Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark One)** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **x**          | **Quarterly Report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|           | For the quarterly period  ended March 31, 2009                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| or             |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **o**          | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|           | For the transition  period from                                                to                                                 |

 

**CommissionFile Number 0-8176**

 

 

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                     | ** ** | **95-1840947**          |
|----------------------------------|------------|-------------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer        |
| incorporation or  organization)  |       | Identification  Number) |

 

**OneWilshire Building**

**624 SouthGrand Avenue, Suite 2900**

**LosAngeles, California 90017-3782**

(Address ofprincipal executive offices, including zip code)

 

**(213)929-1800**

(Registrant’stelephone, including area code)

 

**None**

(Former name,former address and former fiscal year, if changed since last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes **o**   No **x**

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporatewebsite, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (**§**232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).    Yes  **o**    No  **o**

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. (Check one):

 

| ** ** | Large accelerated filer | **o** |   |   | Accelerated filer          | **x** |
|------------|-------------------------|-------|--------|--------|----------------------------|-------|
|       | Non-Accelerated filer   | **o** |   |   | Smaller reporting  company | **o** |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct). Yes **o**   No **x**

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

|   | Class                                   |   | Outstanding as of  June 30, 2009 |   |
|--------|-----------------------------------------|--------|---------------------------------------|--------|
|   |                                    |   |                                  |   |
|   | Common Stock,  $.01 par value per share |   | 24,888,745 shares                     |   |

 

 

 

Tableof Contents

 

**TABLE OF CONTENTS**

 
| ** **       | ** ** | ** **                                                                                                                            | ** ** | **Page** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|             |       |                                                                                                                                  |       |     |
| **Part I**  | ** ** | **Financial  Information**                                                                                                            | ** ** | **2**    |
|             |       |                                                                                                                                  |       |     |
| Item 1.          |       | Financial  Statements                                                                                                                 |       | 2        |
|             |       |                                                                                                                                  |       |     |
|             |       | Condensed Consolidated Balance Sheets (Unaudited) as  of March 31, 2009 and December 31, 2008                               |       | 2        |
|             |       |                                                                                                                                  |       |     |
|             |       | Condensed Consolidated Statements of Operations  (Unaudited) for the three months ended March 31, 2009 and 2008 (As  Restated)   |       | 3        |
|             |       |                                                                                                                                  |       |     |
|             |       | Condensed Consolidated Statement of Changes in  Stockholders’ Equity for the three months ended March 31, 2009  (Unaudited) |       | 4        |
|             |       |                                                                                                                                  |       |     |
|             |       | Condensed Consolidated Statements of Cash Flows  (Unaudited) for the three months ended March 31, 2009 and 2008 (As  Restated)   |       | 5        |
|             |       |                                                                                                                                  |       |     |
|             |       | Notes to Condensed Consolidated Financial Statements  (Unaudited)                                                                     |       | 6        |
|             |       |                                                                                                                                  |       |     |
| Item 2.          |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                           |       | 21       |
|             |       |                                                                                                                                  |       |     |
| Item 3.          |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                           |       | 34       |
|             |       |                                                                                                                                  |       |     |
| Item 4.          |       | Controls and  Procedures                                                                                                              |       | 34       |
|             |       |                                                                                                                                  |       |     |
| **Part II** | ** ** | **Other Information**                                                                                                                 | ** ** | **39**   |
|             |       |                                                                                                                                  |       |     |
| Item 1.          |       | Legal Proceedings                                                                                                                     |       | 39       |
|             |       |                                                                                                                                  |       |     |
| Item 1A.         |       | Risk Factors                                                                                                                          |       | 39       |
|             |       |                                                                                                                                  |       |     |
| Item 6.          |       | Exhibits                                                                                                                              |       | 39       |
|             |       |                                                                                                                                  |       |     |
| **Signatures**   | ** ** |                                                                                                                                  |       | **41**   |

 

Table of Contents

 

**EXPLANATORY NOTE REGARDINGRESTATEMENTS**

 

SouthWestWater Company and its subsidiaries’ (“SouthWest Water” or the “Company”)condensed consolidated financial statements for the three-month period ended March 31,2008 and related financial information have been restated to correct forcertain accounting errors. For further details on the nature of the correctionsand the related effects on the Company’s previously issued consolidatedfinancial statements, see Note 2, “Restatement of Condensed ConsolidatedFinancial Statements.” Restated balances have been identified with the notation“As Restated” where appropriate. Throughout the financial statements, the term “aspreviously reported” will be used to refer to balances from the 2008 condensedconsolidated financial statements as reported prior to restatement for theerrors.

 

We havenot filed amendments to any previously filed Quarterly Reports on Form 10-Qfor the period affected by the restatement. The financial information that hasbeen previously filed or otherwise reported for this period is superseded bythe information in this Quarterly Report on Form 10-Q, and the financialstatements and related financial information contained in previously filedreports should no longer be relied upon.

 

1

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# **PART I –FINANCIAL INFORMATION**

# ** **

## **ITEM1.**              FINANCIALSTATEMENTS

**SOUTHWEST WATER COMPANY ANDSUBSIDIARIES**

 

### **CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)**

 
| ***(In thousands)***                             | ** ** | **March 31,  2009** | ** **    | **December 31,  2008** | ** ** |
|--------------------------------------------------|------------|--------------------------|---------------|-----------------------------|------------|
|                                             |       |                     |          |                        |       |
| **ASSETS**                                       |       |                     |          |                        |       |
| Current  Assets:                                 |       |                     |          |                        |       |
| Cash  and cash equivalents                       |       | $                        |  2,581   |                        | $          |  1,112 |   |
| Accounts  receivable, net                        |       | 29,292                   |          | 29,697                      |       |
| Prepaid  expenses and other current assets       |       | 27,844                   |          | 26,902                      |       |
| Total  current assets                            |       | 59,717                   |          | 57,711                      |       |
|                                             |       |                     |          |                        |       |
| Property,  Plant and Equipment, net              |       | 428,235                  |          | 429,251                     |       |
|                                             |       |                     |          |                        |       |
| Other  Assets:                                   |       |                     |          |                        |       |
| Goodwill                                         |       | 17,826                   |          | 17,652                      |       |
| Intangible  assets                               |       | 1,569                    |          | 1,666                       |       |
| Other  assets                                    |       | 21,942                   |          | 20,927                      |       |
| Total  assets                                    |       | $                        |  529,289 |                        | $          |  527,207 |   |
|                                             |       |                     |          |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**    |       |                     |          |                        |       |
|                                             |       |                     |          |                        |       |
| Current  Liabilities:                            |       |                     |          |                        |       |
| Accounts  payable                                |       | $                        |  15,750  |                        | $          |  16,139 |   |
| Current  portion of long-term debt               |       | 2,180                    |          | 2,213                       |       |
| Other  current liabilities                       |       | 26,925                   |          | 28,370                      |       |
| Total  current liabilities                       |       | 44,855                   |          | 46,722                      |       |
|                                             |       |                     |          |                        |       |
| Other  Liabilities and Deferred Credits:         |       |                     |          |                        |       |
| Long-term  debt, less current portion            |       | 195,500                  |          | 190,578                     |       |
| Deferred  income taxes                           |       | 24,952                   |          | 23,750                      |       |
| Advances  for construction                       |       | 9,198                    |          | 8,910                       |       |
| Contributions  in aid of construction            |       | 116,271                  |          | 117,113                     |       |
| Other  liabilities and deferred credits          |       | 27,987                   |          | 26,334                      |       |
|                                             |       |                     |          |                        |       |
| Commitments  and Contingencies                   |       |                     |          |                        |       |
|                                             |       |                     |          |                        |       |
| Stockholders’  Equity:                      |       |                     |          |                        |       |
| Preferred  stock                                 |       | 458                      |          | 458                         |       |
| Common  stock                                    |       | 249                      |          | 249                         |       |
| Additional  paid-in capital                      |       | 147,737                  |          | 147,775                     |       |
| Accumulated  deficit                             |       | (38,026                  | )             | (34,794                     | )          |
| Accumulated  other comprehensive income          |       | 108                      |          | 112                         |       |
| Total  stockholders’ equity                 |       | 110,526                  |          | 113,800                     |       |
| Total  liabilities and stockholders’ equity |       | $                        |  529,289 |                        | $          |  527,207 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

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**SOUTHWEST WATER COMPANY ANDSUBSIDIARIES**

 

### **CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**

 
| ** **                                           | ** ** | **Three  Months Ended  March 31,** | ** **   |
|------------------------------------------------------|------------|-----------------------------------------|--------------|
| ***(In thousands, except per share data)***          | ** ** | **2009**                                | ** **   | **2008  As Restated** | ** ** |
|                                                 |       |                                    |         |   |   |
| Operating  revenue                                   |       | $                                       |  52,396 |   | $ |  49,666 |   |
|                                                 |       |                                    |         |   |   |
| Expenses:                                            |       |                                    |         |   |   |
| Operating  expenses                                  |       | 51,462                                  |         | 45,128 |   |
| Depreciation  and amortization                       |       | 4,128                                   |         | 3,764 |   |
| Total  operating expenses                            |       | 55,590                                  |         | 48,892 |   |
|                                                 |       |                                    |         |   |   |
| Operating  income (loss)                             |       | (3,194                                  | )            | 774 |   |
|                                                 |       |                                    |         |   |   |
| Other  income (expense):                             |       |                                    |         |   |   |
| Interest  expense                                    |       | (2,076                                  | )            | (2,310 | ) |
| Interest  income                                     |       | 36                                      |         | 50 |   |
| Loss  from continuing operations before income taxes |       | (5,234                                  | )            | (1,486 | ) |
|                                                 |       |                                    |         |   |   |
| Benefit  from income taxes                           |       | (2,002                                  | )            | (521 | ) |
|                                                 |       |                                    |         |   |   |
| Loss  from continuing operations                     |       | (3,232                                  | )            | (965 | ) |
|                                                 |       |                                    |         |   |   |
| Loss  from discontinued operations, net of tax       |       | —                   |         | (8 | ) |
|                                                 |       |                                    |         |   |   |
| Net  loss                                            |       | (3,232                                  | )            | (973 | ) |
| Preferred  stock dividends                           |       | —                   |         | (6 | ) |
|                                                 |       |                                    |         |   |   |
| Net  loss applicable to common stockholders          |       | $                                       |  (3,232 | ) | $ |  (979 | ) |
|                                                 |       |                                    |         |   |   |
| Loss  per common share:                              |       |                                    |         |   |   |
| Basic:                                               |       |                                    |         |   |   |
| Loss  from continuing operations                     |       | $                                       |  (0.13  | ) | $ |  (0.04 | ) |
| Loss  from discontinued operations                   |       | —                   |         | —    |   |
| Net  loss applicable to common stockholders          |       | $                                       |  (0.13  | ) | $ |  (0.04 | ) |
|                                                 |       |                                    |         |   |   |
| Diluted:                                             |       |                                    |         |   |   |
| Loss  from continuing operations                     |       | $                                       |  (0.13  | ) | $ |  (0.04 | ) |
| Loss  from discontinued operations                   |       | —                   |         | —    |   |
| Net  loss applicable to common stockholders          |       | $                                       |  (0.13  | ) | $ |  (0.04 | ) |
|                                                 |       |                                    |         |   |   |
| Weighted  average common shares outstanding:         |       |                                    |         |   |   |
| Basic                                                |       | 24,600                                  |         | 24,385 |   |
| Diluted                                              |       | 24,600                                  |         | 24,385 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

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**SOUTHWEST WATER COMPANY ANDSUBSIDIARIES**

 

### **CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’EQUITY AND COMPREHENSIVE LOSS(UNAUDITED)**

 
| *** ***                                            | ** ** | **Preferred Stock** | ** ** | ** **               | ** **    | **Common Stock**    | ** ** | ** **               | ** ** | **Additional**           | ** ** | ** **               | ** **        | **Accumulated    Other**  | ** ** | ** **               | ** ** |
|---------------------------------------------------------|------------|--------------------------|------------|--------------------------|---------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|-------------------|---------------------------|------------|--------------------------|------------|
| ***(In thousands)***                                    | ** ** | **Number  of  Shares**   | ** ** | **Amount**               | ** **    | **Number  of  Shares**   | ** ** | **Amount**               | ** ** | **Paid-in  Capital**     | ** ** | **Accumulated  Deficit** | ** **        | **Comprehensive  Income** | ** ** | **Total**                | ** ** |
|                                                    |       |                     |       |                     |          |                     |       |                     |       |                     |       |                     |              |                      |       |                     |       |
| **Balance - December 31, 2008**                    | ** ** | **9**                    | ** ** | **$**                    | ** 458** | ** **               | **24,897** | ** **               | **$**      | ** 249**            | ** ** | **$**                    | ** 147,775** | ** **                | **$**      | ** (34,794**        | **)**      | **$** | ** 112** | ** ** | **$** | ** 113,800** | ** ** |
|                                                    |       |                     |       |                     |          |                     |       |                     |       |                     |       |                     |              |                      |       |                     |       |
| Comprehensive  loss:                                    |       |                     |       |                     |          |                     |       |                     |       |                     |       |                     |              |                      |       |                     |       |
| Net  loss                                               |       | —    |       | —    |          | —    |       | —    |       | —    |       | (3,232                   | )                 | —     |       | (3,232                   | )          |
| Other  comprehensive loss:                              |       |                     |       |                     |          |                     |       |                     |       |                     |       |                     |              |                      |       |                     |       |
| Amortization  of actuarial gains                        |       | —    |       | —    |          | —    |       | —    |       | —    |       | —    |              | (4                        | )          | (4                       | )          |
| Comprehensive  loss                                     |       | —    |       | —    |          | —    |       | —    |       | —    |       | —    |              | —     |       | (3,236                   | )          |
|                                                    |       |                     |       |                     |          |                     |       |                     |       |                     |       |                     |              |                      |       |                     |       |
| Cancelled  restricted stock awards                      |       | —    |       | —    |          | (5                       | )          | —    |       | —    |       | —    |              | —     |       | —    |       |
|                                                    |       |                     |       |                     |          |                     |       |                     |       |                     |       |                     |              |                      |       |                     |       |
| Post-vest cancellations  of non-qualified stock options |       | —    |       | —    |          | —    |       | —    |       | (118                     | )          | —    |              | —     |       | (118                     | )          |
|                                                    |       |                     |       |                     |          |                     |       |                     |       |                     |       |                     |              |                      |       |                     |       |
| Share-based  compensation                               |       | —    |       | —    |          | —    |       | —    |       | 80                       |       | —    |              | —     |       | 80                       |       |
|                                                    |       |                     |       |                     |          |                     |       |                     |       |                     |       |                     |              |                      |       |                     |       |
| **Balance - March 31, 2009**                       | ** ** | **9**                    | ** ** | **$**                    | ** 458** | ** **               | **24,892** | ** **               | **$**      | ** 249**            | ** ** | **$**                    | ** 147,737** | ** **                | **$**      | ** (38,026**        | **)**      | **$** | ** 108** | ** ** | **$** | ** 110,526** | ** ** |

 

See accompanying notes tocondensed consolidated financial statements.

 

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**SOUTHWEST WATER COMPANY ANDSUBSIDIARIES**

 

### **CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

 
|                                                                             |       |                                    |         |                     |       |                  |       |
|----------------------------------------------------------------------------------|------------|-----------------------------------------|--------------|--------------------------|------------|-----------------------|------------|
| ** **                                                                       | ** ** | **Three  Months Ended  March 31,** | ** **   |
| ***(In thousands)***                                                             | ** ** | ** **                              | **2009**     | ** **               | ** ** | **2008  As Restated** | ** ** |
|                                                                             |       |                                    |         |                     |       |
| Cash  flows from operating activities of continuing operations:                  |       |                                    |         |                     |       |
| Net  loss                                                                        |       | $                                       |  (3,232 | )                        | $          |  (973            | )          |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |       |                                    |         |                     |       |
| Loss  from discontinued operations, net of tax                                   |       | —                   |         | 8                        |       |
| Depreciation  and amortization                                                   |       | 4,128                                   |         | 3,764                    |       |
| Deferred  income taxes                                                           |       | 1,027                                   |         | 446                      |       |
| Provision  for doubtful accounts                                                 |       | 417                                     |         | 523                      |       |
| Share-based  compensation expense                                                |       | 80                                      |         | 192                      |       |
| Post-vest  cancellations of non-qualified stock options                          |       | (118                                    | )            | —    |       |
| Other,  net                                                                      |       | 58                                      |         | (98                      | )          |
| Changes  in assets and liabilities, net of effects of acquisitions               |       |                                    |         |                     |       |
| Accounts  receivable                                                             |       | (12                                     | )            | (2,164                   | )          |
| Other  current assets                                                            |       | (942                                    | )            | 1,712                    |       |
| Other  assets                                                                    |       | (281                                    | )            | (570                     | )          |
| Accounts  payable                                                                |       | (389                                    | )            | (7,892                   | )          |
| Other  current liabilities                                                       |       | (816                                    | )            | (1,532                   | )          |
| Other  liabilities                                                               |       | 1,702                                   |         | 37                       |       |
| Other,  net                                                                      |       | —                   |         | (37                      | )          |
| Net  cash provided by (used in) operating activities                             |       | 1,622                                   |         | (6,584                   | )          |
|                                                                             |       |                                    |         |                     |       |
| Cash  flows from investing activities of continuing operations:                  |       |                                    |         |                     |       |
| Additions  to property, plant and equipment                                      |       | (3,986                                  | )            | (6,589                   | )          |
| Acquisition  of businesses, net of cash acquired                                 |       | —                   |         | (23,330                  | )          |
| Proceeds  from sales of equipment                                                |       | —                   |         | 9                        |       |
| Net  cash used in investing activities                                           |       | (3,986                                  | )            | (29,910                  | )          |
|                                                                             |       |                                    |         |                     |       |
| Cash  flows from financing activities of continuing operations:                  |       |                                    |         |                     |       |
| Borrowings  under lines of credit                                                |       | 17,500                                  |         | 125,500                  |       |
| Repayments  under lines of credit                                                |       | (12,000                                 | )            | (88,500                  | )          |
| Capital  improvement reimbursements                                              |       | 288                                     |         | 795                      |       |
| Proceeds  from share-based equity incentive plans and stock purchase plans       |       | —                   |         | 762                      |       |
| Contributions  in aid of construction                                            |       | 71                                      |         | 227                      |       |
| Dividends  paid                                                                  |       | (629                                    | )            | (1,473                   | )          |
| Payments  on long-term debt                                                      |       | (644                                    | )            | (529                     | )          |
| Repayment  of advances for construction                                          |       | —                   |         | (487                     | )          |
| Deferred  financing costs                                                        |       | (753                                    | )            | (527                     | )          |
| Net  cash provided by financing activities                                       |       | 3,833                                   |         | 35,768                   |       |
|                                                                             |       |                                    |         |                     |       |
| Cash  flows from discontinued operations:                                        |       |                                    |         |                     |       |
| Operating  activities                                                            |       | —                   |         | (8                       | )          |
| Investing  activities                                                            |       | —                   |         | —    |       |
| Financing  activities                                                            |       | —                   |         | —    |       |
| Net  cash used in discontinued operations                                        |       | —                   |         | (8                       | )          |
|                                                                             |       |                                    |         |                     |       |
| Net  increase (decrease) in cash and cash equivalents                            |       | 1,469                                   |         | (734                     | )          |
| Cash  and cash equivalents at beginning of period                                |       | 1,112                                   |         | 2,950                    |       |
| Cash  and cash equivalents at end of period                                      |       | $                                       |  2,581  |                     | $          |  2,216           |       |
|                                                                                  |            |                                         |              |                          |            |                       |            |  |  |

 

See accompanying notes tocondensed consolidated financial statements.

