American States Water Company

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American States Water Company

630 East Foothill Boulevard
San Dimas, California 91772-9016
U.S.A.
Telephone: (909) 394-3600
Fax: (909) 394-1382
Web site: http://www.gswater.com

Public Company
Incorporated: 1929 as American States Water Service Co. of California
Employees: 489
Sales: $197.5 million (2001)
Stock Exchange: New York
Ticker Symbol: AWR
NAIC: 221310 Water Supply and Irrigation Systems

American States Water Company is a holding company whose main subsidiary, Southern California Water Company, supplies water to more than 245,000 customers in California. American States supplies an additional 10,000 customers in Arizona. While the delivery of water accounts for 92 percent of the company’s revenues, American States also distributes electricity in one service area and its American States Utility Services subsidiary operates and maintains municipally owned water and wastewater systems on a contract basis. American States operates out of the Southern California Water Company headquarters located in the Los Angeles suburb of San Dimas.

American States Founded in 1929

The delivery of water was crucial to the growth of Southern California. In 1905, shortly before the invasion of the film industry, Los Angeles was a city of just 300,000 people and further growth was jeopardized by a lack of additional water supplies. Thanks in large part to legendary engineer William Mulholland and the Los Angeles Aqueduct he built, water from the north flowed into the region. The local distribution of that water, however, was less well organized. By the 1920s, most Southern California communities formed their own water works, leaving just a few, scattered private water companies. Eventually a group of Chicago investors decided to consolidate some of these smaller operations and run them under central management with private funding.

The Chicago investors formed a holding company on April 16, 1928, naming it American States Public Service Company with the intention of investing in utility companies across the country. After some study the new company decided that the Southern California water market presented an excellent opportunity. A public utility engineer named John C. Rath was dispatched to the Los Angeles area and given the authority to purchase small water companies. From March 1928 to October 29, he purchased 33 properties at a cost of nearly $5.8 million. The water companies were spread across Los Angeles County and Orange County, held by two separate local holding companies set up by Rath: the Los Angeles and Suburban Water Company and the Orange County Water Company. His most significant acquisition was the $640,000 purchase of the Los Angeles Water Service Company. Before he left the area to take on other projects for the parent company, Rath made one other contribution to the new water enterprise: he engaged the engineering firm of Olmstead & Gillelen, where he met a young sanitary engineer named Cornelius Prugh Harnish. C.P. Harnish would be associated with the new water company for the rest of his life, including 14 years as its president.

The Chicago corporate parent assigned the task of creating an operational structure out of Rath’s acquisitions to Ephraim Ewing Towles. To consolidate the two holding companies set up by Rath, he created the American States Water Service Company of California, incorporated on December 31, 1929. An office was set up in Los Angeles and Harnish was hired as general manager and chief engineer. The new water company began its operations with 43,000 customers located in 31 communities, with only a portion of its systems inter-connected.

Only a few months prior to the incorporation of American States, the New York Stock Exchange suffered the crash that would usher in the Depression of the 1930s. The water business remained profitable, however, with American States earning more than $600,000 on revenues of nearly $1.5 million in its first full year of operation. Nevertheless, its Chicago holding company did not fare well overall. A change in management led to the termination of Towles, despite having successfully launched the California enterprise. By 1936, the holding company was well on its way to bankruptcy and the America States water business, looking to distance itself, changed its name to the Southern California Water Company. American States Public Service Company emerged from receivership in 1938 and changed its name to American States Utilities Corporation. It continued to own a vast majority of stock in Southern California Water and maintained effective control. Ralph Elsman was named president of the water company, but because he elected to remain in San Jose, California, to also run the San Jose Water Works, he turned over operational control of Southern California Water to Harnish, who put his expertise in sanitary engineering to good use by greatly improving the system’s water quality.

Elsman soon came into conflict with executives of the parent corporation because he advocated selling the properties of Southern California Water to municipalities. The issue divided the board and was only resolved when several Omaha-based investors gained control of the company and ousted Elsman. Walter Whitworth, who had previously headed Southern California Water in the 1930s, took over again. He immediately changed course, withdrawing an offer Elsman made to sell a property to Huntington Beach, and even added two more small water companies to the system: Manchester Heights Water Company and Gould Water Company.

