SouthWest Water Company Reports 2008 Financial Results

LOS ANGELES--(Business Wire)--
SouthWest Water Company (NASDAQ:SWWC), a leading provider of water, wastewater
and public works services, today reported financial results for the year ended
December 31, 2008. As previously announced, the company completed a
comprehensive review of prior financial statements. Accordingly, financial
results for the years ended December 31, 2007 and 2006 reported herein are
restated and reflect adjustments made pursuant to the financial review.

For 2008, the company reported operating revenue of $220.9 million, compared
with operating revenue of $214.9 million for 2007. Adjusted income from
continuing operations, which excludes impairment charges and certain items that
are not routine to operations net of tax (a non-GAAP financial measure),
declined to $1.0 million, or $0.04 per diluted common share, compared with
adjusted income from continuing operations of $7.7 million, or $0.32 per diluted
share, for 2007. A reconciliation table to the most comparable GAAP measure can
be found at the end of this release. Including these charges, the loss from
continuing operations (GAAP) was $31.1 million, or $1.27 per share, compared to
income from continuing operations of $4.9 million, or $0.20 per diluted share,
for 2007. Net loss was $31.9 million, or $1.31 per share, compared with net
income of $1.6 million, or $0.06 per diluted share, for the year ended December
31, 2007.

"The financial review and restatement are behind us and our financial statements
now provide more transparency into our operations," said Mark Swatek, chairman
and chief executive officer. "We are now focusing our energies and resources on
operating basics, on cost control and efficiency gains, on prudent, selective
growth and on carefully managing risk. The stability of our revenue during this
difficult economic time is a testament to the essential services that we offer
in an industry that continues to provide opportunity."

Segment Reporting

Beginning in 2007, SouthWest Water implemented changes to better integrate
segments of the business. In 2007 and 2008, the departments that provide
operational support functions for all businesses were consolidated. In 2008,
operations were reorganized into four operating segments to better service the
distinct strategies of each operating business.

The new reporting segments are: (1) Utilities - all of the company`s owned water
and wastewater utilities outside of Texas; (2) Texas Utilities - which is
reported as a separate segment because of different economic characteristics,
principally due to the large investments made in these operations that are not
yet being recovered in customer rates; (3) O&M Services - contract operations
for generally larger, stand alone operations and; (4) Texas MUD Services -
small, full service contracts operated by a common team of personnel resulting
in a model that proportions a fractional cost to each client.

Segment General and Administrative Costs

As the company implemented its strategy to consolidate certain functions such as
financial services, customer service and IT, overall costs increased due to
expenses associated with the establishment of these departments and their
supporting systems. In the 2008 presentation, these costs are allocated to the
segments they support and are reflected in the segment operating income or loss
results discussed below. Combined, the impact to the segments was a cost
increase of $3.6 million in 2008 as compared to 2007. Now that these departments
are up and operational, the company expects to achieve savings through
continuous right sizing of these costs. Subsequent to year end 2008,
approximately $1.4 million of these cost savings have already been achieved.

"We have enhanced our efficiencies and performance through our reorganization
into four operational segments and the consolidation of certain support
functions," commented Swatek. "The management team is committed to improving the
profitability of the company and is focusing on both operational margins and
reducing SG&A costs."

Utilities

Utilities dealt with an eminent domain proceeding and conservation impacts in
2008, but also added an accretive acquisition that nearly doubled Alabama
operations. Operating revenue increased $4.5 million, or 7%, to $71.5 million
for the year ended December 31, 2008 compared to $67.0 million for the prior
year. The net increase was primarily due to the acquisition of a wastewater
treatment plant in Alabama at the end of January 2008 and rate increases,
principally at the company`s California utility, partially offset by reduced
consumption in California due to conservation efforts and comparably cool and
wet weather. However, operating income decreased $12.2 million, or 45%, to $14.7
million compared to $26.9 million for the prior year. Items that impacted
operating income that are not routine to operations include $8.0 million of net
cost increases associated with the 2009 settlement of eminent domain proceedings
at the company`s New Mexico utility and $0.5 million of goodwill impairment of
Alabama assets. Routine operations were impacted by $3.2 million from reduced
consumption and higher production costs in California.