 

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**SOUTHWEST WATER COMPANY ANDSUBSIDIARIES**

 

### **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

 

**Note 1.        Summary of Significant AccountingPolicies**

** **

**Basis of Presentation**

** **

These condensed consolidated interim financial statements are unaudited.SouthWest Water Company (the “Company”) believes the interim financialstatements are presented on a basis consistent with the audited consolidatedfinancial statements for the year ended December 31, 2008 and include alladjustments necessary for a fair presentation of the financial condition,results of operations and cash flows for such interim periods. All of theseadjustments are normal recurring adjustments.

 

The December 31, 2008 condensed consolidated balance sheet datawere derived from the audited financial statements, but do not include alldisclosures required by accounting principles generally accepted in the UnitedStates of America (“GAAP”).

 

Certain information and disclosures normally included in financialstatements prepared in accordance with GAAP have been omitted in accordancewith Securities and Exchange Commission’s rules and regulations forinterim financial reporting. These condensed consolidated interim financialstatements should be read in conjunction with the audited financial statementsand related notes included in the Company’s 2008 Annual Report on Form 10-K.The Company’s businesses are seasonal because they are affected by weather. Asa result, operating results for interim periods are not necessarily predictiveof the operating results for any other interim period or for the full year.

 

**Fair ValueMeasurements**

** **

The Company applies the provisions of Statement of Financial AccountingStandards (SFAS) No. 157, *Fair ValueMeasurements* (“SFAS 157”). SFAS 157 defines fair value and providesguidance for measuring fair value and expands disclosures about fair valuemeasurements. SFAS 157 does not require any new fair value measurements, but ratherapplies to all other accounting pronouncements that require or permit fairvalue measurements.

 

In February 2008, the Financial Accounting Standards Board (“FASB”)issued a final Staff Position to allow a one-year deferral of adoption of SFAS157 for nonfinancial assets and nonfinancial liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurring basis.The Company elected this one-year deferral and began applying the provisions ofSFAS 157 to nonfinancial assets and nonfinancial liabilities that arerecognized at fair value in the financial statements on a nonrecurring basis inthe current fiscal year beginning January 1, 2009. The Company had nononrecurring measurements recognized at fair value during the quarter ended March 31,2009. The Company generally applies fair value techniques on a nonrecurringbasis associated with (1) valuing potential impairment loss related togoodwill and indefinite-lived intangible assets accounted for pursuant to SFAS142, and (2) valuing potential impairment losses related to long-livedassets accounted for pursuant to SFAS 144. The FASB also amended SFAS 157 toexclude FASB Statement No. 13 and its related interpretive accountingpronouncements that address leasing transactions.

 

SFAS 157 enables the reader of the financial statements to assess theinputs used to develop those measurements by establishing a hierarchy forranking the quality and reliability of the information used to determine fairvalues. SFAS 157 requires that assets and liabilities carried at fair value beclassified and disclosed in one of the following three categories:

 

·                   Level 1: Quoted market prices in active markets foridentical assets or liabilities.

 

·                   Level 2: Observable market based inputs or unobservableinputs that are corroborated by market data.

 

·                   Level 3: Unobservable inputs that are not corroboratedby market data.

 

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**SOUTHWEST WATER COMPANY ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)**

 

The fair values of the Company’s cash equivalents are based on quotedprices in active markets for identical assets (Level 1).

 

The Company’s revolving credit facility and long-term debt withaggregate book values of $197.7 million and $192.8 million, had fair values ofapproximately $195.4 million and $196.4 million at March 31, 2009 and December 31,2008, respectively. The Company believes that these changes in fair value fromtheir carrying amounts are primarily due to current economic conditions and thecurrent state of the credit markets for similar debt instruments. The Companydetermined the estimated fair value amounts by using recent trade activity,available market information and commonly accepted valuation methodologies(Level 2). However, considerable judgment is required in interpreting marketdata to develop estimates of fair value. Accordingly, the fair value estimatespresented herein are not necessarily indicative of the amount that the Companycould realize in a current market exchange. The use of different assumptionsand/or estimation methodologies may have a material effect on the estimatedfair value.

 

**Recent AccountingPronouncements**

** **

In March 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities—anamendment of FASB Statement No. 133* (“SFAS 161”). Thisstatement amends SFAS 133 by requiring enhanced disclosures about a Company’sderivative instruments and hedging activities, but does not change the scopeof, or accounting under, SFAS 133.  SFAS161 requires increased qualitative, quantitative and credit-risk disclosuresabout the entity’s derivative instruments and hedging activities. The Companyadopted SFAS 161 effective January 1, 2009. The Company does not currentlyhold derivative instruments and was not impacted by the adoption of SFAS 161.

 

In April 2008, the FASB issued FSP FAS No. 142-3, *Determination of the Useful Life of Intangible Assets* (“FSP142-3”). FSP 142-3 amends the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof a recognized intangible asset under SFAS 142.  The Company adopted FSP 142-3 effective January 1,2009 and the adoption did not have a not have an impact on its results ofoperations, financial position or cash flows.

 

In December 2008, the FASB issued FSP FAS 132(R)-1, *Employers’ Disclosures about Postretirement Benefit Plan Assets*(“FAS132(R)-1”), which requires additional disclosures for employers’ pension andother postretirement benefit plan assets. As pension and other postretirementbenefit plan assets were not included within the scope of SFAS 157, FSP FAS132(R)-1 requires employers to disclose information about fair valuemeasurements of plan assets similar to the disclosures required under SFAS 157,the investment policies and strategies for the major categories of plan assets,and significant concentrations of risk within plan assets. FSP FAS 132(R)-1will be effective for the Company at December 31, 2009. As FSP FAS132(R)-1 provides only disclosure requirements, the adoption of this standardwill not have an impact on the Company’s results of operations, financialposition or cash flows.

 

In April 2009, the FASB issued FSP FAS 157-4, *DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are Not Orderly*(FSP 157-4), and FSP FASB 107-1 and Accounting Principles Board (APB) 28-1, *Interim Disclosures about Fair Value of Financial Instruments*(FSP 107-1). These two staff positions relate to fair value measurements andrelated disclosures. The FASB also issued a third FSP relating to theaccounting for impaired debt securities titled FSP FAS 115-2 and FAS 124-2, *Recognition and Presentation of Other-Than-Temporary Impairments*(FSP 115-2). These standards are effective for interim and annual periodsending after June 15, 2009. The Company has determined that FSP 157-4 andFSP 115-2 do not currently apply to its activities.  The Company will adopt the disclosurerequirements of FSP 107-1 for the quarter ended June 30, 2009.

 

In May 2009, the FASB issued SFAS No. 165, *Subsequent Events*(“SFAS 196”)*.*  SFAS No. 165 establishes generalstandards for accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued.  SFAS No. 165 sets forth the periodafter the balance sheet date during which management of a reporting entityshould evaluate events or transactions that may occur for potential recognitionin the financial statements, identifies the circumstances under which an entityshould recognize events or transactions occurring after the balance sheet datein its financial statements, and the disclosures that should be made aboutevents or transactions that occur after the balance sheet date. In preparingthese financial statements, SFAS 165 is effective 

 

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**SOUTHWEST WATER COMPANY ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)**

 

for financial statements issued after June 15, 2009.  The Company will adopt this SFAS 165 for thequarter ended June 30, 2009.

 

In June 2009, the FASB issued SFAS No. 166, *Accounting for Transfers of Financial Assets*,*an amendment to SFAS No. 140*(“SFAS 166”). SFAS 166 eliminates the concept of a “qualifying special-purposeentity,” changes the requirements for derecognizing financial assets, andrequires additional disclosures in order to enhance information reported tousers of financial statements by providing greater transparency about transfersof financial assets, including securitization transactions, and an entity’scontinuing involvement in and exposure to the risks related to transferredfinancial assets. SFAS 166 is effective for fiscal years beginning after November 15,2009. The Company will adopt SFAS 166 in fiscal 2010 and isevaluating the impact it will have on the consolidated results of the Company.

 

In June 2009, the FASB issued SFAS No. 167,*Amendments to FASB Interpretation No. 46(R) *(“SFAS167”). The amendments include: (1) the elimination of the exemption forqualifying special purpose entities, (2) a new approach for determiningwho should consolidate a variable-interest entity, and (3) changes to whenit is necessary to reassess who should consolidate a variable-interest entity.SFAS 167 is effective for the first annual reporting period beginning after November 15,2009 and for interim periods within that first annual reporting period. TheCompany will adopt SFAS 167 in fiscal 2010 and is evaluating the impact it willhave on the consolidated results of the Company.

 

In June 2009, the FASB issued SFAS No. 168, *The FASB Accounting Standards Codification and the Hierarchy ofGenerally Accepted Accounting Principles* (“SFAS 168”). SFAS 168replaces FASB Statement No. 162, *The Hierarchy of GenerallyAccepted Accounting Principles*, and establishes the FASB AccountingStandards Codification (the “Codification”) as the source of authoritativeaccounting principles recognized by the FASB to be applied by nongovernmental entitiesin the preparation of financial statements in conformity with generallyaccepted accounting principles (GAAP). SFAS 168 is effective for interim andannual periods ending after September 15, 2009. The Company will begin touse the new Codification when referring to GAAP in its quarterly report on Form 10-Qfor the quarter ending September 30, 2009. This will not have an impact onthe consolidated results of the Company.

 

**Reclassifications**

** **

Certain reclassifications have been made to the prior year’s financialstatements to conform to the current year presentation.

 

**Note 2.    Restatementof Condensed Consolidated Financial Statements`**

** **

The Company has restated its condensed consolidated statement ofoperations and its condensed consolidated statement of cash flows for thethree-month period ended March 31, 2008.

 

Descriptions of the significant restatement adjustments recorded are asfollows:

 

***Application of SFAS 71***

 

Management determined that three of the Company’s utilities previouslyapplying SFAS 71 in the Texas Utilities segment and one utility in theUtilities segment do not meet the criteria for application of SFAS 71 becausetheir cost structures have not allowed for full recovery of their cost ofservice. The Company will continue to report these entities as utilities withinthe Texas Utilities and Utilities operating segments, respectively. The errorimpacts capitalized inter-company profit margin, retired assets and certaincosts associated with rate filings.

 

Management determined that the remaining utilities in the TexasUtilities segment meet the criteria for application of SFAS 71; however,management also determined that inter-company profit was not eliminated, inerror, as it is not probable that the Company would recover this cost in futurerates, as required by SFAS 71.

 

Management also determined that two of the Company’s Alabama wastewaterutilities in the Utilities segment and a wholesale water and wastewaterbusiness within the Texas Utilities segment do not meet the criteria for applicationof SFAS 71 because the rates charged by these entities are not established, orsubject to approval, by an independent 

 

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**SOUTHWEST WATER COMPANY ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)**

 

third-party regulator. Accordingly, capitalized inter-company profitmargin included in certain fixed assets has been written off.

 

Aggregate net charges to loss from continuing operations before incometaxes related to SFAS 71 issues, including the inappropriate capitalization ofinter-company profit, of $0.6 million were recorded for the three-month periodended March 31, 2008.

 

***Accounting for Acquisitions***

 

The Company determined that principles related to the accounting forcertain business combinations were misapplied and errors were made inestablishing the rate of depreciation of assets acquired and in allocating theinitial allocation of the purchase price to assets and liabilities acquired.

 

At the time of those acquisitions, the Company applied a rate ofdepreciation that did not consider the length of time the assets were inservice prior to being acquired. As a result, depreciation expense wasunderstated.

 

Additionally, management identified errors in the allocation of purchaseprices and the accounting for these business combinations was revised tocorrect the allocation of purchase prices to acquired property plant andequipment, identifiable intangible assets, and goodwill.

 

Based on the corrected useful lives of acquired assets and the revisedpurchase price allocations, depreciation and amortization expense increased$0.02 million during the three-month period ended March 31, 2008.Additionally, based on the revision of the fair value allocation for certaintransactions, operating expenses during the three-month period ended March 31,2008 decreased by $0.06 million.

 

***Valuation and Accounting Estimates***

 

As a part of its restatement, the Company identified errors in thefollowing valuation and accounting estimates:

 

·                   Stock-based compensation — Management identified errors in itsaccounting for stock-based compensation primarily related to the accelerationof vesting upon termination and in the valuation of options granted related toappropriate assumptions used in the Black-Scholes option pricing model. Thecorrection of these errors resulted in a decrease of stock compensation expensefor the three-month period ended March 31, 2008 of $0.04 million.

 

·                   Unrecorded liabilities — Management identified certainliabilities for services and capital equipment that were not properly accruedat the end of reported financial periods.

 

In the aggregate, the adjustments described above resulted in anincremental loss before taxes of $0.06 million recorded for the three-monthperiod ended March 31, 2008.

 

***Capitalization of Operating Expenses***

 

The Company conducted a review of its accounting for the costsassociated with the installation of water and sewer taps and determined thatthe Company had been improperly capitalizing and depreciating costs associatedwith installing water and sewer taps in Texas and Mississippi by recognizingthe related tap fee revenue when received, instead of expensing the costs asincurred and recognizing the related revenue in the period the tap was installed.As a result, previously capitalized tap installation costs were charged toexpense when incurred, the associated revenue was deferred to be recognizedupon installation and the related depreciation charge was reversed.

 

Aggregate net charges to loss from continuing operations before incometaxes related to these issues of $0.03 million were recorded for thethree-month period ended March 31, 2008.

 

***Other Adjustments***

 

In the restatement the Company also adjusted for the impact of othererrors that were identified in prior periods but were determined to beimmaterial to that period’s financial statements and therefore corrected in thesubsequent 

 

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**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)**

 

period. As part of the restatement of the consolidated financialstatements, the Company reversed these related entries and reflected thecorrection of the error in the appropriate period. These errors primarilyrelate to period end revenue and expense accruals, billing adjustments, thecalculation of asset impairment charges and income taxes.

 

For the three-month period ended March 31, 2008 presented in the “RestatementAdjustments” columns in the tables below, the $0.4 million increase inoperating loss was offset by a $0.4 million net tax benefit

 

The nature of the restatement adjustments and the impact on the Company’spreviously reported condensed consolidated statement of operations for thethree-month period ended March 31, 2008 are shown in the following table(in thousands, except per share data):

