount of the merger consideration is payable in cash so that the merger allows our stockholders to realize a fixed amount of cash for their investment without the potential risks and uncertainty of non-cash merger consideration.

The Special Committee also considered a number of factors relating to the procedural safeguards involved in the negotiation of the merger agreement, including those discussed below, each of which it believed supported its decision and provided assurance of the fairness of the merger to our stockholders (which are not listed in any relative order of importance):

·               negotiations were conducted under the oversight of the Special Committee comprised solely of independent members of our Board, who are not employees of the Company and who have no material financial interest in the merger that is different from that of our stockholders;

·               the Special Committee received advice and assistance in evaluating, negotiating and recommending the legal and financial terms of the merger agreement from its own independent legal and financial advisors;

·               the Special Committee was granted full authority by the Board to explore strategic alternatives, review and evaluate the advisability of a business combination, and negotiate the terms of a definitive agreement;

·               the vigorous bidding process over an extended period, during which approximately 16 parties contacted the Company or its financial advisor expressing an interest in a transaction with the Company, or were contacted to determine whether they would have an interest in a transaction, and the receipt of written indications of interest from ten bidders (two acting jointly), of which seven were strategic buyers and three were financial buyers (see “—Background of the Merger”);

·               the execution by potential bidders of confidentiality agreements, access to an electronic dataroom containing nonpublic due diligence materials, attendance at management presentations on our business, operations and financial condition, and site visits to our offices and facilities;

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·               the terms and conditions of the merger agreement were the product of arm’s-length negotiations between the Special Committee and its independent financial and legal advisors, on the one hand, and IIF LLC and WAM and their financial and legal advisors, on the other hand;

·               the merger agreement must be adopted by the holders of a majority of the combined voting power of our outstanding common stock and Series A preferred stock, voting together as a single class;

·               the opinion of Wells Fargo Securities that, as of March 1, 2010 and subject to the factors and assumptions set forth therein, the merger consideration to be received in cash by the holders of common stock (other than the excluded shares) in the merger pursuant to the merger agreement was fair, from a financial point of view, to such holders;

·               the ability of our Board under certain circumstances prior to our stockholders’ adoption of the merger agreement to respond to unsolicited, written, bona fide proposals or offers relating or reasonably likely to lead to a competing transaction (as defined below and in the merger agreement) and, upon payment of a termination fee, to change its recommendation and terminate the merger agreement in order to effect the competing transaction; and

·               the availability of appraisal rights to holders of our common stock who comply with all of the required procedures under Section 262 of the Delaware General Corporation Law, which allows such holders to demand that we purchase their shares for fair value (see “—Appraisal Rights”).

The Special Committee also considered a variety of risks and other potentially negative factors concerning the merger, including the following (which are not listed in any relative order of importance):

·               the significant costs and disruption to the Company’s business, operations and management’s time and attention associated with entering into the merger agreement;

·               the disruption and potential harm to the Company’s relationships with its employees, vendors and customers caused by announcement of the execution of the merger agreement and the resulting uncertainty prior to consummation of the merger;

·               the risks and costs to the Company if the merger does not close, including the diversion of management and employee attention, potential employee attrition and the potential effect on our business;

·               the fact that our stockholders, other than Parent and its affiliates, will not participate in any of our future earnings or growth and will not benefit from any appreciation in our value, including any appreciation in value that could be realized as a result of improvements to our operations or increases in the value of our common stock beyond the agreed-upon merger consideration;

·               the restrictions on the conduct of the Company’s business prior to completion of the merger, requiring us to conduct our business only in the ordinary course, subject to specific limitations, which may delay or prevent us from undertaking business opportunities that may arise pending completion of the merger;

·               the receipt of the merger consideration by U.S. persons will be generally subject to U.S. federal income tax;

·               the prohibition on soliciting, initiating or taking action to facilitate inquiries, proposals or offers that may lead to a competing transaction;

·               the requirement that, if the merger agreement is terminated under specified circumstances, we must pay a termination fee of approximately $8,200,000, as well as expenses of Parent, up

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to $3,000,000, which amount is to be deducted from any termination fee that may be payable by us;

·               any recovery from Parent if it fails to consummate the merger under certain circumstances is limited to a termination fee of approximately $13,600,000 or up to $40,000,000 in monetary damages;

·               even if the merger is not completed, the Company will be required to pay its legal and accounting fees and other miscellaneous fees and expenses; and

·               the lack of assurance that all conditions to the parties’ obligations to consummate the merger, including regulatory approvals or clearances, will be satisfied or that the merger will be consummated, although the Special Committee and the Company expect it to be consummated.

The foregoing discussion summarizes the material factors considered by the Special Committee in its review of the merger, but is not meant to be an exhaustive description of the information and factors considered by the Special Committee.  After considering these factors, the Special Committee concluded that the positive factors relating to the merger and the merger agreement outweighed the potential negative factors and unanimously determined that the merger, the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests of the Company and our stockholders.  In view of the wide variety of factors considered by the Special Committee, and the complexity of these matters, the Special Committee did not find it practicable to quantify or otherwise assign relative weights to the foregoing factors.  In addition, individual members of the Special Committee may have assigned different weights to various factors.  The Special Committee recommended that the Board approve the merger agreement based upon the totality of the information presented to and considered by it.

Reasons for the Recommendation of the Board of Directors

Our Board, at a meeting on March 1, 2010, having received reports and updates from the Special Committee and its independent legal and financial advisors and the recommendation of the Special Committee described above, determined that the merger, the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests of the Company and our stockholders; approved the merger agreement; and recommended that our stockholders adopt the merger agreement.

In reaching its conclusion to approve the merger agreement and recommend its adoption by our stockholders, the Board consulted with the Special Committee, independent legal counsel, the Special Committee’s legal and financial advisors and the Company’s management, and considered, among other things:

·               the Special Committee’s unanimous determination that the merger, the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests of the Company and our stockholders and recommendation that the Board approve the merger agreement;

·               the financial presentation of Wells Fargo Securities that was prepared for the Special Committee and was presented to the Board at the request of the Special Committee; and

·               the opinion of Wells Fargo Securities that, as of March 1, 2010 and subject to the factors and assumptions set forth therein, the merger consideration to be received in cash by the holders of common stock (other than the excluded shares) in the merger pursuant to the merger agreement was fair, from a financial point of view, to such holders.

The foregoing discussion summarizes the material factors considered by our Board in its consideration of the merger.  In view of the wide variety of factors considered by our Board, and the complexity of these matters, our Board did not find it practicable to quantify or otherwise assign relative weights to the foregoing factors.  In addition, individual members of our Board may have assigned different weights to various factors.  The Board unanimously approved and recommends adoption by our stockholders of the merger agreement based upon the totality of the information presented to and considered by it.

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OUR BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE ADOPTION OF THE MERGER AGREEMENT.

In considering the Board’s recommendation with respect to the merger agreement, the holders of our common stock should note that directors and members of our management may have interests in the merger than may differ from or be in addition to those of our stockholders, and that members of the Special Committee received fees for their services on the Special Committee in connection with the consideration of the merger.  The Special Committee and the Board considered these potential interests as they considered the merger and the merger agreement.  For more information, see “—Interests of Our Directors and Executive Officers in the Merger” on page [  ].

Opinion of Financial Advisor

The Special Committee retained Wells Fargo Securities to act as its financial advisor in connection with its consideration of a potential transaction involving the Company.  In connection with this engagement, the Special Committee requested that Wells Fargo Securities provide its opinion as to the fairness, from a financial point of view, of the consideration to be received by holders of the common stock other than the excluded shares.  In selecting Wells Fargo Securities as its financial advisor, the Special Committee considered, among other things, the fact that Wells Fargo Securities is an internationally-recognized investment banking firm with substantial experience advising companies in the utility industry and has substantial experience providing strategic advisory services in similar transactions.  Wells Fargo Securities, as part of its investment banking business, is continuously engaged in the evaluation of businesses and debt and equity securities in connection with mergers and acquisitions; underwritings, private placements and other securities offerings; senior credit financings; and general corporate advisory services.

On March 1, 2010, at a meeting of the Special Committee held to evaluate the merger, Wells Fargo Securities delivered to the Special Committee its oral opinion, which was subsequently confirmed in writing on March 2, 2010, to the effect that, as of March 1, 2010, and based on and subject to various assumptions made, procedures followed, matters considered and limitations on the review undertaken by Wells Fargo Securities in connection with the opinion, the experience of its investment bankers and other factors it deemed relevant, the merger consideration to be received by holders of the common stock (other than the excluded shares) pursuant to the merger agreement is fair, from a financial point of view, to such holders.  In rendering its opinion, Wells Fargo Securities expressed no opinion with respect to any amounts to be received by, or to be paid or not paid, for any excluded shares.  The issuance of the opinion of Wells Fargo Securities was approved by an authorized committee of Wells Fargo Securities.

The full text of Wells Fargo Securities’ written opinion to the Special Committee, which sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with such opinion, is attached as Annex B to this Proxy Statement and is incorporated by reference in its entirety into this Proxy Statement.  The following summary is qualified in its entirety by reference to the full text of the opinion.  Wells Fargo Securities provided its opinion for the information and use of the Special Committee in connection with its consideration of the merger.  Wells Fargo Securities’ opinion does not address, and should not be construed to address, any other aspect of the merger, the relative merits of the merger or the decision by the Company to enter into the merger agreement or any related transaction and does not constitute a communication or a recommendation to any holder of the common stock as to how or whether such holder should vote or act on any matters relating to the merger or any other matters.

In arriving at its opinion, Wells Fargo Securities, among other things:

·               Reviewed the merger agreement;

·               Reviewed Annual Reports on Form 10-K for the Company for the three years ended 2008 and the annual report to stockholders for the year ended 2008;

·               Reviewed certain interim reports to stockholders and Quarterly Reports on Form 10-Q for the Company;

·               Reviewed certain business, financial and other information regarding the Company  furnished to it by the Company’s management, and discussed the business and prospects of the Company with its management;

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·               Reviewed financial forecasts for the Company that were developed and furnished to it by the  management of the Company, and that were approved for its use by the Special Committee, and discussed such financial forecasts with the management of the Company;

·               Reviewed certain other periodic reports filed by the Company under the Exchange Act and other publicly available information regarding the Company;

·               Considered certain business, financial and other information regarding the Company and compared that information with corresponding information for certain other publicly-traded companies that it deemed relevant;

·               Considered the proposed financial terms of the merger and compared them with the financial terms of certain other business combinations and other transactions that it deemed relevant;

·               Participated in discussions among representatives of the Company and their legal advisors;

·               Participated in negotiations between IIF LLC and WAM and their legal and financial advisors, on the one hand, and the Special Committee and its legal advisors, on the other hand;

·               Reviewed the historical prices, implied trading multiples and trading volumes of the common stock;

·               Reviewed the reported price and trading activity for the common stock; and

·               Considered such other information, such as financial studies, analyses and investigations, as well as financial, economic and market criteria, as it deemed relevant.

In connection with its review, Wells Fargo Securities assumed and relied upon the accuracy and completeness of the foregoing financial and other information, including all information, analyses and assumptions relating to accounting, legal, regulatory and tax matters, whether publicly available or otherwise provided to, reviewed by or discussed with it.  Wells Fargo Securities has not assumed any responsibility for, nor independently verified, any such information or physically inspected any of the Company’s facilities or assets.  Wells Fargo Securities relied upon the assurances of the management of the Company that they are not aware of any facts or circumstances that would make such information about the Company inaccurate or misleading.  Wells Fargo Securities relied upon financial forecasts regarding the Company that were furnished to it by the management of the Company, and that it was instructed to use, by the management of the Company and the Special Committee, and Wells Fargo Securities was advised by the management of the Company and assumed that such financial forecasts, as well as the estimates, judgments, allocations and assumptions upon which such financial forecasts are based, have been reasonably formulated and reflect the best currently available estimates, judgments, allocations and assumptions of the management of the Company regarding the future financial performance of the Company.  Wells Fargo Securities assumed no responsibility for, and expressed no view as to, any such financial forecasts or the estimates, judgments, allocations or assumptions upon which they are based.  In arriving at its opinion, Wells Fargo Securities has not prepared, obtained or been provided with any independent evaluations or appraisals of the assets or liabilities of the Company, including any contingent liabilities.  Wells Fargo Securities also assumed that there had been no material changes in the condition (financial or otherwise), results of operations, business or prospects of the Company since the date of the last financial statements provided to it.