Subsequent to year end, the California utility received approval for an 11%
increase over 2007 rates which will lessen the impact going forward should the
utility continue to experience reduced consumption. In May 2009 the sale of the
New Mexico utility pursuant to the eminent domain settlement was completed and
the company received $53.0 million in cash at closing ($60.0 million settlement
less a $7.0 million settlement of sewer treatment fees). The proceeds were used
to pay down debt.

Texas Utilities

Texas Utilities third straight year of operational improvements were masked in
2008 by an impairment charge largely driven by the global economic events that
drove down the company`s stock price. Operating revenue increased $6.8 million,
or 25%, to $34.4 million for the year ended December 31, 2008 compared to $27.6
million for the prior year. The net increase was primarily due to rate increases
and increased consumption due to comparably hot and dry weather. However,
operating income decreased $21.2 million to a loss of $18.9 million, compared
with income of $2.3 million for the prior year. The 2008 loss was the result of
a $25.0 million impairment of goodwill.

O&M Services

O&M Services became a stand alone division for the first time in 2008, managed
separately from Texas MUD Services. During the year, the segment rationalized
its book of contracts, significantly enhanced its safety and compliance record
and streamlined management. Operating revenue decreased $0.4 million, or 1%, to
$40.5 million for the year ended December 31, 2008 compared to $40.9 million for
the prior year. The decrease in revenue was primarily due to lost contracts and
the elimination of non-core electrical contracting work, partially offset by new
contracts and project work. Operating loss increased $1.5 million to $2.9
million, compared with a loss of $1.4 million for the prior year. Items that
impacted operating income that are not routine to operations include $1.3
million of increased legal costs including reserves for potential
compliance-related fines related to alleged violations in prior years. By year
end 2008, actions were taken to reduce the potential for future losses by
canceling two poor performing contracts that produced a $0.4 million loss in
2008 and by streamlining the management structure, reducing $0.4 million in
annual management costs.

Texas MUD Services

2008 was a difficult year for Texas MUD Services. Contracts were lost to a new,
low cost competitor in the market and one historically high income generating
line of work, new housing taps and inspections, was significantly impacted by
the slow down in the housing market. Operating revenue decreased $4.9 million,
or 6%, to $74.5 million for year ended December 31, 2008 compared to $79.3
million for the prior year. The decrease was primarily due to contracts lost to
new competition, the reduction in housing related work and the elimination of
non-core operations including specialty pipe rehabilitation work and bookkeeping
services, partially offset by increased revenue from new contract pricing and
increased service and maintenance work. Operating income decreased $6.0 million
to a loss of $3.1 million, compared to income of $2.8 million for the prior
year. This decrease is primarily due to the operational cost structure not
adjusting quickly enough to the reduction in revenue and the change in mix of
services performed for clients. Subsequent to year end, annual G&A costs have
been reduced in this segment $1.0 million through staff reductions.

Corporate Expenses

General corporate expenses increased $6.5 million, or 42%, to $21.8 million
compared with $15.4 million in the prior year. Non-recurring impacts of $4.2
million include; a $3.5 million increase in costs related to the company`s
internal-use software development project, known as Cornerstone, which has been
suspended, including $2.2 million of increased expenses and $1.3 million of
impairment charges; and a $0.7 million cost for pursuit of strategic
alternatives. On-going costs were impacted primarily due to $1.2 million of
Cornerstone depreciation expense and $0.8 million in costs associated with the
write-down of legacy software and unamortized debt issuance costs.

The Cornerstone project has provided the company with a solid financial backbone
and a strong customer service infrastructure. The new call center systems and
software improvements have vastly improved customer call experiences and the new
financial and communications improvements have enhanced the efficiencies of
operations. In October 2008, the company announced the postponement of the rest
of the project in response to global market events, including the credit market
crisis and the need to optimize the use of capital. Certain portions of the
project were eliminated, resulting in the impairment charges mentioned above. As
part of the ongoing strategy of prudent capital management, the company has
recently determined that it is not probable that the remaining software modules
will be implemented and therefore the company will record a $9.0 million
write-down of the investment made in these operational systems in the second
quarter of 2009.