 
| ** **                                             | ** ** | ** **                       | ** ** | ** **                   | ** ** | **Restatement  Adjustment**   | ** ** | ** **                        | ** ** | ** **                                           | ** ** | ** **                                   | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------|------------|
| **Three Months Ended March 31, 2008**             | ** ** | **As Previously  Reported** | ** ** | **Reclass-  ifications (1)** | ** ** | **Application  of   SFAS 71** | ** ** | **Accounting  for  Acquisitions** | ** ** | **Goodwill,  Valuation  and  Accounting  Estimates** | ** ** | **Capitalization  of Operating  Costs** | ** ** | **Other** | ** ** | **As Restated** | ** ** | **Discontinued  Operations  (4)** | ** ** | **As  Restated  and Adjusted  for  Discontinued  Operations** | ** ** |
|                                                   |       |                             |       |                         |       |                          |       |                              |       |                                                 |       |                                         |       |   |   |   |   |   |   |   |   |
| Operating  revenue                                     |       | $                                | 50,763     |                         | $          | —              |       | $                                 | (352       | )                                                    | $          | —                             |       | $ | (21 | ) | $ | (166 | ) | $ | (614 | ) | $ | 49,610 |   | $ | 56 |   | $ | 49,666 |   |
| Expenses:                                              |       |                             |       |                         |       |                          |       |                              |       |                                                 |       |                                         |       |   |   |   |   |   |   |   |   |
| Operations  and maintenance                            |       | 48,956                           |       | (3,430                       | )          | 55                            |       | (55                               | )          | 39                                                   |       | (108                                         | )          | (390 | ) | 45,067 |   | 61 |   | 45,128 |   |
| Depreciation  and amortization                         |       | —                 |       | 3,430                        |       | 214                           |       | 15                                |       | 2                                                    |       | (25                                          | )          | 128 |   | 3,764 |   | —   |   | 3,764 |   |
| Total  expenses                                        |       | 48,956                           |       | —             |       | 269                           |       | (40                               | )          | 41                                                   |       | (133                                         | )          | (262 | ) | 48,831 |   | 61 |   | 48,892 |   |
| Operating  income                                      |       | 1,807                            |       | —             |       | (621                          | )          | 40                                |       | (62                                                  | )          | (33                                          | )          | (352 | ) | 779 |   | (5 | ) | 774 |   |
|                                                   |       |                             |       |                         |       |                          |       |                              |       |                                                 |       |                                         |       |   |   |   |   |   |   |   |   |
| Interest  expense                                      |       | (2,361                           | )          | —             |       | 55                            |       | (18                               | )          | —                                     |       | —                             |       | 14 |   | (2,310 | ) | —   |   | (2,310 | ) |
| Interest  income                                       |       | 122                              |       | —             |       | —              |       | —                  |       | —                                     |       | —                             |       | (78 | ) | 44 |   | 6 |   | 50 |   |
| Loss  from continuing operations before income taxes   |       | (432                             | )          | —             |       | (566                          | )          | 22                                |       | (62                                                  | )          | (33                                          | )          | (416 | ) | (1,487 | ) | 1 |   | (1,486 | ) |
| Benefit  from income taxes **(2)**                     |       | (118                             | )          | —             |       | —              |       | —                  |       | —                                     |       | —                             |       | (403 | ) | (521 | ) | —   |   | (521 | ) |
| Loss  from continuing operations                       |       | (314                             | )          | —             |       | (566                          | )          | 22                                |       | (62                                                  | )          | (33                                          | )          | (13 | ) | (966 | ) | 1 |   | (965 | ) |
| Loss  from discontinued operations, net of tax **(3)** |       | (287                             | )          | —             |       | (89                           | )          | —                  |       | —                                     |       | —                             |       | 369 |   | (7 | ) | (1 | ) | (8 | ) |
| Net  loss                                              |       | (601                             | )          | —             |       | (655                          | )          | 22                                |       | (62                                                  | )          | (33                                          | )          | 356 |   | (973 | ) | —   |   | (973 | ) |
| Preferred  stock dividends                             |       | (6                               | )          | —             |       | —              |       | —                  |       | —                                     |       | —                             |       | —   |   | (6 | ) | —   |   | (6 | ) |
| Net  loss applicable to common Stockholders            |       | $                                | (607       | )                            | $          | —              |       | $                                 | (655       | )                                                    | $          | 22                                           |       | $ | (62 | ) | $ | (33 | ) | $ | 356 |   | $ | (979 | ) | $ | —   |   | $ | (979 | ) |
| Earning  (loss) per common share:                      |       |                             |       |                         |       |                          |       |                              |       |                                                 |       |                                         |       |   |   |   |   |   |   |   |   |
| Basic:                                                 |       |                             |       |                         |       |                          |       |                              |       |                                                 |       |                                         |       |   |   |   |   |   |   |   |   |
| Loss  from continuing operations                       |       | $                                | (0.01      | )                            |       |                          |       |                              |       |                                                 |       |                                         |       |   |   |   |   |   |   |   | $ | (0.04 | ) |
| Loss  from discontinued operations                     |       | (0.01                            | )          |                         |       |                          |       |                              |       |                                                 |       |                                         |       |   |   |   |   |   |   | —   |   |
|                                                   |       |                             |       |                         |       |                          |       |                              |       |                                                 |       |                                         |       |   |   |   |   |   |   |   |   |
| Net  loss applicable to common stockholders            |       | $                                | (0.02      | )                            |       |                          |       |                              |       |                                                 |       |                                         |       |   |   |   |   |   |   |   | $ | (0.04 | ) |
| Diluted:                                               |       |                             |       |                         |       |                          |       |                              |       |                                                 |       |                                         |       |   |   |   |   |   |   |   |   |
| Loss  from continuing operations                       |       | $                                | (0.01      | )                            |       |                          |       |                              |       |                                                 |       |                                         |       |   |   |   |   |   |   |   | $ | (0.04 | ) |
| Loss  from discontinued operations                     |       | (0.01                            | )          |                         |       |                          |       |                              |       |                                                 |       |                                         |       |   |   |   |   |   |   | —   |   |
|                                                   |       |                             |       |                         |       |                          |       |                              |       |                                                 |       |                                         |       |   |   |   |   |   |   |   |   |
| Net  loss applicable to common stockholders            |       | $                                | (0.02      | )                            |       |                          |       |                              |       |                                                 |       |                                         |       |   |   |   |   |   |   |   | $ | (0.04 | ) |

 
| (1) | Certain  reclassifications have been made to the previously reported amounts to  conform to the current presentation.                                                                                                                                                                                                                                           |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The tax provisions  related to the restatement adjustments were based on the effective rates of  the jurisdictions affected.                                                                                                                                                                                                                                    |
| (3) | See Note 4, “Assets  Held for Sale and Dispositions.”                                                                                                                                                                                                                                                                                            |
| (4) | This column is used to reclassify the Company’s  operating statement classification for amounts previously classified as “Loss  from discontinued operations, net of tax” to their related individual  operating statement captions to conform to the current presentation. See Note 4,  “Assets Held for Sale and Dispositions.” |

 

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**SOUTHWEST WATER COMPANY ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)**

 

The following table presents the impact of the restatementadjustments on the Company’s previously reported condensed consolidatedstatements of cash flows for the three months ended March 31, 2008 (inthousands):

 
| ** **                                                                   | ** ** | **Three  months ended March 31, 2008** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                   | ** ** | **As  Previously  Reported**                | ** ** | **Restatement  Adjustment** | ** ** | **As  Restated** | ** ** |
|                                                                         |       |                                        |       |   |   |   |   |
| Cash  flows from operating activities of continuing operations:              |       |                                        |       |   |   |   |   |
| Net  loss                                                                    |       | $                                           | (601       | ) | $ | (372 | ) | $ | (973 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                        |       |   |   |   |   |
| Loss  from discontinued operations, net of tax                               |       | 287                                         |       | (279 | ) | 8 |   |
| Depreciation  and amortization                                               |       | 3,642                                       |       | 122 |   | 3,764 |   |
| Deferred  income taxes                                                       |       | 569                                         |       | (123 | ) | 446 |   |
| Provision  for doubtful accounts                                             |       | —                       |       | 523 |   | 523 |   |
| Share-based  compensation expense                                            |       | 234                                         |       | (42 | ) | 192 |   |
| Other,  net                                                                  |       | —             |       | (98 | ) | (98 | ) |
| Changes  in assets and liabilities, net of effects of acquisitions:          |       |                                        |       |   |   |   |   |
| Accounts  receivable                                                         |       | (1,731                                      | )          | (433 | ) | (2,164 | ) |
| Other  current assets                                                        |       | 3,031                                       |       | (1,319 | ) | 1,712 |   |
| Other  assets                                                                |       | (2,708                                      | )          | 2,138 |   | (570 | ) |
| Accounts  payable                                                            |       | (6,795                                      | )          | (1,097 | ) | (7,892 | ) |
| Other  current liabilities                                                   |       | (1,065                                      | )          | (467 | ) | (1,532 | ) |
| Other  liabilities                                                           |       | 37                                          |       | —      |   | 37 |   |
| Other,  net                                                                  |       | (44                                         | )          | 7 |   | (37 | ) |
| Net  cash used in operating activities                                       |       | (5,144                                      | )          | (1,440 | ) | (6,584 | ) |
|                                                                         |       |                                        |       |   |   |   |   |
| Cash  flows from investing activities of continuing operations:              |       |                                        |       |   |   |   |   |
| Additions  to property, plant and equipment                                  |       | (7,960                                      | )          | 1,371 |   | (6,589 | ) |
| Acquisition  of businesses, net of cash acquired                             |       | (23,330                                     | )          | —      |   | (23,330 | ) |
| Proceeds  from sales of land and equipment                                   |       | 9                                           |       | —      |   | 9 |   |
| Net  cash used in investing activities                                       |       | (31,281                                     | )          | 1,371 |   | (29,910 | ) |
|                                                                         |       |                                        |       |   |   |   |   |
| Cash  flows from financing activities of continuing operations:              |       |                                        |       |   |   |   |   |
| Borrowings  under lines of credit                                            |       | 121,500                                     |       | 4,000 |   | 125,500 |   |
| Repayments  under lines of credit                                            |       | (84,500                                     | )          | (4,000 | ) | (88,500 | ) |
| Capital  improvement reimbursements                                          |       | 795                                         |       | —      |   | 795 |   |
| Proceeds  from share-based equity incentive plans and stock purchase plans   |       | 761                                         |       | 1 |   | 762 |   |
| Contributions  in aid of construction                                        |       | 227                                         |       | —      |   | 227 |   |
| Dividends  paid                                                              |       | (1,473                                      | )          | —      |   | (1,473 | ) |
| Payments  on long-term debt                                                  |       | (439                                        | )          | (90 | ) | (529 | ) |
| Deferred  financing costs                                                    |       | (527                                        | )          | —      |   | (527 | ) |
| Repayment  of advances for construction                                      |       | (488                                        | )          | 1 |   | (487 | ) |
| Net  cash provided by financing activities                                   |       | 35,856                                      |       | (88 | ) | 35,768 |   |
|                                                                         |       |                                        |       |   |   |   |   |
| Cash  flows from discontinued operations:                                    |       |                                        |       |   |   |   |   |
| Operating  activities                                                        |       | (165                                        | )          | 157 |   | (8 | ) |
| Investing  activities                                                        |       | —             |       | —      |   | —      |   |
| Financing  activities                                                        |       | —             |       | —      |   | —      |   |
| Net  cash used in discontinued operations                                    |       | (165                                        | )          | 157 |   | (8 | ) |
|                                                                         |       |                                        |       |   |   |   |   |
| Net  decrease in cash and cash equivalents                                   |       | (734                                        | )          | —      |   | (734 | ) |
| Cash  and cash equivalents at beginning of the period                        |       | 2,950                                       |       | —      |   | 2,950 |   |
| Cash  and cash equivalents at end of the period                              |       | $                                           | 2,216      |   | $ | —      |   | $ | 2,216 |   |

 

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**SOUTHWEST WATER COMPANY ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)**

 

**Note 3.        Acquisition**

** **

On January 31,2008, the Company acquired substantially all of the assets of a wastewatercollection system and related treatment plant in Birmingham, Alabama. Thepurchase price was $23.3 million in cash which the Company borrowed under itsrevolving line of credit. The acquisition was accounted for as a purchase andthe assets acquired have been recorded at their estimated fair values,consisting of $20.8 million of utility plant and $2.5 million of land.

 

Thecondensed consolidated financial statements reflect the financial position andresults of operations of the acquired utility subsequent to its acquisitiondate. Unaudited pro forma consolidated results of operations are presented inthe table below for the three months ended March 31, 2008 as if theacquisition had occurred as of the beginning of each period presented ***(In thousands)***:

 
| Total  revenues                                                    |   | $      | 50,073 |   |
|--------------------------------------------------------------------|--------|--------|--------|--------|
| Loss  from continuing operations                                   |   | (914   | )      |
| Loss  from continuing operations applicable to common stockholders |   | (920   | )      |
| Net  loss applicable to common stockholders                        |   | (928   | )      |
|                                                               |   |   |   |
| Loss  per common share:                                            |   |   |   |
| From  continuing operations applicable to common stockholders:     |   |   |   |
| Basic                                                              |   | $      | (0.04  | )      |
| Diluted                                                            |   | (0.04  | )      |
| Net  loss applicable to common stockholders:                       |   |   |   |
| Basic                                                              |   | (0.04  | )      |
| Diluted                                                            |   | (0.04  | )      |

 

The proforma results of operations are not necessarily indicative of the results thatwould have been achieved had the acquisition occurred as of the dates indicatedor to project the results of operations for any future periods. The aboveinformation reflects adjustments for historical revenues and expenses prior tothe acquisition, as well as incremental operating, general and administrative,depreciation, interest and income tax expense based on the estimated fair valueof assets acquired and additional indebtedness in connection with theacquisition.

 

**Note 4.        Assets Held for Sale and Dispositions**

 

During2007, the Company committed to a plan to sell its wholesale water andwastewater operations in Texas.   In December 2008,the Company completed the sale of its wholesale wastewater business for netcash proceeds of $2.2 million and established a receivable of $0.6 million. Thewastewater treatment plant sold represented a portion of the asset group heldfor sale. The Company is uncertain whether it can consummate the sale of theremaining water business during 2009. Accordingly, the business activity of the water component is reflectedin consolidated continuing operations. The results of operations and cash flows for the wastewater operationsare reflected as discontinued operations for the three-month period ended March 31,2008.  Net assets held for sale at December 31,2008 consisted of property, plant and equipment aggregating $6.3 million anddeferred revenue liabilities of $3.5 million. The following table summarizesthe results of operations of the wastewater operations included in the condensedconsolidated statement of operations as a discontinued operation.

 
| ** **                         | **Three  Months Ended**  | ** **         |
|------------------------------------|--------------------------|--------------------|
| ** **                         | **March 31,  2008** | ** **         |
| ***(In thousands)***               | ** **               | **(As  Restated)** | ** ** |
| Revenues                           |                     | $                  | 95 |   |
| Operating  expenses                |                     | 107                |   |
| Operating  loss                    |                     | (12                | ) |
| Interest  income                   |                     | —             |   |
| Pretax  loss                       |                     | (12                | ) |
| Income  tax benefit                |                     | 4                  |   |
| Loss from  discontinued operations |                     | $                  | (8 | ) |

 

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**SOUTHWEST WATER COMPANY ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)**

 

Inaccordance with EITF 87-24, *Allocation of Interest toDiscontinued Operation*(“EITF 87-24”), as amended, interestexpense reflects interest on debt that the Company is required to repay as aresult of the sale. In addition, and also in accordance with EITF 87-24,costs and expenses exclude the allocation of general corporate overhead.

 

Inaccordance with SFAS 144**intangible andother long-lived assets are assessed for recoverability**wheneverevents or changes in circumstances indicate that their carrying value may notbe recoverable through the estimated undiscounted future cash flows resultingfrom the use of the assets. The Company had determined that the carrying valueof the wastewater assets may not be recoverable through the sales process. As aresult, impairment charges aggregating $0.3 million (all related to property,plant and equipment) were recorded during the second quarter of 2008, to reducethe carrying value of the long-lived assets to expected realizable value.

 

**TheCompany entered into an agreement to sell certain assets of its SouthwestEnvironmental Laboratories, Inc. subsidiary included in the Texas MUDServices segment for $0.5 million in cash paid at close and a contingent considerationconsisting of 25% of the buyer’s quarterly aggregate invoice amounts subsequentto the sale up to an additional $0.75 million of consideration.  The Company also entered into a separateagreement to sell the remaining assets representing real property for totalconsideration of $0.7 million.  Theseagreements closed on April 1, 2009 and April 23, 2009,respectively.  Total assets held for saleconsisted of related property, plant and equipment aggregating $0.5 million,intangible assets of $0.1 million and goodwill of $0.3 million at March 31,2009.  The Southwest EnvironmentalLaboratories, Inc. subsidiary was not considered a discontinued operationin the accompanying consolidated financial statements.**

 

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**Note 5.        Long-Term Debt**

** **

Long-termdebt consists of the following as of March 31, 2009 and December 31,2008:

 
| *** ***                                                 | *** *** | ***March 31,*** | *** *** | ***December 31,*** | ** ** |
|--------------------------------------------------------------|--------------|----------------------|--------------|-------------------------|------------|
| ***(In  thousands)***                                        | ** **   | **2009**             | ** **   | **2008**                | ** ** |
|                                                         |         |                 |         |                    |       |
| Revolving  credit facility                                   |         | $                    | 103,500      |                    | $          | 98,000 |   |
|                                                         |         |                 |         |                    |       |
| 6.85%  convertible subordinated debentures due 2021          |         | 11,912               |         | 11,962                  |       |
|                                                         |         |                 |         |                    |       |
| $30  million capital lease facility and other capital leases |         | 3,944                |         | 4,332                   |       |
|                                                         |         |                 |         |                    |       |
| Term  Loans:                                                 |         |                 |         |                    |       |
| Monarch  Utilities, Inc.:                               |         |                 |         |                    |       |
| 7.37%  fixed rate term loan due 2022                         |         | 10,074               |         | 10,267                  |       |
| 5.77%  fixed rate term loan due 2021                         |         | 693                  |         | 706                     |       |
| 6.10%  fixed rate term loan due 2031                         |         | 20,000               |         | 20,000                  |       |
|                                                         |         |                 |         |                    |       |
| First  Mortgage Bonds:                                       |         |                 |         |                    |       |
| Suburban  Water Systems:                                     |         |                 |         |                    |       |
| 9.09%  series B first mortgage bond due 2022                 |         | 8,000                |         | 8,000                   |       |
| 5.64%  series D first mortgage bond due 2024                 |         | 15,000               |         | 15,000                  |       |
| 6.30%  series E first mortgage bond due 2026                 |         | 10,000               |         | 10,000                  |       |
| New  Mexico Utilities, Inc.:                            |         |                 |         |                    |       |
| 6.10%  series C first mortgage bond due 2024                 |         | 12,000               |         | 12,000                  |       |
|                                                         |         |                 |         |                    |       |
| Economic  Development Revenue Bonds:                         |         |                 |         |                    |       |
| 6.0%  series 1998A due 2018                                  |         | 1,810                |         | 1,810                   |       |
|                                                         |         |                 |         |                    |       |
| Acquisition-related  indebtedness and other                  |         | 78                   |         | 78                      |       |
| Total  long-term debt payment obligations                    |         | 197,011              |         | 192,155                 |       |
| Unamortized  Monarch term loan fair value adjustments        |         | 669                  |         | 636                     |       |
| Total  long-term debt                                        |         | 197,680              |         | 192,791                 |       |
| Less  current portion of long-term debt                      |         | (2,180               | )            | (2,213                  | )          |
| Long-term debt,  less current portion                        |         | $                    | 195,500      |                    | $          | 190,578 |   |

 

On February 15,2008, the Company replaced its existing revolving line of credit by enteringinto a credit agreement with several lenders including Bank of America, aslender and Administrative Agent, KeyBank, CoBank, U.S. Bank, JPMorgan ChaseBank, Comerica Bank, Bank of the West, Citibank and Union Bank of California(the “Bank Group”). The credit agreement provided for a $150.0 millionrevolving credit facility. Proceeds from the initial borrowing under the creditagreement were used to repay borrowings under the Company’s prior $100.0million revolving line of credit.

 

TheCompany is subject to commitment fees under the facility as well as themaintenance of customary financial ratios, cash flow results and otherrestrictive covenants. The Company was not in compliance with certainrestrictive covenants due to the failure to deliver timely its September 30,2008, March 31, 2009 and June 30, 2009 Quarterly Reports on Form 10-Qand its 2008 Annual Report on Form 10-K. In addition, the Company was in violation of one of its financialcovenants, specifically the debt to capitalization ratio, at December 31,2008 and at March 31, 2009.  However, the Company received five amendments to the credit agreementfrom the Bank Group dated November 19, 2008, May 28, 2009, June 17,2009, July 8, 2009 and July 31, 2009 which waived existing andanticipated defaults, specifically related to additional time with regards tofinancial filings and with regards to the debt to capitalization ratio.

