-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SuK8Irt5tALQvKgNQ5dtpQ1f0SHZ9l3XdFjpp58KtXgPhdda0ZAtCg+VxSlIAyUZ 55dFVtW+ItPLn/mGG8LrnQ== 0000950150-98-000322.txt : 19980309 0000950150-98-000322.hdr.sgml : 19980309 ACCESSION NUMBER: 0000950150-98-000322 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980306 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN CALIFORNIA WATER CO CENTRAL INDEX KEY: 0000092116 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 951243678 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12008 FILM NUMBER: 98559469 BUSINESS ADDRESS: STREET 1: 630 E FOOTHILL BLVD CITY: SAN DIMAS STATE: CA ZIP: 91773-9016 BUSINESS PHONE: 9093943600 MAIL ADDRESS: STREET 1: 630 E FOOTHILL CITY: SAN DIMAS STATE: CA ZIP: 91773-9016 10-K405 1 FORM 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Fiscal Year Ended DECEMBER 31, 1997 Commission file number 0-1121 SOUTHERN CALIFORNIA WATER COMPANY (Exact Name of Registrant as specified in its charter) CALIFORNIA 95-1243678 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 630 EAST FOOTHILL BOULEVARD, SAN DIMAS, CALIFORNIA 91773 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (909) 394-3600 Securities registered pursuant to Section 12(b) of the Act: COMMON SHARES, $2.50 PAR VALUE NEW YORK STOCK EXCHANGE - ------------------------------- ----------------------------------------- Title of Each Class Name of Each Exchange On Which Registered Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] The aggregate market value of the total voting stock held by non-affiliates of Registrant was approximately $218,784,000 on March 5, 1998. The closing price per Common Share on that date, as quoted in the Western Edition of The Wall Street Journal, was $24.375. Voting Preferred Shares, for which there is no established market, were valued on March 5, 1998 at $1,462,000 based on a yield of 5.69%. As of March 5, 1998, the number of Registrant's Common Shares, $2.50 Par Value, outstanding was 8,957,671. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Annual Report to Shareholders for the year ended December 31, 1997 as to Part I, Items 1 and 2, and Part II, Items 5, 6, 7 and 8, in each case, as specifically referenced herein. (2) Portions of the Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A as to Part III, Items 10, 11, 12 and 13, in each case as specifically referenced herein. 2 SOUTHERN CALIFORNIA WATER COMPANY INDEX
Page No. -------- PART I Item 1: Business 1 - 8 Item 2: Properties 8 - 10 Item 3: Legal Proceedings 10 - 12 Item 4: Submission of Matters to a Vote of Security Holders 12 PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 12 Item 6: Selected Financial Data 13 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation 13 Item 8: Financial Statements and Supplementary Data 13 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13 PART III Item 10: Directors and Executive Officers of the Registrant 13 Item 11: Executive Compensation 14 Item 12: Security Ownership of Certain Beneficial Owners and Management 14 Item 13: Certain Relationships and Related Transactions 14 PART IV Item 14: Exhibits, Financial Schedules and Reports on Form 8-K 14 Exhibit Index 14 - 16 Signatures 17
i. 3 PART I ITEM 1. BUSINESS GENERAL Southern California Water Company, hereinafter referred to as Registrant, is a utility company engaged principally in the purchase, production, distribution and sale of water (SIC No. 4941). Registrant also distributes electricity in one community (SIC No. 4911). Registrant, regulated by the California Public Utilities Commission, hereinafter referred to as the CPUC, was incorporated in 1929 under the laws of the State of California as American States Water Services Company of California as the result of the consolidation of 20 water utility companies. From time to time, additional water companies and municipal water districts have been acquired and properties in limited service areas have been sold or the subject of condemnation proceedings. Registrant's present name was adopted in 1936. At December 31, 1997, Registrant was organized into three regions operating within 75 communities in 10 counties located throughout the State of California and provided water service in 21 separate customer service areas and one electric customer service area. The total population of these service areas on that date was approximately 1 million persons. For each of the years ended December 31, 1997, 1996 and 1995, about 73% of Registrant's water customers were located in the greater metropolitan areas of Los Angeles and Orange Counties. Registrant provides electric service to the City of Big Bear Lake and surrounding areas in San Bernardino County. Beginning in June, 1996, all electric energy sold by Registrant to customers in its Bear Valley Electric customer service area was purchased under an energy brokerage contract with ENOVA Energy Management, Inc. Prior to June, 1996, all energy sold was purchased from the Southern California Edison Company subsidiary of Edison International. Registrant served 241,581 water customers and 20,698 electric customers at December 31, 1997, or a total of 262,279 customers, compared with 260,985 total customers at December 31, 1996 and 259,437 total customers at December 31, 1995. For the years ended December 31, 1997, 1996 and 1995, approximately 92% of Registrant's operating revenues were derived from water sales and approximately 8% were derived from the sale of electricity. Operating income before taxes on income of the electric district was approximately 12%, 10% and 8% of Registrant's total operating income before taxes for the years ended December 31, 1997, 1996 and 1995, respectively. The material contained in Note 11 Business Segments - of the Notes to Financial Statements in the 1997 Annual Report to Shareholders provides additional information on business segments while Note 12 - Selected Quarterly Financial Data (Unaudited) - of the Notes to Financial Statements in the 1997 Annual Report to Shareholders provides information regarding the seasonal nature of Registrant's business. The Notes to Financial Statements contained in the 1997 Annual Report to Shareholders are included herein by reference. During 1997, Registrant supplied, from all sources, a total of 199,146 acre-feet of water compared to 194,397 acre-feet supplied in 1996 and 183,108 acre-feet in 1995. Of the total water supplied in 1997, approximately 45% was purchased from others, principally from member agencies of the Metropolitan Water District of Southern California ("MWD"). The remaining amount was furnished by the Bureau of Reclamation under contract, at no cost, to Registrant's Arden-Cordova customer service area and to Registrant's Clearlake customer service area by prescriptive rights to water extracted from Clear Lake. The remainder of water supplied was produced from Registrant's owned wells. 4 MWD is organized to deliver imported water to areas within its jurisdiction. Registrant has 52 connections to the water distribution facilities of MWD and other municipal water agencies. MWD imports water from two principal sources: the Colorado River and the State Water Project ("SWP"). Available water supplies from the Colorado River and the SWP have historically been sufficient to meet most of MWD's requirements and MWD's supplies from these sources are anticipated to remain adequate through 1998. MWD's import of water from the Colorado River is expected to decrease in future years due to the requirements of the Central Arizona Project in the State of Arizona. In response, MWD has taken steps to secure additional storage capacity and increase available water supplies, including effecting transfers of water rights from other sources. The recent storms during the 1997-1998 winter period provided precipitation adequate to fill most of the state's reservoirs to near capacity and the outlook for water supply in 1998 is favorable. In those districts of Registrant which pump groundwater, overall groundwater conditions remain at adequate levels allowing Registrant to use groundwater in its resource mix and decrease its dependence on increasingly expensive purchased water. Registrant believes that its water supplies from all sources are adequate to meet current year projected demands. COMPETITION The business of Registrant is substantially free from direct and indirect competition with other public utilities, municipalities and other public agencies. WATER-RELATED OPPORTUNITIES Registrant continues to pursue strategic opportunities related to the operation of municipally-owned water systems on both a stand-alone basis and as part of a joint venture. For example, in December, 1996, Registrant and U.S. Water, L.L.C., a limited liability company owned by the Bechtel Group and by Northwest Water Holdings, Inc., a subsidiary of United Utilities PLC, a water and electric utility based in the United Kingdom, formed Golden State Water Company LLC ("GSWC") for the purpose of pursuing potential opportunities to lease, or operate and maintain, municipally owned retail water supply and distribution systems and water treatment, wastewater collection and wastewater treatment facilities in California. The joint venture currently acts as the manager of the water department of the City of Compton, California pursuant to a short-term contract. GSWC has submitted additional bids in response to requests for proposal. The bids remain subject to approval by the cities and no assurance can be given that GSWC's bids will be approved or that GSWC will ultimately be retained to operate and maintain the cities' water systems or perform any other services for them. There can be no assurance that any other such opportunities will materialize or that, if they do, Registrant (either jointly with GSWC or alone) would be successful in consummating any such lease and/or maintenance and operation arrangements. YEAR 2000 ISSUES Registrant has made an assessment of its Year 2000 issues and does not believe that those issues are likely to be material to its business, operations or financial condition. RATES AND REGULATION Registrant is subject to regulation by the CPUC as to its water and electric business and properties. The CPUC has broad powers to regulate public utilities with respect to service and facilities, rates, classifications of accounts, valuation of properties and the purchase, disposition and mortgaging of properties necessary or useful 5 in rendering public utility service. The also has authority over the issuance of securities, the granting of certificates of convenience and necessity as to the extension of services and facilities and various other matters. The 22 customer service areas of Registrant are grouped into 16 water districts and one electric district for ratemaking purposes. Registrant's water rates vary among the 16 ratemaking districts due to differences in operating conditions and costs. Registrant continuously monitors operations in each of these districts so that it may file applications for rate changes, when warranted, on a district-by-district basis, in accordance with the CPUC's procedure. Under the CPUC's practices, rates may be increased by three methods: general rate increases, offsets for certain expense increases and advice letter filings related to certain plant additions. General rate increases typically are for three-year periods and include "step" and "attrition" increases in rates for the second and third years, respectively. General rate increases are established by formal proceedings in which overall rate structure, expenses and rate base of the district are examined. Rates are based on estimated expenses and capital costs for a prospective two-year period. The attrition mechanism is used to set rates applicable to the third of the three-year cycle, which assumes that the costs and expenses for the third year of the cycle will change in the same proportion over the second year as the change projected for the second year over the first year. Step and attrition rate increases for the second and third years, respectively, are allowed to compensate for projected cost changes, but are subject to the satisfaction of certain tests, including a demonstration that earnings levels in the district did not exceed the latest rate of return authorized for Registrant. General rate proceedings typically take about twelve months from the filing of an application to the authorization of new rates. However, the forecasted test years utilized in general rate proceedings helps to reduce the effects of regulatory lag. Rate increases to offset increases in certain expenses, such as costs of purchased water, energy costs to pump water, costs of power purchased for resale and groundwater production assessments, are accomplished through an abbreviated "offset" procedure that typically takes about two months. The CPUC's regulations require utilities to maintain balancing accounts that reflect differences between specific offset cost increases and the rate increases authorized to offset those costs. The balancing accounts are subject to amortization through the offset procedure or through general rate decisions. An advice letter, or rate base offset, proceeding is generally undertaken on an order of the CPUC in a general rate proceeding and provides for the inclusion of certain plant facilities in future rates, pending notification that such facilities have actually been placed in service. The advice letter provides the required notification and, after CPUC approval, permits Registrant to include the costs associated with the facilities in rates. During each of 1997, 1996 and 1995, Registrant's rates for most of its water ratemaking districts were changed, among other reasons, to directly offset changes in certain expenses (principally purchased water) and for increased levels of capital improvements. Rates in Registrant's Bear Valley Electric customer service area were adjusted in 1996 and 1997. The following table lists information on estimated rate changes, by major type, for the last three years: 6
Balancing General and Rate Base Account Step Rate Offset Year Supply Amortization Increases and Others Total - ----- ---------- ------------ ----------- ---------- ----------- 1997 $ 182,900 $ 63,500 $ 1,331,900 $(63,600) $ 1,514,700 1996 $ 102,500 $(757,700) $16,804,100 $913,300 $17,062,200 1995 $1,780,000 $(272,800) $ 1,426,800 $256,500 $ 3,190,500
In January, 1996, new rates were effective in six of Registrant's rate-making districts which, among other things, authorized a rate of return on common equity of 10.40%, increased depreciation rates, authorized recovery of postretirement medical benefit costs, increased current recovery of labor and labor-related expenses and resulted in an increase in annual water operating revenues of approximately $15 million. Water rates in two additional ratemaking districts were increased on January 1, 1997 to recover costs associated with 1996 and 1997 capital projects in those areas. Registrant filed notices of intent to increase water rates in six ratemaking districts in January, 1998. Registrant is unable to predict if the CPUC will authorize all or any of the proposed increases although it is not anticipated that new rates, if approved, would be effective before January, 1999. New rates were effective in May, 1996 in Registrant's Bear Valley Electric customer service area. An additional step increase was effective in January, 1997. In November, 1996, Registrant filed an application with the CPUC seeking recovery through rates of costs associated with its participation in the coastal aqueduct extension of the State Water Project. Registrant is currently unable to predict if the CPUC will authorize recovery of all or any of the costs associated with its participation in the Project. EMPLOYEE RELATIONS Registrant had 467 employees as of December 31, 1997. Seventeen employees in Registrant's Bear Valley Electric customer service area were members of the International Brotherhood of Electrical Workers, hereinafter referred to as the IBEW. The bargaining unit agreement with the IBEW expires in 1999. Forty-eight of Registrant's water utility employees in its Metropolitan ratemaking district are members of the Utility Workers of America, hereinafter referred to as the UWA. The collective bargaining agreement with the UWA expires in March, 2001. Registrant has no other unionized employees. ENVIRONMENTAL MATTERS 1996 Amendments to Federal Safe Drinking Water Act On August 6, 1996, amendments (the "1996 SDWA amendments") to the Safe Drinking Water Act (the "SDWA") were signed into law. The 1996 SDWA revised the 1986 amendments to the SDWA, which required that the federal Environmental Protection Agency (EPA) set 25 new contaminant standards every three years, with a new process for selecting and regulating contaminants. The EPA can only regulate contaminants that may have adverse health effects, are known or likely to occur at levels of public health concern, and the regulation of which will provide "a meaningful opportunity for health risk reduction." The EPA must, within 18 months of the time that the 1996 SDWA amendments were signed 7 into law, publish a list of contaminants for possible regulation and must update that list every five years. In addition, every five years, the EPA must select at least five contaminants on that list and determine whether to regulate them. The new law allows the EPA to bypass the selection process and adopt interim regulations for contaminants in order to address urgent health threats. Current regulations, however, remain in place and are not subject to the new standard-setting provisions. The California Department of Health Services, acting on behalf of the EPA, administers the EPA's program in California. The 1996 SDWA amendments allow the EPA for the first time to base primary drinking water regulations on risk assessment and cost/benefit considerations and on minimizing overall risk. The EPA must base regulations on best available, peer-reviewed science and data from best available methods. For proposed regulations that involve the setting of maximum contaminant levels ("MCL's"), the EPA must use, and seek public comment on, an analysis of quantifiable and non-quantifiable risk-reduction benefits and cost for each such MCL. Registrant currently tests its wells and water systems for more than 90 contaminants, currently covering all contaminants listed in the SDWA. Water from wells found to contain levels of contaminants above the established MCL's is either treated or blended before it is delivered to customers. Since the SDWA became effective, Registrant has experienced increased operating costs for testing to determine the levels, if any, of the contaminants in Registrant's sources of supply and additional expense to lower the level of any contaminants in order to meet the MCL standards. Such costs and the costs of controlling any other contaminants may cause Registrant to experience additional capital costs as well as increased operating costs. Registrant is currently unable to predict the ultimate impact that the 1996 SDWA amendments might have on its financial position or its results of operation. The ratemaking process provides Registrant with the opportunity to recover prudently incurred capital and operating costs associated with water quality. Management believes that such incurred costs will be authorized for recovery by the CPUC. Proposed Enhanced Surface Water Treatment Rule On July 29, 1994, the EPA proposed an Enhanced Surface Water Treatment Rule ("ESWTR") which would require increased surface-water treatment to decrease the risk of microbial contamination. The EPA has proposed several versions of the ESWTR for promulgation. The version selected for promulgation will be determined based on data collected by certain water suppliers and forwarded to the EPA pursuant to EPA's Information Collection Rule, which requires such water suppliers to monitor microbial and other contaminants in their water supplies and to conduct certain tests in respect of such contaminants. The EPA has proposed an Interim ESWTR applicable only to systems serving greater than 10,000 persons. The final Interim ESWTR will be promulgated by November 1998. The final ESWTR, in any of the forms currently proposed, would apply to each of Registrant's five surface water treatment plants and is expected to be promulgated by November 2000. However, because it is impossible to predict the version of the ESWTR that will be promulgated, Registrant is unable to predict what additional costs, if any, will be incurred to comply with the ESWTR. 8 Regulation of Disinfection/Disinfection By-Products Registrant will also be subject to the new regulations concerning disinfection/disinfection by-products ("DBPs"), Stage I of which regulations are expected to become effective in November, 1998 with compliance required by 2001. Stage 1 will require reduction of tri-halomethane contaminants from 100 micrograms per liter to 80 micrograms per liter and are expected to affect two of Registrant's systems. The EPA must adopt Stage II rules pertaining to DBPs according to a negotiated schedule by 2000. The EPA is not allowed to use the new cost/benefit analysis provided for in the 1996 SDWA amendments for establishing the Stage II rules applicable to DBPs but may utilize the regulatory negotiating process provided for in the 1996 SDWA amendments to develop the Stage II rule. The final rule is expected by 2002. Ground Water Disinfection Rule By December, 1998, the EPA is scheduled to propose regulations requiring disinfection of certain groundwater systems and provide guidance on determining which systems must provide disinfection facilities. The final rule is expected by December 1999. The EPA may utilize the cost/benefit analysis provided in the 1996 SDWA amendments to establish such regulations. It is anticipated that the regulations will apply to several of Registrant's systems using groundwater supplies. While no assurance can be given as to the nature and cost of any additional compliance measures, if any, Registrant does not believe that such regulations will impose significant compliance costs, since Registrant already currently engages in disinfection of its groundwater systems. Regulation of Radon and Arsenic Registrant will be subject to new regulations regarding radon and arsenic. EPA must propose an arsenic rule by January 1, 2000 and adopt a rule one year later. Although EPA originally had 180 days after enactment of the 1996 SDWA amendments to develop a plan to study ways to reduce arsenic health risk uncertainties and was authorized to enter into cooperative agreements to carry out the study, the studies are still being conducted. Depending on the MCL eventually established for arsenic, compliance could cause Registrant to implement costly well-head treatment remedies such as ion exchange or, alternatively, to purchase additional and more expensive water supplies already in compliance for blending with well sources. The EPA has withdrawn its proposed radon rule and has arranged for the National Academy of Sciences to conduct a risk assessment and a study of risk-reduction benefits associated with various mitigation measures. The EPA is expected to establish an MCL based on the findings of the National Academy of Sciences' risk assessment report and to set an alternative MCL based on potential mitigation measures for overall radon reduction. Although Registrant is unable to predict what the standard for radon might eventually be, Registrant itself is currently conducting studies to determine the best treatment for affected wells, which treatment could range from simple aeration to filtration through granular activated carbon. 9 Voluntary Efforts to Exceed Surface Water Treatment Standards Registrant is a voluntary member of the EPA's "Partnership for Safe Water", a national program designed to further protection of the public from diseases caused by cryptosporidium and other microscopic organisms. As a volunteer in the program, Registrant has committed to exceed current regulations governing surface water treatment to ensure that its surface treatment facilities are performing as efficiently as possible. Fluoridation of Water Supplies Registrant is subject to State of California Assembly Bill 733 which requires fluoridation of water supplies for public water systems serving more than 10,000 service connections. Although the bill requires affected systems to install treatment facilities only when public funds have been made available to cover capital and operating costs, the bill requires the CPUC to authorize cost recovery through rates should public funds for operation of the facilities, once installed, become unavailable in future years. Matters Relating to Arden-Cordova System Three of the 27 wells in Registrant's Arden-Codova system have, for several years, been subject to contamination by tricholoroethylene. GenCorp Aerojet has, by court decree, been responsible for all costs related to the provision of well-head treatment. Although the ten-year agreement with Aerojet Corporation expired in 1996, Aerojet Corporation has agreed to reimburse Registrant for the continuing costs, if any, associated with well-head treatment at all three wells. In January, 1997, Registrant was notified that ammonium perchlorate in amounts above the state-determined action level had been detected in three of its wells in its Arden-Cordova system. GenCorp Aerojet has, in the past, used ammonium perchlorate in their processing as an oxidizer of rocket fuels. Registrant has taken the three wells detected with ammonium perchlorate out of service. Although neither the EPA nor the DOHS has established a drinking water standard for ammonium perchlorate, DOHS has established an action level of 18 ppb which requires Registrant to notify customers in its Arden-Cordova customer service area of detection of ammonium perchlorate in amounts in excess of this action level. In April, 1997, Registrant found ammonium perchlorate in three additional wells and had removed those wells from service until it was determined that the levels were below the state-determined action level. Those wells have been returned to service. Registrant provides continual monitoring of these wells to ensure that levels of perchlorate are below the action level currently in effect. GenCorp Aerojet has reimbursed Registrant for all necessary and reasonable activities in the construction of a pipeline to for interconnection of the Folsom City and Arden-Cordova water systems to provide an alternative source(s) of water supply in Registrant's Arden-Cordova customer service area. Registrant and GenCorp Aerojet are in negotiations on other matters related to procedures to address cleanup of the contaminated wells, costs associated with the cleanup, costs associated with increased costs of purchased water as compared to pumped sources and costs associated with new sources of groundwater supply. Registrant is unable to predict when the negotiations will be completed or the likely outcome of such negotiations. 10 Matters Relating to Culver City System The compound methyl tertiary butyl ether ("MTBE") has been detected in the Charnock Basin located in the city of Santa Monica and Culver City, which lies within Registrant's service area. MTBE is an oxygenate used in reformulated fuels. At the request of the Regional Water Quality Control Board, the City of Santa Monica and the California Environmental Protection Agency, Registrant removed two of its wells in the Culver City system from service in October, 1996 to help in efforts to avoid further spread of the MTBE contamination plume. Neither of these wells have been found to be contaminated with MTBE. Registrant is purchasing water from the Metropolitan Water District at an increased cost to replace the water supply formerly pumped from the two wells removed from service. Several studies are under way to determine the possible sources and causes of the MTBE contamination. The federal EPA is pursuing an enforcement effort to reach a settlement with the potentially responsible parties on matters relating to the cleanup of the contamination. Registrant is unable to predict the outcome of the EPA's enforcement efforts. Two of the potentially responsible parties and Registrant have executed an agreement which provides for reimbursement of Registrant's legal and consulting costs related to this matter as well as reimbursement from such parties for increased costs incurred by Registrant in purchasing replacement water. Bear Valley Electric There have been no environmental matters that have materially affected or are currently materially affecting Registrant's Bear Valley Electric customer service area. FORWARD-LOOKING INFORMATION Certain matters discussed in this Report (including the documents incorporated herein by reference) are forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as Registrant "believes," "anticipates," "expects" or words of similar import. Similarly, statements that describe Registrant's future plans, objectives, estimates or goals are also forward-looking statements. Such statements address future events and conditions concerning capital expenditures, earnings, litigation, rate, water quality and other regulatory matters, adequacy of water supplies, liquidity and capital resources, opportunities related to the operation of municipally-owned water systems and accounting matters. Actual results in each case could differ materially from those currently anticipated in such statements, by reason of factors such as utility restructuring, including ongoing local, state and federal activities; future economic conditions, including changes in customer demand; future climatic conditions; legislative, regulatory and other circumstance affecting anticipated revenues and costs. ITEM 2 - PROPERTIES FRANCHISES, COMPETITION, ACQUISITIONS AND CONDEMNATION OF PROPERTIES Registrant holds franchises from the incorporated communities and the counties which it serves. Registrant holds certificates of public convenience and necessity granted by the CPUC in each of the ratemaking districts it serves. Registrant's certificates, franchises and similar rights are subject to alteration, suspension or repeal by the respective governmental authorities having jurisdiction. The laws of the State of California provide for the acquisition of public utility property by governmental agencies through their power of eminent domain, also known as condemnation. Registrant has not been, within the last three years, involved in activities related to the condemnation of any of its water customer service areas or in its Bear Valley Electric customer service area. WATER PROPERTIES As of December 31, 1997, Registrant's physical properties consisted of water transmission and distribution systems which included 2,638 miles of pipeline together with services, meters and fire hydrants and 437 parcels of land, generally less than 1 acre each, on which are located wells, pumping plants, reservoirs and other water utility facilities including five surface water treatment plants. Registrant's 41 water systems and operating properties have been maintained and improved in the ordinary course of business. 11 As of December 31, 1997, Registrant owned and operated 295 active wells equipped with pumps with an aggregate capacity of approximately 180 million gallons per day. Registrant has 52 connections to the water distribution facilities of the MWD and other municipal water agencies. Registrant's storage reservoirs and tanks have an aggregate capacity of approximately 95 million gallons. Registrant owns no dams in its customer service areas. The table below provides, in greater detail, selected water utility plant by ratemaking district.