Capital Expenditures

Total company funded capital expenditures were $33.7 million, including $8.4
million related to the Cornerstone project, compared to $34.9 million in 2007,
including $10.0 million related to the Cornerstone project.

Bank Amendment

The company also said that it has completed an amendment to its credit facility
with its banking syndicate that cures existing events of default.

Non-GAAP Financial Measures

In an effort to provide investors with additional information regarding results
of operations as determined by accounting principles generally accepted in the
United States of America ("GAAP"), the company has disclosed certain non-GAAP
information, which it believes provides useful information to investors. A
reconciliation of the non-GAAP financial measures to the comparable GAAP
financial measure, which include income from continuing operations before the
impairment charges and certain charges that are not routine to operations, can
be found at the end of this release. These non-GAAP financial measures
supplement GAAP disclosures and should not be considered an alternative to the
GAAP measure. In addition, these non-GAAP financial measures may be computed
differently than similarly titled non-GAAP measures used by other companies.

Management believes that the presentation of these adjusted measures is useful
to investors because it provides a means of evaluating the company`s operating
performance without giving effect to impairment and other non-routine charges,
which do not reflect the day-to-day operations of the company. Moreover,
management believes that this presentation facilitates comparisons between the
company and other companies in its industry. In preparing operating plans,
budgets and forecasts, and in assessing historical performance, management
relies, in part, on trends in the company`s historical results, exclusive of
impairment and non-routine charges.

Conference Call

The company will hold a conference call with financial analysts to discuss the
full year 2008 results on July 13, 2009, at 2:00 p.m. Eastern time (11:00 a.m.
Pacific). The call will be web cast live so that interested parties may listen
over the Internet at the company`s website at www.swwc.com. For those unable to
participate in the live web cast, a replay will be available shortly after the
call on the company`s website. A telephonic replay will also be available
beginning at 5:00 p.m. Eastern (2:00 p.m. Pacific) until midnight July 20, 2009
at 888.286.8010 (international callers 617.801.6888), passcode 17555791.

About SouthWest Water Company

SouthWest Water Company provides a broad range of services, including water
production, treatment and distribution; wastewater collection and treatment;
utility billing and collection; utility infrastructure construction management;
and public works services. The company owns regulated public utilities and also
serves cities, utility districts and private companies under contract. More than
a million people in 9 states depend on SouthWest Water for high-quality,
reliable service. Additional information may be found on the company`s website:
www.swwc.com.

Forward-Looking Statements

This document contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements, including
expectations relating to future revenues and income, the company`s ability to
gain new business and control costs, involve risks and uncertainties, as well as
assumptions that, if they prove incorrect or never materialize, could cause the
results of the company to differ materially from those expressed or implied by
such forward-looking statements. Actual results may differ materially from these
expectations due to changes in regulatory, political, weather, economic,
business, competitive, market, environmental and other factors. More detailed
information about these factors is contained in the company`s filings with the
Securities and Exchange Commission, including under the caption "Risk Factors"
in the company`s 2008 Annual Report on Form 10-K. The company assumes no
obligation to update these forward-looking statements to reflect any change in
future events.

RECONCILIATION OF NON-GAAP INCOME FROM CONTINUING OPERATIONS

(unaudited and in thousands except per share) Years Ended December 31,
2008 2007 (restated)
Per share Per share
Income (loss) from continuing operations (GAAP) $ (31,053 ) $ (1.27 ) $ 4,948 $ 0.20
Add Back: Impairment charges 21,482 0.88 1,168 0.05
Add Back: Charges not routine to operations:
Charges associated with New Mexico eminent domain 5,486 0.22 320 0.02
Charges associated with Cornerstone project 3,475 0.14 1,259 0.05
Charges associated with compliance fee reserves 873 0.04 -
Charges associated with strategic alternatives 466 0.02 -
Charges associated with restatement costs 228 0.01 -
Income from continuing operations (adjusted) $ 957 $ 0.04 $ 7,695 $ 0.32

