SOUTHWEST WATER COMPANY

1982 ANNUAL REPORT

For the Year 1982 Operating revenues $15,231,386 Net income $ 2,038,478 Net income available

for common shares $ 1,995,649 0 l)

Per share data: Primacy earnings $ 6.93 Fully diluted

earnings $ 5.03 1 ) Dividends $ 2.20 I 0 () I 00

At Year End Book value per

common share $ 47.31 Utility plant (000) $ 51,516 Miles of water main 817 Number of customers 64,815 ()

The Company is unable to determine the range of bid and asked market quotations forthe various classes of its securities. Due to the limited number of shares outstanding, the Company believes that there is no established public market for any class or series of the Company's securities.

During the last two years the Company continued to pay a regular quarterly cash dividend of $.65625 per share on its Series A Preferred, $1 .00 per share on its Series C Preferred, and $.6875 on its Series D Preferred. During the same period, cash dividends have been paid each quarter on the Company's common stock. The Board of Directors increased the quarterly cash dividend on its common stock from $.50 to $.55 per share beginning with the quarter ended March 31, 1982. All quarterly cash dividends are payable to shareholders of record at the close ofbusiness on the last day of each quarter of the calendar year and are paid on the 20th day of the following month. As of December 31 , 1982, there were approximately 348 holders of record of the Company's common stock.

The Company will file with the Securities and Exchange Commission a Fonn 10-K report for the year ended December 31, 1982. A copy of such report, including financial statements, schedules and exhibits thereto, will be sent to any stockholder without charge upon written request to the Secretary, Southwest Water Company, 16340 East Maplegrove Street, La Puente, California 91744.

Though the climate was not so hot, Southwest Water Company

performed well during 1982.

Unlike the thirsty demands for water made during the unusually hot

summer months of 1981, we experienced normal water demands last

year. Total water usage for 1982 was 16,774,000 hundred cubic feet (ccf.),

or approximately 10 percent less than the 18,637,000 ccf. used in 1981. In

addition, the economic climate of 1982 was difficult, ridden with stresses

of inflation, or rather disinflation, steep interest rates, and high

unemployment. The competitive pressures to automate and improve

productivity remained our dominant business forces.

For 1982 the Company's net income was $2,038,478. Earnings per

common share was $6.93 up from $6.64 in 1981. Our approved annual

dividend for 1982 was $2.20 per common share. In addition to dividend

payments, the Board of Directors declared a 10 percent common stock

dividend for shareholders of record as of January 5, 1983.

Our successful performance is the result of a deeply-rooted philosophy,

defined by goals and operating principles. Among our key goals is one of

providing high quality water and ftrst-rate service to customers at a

reasonable price. We have been commended regularly by the Public

Utilities Commission for our excellent customer service and consistent

resolution of customer problems.

Another well-established goal is improved productivity through

emphasis on employee efficiency and technological innovation. For

several years we searched extensively for computer hardware and

software that was both sophisticated enough to meet our needs and

affordable. Only recently have hardware and software been developed of

a caliber and price that suited our requirements. As a result, we have

purchased a Hewlett-Packard 3000 computer.

In addition to improving operational productivity, our utility must be

granted a fair rate of return by the PUC if we are to prosper. Therefore, we

place strong emphasis on the research, development, and presentation of

our rate needs to the PUC.

Integral to our management philosophy is an underlying sense of

direction and a focus on changes of the future. Genuine opportunities for

expansion persist, and we are positioning the Company, through long­

range strategic planning, for future growth. New Mexico is a prime area for

growth. Although high interest rates have slowed construction there

recently, we anticipate increasing activity in 1983.

The Board of Directors and management are committed, now and in the

future, to meeting the needs of our shareholders. In an environment of

changing economic conditions, our goal is long-term growth of earnings

and dividends. This is demonstrated by a review of our increase in

earnings per common share over the past five years. Earnings have grown

from $3.15 to $6.93 over the years 1978 through 1982, for a compounded

growth rate of approximately 17%.

In an environment of inflation and changing economic conditions, we stand committed to long­term growth of earnings and dividends.

Anton C. Garnier President

Given the economic circumstances of 1982, we centered our

management efforts on increased productivity. With first-rate service as

our principle, we worked to broaden our foundation of experience and

knowledge through a combination of technological innovation and

heightened employee efficiency. Our aim is improved service for the

same dollar.

From the technological standpoint, our philosophy is to blend

experience with state-of-the-art instrumentation. The integration of

computers, data processing equipment, and meter-reading devices into

our operation provides keys to increased efficiency. In 1982 we

introduced equipment that will enhance the monitoring and control of

our water supply system and customer billing. Several major changes

resulted.

The economic scene changes but, as a flourishing business, our dedication to growth persists.

We have fused traditional know-how with state-of-the-art instrumentation to enhance our performance.

Each well-defined goal each technological innovation, each upgraded employee skill adds another dynamic part to the prolific whole.

For one, we purchased a master computer. This Hewlett-Packard 3000 has

the capacity to process up to one million letters or numbers at one time.

Its sizable memory and analytical capabilities place massive information

handling opportunities at our fingertips. The Billing and Collections

Department has already placed all of its bill processing on-line. The

Accounting Department is currently transferring the general ledger,

accounts payable, payroll, and fixed assets. The computer's efficiency will

impact every department as employees develop uses for this quick,

powerful tool.