Wells Fargo Securities’ opinion did not address, nor should it be construed to address, the relative merits of the merger, or any alternative business strategies or transactions that may be, or have been, available to, or considered by, the Company, its Board, the Special Committee or any other committee thereof.  Furthermore, Wells Fargo Securities’ opinion does not address Parent’s ability to consummate the merger.  Wells Fargo Securities relied on the advice of counsel, management of the Company and independent accountants to the Company as to all legal, regulatory and financial reporting matters with respect to the Company, the merger and the merger agreement.  Wells Fargo Securities was not requested to, and did not, express any opinion regarding the tax effect of the merger on the Company or the holders of common stock.

In rendering its opinion, Wells Fargo Securities assumed that the merger would be consummated on the terms set forth in the merger agreement, without amendments or waivers of any terms or conditions in any manner material to

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its analysis, without any adjustment to the consideration to be paid to the holders of the common stock in the merger (through offset, reduction, indemnity claims or otherwise) and that in the course of obtaining any legal, regulatory or other consents and/or approvals, no restrictions will be imposed or other actions taken that will adversely affect the merger or the Company in any manner material to its analysis.  The opinion of Wells Fargo Securities is necessarily based upon economic, market, financial and other conditions and information available to it as of the date of its opinion.  Although subsequent developments may affect its opinion, Wells Fargo Securities does not have any obligation to update, revise or reaffirm its opinion.  The opinion of Wells Fargo Securities only addresses the fairness, as of March 1, 2010, from a financial point of view to the holders of the common stock (other than the excluded shares) of the consideration to be received by such holders in the merger pursuant to the merger agreement and does not address any other terms of the merger or any other agreements, arrangements or understandings entered into in connection with the merger or otherwise.  In rendering its opinion, Wells Fargo Securities expressed no opinion with respect to the amount or nature of any compensation to any officers, directors or employees of Company or any of its affiliates, or any class of such persons, relative to the consideration to be received by the holders of the common stock in the merger or with respect to the fairness of any such compensation.  In rendering its opinion, Wells Fargo Securities expressed no opinion with respect to any amounts or consideration to be received by, or to be paid or not paid, to the holders of the excluded shares in connection with the merger.

In addition, Wells Fargo Securities did not consider, and Wells Fargo Securities expressed no opinion with respect to, the price at which the common stock might trade following the announcement of the merger.  Except as described above, the Special Committee imposed no other instructions or limitations on Wells Fargo Securities with respect to the investigations made or the procedures followed by it in rendering its opinion.  The issuance of Wells Fargo Securities’ opinion was approved by an authorized committee of Wells Fargo Securities.

The summary set forth below does not purport to be a complete description of the analyses performed by Wells Fargo Securities, but describes, in summary form, the material analyses performed by Wells Fargo Securities in connection with Wells Fargo Securities’ opinion.  The preparation of an opinion is a complex process and is not necessarily susceptible to partial analysis or summary description.  Wells Fargo Securities made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor considered by it.  Accordingly, the analyses reflected in the tables and described below must be considered as a whole, and considering any portion of the analyses, without considering all analyses together, could create a misleading or incomplete view of the processes underlying Wells Fargo Securities’ analyses and opinion.

Company Financial Analyses

Premium Paid Analysis .  Wells Fargo Securities reviewed the historical trading prices for the common stock for the five-year period ended February 26, 2010 (the last trading day prior to the meeting of the Special Committee on March 1, 2010).  In addition, Wells Fargo Securities analyzed the consideration of $11.00 per share to be paid to the holders of shares of the common stock in the merger pursuant to the merger agreement in relation to the closing price of the common stock on February 26, 2010, the average closing prices of the common stock during the five day and 30 day trading periods ended February 26, 2010 and the high intra-day trading price of the common stock for the 52 week period ended February 26, 2010.

This analysis indicated that the price per share to be paid to the holders of the common stock in connection with the merger pursuant to the merger agreement represented:

·               a premium of 63.7% based on the closing price of $6.72 per share on February 26, 2010;

·               a premium of 62.0% based on the average closing price of $6.79 per share for the five day trading period ended February 26, 2010;

·               a premium of 72.1% based on the average closing price of $6.39 per share for the 30-day trading period ended February 26, 2010; and

·               a premium of 44.9% based on the latest 52 week high intra-day trading price of $7.59 per share on February 12, 2010.

Comparable Public Companies Analysis .  Wells Fargo Securities reviewed and compared certain financial information

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and financial multiples relating to the Company to corresponding financial information and financial multiples for comparable publicly-traded water utility companies.  Wells Fargo Securities selected these companies based upon its views as to the comparability of the financial and operating characteristics of these companies to the Company.

The companies included in the comparable companies’ analysis were:

·               American States Water Company

·               American Water Works Company, Inc.

·               Aqua America, Inc.

·               Artesian Resources Corporation

·               California Water Service Group

·               Connecticut Water Service, Inc.

·               Middlesex Water Company

·               SJW Corp.

·               The York Water Company

Wells Fargo Securities calculated and compared the financial multiples for the selected companies based on public filings, equity research and common stock closing prices on February 26, 2010 for the selected companies.  Wells Fargo Securities calculated the financial multiples for the Company based on public filings, equity research, financial forecasts provided by management of the Company and the closing price of the common stock of $6.72 per share on February 26, 2010.  With respect to the Company and each of the selected companies, Wells Fargo Securities calculated:

·       enterprise value, which is the market value of common equity plus the book value of debt, less cash, as a multiple of estimated 2010 earnings before interest, taxes, depreciation and amortization, or EBITDA, and estimated 2011 EBITDA; and

·       price as a multiple of estimated 2010 earnings per share, or EPS, and estimated 2011 EPS.

The following table presents the results of these analyses

* For the Company, enterprise value was calculated based on the book value of debt and preferred stock (less cash) listed on the Company’s balance sheet of December 31, 2009.

Applying a range of multiples derived from the comparable public companies analysis to corresponding financial data for the Company provided to Wells Fargo Securities by the management of the Company, Wells Fargo Securities calculated a range of implied equity values per share of the common stock of $4.63 to $7.71. Wells Fargo Securities noted that the per share merger consideration to be paid in connection with the merger is $11.00.

Selected Transactions Analysis.  Wells Fargo Securities analyzed certain information relating to the following selected transactions involving publicly traded utility companies since January 2007.  Although none of the companies involved in the selected transactions is identical to the Company, nor is any of the selected transactions identical to the merger, Wells Fargo Securities chose the transactions in the selected transactions analysis because the companies that participated in the selected transactions are companies with operations that, for the purposes of analysis, may be considered similar to certain of the Company’s results, market size or operations.

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Transactions Involving Utility Companies

For each of the selected transactions, Wells Fargo Securities calculated the transaction enterprise value (defined as the market capitalization of the target’s equity (including premium) at the time of the announcement of the selected transaction plus the book value of the target’s debt minus available cash) as a multiple of one-year forward EBITDA for the target based on public filings and other publicly available information and equity research available at the time of the announcement of the selection transaction.  Wells Fargo Securities then derived an implied enterprise value range for the Company by applying a range of selected multiples to the Company management’s estimate of the Company’s EBITDA for the 12-month period ending December 31, 2011.  The following table presents the results of this analysis:

Applying a range of one-year forward EBITDA multiples of 8.5x to 10.0x derived from the comparable transactions analysis to corresponding financial data for the Company provided to Wells Fargo Securities by the management of the Company, Wells Fargo Securities calculated a range of implied equity values per share of the common stock of $6.94 to $9.25. Wells Fargo Securities noted that the per share merger consideration to be paid in connection with the merger is $11.00.

Illustrative Present Value of Future Share Price Analysis .  Wells Fargo Securities performed an illustrative analysis of the implied present value of a theoretical future price of a share of the common stock, which analysis was designed to provide an indication of the present value of a theoretical future value of a company’s equity as a function of such company’s estimated future earnings, its common stock dividends and its assumed price to future earnings per share multiple.  For this analysis, Wells Fargo Securities used Company management’s financial forecast of the Company’s one-year forward earnings per share for the year ending December 31, 2013.  Wells Fargo Securities first calculated the implied value per share of common stock as of March 31, 2013 by applying a range of price to forward earnings per share multiples of 16.0x to 19.0x to the 2013 earnings per share estimate for the Company provided by Company management, and then discounted the implied value per share of common stock and the annual dividends paid in each interim period up to March 31, 2013 back to March 31, 2010 using the Company’s estimated cost of equity of 9.0%.

This analysis resulted in an implied range of present values of $9.04 to $10.63 per share of common stock.  Wells Fargo Securities noted that the per share merger consideration to be paid in connection with the merger is $11.00.

Illustrative Discounted Cash Flow Analysi s.  Wells Fargo Securities performed an illustrative discounted cash flow

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analysis of the Company using the Company management’s financial forecast for 2010 through 2013 to determine an implied present value per share of the common stock as of March 31, 2010.  In conducting this analysis, Wells Fargo Securities first calculated the net present value of the projected after-tax unlevered free cash flows for the Company for the remainder of fiscal year 2010 and for the fiscal years 2011 through 2013.  Next, Wells Fargo Securities calculated the net present value of the illustrative terminal value of the Company in the fiscal year 2013 by applying a range of terminal value EBITDA multiples of 9.0x to 10.0x to the Company’s estimated EBITDA for fiscal year 2013.  The cash flow streams and terminal values were discounted to present values using discount rates ranging from 7.0% to 8.0%, reflecting estimates of the Company’s weighted average cost of capital.  Wells Fargo Securities then calculated the implied enterprise value of the Company by adding the present value of the projected cash flows of the Company for the remainder of fiscal year 2010 and for the fiscal years 2011 through 2013 to the present value of the terminal value for the Company in fiscal year 2013.  Wells Fargo Securities calculated an implied per share value for the Company by subtracting net debt (which is total debt minus cash) and preferred stock obligations of the Company listed on the Company’s balance sheet as of December 31, 2009 from the present enterprise value of the Company and then dividing by the number of shares of the common stock outstanding (as determined on a fully-diluted basis using the treasury stock method for options) as of December 31, 2009.

This analysis resulted in an implied range of present values of $9.97 to $12.17 per share of common stock.  Wells Fargo Securities noted that the per share merger consideration to be paid in connection with the merger is $11.00.

Premiums Paid Analysis .  Based on public filings and equity research, Wells Fargo Securities compared the $11.00 per share of common stock to be paid to the holders of common stock in connection with the merger pursuant to the merger agreement to the average premiums paid in all public transactions with enterprise values less than $1.0 billion since 2004, excluding those transactions with premiums below 0% and above 200%, to the average premiums paid in the following utility transactions since 2004 and to the average premiums paid in the following water utility transactions since 1998.

Transactions Involving Utility Companies

Transactions Involving Water Utility Companies

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Wells Fargo Securities measured each transaction price per share relative to each target’s closing price per share one day prior to, and the average closing price during the 30-day trading period prior to, the announcement of the selected transaction.

The following table presents the results of this analysis:

Based on the results of the premiums paid analysis, Wells Fargo Securities applied a range of premiums of 15% to 25% to the closing price of $6.72 per share on February 26, 2010 and a range of premiums of 15% to 30% to the average closing price of $6.39 per share for the 30-day trading period ended February 26, 2010.  This analysis resulted in an implied range of values of $7.35 to $8.40 per share of common stock.  Wells Fargo Securities noted that the per share merger consideration to be paid in connection with the merger is $11.00.

Illustrative Take-Private Analysis .  Wells Fargo Securities performed an illustrative take-private analysis using Company’s management’s forecasts, which was designed to provide an indication of the theoretical price per share of common stock a financial investor could pay to acquire the Company and realize an acceptable pre-tax internal rate of return on the investment.  For this analysis, Wells Fargo Securities assumed that the hypothetical acquisition would close on December 31, 2010, and that the hypothetical acquiror would finance the acquisition of the common stock and retirement of a portion of the Company’s then-outstanding debt with a combination of new borrowings and investor equity in a proportion so that total leverage of the Company on the date of the closing would be equal to 4.5x 2010 EBITDA, as estimated by Company management.  In conducting this analysis, Wells Fargo Securities used the Company management’s forecast to calculate the Company’s estimated after-tax free cash flows that would be available to the acquiror over an investment period ending on December 31, 2014. Wells Fargo Securities then calculated the implied exit enterprise value of the Company as of December 31, 2014 by applying a range of exit value EBITDA multiples of 9.0x to 10.0x to the 2014 EBITDA estimate for the Company provided by Company management.  The implied exit value of the investor’s equity investment was then calculated by subtracting the Company’s estimated net debt (which is defined as total debt minus cash) as of December 31, 2014 from the implied exit enterprise value for the Company.  Wells Fargo Securities then calculated the range of theoretical purchase prices per share of common stock which would yield the investor pre-tax rates of return ranging from 12% to 18% per annum.