Pumps Distribution Facilities Reservoirs ----------------- ----------------------------------------------- ------------------ Well Booster Mains(ft) Meters Services Hydrants Tanks Capacity Arden-Cordova 27 15 461,389 3,127 8,032 1,139 2 2,000 Barstow 27 33 866,221 12,739 10,741 990 13 5,025 Bay Point 1 16 138,638 4,914 2,999 296 8 5,046 Calipatria 0 9 134,878 1,064 1,663 69 2 200 Claremont 27 37 716,388 15,753 11,011 1,165 18 17,367 Clearlake 0 14 188,616 2,544 894 73 4 867 Desert 19 24 748,762 7,247 4,561 568 12 1,500 Los Osos 10 11 195,811 3,663 1,374 149 8 1,423 Metropolitan 78 82 4,735,015 143,466 107,630 7,346 41 25,067 Ojai 5 13 234,007 5,098 3,430 347 6 1,536 Orange County 30 37 2,143,579 58,703 39,785 4,330 17 12,153 San Dimas 11 38 1,184,443 19,841 7,652 830 14 10,143 San Gabriel 22 10 547,521 12,459 12,678 770 3 1,520 Santa Maria 29 25 950,041 21,005 7,217 757 8 3,238 Simi Valley 1 19 468,756 13,818 9,454 811 6 6,210 Wrightwood 8 6 215,028 5,403 634 71 7 1,546 - ------------------------------------------------ ----------------------------------------------- --------------------- Total 295 389 13,929,093 330,844 229,755 19,711 169 94,841
Capacity is measured in thousands of gallons ELECTRIC PROPERTIES Registrant's electric properties are all located in the Big Bear area of San Bernardino County. As of December 31, 1997, the Registrant operated 28.7 miles of overhead 34.5 KV transmission lines, 0.6 miles of underground 34.5 KV transmission lines, 172.4 miles of 4.16 KV or 2.4 KV distribution lines, 39.5 miles of underground cable and 14 sub-stations. There are no generating plants in Registrant's system. OFFICE BUILDINGS Registrant's general offices are housed in a single-story office building located in San Dimas, California. The land and the building, which was completed and occupied in early 1990, are owned by Registrant. The Registrant also owns and occupies certain facilities housing regional, district and customer service offices while other such facilities are housed in leased premises. MORTGAGE AND OTHER LIENS As of December 31, 1997, Registrant had no mortgage debt outstanding, and its properties were free of any encumbrances or liens securing indebtedness. 12 FINANCING OF CAPITAL EXPENDITURES Registrant's construction program is designed to ensure its customers high quality service. Registrant maintains an ongoing distribution main replacement program throughout its customer service areas, based on the priority of leaks detected, fire protection enhancement and a reflection of the underlying replacement schedule. In addition, Registrant upgrades its electric and water supply facilities and is aggressively scheduling meter replacements that conform with CPUC requirements. Registrant's Board of Directors has approved anticipated net capital expenditures of approximately $27,100,000 in 1998. Registrant anticipates capital expenditures of approximately $33,000,000 in 1999 and 2000, although such expenditures are subject to final approval by Registrant's Board of Directors. Registrant anticipates that net capital expenditures in excess of its internally generated cash will continue to be financed through a combination of the sale of long-term debt and additional Common Shares. Registrant issued 1,000,000 Common Shares in December, 1996 and an additional 71,500 Common Shares in January, 1997 for aggregate net proceeds of $22,062,000. Also during 1996, Registrant issued approximately 41,000 Common Shares through its Dividend Reinvestment and Common Share Purchase (DRP) and 401(k) Plans for additional aggregate proceeds of approximately $904,000. During 1997 and 1995, all Common Shares issued pursuant to Registrant's DRP and 401(k) plans were purchased on the open market. In December, 1996, Registrant sold $8 million in tax-exempt debt that was issued through the California Pollution Control Financing Authority. The funds were deposited with a trustee and were used during 1997 to finance water main replacements in several of Registrant's customer service areas. ITEM 3. LEGAL PROCEEDINGS On April 24, 1997, a complaint in multiple counts seeking recovery for negligence, wrongful death, strict liability, trespass, public nuisance, private nuisance, negligence per se, strict liability for ultrahazardous activities and fraudulent concealment was filed in Los Angeles Superior Court on behalf of approximately 145 plaintiffs (the "Adler matter"). After preliminary Demurrers and Motions to Strike, these same plaintiffs filed a First Amended Complaint on or about October 16, 1997 seeking recovery on essentially the same theories. Plaintiffs allege that they are, and at all relevant times were, (1) customers of Registrant, (2) that Registrant has provided and continues to provide them with allegedly contaminated water from wells located in an area of the San Gabriel Valley that 13 has been designated a federal environmental (USEPA) superfund site, and (3) the maintenance of this contaminated well water has resulted in contamination of the soil, subsurface soil, and surrounding air, with trichloroethylene, perchloroethene, carbon tetrachloride and other solvents. Plaintiffs further allege that Registrant's actions have caused, and continue to cause, injuries to the plaintiffs' person, personal property and financial interests in unspecified amounts. Plaintiffs seek damages, including general, special, and punitive damages, according to proof at trial, as well as attorney's fees on certain causes of action, costs of suit, and other unspecified relief. Registrant was initially served with the original Complaint on June 3, 1997. On July 31, 1997, Registrant's Motion for A Change of Venue for this matter from Downtown Los Angeles to Pasadena, California was granted. Registrant has provided water service in portions of the San Gabriel Valley for over 60 years along with over 30 other water purveyors. Portions of the San Gabriel Valley have been designated a USEPA superfund site. Registrant is not a potentially responsible party with respect to contamination of the site or sites in the San Gabriel Valley which have been designated as superfund sites. Registrant has commenced and is continuing a review and evaluation of plaintiff's claims and its insurance coverage for these potential liabilities allegedly arising over the past 30 years. Ten plaintiff's were served with interrogatories approximately 45 days ago. A Case Management Order has been agreed upon and within the next 30 days Interrogatories will be sent to the remaining plaintiffs. Registrant was served on November 3, 1997 as Doe I in the matter of Santamaria v. Suburban Water Systems which was filed in Los Angeles Superior court. The complaint makes claims based on Negligence, Strict Liability, Trespass, Nuisance, Negligence per se, Absolute Liability for Ultrahazardous Activity and Fraudulent Concealment. The complaint makes allegations that Registrant sold, but did not create, contaminated water to certain of the 379 individual plaintiffs claiming personal injury and property damage. In addition, there are 10 wrongful death claims with 19 wrongful death plaintiffs. The complaint encompasses a geographical area which includes, as far as can be ascertained, little of Registrant's systems. The complaint differs from the Adler matter in that the plaintiffs have also named Suburban Water Systems, Southwest Water Co., Covina Irrigating Co., California Domestic Water Company, San Gabriel Valley Water Company, and certain parties that have been named as potentially responsible parties in the Superfund Site effecting this area. On February 16, 1998, a Second Amended Complaint was received with some new plaintiffs who were generally spouses of previously named wrongful death plaintiffs. This latest version of the complaint contains new causes of action for battery, and unfair business practices with a request for injunctive relief to abate a nuisance created as a result of alleged contamination. A Motion to Change Venue from Los Angeles County to Ventura County is pending for hearing on March 18, 1998. Registrant was served in January 1998 in the matter of Nathaniel Allen, Jr., et al. V. Aerojet-General Corporation, et al which was filed in Sacramento Superior court. The complaint makes claims based on wrongful death, personal injury, property damage as a result of nuisance and trespass, medical monitoring, and diminution of property values. The claims center around the allegation that the plaintiffs in this matter have been damaged as a result of water delivered to them by Registrant and other defendants which is, or has been in the past, contaminated with a number of chemicals, including TCE, PCE, carbon tetrachloride, 14 perchlorate, Freon-113, hexavalent chromium and other, unnamed, chemicals. On February 9, 1998, defendant McDonnell Douglas Corporation removed this case to United States District Court for the Eastern District of California. A Motion for Partial Dismissal or in the Alternative to Strike and for a More Definitive Statement was also filed by McDonnell Douglas Corporation and that Motion will be heard on March 23, 1998. In light of the breadth of plaintiff's claims, the lock of factual information regarding plaintiff's claims and injuries, if any, the fact that no discovery has yet been completed, Registrant is unable at this time to determine what, if any, potential liability it may have with respect to claims in these lawsuits. Registrant intends to vigorously defend itself against these allegations. Registrant is also subject to ordinary routine litigation incidental to its business. Other than as disclosed above, no legal proceedings are pending, except such incidental litigation, to which Registrant is a party or of which any of its properties is the subject which are believed to be material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION RELATING TO COMMON SHARES - Information responding to Item 201(a) of Regulation S-K is included in the 1997 Annual Report to Shareholders, under the caption "Stock Listing" and located on page 36, filed by Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2). (b) APPROXIMATE NUMBER OF HOLDERS OF COMMON SHARES - As of February 27, 1998, there were 3,874 holders of record of Common Shares. (c) FREQUENCY AND AMOUNT OF ANY DIVIDENDS DECLARED AND DIVIDEND RESTRICTIONS Information responding to Item 201(c) of Regulation S-K is included in the 1997 Annual Report to Shareholders, under the caption "Stock Listing" and located on page 36, filed by Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2). For the last three years, Registrant has paid dividends on its Common Shares on March 1, June 1, September 1 and December 1. Additional information responding to Item 201(c) of Regulation S-K with respect to dividend restrictions is included in the 1997 Annual Report to Shareholders, under Note 2 captioned "Capital Stock" located on Page 29 of the Notes to Financial Statements, filed by Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2). ITEM 6. SELECTED FINANCIAL DATA Information responding to Item 6 is included in the 1997 Annual Report to Shareholders, under the caption entitled "Selected Financial Data" located on Page 11, filed by Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2). 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Information responding to Item 7 is included in the 1997 Annual Report to Shareholders, under the caption entitled "Management's Discussion and Analysis" located on Pages 19 through 22, filed by Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information responding to Item 8 is included in the 1997 Annual Report to Shareholders, filed by Registrant with the Commission pursuant to Regulation 14A, under the following captions located on Pages 23 through 32 and is incorporated herein by reference pursuant to General Instruction G(2). Report of Independent Public Accountants Balance Sheets - December 31, 1997 and 1996 Statements of Capitalization - December 31, 1997 and 1996 Statements of Income - for the years ended December 31, 1997, 1996 and 1995 Statements of Changes in Common Shareholders' Equity - for the years ended December 31, 1997, 1996 and 1995 Statements of Cash Flows - for the years ended December 31, 1997, 1996 and 1995 Notes to Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information responding to Item 10 is included in the Proxy Statement, to be filed by Registrant with the Commission pursuant to Regulation 14A, under the captions entitled "Election of Directors" and "Executive Officers - Experience, Security Ownership and Compensation" and is incorporated herein by reference pursuant to General Instruction G(3). ITEM 11. EXECUTIVE COMPENSATION Information responding to Item 11 is included in the Proxy Statement, to be filed by Registrant with the Commission pursuant to Regulation 14A, under the captions entitled "Election of 16 Directors," "Executive Officers - Experience, Security Ownership and Compensation" and "Performance Graph" is incorporated herein by reference pursuant to General Instruction G(3). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information responding to Item 12 is included in the Proxy Statement, to be filed by Registrant with the Commission pursuant to Regulation 14A, under the captions entitled "Election of Directors" and "Executive Officers - Experience, Security Ownership and Compensation" and is incorporated herein by reference pursuant to General Instruction G(3). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information responding to Item 13 is included in the Proxy Statement, to be filed by Registrant with the Commission pursuant to Regulation 14A, under the caption entitled "Election of Directors" and is incorporated herein by reference pursuant to General Instruction G(3). PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Reference is made to the Financial Statements incorporated herein by reference to Item 8 hereof. 2. Schedules I, III, IV, and V are omitted as they are not applicable. All other required schedules may be found in Exhibit 13 filed herewith. 3. See (c) below. (b) None. (c) Exhibits - 3.1 By-Laws as Amended to April 26, 1994 3.2.1 Restated Articles of Incorporation as Amended to December 4, 1990 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121 3.2.2 Certificate of Amendment of Articles of Incorporation dated December 3, 1992 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1992. Commission File No. 0-1121. 3.2.3 Certificate of Amendment of Articles of Incorporation dated February 17, 1994 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1993. Commission File No. 0-1121. 17 3.2.4 Certificate of Amendment of Articles of Incorporation dated May 22, 1997.* 3.2.5 Certificate of Amendment of Articles of Incorporation dated August 21, 1997.* 3.3 Certificate of Ownership dated August 10, 1978 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121 4.1 Indenture, dated September 1, 1993 between Registrant and Chemical Trust Company of California, as trustee, relating to Registrant's Medium Term Notes, Series A, incorporated herein by reference to Registrant's Form 8-K. Commission File No. 33-62832. 10.1 Deferred Compensation Plan for Directors and Executives incorporated herein by reference to Registrant's Registration Statement on Form S-2 (Registration No. 33-5151). 10.2 Reimbursement Agreement dated October 3, 1997 between Registrant and The Bank of Nova Scotia.* 10.3 Second Sublease dated October 5, 1984 between Registrant and Three Valleys Municipal Water District incorporated herein by reference to Registrant's Registration Statement on Form S-2 (Registration No. 33-5151). 10.4 Note Agreement dated as of February 1, 1989 between Registrant and First Colony Life Insurance incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121. 10.5 Schedule of omitted Note Agreements incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121. 10.6 Note Agreement dated as of May 15, 1991 between Registrant and Transamerica Occidental Life Insurance Company incorporated herein by reference to Registrant's Form 10-Q with respect to the quarter ended June 30, 1991. Commission File No. 0-1121. 10.7 Schedule of omitted Note Agreements incorporated herein by reference to Registrant's Form 10-Q with respect to the quarter ended June 30, 1991. Commission File No. 0-1121. 10.8 Agreement for Financing Capital Improvement dated as of June 2, 1992 between Registrant and Three Valleys Municipal Water District incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1992. Commission File No. 0-1121. 18 10.9 Water Supply Agreement dated as of June 1, 1994 between Registrant and Central Coast Water Authority incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1994. Commission File No. 0-1121. 10.9 Retirement Plan for Non-Employee Directors of Southern California Water Company, as amended, January 25, 1995 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1994. Commission File No. 0-1121. 10.10 Dividend Reinvestment and Common Share Purchase Plan incorporated herein by reference to Registrant's Post-Effective Amendment No. 1 to Form S-3 (Registration No. 33-42218). 10.11 Key Executive Long-Term Incentive Plan incorporated herein by reference to Registrant's 1995 Proxy Statement, Commission File No. 0-1121. 10.19 Energy Management Services Agreement between Registrant and Enova Energy, Inc. incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1996. Commission File No. 0-1121. 13. Portions of the Annual Report to Shareholders for the year ended December 31, 1997 which are expressly incorporated herein by reference.* 21. Subsidiaries of Registrant - Exhibit not included as subsidiaries in the aggregate are not significant. 23. Consent of Independent Public Accountants*. 27. Schedule UT*. (d) None. --------------------- *Filed concurrently herewith 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOUTHERN CALIFORNIA WATER COMPANY By : /s/McCLELLAN HARRIS III McClellan Harris III Vice President - Finance, Treasurer, Chief Financial Officer and Secretary Date: March 6, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated. /s/ W. V. CAVENEY Date: March 6, 1998 - ------------------------------------------- W. V. Caveney Chairman of the Board and Director /s/ FLOYD E. WICKS March 6, 1998 - ------------------------------------------- Floyd E. Wicks Principal Executive Officer; President, CEO and Director /s/ McCLELLAN HARRIS III March 6, 1998 - ------------------------------------------- McClellan Harris III Principal Financial and Accounting Officer; VP - Finance, Treasurer, CFO and Secretary /s/ JAMES L. ANDERSON March 6, 1998 - ------------------------------------------- James L. Anderson, Director /s/ JEAN E. AUER March 6, 1998 - ------------------------------------------- Jean E. Auer, Director /s/ N. P. DODGE, JR. March 6, 1998 - ------------------------------------------- N. P. Dodge, Jr., Director /s/ ROBERT F. KATHOL March 6, 1998 - ------------------------------------------- Robert F. Kathol, Director /s/ LLOYD E. ROSS March 6, 1998 - ------------------------------------------- Lloyd E. Ross, Director 20 EXHIBIT INDEX 3.1 By-Laws as Amended to April 26, 1994 3.2.1 Restated Articles of Incorporation as Amended to December 4, 1990 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121 3.2.2 Certificate of Amendment of Articles of Incorporation dated December 3, 1992 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1992. Commission File No. 0-1121. 3.2.3 Certificate of Amendment of Articles of Incorporation dated February 17, 1994 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1993. Commission File No. 0-1121. 3.2.4 Certificate of Amendment of Articles of Incorporation dated May 22, 1997.* 3.2.5 Certificate of Amendment of Articles of Incorporation dated August 21, 1997.* 3.3 Certificate of Ownership dated August 10, 1978 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121 4.1 Indenture, dated September 1, 1993 between Registrant and Chemical Trust Company of California, as trustee, relating to Registrant's Medium Term Notes, Series A, incorporated herein by reference to Registrant's Form 8-K. Commission File No. 33-62832. 10.1 Deferred Compensation Plan for Directors and Executives incorporated herein by reference to Registrant's Registration Statement on Form S-2 (Registration No. 33-5151). 10.2 Reimbursement Agreement dated October 3, 1997 between Registrant and The Bank of Nova Scotia.* 10.3 Second Sublease dated October 5, 1984 between Registrant and Three Valleys Municipal Water District incorporated herein by reference to Registrant's Registration Statement on Form S-2 (Registration No. 33-5151). 10.4 Note Agreement dated as of February 1, 1989 between Registrant and First Colony Life Insurance incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121. 10.5 Schedule of omitted Note Agreements incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121. 10.6 Note Agreement dated as of May 15, 1991 between Registrant and Transamerica Occidental Life Insurance Company incorporated herein by reference to Registrant's Form 10-Q with respect to the quarter ended June 30, 1991. Commission File No. 0-1121. 10.7 Schedule of omitted Note Agreements incorporated herein by reference to Registrant's Form 10-Q with respect to the quarter ended June 30, 1991. Commission File No. 0-1121. 10.8 Agreement for Financing Capital Improvement dated as of June 2, 1992 between Registrant and Three Valleys Municipal Water District incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1992. Commission File No. 0-1121. 21 10.9 Water Supply Agreement dated as of June 1, 1994 between Registrant and Central Coast Water Authority incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1994. Commission File No. 0-1121. 10.9 Retirement Plan for Non-Employee Directors of Southern California Water Company, as amended, January 25, 1995 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1994. Commission File No. 0-1121. 10.10 Dividend Reinvestment and Common Share Purchase Plan incorporated herein by reference to Registrant's Post-Effective Amendment No. 1 to Form S-3 (Registration No. 33-42218). 10.11 Key Executive Long-Term Incentive Plan incorporated herein by reference to Registrant's 1995 Proxy Statement, Commission File No. 0-1121. 10.19 Energy Management Services Agreement between Registrant and Enova Energy, Inc. incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1996. Commission File No. 0-1121. 13. Portions of the Annual Report to Shareholders for the year ended December 31, 1997 which are expressly incorporated herein by reference.* 21. Subsidiaries of Registrant - Exhibit not included as subsidiaries in the aggregate are not significant. 23. Consent of Independent Public Accountants*. 27. Schedule UT*. --------------------- *Filed concurrently herewith EX-3.2.4 2 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORP. 1 EXHIBIT 3.2.4 CERTIFICATE OF AMENDMENT OF RESTATED ARTICLES OF INCORPORATION OF SOUTHERN CALIFORNIA WATER COMPANY A CALIFORNIA CORPORATION Floyd E. Wicks and McClellan Harris III certify that: 1. They are the duly elected and acting President and Secretary, respectively of Southern California Water Company (the "Corporation"). 2. The Restated Articles of Incorporation of the Corporation shall be amended by striking in its entirety the first full paragraph of Article IV of the restated Articles of Incorporation which now reads: "This Corporation is authorized to issue three classes of stock to be designated, respectively, "$100 Preferred Shares", "Preferred Shares" and "Common Shares". The total number of shares which this Corporation is authorized to issue is 10,239,600 and the aggregate par value of all such shares is $42,240,000; all shares of each class are to have a par value; 150,000 shares are to be $100 Preferred Shares with a par value of $100 per share and an aggregate par value of $15,000,000; 89,600 shares are to be Preferred Shares with a par value of $25 per share and an aggregate par value of $2,240,000; and 10,000,000 shares are to be Common Shares with a par value of $2.50 per share and an aggregate par value of $25,000,000." 2 and substituting therefore the following paragraph to read in full as follows: "This Corporation is authorized to issue three classes of stock to be designated, respectively, "$100 Preferred Shares", "Preferred Shares" and "Common Shares". The total number of shares which this Corporation is authorized to issue is 30,234,800 and the aggregate par value of all such shares is $92,120,000; all shares of each class are to have a par value; 150,000 shares are to be $100 Preferred Shares with a par value of $100 per share and an aggregate par value of $15,000,000; 84,800 shares are to be Preferred Shares with a par value of $25 per share and an aggregate par value of $2,120,000; and 30,000,000 shares are to be Common Shares with a par value of $2.50 per share and an aggregate par value of $75,000,000." 3. The Restated Articles of Incorporation of the Corporation shall be further amended by striking in its entirety paragraph (2) of Article VII of the Restated Articles of Incorporation which now reads: "(2) Number of Shares. The authorized number of shares constituting said Preferred Shares, 5% Series, shall be 80,000." and substituting therefore the following paragraph to read in full as follows: "(2) Number of Shares. The authorized number of shares constituting said Preferred Shares, 5% Series, shall be 84,800." 4. The foregoing amendment set forth in paragraph 3 of this Certificate, as well as the portion of the amendment in paragraph 2 that relates to the "Preferred Shares," are each amendments that may be adopted by the Board of Directors alone (and which were so adopted) because the 3 amendments are required by Section 510 of the California General Corporation Law to reflect the reacquisition of a portion of the Corporation's Preferred Shares, 5% Series, $25 par value, in accordance with the sinking fund provisions thereof. Such reacquired Preferred Shares cannot be reissued. 5. To the extent that it relates to the "Common Shares," the foregoing amendment in paragraph 2 of this Certificate was approved by the required vote of the shareholders of the Corporation in accordance with Section 903 of the California General Corporation Law. The number of outstanding shares of each class entitled to vote was 8,957,671 Common Shares and 84,800 Preferred Shares and the number of shares of each class voting in favor of the amendment equaled or exceeded the required vote, such required vote being the affirmative vote of the majority of the voting power of the outstanding Common Shares and Preferred Shares entitled to vote. 6. The foregoing amendments have been duly approved by the Board of Directors as required by Section 905(b) of the California General Corporation Law. We further declare, under penalty of perjury under the laws of the State of California, that the matters set forth in this Certificate of Amendment are true and correct. IN WITNESS WHEREOF, the undersigned have executed this Certificate in San Dimas, California on this 22nd day of May, 1997. /s/ Floyd E. Wicks ------------------------------ FLOYD E. WICKS, President /s/ McClellan Harris III ------------------------------ McCLELLAN HARRIS III, Secretary EX-3.2.5 3 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORP. 1 EXHIBIT 3.2.5 CERTIFICATE OF AMENDMENT OF RESTATED ARTICLES OF INCORPORATION OF SOUTHERN CALIFORNIA WATER COMPANY A CALIFORNIA CORPORATION Floyd E. Wicks and McClellan Harris III certify that: 1. They are the duly elected and acting President and Secretary, respectively of Southern California Water Company (the "Corporation"). 2. The Restated Articles of Incorporation of the Corporation shall be amended by striking in its entirety the first full paragraph of Article IV of the restated Articles of Incorporation which now reads: "This Corporation is authorized to issue three classes of stock to be designated, respectively, "$100 Preferred Shares", "Preferred Shares" and "Common Shares". The total number of shares which this Corporation is authorized to issue is 30,234,800 and the aggregate par value of all such shares is $92,120,000; all shares of each class are to have a par value; 150,000 shares are to be $100 Preferred Shares with a par value of $100 per share and an aggregate par value of $15,000,000; 84,800 shares are to be Preferred Shares with a par value of $25 per share and an aggregate par value of $2,120,000; and 30,000,000 shares are to be Common Shares with a par value of $2.50 per share and an aggregate par value of $75,000,000." 2 and substituting therefore the following paragraph to read in full as follows: "This Corporation is authorized to issue three classes of stock to be designated, respectively, "$100 Preferred Shares", "Preferred Shares" and "Common Shares". The total number of shares which this Corporation is authorized to issue is 30,233,200 and the aggregate par value of all such shares is $92,080,000; all shares of each class are to have a par value; 150,000 shares are to be $100 Preferred Shares with a par value of $100 per share and an aggregate par value of $15,000,000; 83,200 shares are to be Preferred Shares with a par value of $25 per share and an aggregate par value of $2,080,000; and 30,000,000 shares are to be Common Shares with a par value of $2.50 per share and an aggregate par value of $75,000,000." 3. The Restated Articles of Incorporation of the Corporation shall be further amended by striking in its entirety paragraph (2) of Article VII of the Restated Articles of Incorporation which now reads: "(2) Number of Shares. The authorized number of shares constituting said Preferred Shares, 5% Series, shall be 84,800." and substituting therefore the following paragraph to read in full as follows: "(2) Number of Shares. The authorized number of shares constituting said Preferred Shares, 5% Series, shall be 19,200." 4. The foregoing amendment set forth in paragraph 3 of this Certificate, as well as the portion of the amendment in paragraph 2 that relates to the "Preferred Shares," are each amendments that may be adopted by the Board of Directors alone (and which were so adopted) because the 3 amendments are required by Section 510 of the California General Corporation Law to reflect the reacquisition of a portion of the Corporation's Preferred Shares, 5% Series, $25 par value, in accordance with the sinking fund provisions thereof. Such reacquired Preferred Shares cannot be reissued. 5. The foregoing amendments have been duly approved by the Board of Directors as required by Section 905(b) of the California General Corporation Law. We further declare, under penalty of perjury under the laws of the State of California, that the matters set forth in this Certificate of Amendment are true and correct. IN WITNESS WHEREOF, the undersigned have executed this Certificate in San Dimas, California on this 21st day of August, 1997. /s/ Floyd E. Wicks ------------------------------ FLOYD E. WICKS, President /s/ McClellan Harris III ------------------------------ McCLELLAN HARRIS III, Secretary EX-10.2 4 REIMBURSEMENT AGREEMENT DATED OCTOBER 3, 1997 1 TABLE OF CONTENTS
Page ---- ARTICLE I Definitions 1.01 Certain Defined Terms...................................................2 1.02 Rules of Interpretation.................................................8 ARTICLE II Letter of Credit 2.01 Agreement to Issue Letter of Credit.....................................9 2.02 Obligations.............................................................9 2.03 Obligations Absolute...................................................11 2.04 Letter of Credit Fees and Commissions..................................12 2.05 Increased Costs Due to Change in Law...................................12 2.06 Additional Fees........................................................13 2.07 Waivers................................................................13 2.08 Payment of Expenses, Etc...............................................14 2.09 Actions Relating to Letter of Credit; Indemnity........................14 2.10 Prepayments............................................................16 2.11 Right of Bank to Extend Letter of Credit...............................17 2.12 Optional Prepayment of Certificates; Custodial Account.................17 2.13 Receipt of Certain Funds by Bank.......................................19 2.14 Removal and Replacement of Remarketing Agent...........................19 ARTICLE III Collateral Security 3.01 Security Interest in Accounts..........................................20 3.02 Right of Setoff........................................................20 3.03 Security Interest in Certificates......................................20 3.04 Further Security.......................................................21 ARTICLE IV Conditions Precedent 4.01 Opinion of Counsel to the Company......................................21 4.02 Opinion of Special Counsel.............................................21 4.03 Required Acts and Conditions...........................................21 4.04 No Default.............................................................21 4.05 Representations and Warranties.........................................22 4.06 Certificate of Compliance..............................................22 4.07 Proceedings............................................................22 4.08 Filings and Recordings.................................................23 4.09 Other Conditions Precedent. ...........................................23
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ARTICLE V Representations and Warranties 5.01 Due Organization, Etc..................................................23 5.02 Due Authorization, Etc.................................................23 5.03 Approvals..............................................................24 5.04 Enforceability.........................................................24 5.05 Financial Statements...................................................24 5.06 Litigation.............................................................25 5.07 Title to Property......................................................25 5.08 Compliance with Laws, Contracts........................................25 5.09 Loan Documents.........................................................26 5.10 Exemption of Interest from Federal Income Tax..........................26 5.11 No Misleading Statements...............................................26 5.12 Employee Retirement Income Security Act of 1974........................26 5.13 Subsidiaries...........................................................26 5.14 No Burdensome Restrictions.............................................27 5.15 Taxes..................................................................27 5.16 Investment Company Act.................................................27 5.17 Leases.................................................................27 ARTICLE VI Affirmative Covenants 6.01 Financial Statements...................................................28 6.02 Officer's Certificate..................................................29 6.03 Accountant's Certificate...............................................30 6.04 Subsidiaries...........................................................30 6.05 Other Reports..........................................................30 6.06 Inspection.............................................................32 6.07 Payment of Taxes and Other Charges; ERISA..............................32 6.08 Preservation of Existence, Etc.........................................32 6.09 Compliance with Laws, Etc..............................................32 6.10 Certain Notices........................................................33 6.11 Insurance..............................................................33 6.12 Related Documents......................................................33 6.13 Incorporated Covenants.................................................33 ARTICLE VII Negative Covenants 7.01 Issuance of Stock By Subsidiaries......................................34 7.02 Prohibition of Certain Contracts.......................................34 7.03 Consolidated Tax Returns...............................................35 7.04 Sale of Certain Instruments and Accounts...............................35 7.05 Leasebacks.............................................................35 7.06 Amendments.............................................................36