Another smaller computer, manufactured by Willowglen, is being

delegated the routine tasks of controlling our automated water supply

system. This computer gathers and relays field data, helping the system

controller make more accurate and timely decisions in handling our

water supply. In the future it will be linked to the Hewlett-Packard,

allowing the larger computer to evaluate the data, make routine

decisions, and relay instructions back to the Willowglen computer.

Through their combined abilities, these computers will outperform an

employee in gathering and researching data, evaluating statistics, and

making quicker, cost- and energy-efficient decisions. Employees will be

freed to concentrate on the more complex and analytical decisions of

system control.

Handheld, electronic meter-reading devices have also been introduced.

This miniature computer eliminates paperwork by substituting the

keyboard for the meter-reader's pencil and routebook. It stores an

extensive array of information, including customer names and addresses,

meter locations, account numbers, and even warnings of hazardous

situations. Once completed, the daily readings are transferred to the main

computer in minutes, saving time, decreasing labor costs, and greatly

reducing opportunities for errors.

It is important to note that computers do not eliminate employee

positions. Computerization enhances productivity by increasing speed

and accuracy in job performance. Our highest form of efficiency rests with

our employees. We are committed to enhancing their knowledge and

skills and providing them with opportunities for development. In 1982

we offered a series of six workshops to refine the "management by

objective" techniques of our managers and supervisors. Topics included

practical methods for improving productivity, communications skills, and

performance review systems.

We have a Company policy that actively encourages employees to

continue their education through classes and seminars from local

universities, community colleges, and professional associations. We also

believe cross-training is an important aspect of career path development.

Examples of such cross-training are two programs developed by

Customer Service. One program cross-trains Billing and Collections

employees.

The other program, "cross-knowledge" training, involves the billers,

meter readers, and customer servicemen. Billers spend three days in the

field and, in exchange, field employees experience a full day of customer

relations from the office viewpoint. The program provides insight into

responsibilities and challenges of each Customer Service employee and

encourages good customer relations. It has been so successful that

employees from other departments have expressed a desire for similar

cross-training.

We attribute our productivity to our credo that careful attention to the

parts-the delineated goal, the technological innovation, the upgraded

employee skill-enhances the whole.

Our highest and best form of efficiency is the interactive cooperation among our employees.

The pleasure of our business is providing water for fun as well as need

We are willing to get our feet wet because we believe the reward is worth the risk.

12

As a public utility, the liquidity and capital resources of the Company are influenced most significantly by the construction required to provide acceptable facilities to meet the anticipated needs of customers. The Company depends on earnings and debt to finance these activities. Earnings are used primarily for daily operating expenses and capital expenditures. Debt is used for acquisition of fixed assets and major improvements and for overhaul of existing fixed assets. The Company follows what it believes to be conservative accounting practices which tend to increase coverage and internal cash flow and reduce its external fmancing needs. Although external financing requirements are expected to be minimal, the Company has available lines of credit and sufficient borrowing capacity to meet its commitments. Future cash needs will be met from earnings, funds provided by developers (advances for construction and contributions-in-aid of construction) and a $1 million line of credit available from Security Pacific National Bank The rate charged the Company for any funds borrowed on the line of credit is at prime. The additional debt capacity of the Company under its mortgage bond indenture is $3.7 million at December 31, 1982. The debt-to-capital ratio has steadily decreased in the past three years as annual payments are made to sinking funds. The debt-to-capital ratio has diminished from 50.4% in 1980 to 40.6% in 1982. The Company did not issue additional debt in 1982. The ratio of current-assets-to-current-liabilities was 1.3% at December 31 , 1982. This represents an increase of .1% from 1981 level of 1.2 but a decrease of .2% from 1980. Accounts receivable increased 11.2% in 1982 over its level at December 31, 1981, primarily as a result of offset rate increases. Accounts payable increased 1.3% in 1982, and current portions of advances for construction and other refund contracts increased 8.6% in 1982 from the previous year.

Inflation continued to increase operating expenses during 1982. Total operating expenses and taxes increased 6.4% in 1982 over 1981. However, cost savings programs instituted by the Company during the year carefully controlled expenses. Power and purchased water, two o f the Company's largest and most essential expenses, rose 5 .3%. Rates charged the Company for gas, electricity, and water purchases rose dramatically again in 1982. "Unaccounted-for-water" was stabilized in 1982 at a rate of approximately 8%. Public Utilities Commission procedures provide for annual step increases in basic rates ( in addition to interim offsets) which are designed to compensate for predicted inflationary increases in general costs through 1983.

Revenues for 1982 increased $999,441, or 7.0% over 1981. In 1982 revenues increased as a result of offset rate increases granted by -the Public Utilities Commission ("PUC") which became effective in 1982. Revenues for 1981 increased $3,172,240, or 28.7% over 1980, as a result of general rate increases granted by the "PUC". Revenues for 1980 increased $896,108, or 9% over 1979, as a result of three offset rate increases granted by the "PUC" during 1980 and a 7% increase in billed consumption. Operating expenses for 1982 increased $243,454, or 2.6% over 1981. The program to enhance operating efficiency continued through 1982 which minimized operating cost increases. Operating expenses for 1981 increased $1,120,496, or 13.6% over 1980; and increased for 1980 by $1,051,549, or 14.6% over 1979. Production costs continue to rise for power and purchased water, maintenance costs (repair of machinery and pumping equipment), and administrative and general costs (wages and insurance such as workman's compensation and vehicle coverage).