This analysis resulted in an implied range of $7.45 to $10.92 per share of common stock.  Wells Fargo Securities noted that the per share merger consideration to be paid in connection with the merger is $11.00.

Other Considerations

Wells Fargo Securities prepared the analyses described above solely for purposes of providing its opinion to the Special Committee as to the fairness, from a financial point of view and as of March 1, 2010, of the consideration to be received by the holders of the common stock (other than the excluded shares) in the merger pursuant to the merger agreement.  The analyses do not purport to be appraisals or to reflect the prices at which a company or business might actually be sold or the prices at which any securities have traded or may trade at any time in the future.  The analyses described above that are based upon forecasts of future results are not necessarily indicative of actual results in the future, which may be significantly more or less favorable than suggested by these analyses.  These analyses are based upon numerous factors or events beyond the control of the parties or their respective advisors, and therefore are inherently subject to uncertainty. None of the Company, Wells Fargo Securities or any other person assumes responsibility if future results are materially different from those forecast.  The type and amount of consideration payable in the merger were determined through negotiations between IIF LLC and WAM and their advisors, on the one hand, and the Special Committee and its advisors on the other hand.  Wells Fargo Securities

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did not recommend any specific consideration to the Special Committee or state that any given consideration constituted the only appropriate consideration for the merger.  The decision to enter into the merger agreement was solely that of the Special Committee and the Board.  As described above, Wells Fargo Securities’ opinion and analyses were only one of many factors taken into consideration by the Special Committee in evaluating the merger.  Wells Fargo Securities’ analyses summarized above should not be viewed as determinative of the views of the Special Committee and the Board or management of the Company with respect to the merger or the consideration to be received in the merger.  Wells Fargo Securities has been engaged to act as financial advisor to the Special Committee in connection with the merger and will receive a fee for such services, all of which will be payable upon the consummation of the merger.  In addition, the Company has agreed to reimburse certain of Wells Fargo Securities’ expenses and indemnify it against certain liabilities that may arise out of its engagement.

Wells Fargo Securities and its affiliates provide full-service securities trading and brokerage services and a full range of investment and commercial banking advice and services, including financial advisory services, securities underwritings and placements, and commercial loans.  In that regard, Wells Fargo Securities and/or its affiliates have in the past provided, and may in the future provide, investment and commercial banking advice and services to, and otherwise seek to expand or maintain its business and commercial relationships with, the Company, Parent, and/or certain of their affiliates, for which Wells Fargo Securities and its affiliates have received and would expect to receive customary compensation.  In the ordinary course of its business, Wells Fargo Securities and its affiliates may trade or otherwise effect transactions in the securities and other financial instruments, including bank loans, of the Company, Parent, and/or certain of their respective affiliates for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities and financial instruments.  In that regard, Wells Fargo Securities has acted, and may in the future act, as an underwriter or placement agent in offerings or private placements of securities of  J.P. Morgan Chase & Co. and its affiliates, which are affiliates of J.P. Morgan Asset Management, an advisor to IIF LLC, for which Wells Fargo Securities has received, and would expect to receive, customary compensation.  Wells Fargo Securities and certain of its affiliates also have regular ordinary course business dealings with the J.P. Morgan Chase & Co. and certain of its affiliates.

Delisting and Deregistration of SouthWest Water Common Stock

If the merger is completed, our common stock will be delisted from the NASDAQ Global Select Market and deregistered under the Exchange Act.  Therefore, the provisions of the Exchange Act will no longer apply to us, including the requirement that we furnish a proxy or information statement to our stockholders in connection with meetings of our stockholders.  We will also no longer be required to file periodic reports with the SEC.

Accounting

For financial reporting purposes, the merger will be accounted for by Parent under a purchase price allocation where the assets and liabilities will be presented at their fair value.

Effects on SouthWest Water if the Merger is Not Completed

If our stockholders do not adopt the merger agreement, or if the merger is not completed for any other reason, stockholders will not receive any payment for their shares in connection with the merger.  Instead, we will remain an independent public company and our common stock will continue to be listed and traded on the NASDAQ Global Select Market.  In addition, if the merger is not completed, we expect that management will operate the business in a manner similar to that in which it is being operated today and that our stockholders will continue to be subject to the same risks and opportunities as they currently are, including, among other things, the nature of the water and wastewater industry on which our business largely depends, and general industry, economic, regulatory and market conditions.  Accordingly, if the merger is not consummated, there can be no assurance as to the effect of these risks and opportunities on the future value of your shares.  From time to time, our Board will evaluate and review, among other things, the business operations, properties, dividend policy and capitalization of SouthWest Water and make such changes as are deemed appropriate and continue to seek to identify strategic alternatives to enhance stockholder value.  If our stockholders do not adopt the merger agreement, or if the merger is not consummated for any other reason, there can be no assurance that any other transaction acceptable to SouthWest Water will be offered, or that our business, prospects or results of operations will not be adversely impacted.  We may be required to pay the Parent’s expenses and the termination fees as described in “The Merger Agreement—Termination Fees and Expenses.”

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Interests of Our Directors and Executive Officers in the Merger

In considering the recommendation of our Board  with respect to the merger, you should be aware that some of our members of the Board and executive officers have interests in the merger that are different from, or in addition to, the interests of our stockholders generally.  These interests may present them with actual or potential conflicts of interest, and these interests, to the extent material, are described below.  The Special Committee and Board were aware of these interests and considered them, among other matters, in considering the merger agreement and the merger.

Change of Control Severance Agreements

We have entered into Change of Control Severance Agreements with six of our employees, four of which are Section 16(a) executive officers, which provide that if the executive officer’s employment is terminated by the Company without “cause” or if the executive officer resigns with “good reason” (each as defined in the applicable Change of Control Severance Agreement) within two years following a change of control, such executive officer will receive severance payments as described below.   The completion of the merger will result in a change of control for purposes of these agreements.  The severance payments range from 1.0 to 2.99 times the sum of the executive’s most recent base salary plus the average bonus (or Non-Equity Incentive Plan compensation) for the prior three full years and such severance payments must be paid to the executive in a lump sum within 15 days following the termination of employment.  Certain executives are also entitled to receive up to 24 months of continued medical benefits and certain outplacement services following the termination of employment.  Total payments and benefits (including any accelerated vesting under equity awards) may not exceed the limits imposed by Section 280G of the Internal Revenue Code. Details on the payments and benefits that each of the named executive officers would receive in the event his or her employment terminates are shown on the Potential Payments Upon Post Termination tables specific to each named executive officer on pages [__].

Retention Agreements

Recognizing that the process for completing the merger will take a considerable amount of time due to the required regulatory approvals and the need to satisfy the various other conditions to the merger and the need to retain members of the Company’s management team to help with the successful completion of the merger, as well as to help manage important aspects of the Company and its operations through the period leading up to the completion of the merger, the Company entered into retention agreements with certain members of its management team, including six executive officers.  Each agreement provides for the payment of a bonus if the individual remains employed by the Company for 90 days following consummation of the merger.  If the individual resigns or his or her employment is terminated for cause (as defined in the retention agreement) then he or she will not be eligible to receive the bonus.  However, if the individual’s employment is terminated by the Company for any reason other than cause, he or she will be entitled to receive the bonus.  For executives that have entered into Change of Control Severance Agreements with the Company, if the executive resigns for “good reason” (as defined in the applicable Change of Control Severance Agreement) the bonus will be offset against and reduce the amount of the severance payment provided to such executive.  Total possible bonus payments related to retention agreements with Section 16(a) executive officers aggregates to $695,000.

Treatment of Stock Options and Restricted Stock

As of the Record Date, 83,000 shares of our common stock were subject to stock options granted under our equity incentive plans to our directors with exercise prices less than $11.00 per share.  None of our executive officers have outstanding stock options with exercise prices less than $11.00 per share. Our directors and executive officers also hold stock options for 191,900 and 473,058 shares, respectively, which have exercise prices greater than $11.00 per share.  Upon the consummation of the merger, all outstanding options to acquire common stock held by our directors and executive officers, like all other stock options held by our other employees, will vest in full and will then be canceled.  In consideration for the cancellation of the options, the holder of any such option outstanding immediately prior to the effective time of the merger will receive an amount equal to the number of shares of common stock underlying the option multiplied by the amount (if any) by which $11.00 exceeds the exercise price for each share of common stock underlying the options, without interest and less applicable withholding taxes.  The aggregate cash payment that will be made to these directors in connection with the cancellation of their options upon consummation of the merger will aggregate approximately $155,000.  If the exercise price of the option is equal to or exceeds $11.00, the holder of such option will not be entitled to any merger consideration.

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Upon consummation of the merger, 103,306 shares of restricted stock (of which 48,536 shares are performance contingent restricted stock) held by our executive officers will become fully vested and will be converted into the right to receive $11.00 per share, or approximately $1,136,000 in the aggregate.

Indemnification of Directors and Officers; Insurance

Each of our directors and each officer will be indemnified and held harmless during the six-year period following the effective time of the merger to the full extent permitted by law from any claims arising by virtue of his or her service as a director or officer or in connection with the negotiation, execution and performance of the merger agreement.  Each of these indemnified parties is entitled to the advancement of expenses in defense of any claim, provided that such expenses will be repaid if a court should determine in a final and non-appealable order that indemnification is prohibited by law.  Parent is required to obtain directors and officers liability insurance or a “tail policy” providing coverage for a period of six years following the effective time of the merger, provided the annual premium therefore does not exceed 250% of the last annual premium paid before the effective time of the merger.

Deferred Compensation

Two of our Section 16(a) executive officers, in connection with their commencement of participation in the Deferred Compensation Plan, have elected to receive their deferred compensation account balance in the form of a lump sum payment within 60 days of a change in control (as defined in the Deferred Compensation Plan). The completion of the merger will result in a change of control for the purposes of this plan. The aggregate balance of the deferred compensation accounts for these two executive officers was approximately $190,000 as of December 31, 2009.

Other Considerations

We expect that none of our directors will remain directors of the surviving corporation after the merger is completed. WAM, Water Services, IIF LLC and IIF Subway have not made any loans to our directors and executive officers.

Appraisal Rights

In connection with the merger, our stockholders are entitled to appraisal rights under Section 262 of the Delaware General Corporation Law, provided that they comply with the conditions established by such Section 262.

The discussion below is not a complete summary regarding each stockholder’s appraisal rights under Delaware law and is qualified in its entirety by reference to the text of the relevant provisions of Delaware law, which are attached to this Proxy Statement as Annex C .  Stockholders intending to exercise appraisal rights should carefully review Annex C .  Failure to follow precisely any of the statutory procedures set forth in Annex C may result in a termination or waiver of these rights.

A record holder of shares of our common stock who makes the demand described below with respect to such shares, who continuously is the record holder of such shares through the effective time of the merger, who otherwise complies with the statutory requirements of Section 262 of the Delaware General Corporation Law and who neither votes in favor of the merger nor consents thereto in writing will be entitled to an appraisal by the Delaware Court of Chancery (the “Delaware Court”), of the fair value of his, her or its shares of our common stock in lieu of the consideration that such stockholder would otherwise be entitled to receive pursuant to the merger agreement.  All references in this summary of appraisal rights to a “stockholder” or “holders of shares of our common stock” are to the record holder or holders of shares of our common stock.  Except as set forth herein, our stockholders will not be entitled to appraisal rights in connection with the merger.

Under Section 262 of the Delaware General Corporation Law, where a merger is to be submitted for approval at a meeting of stockholders, such as our Annual Meeting, not less than 20 days prior to the meeting, a constituent corporation must notify each of the holders of its stock for whom appraisal rights are available that such appraisal rights are available and include in each such notice a copy of Section 262 of the Delaware General Corporation Law.  This Proxy Statement is the required notice to the record holders of our common stock.