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ARTICLE VIII Events of Default 8.01 Events of Default......................................................36 8.02 Remedies...............................................................39 8.03 Additional Remedies....................................................39 ARTICLE IX Covenants Relating to Construction 9.01 Indemnity..............................................................39 ARTICLE X Miscellaneous 10.01 Amendment and Waiver..................................................40 10.02 Governing Law.........................................................40 10.03 Notices...............................................................40 10.04 Waiver................................................................40 10.05 Descriptive Headings, Etc.............................................40 10.06 Benefit of Agreement..................................................41 10.07 Counterparts..........................................................41 10.08 Actions...............................................................41 10.09 Participations........................................................41 10.10 Severability..........................................................41 10.11 Confidentiality.......................................................42
EXHIBIT A Irrevocable Letter of Credit EXHIBIT B Pledge and Security Agreement (Certificates of Participation) EXHIBIT C Security Agreement (Second Trust Agreement Funds) EXHIBIT D Opinion of Company Counsel 4 EXHIBIT 10.2 REIMBURSEMENT AGREEMENT BY AND BETWEEN SOUTHERN CALIFORNIA WATER COMPANY AND THE BANK OF NOVA SCOTIA ----------------------------- Dated as of October 3, 1997 ----------------------------- 5 REIMBURSEMENT AGREEMENT THIS REIMBURSEMENT AGREEMENT is made and entered into as of October 3, 1997, by and between SOUTHERN CALIFORNIA WATER COMPANY, a California corporation (the "Company"), and THE BANK OF NOVA SCOTIA (the "Bank"). A. The Company has requested the Three Valleys Municipal Water District, a Municipal Water District of the State of California duly organized and existing under the Constitution and laws of the State of California (the "District"), to finance a portion of the costs of acquisition, construction, equipping and installing of certain water treatment, water transmission and hydroelectric generating facilities (the "Project") as described in Exhibit B to the Second Lease-Purchase Agreement dated as of November 1, 1984 (the "Second Lease-Purchase Agreement") between the District and Central Bank Leasing, a division of Cenval Leasing Corp., a corporation organized under the laws of the State of California (the "Leasing Firm") by the issuance pursuant to the Second Trust Agreement dated as of November 1, 1984, as amended and modified (the "Second Trust Agreement") among the District, the Leasing Firm, First Trust of California National Association, as trustee (the "Trustee") and the Company, of $6,000,000 principal amount of Certificates of Participation (Variable Rate Obligation), (Miramar Water Treatment, Water Transmission and Hydroelectric Generating Facilities Project) (the "Certificates"). B. The Company has requested the Bank to issue an irrevocable letter of credit substantially in the form of Exhibit A hereto (as amended or supplemented from time to time, the "Letter of Credit") in an amount not exceeding $6,296,000 (Six Million Two Hundred and Ninety-Six Thousand Dollars) (the "Letter of Credit Commitment"), of which an amount not exceeding $6,000,000 (Six Million Dollars) may be drawn upon with respect to the principal, or portion of the purchase price equal to principal, of the Certificates, and of which an amount not exceeding $296,000, (Two Hundred Ninety Six Thousand Dollars) may be drawn upon with respect to the payment of up to one hundred twenty (120) days' interest accrued on the Certificates at or prior to the Expiration Date of the Letter of Credit. C. The Bank has agreed to issue the Letter of Credit on the terms and subject to the conditions set forth herein. Accordingly, the parties hereto agree as follows: 6 ARTICLE I Definitions Section 1.01 Certain Defined Terms. As used in this Agreement, the following terms shall have the respective meanings set forth below: "Agreement" shall mean this Reimbursement Agreement as the same may be amended, supplemented or otherwise modified from time to time. "Alternate Base Rate" means, on any date, a fluctuating rate of interest per annum equal to the higher of (a) the rate of interest most recently announced by the Bank in San Francisco, California as its base or prime rate for dollar loans; and (b) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as determined by the Bank, plus 1/2 of 1%. The Alternate Base Rate is not necessarily intended to be the lowest rate of interest determined by the Bank in connection with extensions of credit. Changes in the rate of interest applied on the basis of the Alternate Base Rate will take effect simultaneously with each change in the Alternate Base Rate. "Bank" shall initially mean The Bank of Nova Scotia and shall also mean the issuer of any Alternate Credit Facility (as defined in the Trust Agreement). "Bankruptcy Law" shall mean Title 11, U.S. Code, as amended or supplemented, any successor statute thereto or any similar federal, State or foreign law for the relief of debtors. "Business Day" shall mean a day on which banks located in each of the cities in which (i) the principal office of the Trustee is located, (ii) the principal office of the Paying Agent is located and (iii) the Bank is located are not required or authorized to remain closed and on which the New York Stock Exchange is not closed. "Capitalized Lease" shall mean, with respect to any Person, any lease or any other agreement with respect to the use of property which, in accordance with generally accepted accounting principles, should be capitalized on the lessee's or user's balance sheet or for which the amount of the liability thereunder as if so capitalized should be disclosed in such balance sheet. "Capitalized Lease Obligations" of any Person shall mean and include, as of any date as of which the amount thereof is to be determined, the amount of the liability capitalized or disclosed (or which should be disclosed) in a balance sheet of such Person in respect of a Capitalized Lease of such Person. 7 "Certificates" shall mean the $6,000,000 Certificates of Participation (Variable Rate Obligation) (Miramar Water Treatment, Water Transmission and Hydroelectric Generating Facilities) issued pursuant to the Second Trust Agreement. "Closing Date" shall mean the date all of the conditions precedent to the issuance of the Letter of Credit set forth herein are satisfied. "Company" shall mean Southern California Water Company, a California corporation. "Consolidated" or "consolidated", when used with reference to any financial term in this Agreement (but not when used with respect to any tax return or tax liability), shall mean the aggregate for two or more Persons of the amounts signified by such term for all such Persons, with inter-company items eliminated and, with respect to earnings, after eliminating the portion of earnings properly attributable to minority interests, if any, in the capital stock of any such Person or attributable to shares of Preferred Stock of any such Person not owned by any other such Person. "Co-paying Agent" shall mean the Person serving as Co-Paving Agent pursuant to the Second Trust Agreement. "Controlled Group" shall mean a "controlled group of corporations" as defined in Section 1563(a) of the Internal Revenue Code of 1986, as amended, determined without regard to Sections 1563(a)(4) and (e)(3)(C) of such Code, of which the Company is a part. "Current Indebtedness" of any Person shall mean and include (i) all Indebtedness of such Person for borrowed money which does not constitute Funded Indebtedness of such Person, and (ii) all Indebtedness of such Person (other than for property taxes) which does not constitute Funded Indebtedness of such Person and which is secured by any Lien existing upon property owned by such Person, whether or not the Indebtedness secured thereby has been assumed by such Person. "Default" shall mean any event which, with notice or lapse of time, or both, or the happening of any further condition, event or act, would become an Event of Default. "District" shall mean Three Valleys Municipal Water District, a Municipal Water District duly organized and existing under the Constitution and laws of the State of California. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "Event of Default" shall mean any of the events described in Section 8.01. 8 "Expiration Date" shall mean the expiration date of the Letter of Credit which shall initially be at 3:00 p.m. San Francisco time on November 15, 2000. The Expiration Date shall be subject to extension as provided in Section 2.11 hereof. "Funded Indebtedness" of any Person shall mean and include, as of any date of which the amount thereof is to be determined, all Indebtedness of such Person, whether secured or unsecured, which by its terms has a final maturity, duration, term or payment date more than one year from the date on which Funded Indebtedness is to be determined (including that portion of the principal of such indebtedness due within one year from such date of determination, and also including any Indebtedness of such Person having a final maturity, duration or payment date within one year from such date, which, pursuant to the terms of a revolving credit or similar agreement or otherwise, may be renewed or extended from such date, whether or not theretofore renewed or extended). "Incur" or "incur" (including the correlative terms "incurred", "incurring", incurs and "incurrence"), when used with respect to any Indebtedness, shall mean create, incur, assume, guarantee or in any manner become liable in respect of, such Indebtedness. "Indebtedness" of any Person shall mean and include all obligations of such Person which in accordance with generally accepted accounting principles shall be classified upon a balance sheet of such Person as liabilities of such Person, and in any event shall include all (i) obligations of such Person for borrowed money or which have been incurred in connection with the acquisition of property or assets, (ii) obligations secured by any lien or other charge upon property or assets owned by such Person, even though such Person has not assumed or become liable for the payment of such obligations, (ii) obligations created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, notwithstanding the fact that the rights and remedies of the seller, lender or lessor under such agreement in the event of default are limited to repossession or sale of property, (iv) Capitalized Lease Obligations of such Person and (v) all guarantees of such Person guaranteeing or in effect guaranteeing any indebtedness or other obligation of any other Person. For the purpose of computing the "indebtedness" of any Person, there shall be excluded any particular Indebtedness to the extent that, upon or prior to the maturity thereof, there shall have been deposited with the proper depositary in trust the necessary funds (or evidences of such Indebtedness, if permitted by the instrument creating such Indebtedness) for the payment, redemption or satisfaction of such Indebtedness; and thereafter such funds and evidences of Indebtedness so deposited shall not be included in any computation of the assets of such Person. "Interest Drawing" shall mean a drawing pursuant to Exhibit B of the Letter of Credit. "Interest Purchase Drawing" shall mean a drawing pursuant to Exhibit D of the Letter of Credit. "Investment" shall mean, with respect to any Person, any loan, advance or extension of credit by such Person to, and any guaranty or other contingent liability with respect to the capital stock, Indebtedness or other obligations of, and any contributions to the capital of, any other 9 Person, as well as any ownership, purchase or other acquisition by such Person of any interest in any capital stock or other securities of any such other Person as well as any transfer or sale of property by such Person to any other Person other than upon full payment, in cash, of not less than the agreed sale price or the fair value of such property, whichever is higher, provided that nothing which constitutes Current Indebtedness or Funded Indebtedness of such Person shall also be an Investment of such Person. "Issuance Date" shall mean November 14, 1997. "Joint Venture" shall mean Golden State Water Company LLC and any other joint venture, limited liability company or partnership in which the Company or any of its Subsidiaries has an interest and which has been formed for the purpose of owning, leasing, operating and maintaining, planing, designing, constructing, rebuilding, repairing, rehabilitating and improving or providing services for water, water treatment, wastewater or wastewater treatment systems. "Leasing Firm" shall mean Central Bank Leasing, a division of Cenval Leasing Corp, a corporation organized under the laws of the State of California. "Letter of Credit" shall mean the Bank's irrevocable letter of credit in substantially the form of Exhibit A hereto, as the same may be amended, supplemented or otherwise modified, and any substitute therefor or replacement thereof issued by the Bank. "Letter of Credit Commitment" shall initially mean $6,296,000, which shall be subject to reduction as provided in the Letter of Credit. "Lien" shall mean: (i) any interest in property (whether real, personal or mixed and whether tangible or intangible) which secures an obligation owed to, or a claim by, a Person other than the owner of such property, whether such interest is based on the common law, statute or contract, including, without limitation, any such interest arising from a Capitalized Lease, arising from a mortgage, charge, pledge, security agreement, conditional sale or trust receipt, or arising from a consignment or bailment given for security purposes, (ii) any encumbrance upon such property which does not secure such an obligation and (iii) any exception to or defect in the title to or ownership interest in such property, including, without limitation, reservations, rights of entry, possibilities of reverter, encroachments, easements, rights of way restrictive covenants, licenses and profits a prendre. For purposes of this Agreement, the Company or a Subsidiary shall be deemed to be the owner of any property which it has acquired or holds subject to a Capitalized Lease or conditional sale agreement or other arrangement pursuant to which title to the property has been retained by or vested in some other Person for security purposes. "Limited Waiver" shall mean the Limited Waiver dated as of October 3, 1997 executed by the Trustee and Barclays Bank PLC. "Loan Documents" shall mean this Agreement, the Limited Waiver, the Pledge Agreement and the Security Agreement. 10 "Obligations" shall mean all obligations of the Company to the Bank hereunder, whether monetary or nonmonetary. "PBGC" shall mean the Pension Benefit Guaranty Corporation. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, a government or political subdivision or any department or agency thereof or any other entity. "Plan" shall mean any employee pension benefit plan or plans subject to Title IV of ERISA and maintained by the Company or any Subsidiary or any member of a Controlled Group, or any such plan or plans to which the Company or any Subsidiary is required to contribute on behalf of any of its employees. "Pledge Agreement" shall mean the pledge agreement in substantially the form of Exhibit B hereto, pursuant to which the Bank shall have a first lien on and security interest in any Remarketing Certificates (as defined in Section 2.10) and the other property described therein. "Preferred Stock" shall mean any class of the capital stock of a corporation (whether or not convertible into any other class of such capital stock) which has any right, whether absolute or contingent, to receive dividends or other distributions of the assets of such corporation (including amounts payable in the event of the voluntary or involuntary liquidation, dissolution or winding-up of such corporation), which right is superior to the rights of any other class of the capital stock of such corporation. "Principal Purchase Drawing" shall mean a drawing pursuant to Exhibit C of the Letter of Credit. "Project" shall have the meaning set forth in the Preamble. "Purchase Drawing" shall mean the aggregate of amounts drawn under a Principal Purchase Drawing and, if necessary, an Interest Purchase Drawing in order to purchase Certificates together with accrued interest thereon, if any. "Related Documents" shall mean the Second Trust Agreement, the Certificates, the Second Lease-Purchase Agreement, the Second Miramar Project Sublease, the Pledge Agreement, the Security Agreement (Second Trust Agreement Funds), the Remarketing Agreement and any exhibit, certificate, notice or other written information or document furnished by the Company on or prior to the Closing Date or to be furnished by the Company to the Bank in connection therewith. "Remarketing Agent" shall have the meaning defined in the Second Trust Agreement. 11 "Remarketing Agreement" shall mean that certain Remarketing Agreement dated November 27, 1984[, as amended,] among the Remarketing Agent, the Company and the Trustee and any substitute Remarketing Agreement. "Reportable Event" shall mean a reportable event as defined in Title IV of ERISA, except actions of general applicability by the Secretary of Labor under Section 110 of ERISA. "Restricted Payment" shall mean: (i) every dividend or other distribution paid, made, declared or authorized by the Company on or in respect of any class of its capital stock and (ii) every payment by or on behalf of the Company or by any Subsidiary in connection with the redemption, purchase, retirement or other acquisition of any shares of the Company's capital stock; but excluding, however, from the foregoing every dividend, distribution or other payment to the extent payable in shares of the capital stock of the Company. For purposes of this definition, "capital stock" shall include warrants and other rights and options to acquire shares of capital stock. "Second Lease-Purchase Agreement" shall mean that certain Second Lease-Purchase Agreement dated as of November 1, 1984 by and between the District and the Leasing Firm. "Second Miramar Project Sublease" shall mean that certain Second Miramar Project Sublease dated as of October 5, 1984, by and between the District and the Company. "Second Trust Agreement" shall mean that certain Second Trust Agreement dated as of November 1, 1984, as amended among the District, the Leasing Firm, the Trustee and the Company. "Securities Act" shall mean the Securities Act of 1933, as amended, and any similar or successor federal statute, and the rules and regulations of the Commission thereunder, all as the same may be in effect at the time. "Security Agreement (Second Trust Funds)" shall mean the Security Agreement in substantially the form of Exhibit C hereto, to be executed and delivered by the Trustee and the Bank, pursuant to which the Bank shall have a security interest subordinate to that of the Trustee in all moneys and investments held by the Trustee under the Second Trust Agreement. "Subsidiary" shall mean any corporation of which more than 80% of the Voting Stock is at the time directly or indirectly owned by the Company or one or more of the other Subsidiaries. "Trustee" shall mean First Trust of California National Association or any successor trustee thereto pursuant to the terms of the Second Trust Agreement. "Voting Stock" shall mean stock of any class or classes of a corporation the holders of which are ordinarily in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). 12 Section 1.02 Rules of Interpretation. The definitions set forth in Section 1.01 shall be equally applicable to both the singular and the plural forms of the terms therein defined and shall cover all genders. "Herein," "hereby," "hereunder," "hereof," "hereinbefore," "hereinafter" and other equivalent words refer to this Agreement and not solely to the particular Article, Section or subdivision hereof in which such word is used. Reference herein to an Article number (e.g., Article IV) or a Section number (e.g., Section 6.02) shall be construed to be a reference to the designated Article number or Section number hereof unless the context or use clearly indicates another or different meaning or intent. ARTICLE II Letter of Credit Section 2.01 Agreement to Issue Letter of Credit. The Bank agrees with the Company, in reliance upon the representations and warranties of the Company and on the terms and subject to the conditions herein set forth, to issue to the Trustee on the Issuance Date the Letter of Credit. Section 2.02 Obligations. (a) Except as provided in Subsections 2.02(b) and (c) below, the Company promises to pay to the Bank on the date paid, advanced or incurred with respect to Subsection 2.02(a)(i) hereof and upon demand by the Bank with respect to Subsections 2.02(a)(ii) and 2.02(a)(iii) hereof at its 580 California Street, Suite 2100 in San Francisco, California office, or at such other location in California as the Bank shall specify in a notice to the Company, in United States Dollars and in immediately available funds, the following: (i) The amount paid on each demand or draft (other than pursuant to a Purchase Drawing (except Purchase Drawings required to purchase Certificates pursuant to Sections 3.11(a)(4) and 3.12 of the Second Trust Agreement) or an Interest Drawing) under or in connection with or howsoever purporting to be under or in connection with the Letter of Credit. (ii) Any and all amounts paid, advanced or incurred by the Bank under this Agreement, the Related Documents or any other instrument or document related hereto or thereto. (iii) All other amounts, expenses, fees, commissions, advances, liabilities or any other financial accommodations, howsoever arising, owing by the Company to the Bank, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising pursuant to the terms of this Agreement, the Letter of Credit, the Related Documents or any other instrument or document related hereto or thereto. 13 (b) The Company also hereby agrees to pay to the Bank at its 580 California Street, Suite 2100 office in San Francisco, California, or at such other location in California as the Bank shall specify in a notice to the Company, in United States Dollars and in immediately available funds with respect to any Purchase Drawing (except Purchase Drawings required to purchase Certificates pursuant to Sections 3.11(a)(4) and 3.12 of the Second Trust Agreement which shall be subject to Section 2.02(a)(i) hereof) (i) on the earlier of (A) 364 days from the date that any amount is drawn under the Letter of Credit pursuant to any Purchase Drawing or (B) such date as (x) the principal amount of the Certificates purchased pursuant to such Purchase Drawing shall become due and payable under Section 13.02 of the Second Trust Agreement or as a result of redemption or prepayment of such Certificates, (y) the Certificates purchased pursuant to such Purchase Drawing shall be purchased pursuant to Sections 3.11(a)(4) or 3.12 of the Second Trust Agreement, or (z) the Letter of Credit shall terminate, a sum equal to the amount so drawn under the Letter of Credit that has not been prepaid pursuant to Section 2.10 hereof, in the case of clause (A) above, or the total of all amounts drawn under the Letter of Credit pursuant to any Purchase Drawing that have not been prepaid pursuant to Section 2.10, in the case of clause (B) above; (ii) interest on the amount required to be paid by the Company under clause (i) above from the date of such Purchase Drawing until such amount required to be paid by the Company under clause (i) above is due and payable, payable quarterly in arrears from the date of drawing of such amounts under the Letter of Credit, with the balance due (except as required under clause (i) above) on the day which is 364 days from the date of such Purchase Drawing, at a fluctuating interest rate per annum (computed on the basis of a year of 360 days and the actual number of days elapsed) equal to the Alternate Base Rate plus one percent (1%) from the date of such Purchase Drawing. Any change in an interest rate hereunder which results from a change in the Alternate Base Rate shall become effective at the opening of business on the day on which such change in the Alternate Base Rate shall become effective. (c) The Company also agrees to pay the Bank at its 580 California Street, Suite 2100, office in San Francisco, California, or at such other location in California as the Bank shall specify in a notice to the Company, in United States Dollars and in immediately available funds on or prior to 9:00 a.m. San Francisco time on any day the Bank is required to honor an Interest Drawing, the amount to be paid by the Bank pursuant to such Interest Drawing. The Bank agrees that any funds deposited with it pursuant to this Section 2.02(c) shall be used solely to reimburse the Bank after any Interest Drawing by the Trustee and any other amounts owing hereunder and shall not be used by the Bank to fund any such Interest Drawing, which shall be funded only from moneys of the Bank held separately from such funds deposited. (d) The Company hereby agrees that if any amount remaining unpaid under paragraph (a), (b) or (c) (including any unpaid principal or interest) is not paid when due (whether at maturity, by demand, acceleration or otherwise) it shall thereafter until paid in full (after as well as before judgment) bear interest, payable on demand, at a fluctuating rate per annum (computed on the basis of a year of 360 days and the actual number of 14 days elapsed) equal to the Alternate Base Rate plus two percent (2%). For the purposes of this paragraph (d), any amount owing to the Bank under paragraph (a) or (b) shall be deemed "not paid when due" if payment of such amount is received by the Bank after 3:00 p.m., San Francisco time on the day such amount is due. Section 2.03 Obligations Absolute. The Obligations shall be absolute, unconditional and irrevocable, shall survive expiration or cancellation of the Letter of Credit and payment of the Certificates, and shall be paid strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including, without limitation, the following circumstances: (a) any lack of validity or enforceability of this Agreement, the Letter of Credit or any of the Related Documents; (b) any amendment or waiver of or any consent to departure from the terms of any of the Related Documents; (c) the existence of any claim, setoff, defense or other right which the Company or any other Person may have at any time against the Trustee, any beneficiary or any transferee of the Letter of Credit (or any Person for whom the Trustee, any such beneficiary or any such transferee may be acting), the Bank or any other Person, whether in connection with this Agreement, the Letter of Credit, the Related Documents, the Project or any unrelated transaction provided, however, that nothing herein shall prevent the assertion of any such claim, setoff, defense or other right by suit or compulsory counterclaim following payment; (d) any demand, statement or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect, or any statement therein being untrue or inaccurate in any respect whatsoever; or (e) the surrender or impairment of any security for the performance or observance of any of the terms of this Agreement, the Certificates or any of the Related Documents. Section 2.04 Letter of Credit Fees and Commissions. (a) In consideration of the commitment of the Bank to issue the Letter of Credit on the terms and subject to the conditions of this Agreement, the Company agrees to pay the Bank from the date of execution of this Agreement through and including the Expiration Date of the Letter of Credit, a letter of credit fee (computed on the basis of the actual number of days elapsed over a year of 360 days) at the rate of forty five-hundredths of one percent (0.45%) per annum of an amount equal to the difference between the Letter of Credit Commitment and the amount available for drawing under the Letter of Credit, payable quarterly in arrears on the last Business Day of each calendar quarter, commencing December 31, 1997, or if any such day is not a Business Day, on the next preceding Business Day. 15 (b) In consideration of the issuance by the Bank of the Letter of Credit, the Company agrees to pay to the Bank a facility fee in the amount of $6,296, payable upon execution of this Agreement. Section 2.05 Increased Costs Due to Change in Law. If any law or regulation, any change in any law or regulation, or any interpretation thereof by any court or administrative or governmental authority charged or claiming to be charged with the administration thereof shall (a) impose, modify or make applicable any reserve, special deposit or similar requirement against letters of credit issued by the Bank or with respect to this Agreement, the Letter of Credit or any Related Document or any transactions hereunder or thereunder, (b) impose on the Bank any other condition regarding this Agreement, the Letter of Credit or any Related Document, (c) subject the Bank to any tax, (other than taxes upon income (including State Franchise taxes)) charge, fee, deduction or withholding of any kind whatsoever or (d) affects the amount of capital required or expected to be maintained by the Bank, and the result of any such event, or any similar measure, shall be to increase the cost to the Bank of issuing or maintaining the Letter of Credit, or reduce the rate of return on the Bank's capital, or reduce the amount of principal of, interest on, or any fee or compensation receivable by the Bank in respect of, the Letter of Credit, this Agreement or any Related Document, upon demand by the Bank, the Company shall pay to the Bank, from time to time as specified by the Bank, such additional amounts as shall, in the judgment of the Bank, be sufficient to compensate the Bank for such increased costs or reductions together with interest on each such amount from the date demanded until payment in full thereof at the rate set forth in Section 2.02(d). For the purpose of this Section any reference to the Bank shall be deemed to include any Person to whom the Bank has sold a participation in the Letter of Credit and this Agreement; provided that the Company shall not be obligated to pay any participant in the Letter of Credit any sum in excess of the sum which the Company would have been obligated to pay to the Bank in respect of such interest had the Bank not sold such participation. Section 2.06 Additional Fees. The Company agrees to pay to the Bank, (a) upon each transfer of the Letter of Credit in accordance with its terms, a transfer fee of $1,000 and (b) on the date of each draw under the Letter of Credit, a transaction fee of $150. Section 2.07 Waivers. The Company hereby waives (a) presentment, demand, notice of demand, protest, notice of protest, notice of dishonor and notice of non-payment; (b) except as provided in the Second Trust Agreement or the Pledge Agreement, the right, if any, to the benefit of, or to direct application of, any security hypothecated to the Bank including any Certificates until all Obligations, howsoever arising, shall have been paid; (c) the right to require the Bank to proceed against the Company hereunder, or against any Person under any guaranty or similar arrangement, or under any agreement between the Bank and any Person or to pursue any other remedy in the Bank's power; (d) to the full extent permitted by law, all statutes of limitation; and (e) any defense arising out of the election by the Bank to foreclose on any security by one or more non-judicial or judicial sales, whether or not every aspect of any such sale is commercially reasonable. The Bank may exercise any other right or remedy, even though any such election operates to impair or extinguish the Company's right to reimbursement from, or any other right 16 or remedy it may have against, any Person, or any security. The Company agrees that the Bank may proceed against the Company or any Person directly and independently of any other, and that any forbearance, change of rate of interest, or acceptance, release or substitution of any security, guaranty, or loan or change of any term or condition hereunder or under the Letter of Credit or any Related Document shall not in any way affect the liability of the Company hereunder. Section 2.08 Payment of Expenses, Etc. The Company agrees to pay on demand, whether or not the transactions hereby contemplated shall be consummated, all out-of-pocket costs and expenses (including, without limitation, reasonable fees and expenses of counsel of the Bank in connection therewith and with respect to advising the Bank as to its rights and responsibilities hereunder and thereunder) paid or incurred by the Bank or any Person to whom the Bank has sold a participation in the Letter of Credit in connection with (a) the preparation, review, execution and delivery of this Agreement, the Letter of Credit and any Loan Document or otherwise arising in connection with this Agreement, the Letter of Credit or any Related Document, (b) any amendments, consents or waivers to this Agreement, the Letter of Credit or any Related Document, (c) the protection of the rights of the Bank under this Agreement, the Letter of Credit and the Related Documents, (d) the enforcement of this Agreement and any Related Document, whether by judicial proceedings or otherwise, (e) the enforcement of payment of all Obligations by any action or participation in, or in connection with, a case or a proceeding under the Bankruptcy Law and (f) all stamp, documentary and other taxes and fees (including interest and penalties, if any) which may be payable in connection with the execution, delivery, filing and recording of this Agreement, the Letter of Credit or any Loan Document. The Company agrees to indemnify, defend and hold the Bank, and each Person to whom the Bank has sold a participation in the Letter of Credit and this Agreement, harmless from and against all liability (including, without limitation, interest, penalties and attorneys' fees and expenses) to which it may become subject insofar as such liability arises out of or is based upon a suit or proceeding or governmental action brought or taken in connection with the Project, the issuance of the Certificates or the use (or the proposed or potential use) of the proceeds of any drawing under the Letter of Credit. The obligations of the Company hereunder shall survive cancellation or expiration of the Letter of Credit and payment of the Certificates. Section 2.09 Actions Relating to Letter of Credit; Indemnity. (a) Any action taken or omitted by the Bank under or in connection with this Agreement, the Letter of Credit or any Related Document, if taken or omitted in good faith, shall be binding upon the Company and shall not put the Bank under any resulting liability to the Company. Without limiting the generality of the foregoing, the Bank shall be protected in relying upon a duly executed instrument of transfer in the form attached as an annex to the Letter of Credit. (b) The Bank may, under the Letter of Credit, receive, accept and pay any drafts, demands or other documents and instruments (otherwise in order) signed by, or issued to, the receiver, trustee in bankruptcy, custodian, executor, administrator, guardian or 17 conservator of anyone named in the Letter of Credit as the Person by whom drafts, demands and other documents and instruments are to be made or issued. (c) The Bank shall not have any liability to the Company, and the Company assumes all responsibility for (i) the form, sufficiency, correctness, validity, genuineness, falsification and legal effect of any drafts, demands and other documents, instruments and other papers relating thereto, (ii) the general and particular conditions stipulated therein, (iii) the existence, form, sufficiency and breach of contracts of any nature whatsoever, including the Related Documents, (iv) the solvency, standing and responsibility of any Person whomsoever, (v) any delay in giving or failure to give any notice, demand, or protest, (vi) failure of any Person (other than the Bank, subject to the terms and conditions hereof and thereof) to comply with the terms of the Letter of Credit, (vii) errors, omissions, delays in or non-delivery of any message, however sent, and (viii) any other error, neglect or omission, if done by the Bank in good faith. (d) The Company hereby waives any right to object to any payment made under the Letter of Credit against a draft and accompanying documents as provided in the Letter of Credit varying in punctuation, capitalization, spelling or similar matters of form. The determination whether a demand has been made prior to the expiration of the Letter of Credit and whether a demand is in proper and sufficient form for compliance with the Letter of Credit shall be made by the Bank in its sole discretion, which determination shall be conclusive and binding upon the Company. (e) The Company agrees at all times to protect, indemnify and save harmless the Bank, and any Person to whom the Bank has sold a participation in the Letter of Credit, from and against any