The increase in income tax expense for 1982 over 1981 is due primarily to the increase in taxable income and to the implementation of normalization requirements for depreciation in excess of book tax depreciation and investment tax credit. The increase in income tax for 1981 over l 980 was due to increase in taxable income. Other deductions for 1982 decreased $73,717, or 6.6%, whereas other income decreased $2,839 during the same period. Other deductions for 1981 decreased $49,600, or 4.2% over 1980; whereas other income decreased $97,823, or 25.9%. Other deductions for 1980 decreased $45,846, or 3.9% over 1979, while other income increased $53,180, or 16.4%. As the Company's long-term debt decreased, the interest expense on the debt instruments diminished, reducing the main components of "other deductions".

The consolidated financial statements and other financial information contained in this report has been prepared by the management of Southwest Water Company which has directed considerable effort to ensure the integrity and objectivity of such information. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles deemed appropriate under the circumstances and include amounts based on the best estimates and judgements of management. All of the financial information in this report is consistent with that in the consolidated financial statements. The Corporation maintains a system of internal accounting controls designed to provide reasonable assurance that assets are protected from improper use and to produce records sufficient to prepare reliable financial information. The system is augmented by careful selection and training of qualified personnel, division of responsibilities, delegation of authority, and communication programs for the entire organization which demand high standards of professional and financial integrity from management. The Corporation's independent public accountants have examined the consolidated financial statements in accordance with generally accepted auditing standards, which, among other things, require a review of the system of internal accounting controls in sufficient detail to design their audit tests and to express their opinion on the consolidated fiancial statements in accordance with such standards. The Board of Directors, through its Audit Committee composed solely of outside directors, oversees management's responsibilities in the preparation of financial statements and selects the independent public accountants, subject to stockholder ratification. The Audit Committee meets regularly with management, and the independent public accountants. The Corporation's independent public accountants have full and free access to the Audit Committee.

Anton C. Garnier President

Richard N. Brigham Vice President Finance and Chief Financial Officer

13

14

Southwest \\'mer Company and Subs1diar)

Five Year Summary and Financial Data (Not con:red by Accountants' Report)

Years eillkd DcccmhcT j 1.

1982 19Hl li)HO 19""'9 19~fl

OPERATIONS: Operating revenues $15,231,386 $1-1 .231.91'1 s 11 ,0'19,70') $10.163.')9- i 9.631 ,HO-t Operating expenses

and taxes: Operating expenses 9,596,958 9.3'13,'10-1 H,23.3,00B 7.1H1,-IS9 6.-J-s,-t-6 Depreciation 1,041,093 972,.17 7 92H,2S'' H7S,H69 R20,791 Income taxes (a) 1,780,200 1,3·13,000 1s.~.ooo 323,000 :;9(),000

Total expenses and taxes 12,418,251 11.66R,HHI 9,31-t,26S HJH0.32H .., .H92.26..,

Operating income 2,813,135 2,563.06-t 1,71'i,4-10 1,7 H.).269 1,739,')37 Other deductions

and ( income): Interest and

amortization 1,052,394 1.126,11 1 1,17'i,-ll 1.22l.'iS7 I 112,0'12 Non-utility income (277,737) (2Ho,s-·G) (:PH.399) (32S,219) (U3,HSS)

Total o ther deductions 774,657 81S,S3S -9-,312 H96.33H 97 H,l9-

Net income · 2,038,478 1,..,17529 9tB,128 H86,931 -61,3 10 Dividends on

preferred shares 42,829 +1,23H '19,306 S-1,18 I 'iH.H2()

Net income available for common shares $ 1,995,649 $ I ,673,291 $ H9H,H22 $ 832,7')0 $ 702,SI1

PER SHARE AMOUNTS: Earnings per

common share: Prima.ty $ 6.93 $ 6.6-1 $ 3.79 $ 3.71 $ 3.15

Fully diluted $ 5.03 $ "1.2H $ 2.42 $ 2.31 $ 197

Dividends per common share $ 2.20 $ 1.90 $ 160 $ 1.-JO $ 1.00

Number of shares used in computation of per share information (b): Prima.ty 287,774 251,909 237,075 22-1.503 223,102