Stockholders who desire to exercise their appraisal rights must satisfy all of the conditions of Section 262 of the Delaware General Corporation Law.  Those conditions include the following:

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·               Stockholders electing to exercise appraisal rights must not vote “for” the adoption of the merger agreement.  Voting “for” the adoption of the merger agreement will result in the waiver of appraisal rights.  Also, because a submitted proxy not marked “against” or “abstain” will be voted “for” the proposal to adopt the merger agreement, the submission of a proxy not marked “against” or “abstain” will result in the waiver of appraisal rights.

·               A written demand for appraisal of shares must be filed with us before the taking of the vote on the merger agreement at the Annual Meeting.  The written demand for appraisal should specify the stockholder’s name and mailing address, and that the stockholder is thereby demanding appraisal of his or her shares of our common stock.  The written demand for appraisal of shares is in addition to and separate from a vote against the merger agreement or an abstention from such vote.  That is, failure to return your proxy, voting against, or abstaining from voting on, the adoption of the merger agreement will not satisfy your obligation to make a written demand for appraisal.

·               A demand for appraisal must be executed by or for the stockholder of record, fully and correctly, as such stockholder’s name appears on the stock certificate.  If the shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, this demand must be executed by or for the fiduciary.  If the shares are owned by or for more than one person, as in a joint tenancy or tenancy in common, such demand must be executed by or for all joint owners.  An authorized agent, including an agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record.  However, the agent must identify the record owner and expressly disclose the fact that, in exercising the demand, he or she is acting as agent for the record owner.  A person having a beneficial interest in shares of our common stock held of record in the name of another person, such as a broker or nominee, must act promptly to cause the record holder to follow the steps summarized below in a timely manner to perfect whatever appraisal rights the beneficial owners may have.

A stockholder who elects to exercise appraisal rights should mail or deliver his, her or its written demand to SouthWest Water Company, One Wilshire Building, 624 South Grand Avenue, Suite 2900, Los Angeles, California 90017, Attention: Corporate Secretary.

Within ten days after the effective time of the merger, we must provide notice of the effective time of the merger to all of our stockholders who have complied with Section 262 of the Delaware General Corporation Law and have not voted in favor of the adoption of the merger agreement.

Within 120 days after the effective time of the merger, either we may commence, or any stockholder who has complied with the required conditions of Section 262 of the Delaware General Corporation Law may commence, an appraisal proceeding by filing a petition in the Delaware Court, with a copy served on us in the case of a petition filed by a stockholder, demanding a determination of the fair value of the shares of all dissenting stockholders.  We have no present intent to file an appraisal petition and stockholders seeking to exercise appraisal rights should not assume that we will file such a petition or that we will initiate any negotiations with respect to the fair value of such shares.  Accordingly, holders of our common stock who desire to have their shares appraised should initiate any petitions necessary for the perfection of their appraisal rights within the time periods and in the manner prescribed in Section 262 of the Delaware General Corporation Law.

Within 120 days after the effective time of the merger, any stockholder who has satisfied the requirements of Section 262 of the Delaware General Corporation Law will be entitled, upon written request, to receive from us a statement setting forth the aggregate number of shares of our common stock not voting in favor of the adoption of the merger agreement and with respect to which demands for appraisal were received by us and the aggregate number of holders of such shares.  Such statement must be mailed within 10 days after the stockholder’s request has been received by us or within 10 days after the expiration of the period for the delivery of demands as described above, whichever is later.  Notwithstanding the foregoing, a person who is the beneficial owner of shares of our common stock held either in a voting trust or by a nominee on behalf of such person may, in such person’s own name, file a petition or request from the surviving corporation the statement described in this paragraph.

If a petition for an appraisal is timely filed and a copy thereof is served upon us, we will then be obligated, within 20

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days after service, to file with the Register in the Delaware Court a duly verified list containing the names and addresses of all stockholders who have demanded an appraisal of their shares and with whom agreements as to the value of their shares have not been reached.  After notice to stockholders, as required by the Delaware Court, at the hearing on such petition, the Delaware Court will determine which stockholders are entitled to appraisal rights.  The appraisal proceeding shall be conducted in accordance with the rules of the Delaware Court, including any rules specifically governing appraisal proceedings.  The Delaware Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Delaware Court may dismiss the proceedings as to such stockholder.  Where proceedings are not dismissed, the Delaware Court will appraise the shares of our common stock owned by such stockholders, determining the fair value of such shares exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value.  Unless the Delaware Court in its discretion determines otherwise for good cause shown, interest from the effective date of the merger through the date of payment of the judgment shall be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the merger and the date of payment of the judgment.

Although our Board believes that the merger consideration is fair, no representation is made as to the outcome of the appraisal of fair value as determined by the Delaware Court and stockholders should recognize that such an appraisal could result in a determination of a value higher or lower than, or the same as, the consideration they would receive pursuant to the merger agreement.  Moreover, we do not anticipate offering more than the merger consideration to any stockholder exercising appraisal rights and reserve the right to assert, in any appraisal proceeding, that, for purposes of Section 262 of the Delaware General Corporation Law, the “fair value” of a share of our common stock is less than the merger consideration.  In determining “fair value,” the Delaware Court is required to take into account all relevant factors.  The cost of the appraisal proceeding, which does not include attorneys’ or experts’ fees, may be determined by the Delaware Court and taxed against the dissenting stockholder and/or us as the Delaware Court deems equitable in the circumstances.  Each dissenting stockholder is responsible for his or her attorneys’ and expert witness expenses, although, upon application of a dissenting stockholder, the Delaware Court may order that all or a portion of the expenses incurred by any dissenting stockholder in connection with the appraisal proceeding, including without limitation, reasonable attorneys’ fees and the fees and expenses of experts, be charged pro rata against the value of all shares of stock entitled to appraisal.

Any stockholder who has duly demanded appraisal in compliance with Section 262 of the Delaware General Corporation Law will not, after the effective time of the merger, be entitled to vote for any purpose any shares subject to such demand or to receive payment of dividends or other distributions on such shares, except for dividends or distributions payable to stockholders of record at a date prior to the effective time of the merger.

At any time within 60 days after the effective time of the merger, any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party will have the right to withdraw his, her or its demand for appraisal and to accept the terms offered in the merger agreement.  After this period, a stockholder may withdraw his, her or its demand for appraisal and receive payment for his, her or its shares only with our written consent.  If no petition for appraisal is filed with the court within 120 days after the effective time of the merger, stockholders’ rights to appraisal, if available, will cease.  Inasmuch as we have no obligation to file such a petition, any stockholder who desires a petition to be filed is advised to file it on a timely basis.  Any stockholder may withdraw such stockholder’s demand for appraisal by delivering to us a written withdrawal of his, her or its demand for appraisal and acceptance of the merger consideration, except (i) that any such attempt to withdraw made more than 60 days after the effective time of the merger will require our written approval and (ii) that no appraisal proceeding in the Delaware Court shall be dismissed as to any stockholder without the approval of the Delaware Court, and such approval may be conditioned upon such terms as the Delaware Court deems just; provided, however, that any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party may withdraw his, her or its demand for appraisal and accept the merger consideration offered pursuant to the merger agreement within 60 days after the effective date of the merger.

Failure by any of our stockholders to comply fully with the procedures described above and set forth in Annex C to this Proxy Statement may result in termination of such stockholder’s appraisal rights.  In view of the complexity of exercising appraisal rights under Delaware law, any of our stockholders considering exercising these rights should consult with legal counsel.

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Material U.S. Federal Income Tax Consequences of the Merger

The following summary is a general discussion of the material U.S. federal income tax consequences to our stockholders, other than Parent, whose common stock is converted into cash in the merger.  This summary is based on the current provisions of the Internal Revenue Code of 1986, as amended, or the Code, applicable Treasury Regulations, judicial authority and administrative rulings, all of which are subject to change, possibly with retroactive effect or different interpretations.  Any such change could alter the tax consequences to our stockholders as described herein.  As a result, we cannot assure you that the tax consequences described herein will not be challenged by the Internal Revenue Service, or the IRS, or will be sustained by a court if challenged by the IRS.  No ruling from the IRS has been or will be sought with respect to any aspect of the transactions described herein.  This summary is for the general information of our stockholders, other than Parent, only and does not purport to be a complete analysis of all potential tax effects of the merger.  For example, it does not consider the effect of any applicable state, local, foreign, estate or gift tax laws, or of any non-income tax laws.  In addition, this discussion does not address the tax consequences of transactions effectuated prior to or after the merger (whether or not such transactions occur in connection with the merger), including, without limitation, any exercise of a stock option or the acquisition or disposition of SouthWest Water shares other than pursuant to the merger.  In addition, it does not address all aspects of U.S. federal income taxation that may affect stockholders in light of their particular circumstances, including:

·               stockholders that are insurance companies;

·               stockholders that are tax-exempt organizations;

·               stockholders that are financial institutions, regulated investment companies, or brokers or dealers in securities;

·               stockholders who hold their common stock as part of a hedge, straddle or conversion transaction;

·               stockholders that hold common stock which constitutes qualified small business stock for purposes of Section 1202 of the Code or “section 1244 stock” for purposes of Section 1244 of the Code;

·               stockholders who are liable for the U.S. federal alternative minimum tax;

·               stockholders who are partnerships or any other entity classified as a partnership for U.S. federal income tax purposes;

·               stockholders who acquired their common stock pursuant to the exercise of a stock option or otherwise as compensation; and

·               stockholders whose functional currency for U.S. federal income tax purposes is not the U.S. dollar.

The following summary also does not address the tax consequences for the holders of stock options.  The following summary assumes that stockholders hold their common stock as a “capital asset” under Section 1221 of the Code (generally, property held for investment).  For purposes of this discussion, a U.S. person is defined as a beneficial owner of SouthWest Water common stock that is:

·               a citizen or resident of the United States for U.S. federal income tax purposes;

·               a corporation, including any entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

·               an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

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·               a trust, if its administration is subject to the primary supervision of a U.S. court and one or more U.S. persons have the authority to control all substantial decisions of the trust, or if it has made a valid election under applicable Treasury Regulations to be treated as a U.S. person.

For purposes of this discussion, a “non-U.S. person” is a beneficial owner of SouthWest Water common stock that is not a U.S. person or a partnership (or an entity treated as a partnership for U.S. federal income tax purposes).  Partners of partnerships or other pass-through entities holding our capital stock are encouraged to consult their own tax advisors.

SOUTHWEST WATER STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABLE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES, AND AS TO ANY TAX REPORTING REQUIREMENTS OF THE MERGER AND RELATED TRANSACTIONS IN LIGHT OF THEIR OWN RESPECTIVE TAX SITUATIONS.

Treatment of Holders of Common Stock

The conversion of SouthWest Water common stock into the right to receive cash in the merger will be a taxable transaction to U.S. persons.  Generally, this means that a stockholder, other than Parent, that is a U.S. person, will recognize a capital gain or loss equal to the difference between (1) the amount of cash the stockholder receives in the merger and (2) the stockholder’s adjusted tax basis in the common stock surrendered therefore.  This gain or loss will be long-term if the holder has held SouthWest Water common stock for more than one year as of the date of the merger.  Under current law, any long-term capital gain recognized by a non-corporate stockholder that is a U.S. person will be subject to U.S. federal income tax at a maximum rate of 15%.  Generally, capital losses are deductible only against capital gains and are not available to offset ordinary income; however, individuals are allowed to offset a limited amount of net capital losses against ordinary income.

Appraisal Rights

Under specified circumstances, a stockholder may be entitled to appraisal rights in connection with the merger.  If a stockholder that is a U.S. person receives cash pursuant to the exercise of appraisal rights, such stockholder generally will recognize gain or loss, measured by the difference between the cash received and such stockholder’s tax basis in such common stock.  Interest, if any, awarded in an appraisal proceeding by a court would be included in such stockholder’s income as ordinary income for U.S. federal income tax purposes.  Stockholders who may exercise appraisal rights are urged to consult their own tax advisors.

Non-U.S. Persons

Any gain recognized by a non-U.S. person that is a stockholder upon the receipt of cash in the merger or pursuant to the exercise of appraisal rights generally will not be subject to U.S. federal income tax unless: (1) the gain is effectively connected with a trade or business of the non-U.S. person in the United States (and, if required by an applicable income tax treaty, is attributable to a U.S. permanent establishment of the non-U.S. person); (2) the non-U.S. person is an individual who is present in the United States for 183 days or more in the taxable year of the merger, and certain other conditions are met; or (3) the non-U.S. person owned (actually or constructively) more than 5% of SouthWest Water common stock at any time during the five-year period preceding the merger, and SouthWest Water is or has been a “United States real property holding corporation” for U.S. federal income tax purposes.  SouthWest Water does not believe that it is currently a United States real property holding corporation and does not believe that it has been a United States real property holding corporation at any time during the past five years.