and all claims, actions, suits and other legal proceedings, and from and against any and all losses, claims, demands, liabilities, damages, costs, charges, counsel fees and other expenses which the Bank or any such Person may, at any time, sustain or incur by reason of or in consequence of or arising out of the issuance of the Letter of Credit, this Agreement or any Related Document; it being the intention of the parties that this Agreement shall be construed and applied to protect and indemnify the Bank and any such Person against any and all risks involved in the issuance of the Letter of Credit, all of which risks are hereby assumed by the Company, including, without limitation, any and all risks of the acts or omissions, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority. The Bank and any Person holding a participation in the Letter of Credit shall not, in any way, be liable for any failure by the Bank or anyone else to pay any draft under the Letter of Credit as a result of any governmental acts or any other cause beyond the control of the Bank. The obligations of the Company hereunder shall survive cancellation or expiration of the Letter of Credit and payment of the Certificates. Section 2.10 Prepayments. Pursuant to the Pledge Agreement, the Company has agreed to pledge to the Bank, and grant to the Bank a security interest in, its right, title and interest in Certificates purchased with the proceeds of any Purchase Drawing and delivered to the Bank (the "Remarketing Certificates"; such Certificates when released by the Bank pursuant to Section 5 of 18 the Pledge Agreement shall cease to be Remarketing Certificates). Remarketing Certificates shall be registered as provided for in Section 3 of the Pledge Agreement. Any amounts from time to time owing to the Bank pursuant to clause (i) and (ii) of Section 2.02(b) above may be prepaid at any time (i) by the Company on notice stating the amount to be prepaid, or (ii) on behalf of the Company by the Remarketing Agent on notice from the Remarketing Agent or its designee directing the Bank to deliver Certificates held by the Bank to the Remarketing Agent for sale pursuant to Section 3(c) of the Remarketing Agreement, and specifying the principal amount of Certificates to be so sold. Any notice furnished pursuant to clause (i) or (ii) of this Section 2.10 may be given by telephone and promptly confirmed in writing but shall not be effective unless received by the Bank on or prior to the Business Day preceding the day of the proposed prepayment referred to in clauses (i) and (ii) of this Section 2.10. In addition, the Company shall, for the purpose of paying the purchase price of any Certificate delivered to the Co-Paying Agent (as defined in the Second Trust Agreement) pursuant to Section 3.02(e) of the Second Trust Agreement forthwith upon demand by the Bank prepay any amount owing to the Bank pursuant to clause (i) and (ii) of Section 2.02(b) if the Bank shall at any time determine that the Co-Paying Agent or the Remarketing Agent, as the case may be, failed for any reason to pay or tender payment of the purchase price of such Certificate when due to or for the account of the Person (as defined in the Second Trust Agreement) entitled thereto, and such failure is continuing or any other Person shall assert that such Person has a lien on or security interest in such Certificate and the Bank determines that such assertion is not manifestly unreasonable. The amount of each prepayment pursuant to clause (i) or (ii) of this Section 2.10 or pursuant to the next preceding sentence, shall be allocated first to the reduction of interest accrued to the date of such prepayment pursuant to clause (ii) of Section 2.02(b), and the balance, if any, of such prepayment shall be applied to the reduction of the amount owing pursuant to clause (i) of Section 2.02(b). Upon such prepayment, interest shall cease to accrue on the amount pursuant to clause (i) of 2.02(b) which has been prepaid and the Bank shall release and deliver to the Company, in the case of a prepayment pursuant to clause (i) of this Section 2.10, or the Co-Paying Agent, in the case of a prepayment pursuant to clause (ii) of this Section 2.10, from the pledge and security interest created by the Pledge Agreement, Remarketing Certificates as to which the principal amount plus accrued interest to the date of such release and delivery is equal to the amount of such prepayment. Section 2.11 Right of Bank to Extend Letter of Credit. Upon written notice given by the Company to the Bank at least 90 days prior to the end of each one-year period after the Issuance Date requesting the Bank to extend the Letter of Credit as provided in this Section 2.11, the Bank shall have the right either (i) subject to such terms and conditions as agreed upon by the Bank and the Company, to extend the Letter of Credit for an additional one year after the Expiration Date of the then outstanding Letter of Credit, or,(ii) to decline to extend the Letter of Credit. The Bank shall have complete and absolute discretion in selecting one of the aforesaid options. If the Bank elects to extend the Letter of Credit, the Bank shall give written notice to the Company and the Trustee of such election at least 60 days prior to the end of such one-year period and shall issue to the Trustee an advice of amendment providing for a one-year extension to the Expiration Date of the Letter of Credit provided, however, that the Bank shall also have the option to instruct the Trustee to surrender the outstanding Letter of Credit to the Bank and upon such instruction, the Trustee shall surrender the outstanding Letter of Credit to the Bank on 19 the Business Day next following the day of such instruction, and the Bank shall provide to the Trustee on such date a substitute irrevocable letter of credit in substantially the form of Exhibit A having a new expiration date one year from the Expiration Date of the then outstanding Letter of Credit but otherwise having a term identical to the then outstanding Letter of Credit. Section 2.12 Optional Prepayment of Certificates; Custodial Account. (a) Section 3.11(a)(2) of the Second Trust Agreement provides for the prepayment of all Outstanding Certificates on any Interest Payment Date on or after February 6, 1985 (as these terms are defined in the Second Trust Agreement) upon the exercise of the District's option at the direction of the Company pursuant to Section 8.2 of the Second Lease - Purchase Agreement to cause such prepayment. Section 8.2 of the Second Lease - Purchase Agreement requires the District to give the Leasing Firm, the Company and the Trustee notice of such prepayment at least 60 days prior to the Interest Payment Date on which such prepayment is to occur. The Company hereby agrees that it will give prior written notice to the Bank of its intention to direct the District to exercise its option to prepay all Outstanding Certificates at least fifteen (15) Business Days prior to such direction. Such notice shall state (i) the date on which the Company intends to give such direction to the District, (ii) the Interest Payment Date on which all Outstanding Certificates are to be prepaid and (iii) the Company's intentions with respect to the deposit of monies pursuant to subsection (b) hereof sufficient to reimburse the Bank for a drawing under the Letter of Credit with respect to such prepayment pursuant to subsection (b) hereof. The Company agrees that it will not direct the District to exercise its option to prepay all Outstanding Certificates without the prior written consent of the Bank, provided however, that the Bank agrees that it will give such consent if (i) there has occurred no material adverse change in the financial condition of the Company and (ii) the Company has demonstrated to the satisfaction of the Bank that it will have sufficient moneys to make the deposit required under subsection (b) hereof. (b) In order to facilitate the optional prepayment by the District of the Certificates pursuant to Section 3.11(a)(4) of the Second Trust Agreement, the Company agrees to deposit, in a custodial account maintained by and with the Bank for such purpose (the "Custodial Account"), on or prior to thirty-five (35) days prior to the date designated for such prepayment and in accordance with the Bank's instructions, in immediately available funds, in an amount equal to the amount of principal and accrued interest (if any) to be paid to prepay such Certificates on such prepayment date. The Bank agrees to invest any moneys deposited pursuant to this section as directed by the Company in any investment permitted under the Second Trust Agreement with a maturity of thirty (30) days or less that is generally made available by the Bank to its customers. The Bank agrees to pay to the Company on the respective prepayment date to which such deposit pertains any amounts not needed to reimburse the Bank for any drawings under the Letter of Credit and any other amounts owing hereunder. Cash deposited into the custodial account described above shall be used solely to reimburse the Bank after any drawing by the Trustee under the Letter of Credit in respect of the prepayment of Certificates pursuant to Section 3.11(a)(4) of the Second 20 Trust Agreement and any other amounts owing hereunder and shall not be used by the Bank to fund any such drawing, which shall be funded only from moneys of the Bank held separately from such cash deposited. The Company hereby grants to the Bank, any participant in the Letter of Credit and the Trustee as representative of the holders from time to time for the Certificates, as security for the payment and performance of the Obligations, a lien upon and security interest in all amounts deposited in the Custodial Account. All funds deposited with the Bank pursuant to this Section 2.12 shall be held by the Bank on a pari passu basis with the interest of the Trustee in such funds. Section 2.13 Receipt of Certain Funds by Bank. The Trustee has agreed that it will transfer the monies required to be transferred to the Bank pursuant to the Second Trust Agreement. All such moneys received by the Bank shall be credited by the Bank against any Obligations of the Company to the Bank and any other amounts owing hereunder. The Bank shall also be entitled to retain all or a portion of such moneys received equal to an amount which it reasonably anticipates may be necessary to reimburse the Bank for Obligations and any other amounts which may be incurred by the Bank in the future. The Bank shall transfer all such moneys not required to be so credited or retained to the Company. Section 2.14 Removal and Replacement of Remarketing Agent. Section 9.10 of the Second Trust Agreement and Section 5(a) of the Remarketing Agreement grant the Company the right to remove the Remarketing Agent at any time with the concurrence of the District and Section 9.10 of the Second Trust Agreement grants the Company the right to appoint a successor Remarketing Agent with the concurrence of the District. The Company hereby agrees that (i) upon the receipt of written request by the Bank, it shall take such action so as to cause the removal of the Remarketing Agent, and (ii) it shall not remove the Remarketing Agent without the prior written consent of the Bank, which consent shall not be unreasonably withheld. The Company additionally agrees that it will not appoint a successor Remarketing Agent without the prior written consent of the Bank which consent shall not be unreasonably withheld. ARTICLE III Collateral Security The Obligations shall be secured as follows: Section 3.01 Security Interest in Accounts. The Company hereby grants to the Bank, as security for the payment and performance of the Obligations, a lien upon and security interest subordinate to the lien granted to the Trustee under the Second Trust Agreement, if any, in (i) all interest the Company has in all funds the Company deposits with the Trustee or the District under the Second Trust Agreement, the Second Lease-Purchase Agreement or the Second Miramar Project Sublease, as the case may be, if any, and all interest the Company has in all funds held under the Second Trust Agreement, if any. The Bank shall hold such security interest and lien pursuant to the California Uniform Commercial Code and shall be entitled to all rights, powers and remedies of a secured party thereunder and otherwise available at law or in equity with respect thereto. 21 Section 3.02 Right of Setoff. In addition to any other right or remedy that the Bank may have by operation of law or otherwise, the Bank and any bank buying a participation in the Letter of Credit and this Agreement shall be entitled to exercise their right of setoff or banker's lien in any and all accounts of the Company maintained with the Bank or such participating bank and any and all funds at any time held therein; provided, however, that the Bank hereby irrevocably waives such right of setoff or banker's lien in order to appropriate and apply to the payment of unreimbursed payments under the Letter of Credit and interest thereon any balances, credits, deposits, accounts or moneys of the Company at any time with the Bank when and if there shall be a drawing under the Letter of Credit during the pendency of any proceedings by or against the Company, seeking relief in respect of the Company under the Bankruptcy Law; provided further, however, that the Bank may exercise such right of setoff or banker's lien when and to the extent that it is determined that such exercise would not result in the Bank's being released, prevented or restrained from or delayed in fulfilling its obligations under the Letter of Credit. Section 3.03 Security Interest in Certificates. The Company shall, in accordance with the provisions of the Pledge Agreement, grant to the Bank, for the benefit of the Bank, as security for the payment and performance of the Obligations, a lien upon and first priority security interest in the Remarketing Certificates (as defined in the Pledge Agreement) and other property described in such Pledge Agreement. The Company agrees to execute and deliver and cause to be executed and delivered to the Bank the Pledge Agreement and such financing statements, acknowledgments, notices, authorizations, consents and other documents, instruments and agreements as the Bank may from time to time request to obtain and maintain on behalf of the Bank, the benefits of the security interest and lien granted in the Pledge Agreement. Section 3.04 Further Security. The Bank hereby agrees that it will not at any time accept any collateral as security for the payment of the Obligations unless provision is made prior to or simultaneously with taking of such collateral security for the Bank for an equal and ratable security interest in such collateral security to be granted to the Trustee for the benefit of the holders from time to time of the Certificates; provided, however, that such agreement shall terminate and be of no force and effect as and when and to the extent that the acceptance of such collateral would not result in the Bank's being released, prevented or restrained from or delayed in fulfilling the Bank's obligations under the Letter of Credit. ARTICLE IV Conditions Precedent The obligation of the Bank to issue the Letter of Credit on the Issuance Date is subject to the satisfaction of the following conditions: Section 4.01 Opinion of Counsel to the Company. There shall have been delivered to the Bank in opinion of O'Melveny & Myers, counsel to the Company, dated the Issuance Date, 22 addressed to the Bank and in substantially the form of Exhibit D hereto, and covering such other matters as the Bank may reasonably request. Section 4.02 Opinion of Special Counsel. There shall have been delivered to the Bank the opinion of Rutan & Tucker, Special counsel, dated the Issuance Date, addressed to the Bank and in form and substance satisfactory to the Bank, and covering such other matters as the Bank way reasonably request. Section 4.03 Required Acts and Conditions. All acts and conditions (including, without limitation, the obtaining of any necessary regulatory approvals and the making of any required filings, recordings or registrations) required to be done and performed, and to have happened precedent to the execution, delivery and performance of this Agreement, the Letter of Credit and the Related Documents to which the Company is or is to be a party, and to constitute the same legal, valid and binding obligations of the Company enforceable in accordance with their respective terms, shall have been done and performed and shall have happened in due and strict compliance with all applicable laws. Section 4.04 No Default. There shall exist no Default or Event of Default. Section 4.05 Representations and Warranties. All representations and warranties of the Company contained herein or otherwise made in writing in connection herewith or with any Loan Document shall be true and correct with the same force and effect as though such representations and warranties had been made on and as of the Closing Date. Section 4.06 Certificate of Compliance. There shall have been delivered to the Bank a certificate of the Company, signed by an officer of the Company and dated the Closing Date, to the effect that all of the conditions specified in Sections 4.04 and 4.05 have been satisfied as of such date. Section 4.07 Proceedings. All corporate and other proceedings in connection with the transactions contemplated by this Agreement, the Letter of Credit and the Loan Documents shall be satisfactory in form and substance to the Bank and its counsel, and the Bank and its counsel shall have received an executed copy of this Agreement, each of the Pledge Agreement and the Security Agreement (Second Trust Agreement Funds), and an executed or conformed copy of each Related Document, a specimen copy of the Certificates and copies of such documents as the Bank or such counsel may reasonably request, including, without limitation: (a) Copies of the Articles of the Company, certified by the Secretary of State of the State of California; (b) Copies of the Bylaws of the Company, certified by the Secretary or an Assistant Secretary of the Company; (c) Copies of the resolutions of the Board of Directors of the Company, certified by the Secretary or an Assistant Secretary of the Company, authorizing the execution, 23 delivery and performance by the Company of this Agreement and approving the Letter of Credit; (d) Copies of all approvals, authorizations and consents of any trustee or any holder of any indebtedness or obligation of the Company or any governmental agency or public authority, necessary for the Company to enter into this Agreement, including the Limited Waiver; and (e) A certificate of the Secretary or an Assistant Secretary of the Company certifying the names and true signatures of the Authorized Company Representatives of the Company (as defined in the Second Trust Agreement) authorized to sign this Agreement and the other documents to be delivered by the Company hereunder. Section 4.08 Filings and Recordings. The Pledge Agreement and any required financing statements relating thereto shall have been duly filed and recorded in each jurisdiction in which required to perfect, preserve and protect the first lien and security interest of the Bank and the Trustee thereunder, and the Bank shall have received evidence satisfactory to it as to any such filing, recording and/or registration. Section 4.09 Other Conditions Precedent. The conditions precedent to the obligations of the Company and the Bank hereunder shall also be subject to the effectiveness of the Limited Waiver on or prior to October 3, 1997. ARTICLE V Representations and Warranties In order to induce the Bank to enter into this Agreement and to issue the Letter of Credit, the Company makes the following representations and warranties to the Bank, which shall survive the execution and delivery of this Agreement and the Letter of Credit: Section 5.01 Due Organization, Etc. Each of the Company and its Subsidiaries has been duly organized and is validly existing and in good standing as a corporation under the laws of the jurisdiction in which incorporated. The Company has all requisite power and authority to conduct its business as presently conducted, to own its assets and properties, and to execute and deliver, and to perform all of its obligations under, this Agreement and the Related Documents to which it is or is to be a party, and to carry out the transactions contemplated hereby and thereby. Each of the Company and its Subsidiaries is duly qualified to do business in the jurisdictions in which its ownership of property or conduct of business legally requires such authorization. Section 5.02 Due Authorization, Etc. The execution, delivery and performance by the Company of this Agreement and the Related Documents to which it is or is to be a party have been duly authorized by all necessary corporate action and do not and will not (a) violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Company or any Subsidiary or of the 24 Articles of Incorporation or By-Laws of the Company or any Subsidiary, (b) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or its or their assets or properties may be bound or affected, or (c) except as provided herein, result in or require the creation or imposition of any Lien upon or with respect to any of the assets or properties now owned or hereafter acquired by the Company or any Subsidiary. Neither the Company nor any Subsidiary is a party to, or is otherwise subject to any provision contained in, any instrument evidencing its indebtedness, any agreement relating thereto or any other contract or agreement which limits the amount of, or otherwise imposes restrictions on the incurring of, obligations of the Company under this Agreement and the Related Documents, or if such restrictions are present, such restrictions have been met or duly waived with respect to this Agreement and the Related Documents. Section 5.03 Approvals. No consent, approval or other action by or any registration with, notice to or filing with any Person or any court or administrative or governmental body is or will be necessary for the valid execution, delivery or performance by the Company of this Agreement or any of the Related Documents to which it is or is to be a party other than such consents and approvals which have heretofore been obtained or will be obtained in a timely manner in the future if not currently required. Section 5.04 Enforceability. This Agreement and each of the Related Documents to which the Company is or is to be a party constitute, or when executed and delivered will constitute, legal, valid and binding obligations of the Company, enforceable against it in accordance with their respective terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect generally affecting creditors' rights. The Pledge Agreement, along with all action required to fully perfect the Bank's security interests thereunder, which action has been taken or completed, creates and constitutes valid and perfected first priority security interests in and to the collateral therein described enforceable against all third parties and secures the payment of the Obligations. Section 5.05 Financial Statements. The Company has furnished the Bank with consolidated balance sheets of the Company as of December 31, 1996, and statements of income and retained earnings and changes in financial position for the fiscal year then ended, certified by independent public accountants, and the unaudited consolidated balance sheet of the Company and its Subsidiaries as of June 30, 1997, and statements of income and retained earnings and changes in financial position for the six-month period then ended. Such financial statements (including any related schedules and/or notes) are complete and correct in all material respects, have been prepared in accordance with generally accepted accounting principles consistently followed throughout the period involved and show all liabilities (except as heretofore disclosed to the Bank in writing), direct and contingent, as at the date thereof, and fairly present the condition of the Company and its Subsidiaries as at such dates and the results of operations for the periods indicated, subject only to normal year-end audit adjustments with respect to such unaudited statements. There has been no material adverse change in the business, properties or condition (financial or otherwise) of the Company or its Subsidiaries since the date of the most recent balance sheet furnished hereunder. There are no contingent liabilities which, if 25 determined adversely, would have a material adverse effect on the Company or its Subsidiaries other than as heretofore disclosed in writing to the Bank. Section 5.06 Litigation. There are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or its Subsidiaries, or any of their assets, properties or rights, at law or in equity, by or before any court, arbitrator, administrative or governmental body or other Person which, if determined adversely, would have a material adverse effect on the business, properties, condition (financial or otherwise) or operations of the Company or its Subsidiaries, or adversely affect the Company's ability to perform its obligations under any of the Related Documents other than as heretofore disclosed in writing to the Bank. Section 5.07 Title to Property. The Company believes that, in all material respects, it and its Subsidiaries have such title to the property owned or claimed by each of them, respectively as is necessary to allow the Company and its Subsidiaries taken as a whole to conduct its business as now conducted and as proposed to be conducted by the Company and its Subsidiaries taken as a whole. The Company and its Subsidiaries have good title to all principal plants and reservoirs and other real and personal property material to the Company's business (excluding easements, mineral rights, water rights and other rights ancillary to fee ownership of real property) now purported to be owned by it, subject to no lien of any kind except as permitted under Section 6.13 or as referred to in its balance sheet furnished under Section 5.05. Section 5.08 Compliance with Laws, Contracts. Neither the Company nor any Subsidiary is in violation or default with respect to any applicable law and/or regulation which materially affects the business, properties, condition (financial or otherwise) or operations of the Company or its Subsidiaries taken as a whole, nor are any of them in violation or in default with respect to any order, writ, injunction, demand or decree of any court, or any indenture, agreement or other instrument under which any of them is bound or may be bound, default under or violation of which might have a material and adverse effect on the business, properties, condition (financial or otherwise) or operations of the Company or its Subsidiaries taken as a whole or might result in the acceleration of the maturity of any of their indebtedness other than as heretofore disclosed in writing to the Bank. Section 5.09 Loan Documents. The Company makes each of the representations and warranties made by it in the Loan Documents to which it is or is to be a party, to and for the benefit of the Bank as if the same were set forth at length herein. Section 5.10 Exemption of Interest from Federal Income Tax. It is the intention of the Company that the interest on the Certificates be excluded from the gross income of the holders thereof (other than "substantial users," or "related Persons" of substantial users, as such terms were defined in Section 103(b) of the Internal Revenue Code of 1954, as amended from time to time as in effect on the date of issuance of the Certificates) for Federal income tax purposes. To that end, the Company represents to the Bank that it has not taken any action, and knows of no action that any other Person has taken, which would cause interest on the Certificates to be included in the gross income of the recipients thereof. The Company warrants that it will not 26 take any action or omit to take any action which, if taken or omitted, would cause interest on the Certificates to be included in the gross income of the holders thereof (other than "substantial users," or "related Persons" of substantial users, as such terms were defined in Section 103(b) of the Internal Revenue Code of 1954, as amended from time to time as in effect on the date of issuance of the Certificates) for Federal income tax purposes. Section 5.11 No Misleading Statements. Nothing herein or in any exhibit, certificate, notice or other written information furnished or to be furnished by the Company in connection with this Agreement, the Letter of Credit or any Related Document contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Section 5.12 Employee Retirement Income Security Act of 1974. The Company is in substantial compliance with ERISA; no Reportable Event has occurred and is continuing with respect to any Plan; no notice of withdrawal liability has been received from a Plan pursuant to Section 4202 of ERISA; and the minimum funding standards imposed on the Company by ERISA with respect to each Plan have been satisfied. Section 5.13 Subsidiaries. The Company has heretofore furnished the Bank with a list of all present Subsidiaries, including for each the type of business, jurisdiction of incorporation and percentage of outstanding securities owned of record and beneficially. The Company directly or indirectly owns such securities free and clear of all liens, charges, encumbrances and rights of others. Section 5.14 No Burdensome Restrictions. No contract, agreement or other instrument as to which the Company or its Subsidiaries may be bound materially adversely affects, or insofar as the Company may reasonably foresee may so affect, the business, operations, property or financial or other condition of the Company or its Subsidiaries taken as a whole. Section 5.15 Taxes. Each of the Company and its Subsidiaries has filed or caused to be filed all tax returns which to the knowledge of the Company are required to be filed, and has paid all taxes shown to be due and payable on said returns or on any assessments made against it, except for returns which have been appropriately extended, and all other taxes, fees or other charges imposed on it by any governmental authority, agency or instrumentality which have become due and payable (other than those the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with generally accepted accounting principles have been provided on the books of the Company or its Subsidiaries); and no tax liens have been filed. Section 5.16 Investment Company Act. The Company is not an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 27 Section 5.17 Leases. The Company and its Subsidiaries enjoy peaceful and undisturbed possession under all leases under which they operate which either singly or in the aggregate are material to the Company's operations as a whole, subject to subleases in the ordinary course of business, and all of such leases are valid and subsisting and are in full force and effect. There is no default on the part of the Company or any Subsidiary existing under any of such leases, and none of such leases contains any unusual or burdensome provision which materially adversely affects or in the future may (so far as the Company can now foresee) materially adversely affect the Company's or such Subsidiary's right of occupancy and to continue its operations under such lease. ARTICLE VI Affirmative Covenants The Company covenants with the Bank, until expiration or cancellation of the Letter of Credit and payment in full of all Obligations, as follows: Section 6.01 Financial Statements. The Company will furnish to the Bank: (a) within 90 days after the close of each fiscal year, a balance sheet of the Company setting forth its financial condition as at the end of such fiscal year, together with statements of income, capitalization, earned surplus and changes in financial position of the Company for such fiscal year, setting forth in each case in comparative form the figures for the preceding fiscal year, all in reasonable detail, such balance sheet and statements of income, capitalization, earned surplus and changes in financial position to be accompanied by an opinion with respect thereto of independent public accountants, who may be either the present regular auditors of the books of the Company or other auditors of recognized national standing, which opinion shall state that such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied (except for changes in application in which such accountants concur) and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances; (b) within 45 days after the end of the first, second and third quarterly accounting periods in each fiscal year, an unaudited balance sheet of the Company as at the end of such accounting period, and unaudited statements of income and earned surplus of the Company and a statement of changes in financial position of the Company for the portion of the fiscal year ending with the last day of such quarterly accounting period, setting forth in each case in comparative form the figures for the corresponding periods a year earlier, all in reasonable detail, prepared by the Controller, the Treasurer or an Assistant Treasurer or any other accounting officer of the Company, accompanied by the certificate of the officer preparing such financial statements to the effect that they fairly present the Company's financial condition and results of operations, respectively; 28 (c) promptly upon distribution thereof, copies of all such financial or other statements, including proxy statements, and reports as the Company shall send to any class of its stockholders or holders of its debt securities; (d) promptly after filing thereof, copies of all regular and periodic reports, proxy statements (other than preliminary) and registration statements which the Company may file with the SEC or any governmental agency substituted therefor and, promptly upon written request therefor, copies of the financial statements which the Company may file annually with any state regulatory agency or agencies; provided, however, that the Company need not deliver to the Bank any document which it has filed with the SEC or any governmental agency substituted therefor, or any state regulatory agency or agencies if such reports are not available for inspection by the public or if confidential treatment thereof has been requested and has not been denied; (e) promptly upon receipt thereof, copies of any notices received from state regulatory agencies relating to any order, ruling, statute or other law or information which might reasonably be expected to materially and adversely affect the franchises, permits, licenses or rights for the operation of the business of the Company; and (f) promptly upon request therefor, such information as to the business and properties of the Company as the Bank may from time to time reasonably request in writing. (g) as soon as available any written report pertaining to material items in respect of the Company's internal control matters submitted to the Company by its independent public accountants in connection with each annual or interim special audit of the financial condition of the Company and its Subsidiaries made by the Company's independent public accountants; and Together with each delivery of financial statements required by clauses (a) and (b), the Company will deliver to the Bank a certificate signed by its principal financial officer stating that there exists no Event of Default or Default or, if any such Event of Default or Default exists, stating the nature thereof, the period of existence thereof and what action the Company proposes to take with respect thereto. Section 6.02 Officer's Certificate. Each set of financial statements delivered pursuant to Section 6.01(a) or Section 6.01(b) will be accompanied by a certificate, signed by the President or a Vice President and the Treasurer or an Assistant Treasurer of the Company, stating that a review of the affairs and activities of the Company during the applicable period has been made under their supervision and that the Company was not at any time during such period in default under any of the provisions of this Agreement and demonstrating, in reasonable detail, compliance with Section 6.13 and; provided, however, that, in the event that any such default shall have occurred, such certificate shall so specify and shall state whether such Default has been cured or is continuing. 