Fully diluted 411 ,577 -112,506 -112,88.., -110,6.r 111,')59

STATISTICAL INFORMATION: Working capital $ 1,391 ,757 $ 660,IB.1 $ 1,-1 13,2 f') $ U'6.212 $ 2,H09,HI7 Current ratio 1.3 1.2 1.') 1.') 2.0 Capital expenditures $ 1,2o6,255 $ 2,7')6,7HS $ 1,-tOH,900 $ 2,120,116 $ l/HS,6H-1 Total assets $42,741,986 ~-11,322,029 $.19538,:\83 $375-12,818 $Yi.fl3-I.OHO Long-te rm debt $10,154,200 1>ll,096.HOO $I l.-S6,200 $12.232,.1()6 $12,GS6.366 Total capitalization $25,038,247 $2-1,176,788 $23.3 19,267 $23,12UHO $23,0?9,B'l0 Long-term debt to

capitalization 40.6% -!S.9"o SO.-t~o 52.9"u ')S.O"., Return on common

equity 14.1% 13.6"u H.-l"o 8.--in,J I .'>uu

(a) See notes 1 and 7 to the consolidated financial statemems for informatio n pertaining to income 1axes. (b) Primary earnings per share has been computed based upon weighted average number o f shares outstanding during the year. Fully diluted earnings per .;hare has been computed based upon the average number of shares of common stock o utstand ing assuming that the Series C preferred stock and the 9Yz% convertible subordinated debentures were converted at the beginning of the year and the related dividends and interest, net of income taxes, for the year were e liminated. Calculations are also adjusted for a 19R3 stock dividend.

South"'est \X'ater Company and Subsidiary

Statements of Consolidated Income For the years ended December 31, 1982, 1981 and 1980

1982 l ')Hl l<JHO

Operating Revenues: Metered sales to customers $14,652,894 $13,6'i'i, l -(' $10.-130.328

Other revenues 578,492 'i76.~98 629.3'7

Total operating revenues 15,231,386 14,231.9-l'i 11,0'59.-..0'i

Operating Expenses and Taxes.: Power and water purchased 3,405,336 3.232.96'i 3,13H.6-t3

Production and distribution 1,182,619 1,108.831 1,012,012

Maintenance 1,376,923 1,2-!6,43'i 96'i,7"H

Administrative and general 2 ,931,063 3,012.601 2,'i64.329

Depreciation 1,041,093 972,377 92H.2'i7

Taxes:

Property 324,560 389,613 2'i1,-12H

Income (Notes 1 and 1,780,200 1.3-13,000 t'i.~.ooo

Payroll and local 376,457 363.0'i9 300,8--12

Total operating expenses and taxes 12,418,251 11,66H,881 9.311,26'i

Operating Income 2,813,135 2,'i63.06--i 1,7 1'5,-HO

Other Deductions and (Income): Interest on first mortgage bonds 873,600 907 ,-17'i 941,2'i0

Interest on debentures and other long-term debt 142,137 1'9.108 19-!.3--11

Amortization of debt expense (Note I ) 36,058 36.73'i 3H,90...,

Other interest 599 2,'i43 1.213

Interest income (252,866) (27 -I,S'i 1) (200,877 )

Miscellaneous income (Note H) (24,871) (6.02')) ( 177,522)

Total other deductions and ( income) 774,657 H--!'i,'i3'i 79""~..)12

Net Income 2,038,478 I ,7 1',529 9-!8,128

Dividends on Preferred Shares 42,829 ·H,2.1H --19.306

Net Income Available for Common Shares $ 1,995,649 $ 1,6..,3.291 $ H98,H22

Earnings per Common Share (Note 'i ):

Primary $ 6.93 $ 6.64 $ 379

Fully diluted $ 5.03 $ --1.28 $ 2.'-12

Cash Dividends per Share of Common Stock $ 2.20 $ 190 $ 1.60

Number of Shares used in Computation of per Share Information: Primary 287,774 251,909 237,075

Fully diluted 411,577 412,506 1112,8!37

15 See accompanying IH Jtt~s.

16

Consolidated Balance Sheets

ASSETS

Utility Plant - At cost Land and land rights

Source of supply

Pumping and purification

Transmission and distribution

General (including intangibles)

Construction work in progress

Total utility plant

Less accumulated depreciation and amortization

Utility plant - net

Investment - At cost: Mutual water companies

Current Assets:

Cash Certificates of deposit and savings accounts

Receivables:

Customers (less allowance for doubtful

accounts of $94,062 in 1982 and

$81,856 in 1981)

Other

Materials and supplies, at average cost

Prepayments

Total current assets

Other Assets and Deferred Charges: Deferred debt expense

Notes receivable

Other

Total other assets and deferred charges

Total

1982

$ 947,254

1,359,736

3,998,841

42,584,157

1,896,833

729,308

51,516,129

15,4o6,146

36,109,983

276,777

416,909

2,235,845

1,659,939

341,598

322,486

400,713

5,377,490

245,055

443,624

289,057

977 ,736

$42,741,986

LIABILITIES AND CAPITALIZATION

Capitalization: Common stockholders' equity (Notes 3, · I and 5):

Common stock

Capital surplus Retained earnings

Total common stockholders' equity Cumulative preferred stock (Note -1)

Long-term debt (Note 6)

TOtal capitalization (see accompanying

schedule)

Current Liabilities: Current portion of long-term debt

Accounts payable Accrued Income Taxes (Note 7)

Accrued properry taxes

Accrued interest and dividends payable

Current portion of advances for construction and other refund contracts (Note I )

Other accrued liabilities (NOte 11)

Total current liabilities

Other Liabilities and Deferred Credits: Advances for construction (less current ponion of

$466,000 in 1982 and $421,000 in 1981 (Note I)

Refund contracts relating to utility plant sold

upon condemnation (less current ponion of $42,000 in 1982 and $47,000 in 1981) (Note I)

Deferred income taxes (Notes 1 and 7 )

Deferred gains Contributions in aid of construction (Note I)

Total other liabilities and deferred credits

Commitments and Contingencies (Notes ·1, 6 and 9)

Total

St.~c accompanymg notes.