An individual non-U.S. person whose gain is effectively connected with the conduct of a trade or business in the United States (as described above in clause (1)) will be subject to tax on such gain in the same manner as a U.S. person, as described above.  In addition, a non-U.S. person that is a corporation may be subject to a U.S. corporate-level tax of 35%, as well as a branch profits tax equal to 30% (or lesser rate under an applicable income tax treaty) on such effectively connected gain.  An individual non-U.S. person described in clause (2) above generally will be subject to a flat 30% tax on any gain, which may be offset by U.S.-source capital losses.

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Backup Withholding and Information Reporting

A SouthWest Water stockholder may be subject to “backup withholding” with respect to certain “reportable payments” including taxable proceeds received in exchange for the stockholder’s common stock in the merger.  The current backup withholding rate for 2010 is 28%, but this rate could change at any time.  Backup withholding will generally not apply, however, to a stockholder who is a U.S. person and who furnishes the paying agent with a correct taxpayer identification number on IRS Form W-9 (and who does not subsequently become subject to backup withholding) or who is otherwise exempt from backup withholding, such as a corporation.  Stockholders who fail to provide their correct taxpayer identification numbers may be subject to penalties imposed by the IRS.  In addition, certain non-U.S. persons such as certain nonresident aliens may establish an exemption from backup withholding by delivering the proper version of IRS Form W-8 certifying their non-U.S. status.  Each stockholder and, if applicable, each other payee, should complete and sign the IRS Form W-9 included with the letter of transmittal (or other applicable form such as an IRS Form W-8) in order to provide the information and certification necessary to avoid the imposition of backup withholding, unless an exemption applies and is established in a manner satisfactory to the paying agent.  Any amounts withheld from payments to a stockholder under the backup withholding rules are generally not an additional tax and may be refunded or allowed as a credit against the stockholder’s U.S. federal income tax liability, provided that the stockholder furnishes the required information to the IRS in a timely manner.

Cash received in the merger will also be subject to information reporting unless an exemption applies.

THE FOREGOING DISCUSSION OF THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER IS FOR OUR STOCKHOLDERS’ GENERAL INFORMATION ONLY.  ACCORDINGLY, OUR STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABLE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES.

Regulatory Matters

The merger agreement requires us, Parent and Merger Sub to use reasonable best efforts to take all actions that are necessary, proper and advisable to consummate and make effective the merger, including using reasonable best efforts to obtain all actions, waivers, consents, approvals, orders and authorizations from all governmental authorities.

Antitrust Filing Under the HSR Act

In furtherance of the foregoing obligations, the parties to the merger agreement must prepare any merger notifications or obtain any government clearances or approvals required to close the merger under the HSR Act, and the rules promulgated thereunder by the Federal Trade Commission (the “FTC”).  We filed the notification required by the HSR Act on April 23, 2010.  At any time before or after consummation of the merger, the Antitrust Division of the U.S. Department of Justice or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the merger or seeking divestiture of substantial assets of SouthWest Water or Parent.  At any time before or after the consummation of the merger, any state could take such action under the antitrust laws as it deems necessary or desirable in the public interest.  Such action could include seeking to enjoin the consummation of the merger or seeking divestiture of substantial assets of SouthWest Water or Parent.  Private parties may also seek to take legal action under the antitrust laws under certain circumstances, as can foreign regulatory authorities.

While there can be no assurance that the merger will not be challenged by a governmental authority or private party on antitrust grounds, SouthWest Water, based on a review of information provided by Parent relating to the businesses in which it and its affiliates are engaged, believes that the merger would be in compliance with federal and state antitrust laws.  The term “antitrust laws” means the Sherman Act, as amended, the Clayton Act, as amended, the HSR Act, the Federal Trade Commission Act, as amended, and all other Federal and state statutes, rules, regulations, orders, decrees, administrative and judicial doctrines, and other laws that are designed or intended to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade.

State Regulatory Matters

Additionally, the merger is subject to regulatory approval or, in certain instances, advance notification in the various states in which the Company operates its regulated business.  Those regulatory applications are in progress at this time and the parties to the merger agreement contemplate approval of the applications in due course.  California,

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Oklahoma and Mississippi require prior application and approval before the merger can be closed.  Texas and Alabama require notification of the transaction.

Other

U.S. federal and state laws and regulations may require that SouthWest Water or Parent obtain approvals or certificates of need from, file new license and/or permit applications with, and/or provide notice to, other governmental authorities in connection with the merger.

The parties to the merger agreement have agreed to cooperate with each other in connection with the foregoing and to notify each other promptly following the receipt of any comments from any governmental authority.  In particular, the parties to the merger agreement have agreed to cooperate to promptly develop a mutually acceptable plan to obtain all consents, approvals, orders and authorizations from all state public utility commissions, state public service commissions, departments of public health, departments of health, and similar state regulatory bodies as expeditiously as reasonably practicable and without undue expense.  We have also agreed to consult with Parent prior to making some filings and to consider in good faith Parent’s comments with respect to such filings.

Certain Relationships

There are no material relationships between Parent and Merger Sub or any of their respective affiliates, on the one hand, and SouthWest Water or any of our affiliates, on the other hand, other than in respect of the merger agreement, the 2,700,000 shares of our common stock privately purchased by Parent on March 16, 2010 for $16,200,000 (as described under the “Summary of the Merger — Long-Term Infrastructure Investment”), and the 1,173,969 shares of our common stock accumulated over time by TRF Master Fund (Cayman) LP (which is an affiliate of WAM) through purchases in the public markets.

Litigation Related to the Merger

We are aware of eight purported class action lawsuits related to the proposed merger filed against the Company, some or all of our directors, Parent, and Merger Sub in the Superior Court of the State of California, County of Los Angeles, the Court of Chancery of the State of Delaware, or the United States District Court for the Central District of California.

The complaints are substantially similar and allege, among other things, that the merger is the product of a flawed process and that the consideration to be paid to our stockholders in the merger would be unfair and inadequate.  The complaints further allege, among other things, that our officers and directors breached their fiduciary duties by, among other things, taking actions designed to deter higher offers from other potential acquirers and failing to maximize the value of SouthWest Water stock for the benefit of our stockholders.  The complaints further allege that Parent and Merger Sub aided and abetted the actions of the SouthWest Water officers and directors in breaching their fiduciary duties.  The complaints seek, among other relief, an injunction preventing consummation of the merger, an order rescinding the merger or any of the terms of the merger to the extent already implemented, costs and disbursements of the lawsuits, including attorneys’ and experts’ fees, and such other relief as the court might find just and proper.  We believe these lawsuits are without merit and plan to defend against them vigorously.

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The following summarizes material provisions of the merger agreement, a copy of which is attached to this Proxy Statement as Annex A .  This summary does not purport to be complete and may not contain all of the information about the merger agreement that is important to you.  We encourage you to read carefully the merger agreement in its entirety because the rights and obligations of the parties are governed by the express terms of the merger agreement and not by this summary or any other information contained in this Proxy Statement.

The description of the merger agreement in this Proxy Statement has been included to provide you with information regarding its terms.  The merger agreement contains representations and warranties made by and to the Company, Parent and Merger Sub as of specific dates.  The statements embodied in those representations and warranties were made for purposes of that contract between the parties and are subject to qualifications and limitations agreed by the parties in connection with negotiating the terms of that contract, including qualifications set forth on the disclosure schedules to the merger agreement.  In addition, certain representations and warranties were made as of a specified date, may be subject to contractual standards of materiality different from those generally applicable to stockholders, or may have been used for the purpose of allocating risk between the parties rather than establishing matters as facts.

Effective Time of the Merger

The closing of the merger will take place as soon as practicable, but in no event later than five business days after the satisfaction or waiver of all conditions to completion of the merger.  As part of the closing, we will file a certificate of merger with the Secretary of State of the State of Delaware, and the effective time of the merger will occur at such time as the certificate of merger is so filed (or such later time as provided in the certificate of merger).

Structure of the Merger

At the effective time of the merger, Merger Sub will merge with and into the Company.  The Company will survive the merger, as the surviving corporation, and continue to exist after the merger as a wholly-owned subsidiary of Parent.  All of the Company’s and Merger Sub’s property, rights, privileges, powers and franchises, and all of their debts, liabilities, obligations, restrictions, disabilities and duties, will become those of the surviving corporation.  Following completion of the merger, the Company’s current stockholders, other than Parent and its affiliates, will cease to have any ownership interest in the Company or rights as Company stockholders.  Therefore, such current stockholders of the Company will not participate in any future earnings or growth of the Company and will not benefit from any appreciation in value of the Company.   Following completion of the merger, Merger Sub’s certificate of incorporation and bylaws will be the certificate of incorporation and bylaws of the surviving corporation.

Treatment of Company Securities in the Merger

Company Common Stock

At the effective time of the merger, each share of our common stock issued and outstanding immediately prior to the effective time of the merger will automatically be canceled and will cease to exist and will be converted into the right to receive the merger consideration of $11.00 in cash, without interest and less any applicable withholding taxes, other than shares of Company common stock:

·       held in the treasury of the Company or owned by Parent, Merger Sub or any direct or indirect subsidiary of Parent or of the Company immediately prior to the effective time of the merger, which shares will be canceled without conversion or consideration;

·       held by any of our wholly owned subsidiaries, which shares will remain outstanding but without any right to the consideration payable in the merger; and

·       held by a stockholder who properly demands statutory appraisal rights.

After the effective time of the merger, each of our outstanding stock certificates or book-entry shares representing shares of common stock converted in the merger will represent only the right to receive the merger consideration without any interest.  The merger consideration paid upon surrender of each certificate will be paid in full satisfaction of all rights pertaining to the shares of our common stock represented by that certificate or book-entry share.

Company Preferred Stock

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On or prior to the effective time, each issued and outstanding share of our Series A preferred stock will be redeemed for cash in accordance with the terms thereof.

Company Stock Purchase Warrants

At the effective time of the merger, each outstanding warrant to acquire our common stock that has not been exercised will be canceled and will not represent the right to acquire any shares of our common stock or to receive any merger consideration.

Company Stock Options

At the effective time of the merger, each outstanding option (including performance accelerated stock options), whether or not vested or exercisable, to acquire our common stock will become fully vested and will be canceled and will cease to represent a right to purchase shares of our common stock, and thereafter represent the right to receive an amount in cash, without interest and less applicable withholding taxes, equal to the product of:

·       the number of shares of our common stock subject to each option as of the effective time of the merger, multiplied by

·       the excess, if any, of $11.00 over the exercise price per share of such option.

Each option that has an exercise price per share that is equal to or in excess of $11.00 will be canceled for no consideration.

Company Stock-Based Awards

The Company Stock-Based awards relate to performance shares. Performance shares are phantom stock designed to link to specific balance sheet performance of the Company.  They have a three year term and give a participant the right to receive a cash award at the end of three years, based on the achievement of predetermined performance objectives.  Performance share value is variable, and may payout at, above, or below target.  In the event of poor performance, if the minimum goals are not achieved, the performance shares will not have any value or payout.

At the effective time of the merger, the performance shares granted under our stock plans, whether or not vested or exercisable, will become fully vested and will be canceled and converted into the right to receive the merger consideration (less, if applicable, the amount of any other reduction pursuant to the terms of such performance shares), without interest and less applicable withholding taxes, if any, required to be withheld with respect to such payment.  However, based on expected performance, the Company believes that the stated performance metrics will not meet minimum goals and, therefore, the performance shares will have no value.

Restricted Shares

At the effective time of the merger, each share of restricted stock granted under our stock plans (including performance contingent restricted stock), the restrictions of which have not lapsed immediately prior to the effective time of the merger, will become fully vested and will be converted into the right to receive the merger consideration of $11.00 in cash, without interest, less applicable withholding taxes, if any, required to be withheld with respect to such payment.