29 Section 6.03 Accountant's Certificate. Each set of annual financial statements delivered pursuant to Section 6.01(a) will be accompanied by a report of the independent public accountants who have certified or reported on such financial statements stating that, in making their examination necessary to express an opinion on such financial statements, such accountants have obtained no knowledge of any condition or event which then constitutes, or which after the giving of notice or the passage of time or both would constitute, an Event of Default and, if any such condition or event then exists, specifying the nature and period of existence thereof. Section 6.04 Subsidiaries. If at any time the Company shall have a Subsidiary: (a) the financial statements delivered to the Bank pursuant to Section 6.01(a) and (b) shall be prepared on a consolidated basis for the Company and any such Subsidiary or Subsidiaries in accordance with generally accepted accounting principles; and (b) if the assets of any such Subsidiary exceed 10% of the total assets of the Company as shown on the balance sheet of the Company as at the end of its last preceding fiscal quarter or the net income of such Subsidiary exceeds 10% of the net income of the Company as shown on its income statement for its last preceding fiscal quarter, the financial statements referred to in Section 6.01(a) and (b) shall, at the Bank's request, be furnished on a consolidating basis with respect to the Company and such Subsidiary in addition to those for the Company. Section 6.05 Other Reports. The Company will deliver to the Bank: (a) forthwith upon an officer of the Company's obtaining knowledge of the occurrence of each Default or Event of Default, a certificate from an officer of the Company setting forth the details thereof and the action which the Company proposes to take with respect thereto; (b) a prompt written notice of any condition or event which has resulted or might reasonably be expected to result in (i) a material adverse change in the business, properties, condition (financial or otherwise) or operations of the Company or any Subsidiary, (ii) a breach of or noncompliance with any term, condition or covenant contained herein or in any Related Document, (iii) a material breach of or noncompliance with any term, condition or covenant of any material contract to which the Company or any Subsidiary is a party or by which it or its assets or properties may be bound, or (iv) any material adverse change in the Project (financial, physical or otherwise); (c) a prompt written notice of any claims, proceedings or disputes against or on behalf of the Company or any Subsidiary or, to the knowledge of the Company, threatened or affecting the Company or any Subsidiary, which, if adversely determined, would have a material adverse effect on the business, condition (financial or otherwise) or operations of the Company or any Subsidiary (without in any way limiting the foregoing, claims, proceedings, or disputes involving monetary amounts in excess of $500,000 not fully covered by insurance shall be deemed to be material), or any material labor 30 controversy resulting in or threatening to result in a strike against the Company or any Subsidiary, or any proposal by any public authority to acquire any of the material assets or business of the Company or any Subsidiary; (d) will cause each of its Subsidiaries to deliver to the Bank, as soon as possible, and in any event within thirty (30) days after the Company knows, or has reason to know, that any Reportable Event with respect to any Plan has occurred, a statement of the principal financial officer of the Company or the affected Subsidiary setting forth details as to such Reportable Event and the action which the Company or the affected Subsidiary proposes to take with respect thereto, together with a copy of the notice of such Reportable Event given to the PBGC, if a copy of such notice is available to the Company or the affected Subsidiary, (ii) prompt written notice to the Bank of any decision by the Company, any Subsidiary or any member of the Controlled Group to terminate or withdraw from any Plan, or receipt of a notice of withdrawal liability with respect to a Plan pursuant to Section 4202 of ERISA, and (iii) promptly after receipt thereof a copy of any notice of intent to terminate any Plan or to appoint a trustee to administer any Plan which the Company, any Subsidiary or any member of the Controlled Group may receive from the PBGC or the Internal Revenue Service with respect to any Plan; provided, however, this subparagraph shall not apply to notices of general application promulgated by the Department of Labor; and (e) promptly upon the filing thereof, any annual, quarterly or special reports (including, without limitation, any 10K, 10Q or 8K reports) which the Company shall file with the Securities and Exchange Commission, or any successor agency thereto. Section 6.06 Inspection. The Company will permit any Person designated by the Bank in writing, at the Bank's expense, to visit and inspect any of the assets and properties of the Company and any Subsidiary, including the Project, to examine the books and financial records of the Company and any Subsidiary and make copies thereof or take extracts therefrom, and to discuss the affairs, finances and accounts of the Company and any Subsidiary with the principal officers of the Company and such Subsidiary, all at such reasonable times and as often as the Bank may reasonably request. Section 6.07 Payment of Taxes and Other Charges; ERISA. The Company will pay, and will cause each Subsidiary to pay, before the same shall become delinquent, (i) all taxes, assessments and other governmental charges or levies imposed upon it or any of its properties or income (including, without limitation, such as may rise under Section 4062, 4063 or 4064 of ERISA, or any similar provision of law), and (ii) all claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons which, if unpaid, might result in the creation of a lien upon any of its properties, provided that neither the Company nor any Subsidiary shall be required to pay any such tax, assessment, charge, levy, claim or demand whose amount, applicability or validity is being contested in good faith by appropriate proceedings. The Company will take all actions and fulfill all conditions necessary to maintain, and will maintain, substantial compliance of all employee benefit plans established or 31 maintained, or to which contributions shall be made by the Company that are under the control of the Company (whether such plans are now existing or established in the future), with the requirements of ERISA and the rules and regulations adopted or that may be adopted thereunder. Section 6.08 Preservation of Existence, Etc. Except as otherwise provided, the Company will preserve and maintain its and any Subsidiaries the net assets of which exceed $300,000 existence, rights, franchises and privileges necessary or desirable in the normal conduct of its business as contemplated and as presently conducted. Section 6.09 Compliance with Laws, Etc. The Company will, and will cause each Subsidiary to, comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority having jurisdiction, the terms of any indenture, contract or other instrument to which it is a party or under which it or its properties may be bound, noncompliance with which could materially adversely affect (a) the Company's business, properties, condition (financial or otherwise) or operations, or (b) the Company's ability to perform its obligations under this Agreement or any of the Related Documents to which it is or is to be a party, unless the same is being contested in good faith and by appropriate proceedings and the Company makes adequate provision for payment thereof, satisfactory to the Bank, in the event it should lose such contest. Section 6.10 Certain Notices. The Company will furnish to the Bank (a) a copy of any material notice, certification, demand or other writing or communication given by the District, Leasing Firm or the Trustee to the Company or by the Company to the District, Leasing Firm or the Trustee under or in connection with any of the Related Documents, in each case promptly after the receipt or giving of the same, and (b) any opinion of counsel or certificate required to be given to the District, Leasing Firm or Trustee under the Related Documents, addressed to the Bank. Section 6.11 Insurance. The Company and its Subsidiaries will maintain or cause to be maintained in force until expiration or cancellation of the Letter of Credit and full payment of the Obligations insurance (including but not limited to public liability insurance) with responsible and reputable insurance companies in such amounts and covering such risks as is required by law and as is usually carried by companies engaged in a similar business and owning similar properties in the same general areas in which the Company and its Subsidiaries operates. Section 6.12 Related Documents. The Company makes each of the covenants made by it in the Related Documents to which it is or is to be a party, to and for the benefit of the Bank as if the same were set forth at length herein. Section 6.13 Incorporated Covenants. The Company will perform, comply with and be bound by all of its agreements, covenants and obligations contained in Sections 5.5, 5.6 (other than Section 5.6(a)(3)(ii)), 5.7, 5.8, 5.10, 5.11 and 5.13 of that certain Note Agreement, dated as of May 15, 1991 (the "Note Agreement"), among the Company and the purchasers named in Schedule I attached thereto (such Sections and all other terms of the Note Agreement to which 32 reference is made herein, together with all related definitions and ancillary provisions, being hereby incorporated into this Agreement by reference as though specifically set forth in this Agreement); provided, however, that (a) all references to "Purchaser" or "Purchasers" shall be deemed to refer to the Bank; (b) all references to "Note" or "Notes" shall be deemed to refer to the Obligations hereunder, except in Section 5.6(a)(1) in which the reference to "Notes" shall be deemed to refer to the Obligations hereunder and the promissory notes of the Borrower outstanding under the Note Agreement; and (c) all references to "this Agreement" and "herein", "hereof" and words of similar purport shall, except where the context otherwise requires, be deemed to refer to this Agreement. All such Sections and other terms, definitions and provisions of the Note Agreement shall, except as the Bank shall otherwise consent for purposes of this Agreement, continue in full force and effect for the benefit of the Bank as if it were a Purchaser (as defined in the Note Agreement), whether or not the Notes (as so defined) remain outstanding or the Note Agreement remains in effect among, or is modified or amended by, or any provisions thereof are waived by, the parties thereto. ARTICLE VII Negative Covenants The Company covenants with the Bank, until expiration or cancellation of the Letter of Credit and payment in full of all Obligations, that, without the prior written consent of the Bank: Section 7.01 Issuance of Stock By Subsidiaries. The Company will not permit any Subsidiary to issue, sell or dispose of (i) any shares of its Preferred Stock to any Person except to the Company, or (ii) any shares of its stock, other than Preferred Stock and directors' qualifying shares as required by law, except to the Company or to another Subsidiary or on a pro rata basis to the then holders of each class of shares to be issued or in a transaction otherwise permitted hereunder. Section 7.02 Prohibition of Certain Contracts. The Company will not, and will not permit any Subsidiary to, enter into, become a party to or become liable in respect of, any of the following: (a) any contract obligating the Company or any Subsidiary to make any Investment in any Person unless such Investment is otherwise permitted hereunder, or to purchase any property from any Person if the purpose of such purchase is to enable such Person to maintain working capital, net worth or any other balance sheet condition, or to pay debts, dividends or expenses; 33 (b) any lease or contract to use any real or Personal property if such lease or contract or any related document provides that the obligation of the Company or any Subsidiary, as lessee or user, to make payments thereunder is absolute and unconditional under provisions not customarily found in commercial leases then in general use, or requires that the lessee or user underwrite the adequacy of condemnation awards or insurance proceeds or purchase or otherwise acquire securities or obligations of the lessor, except such lease or contract any part of the future payments under which constitutes Funded Indebtedness permitted hereunder; (c) any contract for the sale or use of materials, supplies or other property, or any contract for rendering services, if such contract or any related document requires that payment to the Company or any Subsidiary, as the case may be, for such materials, supplies or other property, or the use thereof, or payment to the Company or any Subsidiary, as the case may be, for such services, shall be subordinated to any Indebtedness (of the purchaser or user of such materials, supplies or other property or the Person entitled to the benefit of such services) owed or to be owed to any Person; (d) any contract or agreement subordinating or consenting to the subordination of any then existing right or claim of the Company or any Subsidiary to any right or claim of any other Person; and (e) any other contract which, in economic effect, is substantially equivalent to a guarantee of the obligations of any Person, except if such contract constitutes Funded Indebtedness permitted hereunder. Section 7.03 Consolidated Tax Returns. The Company will not file, or consent to the filing of, any consolidated income tax return with any Person other than a Subsidiary or any corporation controlled by the Company. Section 7.04 Sale of Certain Instruments and Accounts. The Company will not, and will not permit any Subsidiary to, sell, assign, transfer or otherwise dispose of any promissory notes owned by it, or any of its accounts receivable (including trade acceptances), except (i) in transactions involving the Company and one or more Subsidiaries, exclusively, or involving two or more Subsidiaries, exclusively, and (ii) as part of a transaction otherwise permitted hereunder. Section 7.05 Leasebacks. The Company will not, and will not permit any Subsidiary to, become or remain liable in any way, whether directly or by assignment or as a guarantor, for the obligations of the lessee or user under any lease or contract for the use of any real or Personal property, if such property is owned on the date of this Agreement or is thereafter acquired by the Company or any Subsidiary, and if such property either (i) has been or is to be sold or transferred to any Person by the Company or any Subsidiary or (ii) was, is or will be used by the Company or any Subsidiary for substantially the same purpose as any other property which has been or is to be sold or transferred by the Company or any Subsidiary to any Person in connection with such lease or contract, except that the Company may become and remain liable for Capitalized 34 Lease Obligations to the extent such Capitalized Lease Obligations were incurred in compliance with the terms hereof. Section 7.06 Amendments. Without the consent of the Bank, the Company will not amend, modify or terminate, or agree to amend, modify or terminate any Certificate or any Related Document. ARTICLE VIII Events of Default Section 8.01 Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) the Company shall fail to make any payment required to be made by it hereunder or under any of the Related Documents when due; or (b) the Trustee shall fail to make any payment required to be made by it under (the Second Trust Agreement) or any Certificate when due; or (c) any representation or warranty made by the Company in this Agreement, any of the Related Documents or any writing furnished in connection with or pursuant to this Agreement or any of the Related Documents shall be false in any material respect or shall omit any material fact on the date as of which made; or (d) the Company shall fail to perform or observe any term, covenant or agreement contained in Article VII; or (e) the Company shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or any of the Related Documents on its part to be performed or observed, (i) with respect to any such term, covenant or agreement contained herein, any such failure remains unremedied for thirty (30) days after such failure shall first become known to any officer of the Company, and (ii) with respect to any such term, covenant or agreement contained in any of the other Related Documents and any such failure remains unremedied after any applicable grace period specified in such Related Document, if any; or (f) an event of default shall occur under the Second Trust Agreement, the Second Lease-Purchase Agreement the Second Miramar Project Sublease, the Remarketing Agreement or the Pledge Agreement; or (g) the Company shall default in any payment of principal of or interest on any other obligation for money borrowed (or of any obligation under a conditional sale or other title retention agreement or of any obligation secured by a purchase money mortgage or of any obligation under notes payable or drafts accepted representing extensions of credit) 35 beyond any period of grace provided with respect thereto; or the Company shall default in the performance or observance of any other agreement, or any term or condition contained in any other agreement under which any such obligation is created (or if any other default thereunder or under such agreement shall occur and be continuing) and the effect of such default is to cause, or to permit the holder or holders of such obligation (or a trustee on behalf of such holder or holders) to cause, such obligation to become due prior to any stated maturity; or (h) the Company or any Subsidiary shall commence (by petition, application, or otherwise) a voluntary case or other proceeding under the laws of any jurisdiction seeking liquidation, reorganization, or other relief with respect to itself or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect, or seeking the appointment of a trustee, self-trusteeship, receiver, custodian, or other similar official of it or any substantial part of its property; or shall consent (by answer or failure to answer, or otherwise) to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it; or shall make an assignment for the benefit of creditors; or shall generally not pay its debts as they become due or not be able to pay its debts as they become due; or admit in writing its inability to pay its debts as they become due; or shall take any corporate action to authorize any of the foregoing; or (i) an involuntary case or other proceeding shall be commenced under the laws of any jurisdiction against the Company or any Subsidiary, seeking liquidation, reorganization, or other relief with respect to it or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect, or seeking the appointment of a trustee, receiver, custodian, or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 30 days or a trustee, receiver, custodian or other official shall be appointed in such involuntary case; or (j) a judgment or order for the payment of money in excess of $250,000 shall be rendered against the Company and such judgment or order shall continue unsatisfied and unstayed for a period of thirty (30) days; or (k) any judgment, writ, attachment, execution, injunction, or similar process in excess of $250,000 shall be issued or levied against the property of the Company, and such process shall not be released, vacated, or fully bonded within thirty (30) days after its issue or levy; or (l) any Reportable Event, which the Bank determines in good faith constitutes grounds for the termination of any Plan or Plans by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer or liquidate any Plan or Plans shall have occurred and be continuing thirty (30) days after written notice of such determination by the Bank shall have been given to the Company, any of its Subsidiaries or any member of the Controlled Group, or (ii) a decision shall have been 36 made by the Company, any of its Subsidiaries or any member of the Controlled Group to terminate, file a notice of termination with respect to, or withdraw from, any Plan or Plans, or (iii) a trustee shall be appointed by the appropriate United States District Court to administer any Plan or Plans, or (iv) the PBGC shall institute proceedings to terminate any Plan or Plans or to appoint a trustee to administer any Plan or Plans, or (v) the receipt of a notice of withdrawal of liability pursuant to Section 4202 of ERISA, and in case of the occurrence of any event described in the preceding clauses (i), (ii), (iii), (iv) and (v) of this subsection, the aggregate amount of the Company's liability to a Plan or to the Pension Benefit Guaranty Corporation under Sections 4062, 4063, 4064, 4201 or 4204 of ERISA as determined in good faith by the Bank could exceed 5% of the Company's net worth, and such liability of the Company is not covered in full, for the benefit of the Company, by insurance; (m) a Determination of Taxability (as defined in the Second Lease - Purchase Agreement) shall occur; THEN, or at any time thereafter, the Bank may take such action in its discretion as is authorized under Sections 8.02 and 8.03 below. Section 8.02 Remedies. When the Company is in default under Section 8.01(h) or 8.01(i) above, any and all Obligations then owing or which will become owing upon a drawing of the full amount available under the Letter of Credit shall automatically become due and payable, and in the case of any other default under Section 8.01, the Bank may, at its option, in addition to all other rights, powers and privileges the Bank may have, by written notice to the Company and the Trustee exercise any or all of the following remedies, which remedies shall not be exclusive: (a) require the Trustee to declare the Certificates due and payable as provided in the Second Trust Agreement, (b) declare the amount for which the Letter of Credit was issued and any other Obligations then owing or which will become owing as a result of the Certificates being declared due and payable as provided in the Second Trust Agreement immediately due and payable without further demand or notice and the Company shall pay to the Bank such amounts, and (c) take such action as the Bank in its sole discretion deems necessary or desirable to remedy any default, which action shall not be deemed a waiver of such default or any prior or subsequent default. Section 8.03 Additional Remedies. In addition to the remedies set forth in Section 8.02, upon the occurrence of any Event of Default, the Bank may exercise any right or remedy which it has under this Agreement, any Related Document or otherwise available at law or in equity or by statute, and all of the Bank's rights and remedies will be cumulative. ARTICLE IX Covenants Relating to Construction 37 Section 9.01 Indemnity. The Company agrees to indemnify and hold the Bank harmless from and against all liabilities, claims, damages, costs and expenses (including but not limited to reasonable legal fees and disbursements) arising out of or resulting from any defective workmanship or materials occurring in the construction of the Project. Upon demand by the Bank, the Company will defend any action or proceeding brought against the Bank alleging any defective workmanship or materials, or the Bank may elect to conduct its own defense at the expense of the Company. ARTICLE X Miscellaneous Section 10.01 Amendment and Waiver. This Agreement and each provision hereof may be amended, changed, waived, discharged or terminated only by an instrument in writing signed by the parties hereto provided, however the signature of the Trustee shall be required only with respect to those amendments, waivers, discharges or terminations that expand or otherwise modify the nature of its obligations hereunder. A Default or Event of Default may be waived by the Bank and any such Default or Event of Default which has been waived in writing by the Bank shall not be deemed to be continuing during the period (including any retroactive period) for which the waiver is effective. Section 10.02 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. Section 10.03 Notices. Except as provided herein, all notices, requests, demands or other communications to or upon the respective parties hereto shall be deemed to have been given or made when deposited in the mail, postage prepaid, or, in the case of telex or telegraphic notice, when delivered to the telex or telegraphic company, or in the case of telex notice sent over a telex owned or operated by a party hereto, when sent, addressed to the Company or to the Bank, as the case may be, at their respective addresses shown opposite their signatures hereto or at such other address as either of such parties may hereafter specify in writing to the other, except that any communication with respect to a change of address shall be deemed to be given or made when received by the party to whom such communication was sent. Section 10.04 Waiver. No failure or delay on the part of the Bank in exercising any right, power or privilege under this Agreement, the Letter of Credit, or any of the Related Documents and no course of dealing between the Company or any other Person and the Bank shall operate as a waiver hereof or thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise of any other right, power or privilege. No notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances or Constitute a waiver of the right of the Bank to any other or further action in any circumstances without notice or demand. 38 Section 10.05 Descriptive Headings, Etc. The descriptive headings of the several Articles and Sections of this Agreement are inserted for convenience only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. Section 10.06 Benefit of Agreement. This Agreement shall be binding upon each party hereto, its successors and assigns, except that the Company may not transfer or assign any or all of its rights or obligations hereunder without the prior written consent of the Bank. This Agreement is made and entered into solely for the protection and benefit of the Bank the Trustee and the Company and their successors and assigns and no other Person shall have any right of action under this Agreement. Section 10.07 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which taken together shall constitute one agreement, and any party hereto may execute this Agreement by signing any such counterpart. Section 10.08 Actions. The Bank shall have the right, but not the obligation, to commence, appear in and defend any action or proceeding which might affect its security or its rights, duties or liabilities relating to the Obligations, the Project, this Agreement, the Related Documents or the Letter of Credit. The Company will pay promptly on demand all of the Bank's reasonable out-of-pocket costs, expenses and legal fees and disbursements incurred in those actions or proceedings. Section 10.09 Participations. The Bank shall have the right at any time to sell participations in the Letter of Credit and this Agreement to any other Persons without the consent of the Company or the Trustee, provided that no such action by the Bank shall relieve the Bank of its obligations hereunder. The Bank may disclose to any participants or prospective participants any information or other data or material in the Bank's possession relating to this Agreement, any Related Document, the Company and the Project, without the consent of the Company. Section 10.10 Severability. Any provision of this Agreement which is illegal, invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such illegality, invalidity or enforceability without invalidating the remaining provisions hereof or affecting the legality, validity or enforceability of such provision in any other jurisdiction. The parties hereto agree to negotiate in good faith to replace any illegal, invalid or unenforceable provision of this Agreement with a legal, valid and enforceable provision that, to the extent possible, will preserve the economic bargain of this Agreement or otherwise to amend this Agreement to achieve such result. Section 10.11 Confidentiality. The Bank agrees to use reasonable precautions to keep confidential, in accordance with its customary procedures for handling confidential information of the same nature, all non-public information supplied by the Company, its Subsidiaries or Joint Ventures pursuant to the Agreement which (a) is identified as non-public at the time it is delivered to the Bank or (b) constitutes any financial statement, financial projections or forecasts, 39 budget, compliance certificate, audit report, management letter or accountants' certification delivered hereunder or any contract or agreement not previously filed, or filed on a confidential basis, with any governmental authority (collectively, the "Confidential Information"), provided that nothing herein shall limit the disclosure of any such Confidential Information (i) to the extent required by statute, rule, regulation or judicial process, (ii) on a confidential basis, to the counsel to the Bank, (iii) to bank examiners, auditors or accountants and any analogous counterpart thereof, (iv) in connection with litigation to which the Bank is a party, or (v) to any participant or prospective participant in the Letter of Credit so long as such participant or prospective participant agrees to keep such Confidential Information confidential on substantially the same basis as provided in this Section. 40 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective duly authorized officers as of the date first above written. ADDRESS: SOUTHER CALIFORNIA WATER COMPANY 630 East Foothill Boulevard San Dimas, CA 91773 By___________________________ Attn: McClellan Harris III Its CFO, VP-Finance, Treasurer and Corporate Secretary ADDRESS: THE BANK OF NOVA SCOTIA 580 California Street Suite 2100 By___________________________ San Francisco, CA 94104 Its____________________________ 41 EXHIBIT A IRREVOCABLE LETTER OF CREDIT THE BANK OF NOVA SCOTIA 580 California Street San Francisco, California 94104 Date: November 14,1997 LETTER OF CREDIT No.____ First Trust of California National Association 550 South Hope Street, Suite 500 Los Angeles, California 90071 Attention:__________________ Dear Sirs: You, as Trustee under the Second Trust Agreement dated as of November 1, 1984, as amended and modified (the "Second Trust Agreement") among Central Bank Leasing (the "Leasing Firm"), Three Valleys Municipal Water District (the "District"), Southern California Water Company (the "Company"), and you, pursuant to which U.S. $6,000,000 (Six Million Dollars) in aggregate principal amount of Certificates of participation (Variable Rate Obligation) (Miramar Water Treatment, Water Transmission and Hydroelectric Generating Facilities) (the "Certificates") are being issued, are hereby irrevocably authorized to draw on Irrevocable Letter of Credit No. ______ issued by The Bank of Nova Scotia (the "Bank"), for the account of the Company available by your drafts at sight upon the terms and conditions hereinafter set forth, an aggregate amount not exceeding U.S. $6,296,000 (Six Million Two Hundred and Ninety-Six Thousand Dollars) (the "Stated Amount"). This Letter of Credit is effective immediately and expires on November 15, 2000 (the "Expiration Date"). The amount available, in the aggregate, under Principal Drawings (as hereinafter defined) and principal purchase Drawings (as hereinafter defined) shall not exceed $6,000,000 (Six 42 Million Dollars), as such amount may be decreased and/or increased as hereinafter provided. The amount available, in the aggregate, under Interest Drawings (as hereinafter defined) and Interest purchase Drawings (as hereinafter defined) shall not exceed $296,000 (Two Hundred and Ninety-Six Thousand Dollars), as such amount may be decreased and/or increased as hereinafter provided. Funds under this Letter of Credit are available to you against your sight drafts drawn on us, stating on their face: "Drawn under Irrevocable Letter of Credit No. ______ issued by The Bank of Nova Scotia, 580 California Street, San Francisco, California." (A) If the drawing is being made with respect to any payment of principal of the Certificates ("Principal Drawing"), the sight draft shall be accompanied by your written certificate signed by you in the form of Exhibit A attached hereto appropriately completed. (B) If the drawing is being made with respect to a payment of interest on the Certificates (an "Interest Drawing"), the sight draft shall be accompanied by your written certificate signed by you in the form of Exhibit B hereto appropriately completed. (C) If the drawing is being made in accordance with Sections 3.02(e), 3.11(a)(4) or 3.12 of the Second Trust Agreement with respect to payment of the portion of the purchase price of Certificates delivered to the Co-Paying Agent appointed pursuant to the Second Trust Agreement (the "Co-Paying Agent") equal to the principal amount of such Certificates (a "Principal Purchase Drawing"), the sight draft shall be accompanied by your written certificate signed by you in the form of Exhibit C attached hereto appropriately completed. In connection with any principal Purchase Drawing, Certificates in aggregate principal amount equal to the amount of your sight draft(s) presented in respect of any such drawing shall be delivered by the Co-Paying Agent to the Bank as promptly as practicable, and in any event within five (5) Business Days (as hereinafter defined), after such drawing. (D) If the drawing is being made with respect to payment of the portion of the purchase price of Certificates referred to in paragraph (C) above equal to the amount of accrued and unpaid interest on such Certificates to the date of purchase of such Certificates (an "Interest Purchase Drawing"), the sight draft shall be accompanied by your written certificate signed by you in the form of Exhibit D attached hereto appropriately completed and such Interest purchase Drawing shall be made simultaneously with the related principal Purchase Drawing. Presentation of such draft(s), Certificate(s) and certificate(s) shall be made at our office located at 580 California Street, San Francisco, California 94104, Attention: Letter of Credit Department, or at any other office in the State of California which may be designated by us by written notice delivered to you. Drafts and certificates may be presented to the Bank in the forms of a tested 43 telex (telex no. 00340602), with original executed drafts and certificates to follow immediately thereafter. We hereby agree that all drafts drawn under and in compliance with the terms of this Letter of Credit will be duly honored by us upon delivery of the certificate(s) as specified if presented at such office on or before the Expiration Date hereof provided that in each case the documents presented in connection with a drawing conform to the terms and conditions hereof, the following time schedule shall prevail: (A) If a Principal Drawing or an Interest Drawing is made by you hereunder at or prior to 2:00 P.M., San Francisco time, on a Business Day (as hereinafter defined), payment shall be made to you or to your order of the amount specified, in immediately available funds, at or prior to 9:00 A.M. San Francisco time, on the next succeeding Business Day. (B) If a Principal Drawing or an Interest Drawing is made by you hereunder after 2:00 P.M., San Francisco time, on a Business Day, payment shall be made to you or to your order of the amount specified, in immediately available funds, at or prior to 9:00 A.M. San Francisco time, on the second succeeding Business Day. (C) If a principal purchase Drawing or an Interest purchase Drawing is made by you hereunder at or prior to 9:00 AM., San Francisco time on a Business Day, payment shall be made to you or to your order of the amount specified, in immediately available funds, at or prior to 12:00 noon, San Francisco time on such Business Day. (D) If a principal Purchase Drawing or an Interest Purchase Drawing is made by you hereunder after 9:00 AM., San Francisco time, on a Business Day, payment shall be made to you or to your order of the amount specified, in immediately available funds, at or prior to 12:00 noon, San Francisco time, on the next succeeding Business Day. If requested by you, payment under this Letter of Credit may be made by deposit of immediately available funds into a designated account, that you maintain with us. As used herein, "Business Day" shall mean a day on which banks located in each of the cities in which, (i) the principal office of the Trustee is located (ii) the principal office of the Paying Agent (as defined in the Second Trust Agreement) is located and (iii) the Bank is located are not required or authorized to remain closed and on which the New York Stock Exchange is not closed. The amount available under this Letter of Credit and the amount available, in the aggregate, under principal Drawings and principal purchase Drawings shall be decreased upon, and to the extent of, each principal Drawing and principal Purchase Drawing and shall also be decreased upon and to the extent of any prepayment of the principal amount of Certificates for which no drawing under this Letter of Credit is required pursuant to Sections 3.11 (a) (1), 3.11 (a) (2), 3.11 (a) (6) or 3.11 (a) (7) of the Second Trust Agreement. The amount available under this Letter of Credit and the amount available, in the aggregate, under Interest Drawings and Interest purchase Drawings shall be decreased upon, and to the extent of, each Interest Drawing, 44 and shall be decreased by an amount equal to one hundred and twenty (120) days' interest on each Certificate purchased pursuant to a Principal purchase Drawing and on each Certificate prepaid for which no drawing under the Letter of Credit is required. Upon receipt by the Bank of reimbursement in full by the Company of any amounts due the Bank because of an Interest Drawing, the amount available under this Letter of Credit and the amount available, in the aggregate, under Interest Drawings and Interest Purchase Drawings shall be increased by the amount of the reimbursed Interest Drawing. The Bank shall have the right at any time during the ten Business Days following the day on which a payment in respect of an Interest Drawing is made to increase the amount available, in the aggregate, under Interest Drawings and Interest Purchase Drawings by the amount of the Interest Drawing or not to increase the amount so available if at such time such reimbursement has not been made or any other Event of Default (as defined in the Reimbursement Agreement, dated as of October 3, 1997, among the Company and the Bank) shall have occurred and then be continuing. The Bank shall immediately notify the Company and the Trustee by telephone (confirmed in writing) if the Bank elects to increase its obligation under this Letter of Credit pursuant to the immediately preceding sentence. If no such notice is given by the Bank prior to the close of business on the tenth Business Day following a date on which a payment with respect to an Interest Drawing is made, the amount available under this Letter of Credit shall be automatically increased as hereinabove provided whether or not the Bank has received reimbursement by the Company of the amounts due in respect of such payment. If the Bank releases Certificates to the Remarketing Agent pursuant to Section S of the pledge Agreement, dated as of October 3, 1997(the "Pledge Agreement") between the Company and the Bank in connection with a remarketing of such Certificates and the Bank receives payment in an amount equal to the principal amount of, plus accrued and unpaid interest on, such Certificates, (i) the amount available under this Letter of Credit will thereupon, and without further action by the Bank, be increased by an amount equal to the sum of the principal amount of such Certificates so released, and an amount equal to one hundred and twenty (120) days' interest on such Certificates, (ii) the amount available, in the aggregate, for Principal Drawings and Principal Purchase Drawings shall be increased by the principal amount of the Certificates so released; and (iii) the amount available, in the aggregate, for Interest Drawings and Interest Purchase Drawings shall be increased by an amount equal to one hundred and twenty (120) days' interest on the Certificates so released. Only you as Trustee may make a drawing under this Letter of Credit. You may not make any drawing with respect to any Certificate purchased by the Company pursuant to Sections 3.02(e), 3.11(a) (4) or 3.12 of the Second Trust Agreement and not released pursuant to Section 5 of the Pledge Agreement, and the Bank shall not honor any such drawing. Upon the payment to you or to your order of the amount specified in a sight draft drawn hereunder, we shall be fully discharged on our obligation under this Letter of Credit with respect to such sight draft, and we shall not thereafter be obligated to make any further payments under this Letter of Credit in respect of such sight draft to you or any other person who may have made to you or makes to you a demand for payment of principal of, purchase price of, or interest on, any Certificate. 