 

The May 28,2009 amendment to the agreement reduced the total amounts available to borrowunder the line from $150.0 million to $110.0 million.

 

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**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)**

 

Therevolving line of credit commitment ends on February 15, 2013 (if notrenewed or extended), at which time all borrowings must be repaid. However,there are certain provisions within the revolving credit facility agreementthat could potentially be interpreted as a subjective acceleration clause.Though the Company does not anticipate any changes in its business practicesthat would result in any material adjustments to the revolving credit facility,management cannot be certain how the lender will interpret the subjectiveacceleration clause.

 

Borrowingsunder the credit facility bear interest, at the Company’s option, based on amargin either over the LIBOR rate or the prime rate. The margins vary dependingupon the Company’s consolidated debt to equity ratio. As of March 31,2009, the applicable margins are 3.50% over the LIBOR rate or 2.50% over theprime rate. The nominal weighted-average annual interest rates on all creditfacility borrowings outstanding were 4.06% as of March 31, 2009 and 1.58%as of December 31, 2008.

 

TheCompany had irrevocable standby letters of credit in the amount of $3.3 millionissued and outstanding under its revolving credit facility as of March 31,2009, reducing available borrowings under the credit facility to $43.2 millionas of that date.

 

**Note 6.        Commitments and Contingencies**

** **

**Legal Proceedings**

** **

*New Mexico Utilities, Inc.*

* *

NewMexico Utilities, Inc. (“NMUI”), one of the Company’s wholly-ownedregulated utilities, had an agreement with the Albuquerque Bernalillo CountyWater Utility Authority, a political subdivision of the State of New Mexico(the “ABCWUA”), whereby the ABCWUA treated the effluent from NMUI’s wastewatercollection system for a fee. The treated effluent is returned to the Rio GrandeUnderground Basin, creating return flow credits. Return flow creditssupplemented NMUI’s existing water rights, enabling it to pump additional waterfrom the basin.

 

In August 2004,the ABCWUA increased the fee charged to NMUI, using a different formula thanhad been used to calculate fee increases since 1973. The Company believed theincrease violated the terms of a 1973 written agreement between the parties.Subsequently, the ABCWUA also claimed ownership of the return flow credits. On September 13,2004, the Company filed a Complaint for Declaratory Judgment in the SecondJudicial District Court, County of Bernalillo, State of New Mexico (the “Court”),requesting that the Court settle these disputes. In a letter ruling dated May 2,2007, the Court ruled that the ABCWUA could use a new formula to set fees forNMUI. The Company filed a motion for reconsideration and that motion was deniedon October 2, 2007. The Court did not rule on whether the new ratewas appropriate, made no determination as to any amount NMUI may owe to theABCWUA, and did not rule on the ownership of the return flow credits.

 

Additionally,the ABCWUA had asserted that NMUI owed to the ABCWUA an amount of approximately$800,000 related to back payments, penalties and interest arising from analleged underpayment by NMUI for three years for its discharge of effluentthrough an unmetered second connection between NMUI and the ABCWUA. The claimwas contested by NMUI. On October 29, 2008, the matter was settled by aone time payment by NMUI to the ABCWUA of $500,000.

 

The NewMexico Public Regulation Commission (the “NMPRC”) ruled that NMUI may commencebilling its customers for a portion of the sewer fee increase and hold thecollected amounts in escrow (“Rate Rider Escrow”), pending a final courtdecision.

 

Inaddition, on January 19, 2007, the ABCWUA and the City of Rio Rancho, ahome-rule municipal corporation, as Petitioners, filed a Petition forCondemnation against NMUI and others, as defendants, in the Court (the “Petition”).The Petition sought to acquire, by condemnation, all of the assets of NMUI,including all real property, through the stated power of eminent domain. ThePetition also alleged that the Petitioners need to acquire the NMUI assets forthe public purposes of providing water and wastewater services to NMUIcustomers and that the acquisition of NMUI is necessary, appropriate and in thepublic interest. The Company contested the Petition.

 

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**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)**

 

In thefourth quarter of 2008, the Company attempted to settle the sewer rate andreturn flow credit issues with an $8.0 million cash offer. The settlement offerwas not accepted by ABCWUA.

 

On January 29,2009, NMUI and the ABCWUA entered into a Settlement, Arbitration Award, andAcquisition Agreement (the “Agreement”) to resolve all outstanding claims,demands and existing lawsuits between them. The Agreement closed on May 8,2009 (the “Closing”) after the financing was completed.  Under the Agreement, the ABCWUA acquiredcertain of the assets of NMUI necessary for the ABCWUA to own, operate andmaintain the water and wastewater system of NMUI in settlement of condemnation.In consideration of the assets acquired, the ABCWUA agreed to pay to NMUI atthe Closing as full, final and complete consideration the sum of: (i) $60.0million; (ii) an amount equal to the NMUI accounts receivable at the dateof Closing; and (iii) an amount equal to the unbilled services at the dateof Closing.

 

On May 8,2009 NMUI was also refunded an amount equal to 7/8th of the total Rate RiderEscrow Funds deposited from the period from November 27, 2007 through January 12,2009 aggregating $1.3 million. The remaining Rate Rider Escrow Funds depositedthrough January 12, 2009 were released to NMUI for transfer to the ABCWUAto fund customer bill credits or refunds. NMUI also received reimbursement from the Rate Rider Escrow Funds foramounts paid to the ABCWUA for the period January 13, 2009 through thedate of Closing.

 

Inaddition, the settlement resolves all other legal issues between NMUI andABCWUA including the dispute over the sewer fee the ABCWUA charged NMUI for thetreatment of effluent from NMUI’s wastewater collection system and theownership of the return flow credits from that treated wastewater, as well asall other disputed amounts of the ABCWUA. As part of the settlement, NMUIagreed to pay $7.0 million to the ABCWUA at the time of closing to resolve thesewer fee issue.  This amount was accruedat December 31, 2008.

 

Netcash proceeds from settlement were $53.9 million and the resulting gain, net ofdirect transactional costs of $0.2 million, was $27.0 million. Substantiallyall of the utility plant assets of NMUI were pledged as collateral of $12.0million in first mortgage bonds with an original maturity of 2024.  The Company repaid in full the outstandingborrowings under the related bonds and related accrued interest of $0.3 million,and used the remaining cash proceeds of $41.4 million to pay the unassumedliabilities of NMUI and to pay down the Company’s revolving credit facility.

 

*Investigations*

* *

On May 18,2005, the Environmental Protection Agency (“EPA”) executed a search warrant atthe Company’s Texas-based testing laboratory and on July 20, 2006 thelaboratory received a subpoena to provide additional records and information toa grand jury. The Company has cooperated fully with the EPA’s investigation andhas provided the records requested. The Company remains in close cooperationand coordination with EPA’s counsel in an attempt to resolve the matterfavorably. In April 2009, the Company submitted to the EPA its formalrequest that the EPA not pursue criminal sanctions against the Company.  No amounts have been accrued related to theproposed settlement or any potential fines, penalties or other liabilities.

 

TheCompany received a letter dated January 28, 2008 from the California StateWater Resources Control Board Office of Enforcement (the “Board”). The letterindicates that the Board has conducted an investigation of the operations of asubsidiary of the Company with respect to various California wastewatertreatment facilities which are operated, but not owned, by the subsidiary. TheBoard alleges that the subsidiary has violated certain provisions of theCalifornia Water Code and may be subject to civil administrative liability inexcess of $15.0 million, and possible administrative action against thesubsidiary’s status as a contract operator in California.  Since receipt of the letter, the Company hasconducted an internal investigation and worked in cooperation with the Board toresolve the matter favorably. The Board has made an offer of settlement,assuming that the Company implements an acceptable compliance program thatwould among other things require the Company to pay fines and penalties in thesum of $1.25 million, which is fully accrued at December 31, 2008. TheCompany is still in discussions with the Board to negotiate that offer further.

 

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**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)**

 

*Class Action Litigation*

* *

*Perrin v.SouthWest Water Company, et al.*, Case No. CV 08-07844 (Central District ofCalifornia) and related, consolidated cases: On November 26, 2008, an alleged purchaser of the Company’s stockfiled an alleged securities class action lawsuit in the United States DistrictCourt for the Central District of California. The complaint generally alleges that from May 10, 2005 through November 9,2008, the Company made false statements or omitted to state facts necessary tomake the Company’s disclosures not misleading. Five additional and substantially similar cases were filed in the samecourt.  On January 26, 2009, motionsfor consolidation and for the appointment of lead plaintiff and lead counselwere filed by the plaintiffs.  On February 12,2009, the court granted the motion for consolidation and for the appointment oflead plaintiff and lead counsel. Pursuant to stipulation, the lead plaintiff has up to and including thelater of 60 days after the appointment of lead plaintiff or the filing ofthe restated financial statements to file a consolidated complaint.  The Company will have 60 days to answer ormove to dismiss the consolidated complaint. Given the nature and preliminarystatus of these cases, the Company cannot yet determine the amount or areasonable range of potential loss in these matters, if any.

 

*Derivative Litigation*

* *

*Sherman v.Christie, et al.*,Case No. BC404946 (Los Angeles County Superior Court) and relatedcases):  On January 2, 2009, analleged shareholder of the Company filed a shareholder derivative case onbehalf of the Company, alleging breach of fiduciary duty arising from theCompany’s announcement of its intent to restate its financial statementsagainst certain of its present and former members of the Company’s Board ofDirectors.  Two additional, substantiallysimilar cases were filed.  Stipulationswere entered extending the time to respond to the complaints.  On April 23, 2009, the court found thatthe three derivative suits were “complex” and related and transferred the casesto a single judge for all purposes and ordered an initial status conference forDecember 3, 2009.  The cases wereconsolidated on May 19, 2009.  Thelead plaintiff has up to and including the later of 60 days after the filing ofthe Company’s restated financial statements to file a consolidatedcomplaint.  The Company will then have 60days to answer or move to dismiss the consolidated complaint. Given the natureand preliminary status of these cases, the Company cannot yet determine the amountor a reasonable range of potential loss in these matters, if any.

 

*Other Matters*

* *

TheCompany and its subsidiaries are also involved in other routine legal andadministrative proceedings arising during the ordinary course of business. TheCompany believes that the ultimate disposition of such matters will not have amaterial adverse effect on the Company’s consolidated financial position,results of operations or cash flows.  Anyrelated legal costs are expensed when incurred.

 

**Note7.        Earnings Per Share**

** **

Thefollowing table is a reconciliation of the numerators (income) and denominators(shares) used in both the basic and diluted earnings per share calculations.

 
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                     | ** ** | **March 31,**     | ** ** |
| ** **                                                                     | ** ** | ** **             | ** ** | **2008** | ** ** |
| ***(In thousands)***                                                           | ** ** | **2009**               | ** ** | **As  Restated** | ** ** |
|                                                                           |       |                   |       |   |   |
| Numerators—Net  loss applicable to common stockholders:                   |       |                   |       |   |   |
| Loss  from continuing operations                                               |       | $                      | (3,232     | ) | $ | (965 | ) |
| Less  preferred stock dividends                                                |       | —                 |       | (6 | ) |
| Loss  from continuing operations applicable to common stockholders, net of tax |       | (3,232                 | )          | (971 | ) |
| Loss  from discontinued operations, net of tax                                 |       | —                 |       | (8 | ) |
| Net  loss applicable to common stockholders                                    |       | $                      | (3,232     | ) | $ | (979 | ) |
|                                                                           |       |                   |       |   |   |
| Denominators—                                                             |       |                   |       |   |   |
| Basic  and diluted weighted average common shares outstanding                  |       | 24,600                 |       | 24,385 |   |

 

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**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)**

 

TheCompany has $11.9 million of 6.85% fixed-rate convertible subordinatedebentures outstanding as March 31, 2009. The debentures are convertibleinto common stock at any time prior to maturity, unless previously redeemed, ata conversion price of $11.018 per share which totals 1.1 million shares at March 31,2009. At such time as the assumed conversion of the debentures has a dilutiveeffect on earnings per share, the debentures will be included in thecalculation of diluted earnings per share after adjusting net income for theafter-tax effect of the debenture interest expense.

 

**Note 8.        Consolidated Statements of Cash Flows**

** **

Thefollowing information supplements the Company’s consolidated statements of cashflows.

 
| ** **                                    | ** ** | ***Three  Months Ended*** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|
| ** **                                    | ** ** | ***March 31,***      | ** ** |
| ** **                                    | ** ** | ** **                | ** ** | **2008** | ** ** |
| ***(In thousands)***                          | ** ** | **2009**                  | ** ** | **As Restated** | ** ** |
|                                          |       |                      |       |   |   |
| Cash  paid during the period for:             |       |                      |       |   |   |
| Interest                                      |       | $                         | 1,677      |   | $ | 1,879 |   |
| Income  taxes paid (refunded), net            |       | 67                        |       | 1,546 |   |
|                                          |       |                      |       |   |   |
| Components  of cash paid for acquisitions:    |       |                      |       |   |   |
| Fair  value of assets acquired                |       | $                         | —     |   | $ | 23,330 |   |
| Liabilities  assumed                          |       | —                    |       | — |   |
| Cash  paid for acquisitions                   |       | $                         | —     |   | $ | 23,330 |   |
|                                          |       |                      |       |   |   |
| Non-cash  investing and financing activities: |       |                      |       |   |   |
| Equipment  acquired through capital lease     |       | $                         | —     |   | $ | 52 |   |
| Debentures  converted into common stock       |       | —                    |       | 14 |   |

 

**Note 9.        Dividend Reinvestment and Direct StockPurchase Plan (“DRIP / DSPP”)**

 

TheCompany has a dividend reinvestment and stock purchase plan that gives commonstockholders the option of receiving their dividends in cash or in common stockat a discount from prevailing market prices (“DRIP”). The plan also permitsexisting stockholders to purchase additional common stock, up to a maximum of$10,000 per month, at a discount (“DSPP”); new investors may participate in theplan, subject to a $250 minimum initial investment. The Company may, at itssole discretion, permit purchases above the $10,000 stated maximum. Thediscounts may range from 0% to 5%, as determined from time to time by theCompany. The DRIP and DSPP discounts offered by the Company were 5% for theDRIP and 0% for the DSPP as of March 31, 2009. As of March 31, 2009,there are 3.7 million shares authorized for issuance under the plan of which0.7 million shares remain available for issuance.  However, in November 2008, the Companydetermined that participation in these plans should be suspended due to theCompany’s ineligibility to use its Registration Statement on Form S-3until 12 months after the Company is current in all SEC filings.

 

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**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)**

 

**Note 10.      Employee Retirement Plan**

** **

TheCompany has a non-qualified supplemental executive retirement plan (“SERP”) fora certain key executive officer for the purpose of providing supplementalincome benefits to plan participants or their survivors upon retirement ordeath. There is only one participant remaining in the SERP. That individual hasreached retirement age and the plan provides that no additional benefits accrueupon reaching retirement age. The plan measurement date is December 31 ofeach year. The following table details the components of the net periodicbenefit costs:

 
| ** **                       | ** ** | **Three  Months Ended** | ** ** |
|----------------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | **March 31,**      | ** ** |
|                             |       |                    |       | **2008** |   |
| ***(In thousands)***             | ** ** | **2009**                | ** ** | **As  Restated** | ** ** |
|                             |       |                    |       |   |   |
| Interest  cost                   |       | $                       | 11         |   | $ | 15 |   |
| Amortization  of actuarial gains |       | (7                      | )          | (5 | ) |   |
| Net periodic  benefit costs      |       | $                       | 4          |   | $ | 10 |   |   |

 

**Note 11.      Segment Information**

** **

The Company’s principal business activity is to operateand maintain water and wastewater infrastructure.  Through its operating subsidiaries, theCompany owns 132 systems and operates hundreds more under contract to cities,utility districts and private companies. The Company has four reportingsegments. The Company separates its segments first by whether it owns theutility or provides contract services to others. Its owned water and wastewaterutilities are referred to as its Utilities operations. In its financialstatements the Company reports its Texas Utilities operations as a separatesegment because of different economic characteristics. This is principally dueto the fact that Texas Utilities are under-recovering their current cost ofservice as the Company has made large investments in these operations that arenot yet being recovered through rates it charges. The Company’s contractoperations are segmented by contract type into those that are generally larger,stand-alone operations (“O&M Services”) and those that are small, fullservice contracts operated by a common team of personnel resulting in a modelthat proportions a fractional cost to each client (“Texas MUD Services”).

 

Thefollowing table presents information about the operations of each segment forthe three-month periods ended March 31, 2009 and 2008.  The 2008 amounts have been adjusted tocorrect the errors discussed in Note 2.