1982 1981

$ 271,478 $ 2-1 2,029

7 ,100,827 6,705,725

6,759,979 5,3-19,071

14,132,284 12,296,825

751,763 783, 163

10,154,200 11 ,096,800

25,038,247 2·1,176,7RR

530,000 355,000

478,562 -172,-116

321,024 420.535

267,582 263,037

378,895 362,35·1

508,000 -168,000

1,501 ,670 1 ,5H~,"""'35

3,985,733 3,860,077

8,126,533 8,151,351

295,993 336,72-1

1,857,840 1,-101,930

134,867 15-1, 103

3,302,773 3,2'1 1,056

13,718,006 13,285,16'1

$42,741,986 $·~ 1,322,029

17

Ill lll1JYlP\ llld idlll

Consolidated Schedule of Capitalization

18

I ill 'I I I )>

Common Stockholders' Equity ( otL ~ ~. 1 :111d 'i l

Common stock, par value $1 per share,

1,000,000 shares authorized, 271,478

and 242,029 shares outstanding, respectively

Capital surplus

Retained earnings

Total common stockholders' equity

Cumulative Preferred Stock, par value $50 per share ( ' L

Series A, 5111%, 18,8423/s shares authorized,

10,931111 and 11,339111 shares outstanding,

respectively Series D, 5112%, 5,500 shares authorized,

2,860 and 3,080 shares outstanding,

respectively Series C, 8% convertible, 4,000 shares authorized,

1,244 shares outstanding, Preferred stock, not designated, 171,657o/s shares

authorized, none outstanding

Total preferred stock

Long-Term Debt (. 'oiL 6). First Mortgage Bonds:

Series "F", 9%, due 1993

Series "G", 93/4%, due 1996

Series "H", 8Sfs%, due 1998

9112% convertible subordinated debentures,

due 1995 Less amounts due within one year:

Annual sinking fund requirement

Total long-term debt

Total Capitalization

•lt.~ :u:umlp.ltl\'lllg note~

1982 19HI

$ 271,478 2'12,0>9

7,100,827 G, ll'i,72'i

6,759,979 'i,3-t9,07 I

14,132,284 12,2.96 1:12'>

546,563 '166.963

143,000 l'i·t,OOO

62,200 62,200

751,763 H3,16~

2,555,000 2,660,000

3,750,000 1,000,000

3,000,000 3,000,000

1,379,200 1,791.HOO

(530,000) (5'}'5,000)

10,154,200 ll,096,HOO

$25,038,247 $2·1,176, !:!H

Soutlw>est \\ atcr Com pan\' ancl Suhsidian·

Consolidated Statements of Changes in Cumulative Preferred Stock and Common Stockholders' Equity rm th. year: ended Deu.:lllbe1 51 1980, 1981 ;md 1982

CUMUlATIVE PREFERRED STOCK COMMON STOCKIIOIDERS' EQUI1Y

SW.\> H%, SERIES C. 5Y'% COMMON CAPITAL RETAINED SERIES A CONVERTIHI.F. SERIES D ~TOCK SIJRPUJS EARNINGS

Balance at}anuary 1, 1980 $649,Ql2 $92,500 $176,000 $206,140 $6,199,769 $3,565,593

Add (Deduct): Retirement of Series D

cumulative preferred stock (Note~) (11,000)

Repurchase and retirement of Series A cumulative preferred stock (Note 1) (63,774) 31,888

Issuance of common stock (Note '\):

Conversion of Series C cumulative convenible preferred stock (17,500) 1,400 16,100

Conversion of $164,400 face amount of 9Vz% convertible subordinated debentures 11,736 152,568

Net income 948,128 Cash dividends (395,493)

Balance atDecember31, 1980 585,238 75,000 165,000 219,276 6,400,325 4,118,228

Add (Deduct): Retirement of Series D

cumulative preferred stock (Note 'I) (11,000)

Repurchase and retirement of Series A cumulative preferred stock (Note I) (18,275) 11 ,148

Issuance of common stock (Nolc j).

Conversion of Series C cumulative convertible preferred stock (12,800) 1,024 11,776

Conversion of $304,400 face amount of 9Vz% convenible subordinated debentures 21 ,729 282,476

Net income 1,717,529 Cash dividends (486,686)

Balance at December 31,1981 566,963 62,200 154,000 242,029 6,705,725 5,349,071

Add (Deduct): Retirement of Series D

cumulative preferred stock (Note ~ ): (11,000)

Repurchase and retirement of Series A cumulative preferred stock (Note -1\ ( 20,400) 12,240

Issuance of common stock (Note 3):

Conversion of $412,600 face amount of 9'12% convertible subordinated debentures 29,449 382,862

Net income 2,038,478 Cash dividends (627,570)

Balance at December 31,1982 $546,563 $62,200 $143,000 $271,478 $7,100,827 $6,759,979

19 See atTnnlp:uwing notes.

Southwest Water Company and Subsidiary

Statements of Changes in Consolidated Financial Position For the years ended December 31, 1982, 1981 and 1980

1982 19!ll 1980

Source of Funds: Net income $ 2,038,478 $ 1,717,529 $ 9--18,128

Depreciation and amortization 1,077,509 1,008,762 972,9~1:!