45 If the amount available under this Letter of Credit has been decreased as a result of a Principal Drawing or Principal Drawings, the Bank shall have the right to require the Trustee to surrender this Letter of Credit to the Bank and to accept a substitute Letter of Credit which has a Stated Amount equal to the Stated Amount of this Letter of Credit less (i) the amount of such Principal Drawing or principal Drawings and (ii) an amount equal to one hundred and twenty days' interest on such Principal Drawing or Principal Drawings and which otherwise contains terms identical to this Letter of Credit. Upon the earlier of (i) the making by you of the final drawing available to be made hereunder (except a Principal Purchase Drawing with respect to which the Remarketing Agent is permitted to offer for sale pursuant to the Second Trust Agreement the Certificates purchased with the proceeds of such drawing), (ii) our receipt of a certificate signed by your duly authorized officer stating that: "(a) the conditions precedent to the acceptance of an Alternate Credit Facility (as defined in the Second Trust Agreement) set forth in the Second Trust Agreement have been satisfied, (b) the Trustee has accepted the Alternate Credit Facility and (c) upon receipt by The Bank of Nova Scotia of this certificate, Irrevocable Letter of Credit No. ______ issued by The Bank of Nova Scotia shall terminate.", (iii) 3:00 P.M. at San Francisco time, on the effective date of the Fixed Interest Rate (as defined in the Second Trust Agreement), such effective date to be specified in a written direction from the Company or the Trustee to the Bank pursuant to Section 3.03 of the Second Trust Agreement and (iv) the Expiration Date hereof, this Letter of Credit shall automatically terminate and be delivered to the Bank for cancellation. This Letter of Credit is subject to the Uniform Customs and practices for Documentary Credits (1993 Revision), International Chamber of Commerce, publication No. 500 (the "Uniform Customs"). As to matters not governed by the Uniform Customs, this Letter of Credit shall be governed by and construed in accordance with the laws of the State of California. Communications with respect to this Letter of Credit shall be in writing and shall be addressed to The Bank of Nova Scotia, San Francisco Agency, 580 California Street, San Francisco, California 94104, Attention: Letter of Credit Department, specifically referring thereon to "Irrevocable Letter of Credit No. ______ issued by The Bank of Nova Scotia, 580 California Street, San Francisco, California 94104." This Letter of Credit may be transferred more than once, but only in the amount of the full unutilized balance hereof and only after receipt by the Bank of a $1,000 transfer fee, to any single transferee who has succeeded First Trust of California National Association as trustee under the Second Trust Agreement. Transfers may be effected only through ourselves and only upon presentation to us of a duly executed instrument of transfer in the form attached hereto as Exhibit E. Any transfer of this Letter of Credit as aforesaid must be endorsed by us on the reverse hereof and may not change the place of presentation from our Letter of Credit office in San Francisco, California. This Letter of Credit sets forth in full our undertaking, and such undertaking shall not in any way be modified, amended, amplified or limited by reference to any document, instrument or agreement referred to herein (including, without limitation, the Certificates), except only the certificate(s) and the sight draft(s) referred to herein; and any such reference shall not be deemed 46 to incorporate herein by reference any document, instrument or agreement except for such certificate(s) and such sight draft (5). Very truly yours, THE BANK OF NOVA SCOTIA By_________________________________ Its_________________________________ By_________________________________ Its_________________________________ 47 EXHIBIT A CERTIFICATE FOR PRINCIPAL DRAWING The undersigned, [Insert Name of Beneficiary) (the "Trustee") hereby certifies to The Bank of Nova Scotia (the "Bank"), with reference to Irrevocable Letter of Credit No. ______ (the "Letter of Credit"; any capitalized term used herein and not defined shall have its respective meaning as set forth in the Letter of Credit) issued by the Bank in favor of the Trustee, that: (1) The Trustee is the Trustee under the Second Trust Agreement for the holders of the Certificates. (2) The Trustee is making a drawing under the Letter of Credit with respect to the payment of the principal amount of all or a portion of the Certificates by reason of prepayment, acceleration or redemption (in whole or in part) pursuant to Section [Insert 3.11(a) (2), 3.11(a) (3), or 13.02] of the Second Trust Agreement or their maturity. (3) The amount of principal of the Certificates which is due and payable is $ [Insert Amount], and the Trustee has not heretofore made a drawing which has been honored under the Letter of Credit for such amount or any portion thereof in respect of such principal payment. The amount of the sight draft accompanying this certificate does not exceed such amount. (4) The amount of the sight draft accompanying this Certificate does not exceed the amount available in the aggregate for Principal Drawings and Principal Purchase Drawings under the Letter of Credit. (5) The amount of the sight draft accompanying this certificate was computed in accordance with the terms and conditions of the Certificates and the Second Trust Agreement. IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the __ day of ____________________ Very truly yours, ----------------------------------- [Insert Name), as Trustee ----------------------------------- By [Insert Name and Title of Authorized Officer] 48 EXHIBIT B CERTIFICATE FOR INTEREST DRAWING The undersigned, [Insert Name of Beneficiary] (the "Trustee") hereby certifies to The Bank of Nova Scotia (the "Bank"), with reference to Irrevocable Letter of Credit No. ______ (the "Letter of Credit"; any capitalized term used herein and not defined shall have its respective meaning as set forth in the Letter of Credit) issued by the Bank in favor of the Trustee, that: (1) The Trustee is the Trustee under the Second Trust Agreement for the holders of the Certificates. (2) The Trustee is making a drawing in the amount of $[Insert Amount] under the Letter of Credit with respect to the payment of interest on the Certificates. (3) Interest accrued on the Certificates on or prior to the Expiration Date is due and payable, and the Trustee has not heretofore made a drawing which has been honored under the Letter of Credit for such amount or any portion thereof in respect of such interest payment. The amount of the sight draft accompanying this certificate does not exceed the amount of interest on the Certificates that is due and payable. (4) The amount of the sight draft accompanying this certificate does not exceed the amount available in the aggregate for Interest Drawings and Interest Purchase Drawings under the Letter of Credit. (5) The amount of the sight draft accompanying this certificate was computed in accordance with the terms and conditions of the Certificates and the Second Trust Agreement. IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the __ day of _________________, Very truly yours, ----------------------------------- [Insert Name], as Trustee By_________________________________ [Insert Name and Title of Authorized Officer] 49 EXHIBIT C CERTIFICATE FOR PRINCIPAL PURCHASE DRAWING The undersigned, [Insert Name of Beneficiary] (the "Trustee") hereby certifies to The Bank of Nova Scotia (the "Bank"), with reference to Irrevocable Letter of Credit No. _____ (the "Letter of Credit"; any capitalized term used herein and not defined shall have its respective meaning as set forth in the Letter of Credit) issued by the Bank in favor of the Trustee, that: (1) The Trustee is the Trustee under the Second Trust Agreement for the holders of the Certificates. (2) The Trustee is making a drawing under the Letter of Credit at the written request of [Insert Name of CoPaying Agent] in its capacity as Co-Paying to pay the portion of the purchase price of Certificates delivered to the Co-Paying Agent pursuant to Section [Insert 3.02(e), 3.11(a) (4) or 3.12] of the Second Trust Agreement equal to the principal amount of such Certificates, and the Co-Paying Agent has agreed to deliver to the Bank within 5 Business Days a principal amount of Certificates equal to the amount of the sight draft accompanying this certificate. (3) The principal amount of the purchased Certificates with respect to which this drawing is made is $[Insert Amount], and the Trustee has not heretofore made a drawing which has been honored under the Letter of Credit for the principal amount, or any portion thereof, of the Certificates with respect to such purchase. The amount of the sight draft accompanying this certificate does not exceed such amount. (4) The amount of the sight draft accompanying this certificate does not exceed the amount available in the aggregate for Principal Drawings and Principal Purchase Drawings under the Letter of Credit. (5) The Trustee hereby directs you to make payment of $[Insert Amount, not Exceeding Amount of Sight Draft] of the sight draft accompanying this Certificate to account no. ________ of said Co-Paying Agent at _____________ and the balance thereof (if any) to the Trustee. IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the __ day of ______ Very truly yours, ----------------------------------- [Insert Name], as Trustee By_________________________________ [Insert Name and Title of Authorized Officer] 50 EXHIBIT D CERTIFICATE FOR INTEREST PURCHASE DRAWING The undersigned1 [Insert Name of Beneficiary] (the "Trustee") hereby certifies to The Bank of Nova Scotia (the "Bank"), with reference to Irrevocable Letter of Credit No. _____ (the "Letter of Credit"; any capitalized term used herein and not defined shall have its respective meaning as set forth in the Letter of Credit) issued by the Bank in favor of the Trustee, that: (1) The Trustee is the Trustee under the Second Trust Agreement for the holders of the certificates. (2) The Trustee is making a drawing under the Letter of Credit at the written request of [Insert Name of Co-Paying Agent] in its capacity as Co-Paying Agent, to pay the portion of the purchase price of Certificates delivered to the Co-Paying Agent pursuant to Section [Insert 3.02(e), 3.11(a) (4) or 3.12] of the Second Trust Agreement equal to the amount of accrued and unpaid interest on such Certificates to the date of purchase thereof. (3) The amount of accrued and unpaid interest on the purchased Certificates with respect to which this drawing is made is $[Insert Amount], and the Trustee has not heretofore made a drawing which has been honored under this Letter of Credit for the accrued and unpaid interest, or any portion, thereof on the purchased Certificates with respect to such purchase. The amount of the sight draft accompanying this certificate does not exceed the amount of interest accrued and unpaid on such Certificates to the date of purchase thereof. (4) The amount of the sight draft accompanying this certificate does not exceed the amount available in the aggregate for Interest Drawings and Interest purchase Drawings under the Letter of Credit. (5) The amount of the sight draft accompanying this certificate was computed in accordance with the terms and conditions of the Certificates and the Second Trust Agreement. The Trustee hereby directs you to make payment of $[Insert Amount not Exceeding Amount of Sight Draft] of the sight draft accompanying this certificate to account no. of said Co-Paying Agent at _____________ balance thereof (if any) to the Trustee. 51 IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the __day of ____________ ____. Very truly yours, ------------------------------------ [Insert Name], as Trustee By_________________________________ [Insert Name and Title of Authorized Officer] 52 EXHIBIT E The Bank of Nova Scotia San Francisco Agency 580 California Street San Francisco, California 94104 Re: Irrevocable Letter of Credit No. ______ issued by The Bank of Nova Scotia Gentlemen: For value received, the undersigned beneficiary hereby irrevocably transfers to: (Name of Transferee) (Address) all rights of the undersigned beneficiary to draw under the above Letter of Credit in its entirety. By this transfer, all rights of the undersigned beneficiary in such Letter of Credit are transferred to the transferee, and the transferee shall have the sole rights as beneficiary thereof, including sole rights relating to any amendments, whether increases or extensions or other amendments, and whether now existing or hereafter made. The Letter of Credit may hereafter be amended, extended or increased without necessity of any consent of or notice to the undersigned beneficiary, and you will give notice thereof directly to the transferee. The advice of such Letter of Credit is returned herewith, and we ask you to endorse the transfer on the reverse thereof, and forward it direct to the transferee with your customary notice of transfer. SIGNATURE AUTHENTICATED Yours very truly, - ----------------------------- ----------------------------- (Bank). Signature of Beneficiary 53 EXHIBIT B PLEDGE AND SECURITY AGREEMENT, dated as of November 14, 1997, made by THE SOUTHERN CALIFORNIA WATER COMPANY, a California corporation (the "Pledgor"), in favor of THE BANK OF NOVA SCOTIA (the "Bank"), as contemplated by the Reimbursement Agreement dated as of October 3, 1997, among the Pledgor and the Bank (hereinafter, as the same may from time to time be amended or supplemented, called the "Agreement"): W I T N E S S E T H: WHEREAS, pursuant to that certain Second Trust Agreement dated as of November 1, 1984, as amended and modified (the "Second Trust Agreement") among the Three Valleys Municipal Water District (the "District"), Central Bank Leasing (the "Leasing Firm"), the Pledgor, and Bank of America National Trust and Savings Association (the "Trustee"), $6,000,000 in a~gregate principal amount of Certificates of Participation (Variable Rate Obligation) (Miramar Water Treatment, Water Transmission and Hydroelectric Generating Facilities) (the "Certificates") are to be issued. WHEREAS, the Second Trust Agreement requires that Certificates delivered by the holders thereof to the Co-Paying Agent pursuant to the Second Trust Agreement be purchased under certain circumstances with the proceeds of Principal purchase Drawings and Interest Purchase Drawings under the Letter of Credit issued by the Bank under the Agreement (the "Remarketing Certificate(s)"); WHEREAS, the Pledgor will be the owner of the Remarketing Certificate(s); and WHEREAS, it is a condition precedent to the obligation of the Bank to enter into the Agreement and to issue the Letter of Credit that the Pledgor shall have executed and delivered this pledge Agreement to the Bank; NOW, THEREFORE, in consideration of the premises and in order to induce the Bank to enter into the Agreement and issue the Letter of Credit thereunder and for other good and valuable consideration, receipt of which is hereby acknowledged, the Pledgor hereby agrees with the Bank as follows: 1. Defined Terms. Unless otherwise defined herein, terms defined in the Agreement shall have such defined meanings when used herein. 2. Pledge. The Pledgor hereby pledges, assigns, hypothecates, transfers, and delivers to the Bank all its right, title and interest in and to the Remarketing Certificate(s) and hereby grants tot he Bank a first lien on, and security interest in, the pledgor's right, title and interest in and to the Remarketing Certificate(s) and in all proceeds thereof, as collateral security for the prompt 54 and complete payment when due of all amounts due in respect of the reimbursement obligation of the Pledgor set forth in Sections 2.02(a) and 2.02(b) of the Agreement and interest on such amounts as set forth mt he Agreement (all the foregoing being hereinafter called the "Obligations") 3. Registration of and Interest on the Remarketing Certificate(s) - Upon delivery to the Bank pursuant to Section 9.14(b) of the Second Trust Agreement, Remarketing Certificate(s) shall be registered in the name of the pledgor and shall be duly endorsed for transfer by the pledgor in blank or the Pledgor shall have delivered to the Bank appropriate instruments of transfer duly executed in blank by the pledgor. The Bank may, but shall not be obligated to, register Remarketing Certificate(s) in its name or that of its agent at any time or from time to time. Except after the occurrence of an Event of Default and while the same is continuing, and except after any portion of the Obligations has been declared or has otherwise become due and payable and has not been paid, the Pledgor shall be entitled to receive and retain interest payments in respect of the Remarketing Certificate(s) and the Bank shall promptly pay over to or to the order of the Pledgor any interest received by the Bank and deliver to or to the order of the Pledgor any due-bill-checks received by the Bank pursuant to the Second Trust Agreement. If an Event of Default shall be cured or waived in writing by the Bank before the Obligations shall become or be declared to be due and payable, the Bank shall promptly thereafter pay over or deliver to the Pledgor all interest and due-bill-checks received by the Bank after the occurrence of such Event of Default and prior to such cure or waiver. 4. Collateral. All property at any time pledged with the Bank hereunder (whether describe herein or not) and all income therefrom and proceeds thereof, are herein collectively sometimes called the "Collateral." 5. Release of Remarketing Certificate(s). If the Pledgor or the Co-Paying Agent or the Remarketing Agent makes or cause to be made to the Bank a payment of the Pledgor's reimbursement obligation under Section 2.02(a) of the Agreement or a prepayment in respect of the Pledgor's reimbursement obligation under Section 2.02(b) of the Agreement in accordance with Section 2.10 thereof, the Bank agrees to release from the lien of this Pledge and Security Agreement and deliver to the Pledgor (or its order) or the Co-Paying Agent (if such prepayment is made by the Co-Paying Agent on behalf of the Pledgor) Remarketing Certificate(s), of which the principal amount plus accrued interest is equal to the amount of the prepayment so made. 6. Rights of the Bank. The Bank shall not be liable for failure to collect or realize upon the Obligations or any collateral security or guarantee therefor, or any part thereof, or for any delay in so doing nor shall it be under any obligation to take any action whatsoever with regard thereto. If an Event of Default has occurred and is continuing, the Bank may thereafter without notice exercise all rights, privileges or options pertaining to any Remarketing Certificate(s) as if it were the absolute owner thereof (except, before any portion of the Obligations has been declared or has otherwise become due and payable and has not been paid, the right to sell the Remarketing Certificates), upon such terms and conditions as it may determine, all without liability except to account for property actually received by it, but the Bank shall have no duty to 55 exercise any of the aforesaid rights, privileges or~options and shall not be responsible for any failure to do so or delay in so doing. 7. Remedies. In the event that any portion of the Obligations has been declared or has otherwise become due and payable, and has not been paid, the Bank, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon the Pledgor or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived), may forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase, contract to sell or otherwise dispose of and deliver said Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of the Bank's offices or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk, with the right to the Bank upon any such sale or sales, public or private, to purchase the whole or any part of said Collateral so sold, free of any right or equity of redemption in the Pledgor, which right or equity is hereby expressly waived or released. The Bank shall apply the net proceeds of any collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care, safekeeping orotherwise of any and all of the Collateral or in any way relating to the rights of the Bank hereunder, including reasonable attorney's fees and legal expenses, to the payment in whole or in part of the Obligations in such order as the Bank may elect, and only after such application of such net proceeds and after the payment by the Bank of any other amount required by any provision of law, including, without limitation, Section 9-504 (a) (c) of the Uniform Commercial Code of the State of California need the Bank account for the surplus, if any, to the Pledgor. The Pledgor agrees that the Bank need not give more than ten days' notice of the time and place of any public sale or of the time after which a private sale or other intended disposition. In addition to the rights and remedies granted to it herein and in any other instrument or agreement securing, evidencing or relating to any of the Obligations, the Bank shall have all the rights and remedies of a secured party under the Uniform Commercial Code of the State of California. 8. ReDresentations. Warranties and Certain Covenants of the Pledgor. The Pledgor represents and warrants that (a) on the date of delivery to the Bank of any Remarketing Certificate(s) described herein, neither the Remarketing Agent, Co-Paying Agent nor the Trustee will, in its capacity as Remarketing Agent, Co-Paying Agent or Trustee, as the case may be, have any right, title or interest in or to the Remarketing Certificate(s); (b) it has, and on the date of delivery to the Bank of any Remarketing Certificate(s) will have, full power, authority and legal right to pledge all of its right, title and interest in and to the Remarketing Certificate(s) pursuant to this Pledge and Security Agreement; (c) this Pledge and Security Agreement has been duly authorized, executed and delivered by the Pledgor and constitutes a legal, valid and binding obligation of the Pledgor enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, or other laws relating to or limiting creditors' rights generally and subject to usual equity principles in the event that equitable remedies are sought; (d) no consent of any other party (including, without limitation, stockholders or creditors of the Pledgor) and no consent, license, permit, approval or 56 authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority, domestic or foreign, is required to be obtained by the Pledgor in connection with the execution, delivery or performance of this Pledge and Security Agreement; (e) the execution, delivery and performance of this Pledge and Security Agreement will not violate any provision of any law or regulation presently in effect having applicability to the Pledgor or of any order, judgment, writ, award or decree of any court, arbitrator or governmental authority, domestic or foreign, or of the certificate of incorporation or by-laws of the Pledgor or of any securities issued by the Pledgor, or of any material mortgage, indenture lease contract, or other agreement, instrument or undertaking to which the Pledgor is a party or which is binding upon the Pledgor or upon any of the Pledgor's assets and will not result in the creation or imposition of any lien, charge or encumbrance on or security interest in any of the assets of the Pledgor, except as contemplated by this Pledge and Security Agreement; (f) there is no pending action or proceeding before any court, governmental agency or arbitrator against or directly involving the Pledgor and, to the best of the Pledgor's knowledge, there is no threatened action or proceeding affecting the Pledgor before any court, governmental agency or arbitrator which, in any case, is likely (to the extent not covered by insurance) materially to impair the Pledgor's ability to perform its obligations under this Pledge and Security Agreement; and (g) the pledge, assignment and delivery of Remarketing Certificate(s) pursuant to this Pledge and Security Agreement will create a valid first lien on and a first perfected security interest in, all right, title and interest of the Pledgor in and to such Remarketing Certificate(s), and the proceeds thereof, subject to no prior pledge, lien, mortgage, hypothecation, security interest, charge, option or encumbrance created by the Pledgor or to any agreement purporting to grant to any third party a security interest in the property or assets of the Pledgor which would include the Remarketing Certificate (5). The Pledgor covenants and agrees that upon delivery of any Remarketing Certificate to the Bank and payment of the proceeds of the related Principal Purchase Drawing or Interest Purchase Drawing if any, to or for the account of the holder who delivered such Certificate to the Co-Paying Agent or the Trustee pursuant to Section 3.02(e) of the Second Trust Agreement, the Pledgor will own the same free and clear of all lines, claims, encumbrances and security interests of any nature whatsoever created by the Pledgor, except for the lien and security interest provided for hereby, and the Pledgor covenants and agrees that it will defend the Bank's right, title and security interest in and to the Remarketing Certificate(s) and the proceeds thereof against the claims and demands of all persons whomsoever; and covenants and agrees that it will have like title to and right to pledge any other property at any time hereafter pledged to the Bank as Collateral hereunder and will likewise defend the Bank's right thereto and security interest therein. 9. Negative Covenant. Except for interest on and duebill-checks in respect of Remarketing Certificate(s) which the Pledgor is entitled to receive under Section 3 hereof, and except as contemplated in Section 5 hereof, the Pledgor will not, without the prior written consent of the Bank, sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Collateral, nor will it create, incur or permit to exist any pledge, lien, mortgage, hypothecation, security interest, charge, option or any other encumbrance with respect to any of the Collateral, or any interest therein, or any proceeds thereof, except for the lien and security interest provided for by this Pledge and Security Agreement and except for any of the foregoing which were not created by the Pledgor and which are being contested in good faith. 57 10. Sale of Collateral. The Pledgor agrees to do or cause to be done all such other acts and things as may be necessary to make any sale or sales of any portion or all of the Remarketing Certificate(s) contemplated by Section 7 hereof valid and binding and in compliance with any and all applicable laws, regulations, orders, writs, injunctions, decrees or awards of any and all courts, arbitrators or governmental instrumentalities, domestic or foreign, having jurisdiction over any such sale or sales, all at the Pledgor's expense. The pledgor further agrees that a breach of any of the covenants contained in this Section 10 will cause irreparable injury to the Bank, that the Bank has no adequate remedy at law in respect or such breach and, as a consequence, agrees that each and every covenant contained in this section shall be specifically enforceable against the pledgor and the Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred under the Agreement. The Pledgor further acknowledges that impossibility of ascertaining the amount of damages which would be suffered by the Bank by reason of a breach of any of such covenants and, consequently, agrees that, if the Bank shall sue for damages for breach, it shall pay, as liquidated damages and not as a penalty, against release to it of the Remarketing Certificate(s), an amount equal to the value of the Remarketing Certificate(s) on the date the Bank shall demand compliance with this Section. 11. Amendments. Modifications and Waivers with Respect to Obligations. The Pledgor hereby consents that, without the necessity of any reservation of rights against the Pledgor, and without notice to or further assent by the Pledgor, any demand for payment of any of the Obligations made by the Bank may be rescinded by the Bank and any of the Obligations continued, and the Obligations, or the liability of the Pledgor or any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered, or released by the Bank, and the Agreement or any collateral security documents of guarantees or documents in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Bank may deem advisable from time to time, and any collateral security at any time held by the Bank for the payment of the Obligations may be sold, exchanged, waived, surrendered or released, all without the necessity of any reservation of rights against the Pledgor and without notice to or further assent by the pledgor, which will remain bound hereunder, notwithstanding any such renewal, extension, modification, acceleration, compromise, amendment, supplement, termination, sale, exchange, waiver, surrender or release. The Bank shall have no obligation to protect, secure, perfect or insure any other collateral security document or property subject thereto at any time held as security for the Obligations. The pledgor waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Bank upon this Pledge and Security Agreement, and the Obligations and any of them shall conclusively be deemed to have been created, contracted or incurred in reliance upon this pledge and Security Agreement, and all dealings between the Company and the Bank shall likewise be conclusively presumed to have been had or consummated in reliance upon this pledge and Security Agreement. The Pledgor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Pledgor with respect to the Obligations. 58 12. Further Assurances. The pledgor agrees that at any time and from time to time upon the written request of the Bank, the pledgor will execute and deliver such further documents and do such further acts and things as the Bank may reasonably request in order to effect the purposes of this Pledge and Security Agreement. 13. Severability. Any provision of this Pledge and Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceabi1ity in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 14. No Waiver; cumulative Remedies. The Bank shall not by an act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder and no waiver shall be valid unless in writing, signed by the Bank, and then only to the extent herein set forth. A waiver by the Bank of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Bank would otherwise have on any future occasion. No failure to exercise nor any delay in exercising on the part of the Bank, any right, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and may be exercised singly or concurrently, and not exclusive of any rights or remedies provided by law. 15. Waivers. Amendments; Applicable Law. None of the terms or provisions of this Pledge and Security Agreement may be waived, altered, modified or amended except by an instrument in writing, duly executed by the Bank. This Pledge and Security Agreement and all obligations of the Pledgor hereunder shall be binding upon the successors and assigns of the Pledgor, and shall, together with the rights and remedies of the Bank hereunder, inure to the benefit of the Bank and its successors and assigns. This Pledge and Security Agreement shall be governed by, and be construed and interpreted in accordance with, the laws of the State of California. IN WITNESS WHEREOF, the Pledgor has caused this Pledge and Security Agreement to be duly executed and delivered by its duly authorized officer, and its corporate seal to be affixed on the day and year first above written. SOUTHERN CALIFORNIA WATER COMPANY, a California corporation By_________________________________ Its:_______________________________ 59 EXHIBIT C SECURITY AGREEMENT (Second Trust Agreement Funds) This Agreement is made as of November 14, 1997, between The BANK OF NOVA SCOTIA ("Bank") and FIRST TRUST OF CALIFORNIA, as Trustee under the Second Trust Agreement hereinafter mentioned (the "Trustee"). Unless otherwise defined herein or unless the context otherwise requires, terms defined in the Second Trust Agreement shall have the same meanings herein. Trustee has entered into a Second Trust Agreement, dated as of November 1, 1984, as amended and modified (the "Second Trust Agreement"), with Central Bank Leasing, Three Valleys Municipal Water District and Southern California Water Company (the "Company"), under which it, as Trustee, has agreed to take certain actions in the event of a drawing or drawings under the Letter of Credit. Trustee has agreed, pursuant to Sections 4.05, 4.06 and 15.02 of the Second Trust Agreement to pay or deliver to the Bank monies in the Funds specified in Sections 4.05, 4.06 and 15.02, respectively. Trustee acknowledges that, subject to the terms of the Second Trust Agreement and the Reimbursement Agreement dated as of October 3, 1997, between the Company and the Bank, the Bank has a security interest in all monies, interest payable thereon and investments held by the Trustee, as Trustee, which security interest is subordinate to the security interest granted in favor of the Trustee by the terms of the Second Trust Agreement. Insofar as the Bank's security interest in such monies, interest and investments is concerned, Trustee acknowledges that it holds such monies, interest and investments on behalf of the Bank to constitute the perfection of the Bank's security interest therein pursuant to the California Uniform Commercial Code without the necessity of filing. The Bank agrees that in the event such monies, interest and investments are paid to the Bank under the Second Trust Agreement, the Bank will indemnify and hold Trustee harmless from any liability or expenses Trustee may incur as a result of such payment, arising out of or relating to any action brought against Trustee by or on behalf of the Company, including without limitation any bankruptcy trustee thereof. The Bank shall have the right to defend any such action with counsel of the Bank's own selection, and Trustee will agree to any settlement of any such action approved by the Bank, provided that Trustee is concurrently indemnified as provided herein. This Agreement does not expand Trustee's powers, duties, or responsibilities under the Second Trust Agreement, and does not in any manner change, alter or diminish Trustee's duties 60 to the holders of the Certificates as set forth in the Second Trust Agreement, nor create any conflict with such powers, duties or responsibilities. The parties acknowledge that Trustee's primary responsibility under the Second Trust Agreement is to the holders of the Bonds. This Agreement shall be governed by and construed in accordance with the laws of the State of California, and shall be binding upon each party hereto, its successors and assigns. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute one agreement, and any party hereto may execute this Agreement by signing any such counterpart. FIRST TRUST OF CALIFORNIA, as Trustee By ----------------------------------- ------------------------------------- Name and Title THE BANK OF NOVA SCOTIA By ----------------------------------- -------------------------------------- Name and Title EX-13 5 PORTIONS OF THE ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 SOUTHERN CALIFORNIA WATER COMPANY 11. Selected Financial Data