 

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**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

 
| ***(In thousands)***                                          | ** ** | **Utilities** | ** ** | **Texas  Utilities** | ** ** | **O&M    Services**        | ** ** | **MUD    Services** | ** ** | **Corp.  (1)**           | ** ** | **Consol-  idated**            | ** ** |
|---------------------------------------------------------------|------------|---------------|------------|----------------------|------------|--------------------------------|------------|---------------------|------------|--------------------------|------------|--------------------------------|------------|
|                                                          |       |          |       |                 |       |                           |       |                |       |                     |       |                           |       |
| **Three Months Ended March 31, 2009**                    |       |          |       |                 |       |                           |       |                |       |                     |       |                           |       |
| ** **                                                    |       |          |       |                 |       |                           |       |                |       |                     |       |                           |       |
| Operating  revenue                                            |       | $             | 15,682     |                 | $          | 8,591                          |       | $                   | 9,147      |                     | $          | 18,976                         |       | $ | —    |   | $ | 52,396 |   |
|                                                          |       |          |       |                 |       |                           |       |                |       |                     |       |                           |       |
| Expenses:                                                     |       |          |       |                 |       |                           |       |                |       |                     |       |                           |       |
| Operating  expenses                                           |       | 9,948         |       | 5,052                |       | 8,877                          |       | 18,327              |       | 9,258                    |       | 51,462                         |       |
| Depreciation  and Amortization                                |       | 2,249         |       | 1,160                |       | 133                            |       | 215                 |       | 371                      |       | 4,128                          |       |
| Total  expenses                                               |       | 12,197        |       | 6,212                |       | 9,010                          |       | 18,542              |       | 9,629                    |       | 55,590                         |       |
|                                                          |       |          |       |                 |       |                           |       |                |       |                     |       |                           |       |
| Operating  income (loss)                                      |       | 3,485         |       | 2,379                |       | 137                            |       | 434                 |       | (9,629                   | )          | (3,194                         | )          |
| Interest  expense                                             |       | (756          | )          | (443                 | )          | (28                            | )          | (2                  | )          | (847                     | )          | (2,076                         | )          |
| Interest  income                                              |       | 28            |       | 3                    |       | 2                              |       | 3                   |       | —    |       | 36                             |       |
| Other  income (expense)                                       |       | 119           |       | (144                 | )          | (62                            | )          | (75                 | )          | 162                      |       | —          |       |
|                                                          |       |          |       |                 |       |                           |       |                |       |                     |       |                           |       |
| Income  (loss) from continuing operations before income taxes |       | $             | 2,876      |                 | $          | 1,795                          |       | $                   | 49         |                     | $          | 360                            |       | $ | (10,314 | ) | $ | (5,234 | ) |
|                                                          |       |          |       |                 |       |                           |       |                |       |                     |       |                           |       |
| **Three  Months Ended March 31, 2008  (As Restated)**    |       |          |       |                 |       |                           |       |                |       |                     |       |                           |       |
| Operating  revenue                                            |       | $             | 14,553     |                 | $          | 8,008                          |       | $                   | 9,638      |                     | $          | 17,467                         |       | $ | —     |   | $ | 49,666 |   |
|                                                          |       |          |       |                 |       |                           |       |                |       |                     |       |                           |       |
| Expenses:                                                     |       |          |       |                 |       |                           |       |                |       |                     |       |                           |       |
| Operating  expenses                                           |       | 8,371         |       | 4,870                |       | 9,787                          |       | 17,130              |       | 4,970                    |       | 45,128                         |       |
| Depreciation  and Amortization                                |       | 1,890         |       | 1,108                |       | 58                             |       | 308                 |       | 400                      |       | 3,764                          |       |
|                                                          |       |          |       |                 |       |                           |       |                |       |                     |       |                           |       |
| Total  expenses                                               |       | 10,261        |       | 5,978                |       | 9,845                          |       | 17,438              |       | 5,370                    |       | 48,892                         |       |
|                                                          |       |          |       |                 |       |                           |       |                |       |                     |       |                           |       |
| Operating  income (loss)                                      |       | 4,292         |       | 2,030                |       | (207                           | )          | 29                  |       | (5,370                   | )          | 774                            |       |
| Interest  expense                                             |       | (751          | )          | (328                 | )          | —     |       | (37                 | )          | (1,194                   | )          | (2,310                         | )          |
| Interest  income                                              |       | 15            |       | 10                   |       | —     |       | 23                  |       | 2                        |       | 50                             |       |
| Other  income (expense)                                       |       | 153           |       | (932                 | )          | 17                             |       | 34                  |       | 728                      |       | —     |       |
|                                                          |       |          |       |                 |       |                           |       |                |       |                     |       |                           |       |
| Income  (loss) from continuing operations before income taxes |       | $             | 3,709      |                 | $          | 780                            |       | $                   | (190       | )                        | $          | 49                             |       | $ | (5,834 | ) | $ | (1,486 | ) |

 

(1)             Reflects corporate headquarters general andadministrative expenses and interest expense, net of interest income charged onintercompany debt.

 

**Note 12.      Subsequent Events**

** **

In October 2008the Company postponed elements of its Cornerstone internal-use softwaredevelopment project.  Based on thepostponement it was determined that it was not probable that the implementationof certain software modules would be completed. As a result, impairment charges aggregating $1.3 million were recordedin the fourth quarter of 2008 against the costs capitalized in constructionwork-in-progress.   In May 2009, theCompany, based on additional information, determined that it was not probablethat the implementation of the remaining uncompleted software modules would becompleted and recorded an additional impairment of $9.0 million during thequarter ended June 30, 2009, which may be reduced by any possiblerecoveries received from vendors or other adjustments.

 

On April 9,2009 the Company declared a quarterly cash dividends of $0.025 per share ofcommon stock and $0.65625 per share of Series A preferred stock. Thedividends were paid on May 5, 2009 to stockholders of record as of April 20,2009.

 

20

## **Table of Contents**

 

## **ITEM2.**              MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## ** **

### **RESTATEMENT**

### ** **

SouthWestWater Company and its subsidiaries’ (“SouthWest Water” or the “Company”)condensed consolidated statements of operations and cash flows for thethree-month period ended March 31, 2008 and related financial informationhave been restated to correct for certain accounting errors. For furtherdetails on the nature of the corrections and the related effects on the Company’spreviously issued consolidated financial statements, see Note 2, “Restatementof Condensed Consolidated Financial Statements.” Restated balances have beenidentified with the notation “As Restated” where appropriate. Throughout thisQuarterly Report, the term “as previously reported” will be used to refer tobalances from the 2008 condensed consolidated financial statements as reportedprior to restatement for the errors.

 

Thecorrections to

 

the reports for the affected prior period are containedin this report on Form 10-Q and we are not filing a separate amendedreport for such period.

 

### **SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS**

### ** **

Management’sDiscussion and Analysis of Financial Condition and Results of Operations (“MD&A”)is intended to help the reader understand the results of operations andfinancial condition of SouthWest Water Company. This MD&A also contains “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. All statements containedherein that are not clearly historical in nature are forward-looking, and thewords “anticipate,” “believe,” “belief,” “expect,” “estimate,” “project,” “plan,”“intend,” “continue,” “predict,” “may,” “will,” “should,” “strategy,” “willlikely result,” “will likely continue,” and similar expressions are generallyintended to identify forward-looking statements. Forward-looking statements aresubject to risks and uncertainties that could cause actual results to differmaterially from our historical experience and our present expectations orprojections. A detailed discussion of these and other risks and uncertaintiesthat could cause actual results and events to differ materially from suchforward-looking statements is included in the section entitled “Item 1A. RiskFactors” in our 2008 Annual Report on Form 10-K. Caution should be takennot to place undue reliance on any such forward-looking statements since suchstatements speak only as of the date when made. Other than as required byapplicable law, we undertake no obligation to publicly update or reviseforward-looking statements whether as a result of new information, futureevents, or otherwise.

 

TheMD&A is intended to help the reader understand the results of operations,financial condition and cash flows of SouthWest Water Company and is providedas a supplement to, and should be read in conjunction with, our condensedconsolidated financial statements and the accompanying notes to the financialstatements included in this report.

 

### **OVERVIEW**

### ** **

SouthWest Water’s principal business activity is tooperate and maintain water and wastewater infrastructure.  Through our operating subsidiaries, we own132 systems and operate hundreds more under contract to cities, utilitydistricts and private companies. SouthWest Water was incorporated in Californiain 1954 and reincorporated in Delaware in 1988. We maintain our corporateoffices in Los Angeles, California.

 

In the past ten years, we have completed over 19acquisitions of both utility and contract service businesses. Theseacquisitions operated largely independent of each other, resulting in a complexbusiness structure with varying business practices. In 2006, our Board ofDirectors appointed a new Chief Executive Officer to, among other things,review Company operations and plan for future growth. Beginning in 2007, weimplemented changes to better integrate the various segments of the business.In 2007 and 2008, we made a major change to how we operate; we 

 

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consolidated many of the departments that providecommon support functions such as environmental health and safety, our financialand accounting services, information technology and our customer call center.These consolidated departments allocate their costs to each operating segmentwhere appropriate. In 2008, our operations were divided into four operatingsegments to better focus the distinct strategies of each of our operatingbusinesses. Each segment has imbedded in it the direct operating cost and infrastructureto deliver its plan, relying upon the allocated common support functionsdiscussed above. Each operating segment is led by a Managing Director and aFinancial Director.  We believe thismanagement structure brings both direct operational and financial managementaccountability to each of the operations.

 

As a result of this reorganization, we now have fourreporting segments.  We separate oursegments first by whether we own the utility or we provide contract services toothers. Our owned water and wastewater utilities are referred to as ourUtilities operations (“Utilities”). In our financial statements we report ourTexas Utilities operations (“Texas Utilities”) as a separate segment because ofdifferent economic characteristics. This is principally because the TexasUtilities predominantly under-recovered their current cost of service, whichincludes a reasonable return on equity, as we have made large investments inthese operations since acquisition that are not yet being recovered through therates we charge. Our contract operations are segmented by contract type intothose that are generally larger, stand-alone operations (“O&M Services”)and those that are small, full service contracts operated by a common team ofpersonnel resulting in a model that proportions a fractional cost to eachclient (“Texas MUD Services”).

 

**Utilities** consist of our owned water and wastewater utilitieslocated in California, Alabama, Mississippi and our recently sold New Mexicoutility (see Item 1, “Legal Proceedings,” for detailed information on theNew Mexico utility sale). Residential customers make up the largest componentof our Utilities customer base, with these customers representing approximately92% of our water and wastewater connections. Substantially all of our Utilitiescustomers are metered which allows us to measure and bill for each customer’swater consumption. Each of the operations in this segment has a unique serviceterritory that is subject to state and federal regulations regarding standards ofwater quality, safety, environmental and other matters. The rates that we cancharge for water and wastewater service include the opportunity to earn areasonable rate of return on investments in these utilities as approved bystate regulatory agencies; except for some of our Alabama wastewater rateswhich are governed by our service agreements. Some of these governmentalagencies approve a forward looking recovery of costs and some approve recoveryof costs based on a historical test year (backward looking). Our Utilitiesoperations are characterized by ongoing capital investments to maintain andenhance the reliability and quality of the service we provide, as well asroutine growth from rate increases and new connections.

 

**Texas Utilities** consists of 120 small, mostly rural systems that aregrouped into nine jurisdictional utilities across Texas. Residential customersmake up the largest component of our Texas Utilities customer base, with thesecustomers representing approximately 98% of our water and wastewaterconnections. Substantially all of our Texas Utilities customers are meteredwhich allows us to measure and bill for our customers’ water consumption. Thesesystems are broadly dispersed geographically. The majority of the systems areorganized as one utility with a single tariff, known as Monarch Utilities.  The Monarch utilities, as well as two smallersystems acquired in 2007, were in various stages of disrepair at the time ofacquisition and we continue to spend significant amounts of capital to maintainregulatory compliance and to improve the quality of service. We are not yetrecovering all of these costs in our rates and as a result, we have a lowerrate of return than typically expected from a utility. We intend to activelypursue recovery of these costs in the rate setting process. All other aspectsof operations for these utilities are the same as our Utilities operations;therefore, as soon as we are recovering our costs, including a reasonablereturn on equity, we expect to aggregate this segment with our Utilitiessegment.

 

**O&M Services** generally consists of operations that areproject-specific contracts with cities, public agencies and private owners.Most contracts are stand-alone operations staffed with project-specificpersonnel, with an average contract life of two to three years. Under a typicalO&M contract, we charge a fee that covers a specified level of service thatincludes facility operations and maintenance and may include other water orwastewater related services. Services are typically provided evenly throughoutthe contract period and are billed on a monthly basis. If we provide servicesbeyond the scope of a contract, we bill for the additional services on atime-and-materials basis or negotiate a unique price. These contracts arelargely located in California, Colorado, Alabama, Mississippi, and Georgia.

 

**Texas MUD Services** is a full service provider of utility services to alarge number of small utilities in Texas that are 

 

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mostly owned by municipal utility districts (“MUD”). AMUD is created to provide water supply, wastewater treatment and drainageservice to areas where municipal services are not available. We service over270 MUD clients with a common team of client managers, operators, customerservice and billing personnel. Therefore, these contracts are allocated aproportional amount of each cost center creating a business model that issignificantly different from that of O&M Services. Under a typical MUDcontract, we bill a monthly base fee to provide a specified level of service;usually water and/or wastewater facility inspections, routine operations,equipment maintenance, and utility customer service including meter reading,call center, dispatch, and billing and collection services. We bill for anyadditional services provided beyond the basic contract on a time-and-materialsbasis as such services are rendered. Most contracts provide for an increase inthe monthly base fee as the number of customer connections increases andgenerally include inflation adjustments. The majority of our MUD contracts arecancelable with 30 to 60 days prior notice by either party, but tend to lastfor long periods due to the close working relationships between the operatorsand the clients. No one district represents more than 4% of the overall revenueof this segment.

 

**Impacts to Results of Operations 2009 and 2008**

 

**Utilities & Texas Utilities:**Our Utilities segments’ results ofoperations are generally influenced by a variety of factors that are similarbetween the two segments and the industry in general. A more completeunderstanding of these factors can be gained by reviewing this section alongwith the Risk Factors section in our Form 10-K. As we review and discussperformance, the general areas of impact we evaluate are as follows:

 

§                   **Growth Related**: Growth in our utilities segments isgenerally characterized by the following drivers; 1) growth in the number ofconnections served within existing utility certified service areas, or 2)acquisition of new service areas. In our Utilities segment, our largest utilityis our California utility which is a substantially built out system that doesnot generally see much change in connection count. The majority of our otherutilities are in markets that experienced significant new home construction inthe past, but saw this growth significantly decline throughout 2008 and thefirst quarter of 2009. Growth through acquisitions was most significant in 2008with the acquisition of a 4,000 connection wastewater utility system in Alabamain late January 2008.

 

§                   **Rate Related**: Each of our utilities will increaserates from time to time as allowed by the regulator or governing contract, torecover expenses and realize a return on invested capital. Rate cases can takemonths or years to impact results due to the time needed to prepare, presentand ultimately receive approval from the regulator. In each of our utilities,we have a long-term rate strategy that matches our expectation for growth,regulatory change and demand. In 2008, we were actively pursuing rate increasesin our California, Texas, New Mexico and Alabama utilities. Our Texas Utilitiesbenefited in 2008 from a full year impact of an interim rate increase from our2007 Monarch rate filing, which was resolved through an all-party settlement inDecember 2008. By March 2010 this rate case settlement will haveresulted in phased in water rate increases totaling 43%. The settlement alsorequired us to refund an estimated $0.6 million impacting 2008 revenue.  We also implemented rate increases in threesmaller Texas utilities and reached all-party settlements with two of them inlate 2008 and the third in the second quarter of 2009. In Alabama we have acontractual agreement with the local government over our Shelby Countywastewater utility that provides us with the ability to request rate increasesannually, pursuant to the terms of the contract. Accordingly, we requested andreceived an 8% increase in January 2008.

 

Additionally, we were actively working with ourregulators in 2009 on additional rate cases that will impact 2009 and futureperiods. Increases that impacted the first quarter include rate increases inCalifornia and Alabama.  In California weworked with the California Public Utilities Commission (“CPUC”) on our 2009general rate case which was settled in the first quarter of 2009 for an 11%increase over our rates at the beginning of 2008.  In Alabama, we applied for a rate increaseunder our Shelby County and Riverview wastewater utility contracts and receivedpermission to raise rates 14% and 4.5% respectively, in January 2009.  In New Mexico we filed for and received arate rider surcharge. Surcharges were required to be deposited in escrow asthey were collected. They relate to our dispute with the entity that treats anddisposes of our sewage, who was also the entity seeking to acquire our utilitythrough eminent domain. At 

 

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the closing of the sale through eminent domain in May 2009,$1.3 million was distributed to us from funds collected through the rate rider.

 

§                   **Demand Related**: Our utility results are largelydependent upon the sale and distribution of water, the amount of which isdependent on seasonal weather fluctuations, particularly during the summermonths when water demand will vary greatly with rainfall and temperaturelevels.  Not only does rainfall vary from season to season, but fromyear to year. The uniform rate design that regulators require for our utilitiescan result in unrecovered fixed costs and lower earnings during periods oflower than expected water use. This can occur during abnormal weatherconditions, such as when summer temperatures are cooler than normal or duringmandatory restrictions on water use because of drought. Also, demand relatedchanges can occur as a result of conservation and socio-economic impacts.Demand related changes often impact both the revenue of the utility and thecost of production. In 2008 we saw increased demand and demand-related costs inTexas due to drought conditions. We saw lower demand at our California utilityin 2008 and in the first quarter of 2009, largely due to conservation andsocio-economic conditions associated with the decline in general economicconditions.

 

§                   **Supply Related**: The cost of water and relatedcommodities is a major driver of our results. Utilities that purchase water aresubject to changes in operations due to the amount and cost of that water.Purchased water supply changes are typically driven by longer-term climateissues such as extended drought but can also be driven by short-termmaintenance needs. In the first quarter of 2009, we saw increased cost ofpurchased water in Texas and California. In Texas, we purchased more water thanin the first quarter of 2008 due to the inability of our owned sources of groundwater to produce enough water as a result of ongoing drought conditions.  In California, our average unit cost of waterhas increased due to lower water levels in our main aquifers, resulting in aneed to purchase more water, as well as the higher costs of imported water.

 

§                   **Operation & MaintenanceRelated**: Ouroperation and maintenance costs include fuel, power, labor, labor benefits,facility costs, and other ordinary costs of producing or treating water.  These costs are impacted by compliance withenvironmental and health safety standards. They are also typically subject toinflation effects and while we can file for recovery after inflation effectsare incurred in backward looking rate making jurisdictions, we often experiencea lag between the time we incur these costs and when we receive the rateincrease to cover these costs. In California, which is a forward looking ratemaking environment, we estimate the impact of inflation in our rate filings andmust absorb any costs that are different than our estimates.

 

§                   **General & AdministrativeRelated**: Ourgeneral and administrative costs include expenses directly incurred by thesegment such as management expense as well as costs for services performed byconsolidated support functions that are then allocated to each segment. Thesesupport costs include information technology (“IT”), shared financial services,customer service center and environmental health and safety. In 2008, we madelarge investments in our consolidated support functions that have driven costshigher, but we now have a foundation upon which to drive sustainable continuousimprovement into the organization. As the efficiencies of these investmentstake hold, we have targeted objectives to reduce the fixed costs of supportingour operations.