Convertible Subordinated Debentures

The 6.85% convertible subordinated debentures will remain as outstanding obligations of the surviving corporation until they are converted or redeemed.  From and after the effective time of the merger, a holder of our convertible subordinated debentures may convert the debentures into the amount of cash which the holder would have had immediately after the merger if the holder had converted the debentures immediately before the merger.  Accordingly, the debentures will become convertible into $11.00 in cash for each share of common stock into which they are convertible.  The debentures are currently convertible, at the option of the holder, into shares of our common stock at a conversion price of $11.018.  We may redeem the debentures at any time, in whole or in part, at a redemption price of 100% of the principal amount.

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Dissenting Shares

Our shares of common stock that are outstanding immediately prior to the effective time of the merger and that are held by holders who have neither voted in favor of the adoption of the merger agreement nor consented thereto in writing and who have properly demanded in writing appraisal for such shares in accordance with the Delaware General Corporation Law (the “dissenting shares”) will not be converted into, or represent the right to receive, $11.00 per share in cash, without interest and less any applicable withholding taxes.  The holders of the dissenting shares will instead be entitled to receive after the effective time payment of the fair value of the dissenting shares held by them, except that all dissenting shares held by holders who have failed to perfect or who effectively have withdrawn or lost their rights to appraisal of such dissenting shares will then cease to be dissenting shares and be deemed to have been converted into, as of the effective time, the right to receive $11.00 per share in cash, without interest and less any applicable withholding taxes.

Exchange and Payment Procedures

At or prior to the effective time of the merger, Merger Sub will deposit with a U.S. bank or trust company reasonably acceptable to the Company (the “paying agent”) an amount of cash sufficient to pay the merger consideration to each holder of shares of our common stock.  Promptly after the effective time of the merger, the surviving corporation will cause to be mailed a letter of transmittal and instructions to each holder of record of our common stock (each such holder is a stockholder that holds stock in its own name as of the effective time of the merger and is referred as the “registered stockholder”).  The letter of transmittal and instructions will tell the registered stockholder, among other things, how to surrender their stock certificates or book-entry shares in exchange for the merger consideration.  If your shares are held in “street name” by your broker, you will not receive a letter of transmittal and will automatically receive the merger consideration in exchange for your shares of stock through your broker, unless you have properly demanded and perfected your statutory appraisal rights in accordance with the Delaware General Corporation Law.

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

Registered stockholders will not be entitled to receive the merger consideration until they surrender or transfer their stock certificates or book-entry shares, as applicable, to the paying agent, together with a duly completed and executed letter of transmittal and any other documents as may be required by the letter of transmittal.  The merger consideration may be paid to a person other than the person in whose name the corresponding certificate is registered if the certificate is properly endorsed or is otherwise in the proper form for transfer.  In addition, the person who surrenders such certificate must either pay any transfer or other applicable taxes or establish to the satisfaction of the surviving corporation that such taxes have been paid or are not applicable.

No interest will be paid or will accrue on the cash payable upon surrender of the certificates or book-entry shares.  The Parent, Merger Sub, the surviving corporation or the paying agent will be entitled to deduct and withhold, and pay to the appropriate taxing authorities, any applicable taxes from the merger consideration.  Any sum that is withheld will be deemed to have been paid to the person with regard to whom it is withheld.

At the effective time of the merger, our stock transfer books will be closed, and there will be no further registration of transfers of outstanding shares of our common stock.  If, after the effective time of the merger, certificates are presented to the surviving corporation for transfer, they will be canceled and exchanged for the merger consideration.

Neither the paying agent nor the surviving corporation will be liable to any person for any cash delivered to a public official pursuant to any abandoned property, escheat or other similar law.  Any portion of the merger consideration deposited with the paying agent that remains undistributed to the holders of our common stock for twelve months after the effective time of the merger, will be delivered, upon demand, to the surviving corporation.  Stockholders who have not received the merger consideration prior to the delivery of such funds to the surviving corporation may, thereafter, look to the surviving corporation for the payment of the merger consideration (subject to abandoned property, escheat and other similar laws).

If you have lost a certificate, or if it has been stolen, mutilated or destroyed, then before you will be entitled to receive the merger consideration, you will have to comply with the replacement requirements established by the surviving corporation, including, if necessary, the posting of a bond in a customary amount sufficient to protect the surviving corporation against any claim that may be made against it with respect to that certificate.

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Representations and Warranties

We make various representations and warranties in the merger agreement to Parent and Merger Sub, which may be subject to important limitations and qualifications set forth in the merger agreement and the disclosure schedules thereto.  You should be aware that it may not be appropriate to judge the accuracy of such representations and warranties as of the date of this Proxy Statement.  Our representations and warranties in the merger agreement relate to, among other things:

·       our and our subsidiaries’ organization, good standing and qualification to do business;

·       our and our subsidiaries’ certificate of incorporation and Bylaws (as defined in this Proxy Statement) and equivalent organizational documents;

·       our capitalization, including the number of shares of our common stock, preferred stock, warrants, stock-based awards and stock options;

·       our corporate power and authority to enter into the merger agreement and to consummate the transactions contemplated by the merger agreement (including that our Board, in accordance with the Delaware General Corporation Law, upon the recommendation of our Special Committee, has approved and declared advisable the merger agreement, the merger and the transactions contemplated thereby and determined that the merger agreement and the transactions contemplated thereby are fair to and in the best interests of the Company and our stockholders);

·       the absence of violations of or conflicts with our and our subsidiaries’ governing documents, applicable law or agreements with third parties as a result of entering into the merger agreement and performing our obligations under the merger agreement;

·       the required consents and approvals of governmental entities in connection with the transactions contemplated by the merger agreement;

·       possession of permits, franchises, licenses, orders, approvals, consents and other similar authorizations necessary to operate our business in compliance with applicable legal requirements;

·       the regulation of our business as a public utility holding company, public utility or public service company (or similar designation);

·       compliance with the Sarbanes-Oxley Act of 2002 and the applicable rules of the NASDAQ Global Select Market since December 31, 2008;

·       our SEC filings since December 31, 2008, including the financial statements contained therein;

·       the absence of a “material adverse effect” and certain other changes, events, circumstances or developments related to us or our subsidiaries since December 31, 2008;

·       legal proceedings and governmental orders;

·       employment and labor matters affecting us or our subsidiaries, including matters relating to our and our subsidiaries’ employee benefit plans;

·       intellectual property;

·       taxes;

·       environmental matters;

·       the identification of our material contracts and the absence of any breach, violation or default of the material contracts;

·       insurance policies;

·       real property and personal property;

·       accuracy and compliance as to form with applicable securities laws of this Proxy Statement;

·       the receipt by our Special Committee of a fairness opinion from Wells Fargo Securities;

·       the absence of undisclosed broker’s fees;

·       the inapplicability of takeover and similar statutes;

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·       the absence of undisclosed related party transactions;

·       the absence of any unlawful payments and compliance with the United States Foreign Corrupt Practices Act; and

·       the quality of the water supplied by us and our rights to extract and deliver water in the future.

For the purposes of the merger agreement, a “material adverse effect” with respect to us means any fact, circumstance, condition, development, event, change, effect or occurrence, that (a) prevents or materially delays us from consummating the merger, or (b) has had or would be likely to have a material adverse effect on the assets, liabilities, properties, business, results of operation or condition (financial or otherwise) of us or our subsidiaries, taken as a whole.  A “material adverse effect” with respect to us will not be deemed to have occurred, however, as a result of any event, fact, circumstance, condition, development, event, change, effect or occurrence resulting from:

·       any change in and of itself in the market price or trading volume of the shares of our common stock between the date hereof and the effective time of the merger (it being understood that any event, fact, circumstance, condition, development, event, change, effect or occurrence giving rise to or contributing to such change in the market price or trading volume of the shares of our common stock may result in, or contribute to, a “material adverse effect”);

·       the public announcement or pendency of the merger or the merger agreement or any of the transactions contemplated by the merger agreement;

·       failure in and of itself by us or our subsidiaries, taken as a whole, to meet any publicly disclosed financial performance projections or forecasts for any period (it being understood that any event, fact, circumstance, condition, development, event, change, effect or occurrence giving rise to or contributing to such failure may result in, or contribute to, a “material adverse effect”);

·       changes in and of themselves in any credit rating as to us or any of our subsidiaries (it being understood that any event, fact, circumstance, condition, development, event, change, effect or occurrence giving rise to or contributing to such change may result in, or contribute to, a “material adverse effect”);

·       changes or developments affecting the water utility or water services industries generally or affecting the economy or financial or securities markets generally, in each case, that do not have a disproportionate impact on us or any of our subsidiaries relative to other companies in the industries in which we and our subsidiaries operate;

·       acts of God, calamities, national or international political or social conditions, or military or terrorist attacks that do not have a disproportionate impact on us or any of our subsidiaries relative to other companies in the industries in which we and our subsidiaries operate;

·       changes in laws or tax principles or generally accepted accounting principles that do not have a disproportionate impact on us or any of our subsidiaries relative to other companies in the industries in which we and our subsidiaries operate; or

·       any actions taken or required to be taken by us or our subsidiaries pursuant to the merger agreement in order to obtain any approval or authorization for the consummation of the merger under applicable antitrust or other laws.

The merger agreement also contains various representations and warranties made by Parent and Merger Sub to us which may be subject to important limitations and qualifications set forth in the merger agreement.  You should be aware that it may not be appropriate to judge the accuracy of such representations and warranties as of the date of this Proxy Statement.  These representations and warranties relate to, among other things:

·       their organization, valid existence and good standing;

·       their corporate power and authority to enter into the merger agreement and to consummate the transactions contemplated by the merger agreement;

·       the absence of any violation of or conflict with their governing documents, applicable law or certain agreements as a result of entering into the merger agreement and consummating the merger;

·       the required consents and approvals of governmental entities in connection with the transactions contemplated by the merger agreement;

·       the sufficiency of their capital resources to consummate the merger;

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·       the accuracy of information supplied for inclusion in this Proxy Statement;

·       the vote required from Parent as the sole equity holder of Merger Sub and the fact that no vote of the equity holders of Parent is required in connection with the merger;

·       legal proceedings and governmental orders;

·       Parent’s ownership of Merger Sub;

·       the absence of undisclosed broker’s fees;

·       the fact that neither Parent not Merger Sub owned as of the date of the merger agreement any shares of our capital stock; and

·       equity financing commitments obtained by Parent from IIF LLC and WAM providing for all financing required to consummate the merger.

The representations and warranties of each of the parties to the merger agreement will expire upon the effective time of the merger.

Conduct of Our Business Pending the Merger

For the period between March 2, 2010 and the effective time of the merger, we and our subsidiaries have agreed:

·       to conduct our business in all material respects in the ordinary course of business consistent with past practice; and

·       to use reasonable commercial efforts to:  (a) preserve intact our business organization and preserve our current relationships with governmental entities, customers, suppliers and other persons with whom we have business dealings; (b) preserve our material assets, rights and properties in good condition; (c) retain the services of our current officers and key employees; and (d) not allow certain commercial contracts to lapse or expire.