Southern California Water Gains Independence in 1947

Conflicts with the parent corporation continued into the 1940s. In 1942, the Omaha investors who controlled the holding company, gained control of Southern California Water and removed Whitworth. The valuable Harnish, however, stayed on. He was instrumental in a 1943 effort that consolidated the company’s operations, which until this point were an inefficient patchwork collection of water systems, with separate billing and delivery capabilities. The reorganization of Southern California Water not only produced greater efficiencies and allowed the company to lower the rates it charged customers, but it ultimately resulted in improved profits. With the post-World War II building boom in Southern California about to begin, the company was in a much better position for future prosperity, although it would face other challenges in the years following World War II. In 1946, the City of Los Angeles announced that it wanted to acquire most of the company’s water delivery properties within the city, a move made possible by condemnation rights afforded local communities by California state law. Because Los Angeles properties represented about 30 percent of the company’s total holdings, Southern California Water resisted the city’s bid. During the five years of negotiations that ensued, the company would finally be free of American States Utilities Company, which was ordered dissolved by the SEC. In November 1947, the matter was finalized and Southern California Water began a separate existence. Harnish, who assumed the presidency of the company late in the year, would lead the company into a new era.

The number of customers served by Southern California Water under Harnish’s leadership increased steadily, growing from 85,000 in 1948 to 97,000 by 1951. That number would soon drop by 30,000 and revenues decrease by approximately 26 percent when negotiations with the City of Los Angeles were finally concluded in June 1951 and the company agreed to a $3,342,9444 purchase price for the properties the city wanted. Harnish took advantage of the cash, however, investing in improvements to the system as well as acquiring water properties in the Norwalk district of Los Angeles County that added 16,000 customers. He also reorganized the divisions of the company, resulting in a streamlined operation. In addition, Harnish was heavily involved in the development of a new master plan with the Metropolitan Water District of Southern California to ensure a reliable source of potable water for the future.

By the end of the 1950s, Southern California Water more than recovered the ground it lost in the sale of its property to the City of Los Angeles, with the number of customers it served growing to 114,000. Moreover, revenues, which totaled almost $2.75 million in 1952, increased to $6.5 million in 1959. With the company on a solid footing, Harnish, who was approaching his 68th birthday, decided in March 1960 that it was time to retire and turn over the presidency to new leadership. He remained on the board, however, and continued to exert a positive influence through the 1970s. His replacement, Philip F. Walsh, had been with the company for 21 years, so that despite lacking an engineering degree he was well prepared to lead Southern California Water.

Company Perspectives:

American States Water Company provides quality utility services, an environment for employee growth and development, and a dedication to increasing shareholder value through geographic growth in both regulated and non-regulated utility markets.

During the 14-year tenure of Walsh at the helm, Southern California Water was extremely active in acquiring private water companies as well as selling off systems to municipalities. The company also applied to the state for rate increases on a steady basis. In 1968, Walsh turned to the state’s Public Utilities Commission to find a new manager of the company’s Rate and Valuation Department; the individual he appointed to this position, William V. Caveney, would one day become president of Southern California Water. At the same time, Walsh, whose health was starting to fail due to lung cancer, began to groom his immediate successor, William Franklin, an electrical engineer by training. Gradually Walsh turned over control of the organization to Franklin and finally he succumbed to cancer in 1973 at the age of 59. Southern California Water enjoyed a prosperous era under Walsh, with annual revenues growing by more than 140 percent to nearly $17.4 million. Like Walsh, Franklin had been hired by Harnish in 1939 and had a deep commitment to the company. He assumed the presidency of the company during a difficult period, as the nation suffered through a recession that resulted in high interest rates as well as inflationary pressures. Because of spiking energy costs, he was forced to constantly request rate increases, while at the same time trimming debt and keeping a close eye on the balance sheet. Despite trying circumstances, the company was able to top $20 million in annual revenues in 1975. The following year Southern California Water made one of its largest single acquisitions, the $3.4 million purchase of the California Cities Water Company, which added more than 20,000 customers.