For the years ended December 31, (in thousands, except per share amounts) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT INFORMATION Total Operating Revenues $153,755 $151,529 $129,813 $122,675 $108,506 Total Operating Expenses 130,297 128,100 108,425 103,745 88,456 Operating Income 23,458 23,429 21,388 18,930 20,050 Other Income 758 531 336 236 354 Interest Charges 10,157 10,500 9,559 7,828 8,378 Net Income 14,059 13,460 12,165 11,338 12,026 Preferred Dividends 92 94 96 98 100 Earnings Available for Common Shareholders 13,967 13,366 12,069 11,240 11,926 Basic Earnings per Common Share $ 1.56 $ 1.69 $ 1.54 $ 1.43 $ 1.66 Dividends Declared per Common Share $ 1.25 $ 1.23 $ 1.21 $ 1.20 $ 1.19 BALANCE SHEET INFORMATION Total Assets $457,074 $430,922 $406,255 $383,627 $358,533 Common Shareholders' Equity 151,053 $146,766 $121,576 $118,962 $116,463 Long-Term Debt 115,286 107,190 107,455 92,891 84,286 Preferred Shares - Not subject to Mandatory 1,600 1,600 1,600 1,600 1,600 Preferred Shares - Mandatory Redemption 440 480 520 560 600 Total Capitalization $268,379 $256,036 $231,151 $214,013 $202,949 Book Value per Common Share $ 16.86 $ 16.52 $ 15.50 $ 15.16 $ 14.92 Average Shares Outstanding 8,957 7,891 7,845 7,842 7,186
BOOK VALUE PER COMMON SHARE (in dollars)
1993 1994 1995 1996 1997 14.92 15.16 15.50 16.52 16.86
DIVIDENDS DECLARED PER COMMON SHARE (in dollars)
1993 1994 1995 1996 1997 1.19 1.20 1.21 1.23 1.25
EARNINGS PER COMMON SHARE (in dollars)
1993 1994 1995 1996 1997 1.66 1.43 1.54 1.69 1.56
2 SOUTHERN CALIFORNIA WATER COMPANY 19. Management's Discussion and Analysis Results of Operations Years Ended December 31, 1997 and 1996 Earnings per common share in 1997 decreased by 7.7% to $1.56 per share as compared to $1.69 per share for the comparable period last year. Earnings from operations only, after interest and dividends paid, were $1.48 per share in 1997, a decrease of 8.6% from the $1.62 reported in 1996. The decline in recorded results is significantly attributed to increased supply costs during the first eight months of 1997. Water operating revenues increased by 0.7% in 1997 to $141.0 million from the $140.0 million reported in 1996. Although water sales volumes in 1997 were 2.6% higher than last year, in 1996, the Company began recovery of previously incurred supply costs, in accordance with rules of the CPUC. In 1997, recovery of these costs was completed in several customer service areas and rates were accordingly reduced partially offsetting rate increases effective during 1997 in other customer service areas. Electric operating revenues of $12.8 million were 10.7% higher in 1997 as compared to last year due to the impacts of a general rate increase effective in January 1997 as well as a 3.6% increase in kilowatt-hour sales. Purchased water costs remained relatively the same at $38.3 million in 1997 as compared to $38.4 million in 1996, despite a 6.4% increase in volumes purchased, due to refunds received from the Company's wholesale water supplier during 1997 of approximately $1.984 million, which reduced recorded purchased water costs. There were no such refunds received during 1996. Costs of power purchased for pumping decreased by 2.0% to $7.6 million in 1997 chiefly as the result of the reduced amounts of water produced from pumped sources in the Company's resource mix. During 1997, the Company had several wells out of service due to water quality issues which significantly affected its ability to fully utilize its groundwater resources. Costs of power purchased for resale in 1997 decreased by 10.9% to $5.2 million from the $5.8 million recorded in 1996 due to reduced costs from the Company's energy provider which partially offset the effects of increased kilowatt-hour sales volumes recorded during the year. Groundwater production assessments increased 15.2% to $6.8 million in 1997 from $5.9 million in 1996 due to additional assessments associated with increased pumping in the Company's San Gabriel Valley and San Dimas customer service areas. A positive entry for the provision for supply cost balancing accounts reflects recovery of previously under-collected supply costs. Conversely, a negative entry for the provision for supply cost balancing accounts reflects an under-collection of previously incurred supply costs. The positive entry for 1997 is a result of approval by the CPUC of rate increases sufficient to recover previously under-collected purchased supply costs, as well as refunds received during 1997 from wholesale suppliers. The balancing account mechanism insulates earnings from changes in the costs of supply costs which are outside of the immediate control of the Company. However, the balancing account is not designed to insulate earnings against changes in supply mix, as occurred during the first eight months of 1997. Administrative and general expenses increased by 7.7% to $22.1 million in 1997 from the $20.5 million recorded in 1996. This increase reflects higher labor costs. In addition, during 1997 the Company incurred costs for consulting on water quality litigation for which there was no corresponding amount in 1996. In 1997, maintenance expense decreased by 5.7% to $7.3 million from $7.7 million recorded in 1996 due principally to increased emphasis being placed on the Company's meter replacement and capital improvement program which partially offset increased maintenance on the Company's water supply sources. Depreciation expense in 1997 increased by 8.4% to $11.0 million reflecting the effects of recording approximately $31.0 million in net plant additions during 1996, depreciation on which began in 1997. Taxes on income decreased by approximately 4.4% to $9.8 million in 1997 as compared to the $10.3 million last year as a result of lower pre-tax income. Other taxes increased by 3.0% in 1997 to $6.3 million due primarily to increased property taxes resulting from higher valuation assessments in 1997. Other income increased by 42.7% in 1997 due principally to an increase in billings to the City of Folsom for the lease of a portion of the Company's water rights in the American River. Interest expense decreased by 3.3% to $10.2 million primarily due to reduced short-term bank borrowing and the lower borrowing rates experienced during 1997. 3 20. SOUTHERN CALIFORNIA WATER COMPANY Years Ended December 31, 1996 and 1995 Earnings per common share in 1996 increased by 9.7% to $1.69 per share as compared to $1.54 per share for the comparable period last year. Earnings from operations only, after interest and dividends paid, were $1.62 per share in 1996, an increase of 8% from the $1.50 reported in 1995. Water operating revenues increased by 17.7% in 1996 to $140 million from the $118.9 reported in 1995 due principally to the impacts of general rate increases, which went into effect in January, 1996, and to a 7.5% increase in water sales volumes in 1996 as compared to 1995. Electric operating revenues of $11.5 million were 5.9% higher in 1996 as compared to last year due to the impacts of a general rate increase effective in May, 1996 as well as a 5% increase in kilowatt-hour sales. Purchased water costs increased by 17.5% to $38.4 million in 1996 reflecting increases in purchased water rates, the latest series of which was effective July 1, 1995, as well as increased purchased water volumes. Costs of power purchased for pumping decreased by 3.2% to $7.7 million in 1996 chiefly as the result of increased usage of purchased water in the resource mix. In 1996, costs of power purchased for resale increased by 11.7% to $5.8 million due to increased kilowatt-hour sales and recovery of costs in the electric supply cost balancing account. Groundwater production assessments of $5.9 million in 1996 were 3.1% lower due to the increased amount of purchased water in the resource mix. A positive entry for the provision for supply cost balancing accounts reflects recovery of previously under-collected supply costs. The positive entry for 1996 results from approval by the CPUC of rate increases sufficient to recover previously under-collected purchased water supply costs, supply costs for power purchased for pumping and for resale and groundwater production assessments. Although other operating expenses remained relatively unchanged in 1996 as compared to 1995, administrative and general expenses of $20.5 million were 20.7% greater than in 1995. This increase reflects an increase in the amount of labor being charged to this category since, as a part of the settlement stipulation for the rates that were effective January 1, 1996, the company began expensing, and currently recovering, a greater percentage of labor for persons engaged in general and administrative functions. Moreover, this category has increased due to higher personnel-related expenses such as health insurance, post-retirement medical benefits, pension and 401(k) plan costs and long-term compensation expenses. In addition, in 1995, the company reversed approximately $639,000 in costs related to its participation in the State Water Project for which there is no corresponding entry in 1996. Depreciation expense in 1996 increased by 19.1% to $10.1 million reflecting the effects of recording approximately $30 million in net plant additions during 1995, depreciation on which began in 1996 as well as higher depreciation rates authorized by the CPUC that became effective January 1, 1996. Taxes on income increased by approximately 17.1% to $10.3 million in 1996 as compared to last year as a result of higher pre-tax income. For 1996, other taxes increased by 25.4% due to increased franchise fees as a result of increased revenues, as well as increased property taxes resulting from higher valuation assessments in 1996. Maintenance expense of $7.7 million in 1996 was 34.6% greater than last year reflecting increased maintenance emphasis on pumping, hydrant and valve equipment. Other income increased by 58% in 1996 due principally to an increase in billings to the City of Folsom for the lease of a portion of the company's water rights in the American River. Interest expense for 1996 increased by 9.8% to $10.5 million primarily as a result of the sale in September, 1995 of $30 million in long-term debt as well as increased short-term bank borrowing during 1996. Financial Condition Liquidity and Capital Resources The Company funds the majority of its operating expenses, interest payments on its debt, dividends on its outstanding common and preferred shares and makes its mandatory sinking fund payments through internal sources. However, because of the seasonal nature of its water and electric businesses, the Company utilizes its short-term borrowing capacity on occasion to finance current operating expenses. 4 SOUTHERN CALIFORNIA WATER COMPANY 21. The Company continues to rely on external sources, including short-term bank borrowing, the receipt of contributions-in-aid-of-construction and advances for construction and install-and-convey advances, to fund the majority of its construction expenditures. The aggregate short-term borrowing capacity available to the Company under its three bank lines of credit was $37 million as of December 31, 1997 of which a total of $26 million was outstanding. The Company routinely employs short-term bank borrowing as an interim financing source prior to executing either a long-term debt or equity issue. The Company issued 71,500 common shares in January 1997 for aggregate proceeds of $1,472,185. These funds were used to repay a portion of the then-outstanding short-term bank debt. The Company anticipates issuing additional long-term debt in 1998, with the net proceeds again being used initially to repay short-term bank borrowings and, after that, fund construction expenditures. The Company has no derivative financial instruments, financial instruments with significant off-balance sheet risks or financial instruments with concentrations of credit risk. Construction Program The Company's construction program is designed to ensure its customers high quality service. A program for distribution main replacement is on-going throughout the customer service areas, based on priority of leaks detected, fire protection enhancement and reflects the underlying replacement schedule. In addition, general upgrades in the Company's water supply facilities are anticipated to be on-going. The Company's Board of Directors has approved anticipated net capital expenditures of approximately $27.1 million in 1998. Regulatory Matters The Company is subject to regulation by the CPUC which has broad powers with respect to service and facilities, rates, classifications of accounts, valuation of properties, the purchase, disposition and mortgaging of properties necessary or useful in rendering public utility service, the issuance of securities, the granting of certificates of convenience and necessity as to the extension of services and facilities and various other matters. The 22 customer service areas of the Company are grouped into 16 water districts and one electric district for ratemaking purposes. Water rates vary among the 16 ratemaking districts due to differences in operating conditions and costs. The Company continuously monitors operations in each of these districts so that applications for rate changes may be filed, when warranted. Under the CPUC's practices, rates may be increased by three methods: general rate increases (GRC's), offsets for certain expense increases and advice letter filings related to certain plant additions. GRC's are typically for three-year periods, include step increases, and rates are based on estimated expenses and capital costs. GRC's have a typical regulatory lag of one year. Offset rate increases typically have a two to four month regulatory lag. In January, 1996, new rates were implemented in six water ratemaking districts and water rates in two additional ratemaking districts were increased on January 1, 1997 to recover costs associated with capital projects in those areas. Step increases in rates were effective in January 1997 in Bear Valley Electric. Increased rates were approved and are in effect as of January 2, 1998 for three additional water ratemaking districts. Notices of intent to increase water rates were filed for six water ratemaking districts as well as for recovery of costs associated with general office functions in January 1998. The Company is unable to predict whether the CPUC will authorize all or any of the proposed increases, although it is not anticipated that new rates, if approved, would be effective before January, 1999. In November, 1996, the Company filed an application with the CPUC seeking recovery through rates of $1.8 million in costs associated with its participation in the coastal aqueduct extension of the State Water Project ("SWP"). The Company is pursuing alternative forms of recovery of its investment in SWP, which will require CPUC approval. The Company is currently unable to predict if the CPUC will authorize recovery of all or any of the costs associated with its participation in the Project. Environmental Matters The 1996 amendments to the Safe Drinking Water Act ("SDWA") amount to a rewrite of the law that the United States Environmental Protection Agency ("EPA") has been trying to implement for the last ten years. The California Department of Health Services, acting on behalf of the EPA, administers the EPA's program. The 1996 SDWA amendments contain a new process for selecting and regulating contaminants under which EPA regulates contaminants that may have adverse health effects, are known or are likely to occur at levels of public health concern, and provide "a meaningful opportunity for health risk reduction." The EPA must, within 18 months, publish a list of contaminants for possible regulation and must update such list every five years. In addition, 5 22. SOUTHERN CALIFORNIA WATER COMPANY every five years, the EPA must select at least five contaminants on the list and determine whether to regulate them. The new law allows the EPA to bypass the selection process and adopt interim regulations for contaminants in order to address urgent health threats. Current regulations, however, remain in place and are not subject to the new standard-setting provisions. The Company currently tests its wells and water systems for more than 90 contaminants, covering all contaminants listed in the SDWA. Water from wells found to contain levels of contaminants above the established maximum contaminant limits (MCL's) is either treated or blended before it is delivered to customers. Since the SDWA became effective, the Company has experienced increased operating costs for testing to determine the levels, if any, of the contaminants in the Company's sources of supply as well as additional expense to lower the level of any contaminants in order to meet the MCL standards. Such costs and the costs of controlling any other contaminants may cause the Company to incur additional capital costs as well as increased operating costs. However, the rate-making process provides the Company with the opportunity to recover prudently incurred capital and operating costs associated with water quality, and management believes that such prudently incurred costs will be authorized for recovery by the CPUC. There have been no environmental matters that have materially affected or are currently materially affecting the Company's Bear Valley Electric customer service area. Water Supply During 1997, the Company supplied a total of 199,146 acre feet of water. Of this amount, approximately 54% came from pumped sources and 45% was purchased from others, principally the Metropolitan Water District of Southern California ("MWD"). The remaining amount was supplied by the Bureau of Reclamation (the "Bureau") under a no-cost contract. During 1996, the Company produced 194,397 acre feet of water, 56% of which came from pumped sources, 42.5% was purchased and the remainder was supplied by the Bureau. The MWD is a water district organized under the laws of the State of California for the purpose of delivering imported water to areas within its jurisdiction. The Company has 52 connections to the water distribution facilities of MWD and other municipal water agencies. MWD imports water from two principal sources: the Colorado River and the State Water Project (SWP). Available water supplies from the Colorado River and the SWP have historically been sufficient to meet most of MWD's requirements and MWD's supplies from these sources are anticipated to continue to remain adequate through 1998. However, MWD has taken a number of steps to secure additional storage capacity and increase available water supplies, including effecting transfers of water rights from other sources. The 1996-1997 water year, which ended September 1997, was labeled a "wet one" by the California Department of Water Resources. The outlook for water supply in 1998 remains favorable. In those customer service areas of the Company which pump groundwater, overall groundwater conditions remain at adequate levels. However, certain of the Company's groundwater supplies have been affected to varying degrees by various forms of contamination which, in some cases, has caused increased reliance on purchased water in its resource mix and has adversely affected earnings. Water-Related Opportunities The Company has pursued and continues to pursue opportunities to bid on long-term leases, and operation and maintenance contracts of government-owned water systems on a stand-alone basis or as part of its joint venture - Golden State Water Company (GSWC). GSWC has four active bids currently outstanding, although no assurance can be given that GSWC will be successful on any of the currently active bids. The Company may pursue future bids, if any, through GSWC, on a stand-alone basis, or through another affiliation. In addition, the Company is pursuing the creation of a holding company, subject to shareholder and regulatory approval, which will provide the structure necessary to allow for independent operations of both the regulated and non-regulated sectors of the Company. Shareholders will be asked to approve formation of the holding company at the 1997 Annual Meeting of Shareholders. 6 SOUTHERN CALIFORNIA WATER COMPANY 23.
Balance Sheets For the years ended December 31, (in thousands, except per share amounts) 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Assets UTILITY PLANT, AT COST Water $ 446,605 $ 411,852 Electric 34,137 33,300 -------------------------- 480,742 445,152 Less - Accumulated depreciation (125,020) (114,086) -------------------------- 355,722 331,066 Construction work in progress 27,901 26,710 -------------------------- Net utility plant 383,623 357,776 -------------------------- OTHER PROPERTY AND INVESTMENTS 1,355 774 -------------------------- CURRENT ASSETS Cash and cash equivalents 4,186 3,783 Accounts receivable - Customers, less reserves of $466 in 1997 and $387 in 1996 8,544 7,870 Other 3,614 1,713 Unbilled revenue 9,106 12,596 Materials and supplies, at average cost 1,299 1,292 Supply cost balancing accounts 4,286 6,273 Prepayments 7,676 6,933 Accumulated deferred income taxes - net 5,783 3,302 -------------------------- Total current assets 44,494 43,762 -------------------------- DEFERRED CHARGES Regulatory tax-related assets 22,337 23,201 Other 5,265 5,409 -------------------------- Total deferred charges 27,602 28,610 -------------------------- TOTAL ASSETS $ 457,074 $ 430,922 ========================== Capitalization and Liabilities CAPITALIZATION Common shareholders' equity $ 151,053 $ 146,766 Preferred shares 1,600 1,600 Preferred shares - mandatory redemption 440 480 Long-term debt 115,286 107,190 -------------------------- Total capitalization 268,379 256,036 -------------------------- CURRENT LIABILITIES Notes payable to banks 26,000 16,000 Long-term debt and preferred shares - current 231 482 Accounts payable 11,770 12,865 Taxes payable 9,115 5,777 Accrued interest 1,868 1,772 Other 7,196 7,792 -------------------------- Total current liabilities 56,180 44,688 -------------------------- OTHER CREDITS Advances for construction 55,574 55,848 Contributions in aid of construction 28,467 28,158 Accumulated deferred income taxes - net 42,984 40,404 Unamortized investment tax credits 3,246 3,337 Regulatory tax-related liability 1,950 1,995 Other 294 456 -------------------------- Total other credits 132,515 130,198 -------------------------- TOTAL CAPITALIZATION AND LIABILITIES $ 457,074 $ 430,922 ==========================
The accompanying notes are an integral part of these financial statements 7 24. SOUTHERN CALIFORNIA WATER COMPANY Statements Of Capitalization
For the years ended December 31, (in thousands, except per share amounts) 1997 1996 - ------------------------------------------------------------------------------------------------------ COMMON SHAREHOLDERS' EQUITY: Common shares, $2.50 par value -- Authorized 30,000,000 shares Outstanding 8,957,671 in 1997 and 8,886,171 in 1996 $ 22,394 $ 22,215 Additional paid-in capital 74,937 73,645 Earnings reinvested in the business 53,722 50,906 -------------------------- 151,053 146,766 -------------------------- PREFERRED SHARES: $25 PAR VALUE Authorized 64,000 shares Outstanding 32,000 shares, 4% Series 800 800 Outstanding 32,000 shares, 4 1/4% Series 800 800 -------------------------- 1,600 1,600 -------------------------- PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION Requirements: $25 par value Authorized and outstanding 19,200 shares in 1997 and 20,800 shares in 1996, 5% Series 480 520 Less: Preferred shares to be redeemed within one year (40) (40) -------------------------- 440 480 -------------------------- LONG-TERM DEBT 5.82% notes due 2003 12,500 12,500 10.10% notes due 2009 10,000 10,000 6.64% notes due 2013 1,100 1,100 6.80% notes due 2013 2,000 2,000 8.50% fixed rate obligation due 2013 1,947 2,018 Variable rate obligation due 2014 6,000 6,000 6.87% notes due 2023 5,000 5,000 7.00% notes due 2023 10,000 10,000 7.55% notes due 2025 8,000 8,000 7.65% notes due 2025 22,000 22,000 5.50% notes due 2026 8,000 8,000 less funds held by trustee -- (8,000) 9.56% notes due 2031 28,000 28,000 Other 930 1,014 -------------------------- 115,477 107,632 Less: Current maturities (191) (442) -------------------------- 115,286 107,190 -------------------------- TOTAL CAPITALIZATION $ 268,379 $ 256,036 ==========================
The accompanying notes are an integral part of these financial statements 8 SOUTHERN CALIFORNIA WATER COMPANY 25. Statements Of Income
For the years ended December 31, (in thousands, except per share amounts) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ OPERATING REVENUES Water $ 140,988 $ 139,997 $ 118,922 Electric 12,767 11,532 10,891 ------------------------------------------- Total operating revenues 153,755 151,529 129,813 ------------------------------------------- OPERATING EXPENSES Water purchased 38,318 38,355 32,629 Power purchased for resale 5,188 5,825 5,215 Power purchased for pumping 7,554 7,711 7,963 Groundwater production assessment 6,847 5,946 6,137 Supply cost balancing accounts 2,813 2,064 (1,146) Other operating expenses 13,074 13,421 13,351 Provision for State Water Project -- -- (639) Administrative and general expenses 22,138 20,549 17,029 Depreciation 10,952 10,102 8,483 Maintenance 7,301 7,745 5,754 Taxes on income 9,830 10,283 8,784 Property and other taxes 6,282 6,099 4,865 ------------------------------------------- Total operating expenses 130,297 128,100 108,425 ------------------------------------------- OPERATING INCOME 23,458 23,429 21,388 ------------------------------------------- OTHER INCOME Total other income - net 758 531 336 ------------------------------------------- Income before interest charges 24,216 23,960 21,724 ------------------------------------------- INTEREST CHARGES Interest on long-term debt 8,821 8,551 7,807 Other interest and amortization of debt expense 1,336 1,949 1,752 ------------------------------------------- Total interest charges 10,157 10,500 9,559 ------------------------------------------- NET INCOME 14,059 13,460 12,165 Dividends on Preferred Shares (92) (94) (96) ------------------------------------------- EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 13,967 $ 13,366 12,069 ------------------------------------------- BASIC EARNINGS PER COMMON SHARE $ 1.56 $ 1.69 $ 1.54 ------------------------------------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 8,957 7,891 7,845 ===========================================
The accompanying notes are an integral part of these financial statements 9 26. SOUTHERN CALIFORNIA WATER COMPANY Statements Of Changes In Common Shareholders' Equity
Common Shares --------------------- Additional Earnings Number Paid-in Reinvested in (in thousands) of Shares Amount Capital the Business - ------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1994 7,845 $19,613 $54,753 $44,596 Add: Net income 12,165 Deduct: Dividends on Preferred Shares 96 Dividends on Common Shares - $1.205 per share 9,455 ----------------------------------------------- BALANCES AT DECEMBER 31, 1995 7,845 $19,613 $54,753 $47,210 Add: Net income 13,460 Issuance of Common Shares for public offering 1,000 2,500 18,090 under Dividend Reinvestment and 401(k) Plans 41 102 802 Deduct: Dividends on Preferred Shares 94 Dividends on Common Shares - $1.225 per share 9,670 ----------------------------------------------- BALANCES AT DECEMBER 31, 1996 8,886 $22,215 $73,645 $50,906 Add: Net income 14,059 Issuance of Common Shares for public offering 72 179 1,292 Deduct: Dividends on Preferred Shares 92 Dividends on Common Shares - $1.245 per share 11,151 ----------------------------------------------- BALANCES AT DECEMBER 31, 1997 8,958 $22,394 $74,937 $53,722 ===============================================
The accompanying notes are an integral part of these financial statements 10 SOUTHERN CALIFORNIA WATER COMPANY 27. Statements Of Cash Flows
For the years ended December 31, (in thousands, except per share amounts) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 14,059 $ 13,460 $ 12,165 Adjustments for non-cash items: Depreciation and amortization 11,387 10,389 9,033 Deferred income taxes and investment tax credits 826 577 2,016 Other - net (1,426) (1,660) 416 Changes in assets and liabilities: Customer receivables (673) 368 651 Supply cost balancing accounts 1,987 1,800 (1,065) Accounts payable (1,095) 6,026 (1,609) Taxes payable 3,338 215 (73) Other - net 341 122 (2,585) ---------------------------------------- Net cash provided 28,744 31,297 18,949 ---------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (34,717) (31,953) (25,808) ---------------------------------------- Net cash used (34,717) (31,953) (25,808) ---------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Common Shares 1,472 21,494 -- Issuance of long-term debt and lease obligations 8,000 -- 30,000 Receipt of advances for and contributions in aid of construction 1,302 2,462 2,761 Refunds on advances for construction (2,957) (2,088) (2,812) Repayments of long-term debt and redemption of preferred shares (198) (15,447) (4,477) Net change in notes payable to banks 10,000 7,500 (11,000) Common and preferred dividends paid (11,243) (9,825) (9,614) ---------------------------------------- Net cash provided 6,376 4,096 4,858 ---------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 403 3,440 (2,001) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,783 343 2,344 ---------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,186 $ 3,783 $ 343 ---------------------------------------- TAXES AND INTEREST PAID: Income taxes paid $ 6,338 $ 10,767 $ 6,955 Interest paid 9,451 10,128 9,043 ---------------------------------------- NON-CASH TRANSACTIONS: Property installed by developers and conveyed to Company $ 2,082 $ 957 $ 2,764 ========================================
The accompanying notes are an integral part of these financial statements 11 28. SOUTHERN CALIFORNIA WATER COMPANY Notes to Financial Statements Note 1 Summary of Significant Accounting Policies The Company is an investor-owned public utility engaged principally in the purchase, production, distribution and sale of water. The Company also distributes electricity in one community. The Company is regulated by the California Public Utilities Commission (CPUC) as to its water and electric business including properties, rates, services, facilities and other matters. The accounting records are maintained in accordance with the Uniform System of Accounts prescribed by the CPUC. The preparation of these financial statements required the use of certain estimates by management in determining the company's assets, liabilities, revenues and expenses. Property and Depreciation -- The Company capitalizes as utility plant the cost of additions and replacements of retirement units. Such cost includes labor, material and certain indirect charges. Depreciation is computed on the straight-line, remaining-life basis. For the years 1997, 1996 and 1995, the aggregate provisions for depreciation approximated 2.77%, 2.71%, and 2.52% of beginning of the year depreciable plant, respectively. Interest is generally not capitalized for financial reporting purposes as such procedure is generally not followed for rate-making purposes. Revenues -- Revenues include amounts billed to customers and an amount of unbilled revenue representing amounts to be billed for usage from the last meter reading date to the end of the accounting period. Basic Earnings Per Common Share -- Earnings per Common Share are based upon the weighted average number of Common Shares outstanding and net income after deducting preferred dividend requirements. Supply Cost Balancing Accounts -- As permitted by the CPUC, the Company maintains water and electric supply cost balancing accounts to account for under-collections and over-collections of revenues designed to recover such costs. Recoverability of such costs is recorded in income and charged to balancing accounts when such costs are incurred. The balancing accounts are credited when such costs are recovered through rate adjustments. The Company accrues interest on its supply cost balancing accounts at the rate prevailing for 90-day commercial paper. Debt Issue Expense and Redemption Premiums -- Original debt issue expenses are amortized over the lives of the respective issues. Premiums paid on the early redemption of debt which is reacquired through refunding are deferred and amortized over the life of the debt issued to finance the refunding. The redemption premium on debt reacquired without refunding is amortized over the remaining period the debt would have been outstanding. Other Credits -- Advances for construction represent amounts advanced by developers which are generally refundable at either a rate of 22% of the revenue received from the installations for which funds were advanced or in equal annual installments over a 40-year period. Contributions in aid of construction are similar to advances, but require no refunding and are amortized over the useful lives of the related property. Cash and Cash Equivalents -- For purposes of the Statements of Cash Flows, cash and cash equivalents include short-term cash investments with an original maturity of three months or less. Deferred Charges -- At December 31, 1997, $362,000 of deferred rate case charges are being recovered over three year periods in rates charged to customers. Financial Instrument Risk -- The Company does not carry any financial instruments with off-balance sheet risk nor do its operations result in concentrations of credit risk. Fair Value of Financial Instruments -- The following methods and assumptions were used to estimate the fair value, as shown in the table below, of each class of financial instrument for which it is practicable to estimate that value: Cash and Cash Equivalents, Accounts Receivable and Short-term Debt -- The carrying amount. Long-term Debt -- Rates available to the Company at December 31, 1997 and 1996 for debt with similar terms and remaining maturities were used to estimate fair value. Changes in the assumptions will produce differing results.