 

§                   **Other**: Other is reserved for unusual items thatmay impact results from time to time. Most significantly in the first quarterof 2009 our utility in New Mexico expensed $0.5 million in costs related to thesettlement of a sewer fee dispute and eminent domain proceedings.

 

**O&M Services Segment**: Our O&M Services segment results ofoperations are generally influenced by a variety of events. As we review anddiscuss performance, the general areas of impact we evaluate are as follows:

 

§                   **Contract Growth: **Growth is generally due to new contracts, additionalproject work under existing 

 

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contracts and contract price increases. Our primarydriver of contract growth in the first quarter of 2009 was from expanding thescope of work provided to existing customers.

 

§                   **Lost Work: **Lost work is generally driven by lost contracts or areduction in project work for existing contracts. The primary driver, in thefirst quarter of 2009, was reduced project work as well as the cancellation oftwo of our contracts in California in 2008 due in part to the financial underperformance of the contracts.

 

§                   **General & AdministrativeRelated (G&A): **Our general and administrative costsinclude expenses directly incurred by the segment such as management expense aswell as costs for services performed by consolidated support functions that arethen allocated to each segment. These support costs include IT, sharedfinancial services, customer service center and environmental health andsafety.  In 2008, we made largeinvestments in our consolidated support functions that have driven costs higherbut we now have a foundation upon which to drive sustainable continuousimprovement into the organization. As the efficiencies of these investmentstake hold, we have targeted objectives to reduce the fixed costs of supportingour operations.

 

§                   **Other: **Other is reserved for unusual items that may impactresults from time to time, such as legal fees, fines or the elimination ofcertain non-core service offerings. Most significantly in the first quarter of2009, we eliminated certain non-core service offerings in Colorado.

 

**Texas MUD Services Segment**: Our Texas MUD Services segment’s resultsof operations are generally influenced by a variety of events. As we review anddiscuss performance, the general areas of impact we evaluate are as follows:

 

§                   **Contract Growth: **Growth is generally due to new contracts, additionalproject work and contract price increases. In the first quarter of 2009, our growth was primarily driven byincreases in service order work.

 

§                   **Lost Work:**Lost work is generally driven by lostcontracts, reduction in project work or a reduction in ancillary services, suchas new taps and inspection services for new home construction.  In the first quarter of 2009, lost work wasprimarily driven by lost contracts.

 

§                   **General & AdministrativeRelated (G&A): **Our general and administrative costsinclude expenses directly incurred by the segment such as management expense aswell as costs for services performed by consolidated support functions that arethen allocated to each segment. These support costs include IT, sharedfinancial services, customer service center and environmental health andsafety. In 2008, we made large investments in our consolidated supportfunctions that have driven costs higher, but we now have a foundation uponwhich to drive sustainable continuous improvement into the organization. As theefficiencies of these investments take hold, we have targeted objectives toreduce the fixed costs of supporting our operations.

 

§                   **Other: **Other is reserved for unusual items that may impactresults from time to time.

 

**Corporate Segment**: Our corporate segment represents costs related toexecutive management, investor relations, human resources, general legal andinsurance, certain IT functions that support all operations and public companyneeds, audit costs, and other expenses generally related to the parentorganization. Most of the costs are general and administrative in nature andnot subject to much variation. In the first quarter of 2009, costs wereprimarily impacted by $5.3 million of expenses associated with our restatementof historical financial results.

 

Onoccasion, we do have other costs that flow through the segment. In 2008, theexpenses associated with the Cornerstone internal-use software developmentproject were largely supported by the corporate segment. This project upgradedour core IT infrastructure such as phones, servers and communications links. Inaddition, as of 

 

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January 1,2008 we are operating on a single company-wide financial ledger system. In thefourth quarter of 2008, the remaining portions of the project were put on holdand certain portions of the project were eliminated.

 

In May 2009,the Company, based on additional current information, determined that it wasnot probable that the implementation of the remaining uncompleted softwaremodules would be completed and recorded a charge of $9.0 million during thequarter ended June 30, 2009, which may be reduced by any possiblerecoveries received from vendors or other adjustments.

 

#### **Acquisitions**

#### ** **

Ourfinancial position, results of operations and cash flows have been affected byour history of acquisitions. Our most recent significant acquisition, whichaffects the comparability of the historical financial condition and results ofoperations described in the MD&A, is the acquisition of a Birmingham,Alabama-based wastewater collection and treatment system that servesapproximately 4,000 residential and commercial connections in a service areadirectly adjacent to our existing Shelby County collection and treatmentsystem, acquired in January 2008 (“Riverview”).

 

**Assets Held for Sale andDispositions**

** **

During2007, we committed to a plan to sell our wholesale water and wastewateroperations in Texas.  In December 2008,we completed the sale of our wholesale wastewater business for net cashproceeds of $2.2 million and a receivable of $0.6 million.  The wastewater treatment plant soldrepresents a portion of the combined water and wastewater operations’ assetsand liabilities. We are uncertain whether we can consummate the sale of theremaining business during 2009, accordingly, the business activity of the watercomponent are reflected in consolidated continuing operations in 2009.

 

Weentered into an agreement to sell the assets of our Southwest EnvironmentalLaboratories, Inc. subsidiary in 2009 for cash consideration of $0.5million paid at close and up to an additional $0.75 million of considerationconsisting of 25% of the buyer’s quarterly aggregate invoice amounts subsequentto the sale.  The sale closed on April 1,2009.

 

In January 2009we reached a settlement in eminent domain proceedings against our New Mexicoutility, New Mexico Utilities Inc. (“NMUI”). On May 8, 2009 we received$54.3 million in cash at closing ($60.0 million settlement and $1.3 millionescrow release, less $7.0 million retained by the condemning entity insettlement of sewer treatment fees).  Weused $12.3 million of the net proceeds to pay down NMUI bonds and relatedaccrued interest, and the remaining cash proceeds of $41.9 million was used topay the unassumed liabilities of NMUI and to pay down our revolving creditfacility.

 

### **RESULTS OF OPERATIONS**

### ** **

#### **Three months ended March 31,2009 Compared to 2008**

#### ** **

Consolidatedoperating revenue increased $2.7 million, or 5.5%, to $52.4 million for thethree-month period ended March 31, 2009 from $49.7 million for the sameperiod in the prior year.  Consolidatedoperating expenses increased $6.7 million, or 13.7%, to $55.6 million for thethree-month period ended March 31, 2009 from $48.9 million for the 2008period. Resulting operating income decreased $4.0 million to a loss of $3.2million for the three-month period ended March 31, 2009, from operatingincome of $0.8 million for the same period in the prior year.  The first quarter operating loss includes theimpact of $5.3 million of costs associated with the restatement of historicalfinancial results, as well as other costs described below.

 

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| ** **                               | ** ** | **Three  Months  Ended March 31,** | ** ** | ** **       | ** ** | ** **                     | ** ** | ** **              | ** ** |
|------------------------------------------|------------|-----------------------------------------|------------|------------------|------------|--------------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | ** **                              | ** ** | **2008**         | ** ** | **Increase   ** | ** ** | **Percent  of Revenue** | ** ** |
| ***(In thousands, except percentages)*** | ** ** | **2009**                                | ** ** | **As  Restated** | ** ** | **(Decrease)**                 | ** ** | **2009**                | ** ** | **2008** | ** ** | ** ** |
|                                     |       |                                    |       |             |       |                           |       |                    |       |   |   |
| Utilities                                |       |                                    |       |             |       |                           |       |                    |       |   |   |
| Operating  Revenue                       |       | $                                       | 15,682     |             | $          | 14,553                         |       | $                       | 1,129      |   |   |   |   |   |
| Operating  Expenses                      |       | 12,197                                  |       | 10,261           |       | 1,936                          |       | 77.8%                   |       |   | 70.5% |   |
| Operating  Income (loss)                 |       | $                                       | 3,485      |             | $          | 4,292                          |       | $                       | (807       | ) | 22.2% |   | 29.5% |   |
| Texas  Utilities                         |       |                                    |       |             |       |                           |       |                    |       |   |   |
| Operating  Revenue                       |       | $                                       | 8,591      |             | $          | 8,008                          |       | $                       | 583        |   |   |   |   |   |
| Operating  Expenses                      |       | 6,212                                   |       | 5,978            |       | 234                            |       | 72.3%                   |       |   | 74.7% |   |
| Operating  Income (loss)                 |       | $                                       | 2,379      |             | $          | 2,030                          |       | $                       | 349        |   | 27.7% |   | 25.3% |   |
| O&M  Services                        |       |                                    |       |             |       |                           |       |                    |       |   |   |
| Operating  Revenue                       |       | $                                       | 9,147      |             | $          | 9,638                          |       | $                       | (491       | ) |   |   |   |   |
| Operating  Expenses                      |       | 9,010                                   |       | 9,845            |       | (835                           | )          | 98.5%                   |       |   | 102.1% |   |
| Operating  Income (loss)                 |       | $                                       | 137        |             | $          | (207                           | )          | $                       | 344        |   | 1.5% |   | -2.1% |   |
| Texas  MUD Services                      |       |                                    |       |             |       |                           |       |                    |       |   |   |
| Operating  Revenue                       |       | $                                       | 18,976     |             | $          | 17,467                         |       | $                       | 1,509      |   |   |   |   |   |
| Operating  Expenses                      |       | 18,542                                  |       | 17,438           |       | 1,104                          |       | 97.7%                   |       |   | 99.8% |   |
| Operating  Income (loss)                 |       | $                                       | 434        |             | $          | 29                             |       | $                       | 405        |   | 2.3% |   | 0.2% |   |
| Corporate                                |       |                                    |       |             |       |                           |       |                    |       |   |   |
| Operating  Expenses                      |       | $                                       | 9,629      |             | $          | 5,370                          |       | $                       | 4,259      |   |   |   |   |   |
| Total                                    |       |                                    |       |             |       |                           |       |                    |       |   |   |
| Total  Operating Revenue                 |       | $                                       | 52,396     |             | $          | 49,666                         |       | $                       | 2,730      |   |   |   |   |   |
| Total  Operating Expenses                |       | 55,590                                  |       | 48,892           |       | 6,698                          |       | 106.1%                  |       |   | 98.4% |   |
| Operating Income  (Loss)                 |       | $                                       | (3,194     | )                | $          | 774                            |       | $                       | (3,968     | ) | (6.1)% |   | 1.6% |   |
|                                          |            |                                         |            |                  |            |                                |            |                         |            |  |  |  |  |  |  |  |  |

 

***Utilities***

 
| ** **                                            | ** ** | **Operating** | ** ** | **Operating** | ** ** | **Operating** | ** ** |
|-------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ***(In thousands)***                                  | ** ** | **Revenue**   | ** ** | **Expense**   | ** ** | **Income**    | ** ** |
|                                                  |       |          |       |          |       |          |       |
| Three  months ended March 31, 2008 (As Restated) |       | $             | 14,553     |          | $          | 10,261        |       | $ | 4,292 |   |
| Growth  Related                                       |       | 514           |       | 278           |       |          |       |
| Rate  Related                                         |       | 1,064         |       |          |       |          |       |
| Demand  Related                                       |       | (449          | )          |          |       |          |       |
| Supply  Related                                       |       |          |       | 794           |       |          |       |
| G&A  Related                                      |       |          |       | 378           |       |          |       |
| Other                                                 |       |          |       | 486           |       |          |       |
| Three months ended March 31, 2009                |       | $             | 15,682     |          | $          | 12,197        |       | $ | 3,485 |   |

 

Operatingrevenue increased $1.1 million, or 7.8 %, to $15.7 million for three monthsended March 31, 2009 from $14.6 million for the same period in prioryear.  The net increase was primarily dueto the following events:

 

Ÿ                   Growth Related: A $0.5 million increase primarily dueto the acquisition of the Riverview wastewater treatment plant in Alabama atthe end of January 2008.

 

Ÿ                   Rate Related: A $1.1 million increase due to rateincreases in California and Alabama, of which $0.9 million is due to ourCalifornia utility implementing a step rate increase in July 2008 andgeneral rate increase in January 2009, and $0.2 million is due to rateincreases at two of our Alabama utilities.

 

Ÿ                   Demand Related: A $0.4 million decrease primarily dueto reduced consumption at our California utility related to customers’conservation efforts.

 

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Operatingexpenses increased $1.9 million, or 18.9%, to $12.2 million for the threemonths ended March 31, 2009, from $10.3 million for same period in theprior year.  The net increase wasprimarily due to the following events:

 

Ÿ                   Growth Related: A $0.3 million increase due to theacquisition of the Riverview wastewater treatment plant in Alabama at the endof January 2008.

 

Ÿ                   Supply Related: A $0.8 million increase primarily dueto higher average unit costs of delivered water in California.

 

Ÿ                   G&A Related: A $0.4 million increase due to generaland administrative costs, primarily due to increased costs associated with theimplementation of our strategy to consolidate support functions.

 

Ÿ                   Other: A $0.5 million increase, primarily due to costsassociated with the eminent domain proceedings at our New Mexico utility,including a sewer fee dispute with the condemning entity, and legal fees.

 

As aresult of the above events, operating income decreased $0.8 million, to $3.5million for the three months ended March 31, 2009, from $4.3 million forthe same period in the prior year.  The2009 first quarter operating income includes the impact of the $0.5 million ofOther costs described above.

 

***Texas Utilities***

 
| ** **                                            | ** ** | **Operating** | ** ** | **Operating** | ** ** | **Operating** | ** ** |
|-------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ***(In thousands)***                                  | ** ** | **Revenue**   | ** ** | **Expense**   | ** ** | **Income**    | ** ** |
|                                                  |       |          |       |          |       |          |       |
| Three  months ended March 31, 2008 (As Restated) |       | $             | 8,008      |          | $          | 5,978         |       | $ | 2,030 |   |
| Rate  Related                                         |       | 583           |       |          |       |          |       |
| Supply  Related                                       |       |          |       | 142           |       |          |       |
| O&M  Related                                      |       |          |       | (284          | )          |          |       |
| G&A  Related                                      |       |          |       | 376           |       |          |       |
| Three months ended March 31, 2009                |       | $             | 8,591      |          | $          | 6,212         |       | $ | 2,379 |   |

 

Operatingrevenue increased $0.6 million, or 7.3%, to $8.6 million for three months endedMarch 31, 2009 from $8.0 million for the same period in prior year. Thenet increase was primarily due to the following events:

 

Ÿ                   Rate Related: A $0.6 million increase primarily due torate increases at three small utilities implemented in the latter half of 2008and a step-increase in rates at one utility during the first quarter of 2009.

 

Operatingexpenses increased $0.2 million, or 3.9%, to $6.2 million for the three monthsended March 31, 2009, from $6.0 million for the same period in the prioryear.  The net increase was primarily dueto the following events:

 

Ÿ                   Supply Related: A $0.1 million increase due toincreased purchased water as a result of the inability of our owned sources ofground water to produce enough water due to ongoing drought conditions.

 

Ÿ                   O&M Related: A $0.3 million decrease, primarilydriven by reduced auto, labor and supply expenses, partially offset by anincrease in depreciation and water treatment costs.

 

Ÿ                   G&A Related: A $0.4 million increase primarily dueto increased costs associated with the implementation of our strategy toconsolidate support functions.

 

As aresult of the above events, operating income increased $0.4 million, to $2.4million for the three months ended March 31, 2009, from income of $2.0million for the same period in the prior year.

 

***O&M Services***

 
| ** **                                            | ** ** | **Operating** | ** ** | **Operating** | ** ** | **Operating**     | ** ** |
|-------------------------------------------------------|------------|---------------|------------|---------------|------------|-------------------|------------|
| ***(In thousands)***                                  | ** ** | **Revenue**   | ** ** | **Expense**   | ** ** | **Income (Loss)** | ** ** |
|                                                  |       |          |       |          |       |              |       |
| Three  months ended March 31, 2008 (As Restated) |       | $             | 9,638      |          | $          | 9,845             |       | $ | (207 | ) |
| Contract  Growth                                      |       | 955           |       | 397           |       |              |       |
| Lost  Work                                            |       | (1,145        | )          | (1,036        | )          |              |       |
| G&A  Related                                      |       |          |       | 120           |       |              |       |
| Other                                                 |       | (301          | )          | (316          | )          |              |       |
| Three months ended March 31, 2009                |       | $             | 9,147      |          | $          | 9,010             |       | $ | 137 |   |

 

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Operatingrevenue decreased $0.5 million, or 5.1%, to $9.1 million for the three monthsended March 31, 2009 from $9.6 million for the same period in the prioryear. The decrease in revenue was primarily due to the following events:

 

Ÿ                   Contract Growth: A $1.0 million increase, primarily dueto $0.4 million of increased project work in the southeast and $0.5 millionfrom price and scope increases, primarily in California.

 

Ÿ                   Lost Work: A $1.1 million decrease due to lostcontracts and reduced project work, including $0.5 million relating to twounderperforming contracts in the west region that were terminated by managementin late 2008.

 

Ÿ                   Other: A $0.3 million decrease as we stopped certainnon-core service offerings in Colorado.

 

Operatingexpenses decreased $0.8 million, or 8.5% to $9.0 million for the three monthsended March 31, 2009, from $9.8 million for the same period in the prioryear.  The net decrease was primarily dueto the following events:

 

Ÿ                   Contract Growth: A $0.4 million increase due to new andexpanded scope on contracts identified above.

 

Ÿ                   Lost Work: A $1.0 million decrease due to lostcontracts and reduced project work.

 

Ÿ                   G&A related: A $0.1 million increase due to costsrelated to our strategy to consolidate support facilities.

 

Ÿ                   Other: A $0.3 million decrease as we stopped pursuingcertain service offerings in Colorado.

 

As aresult of the above events, operating income increased $0.3 million to $0.1million for the three months ended March 31, 2009, from a loss of $0.2million for the same period in the prior year.