Well over 60 years of age, Franklin tabbed Caveney as the man to succeed him at Southern California Water, at first naming him an executive vice-president in 1978. Then, in 1980, when he turned 65, Franklin named Caveney the new president of the company, but stayed on as CEO and chairman of the board. At the end of another two-year period, Caveney became the chief executive as well, with Franklin continuing on as chairman. As the first president without ties to the company’s earliest years, Caveney was in a position to understand the time had come for fundamental changes at Southern California Water. He recognized the need for capital expenditures and increased the budget accordingly. He also convinced the board to contract a consulting firm to take a look at the company from the outside and recommend a succession plan. The resulting plan suggested that Southern California Water had two viable options: either sell the company or recruit skilled executives to take the company to the next level. Selling the company was never seriously considered, and Caveney began to beef up his management team.

The Mid-1980s Bring Conflicts With Local Communities

During the mid-1980s, Southern California Water came into conflict with many of the communities it served. Upset over ever increasing rates, several municipalities threatened to use the state’s condemnation laws to take over local water systems. The most contentious situation involved the city of Big Bear Lake in Bear Valley, whose water company had been one of the original properties purchased by John Rath in 1928. Southern California Water was offered $10.4 million for the system, which the company appraised at $27 million. After several years of litigation, in 1989, the suit was settled and Southern California Water was awarded $29 million in total compensation. The case had a galvanizing effect on other state water companies, which aggressively lobbied for a change in the law. In 1992, California passed a “Necessity Bill,” requiring communities to provide a justification for condemnation as well as fair compensation.

In 1990, revenues for Southern California Water reached $87.34 million. In that same year, Caveney turned over day-to-day responsibilities and the presidency to Floyd Wicks. As had been the case with Franklin, he stayed on as chairman and also retained the CEO position for a two-year transitional period. Wicks was one of the new breed of executives Caveney had brought into Southern California Water in recent years. A trained engineer, Wicks had 15 years of experience with Consumers Water Company in addition to time in the public sector. He joined Southern California Water in 1988 as Vice President of Operations, a job that gave him a strong overview of the organization. His first priority as president was to bolster the staff. Compared to other water companies Southern California Water, with its 39 separate water systems, was understaffed. The California Public Utilities Commission questioned the validity of this sudden rise in employment and in 1992 initiated an audit. Rather than resist, Caveney and Wicks decided to offer the company’s full cooperation with the outside firm hired to conduct the study. Two years later an audit report was released, and rather than criticizing the company for high staffing levels, it suggested that Southern California Water actually needed additional personnel. In addition, it made 114 recommendations for change. Management replied by unequivocally accepting every recommendation, most of which were improvements to the organization. As a result Southern California Water initiated sweeping changes in all of its systems and, in the process, modernized its information technology infrastructure and positioned the company to compete in a new era for the water industry.

The United States water industry was traditionally a highly fragmented business, with tens of thousands of private and municipal water systems spread across the country. During the mid-1990s a period of consolidation ensued, as many of the private companies, which comprised 20 percent of all water systems, were acquired by larger concerns. Moreover, municipalities increasingly turned over the operation of their water and wastewater systems to the private sector. Much of this activity was fueled by major French companies that following World War II had been forced out of electricity and gas by nationalization and subsequently devoted all of their resources to water, the only remaining utility available to them. After decades of growth and mergers, the resulting French behemoths targeted the United States, forming partnerships with domestic companies to gain a significant share of America’s water and wastewater business. Southern California Water was the second largest investor-owned water company in California and the fifth largest in the nation. It was not considered a small company, but it clearly faced a future in which it had no choice but to grow larger. On July 1, 1998, a new holding company with an old name was formed, American States Water Company. Southern Water became a subsidiary, as did American States Utility Services, a business set up to manage community water and wastewater systems.

Key Dates:

1928:: American States Public Service Company begins acquiring small California water companies.
1936:: The company changes name to Southern California Water Company.
1951:: The City of Los Angeles uses condemnation laws to acquire one of the company’s major systems.
1976:: California Cities Water Company is acquired.
1998:: A holding company, American States Water Company, is formed.
2000:: Chaparral City Water Co. of Arizona acquired.

American States acquired its first water system in over ten years when in December 2000 it purchased the Peerless Water Co. In March the company expanded outside of California for the first time in its history, buying the Chaparral City Water Co. of Arizona for $31.2 million. Investors began to take notice of American States, which traded on the New York Stock Exchange, but they were more likely to view it as an attractive takeover candidate than as a company with prospects for greater growth. Entering 2002, American States remained independent, but whether it would remain so remained very much an open question.