Recognized gain on installment note (19,236) (14,093) (4,322)

Increase (decrease) in deferred taxes 455,910 ( 16,357) 27,390

Total from operations 3,552,661 2,695.1:!41 1,944,154

Sale of assets (Note 8) 63.909

Advances for construction (Note 1) 61,519 643,7HH ·11:!0,997

Contributions in aid of construction (Note 1) 72,682 75,295 168,39.j

Total source of funds 3,686,862 3,4 14 ,924 2,657,454

Applications of Funds: Additions tO utility plant 1,206,255 2,756 ,785 1,'"108,900

Reduction in long~term debt 530,000 355,195 311,861

Reduction in advances and contributions for

construction and other refund contracts

(Note 1) 496,704 578,908 513,320

Dividends 627,570 486,686 395,493

Additions ( reduction) to other assets 75,599 (27,715) (52,040)

Retirement of preferred stock 19,160 18,127 42,887

Total applications of funds 2,955,288 4,167,986 2,620,421

Increase (Decrease) in Working capital $ 731,574 s (753,062) s 37,033

Represented by Increase (Decrease) in : Cash and certificates of deposit and

savings accounts $ 591,699 s ( 193,772) s 76,665

Receivables 242,502 260,786 7,028

Materials and supplies (5,018) (60,329) 32,165

Prepayments 28,047 (2,093) (37,297)

Total current assets 857,230 4,')92 78,561

Current portion of long-term debt 175,000 (48,000)

Accounts payable 6,146 84,55·1 2,418

Accrued taxes (99,511 ) 420,535 (88,251~)

Current portion of advances for construction

(Note 1) 40 ,000 60,000 (15,000)

Other 4,021 192,565 190,364

Total Current liabilities 125,656 757,65'+ '11 ,528

Increase (Decrease) in Working Capital $ 731,574 $ (753,062) $ 37,033

20 See accompanying n01es.

Notes to Consolidated Financial Statements

The Company operates primarily in the water utility industry. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Suburban Water Systems (formerly Southwest Suburban Water). All significant intercompany transactions have been eliminated. The Company and Suburban Water Systems (Suburban Water) follow the accounting policies prescribed or authorized by the Public Utilities Commission of the State of California (PUC) and, as to a subsidiary of Suburban Water, the Public Service Commission of the State of New Mexico (PSC).

The cost of additions, renewals, and betterments to utility plant is charged to the appropriate plant accounts. Cost includes labor, material, other direct costs, and indirect charges. The cost of utility plant retired or otherwise disposed of, including removal costs and excluding salvage, is charged to accumulated depreciation. Depreciation is recorded primarily on the straight-line remaining life basis and was equivalent to 2.4, 2.3 and 2.4 percent of average depreciable plant for the years ended December 31, 1982, 1981 and 1980, respectively. Expenditures which materially increase utility plant lives are capitalized while the costs of maintenance and repairs are charged to expense as incurred. A substantial portion of utility plant is pledged as collateral for first mortgage bonds.

Income taxes have been provided for on the basis of the amounts expected to be paid currently in accordance with policies prescribed by the PUC and PSC through December 31, 1981. The Company has implemented the Accelerated Cost Recovery System (ACRS) for tax depreciation of all property additions subsequent to December 31, 1981, and uses an accelerated method of tax depreciation for substantially all property additions prior to January 1, 1982. Both methods result in tax depreciation which is in excess of book depreciation. The Company includes the tax benefit of accelerated depreciation on assets acquired prior to the use of ACRS in net income ("flow through method"). In accordance with the Economic Recovery Tax Act of 1981 the Company was required and has changed in 1982 from the flow through method to the normalization method for investment tax credits and for ACRS deductions in excess of book depreciation. Deferred income taxes of $481,800, have been provided in 1982 for these timing differences. The investment tax credits for 1982 additions to the Company's utility property are being amortized against federal income taxes rateably over the estimated productive lives of the related assets as allowed by the PUC and PSC. Deferred income taxes are also provided on gains from sales under various condemnation proceedings which have been reported for financial statement purposes but which are not currently reportable for income tax purposes.

Deferred debt expense is being amortized under the bonds-outstanding method over the original lives of the related debt issues.

Advances for construction, primarily for water main extensions, are generally refundable to the depositor at a rate of 22% of the revenue received from such installations over a 20-year period. Refund contracts which are issued after June 1982 are refundable to the depositor at a rate of 21!2% each year, over a 40-year period.

Contributions-in-aid of construction are donations or contributions in cash, services or property from governmental agencies and municipalities, or individuals for purpose of constructing utility plant. Depreciation applicable to such plant is charged to the contributions-in-aid account rather than to depreciation expense. The charges continue until the cost applicable to such properties has been fully depreciated or the asset retired.

Pension costs are funded when accrued. The annual cost includes normal cost and amortization of unfunded past service costs with interest thereon over a 10-year period.