Diluted shares outstanding used in calculations 24,446 24,419

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,
(In thousands, except per share data) 2008 2007 2006
As Restated As Restated

Operating revenue $ 220,850 $ 214,876 $ 212,503

Operating expenses:
Operations and maintenance 210,493 185,752 185,004
Depreciation and amortization 15,422 12,047 10,865
Impairment of goodwill and other long-lived assets 26,929 1,768 -
Total expenses 252,844 199,567 195,869

Operating income (loss) (31,994 ) 15,309 16,634

Other income (expense):
Interest expense (9,159 ) (8,435 ) (8,439 )
Interest income 505 618 456
Other, net - (6 ) 58
Income (loss) from continuing operations before income taxes (40,648 ) 7,486 8,709

Provision for (benefit from) income taxes (9,595 ) 2,538 2,701

Income (loss) from continuing operations (31,053 ) 4,948 6,008

Income (loss) from discontinued operations, net of tax (864 ) (3,359 ) (35 )
Cumulative effect of change in accounting principle, net of tax - - 273

Net income (loss) (31,917 ) 1,589 6,246
Preferred stock dividends (24 ) (24 ) (24 )

Net income (loss) applicable to common stockholders $ (31,941 ) $ 1,565 $ 6,222

Earning (loss) per common share:
Basic:
Income (loss) from continuing operations $ (1.27 ) $ 0.21 $ 0.26
Income (loss) from discontinued operations (0.04 ) (0.14 ) (0.00 )
Cumulative effect of change in accounting principle - - 0.01
Net income (loss) applicable to common stockholders $ (1.31 ) $ 0.07 $ 0.27

Diluted:
Income (loss) from continuing operations $ (1.27 ) $ 0.20 $ 0.26
Income (loss) from discontinued operations (0.04 ) (0.14 ) (0.00 )
Cumulative effect of change in accounting principle - - 0.01
Net income (loss) applicable to common stockholders $ (1.31 ) $ 0.06 $ 0.27

Weighted average common shares outstanding:
Basic 24,446 24,101 22,928
Diluted 24,446 24,419 23,512

CONSOLIDATED BALANCE SHEETS

December 31,
(In thousands) 2008 2007

As Restated

ASSETS
Current Assets:
Cash and cash equivalents $ 1,112 $ 2,950
Accounts receivable, net 29,697 28,434
Prepaid expenses and other current assets 26,902 17,971
Total current assets 57,711 49,355

Property, Plant and Equipment, net 429,251 388,415

Other Assets:
Goodwill 17,652 43,275
Intangible assets 1,666 2,297
Other assets 20,927 20,782
Total assets $ 527,207 $ 504,124

LIABILITIES AND STOCKHOLDERS` EQUITY

Current Liabilities:
Accounts payable $ 16,139 $ 15,969
Current portion of long-term debt 2,213 2,236
Other current liabilities 28,370 26,635
Total current liabilities 46,722 44,840

Other Liabilities and Deferred Credits:
Long-term debt, less current portion 190,578 145,684
Deferred income taxes 23,750 20,945
Advances for construction 8,910 9,210
Contributions in aid of construction 117,113 109,297
Other liabilities and deferred credits 26,334 27,394

Commitments and Contingencies

Stockholders` Equity:
Preferred stock, $0.01 par value per share, 250 shares authorized, 9 shares issued and outstanding 458 458
Common stock, $0.01 par value per share, 75,000 shares authorized, 24,897 and 24,268 shares issued and outstanding at December 31, 2008 and 2007, respectively 249 243
Additional paid-in capital 147,775 143,778
Retained earnings (accumulated deficit) (34,794 ) 2,190
Accumulated other comprehensive income 112 85
Total stockholders` equity 113,800 146,754
Total liabilities and stockholders` equity $ 527,207 $ 504,124

For Further Information:
SouthWest Water Company
DeLise Keim, 213-929-1846
www.swwc.com

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