 

***Texas MUD Services***

 
| ** **                                            | ** ** | **Operating** | ** ** | **Operating** | ** ** | **Operating** | ** ** |
|-------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ***(In thousands)***                                  | ** ** | **Revenue**   | ** ** | **Expense**   | ** ** | **Income**    | ** ** |
|                                                  |       |          |       |          |       |          |       |
| Three  months ended March 31, 2008 (As Restated) |       | $             | 17,467     |          | $          | 17,438        |       | $ | 29 |   |
| Contract  Growth                                      |       | 2,718         |       | 1,654         |       |          |       |
| Lost  Work                                            |       | (1,209        | )          | (481          | )          |          |       |
| G&A  Related                                      |       |          |       | (69           | )          |          |       |
| Three months ended March 31, 2009                |       | $             | 18,976     |          | $          | 18,542        |       | $ | 434 |   |

 

Operatingrevenue increased $1.5 million, or 8.6%, to $19.0 million for three monthsended March 31, 2009 from $17.5 million for the same period in the prioryear. The increase was primarily due to the following events:

 

Ÿ                   Contract Growth: A $2.7 million increase due tocontract pricing increases and increases in service order work, generallyrelated to improvements in plant and facilities of our clients.

 

Ÿ                   Lost Work: A $1.2 million decrease in revenue due tothe loss of several contracts in our Houston and Austin markets to low-pricedcompetition and a general slowdown in the housing market.

 

Operatingexpenses increased $1.1 million, or 6.3%, to $18.5 million for the three monthsended March 31, 2009, from $17.4 million for the same period in the prioryear.  The net increase was primarily dueto the following events:

 

Ÿ                   Contract Growth: A $1.7 million increase in generaloperating costs related to increases in service and maintenance work orders.

 

Ÿ                   Lost Work: A $0.5 million decrease related to lostcontracts.

 

Ÿ                   G&A Related: a $0.1 million decrease, primarily dueto miscellaneous savings and efficiency gains in general and administrativecosts, partially offset by a $0.3 million increase in bad debt expense largelyrelated to close out work on lost contracts and slower pay from municipal clientson developer related costs. 

 

As aresult of the above events, operating income increased $0.4 million to $0.4million for the three months ended March 31, 2009, compared to income of$29,000 for the same period in the prior year.

 

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***Corporate***

 

Operatingexpenses increased $4.3 million, or 79.3%, to $9.6 million for the three monthsended March 31, 2009, from $5.4 million for the same period in the prioryear.

 

The netincrease was primarily due to the following events:

 

Ÿ                   Project Costs: A $0.7 million decrease as result ofcosts incurred in the first quarter of 2008 related to our Cornerstoneinternal-use software development project. In October 2008, we announcedthe suspension of the project due to the uncertain financial markets that ledto the decision to minimize all cash expenditures.

 

Ÿ                   G&A Related: A $0.3 million decrease related toreductions in corporate overhead departments.

 

Ÿ                   Other: A $5.2 million increase, primarily driven by$5.3 million of financial restatement related costs, including audit fees andaccounting resource expenses to support the restatement of historical financialresults, partially off-set by reduced costs associated with expenditures in thecomparable period for the evaluation of a strategic business opportunity.

 

**Other Income (Expense)**

 

Aggregateother expenses decreased $0.2 million, or 11.1% to $2.0 million for the threemonths ended March 31, 2009, compared to $2.3 million for the same periodin the prior year as follows:

 
| ** **           | ** ** | **   Three  Months Ended March 31,** | ** ** | ** **                       |
|----------------------|------------|----------------------------------------------------------|------------|----------------------------------|
| ** **           | ** ** | ** **                                               | ** ** | **2008    ** | ** ** | ** ** | ** ** |
| ***(In thousands)*** | ** ** | ** **                                               | **2009**   | ** **                       | **As Restated** | ** ** | **Change** | ** ** |
|                 |       |                                                     |       |                             |   |   |   |
| Interest  expense    |       | $                                                        | (2,076     | )                                | $ | (2,310 | ) | $ | 234 |   |
| Interest  income     |       | 36                                                       |       | 50                               |   | (14 | ) |   |
| Total                |       | $                                                        | (2,040     | )                                |   | $ | (2,260 | ) |   | $ | 220 |   |
|                      |            |                                                          |            |                                  |  |  |  |  |  |  |  |  |  |  |

 

***Interest Expense.***Interest expense decreased by $0.2million, or 10.1%, to $2.1 million for the three months ended March 31,2009 from $2.3 million for the same period during the prior year.

 

Thechange in total interest incurred is primarily due to decreased interestrates.  The weighted average effectiveannual interest rate on total borrowings was approximately 4.2% for the threemonths ended March 31, 2009 and 5.3% for the same period in the prioryear.

 

Thedecreased rates of interest were offset by an increase in borrowing levels. Theaverage balance of interest bearing debt outstanding increased to $197.8million during the three months ended March 31, 2009 compared to $173.9million for the same period in the prior year.

 

**Provision for Income Taxes**

 

Oureffective consolidated income tax rate on continuing operations was a benefitof (37.8)% for the three months ended March 31, 2009 compared to a benefitof (35.0)% for the same period in 2008. The lower effective rate in 2008 is caused by state income taxesreducing the expected overall income tax benefit at a more normalized effectiverate.

 

**Loss fromDiscontinued Operations**

 

Loss from discontinuedoperations during the three month period ended March 31, 2008, whichpertains to a wastewater business which we held for sale, was $8,000. 

 

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**RECENTACCOUNTING PRONOUNCEMENTS**

 

See thediscussions under the caption “Recent Accounting Pronouncements” contained inNote 1 to the condensed consolidated financial statements included in Part I,Item 1 of this report.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

### ** **

Ouroverall objectives with respect to liquidity and capital resources are to:

 

Ÿ                   generate sufficient operating cash flows to service ourdebt and tax obligations, fund capital improvements and organic growth, and paydividends to our stockholders;

 

Ÿ                   utilize our credit facility for major capitalimprovements and to manage seasonal cash needs;

 

Ÿ                   obtain external financing for major acquisitions; and

 

Ÿ                   maintain approximately equal levels of debt and equityconsistent with the investor-owned water utility industry.

 

Ourstatements of cash flows are summarized as follows:

 
| ** **                                        | ** ** | **Three  Months Ended** | ** ** | ** **      | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-----------------|------------|
| ** **                                        | ** ** | **March 31,**      | ** ** | ** **      | ** ** |
| ** **                                        | ** ** | ** **              | ** ** | **2008**        | ** ** | ** ** | ** ** |
| ***(In thousands)***                              | ** ** | **2009**                | ** ** | **As Restated** | ** ** | **Change** | ** ** |
|                                              |       |                    |       |            |       |   |   |
| Net  cash provided by (used in):                  |       |                    |       |            |       |   |   |
| Continuing  operations:                           |       |                    |       |            |       |   |   |
| Operating  activities                             |       | $                       | 1,622      |            | $          | (6,584 | ) | $ | 8,206 |   |
| Investing  activities                             |       | (3,986                  | )          | (29,910         | )          | 25,924 |   |
| Financing  activities                             |       | 3,833                   |       | 35,768          |       | (31,935 | ) |   |
| Total  continuing operations                      |       | 1,469                   |       | (726            | )          | 2,195 |   |
| Discontinued  operations:                         |       |                    |       |            |       |   |   |
| Operating  activities                             |       | —                  |       | (8              | )          | 8 |   |
| Total  discontinued operations                    |       | —                  |       | (8              | )          | 8 |   |
| Increase (decrease) in  cash and cash equivalents |       | $                       | 1,469      |            | $          | (734 | ) | $ | 2,203 |   |

 

**Cash Flowsfrom Operating Activities of Continuing Operations.**Net cash provided by operating activitieswas $1.6 million for the three months ended March 31, 2009 versus cashused of $6.6 million for the same period last year. Operational aspects of ourbusinesses that affected working capital in 2009 versus 2008 are highlightedbelow:

 

Ÿ                   a net loss of $3.2 million;

 

Ÿ                   non-cash operating expenses of  $5.6 million; and,

 

Ÿ                   changes in operating assets and liabilities decreasingcash by $0.8 million.

 

**Cash Flowsfrom Investing Activities of Continuing Operations.**Cash used in investing activities totaled$4.0 million represent purchases on property, plant and equipment, principallywithin our utility segments.

 

**Cash Flowsfrom Financing Activities of Continuing Operations.**During the three months ended March 31,2009, we financed our growth through a broad range of capital initiatives:

 

Ÿ                   borrowed a net amount of $5.5 million under ourrevolving line of credit; and

 

Ÿ                   received $0.4 million of capital improvementreimbursements and contributions in aid of construction.

 

Revolvinglines of credit were primarily used to fund our investing activities and, to alesser extent, to fund operations. Additional borrowing availability under ourrevolving credit facility was $43.2 million as of March 31, 2009.

 

Duringthe three months ended March 31, 2009 we did not declare dividends,although the dividend declared in December 2008 was paid in January 2009at a quarterly dividend rate of $0.025 per share.

 

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### **Table of Contents**

 

### **CONTRACTUAL OBLIGATIONS**

### ** **

Thefollowing table summarizes our known contractual obligations to make futurecash payments as of March 31, 2009, as well as an estimate of the periodsduring which these payments are expected to be made.

 
| ** **                                        | ** ** | **Years  Ended December 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------|------------|
| ** **                                        | ** ** | ** **                         | ** ** | **Remainder** | ** ** | **2010** | ** ** | **2012** | ** ** | **2014** | ** ** |
| ** **                                        | ** ** | ** **                         | ** ** | **of** | ** ** | **and** | ** ** | **and** | ** ** | **and** | ** ** |
| ***(In thousands)***                              | ** ** | **Total**                          | ** ** | **2009** | ** ** | **2011** | ** ** | **2013** | ** ** | **Beyond** | ** ** |
|                                              |       |                               |       |   |   |   |   |   |   |   |   |
| Long-term  debt (1):                              |       |                               |       |   |   |   |   |   |   |   |   |
| Bank  line of credit (2)                          |       | 103,500                            |       | —    |   | —    |   | 103,500 |   | —    |   |
| Mortgage  bonds (3)                               |       | 45,000                             |       | 12,000 |   | —    |   | — |   | 33,000 |   |
| Bank  term loans (4)                              |       | 30,767                             |       | 616 |   | 1,646 |   | 1,646 |   | 26,859 |   |
| Convertible  subordinated debentures (5)          |       | 11,912                             |       | — |   | — |   | — |   | 11,912 |   |
| Capital  lease obligations (6)                    |       | 3,944                              |       | 805 |   | 2,140 |   | 999 |   | — |   |
| Economic  development revenue bonds (7)           |       | 1,810                              |       | 120 |   | 260 |   | 295 |   | 1,135 |   |
| Note  Payable                                     |       | 78                                 |       | 78 |   | —    |   | —    |   | —    |   |
| Total  long-term debt                             |       | 197,011                            |       | 13,619 |   | 4,046 |   | 106,440 |   | 72,906 |   |
|                                              |       |                               |       |   |   |   |   |   |   |   |   |
| Repayment  of advances for construction (8)       |       | 9,888                              |       | 690 |   | 1,366 |   | 827 |   | 7,005 |   |
| Water  purchase commitment (9)                    |       | 7,067                              |       | 345 |   | 920 |   | 920 |   | 4,882 |   |
| Operating  lease obligations                      |       | 22,516                             |       | 3,852 |   | 6,985 |   | 3,703 |   | 7,976 |   |
| Total  obligations as of March 31, 2009 (10) |       | 236,482                            |       | 18,506 |   | 13,317 |   | 111,890 |   | 92,769 |   |

 

----

(1)             Excludesinterest payments, which are described in the following notes. The terms of thelong-term debt are more fully described in the notes to the condensedconsolidated financial statements included in this report and in our 2008Annual Report on Form 10-K.

 

(2)             The banklines of credit bear interest at variable rates and therefore the amount offuture interest payments are uncertain. Borrowings bear interest, at ouroption, based on a margin either: a) over the LIBOR rate; or b) under the primerate. The margins vary based on our consolidated debt to equity ratio. Theweighted-average annual interest rate on our bank line of credit borrowings was5.22% as of March 31, 2009.

 

(3)             $12.0million has been included as a payment in 2009 related to the 2009 NMUIsettlement and the resulting repayment of the NMUI mortgage bonds.  Interest on the mortgage bonds is fixed at aweighted-average annual interest rate of 6.52% and is payable semiannually.

 

(4)       Interest on the bank term loans is fixed at a weighted-averageannual interest rate of 6.52% and is payable semiannually.

 

(5)             Intereston the convertible debentures is fixed at a 6.85% annual rate and is payablequarterly. The debentures are convertible, at the option of the holder, intoshares of our common stock at any time prior to their maturity.

 

(6)             Intereston the capital lease obligations is imputed at a weighted-average annualinterest rate of 4.59% and is payable monthly.

 

(7)             Intereston the economic development bonds is fixed at a weighted-average annualinterest rate of 6.00% and is payable semiannually.

 

(8)             Advancesfor construction are non-interest bearing. Our repayment assumptions on certain obligations are based uponforecasted connection growth.  Ifforecasted connections do not materialize, the related payments are not due andcorresponding amounts become contributed capital.

 

(9)             Reflectsthe minimum annual contractual commitment to purchase water through 2024. Theamount is subject to increases in future periods for production costs increasesand may also increase, but not decrease, if average actual usage exceeds aspecified amount.

 

(10)        Excludespreferred stock dividend obligations. Preferred stockholders are entitled toreceive annual dividends of $2.625 per share and there are 9,156 shares ofpreferred stock currently outstanding. The preferred stock is redeemable by theCompany at any time for $52.00 per share and, from time to time, we haveelected to repurchase shares offered to us by preferred stockholders at pricesless than $52.00 per share.

 

### **FINANCIAL CONDITION**

### ** **

Weexpect our existing sources of liquidity to remain sufficient to meet ouranticipated obligations. Our business is capital intensive, requiringsignificant resources to fund operating expenses, construction expenditures,and interest and dividend payments. During 2009 and in subsequent years, we mayfrom time to time satisfy these requirements with a combination of cash fromoperations and funds from the capital markets as conditions warrant. We expectthat borrowing capacity under our revolving credit facility will continue to beavailable to manage working capital during those periods.

 

At March 31,2009, we had working capital of $14.9 million compared to working capital of$11.0 million at December 31, 2008.

 

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We haveaccess to $110 million in financing under a revolving credit facility thatexpires February 15, 2013. A total of eight banks participate in thefacility. At March 31, 2009, we were operating under an amendment to ourCredit Agreement, primarily allowing for additional time with regards to financialfilings. At that time, we had $43.2 million of additional borrowings availableunder our revolving credit facility, which expires on February 15, 2013.Subsequent to the end of the quarter, we entered into additional amendments toour Credit agreement which waived existing and anticipated defaults,specifically related to additional time with regards to financial filings andwith regards to the debt to capitalization ratio. The agreement requires wemaintain a ratio below 60%. We anticipated the impact of the restatement on ourretained earnings, combined with the additional borrowings on the facilityduring 2008, would create a default under the debt to capitalization covenant.The default was cured due to the second amendment to the credit agreement datedMay 28, 2009.  Our credit facilitywas reduced from $150 million to $110 million as part of the second amendment,leaving $38 million of available liquidity on the facility under the newamendment as of May 28, 2009.  Ourability to comply with financial covenants, pay principal or interest andrefinance our debt obligations will depend on our future operating performanceas well as other factors beyond our control. Continued opportunity foroperating improvements, cash management and suspension of elective capitalexpenditures should improve our ability to comply with the covenants in therevolving credit facility. As of June 30, 2009, our debt to capitalizationratio was estimated at 56%. Under the amendments discussed above, we also wereprovided additional time to file our March 31, 2009 and June 30, 2009Quarterly Reports on Form 10-Q.  Itis our intention to meet the extended filing deadlines provided in theamendment, and to remain current on our filings thereafter.

 

As partof the Amended Credit Agreement with our primary working capital line, we haveagreed to only utilize up to an additional $12.5 million under our capitallease facility.  Our California and NewMexico mortgage bond indentures permit the issuance of an additional $91.2million of first mortgage bonds at March 31, 2009. However, the terms ofour revolving credit facility do not permit additional first mortgage bondindebtedness without prior consent from the credit facility lenders. Themortgage bond indentures also limit the amount of cash and property dividendsour California and New Mexico utilities paid to the parent company. Dividendshave averaged $5.0 million to $5.6 million per year and are less than theaggregate cumulative dividend restriction threshold by $50.4 million at March 31,2009. We were in compliance with or obtained waivers for all loan agreementcovenants during the three-month period ended March 31, 2009.

 

We haveon file a registration statement with the Securities and Exchange Commission,which is effective for the issuance of up to $50.0 million aggregate principalamount of common stock, debt securities and warrants. To date we have issuedapproximately $43.6 million of common stock under the shelf registration, andabout $6.4 million remains available for issuance at March 31, 2009. As wewere unable to timely file our required SEC filings for the September 30,2008, March 31, 2009 and June 30, 2009 Quarterly Reports on Form 10-Qand our 2008 Annual Report on this Form 10-K, we can not use RegistrationStatements on Form S-3 for registration of our securities with the SEC atthis time. Use of Form S-3 requires, among other things, that the issuerbe current and timely in its reports under the Exchange Act for at least twelvemonths. Accordingly, we will have to meet more demanding requirements toregister additional securities, which may make it more difficult for us toeffect public offering transactions, and our range of available financingalternatives could be limited.

 

In January 2009we reached a settlement of eminent domain proceedings against our New Mexicoutility. On May 8, 2009 we received $53.9 million in cash at closing ($60million settlement and $0.9 million escrow release, less $7.0 million retainedby ABCWA in settlement of sewer treatment fees) and incurred $0.2 million oftransactional costs.  We used $12.3million of the net proceeds to pay down NMUI bonds and related accruedinterest, and we used the remaining cash proceeds of $41.4 million to pay anyunassumed liabilities of NMUI and to pay down our revolving credit facility.

 

### **CERTAIN CONTRACTUAL COMMITMENTS AND INDEMNITIES**

### ** **

At March 31,2009, we had irrevocable standby letters of credit in the amount of $3.3million issued and outstanding under our credit facility.

 

Duringour normal course of business, we have entered into agreements containingindemnities pursuant to which we may be required to make payments in thefuture. These indemnities are in connection with facility leases andliabilities and operations and maintenance contracts entered into by ourcontract services businesses. The duration of 

 

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theseindemnities, commitments and guarantees varies, and in certain cases, isindefinite. Substantially all of these indemnities provide no limitation on themaximum potential future payments we could be obligated to make and is notquantifiable. We have not recorded any liability for these indemnities.