Certain reclassifications have been made to prior year fmancial statements to conform to the 1982 presentation. 21

1 INVES""~ ENTS Investments consist principally of less than 50% of ownership interest in two mutual water companies. The Company's equity in the net assets at December 31, 1982 and 1981 was in excess of cost. The Company purchased water for its operations from these mutual water companies at a cost of approximately $630,000 in 1982 and $551,000 in 1981.

')MMON STOC ( During 1980, the Company issued 1,400 shares of common stock in exchange for 350 shares of the Company's Series C convertible preferred stock, and 11,736 shares of common stock in exchange for the Company's 9'12% convertible subordinated debentures having a face value of $164,400. In 1981, the Company issued 1,024 shares of common stock in exchange for 256 shares of the Company's Series C convertible preferred stock, and 21,729 shares in exchange for the Company's 9'12% convertible subordinated debentures having a face value of$304,400. In 1982, the Company issued 29,449 shares in exchange for the Company's 9112% convertible subordinate debentures having a face value of $412,600.

4 ~'~':FElli 1.m STOCK The Company's cumulative preferred stock is redeemable so lely at the Company's option, except as noted below, at the following per share prices:

51/.1% Series "A" at $52 5112% Series "D" at $54 8% Series "C" at $53 through December 31, 1982, $52 through December 31, 1986 and par thereafter.

The Company is required to provide for the annual redemption of220 shares of the Series D Preferred Stock at par value, plus accrued dividends, until fully redeemed. Each share of the Series C Preferred Stock is convertible currently into three and one third shares of common stock. At December 31, 1982 and 1981, 4,146 and 4,976 shares of common stock were reserved for such conversion, respectively.

During 1977, the Company adopted a voluntary program to purchase and retire all of its outstanding Series A Preferred Stock. Purchases are limited to $40,000 a year and are subject to the satisfaction of certain conditions concerning the Company's net income. The Company may discontinue this program at anytime. In 1980, 1275.5 shares of its outstanding Series A Preferred Stock were purchased for $25.00 per share plus accrued dividends to date of sale; and in 1981, 365.5 shares of its outstanding Series A Preferred Stock were purchased for $19.50 per share plus accrued dividends to date of sale; and in 1982,408 shares of its outstanding Series A Preferred Stock were purchased for $20.00 per share plus accrued dividends to date of sale. All stockholders were eligible to accept the Company's offers. All shares validly tendered by shareholders of twenty· five or fewer were purchased first, and the remainder was purchased from all other holders in the order in which such tenders were received.

. .l .. :>.l''"N"'S E"' S A .... .E Primary earnings per share has been computed based upon the weighted average number of shares of common stock outstanding during each year. Fully d iluted earnings per share for 1982, 1981 and 1980 has been computed based upon the average number of shares of common stock outstanding, assuming that the Series C Preferred Stock and the 9'12% convertible subordinated debentures were converted at the beginning of the year and the related dividends and interest, net of income taxes, for the year were e liminated. Calculations are also adjusted for a 1983 stock dividend.

6. tONG-TERM D ED'~ The 9112% convertible subordinated debentures are currently convertible into common stock at the rate of 1 share for each $14 principal amount of such debentures. At December 31, 1982 and 1981, therewere98,514and 127,986 shares of common stock reserved for such conversion, respectively. Aggregate annual maturities and sinking fund requirements of all long-term debt for the four years ended December 31, 1987, are as follows: 1984, $571,000;

22 1985,$570,000; 1986, $569,000; and 1987, $568,000.

7 '1COME TAll ~ A reconciliation of the differences berween actual income tax expense and the amount computed by applying the statutoty federal income tax to pretax income is as follows:

Computed statutory federal income tax expense

Excess of tax over book depreciation State income taxes, net of federal

income tax benefit Income taxed at capital

gains rates Investment tax credit (net

of recapture) Other

1982

46% (1)

6

(1) (3)

19til

H

(6) ( 1 )

19HO

(.2)

(2·1) ( .. 1)

Actual income tax expense 47% ·H".. 1-J',

Deferred income taxes arise as a result of the reporting for financial statement purposes of gains from sales under condemnation proceedings which are not currently reportable for federal income tax purposes and normalized depreciation and investment tax credits in 1982 (See Note 1). Replacement assets have been or will be purchased with the proceeds of these condemnation sales. Thus, in the opinion of management, the taxes on such gains are deferred for income tax purposes until: ( 1) the assets acquired with the proceeds are disposed of in a transaction requiring the recognition of gain or loss for tax purposes, or (2) the book depreciation on assets acquired exceeds the amount allowable for income tax purposes during any year. In accordance with the Internal Revenue Code, the deferred taxes on the sale of certain of Suburban Water's real estate in 1980 are payable March 15, 1984, unless Suburban Water completes a reinvestment of the proceeds by December 31, 1983. In the opinion of management, it is probable that such reinvestment will be completed before December 31, 1983. To date, all such reinvestments have been made on a timely basis.

The income tax provision is composed of the fo llowing elements:

1982 1YH1 IYHO

Current Federal $ 957,000 $1,0-'),2')0 $ ')3,000 Clm·ent State 341,400 26"7,000 ~3.000

Deferred 481,800 -,')0 27,000 ---$1,780,200 S1.3-l3,ooo l11.3,000

The provision for income taxes in 1982, 1981 and 1980 has been reduced by investment tax credits (net of recapture) of $13,053, S172,829 and $265,771, respectively.