By way of amplification and not limitation of the foregoing, under the merger agreement we have agreed, subject to certain exceptions and unless Parent gives its prior written consent, until the effective time of the merger not to:

·       adjust, split, combine, subdivide or reclassify any of our capital stock or other equity interests, or otherwise amend, modify or waive any term of any of our outstanding capital stock or equity interests;

·       make, declare or pay any dividend or other distribution on our capital stock or other equity interests, or redeem, purchase or otherwise acquire any of our capital stock or other equity interests, except our Series A preferred stock, which we have agreed to redeem before the closing of the merger, and except that we can continue to pay cash dividends consistent with past practices on our common stock (but not in excess of $0.05 per share per quarter) and Series A preferred stock (but not in excess of $0.65625 per share per quarter);

·       issue, sell, transfer or grant to any person any right to acquire any shares of our capital stock or equity interests, except in the ordinary course of business consistent with past practice pursuant to the exercise of outstanding company stock options, as required upon the conversion of outstanding convertible debentures, or as required upon the exercise of outstanding stock-based awards or common stock purchase warrants;

·       enter into any agreement with respect to the voting of our capital stock or other equity interests;

·       sell, transfer, mortgage, license, cancel, abandon, lease, pledge, encumber, divest or otherwise dispose or restrict the use of any properties, rights, assets or lines of business having a value in excess of $1,000,000 in the aggregate in any twelve-month period, except in the ordinary course of business;

·       make or agree to make any capital expenditures in excess of the applicable amounts set forth in our financial forecast, except for capital improvements mandated or required by regulatory authorities;

·       enter into any material new line of business;

·       incur, issue, modify, renew, refinance, syndicate, assume, guarantee, or become obligated with respect to any indebtedness (except for borrowings under our Amended and Restated Credit Agreement in the ordinary course of business and consistent with past practices), in amounts greater than $1,000,000 individually or $2,000,000 in the aggregate, or any indebtedness containing covenants that would prevent or materially

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delay or impede the merger, except to comply with mandates or requirements of regulatory authorities for capital improvements;

·       make, offer to make or enter into any agreement to make any loans, advances or capital contributions to, or acquire or invest in, another person, or acquire any assets outside of the ordinary course of business from any person or business, for consideration in excess of $2,000,000 in the aggregate;

·       enter into, renew, extend, materially amend or waive any material provision of or terminate any material contract other than amendments or waivers of up to $1,000,000 in the aggregate or amendments under our Amended and Restated Credit Agreement which would not materially impede the merger,

·       enter into, renew, extend, materially amend or waive any material provision of or terminate any material contract or any contract not in the ordinary course involving payments or transfers of value by us in excess of $1,000,000 in the aggregate in any twelve-month period;

·       except to the extent required by law or by our employee benefit plans or in the ordinary course of business consistent with past practice (other than with respect to senior executives), (a) increase the compensation or benefits of, or provide any pension, retirement, severance, retention or other similar benefits to, any of our current or former employees, officers, directors, consultants, independent contractors or other service providers (other than some cost of living adjustments), (b) establish, adopt, implement, enter into, amend, terminate, or otherwise commit to or alter in any respect, any of our employee benefit plans, (c) accelerate the vesting of, or the lapse of restrictions with respect to, any stock options, stock awards or stock-based awards, (d) take any action to fund or secure the payment of compensation or benefits under any of our employee benefit plans, (e) change the manner in which contributions to our employee benefit plans are made or the basis on which such contributions are determined, (f) allow for the commencement of any new offering periods under any stock purchase plans or (g) enter into any written contracts of employment;

·       waive, release, assign, settle or compromise any material right, claim, liability, obligation, indebtedness, action or proceeding, other than such as would not result in material liabilities or obligations for the surviving corporation, would not reasonably be expected to materially delay or prevent the merger, or would involve only the payment of monetary amounts not in excess of $1,000,000 in the aggregate;

·       fail to maintain in full force and effect insurance policies of the type and with comparable coverage to such insurance policies in place on the date of the merger agreement;

·       propose or adopt any amendment or waiver to any provision of our certificate of incorporation or Bylaws;

·       take or omit to take any action that is intended or would reasonably be expected to result in any of the conditions to the merger set forth in the merger agreement not being satisfied prior to the “end date” (as defined below), or satisfaction of those conditions being materially delayed by us;

·       adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of such entity, other than the merger and other than as permitted by the merger agreement;

·       implement or adopt any material change in our tax or financial accounting principles, practices or methods, other than as required or permitted by generally accepted accounting principles, applicable law or regulatory guidelines;

·       enter into any closing agreement with respect to material taxes, settle or compromise any material liability for taxes, make, revoke or change any material tax election, agree to any adjustment of any material tax attribute, surrender any claim for a material refund of taxes, execute or consent to any waivers extending the statutory period of limitations with respect to the collection or assessment of material taxes, file any material amended tax return (other than as resulting from the restatement of our financial statements), or obtain any material tax ruling;

·       create, acquire or change the form of entity of any of our subsidiaries; or

·       agree to take or make any commitment to take, or adopt any resolutions of our Board approving or purporting to implement any of the foregoing actions.

No Solicitation of Transactions

We have agreed that we, our subsidiaries and our respective directors, officers and employees will not, and we are required to direct our accountants, auditors, attorneys, consultants, legal counsel, agents, investment bankers,

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financial advisors and other representatives not to, directly or indirectly:

·       solicit, initiate or knowingly encourage, or take any other action for the purpose of facilitating any inquiries, proposals or offers that constitute, or may reasonably be expected to lead to, a “competing transaction” (as defined below);

·       enter into or maintain or continue discussions or negotiations with any third parties to facilitate such inquiries or obtain proposals or offers for a competing transaction (which required terminating all discussions or negotiations with any third parties conducted before entering into the merger agreement);

·       agree to, approve, endorse or recommend any competing transaction or enter into any letter of intent, commitment or agreement relating to a competing transaction; or

·       authorize or permit any of the actions listed above.

In the merger agreement, a “competing transaction” is generally defined as:

·       a merger, share exchange, recapitalization or similar transaction involving us (or any of our subsidiaries whose business constitutes more than 10% of our consolidated revenues, net income or assets);

·       any direct or indirect sale, lease, or other transfer of more than 10% of our consolidated assets;

·       any issuance, purchase or sale of shares representing more than 10% of the voting power of our stock (including by way of any tender offer or exchange offer, but not including any repurchases by us of our stock);

·       the sale in any manner of 10% of our consolidated total assets, revenues or earnings;

·       our dissolution or liquidation or similar transaction;

·       any inquiry, proposal or offer with respect to any of the foregoing transactions; and

·       any other transaction involving us and having an effect similar to any of the foregoing transactions.

Despite the foregoing restrictions, at any time prior to our stockholders’ adoption of the merger agreement, our Board or the Special Committee can furnish information to, and enter into discussions and negotiations with, a third party that has made an unsolicited, written, bona fide proposal or offer relating to, or that is reasonably likely to lead to, a competing transaction, as long as the Board has:

·       reasonably determined, in its good faith judgment (after consulting with its financial advisor), that the proposal or offer constitutes or is reasonably likely to lead to a “superior proposal” (as defined below);

·       reasonably determined, in its good faith judgment (after consulting with its outside legal counsel), that, in light of the proposal or offer, the failure to furnish such information or enter into discussions would constitute a breach of its fiduciary duties under applicable law;

·       provided written notice to Parent of its intent to furnish information or enter into discussions with that third party prior to taking any such action; and

·       obtained from that third party an executed confidentiality agreement on terms and conditions not materially less restrictive to such third party than those contained in the confidentiality agreement between us and WAM.

In the merger agreement, a “superior proposal” is generally defined as an unsolicited, written, bona fide proposal or offer made by a third party with respect to a “competing transaction” that the Board determines, in its good faith judgment (after consulting with its legal counsel and financial advisors), to be (i) more favorable from a financial point of view to our stockholders than the merger and (ii) reasonably capable of being completed, taking into account relevant financial, regulatory, legal and other aspects of such proposal.  For the purposes of this definition of a “superior proposal,” references in the definition of “competing transaction” to 10% will be deemed to be references to 50% or more.

We must notify Parent as promptly as practicable (and in any event within one business day) after we receive any proposal or offer or any inquiry or contact with any third party regarding a potential proposal or offer for a competing transaction.  This notice must specify the material terms and conditions of the proposal or offer and identify the third party making the proposal or offer.

Additionally, our Board cannot (a) withhold, withdraw or modify, or propose publicly to withhold, withdraw or modify, in a manner adverse to Parent or Merger Sub, its recommendation that our stockholders adopt the merger agreement, or (b) approve or recommend, or cause or permit us to enter into any letter of intent, commitment or agreement with respect to, any competing transaction.  However, our Board can change its recommendation and/or recommend a

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competing transaction if:

·       our Board reasonably determines, in its good faith judgment (after consulting with outside legal counsel), that the failure to make a change in its recommendation would constitute a breach of its fiduciary duties under applicable law; and

·       in response to an unsolicited, written, bona fide proposal or offer relating to a competing transaction, our Board reasonably determines that it constitutes or is reasonably likely to lead to a superior proposal.

In connection with a competing transaction that constitutes or is reasonably likely to lead to a superior proposal, our Board may make a change in its recommendation or recommend the competing transaction, and it may then terminate the merger agreement and enter into a definitive agreement to effect the competing transaction, but only:

·       after providing written notice to Parent advising it that our Board has received a superior proposal, specifying the material terms and conditions of the proposal, identifying the third party making the proposal and indicating that our Board intends to change its recommendation and/or recommend a competing transaction; and

·       if Parent does not, prior to five business days after its receipt of the notice of the superior proposal, make an offer that leads our Board to determine, in its good faith judgment (taking into account any changes to the terms of the merger agreement proposed in writing by Parent to us) that the superior proposal giving rise to the written notice to Parent (as described above) does not continue to constitute a superior proposal.

Access to Information

From the date of the merger agreement until the effective time of the merger, but subject to legal, governmental order and other restrictions, we have agreed to (and to cause our subsidiaries to): (a) provide to Parent and its representatives reasonable access, during normal business hours and upon reasonable notice by Parent, to the officers, employees, agents, properties, offices and other facilities of the Company and its subsidiaries and to their books and records, (b) furnish to Parent and its representatives such financial and operating data and other information as Parent or its representatives may reasonably request, and (c) furnish to Parent such information concerning our and our subsidiaries’ business, properties, contracts, assets, liabilities, personnel and other aspects as Parent or its representatives may reasonably request.

Each party to the merger agreement has agreed to comply with the confidentiality agreement between the Company and WAM as if a party to that agreement.

Reasonable Best Efforts to Complete the Merger

Each of the parties to the merger agreement agrees to use its reasonable best efforts to take all actions that are necessary, proper and advisable to complete the merger, including using its reasonable best efforts to accomplish the following as promptly as reasonably practicable following the date of the merger agreement:

·       taking all actions to satisfy the conditions to completion of the merger, as set forth in the merger agreement;

·       obtaining all necessary actions, waivers, consents, approvals, orders and authorizations from governmental authorities, and making all necessary registrations, declarations, notifications and filings to obtain all approvals or waivers from governmental authorities; and

·       obtaining all necessary consents, approvals or waivers from third parties.

The parties to the merger agreement have agreed to cooperate with each other in connection with the foregoing and to notify each other promptly following the receipt of any comments from any governmental authority.  In particular, the parties to the merger agreement have agreed to cooperate to promptly develop a mutually acceptable plan to obtain all consents, approvals, orders and authorizations from all state public utility commissions, state public service commissions, departments of public health, departments of health, and similar state regulatory bodies as expeditiously as reasonably practicable and without undue expense.  We have also agreed to consult with Parent prior to making some filings and to consider in good faith Parent’s comments with respect to such filings.

Stockholders’ Meeting

In the merger agreement, we have agreed:

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·       to duly call, give notice of, convene and hold a meeting of our stockholders as promptly as practicable for the purpose of considering and taking action on the merger agreement and the merger; and

·       except as permitted by the merger agreement, to include in this Proxy Statement, and not subsequently withhold, withdraw or modify in any manner adverse to Merger Sub or Parent, the recommendation of our Board that our stockholders adopt the merger agreement, and to take all action that is both reasonably necessary or advisable to obtain such adoption.

Parent has agreed to cause all of the shares or our capital stock owned by Parent or any of its affiliates to be voted at the stockholders meeting in favor of the adoption of the merger agreement.

Employee Benefits Matters

Among other agreements set forth in the merger agreement, Parent has agreed that on and after the effective time of the merger, Parent will, and will cause the surviving corporation to, honor in accordance with their terms all employment agreements and all bonus, retention and severance obligations, of the Company or any subsidiary, to pay at the effective time of the merger to the applicable officers and employees any amounts with respect to such agreements and obligations that are payable by their terms at the effective time of the merger.  Also, for a period of one year following the effective time of the merger, Parent has agreed to cause the surviving corporation to provide substantially similar employee benefits to our employees who remain employed by the surviving corporation provided under our employee benefit plans for similarly situated employees.  Parent will, and will cause the surviving corporation to, treat, and cause the applicable benefit plans to treat, the service of our employees and employees of our subsidiaries who remain employed by Parent, Merger Sub or their subsidiaries after the effective time of the merger with the Company or the subsidiaries attributable to any period before the effective time of the merger as service rendered to Parent or the surviving corporation for purposes of eligibility to participate, vesting and for other appropriate benefits, including applicability of minimum waiting periods for participation.

Indemnification and Insurance

Each of our directors and officers is indemnified and held harmless during the six-year period following the effective time of the merger to the full extent permitted by law from any claims arising by virtue of his or her service as a director or officer or in connection with the negotiation, execution and performance of the merger agreement.  Each of these indemnified parties is entitled to the advancement of expenses in defense of any claim, provided that such expenses will be repaid if a court should determine in a final and non-appealable order that indemnification is prohibited by law.  Parent is required to obtain directors and officers liability insurance or a “tail policy” providing coverage for a period of six years following the effective time of the merger, provided the annual premium therefore does not exceed 250% of the last annual premium paid before the effective time of the merger.