 

### **OFF-BALANCE SHEET ARRANGEMENTS**

### ** **

Throughthe date of this report, we did not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities, which would have beenestablished for the purpose of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes. In addition, we do not engagein trading activities involving non-exchange traded contracts. We are notmaterially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in these relationships. We do not haverelationships or transactions with persons or entities that derive benefitsfrom their non-independent relationship with our subsidiaries or us.

 

Welease some of our equipment and office facilities under operating leases whichare deemed to be off-balance sheet arrangements. Our future operating leasepayment obligations are more fully described under the caption “ContractualObligations” above.

 

## **ITEM3.**              QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

## ** **

As of March 31,2009, we had $197.7 million of long-term variable and fixed-rate debt. We areexposed to market risk based on changes in prevailing interest rates.

 

Marketrisk related to our variable-rate debt is estimated as the potential decreasein pre-tax earnings resulting from an increase in interest rates. We have$103.5 million of long-term debt that bears interest at variable rates based oneither the prime rate or LIBOR rate. Our variable-rate debt had a weightedaverage annual interest rate of 4.06% as of March 31, 2009. A hypotheticalone percent (100 basis points) increase in the average annual interest ratescharged on our variable-rate debt would reduce our pre-tax earnings byapproximately $1.0 million per year.

 

Ourfixed-rate debt, which has a carrying value of $94.2 million, has a fair valueof $91.9 million as of March 31, 2009. Market risk related to ourfixed-rate debt is deemed to be the potential increase in fair value resultingfrom a decrease in prevailing interest rates. Our fixed-rate debt had aweighted average annual interest rate of 6.5% as of March 31, 2009. Ahypothetical ten percent decrease in annual interest rates, from 6.5% to 5.9%,would increase the fair value of our fixed-rate debt by approximately $5.6million.

 

We donot use derivative financial instruments to manage or reduce these risksalthough we may do so in the future. We do not enter into derivatives or otherfinancial instruments for trading or speculative purposes.

 

## **ITEM 4.**              CONTROLSAND PROCEDURES

## ** **

This Report includes the certifications attached asExhibits 31.1 and 31.2 of our Chief Executive Officer (“CEO”) and ChiefFinancial Officer (“CFO”) required by Rule 13a-14 of the Exchange Act.This Item 4 includes information concerning the controls and controlevaluations referred to in those certifications.

 

Asdiscussed in the Explanatory Note at the beginning of this report, we haverestated our previously filed financial statements.  In this Form 10-Q, we are restating ourcondensed consolidated statement of operations and statement of cash flows forthe three months ended March 31, 2008.

 

Detailsof the restatement and its underlying circumstances are discussed in theExplanatory Note at the beginning of this report and in Note 2 of Notes toCondensed Consolidated Financial Statements in Part I, Item 1 of thisreport.

 

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### **DISCLOSURE CONTROLS AND PROCEDURES**

### ** **

Disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) are designed to provide reasonable assurance that informationrequired to be disclosed in reports we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the SEC and that such information is accumulatedand communicated to our management, including the CEO and CFO, as appropriateto allow timely decisions regarding required disclosures.

 

Ourmanagement, under the supervision and with the participation of our CEO andCFO, evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as of March 31, 2009. Based on our evaluation andthe identification of the material weaknesses in internal control overfinancial reporting described below, our CEO and CFO concluded that, as of March 31,2009, our disclosure controls and procedures were not effective.

 

Inconnection with our assessment of our disclosure controls and procedures, wehave identified the following deficiencies that constituted individually, or inthe aggregate, material weaknesses in our internal control over financialreporting as of March 31, 2009:

 

1.               We did not maintain an effective controlenvironment because of the following material weaknesses:

 

·                   We did not maintain an environment that consistently emphasized strictadherence to generally accepted accounting principles. This control deficiency,in certain instances, led to inappropriate accounting decisions and entries.This control deficiency was magnified by the decentralized nature of theaccounting function that existed at our various operating locations.

 

·                   We did not maintain in certain areas of our internal audit, finance andaccounting departments, a sufficient complement of resources with anappropriate level of accounting knowledge, experience and training commensuratewith our financial reporting requirements. These areas include period-end financial reporting process, acquisitionaccounting, goodwill, regulatory accounting, stock-based compensation,property, plant and equipment, estimates and accruals.

 

·                   We did not maintain complete and accurate business documentation tosupport certain transactions and accounting records. The controls in theseareas with respect to the creation, maintenance and retention of complete andaccurate business records were not effective. This control deficiency was magnified by the number of legacy financialsystems and the decentralized nature of the accounting function that existed atour various operating locations.

 

2.               We did not maintain effective monitoringof controls over areas including period end financial reporting process,acquisition accounting, goodwill, regulatory accounting, stock-basedcompensation, property, plant and equipment, estimates and accruals.  This deficiency resulted in either not havingadequate controls designed and in place or not achieving the intended operatingeffectiveness of controls.

 

3.               We did not maintain effective controlsover risk assessments.  Specifically, wedid not maintain processes to perform and evaluate the annual business and fraudrisks affecting financial reporting processes. This deficiency resulted in either not having adequate controls designedand in place or not achieving the intended operating effectiveness of controls.

 

Thematerial weaknesses in control environment, monitoring of controls and riskassessment described above contributed to the material weaknesses set forthbelow.

 

4.               We did not maintain and communicatesufficient and consistent accounting policies with respect to generallyaccepted accounting principles. This control deficiency, among other things,limited our ability to detect and correct accounting errors in previouslyissued financial statements.

 

5.               We did not maintain effective controlsover the recording of journal entries, both recurring and non-recurring.  Specifically, effective controls were notdesigned and in place to ensure that journal entries were properly 

 

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preparedwith sufficient supporting documentation or were reviewed and approved toensure the accuracy and completeness of the journal entries.

 

6.               We did not maintain effective controlsover the completeness and accuracy of key spreadsheets and system-generatedreports.  Specifically, effectivecontrols were not designed and in place to ensure that key spreadsheets andsystem-generated reports were properly reviewed for accuracy and completeness.

 

7.               We did not maintain effective controls overthe application of generally accepted accounting principles commensurate withfinancial reporting requirements.  Thisdeficiency led to, in certain instances, inappropriate accounting decisions andentries related to the income tax provision, termination benefits, recognitionof revenue, bonus accrual, asset retirement obligations, and various cost andexpense accounts.

 

8.               We did not maintain effective controlsover the completeness and accuracy of our accounting for acquisitions.  Specifically, we did not design and maintaineffective controls with respect to the application of relevant GAAP and thedeficiency resulted in errors in the allocation of the purchase price to theunderlying assets acquired, including goodwill and the liabilities assumed.  This deficiency affected property, plant andequipment, deferred income tax and liabilities, goodwill and long-termliability accounts.

 

9.               We did not maintain effective controlsover the completeness, accuracy and valuation of our accounting estimates relatedto our claims process associated with medical, automobile and workers’compensation self-insurance. Specifically, we did not design and maintain effective controls withrespect to the maintenance and reconciliation of claims and the review ofactuarial valuations.  This deficiencyaffected accrued liabilities and expense accounts.

 

10.         We did not maintain effective controlsover the completeness and accuracy of our accounting for the impairment ofgoodwill.   Specifically, we did notdesign and maintain effective controls to ensure proper identification ofreporting units, triggering events and proper cash flow projections todetermine fair value.  This deficiencyaffected goodwill related accounts.

 

11.         We did not maintain effective controlsover the completeness and accuracy of our accounting for regulatedentities.  Specifically, we did notdesign and maintain effective controls with respect to the application ofrelevant GAAP and the deficiency resulted in errors in the accounting forintercompany profit, regulatory assets and liabilities.  This deficiency affected revenue, property,plant and equipment, and regulatory asset and regulatory liability accounts.

 

12.         We did not maintain effective controlsover the accuracy and valuation of stock-based compensation.  Specifically, we did not maintain effectivecontrols over the assumptions used in the calculation of stock-basedcompensation.  This deficiency affectedstock-based compensation related accounts.

 

13.         We did not maintain effective controlsover the completeness and accuracy of property, plant and equipment and relateddepreciation expense.  Specifically, wedid not design and maintain effective controls to ensure that there was timelytransfer of property, plant and equipment additions from construction work inprogress; that retirements were properly recorded; that depreciation expensewas accurately recorded based on appropriate useful lives assigned to therelated property, plant and equipment; that assets are capitalized properly;and that impairment losses were timely identified and determined.  This deficiency affected property, plant andequipment, deprecation expense and operating expense accounts.

 

14.         We did not maintain effective controlsover the completeness and accuracy of unbilled utilities revenue.  Specifically, we did not maintain effectivecontrols to standardize a process and methodology of calculating and recordingunbilled revenue in the proper period. This deficiency affected utility revenue and unbilled receivableaccounts.

 

15.         We did not maintain effective controls toensure the completeness of the recording of accounts payable and accruedliabilities, operating expenses and property, plant and equipment additions ona timely basis.  Specifically, we did notreview and approve invoices and their supporting documentation on a timelybasis.  Material outstanding liabilitieswere not recorded for which goods were received or services were rendered by 

 

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vendorsprior to the balance sheet date. Consequently, our accounts payable and accrued liability balances wereunderstated at the period end by the aggregate value of these unpaid invoiceswhich relate to construction work in progress and other selling andadministrative expenses.

 

Webelieve that because of the substantial work performed restating our historicalaccounting records, the performance of additional procedures by management designedto ensure the reliability of our financial reporting and the ongoing efforts toremediate the material weaknesses in internal control over financial reportingdescribed below, the condensed consolidated financial statements for theperiods covered by and included in this report are fairly stated in allmaterial respects.

 

### **CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING**

### ** **

Therewas no change in our controls during the three months ended March 31, 2009that has materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

### **PLANS FOR REMEDIATION OF MATERIAL WEAKNESSES**

### ** **

We haveengaged in and are continuing to engage in substantial efforts to improve ourinternal control over financial reporting and disclosure controls andprocedures related to the preparation of our financial statements anddisclosures. We have begun the implementation of some of the measures describedbelow and concentrated our efforts on (i) communicating, both internallyand externally, our commitment to a strong effective control environment, highethical standards and financial reporting integrity, (ii) certainpersonnel actions, (iii) comprehensive training for Finance and AccountingDepartment personnel, (iv) the implementation of policies and proceduresto ensure that we retain important business and accounting records and (v) morerigorous period end reporting policies and processes involving journal entryapproval, account reconciliations and supporting documentation includingmanually prepared spreadsheets.

 

Subsequentto March 31, 2009, we have implemented a remediation plan (“the Plan”) toaddress the material weaknesses for each of the affected areas presented above.The Plan builds upon many of the initiatives we started over the past twoyears, such as development of a centralized financial services platform andconsolidation of financial accounts onto a common system.  The Plan will ensure that each area affectedby a material control weakness is put through a comprehensive remediationprocess.  The remediation process entailsa thorough analysis which includes the following phases:

 

a)               Define and assess the deficiency: ensure athorough understanding of the “as is” state, process owners, and gaps in thedeficiency. This work is underway for all identified areas.

 

b)              Design and evaluate a remediation actionfor each weakness for each affected area: validate or improve the relatedpolicy and procedures, evaluate skills of the process owners with regards tothe policy and adjust as required. The Plan will require an assessment of allfailures; we expect that many of the recent improvements will provide anexcellent starting point for the specific action plans.

 

c)               Implement specific remediation actions:train process owners, allow time for process adoption and adequate transactionvolume for next steps.

 

d)              Test and measure the design andeffectiveness of the remediation plan: internal audit to test and providefeedback on the design and operating effectiveness of the control.

 

e)               Management review and acceptance ofcompletion of the remediation effort.

 

ThePlan will be administered by a Controls Committee comprised of key leaders fromcross functional portions of the organization, including the CFO. The Directorof Internal Control will chair the Committee. Each specific area of actionwithin the Plan will be assigned a project leader to coordinate the resourcesrequired for timely completion of the remediation process. The Committee willreport quarterly and as needed to the Audit Committee of our Board of Directorson progress made.

 

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Webelieve the steps taken to date have improved the effectiveness of our internalcontrol over financial reporting, however we have not completed the correctiveprocesses and procedures identified herein, that we believe necessary.Accordingly, as we continue to monitor the effectiveness of our internalcontrol over financial reporting in the areas affected by the materialweaknesses described above, we will perform additional procedures prescribed bymanagement including the use of manual mitigating control procedures and theutilization of external technical advisors to ensure that our financialstatements continue to be fairly stated in all material respects.

 

Subsequentto March 31, 2009, we have engaged in and are continuing to engage insubstantial efforts to improve our internal control over financial reportingand disclosure controls and procedures related to the preparation of ourfinancial statements and disclosures. We have begun the implementation of someof the measures described above including the establishment of the ControlsCommittee. The Controls Committee has concentrated their efforts on (i) communicating,both internally and externally, our commitment to a strong effective controlenvironment, emphasizing accountability and a strict adherence to generallyaccepted accounting principles and financial reporting integrity, (ii) takingcertain personnel actions, (iii) clarification and documentation of keyaccounting policies and processes, (iv) comprehensive training for Financeand Accounting Department personnel, (v) the implementation of policiesand procedures to ensure that we retain important business and accountingrecords, and (vi) more rigorous period end reporting policies andprocesses involving journal entry approval, account reconciliations andsupporting documentation including manually prepared spreadsheets.  This work will continue during 2009 andafter.

 

### **INHERENT LIMITATIONS OF DISCLOSURE CONTROLS AND PROCEDURES**

### ** **

We donot expect that our disclosure controls and procedures will prevent or detectall errors. A control system, no matter how well designed and operated, canprovide only reasonable, not absolute, assurance that the control system’sobjectives will be met. Further, the design of a control system mustacknowledge the fact that there are resource constraints and the benefits ofcontrols must be considered relative to their costs. These inherent limitationsinclude the realities that judgments in decision making can be faulty and thatbreakdowns can occur because of simple error or mistake. Controls can also becircumvented by the deliberate acts of one or more persons. The design of anysystem of controls is based, in part, upon certain assumptions about thelikelihood of future events and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.Over time, controls may become inadequate because of changes in conditions ordeterioration in the degree of compliance with associated policies orprocedures. Because of the inherent limitations in a cost-effective controlsystem, misstatements due to error may occur and not be detected.

 

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# **PART II –OTHER INFORMATION**

# ** **

## **ITEM 1.          LEGAL PROCEEDINGS**

## ** **

Therehave been no new, material developments to or terminations of legalproceedings, other than ordinary routine litigation incidental to the business,to which the Company or any of its subsidiaries is a party or of which any of theirproperty is the subject during the period covered by this Quarterly Report.

 

## **ITEM 1A.       RISK FACTORS**

## ** **

Therehave been no material changes in our risk factors since we last reported under Part I,Item 1A, in our Annual Report on Form 10-K for the year ended December 31,2008.

 

## **ITEMS 2, 3, 4AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.**

 

 

## **ITEM 6.          EXHIBITS**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.1         |       | Certificate of Amendment  to Restated Certificate of Incorporation of SouthWest Water Company (incorporated  by reference to Exhibit 3.1 included in the Company’s Form 8 K  filed with the Commission on May 22, 2008)                                                                                                                                                                                                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.2.5       |       | Amendment No. 5 to  the Amended and Restated Bylaws of SouthWest Water Company (incorporated by  reference to Exhibit 3.2 included in the Company’s Form 8 K filed  with the Commission on May 22, 2008)                                                                                                                                                                                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.17       |       | Credit Agreement dated  at February 15, 2008 among the Company, as borrower, the several lenders  parties thereto, Bank of America, N.A., as Administrative Agent, Swing Line  Lender and Letter of Credit Issuer, Banc of America Securities LLC, as Sole  Lead Arranger and Sole Book Manager, KeyBank National Association, as  Syndication Agent, and CoBank ACB, U.S. Bank National Association and  JPMorgan Chase Bank, N.A., as Documentation Agents (incorporated by reference  to Exhibit 10.1 included in the Company’s Form 8-K filed with the  Commission on February 22, 2008) |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.17.1     |       | Amendment No. 1 to  Amended and Restated Credit Agreement dated as of November 19, 2008  (incorporated by reference to Exhibit 10.17.1 included in the Company’s  Form 10-K filed with the Commission on July 9, 2009)                                                                                                                                                                                                                                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.17.2     |       | Amendment No. 2 to  Amended and Restated Credit Agreement dated as of May 28, 2009  (incorporated by reference to Exhibit 10.17.2 included in the Company’s  Form 10-K filed with the Commission on July 9, 2009)                                                                                                                                                                                                                                                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.17.3     |       | Amendment No. 3 to  Amended and Restated Credit Agreement dated as of June 17, 2009  (incorporated by reference to Exhibit 10.17.3 included in the Company’s  Form 10-K filed with the Commission on July 9, 2009)                                                                                                                                                                                                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.17.4     |       | Amendment No. 4 to  Amended and Restated Credit Agreement dated as of July 9, 2009  (incorporated by reference to Exhibit 10.17.4 included in the Company’s  Form 10-K filed with the Commission on July 9, 2009)                                                                                                                                                                                                                                                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.17.5     |       | Amendment No. 5 to  Amended and Restated Credit Agreement dated as of July 31, 2009  (incorporated by reference to Exhibit 10.17.5 included in the Company’s  Form 10-Q filed with the Commission on August 3, 2009)                                                                                                                                                                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.1        | *          | Certification of Principal  Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of  2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.2        | *          | Certification of  Principal Financial Officer Pursuant to Section 302 of the Sarbanes  Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 32.1        | *          | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of  2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

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| **Exhibit** | ** ** | ** **                                                                                                |
|-------------|------------|-----------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Exhibit Description**                                                                              |
| ** **  | ** ** | ** **                                                                                                |
| 32.2        | *          | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of  2002 |

 

----

*                  Filed herewith

 

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# **SIGNATURES**

# ** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned, theretoduly authorized.

 

 
|                              | SOUTHWEST WATER COMPANY  (REGISTRANT**)** |
|-----------------------------------|-------------------------------------------|
|                              |                                      |
|                              |                                      |
| Dated:  August 25, 2009 | /s/  DAVID STANTON                   |   |
|                              | David Stanton                             |
|                              | Chief Financial Officer                   |

 

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