8 SALES OF ASSETS In November 1981, the Company sold a parcel ofland for $22,580. This transaction resulted in a net gain of$10,870. The gain is reported in other income. In December 1980, the Ciry oflndustry Urban Development Agency acquired certain of the Company's real estate situated in the San)ose-Whittier district for $129,000. The acquisition was made in a negotiated sale but under threat of condemnation through eminent domain proceedings. The transaction resulted in a gain of$73,630 net of applicable deferred income taxes of$44,367 (see Note 7). The gain from the sale is included in miscellaneous income. ln December 1980, the Company sold the assets of its trash collection setvices (an insignificant part of the Company's operations) within New Mexico for the consideration of$175,000, payable $75,000 in cash and a promissory note for $100,000 bearing interest at the rate of 14% per annum payable over a period of 48 months. The transaction resulted in a total pretax gain of $111,826. This transaction is being accounted for as an installment sale. The portions recognized in 1982, 1981 and 1980 are included in miscellaneous income.

9. LEASE COMMITMENTS The Company's subsidiary, Suburban Water, is committed under long-term operating lease agreements, principally for equipment. Aggregate rental expense under all operating leases approximated $231,000, $160,000 and $130,000 forthe years ended December 31, 1982, 1981 and 1980, respectively. At December 31, 1982, the Company was committed for total future minimum rental payments of$816,000, of which the following amounts are due in each ofthe fivesucccedingyears: 1983, $256,000; 1984, $249,000; 1985, $191,000; 1986, $98,000; and 1987,$22,000. 23

The Company has a non-contributory retirement plan (the plan) under which all employees who have one or more years of service and have attained the age of25 years are qualified to participate. As ofDecember 31, 1982, the date of the latest actuarial valuation of the plan, the actuarial value of the pension fund assets exceeded the present value of vested benefits by approximately $1,119,624. Pension expense for 1982, 1981 and 1980 was $172,325, $186,385, and $227,691, respectively. Additional disclosures required by Statement Financial Accounting Standards No. 36 (SFAS #36) have not been presented since such information is nor available because the plan is not required to report such information pursuant to the Employees' Retirement Income Security Act of 1974. As permitted by SFAS # 36, the Company is complying with the disclosure requirements of Accounting Principles Board Opinion No.8.

Included in other accrued liabilities are the following:

Pensions Water Assessment Insurance Vacations Other

Total

PEAT, MARWICK, MITCHELL & CO. Certif•ed Pubo~c Accountants 555 South Flower Street Los Anqele,, Californ a 90071

To the Board of Directors and Stockholders of Southwest Water Company:

1982

s 172,325 447,231 165,963 207,555 508,596

$1,501,670

We have examined the consolidated balance sheets and the consolidated schedules of capitalization of Southwest Water Company and subsidiary at December 31, 1982 and 1981 and the results of their operations and statements of income, changes in cumulative preferred stock and common stockholders' equity, and changes in financial position for each of the years in the three year period ended December 31, 1982. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the aforementioned consolidated financial statements present fairly the financial position of Southwest Water Company and its subsidiary at December 31, 1982 and 1981 and the results of their operations and the changes in their financial position for each ofthe years in the three year period ended December 31, 1982, in conformity with generally accepted accounting principles which, except for the change, with which we concur, in the manner of providing for deferred income taxes as described in note 1 of notes to financial statements, have been applied on a consistent basis.

24 February 23, 1983

President

Vice President Operations

Vice President Customer Service and Corporate Secretary

Vice President Finance Chief Financial Officer

Allen D. Harper Donovan D. Huennekens Richard Kelton Ira W. Kinsey

Allen D. Harper Ira W. Kinsey Louis L. Kelton

Amon C. Garnier Michael ]. Fasman R. Roland Smith Louis L. Kelton

Michael]. Fasman Anton C. Gamier Donovan D. Huennekens Richard Kelton R. Roland Smith

Latham & Watkins 660 Newport Center Drive Suite 1400 Newport Beach, California 92660

Peat, Marwick, Mitchell & Co. 555 South Flower Street Los Angeles, California 90071

Security Pacific National Bank 333 South Hope Street Los Angeles, California 90017

President of the Company

Lawyer and Partner, Allen and Fasman

Financial Adviser; Retired Vice President, Investments, Pacific Mutual Life Insurance Company

President and Director, John D. Lusk & Son, commercial, industrial, and residential developers

Chairman, Board of Directors, Bollenbacher & Kelton, Inc., commercial and residential developers; Member of Board of Trustees, University of West Los Angeles Law School; Member of Advisory Board, Mitsui Manufacturers Bank

President, Bollenbacher & Kelton, Inc., commercial and residential developers; President, Educational Contractors of America, Inc.; Vice President, Board of Trustees, Pacific Asia Museum

Retired Vice President, Security Pacific National Bank; Trustee, Ho llywood Presbyterian Medical Center

Retired: Chairman Emeritus WIA Corporation Western Insurance Associates American Coverage Administrators Des Moines, Iowa; Director, Goodwill Industries of Southern California

Southwest Water Company 16340 East Maplegrove Street, La Puente, California 91744 (213) 918·1231