Conditions to the Merger

Conditions to Each Party’s Obligation to Effect the Merger

The obligations of each of the parties to complete the merger are subject to the satisfaction or waiver (if permissible) of the following conditions:

·       our stockholders must have adopted the merger agreement;

·       no governmental authority will have taken action that seeks to make the merger illegal or otherwise restricts, prevents or prohibits the consummation of the merger;

·       the waiting periods applicable to the consummation of the merger under the HSR Act must have expired or been terminated; and

·       the material regulatory consents and approvals required to consummate the merger must have been obtained and become final.

Conditions to Obligations of Parent and Merger Sub

The obligations of Parent and Merger Sub to effect the merger are subject to the satisfaction or waiver (if permissible) by Parent of the following additional conditions:

·       our representations and warranties set forth in the merger agreement must be true and correct in all respects (or in all material respects in some cases) as of the date of the merger agreement and the effective date of the merger, in each case, except where the failure of such representations and warranties to be true and

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correct has not had and would not reasonably be expected to have, individually or in the aggregate, a material adverse effect;

·       we must have performed in all material respects all of our obligations under the merger agreement; and

·       each member of our Board must have tendered his or her resignation.

Conditions to Obligations of the Company

Our obligation to effect the merger is subject to the satisfaction or waiver (if applicable) by us of the following additional conditions:

·       the representations and warranties of Parent and Merger Sub set forth in the merger agreement must be true and correct in all respects (or in all material respects in some cases) as of the date of the merger agreement and the effective date of the merger, in each case, except where the failure of such representations and warranties to be true and correct has not had and would not reasonably be expected to have, individually or in the aggregate, a “Parent material adverse effect” (which means a failure that prevents or materially delays or materially impairs the ability of Parent or Merger Sub to timely consummate the merger and the other transactions contemplated by the merger agreement); and

·       Parent and Merger Sub must have performed in all material respects all of their respective obligations under the merger agreement.

Financing

Under the terms of the merger agreement, the completion of the merger is not subject to Parent securing financing to fund the payment of cash to our common stockholders in the merger.  IIF LLC and WAM have executed equity commitment letters (which are subject to certain conditions and exceptions as provided in such letters) pursuant to which they have agreed with Parent to make cash investments of $275,743,000 and $27,574,300, respectively, in Parent to be used to enable it to fund the cash payable to our common stockholders in the merger.  The IIF LLC equity commitment letter itself provides for a cash investment in Parent adequate to fund the entire aggregate cash amount payable to our common stockholders in the merger.

Termination

The merger agreement may be terminated and the merger may be abandoned at any time prior to the effective time of the merger, whether before or after the adoption of the merger agreement by our stockholders, as follows:

·       by the mutual written consent of us and Parent;

·       by either us, on the one hand, or Parent or Merger Sub, on the other hand, if:

o       our stockholders do not adopt the merger agreement;

o       any governmental authority takes an action that permanently restrains, enjoins or otherwise prohibits the consummation of the merger; or

o       the merger has not been consummated within 12 months following the date of the merger agreement (the “end date”), provided that this end date will be extended to 18 months following the date of the merger agreement to allow for the receipt of certain material regulatory approvals, and for up to an additional 60 days if any waiting period for any of these regulatory approvals has not expired (or earlier to the time of expiration of such waiting period), if all other conditions to the obligations of the parties to effect the merger shall have been satisfied or be capable of being satisfied.

·       by Parent, if:

o       we breach in any material respect any of our representations or warranties, or we fail to perform in any material respect any of our covenants that would result in these conditions to closing not being satisfied, subject to a cure period of the lesser of 30 days or the number of days remaining before the end date, provided that Parent or Merger Sub are not then in breach of the merger agreement such that certain conditions to closing relating to their representations, warranties or covenants would not be satisfied;

o       our Board changes its recommendation that our stockholders adopt the merger agreement and/or recommends a competing transaction;

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o       in the event a tender offer or exchange offer for our common shares is commenced, and our Board recommends that stockholders tender their shares or within a specified time period fails to recommend against the offer and reaffirm the merger agreement;

o       we enter into a letter of intent or agreement relating to a competing transaction; or

o       we or our Board publicly announce an intention to do any of the foregoing.

·       by the Company, if:

o       Parent or Merger Sub breach in any material respect any of their representations or warranties or fail to perform in any material respect any of their covenants that would result in these conditions to closing not being satisfied, subject to a cure period of the lesser of 30 days or the number of days remaining before the end date, provided that we are not then in breach of the merger agreement such that certain conditions relating to our representations, warranties or covenants would not be satisfied;

o       our Board changes its recommendation that our stockholders adopt the merger agreement and/or recommends a competing transaction that is or is reasonably likely to lead to a superior proposal, provided that in the context of such a competing transaction we must fully comply with the provisions restricting solicitation in the merger agreement, including the requirement that Parent be given the opportunity to negotiate with us and make an offer so that the superior proposal no longer constitutes a superior proposal; or

o       the merger is not consummated as a result of Parent’s and Merger Sub’s failure to effect the merger and at the time all of the conditions to Parent’s and Merger Sub’s obligations to effect the merger will have been satisfied (other than such conditions that, by their nature, cannot be satisfied until the closing of the merger), and Parent and Merger Sub have failed to consummate the merger within 10 business days after we have delivered notice of such failure.

Termination Fees and Expenses

Each party to the merger agreement will pay its own expenses, except as follows:

·       We will share equally with Parent the filing fee required under the HSR Act.

·       We are required to pay Parent a termination fee of approximately $8,200,000 (which would equal 3% of the amount payable by Parent to the our stockholders under the terms of the merger agreement) if the merger agreement is terminated:

o       by Parent due to our breach of the non-solicitation provisions included in the merger agreement or our Board withholds, withdraws or modifies its recommendation that our stockholders adopt the merger agreement;

o       by us or Parent because our Board changes its recommendation that our stockholders adopt the merger agreement and/or recommends a competing transaction;

o       by Parent because, in the event of the commencement of a tender or exchange offer, our Board recommends that our stockholders tender their shares or fails to recommend against the offer and reaffirm the merger agreement; or

o       by Parent because we enter into any letter of intent or agreement relating to a competing transaction prior to the termination of the merger agreement.

·       In the event that a competing transaction is communicated to us and not withdrawn, and prior to or within 18 months following termination of the merger agreement we consummate a competing transaction, then we are required to pay Parent a termination fee of approximately $8,200,000 (which would equal 3% of the amount payable by Parent to our stockholders under the terms of the merger agreement) if the merger agreement was terminated:

o       by us or Parent if our stockholders did not adopt the merger agreement; or

o       by Parent if Parent terminated the merger agreement due to our breach of the merger agreement, other than by reason of our breach of the non-solicitation provisions contained in the merger agreement, our breach of the provisions contained in the merger agreement permitting our Board to withhold, withdraw or modify its recommendation that our stockholders adopt the merger agreement

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under specified circumstances, or our breach of the representations and warranties in the merger agreement that would arise as of the date of the closing of the merger.

·       We are required to reimburse Parent for its expenses related to the merger agreement and merger up to $3,000,000 if (i) the merger agreement is terminated by Parent or Merger Sub because we breached any of our representations, warranties or covenants that would result in conditions to closing not being satisfied (other than our breach of the non-solicitation provisions contained in the merger agreement, our breach of the provisions contained in the merger agreement permitting our Board to withhold, withdraw or modify its recommendation that our stockholders adopt the merger agreement under specified circumstances, or our breach of our representations or warranties that would arise as of the closing of the merger), or (ii) the merger agreement is terminated by us or Parent because our stockholders did not adopt the merger agreement.  The payment of such expenses will be credited against any further obligation we may have to pay a termination fee.

·       Parent is required to reimburse us for our expenses related to the merger agreement and merger up to $3,000,000 if the merger agreement is terminated by us because Parent or Merger Sub breached any of their representations, warranties or covenants that would result in conditions to closing the merger not being satisfied (other than breaches of Parent’s and Merger Sub’s representations and warranties that would arise as of the closing of the merger).  The payment of such expenses will be credited against any further obligation of Parent to pay the reverse termination fee as described below.

·       If we terminate the merger agreement as a result of Parent’s and Merger Sub’s failure to effect the merger and at the time all of the conditions to effecting the merger have been satisfied (other than only the conditions to our obligation to effect the merger), and Parent and Merger Sub fail to consummate the merger within 10 business days after we have delivered notice of such failure, then we may elect either:

o       to pursue monetary damages against Parent, provided that Parent’s maximum aggregate liability for such damages will not exceed $40,000,000 (provided, that we will not be permitted to pursue any equitable remedies, including specific performance); or

o       to receive from Parent a reverse termination fee of approximately $13,600,000 (which would equal 5% of the amount payable by Parent to our stockholders under the terms of the merger agreement).

Parent has agreed with us that at all times prior to the effective time of the merger, it will have not less than $40,000,000 in equity, either in the form of cash or shares of our common stock (valued at the original purchase price thereof).

Amendment and Waiver

The merger agreement may be amended by the parties thereto at any time before or after adoption of the merger agreement by our stockholders, but, after adoption, no amendment will be made that by law requires further approval by our stockholders without obtaining such approval.

Until the effective time of the merger, the parties may, to the extent legally allowed:

·       extend the time for the performance of any of the obligations or other acts of the other parties in the merger agreement;

·       waive any inaccuracies in the representations and warranties contained in the merger agreement; and

·       waive compliance with any of the agreements or conditions contained in the merger agreement.

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Our common stock is listed on the NASDAQ Global Select Market under the ticker symbol “SWWC.” This table shows, for the periods indicated, the high and low sales price per share for our common stock as reported by the NASDAQ Global Select Market (or its predecessor, the NASDAQ National Market).

The closing price per share of our common stock on March 2, 2010 (the last trading day before announcement of the merger agreement) was $7.07.  The high and low sales prices per share for our common stock as reported by the NASDAQ Global Select Market on May [_], 2010, the latest practicable trading day before the filing of this Proxy Statement were $[___] and $[_ _], respectively.

As of [__   _], 2010, our common stock was held of record by [__   _] stockholders.

Following the completion of the merger, our common stock will not be traded on any public market.

Dividend Policy

Since 1960, our practice has been to pay common stock cash dividends quarterly. The amount and timing of future dividends depends on our growth, results of operations, profitability and financial condition, as well as other factors deemed relevant by our Board. In 2008, we paid dividends of $0.24 per share of common stock. In 2009, we paid dividends of $0.125 per share of common stock. Since the fourth quarter of 2009, our quarterly dividend rate has been $0.05 per share of common stock.  Under U.S. federal income tax law, dividends to holders of our common stock are taxable to the extent they are paid out of current or accumulated earnings and profits. Generally, the amount of the dividend treated as a return of capital should reduce the tax basis to the holders of our common stock in such stock.  The dividend payments in 2009 represent a return of capital as the Company is in a negative accumulated earnings and profit position resulting from fourth quarter operating losses incurred in 2008 and the tax-basis loss in 2009.  We also paid dividends of $2.67 per share of Series A preferred stock in 2008 and 2009 and a first quarter dividend of $0.65625 in 2010.  Through and until the completion of the merger, we are permitted under the terms of the merger agreement to pay cash dividends consistent with our past practices on our common stock (but not in excess of $0.05 per share per quarter) and Series A preferred stock (but not in excess of $0.65625 per share per quarter).

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The following table presents certain information regarding the ownership of our common stock as of May 21, 2010, by:

·       each director;

·       our executive officers named in the Summary Compensation Table;

·       all of our executive officers and directors as a group; and

·       all those known by us to be beneficial owners of more than five percent of our common stock.

We calculate beneficial ownership by including shares owned in each Director’s or named executive officer’s name (or by any member of his or her immediate family).  Also, in calculating the percentage ownership, we count securities which the director or named executive officer could purchase within 60 days of May 21, 2010, (such as exercisable stock options that are listed in a separate column as outstanding securities).  No director or named executive officer owns shares of our preferred stock.  Except as otherwise noted, to our knowledge, the named individual or their family members have sole voting and investment power with respect to the securities beneficially owned by the stockholder.  Unless otherwise indicated, the business address for each listed stockholder is 624 South Grand Avenue, Suite 2900, Los Angeles, California 90017.

BENEFICIAL OWNERSHIP TABLE