1997 1996 ----------------------------------------------------- Carrying Fair Carrying Fair (in thousands) amount value amount value - ---------------------------------------------------------------------------------- Financial assets: Cash $ 4,186 $ 4,186 $ 3,783 $ 3,783 Accounts receivable 21,264 21,264 22,179 22,179 Financial liabilities: Short-term debt 26,000 26,000 16,000 16,000 Long-term debt $115,326 $126,930 $107,632 $114,892 =====================================================
12 SOUTHERN CALIFORNIA WATER COMPANY 29. Note 2 Capital Stock All of the series of Preferred Shares outstanding at December 31, 1997 are redeemable at the option of the Company. At December 31, 1997, the redemption price per share for each series of $25 Preferred Shares was $27.00, $26.50 and $25.25 for the 4%, 4 1/4% and 5% Series, respectively. To each of the redemption prices must be added accrued and unpaid dividends to the redemption date. The $25 Preferred Shares, 5% Series, are subject to mandatory redemption provisions of 1,600 shares per year. The annual aggregate mandatory redemption requirements for this Series for the five years subsequent to December 31, 1997 is $40,000 each year. In 1996, the Company issued 1,000,000 Common Shares through a secondary public offering and, in January 1997, issued an additional 71,500 Common Shares as part of the same offering. The net proceeds from these sales were used to repay a portion of short-term debt then outstanding. For the years ended December 31, 1996 and December 31, 1995, all shares issued under the Company's Dividend Reinvestment Plan (DRP) and the 401(k) Plan were purchased on the open market. For the year ended December 31, 1996, the Company issued 20,228 and 20,851 Common Shares, respectively, under the DRP and the 401(k) programs. There are 89,226 and 71,408 Common Shares reserved for issuance under the DRP and the 401(k) Plan, respectively, at December 31, 1997. Shares reserved for the 401(k) Plan are in relation to Company matching contributions and for investment purposes by participants. As of December 31, 1997 there were no retained earnings restricted as to the payment of cash dividends on Common Shares. Note 3 Compensating Balances and Bank Debt At December 31, 1997, the Company maintained $37,000,000 in aggregate borrowing capacity with three commercial banks with no compensating balances required. Of this amount, $26,000,000 was outstanding at year-end. Loans can be obtained at the option of the Company and bear interest at rates based on floating prime borrowing rates or at money market rates. Short-term bank borrowing activities for the last three years were as follows:
(in thousands, except percent) 1997 1996 1995 - --------------------------------------------------------------------------------- Balance Outstanding at December 31, $26,000 $16,000 $ 8,500 Interest Rate at December 31, 6.39% 6.17% 6.39% Average Amount Outstanding $15,678 $26,109 $17,897 Weighted Average Annual Interest Rate 6.27% 5.97% 6.92% Maximum Amount Outstanding $32,000 $36,000 $27,500 -------------------------------------
Note 4 Long-Term Debt In December, 1996, the Company sold $8 million in tax-exempt debt that was issued through the California Pollution Control Financing Authority. The funds were deposited with a trustee and were used during 1997 to finance water main replacements. In 1995, the Company issued a total of $30 million of unsecured notes, the proceeds of which were used to pay down short-term bank borrowing. The Company has no mortgage debt, and leases and other similar financial arrangements are not material. The Company has posted an Irrevocable Letter of Credit, which expires July 31, 1998, in the amount of $713,016 as security for its self-insured workers' compensation plan. The Company has also provided an Irrevocable Letter of Credit in the amount of $6,296,000 to a trustee with respect to the variable rate obligation issued by the Three Valleys Municipal Water District. Annual maturities of all long-term debt, including capitalized leases, amount to $191,114, $203,038, $1,208,804, $1,216,212 and $1,167,779 for the 5 years ending December 31, 1998 through 2002, respectively. Note 5 Taxes on Income The Company provides deferred income taxes for temporary differences under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109) for certain transactions which are recognized for income tax purposes in a period different from that in which they are reported in the financial statements. The most significant items are the tax effects of accelerated depreciation, the supply cost balancing accounts and advances for and contributions in aid of construction. SFAS No. 109 also requires that rate-regulated enterprises record deferred income taxes for temporary differences accorded flow-through treatment at the direction of a regulatory commission. The resulting deferred tax assets and liabilities are recorded at the expected cash flow to be reflected in future rates. Since the CPUC has consistently permitted the recovery of previously flowed-through tax effects, the Company has established regulatory liabilities and assets offsetting such deferred tax assets and liabilities. Deferred investment tax credits are being amortized to other income ratably over the lives of the property giving rise to the credits. The significant components of deferred tax assets and deferred tax liabilities, as reflected in the balance sheets, and the accumulated net deferred income tax liabilities at December 31, 1997 and 1996 were: 13 30. SOUTHERN CALIFORNIA WATER COMPANY
December 31, --------------------------- (in thousands) 1997 1996 - -------------------------------------------------------------------------------- Deferred tax assets: Balancing accounts $ 27 $ 908 State tax effect 5,756 2,394 --------------------------- 5,783 3,302 --------------------------- Deferred tax liabilities: Depreciation (40,822) (38,888) Advances and contributions 17,005 17,805 Other property related (9,602) (10,170) Other non-property related (9,565) (9,151) --------------------------- (42,984) (40,404) --------------------------- Accumulated deferred income taxes - net $(37,201) $(37,102) ---------------------------
The current and deferred components of income tax expense are as follows:
December 31, ---------------------------------------- (in thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------- Current Federal $ 7,205 $ 7,224 $ 5,432 State 2,287 2,452 2,110 ---------------------------------------- Total current tax expense 9,492 9,676 7,542 ---------------------------------------- Deferred -- Federal and State: Accelerated depreciation 2,996 3,175 3,273 Balancing accounts (871) (798) 472 State Water Project -- 296 (296) Advances and contributions (210) (894) (477) California privilege year franchise tax (617) (683) (394) Adjustments to prior year provision -- 410 (855) Other (566) (732) (520) ---------------------------------------- Total deferred tax expense 732 774 1,203 ---------------------------------------- Total income tax expense $ 10,224 $ 10,450 $ 8,745 ---------------------------------------- Income taxes included in operating expenses $ 9,830 $ 10,283 $ 8,784 Income taxes included in other income and expenses -- net 394 167 (39) ---------------------------------------- Total income tax expense $ 10,224 $ 10,450 $ 8,745 ----------------------------------------
Additional information regarding taxes on income is set forth in the following table:
December 31, ------------------------------------------ (in thousands) 1997 1996 1995 - ----------------------------------------------------------------------------------- Federal taxes on pre-tax income at statutory rates $ 8,451 $ 8,368 $ 7,318 Increase (decrease) in taxes resulting from: State income tax expense 1,864 2,051 1,725 Depreciation 853 716 426 Federal benefit of state taxes (652) (718) (604) Adjustments to prior years' provisions (143) 254 76 Other -- net (149) (221) (196) ------------------------------------------ Total income tax expense $ 10,224 $ 10,450 $ 8,745 ------------------------------------------ Pre-tax income $ 24,145 $ 23,910 $ 20,910 ------------------------------------------ Effective income tax rate 42.3% 43.7% 41.8% ------------------------------------------
Note 6 Employee Benefit Plans The Company maintains a pension plan (the Plan) which provides eligible employees (those age 21 and over, with one year of service) monthly benefits upon retirement based on average salaries and length of service. The normal retirement benefit is equal to 2% of the five highest consecutive years average earnings multiplied by the number of years of credited service, up to a maximum of 40 years, reduced by a percentage of primary social security benefits. There is an early retirement option. Annual contributions are made to the Plan which comply with the funding requirements of the ERISA. At December 31, 1997, the Company had 467 employees. Sixty-five employees are covered by collective bargaining agreements, the earliest of which expires in 1999. The weighted-average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of projected benefit obligations for 1997 and 1996 were 7.0% and 4% and 7.5% and 4% respectively. The expected long-term rate of return on assets, which consist primarily of fixed income securities, was 8.0% for 1997 and 1996. The following table sets forth the Plan's funded status and amounts recognized in the Company's balance sheets at December 31, 1997 and 1996 and the components of net pension cost for 1997 and 1996:
December 31, ------------------------ (in thousands) 1997 1996 - ----------------------------------------------------------------------------- Accumulated benefit obligation: Vested $ 24,381 $ 21,078 Nonvested 1,985 1,862 ------------------------ Total $ 26,366 $ 22,940 ------------------------ Projected benefit obligation for service rendered to date (33,410) (28,733) Plan assets at fair value 33,433 29,240 Unrecognized net loss/(gain) due to past experience different from assumptions made 1,538 936 Unrecognized net obligation at January 1, 1986 being recognized over 15 years 171 228 Unrecognized prior service cost due to Plan amendments 444 489 ------------------------ Accrued pension asset $ 2,176 $ 2,160 ------------------------ Service cost benefits earned during the period $ 1,351 $ 1,406 Interest cost on projected benefit obligation 2,112 1,970 Return on Plan assets (4,065) (2,169) Net amortization and deferral 1,873 165 ------------------------ Net pension cost $ 1,271 $ 1,372 ------------------------
The Company also provides all active employees medical, dental and vision care benefits through a medical insurance plan. Eligible employees who retired prior to age 65, and/or their spouses, were able to retain the benefits under the active plan until reaching age 65. Upon reaching age 65, and for those employees retiring at or after age 14 SOUTHERN CALIFORNIA WATER COMPANY 31. 65, and/or their spouses, continued coverage was provided through a medicare supplement insurance policy paid for by the Company. Effective January 1, 1993, the Company adopted the provisions of SFAS No. 106, "Employers' Accounting for Post-retirement Benefits Other Than Pensions." As a result, the Company amended the retiree medical plan, substantially reducing benefits for those current employees retiring after September 30, 1995. No such benefits are available to employees hired on or after February 1, 1995. The CPUC has issued a decision which provides for the recovery in rates of tax-deductible contributions made to a separately trusteed fund. The Company established two separate trusts in 1995, one for those retirees who were subject to a collectively bargained agreement and another for all other retirees. The Company's funding policy is to contribute annually an amount at least equal to the revenues authorized to be collected through rates for post-retirement benefit costs. Assets in these trusts amounted to approximately $1,103,485 as of December 31, 1997. The following table presents information on the plan's funded status and the accrued post-retirement liability as of December 31, 1997 and 1996:
December 31, ------------------------ (in thousands) 1997 1996 - ------------------------------------------------------------------------------- Accumulated post-retirement benefit obligation (APBO): Retirees and dependents $ 2,326 $ 2,248 Other fully eligible participants 421 307 Other active participants 1,755 1,458 ------------------------ Total $ 4,502 $ 4,013 ------------------------ Plan assets at fair value $ 1,103 $ 549 ------------------------ Accumulated post-retirement benefit obligation in excess of plan assets 3,399 3,413 Unrecognized transition obligation (7,126) (7,545) Unrecognized prior service cost 3,627 3,826 Unrecognized net (gain)/loss 1,644 2,000 ------------------------ Accrued post-retirement benefit liability $ 1,544 $ 1,694 ------------------------
The components of net periodic post-retirement benefits cost for 1997 and 1996 are as follows:
December 31, -------------------- (in thousands) 1997 1996 - -------------------------------------------------------------------------------- Service cost -- benefits earned during year $ 120 $ 127 Interest cost on APBO 294 345 Actual return on plan assets (48) -- Net amortization and deferral 140 220 -------------------- Net periodic post-retirement benefit cost $ 506 $ 692 --------------------
Post-retirement benefit costs for 1993, 1994 and 1995 were estimated at a total of approximately $1.6 million and have been recorded as a regulatory asset for recovery over a 20 year period. The weighted average discount rate used in determining the accumulated post-retirement benefit obligation at December 31, 1997 and 1996 was 7.0% and 7.5%, respectively. A sliding scale for assumed health care cost increases starting at 11% in 1996 declining 1% per year for five years and then remaining at 6% thereafter was used for both periods. A 1% increase in the health care cost trend would increase the accumulated post-retirement benefit obligation at December 31, 1997 by $228,000 and the net periodic post-retirement benefit cost for 1997 by $15,000. The Company has a 401(k) Investment Incentive Program under which employees may invest a percentage of their pay, up to a maximum investment prescribed by law, in an investment program managed by an outside investment manager. Company contributions to the 401(k) are based upon a percentage of individual employee contributions and, for 1997, 1996 and 1995, totaled $785,687, $839,000, and $389,000, respectively. Note 7 Business Risks and Concentration of Sales The Company's utility operations are engaged in supplying water and electric service to the public. Although the Company has a diversified base of residential, industrial and other customers, revenues derived from commercial and residential water customers accounted for approximately 93% and 90% of total Company revenues in 1997 and 1996, respectively. Approximately 44% of the Company's water supplies comes from imported water with the remainder produced from Company-owned wells. The long term availability of imported water supplies is dependent upon, among other things, drought conditions throughout the state, increases in population, water quality standards and legislation that may potentially reduce water supplies. SCW does not anticipate any constraints on its imported water supplies in 1998. Note 8 Contingencies In November 1996, the Company filed an application with the CPUC seeking recovery through rates of $1.8 million in costs associated with its participation in the coastal aqueduct extension of the State Water Project ("SWP"). Alternate forms of recovery of these costs are also being pursued, which will require CPUC approval. Currently the Company is unable to predict if the CPUC will authorize recovery of all or any of the costs associated with its participation in the Project. In 1996, the Company formed Golden State Water Company LLC (GSWC) for the purpose of pursuing strategic opportunities related to the operation of government-owned water systems. Pursuant to the terms of the Limited Liability Company Agreement, the Company's losses, if any, are limited during the first three years of the agreement. At the end of the three year period, if the Company decides 15 32. SOUTHERN CALIFORNIA WATER COMPANY to continue as a partner in GSWC, it is required to contribute additional capital, if necessary, to reimburse the joint venture for the difference between the actual losses incurred and the losses booked by the Company. For 1997, the difference between the actual loss and the amount booked by the Company was $185,000. The Company has been named as a defendant in three lawsuits which allege that the Company delivered contaminated water to its customers. Plaintiffs in these actions seek damages, including general, special, and punitive damages, according to proof at trial, as well as attorney's fees on certain causes of action, costs of suit, and other unspecified relief. The Company has commenced and is continuing a review and evaluation of plaintiff's claims and its insurance coverage for these potential liabilities. In light of the breadth of plaintiff's claims, the lack of factual information regarding plaintiff's claims and injuries, if any, the fact that no discovery has yet been completed, the Company is unable to determine at this time what, if any, potential liability it may have with respect to these claims. The Company intends to vigorously defend itself against these allegations. Management believes that proper insurance coverage and reserves are in place to insure against property, general and product liability and workers' compensation claims. Note 9 Construction Program The Company's 1998 construction budget provides for gross expenditures of approximately $33.0 million of which $5.9 million is anticipated to be obtained from developers and others. Note 10 Allowance for Doubtful Accounts The table below presents the Company's provision for doubtful accounts charged to expense and accounts written off, net of recoveries for the last three years.
(in thousands) 1997 1996 1995 - ----------------------------------------------------------------------------------- Balance at beginning of year $ 387 $ 648 $ 419 Provision charged to expense 707 571 1,501 Accounts written off, net of recoveries (628) (832) (1,272) Balance at end of year $ 466 $ 387 $ 648
Note 11 Business Segments The table below sets forth information relating to the Company's operating segments. In addition to amounts set forth, certain assets have not been allocated. The identifiable assets are net of respective accumulated provisions for depreciation. Note 12 Selected Quarterly Financial Data (Unaudited) The quarterly financial information presented below is unaudited. The business of the Company is of a seasonal nature and it is management's opinion that comparisons of earnings for the quarterly periods do not reflect overall trends and changes in the Company's operations. Business Segments
Years Ended December 31, (in thousands) 1997 1996 1995 ----------------------------------------------------------------------------------- Water Electric Water Electric Water Electric - ------------------------------------------------------------------------------------------------------------------------------ Operating revenues $140,988 $ 12,767 $139,997 $ 11,532 $118,922 $ 10,891 Operating income before income taxes 29,200 4,089 30,294 3,418 27,776 2,396 Identifiable assets 359,474 24,149 333,377 24,399 313,190 21,778 Depreciation expense 10,011 941 9,235 867 7,717 766 Capital additions 37,205 2,007 31,295 2,644 25,753 2,985 -----------------------------------------------------------------------------------
Quarterly Financial Data (in thousands, except Operating Operating per share amounts) Revenues Income Net Income Earnings per Share ---------------------- ---------------------- ---------------------- ------------------- 1997 1996 1997 1996 1997 1996 1997 1996 - ------------------------------------------ ---------------------- ---------------------- ------------------- First Quarter $ 32,206 $ 30,397 $ 3,738 $ 4,710 $ 1,312 $ 2,168 $ 0.14 $ 0.27 Second Quarter 39,343 39,894 5,372 6,486 3,080 4,102 0.34 0.52 Third Quarter 45,700 45,218 8,385 7,963 6,044 5,410 0.67 0.68 Fourth Quarter 36,506 36,020 5,963 4,270 3,623 1,780 0.41 0.22 ------------------------------------------------------------------------------------------------------- Year $153,755 $151,529 $ 23,458 $ 23,429 $ 14,059 $ 13,460 $ 1.56 $ 1.69 -------------------------------------------------------------------------------------------------------
16 SOUTHERN CALIFORNIA WATER COMPANY 33. Report Of Management The financial statements contained in this annual report were prepared by the management of Southern California Water Company, which is responsible for their integrity and objectivity. The financial statements were prepared in accordance with generally accepted accounting principles and include, where necessary, amounts based upon management's best estimates and judgments. All other financial information in the annual report is consistent with the financial statements and is also the responsibility of management. The Company maintains systems of internal control which are designed to help safeguard the assets of the Company and provide reasonable assurance that accounting and financial records can be relied upon to generate accurate financial statements. These systems include the hiring and training of qualified personnel, appropriate segregation of duties, delegation of authority and an internal audit function which has reporting responsibility to the Audit Committee of the Board of Directors. The Audit Committee, composed of three outside directors, exercises oversight of management's discharge of its responsibilities regarding the systems of internal control and financial reporting. The committee periodically meets with management, the internal auditor and the independent accountants to review the work and findings of each. The committee also reviews the qualifications of, and recommends to the Board of Directors, a firm of independent accountants. The independent accountants, Arthur Andersen LLP, have performed an audit of the financial statements in accordance with generally accepted auditing standards. Their audit gave consideration to the company's system of internal accounting control as a basis for establishing the nature, timing and scope of their work. The result of their work is expressed in their Report of Independent Public Accountants. /S/ FLOYD E. WICKS Floyd E. Wicks President, Chief Executive Officer /S/ MCCLELLAN HARRIS III McClellan Harris III Chief Financial Officer, Vice President-Finance, Treasurer and Corporate Secretary February 12, 1998 Report Of Independent Public Accountants To the Shareholders and the Board of Directors of Southern California Water Company: We have audited the balance sheets and statements of capitalization of Southern California Water Company (a California corporation) as of December 31, 1997 and 1996 and the related statements of income, changes in common shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also Eincludes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Southern California Water Company as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /S/ ARTHUR ANDERSEN LLP Arthur Andersen LLP Los Angeles, California February 12, 1998 17 34. SOUTHERN CALIFORNIA WATER COMPANY Statistical Review 1997-1988
(in thousands, except per share and per customer amounts) 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- FINANCIAL INFORMATION Revenues by classification Residential and commercial $131,007 $126,456 $106,480 $100,796 Industrial 1,998 1,847 1,674 1,459 Fire service 1,319 1,269 1,211 1,181 Other 6,664 10,425 9,557 8,651 Total water 140,988 139,997 118,922 112,087 Electric 12,767 11,532 10,891 10,588 Total operation revenues 153,755 151,529 129,813 122,675 Net income 14,059 13,460 12,165 11,338 Earnings available for common shareholders 13,967 13,366 12,069 11,240 Earnings per common share 1.56 1.69 1.54 1.43 Dividends declared per common share 1.25 1.23 1.21 1.20 Book value per common share 16.86 16.52 15.50 15.16 Total assets 457,074 430,922 406,255 383,627 Net utility plant 383,623 357,776 334,968 317,879 Capital additions 39,226 34,374 28,761 30,307 Long-term debt 115,286 107,190 107,455 92,891 Preferred shares 1,600 1,600 1,600 1,600 Preferred shares - mandatory redemption 440 480 520 560 Investment per customer $ 1,900 $ 1,808 $ 1,688 $ 1,578 OPERATION INFORMATION Water sold by classification (mg) Residential and commercial 54,623 52,843 49,641 51,084 Industrial 899 828 802 818 Fire service 417 831 130 308 Other 5,070 4,932 4,706 4,537 Total water 61,009 59,434 55,279 56,747 Total electric sales (mwh) 121,315 117,139 111,519 110,234 Customers by classification Residential and commercial 236,270 235,244 233,920 232,879 Industrial 331 333 326 323 Fire service 2,964 2,925 2,909 2,896 Other 2,016 2,046 1,807 1,807 Total water 241,581 240,548 238,962 237,905 Electric 20,698 20,437 20,475 20,331 Total company 262,279 260,985 259,437 258,236 Water production by source (mg) Purchased 28,894 27,147 24,356 25,940 Pumped -- electric 34,531 35,216 34,105 33,337 Pumped -- gas 316 40 218 198 Gravity and surface 1,147 932 979 967 Total supply 64,888 63,335 59,658 60,442 Miles of main in service 2,638 2,603 2,587 2,567 Number of employees 467 463 448 467 - ----------------------------------------------------------------------------------------------------------------
mg=Millions of Gallons mwh=Mega-Watt Hours 18 SOUTHERN CALIFORNIA WATER COMPANY 35.
1993 1992 1991 1990 1989 1988 - -------------------------------------------------------------------------- $ 86,918 $ 82,112 $ 68,063 $ 69,161 $ 67,404 $ 64,279 1,134 1,110 1,019 1,021 1,074 1,330 1,149 1,067 927 954 785 724 8,954 6,336 8,273 5,150 4,909 4,874 98,155 90,625 78,282 76,286 74,172 71,207 10,351 10,035 12,378 11,054 10,043 8,682 108,506 100,660 90,660 87,340 84,215 79,889 12,026 12,142 15,363 8,907 8,730 6,127 11,926 12,040 15,259 8,801 8,622 6,017 1.66 1.82 2.34 1.40 1.38 1.47 1.19 1.15 1.10 1.08 1.04 1.01 14.92 13.28 12.59 11.31 10.97 10.61 358,533 312,491 293,444 268,028 254,346 237,450 294,990 277,525 258,558 235,713 214,465 213,947 28,626 26,975 32,472 27,078 25,726 24,036 84,621 84,195 82,634 67,246 67,767 56,532 1,600 1,600 1,600 1,600 1,600 1,600 600 640 680 720 760 800 $ 1,480 $ 1,388 $ 1,297 $ 1,213 $ 1,125 $ 1,078 48,033 47,541 44,528 51,696 51,841 50,425 679 699 737 937 966 1,286 33 23 11 50 25 19 4,019 3,890 3,807 4,511 4,635 4,546 52,764 52,153 49,083 57,194 57,467 56,276 106,234 105,346 101,923 103,376 97,583 88,375 231,966 230,956 230,175 221,888 220,876 231,139 322 330 347 376 385 398 2,877 2,846 2,779 2,610 2,562 2,416 1,820 1,795 1,812 1,819 1,813 1,843 236,985 235,927 235,113 226,693 225,636 235,796 20,131 20,039 19,780 19,559 19,215 18,780 257,116 255,966 254,893 246,252 244,851 254,576 25,156 24,377 23,221 31,021 32,189 31,542 32,056 30,406 28,640 28,923 29,733 30,391 195 177 245 270 306 276 658 1,249 1,046 1,255 361 1,002 58,065 56,209 53,152 61,469 62,589 63,211 2,560 2,549 2,535 2,517 2,488 2,688 486 445 422 410 388 392 - --------------------------------------------------------------------------
19 36. SOUTHERN CALIFORNIA WATER COMPANY Shareholder Information Annual Meeting of Shareholders All shareholders are invited to attend the Annual Meeting of Shareholders which will be held on Tuesday, April 28, 1998, beginning at 10:00 am, at the Industry Hills Sheraton, One Industry Hills Parkway, City of Industry, California 91744. Notice of meeting and proxy materials will be mailed. Stock Listing Common Shares of Southern California Water Company are traded on the New York Stock Exchange under the symbol SCW. The high and low sales prices and dividends paid on the Common Shares for the past two years were:
Dividends 1997 High Low Paid - ------------------------------------------------------------------------- First Quarter $ 23 $20 5/8 $ 0.310 Second Quarter 24 1/2 20 1/4 0.310 Third Quarter 24 5/8 20 1/2 0.310 Fourth Quarter 25 5/8 21 1/2 0.315 ---------------------------------------- $ 1.245
Dividends 1996 High Low Paid - ------------------------------------------------------------------------------------ First Quarter $ 22 $ 18 3/4 $ 0.305 Second Quarter 22 5/8 19 3/4 0.305 Third Quarter 23 3/8 19 3/8 0.305 Fourth Quarter 24 1/8 21 0.310 --------------------------------------------- $ 1.225
Independent Certified Public Accountants Arthur Andersen LLP 633 West Fifth Street Los Angeles, CA 90071 Corporate Reports Shareholders with questions, or who wish to obtain a copy of the company's reports to the Securities and Exchange Commission without charge, should contact: Southern California Water Company Attn: McClellan Harris III 630 East Foothill Boulevard San Dimas, CA 91773 Phone: (909) 394-3600 Fax: (909) 394-1382 Shareholder Assistance Shareholders with questions about replacement of dividend checks, transferring stock, replacing lost or stolen certificates or other matters related to their ownership of stock, should contact: ChaseMellon Shareholder Services, L.L.C. Overpeck Centre 85 Challenger Road Ridgefield Park, NJ 07660 (800) 522-6645 http://www.cmssonline.com Dividend Reinvestment and Common Share Purchase Plan The Company has a Dividend Reinvestment and Common Share Purchase Plan that offers shareholders of record a convenient way to increase their holdings by reinvesting all or part of their cash dividends in additional Common Shares of the Company. The Plan also provides for receipt of optional cash payments for the purchase of additional Common Shares. A prospectus and authorization form may be obtained from ChaseMellon Shareholder Services, L.L.C. 1998 Dividend Schedule The following schedule shows the anticipated Common and Preferred Share record and payment dates for 1998: Record Dates Payment Dates - ------------------------------------------- February 9 March 1 May 11 June 1 August 10 September 1 November 9 December 1 Internet Address http://www.scwater.com 20 Corporate Information Board of Directors W. V. Caveney (71, 17) (a,c) Chairman of the Board Floyd E. Wicks (54, 8) (c,d) President, Chief Executive Officer James L. Anderson (56, 1) (a,c) Senior Vice President Americo Life Inc. Orange, California Jean E. Auer (61, 2) (a,b,c,d) Consultant and member of the Board of Directors of the Water Education Foundation Hillsborough, California N. P. Dodge, Jr. (61, 7) (a,b) President, N.P. Dodge Company Omaha, Nebraska Robert F. Kathol (56, 2) (a,b) Executive Vice President Kirkpatrick, Pettis, Smith, Polian Inc. Omaha, Nebraska Lloyd E. Ross (56, 2) (a,c,d) Managing Partner, Invermex L.P. Irvine, California (age, years of service) (a) Member - Compensation Committee (b) Member - Audit Committee (c) Member - Business Opportunities Committee (d) Member - Nominating Committee Elected Officers W. V. Caveney (71, 29) Chairman of the Board Floyd E. Wicks (54, 10) President, Chief Executive Officer McClellan Harris III (46, 7) Chief Financial Officer, Vice President -- Finance, Treasurer and Corporate Secretary Joel A. Dickson (45, 7) Vice President -- Customer and Operations Support Donald K. Saddoris (54, 30) Vice President -- Customer Service, Region I Randell J. Vogel (62, 5) Vice President -- Customer Service, Region II James B. Gallagher (43, 10) Vice President -- Customer Service, Region III Joseph F. Young (52, 20) Vice President -- Government Affairs Denise L. Kruger (33, 5) Vice President -- Quality Assurance Susan L. Conway (36, 9) Vice President -- Regulatory Affairs (age, years of service) EX-23 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated February 12, 1998 included in the 1997 Annual Report to Shareholders of Southern California Water Company. It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 1997 or performed any audit procedures subsequent to the date of our report. We further consent to the incorporation by reference of the above-mentioned report, incorporated by reference in this Annual Report on Form 10-K in the Southern California Water Company Registration Statements which follow:
Registration Form File No. Effective Date ----------------- -------- ---------------- S-3 33-42218 August 22, 1991 S-8 33-71226 November 4, 1993 S-3 33-60441 August 11, 1995
ARTHUR ANDERSEN LLP Los Angeles, California March 6, 1998 EX-27 7 FINANCIAL DATA SCHEDULE
UT YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 PER-BOOK 383,623 1,355 44,494 27,602 0 457,074 22,394 74,937 53,722 151,053 440 1,600 115,286 26,000 0 0 66 40 928 125 161,536 457,074 153,755 9,830 120,467 130,297 23,458 758 24,216 10,157 14,059 92 13,967 11,152 0 28,744 1.56 1.56
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