Southwest Water Company Business Information, Profile, and History

Company Perspectives:

Southwest Water is a unique player in the water and wastewater operations industry, capitalizing on the rapid growth of service outsourcing, while maintaining a solid foundation in the regulated utility business. Working with cities, utility districts, private companies, and developers, the company provides a broad range of operation and maintenance services for water and wastewater systems. Southwest Water is also an active player in the growing utility submetering, billing, and collection industry. With half a century of experience and a leadership position within its market niche, Southwest Water is well positioned for continued growth in the more than $20 billion per year U.S. water and wastewater industry.

History of Southwest Water Company

Southwest Water Company owns and operates water and wastewater treatment systems, manages and operates water and wastewater treatment systems under contract, and provides utility submetering services. The company's regulated public utilities are operated through southern California-based Suburban Water Systems, New Mexico Utilities, Inc., and two utilities in Texas, Windermere Utility Company and Hornsby Bend Utility Company. Southwest Water's contract operations are conducted through ECO Resources, Inc., which operates in California, New Mexico, Texas, and Mississippi. The company's submetering activities are operated through Master Tek International, Inc., which serves customers in 30 states, coast to coast. Southwest Water serves more than one million customers, predominantly in California and Texas.

Origins

Southwest Water's corporate lineage stretches throughout much of the 20th century. The company's earliest predecessor began supplying water to customers in the Los Angeles area as early as 1907. A more direct route to Southwest Water's past began on December 10, 1954, when Suburban Water Systems--an integral component of the company's corporate structure in the 21st century--was incorporated.

From its birth as a regulated water utility, Suburban Water Systems benefited from the strident growth and development surrounding it. Operating in a regulated industry, Suburban Water Systems was dependent almost entirely on population growth within its service area for its own financial success. Rate increases only provided modest growth, whereas the establishment of new communities, the expansion of existing neighborhoods, and new industrial and commercial development could provide a substantial surge in the company's bottom line. Such was the case for Suburban Water Systems between the mid-1950s and the late 1960s. The Los Angeles area became the greater Los Angeles area, as the suburban sprawl that would later describe the region began to take shape. Officials at Suburban Water Systems witnessed their service area transform from agricultural use to residential, business, and industrial use, a conversion that added meaningfully to the company's stature.

The more than decade-long growth period experienced by Suburban Water Systems tapered off by the late 1960s. Population expansion within the company's service area slowed considerably, reaching its saturation point. Modest growth of the pace typical of a regulated water utility in a mature market set in, prompting company management to pursue opportunities elsewhere. Suburban Water Systems officials moved quickly, completing an acquisition just as business in the Los Angeles area began to lose its robust vigor. In 1969, Suburban Water Systems purchased New Mexico Utilities, Inc., a small water utility serving 800 customers. In 1975, the name of the combined businesses was changed to Southwest Water Company, with Suburban Water Systems and New Mexico Utilities, Inc. operating as its two subsidiaries.

In the decade after the name Southwest Water was adopted, growth was recorded at a measured pace, presided over by a leader whose contributions to Southwest Water's financial health were substantial. Anton C. Garnier, who would serve as Southwest Water's president, chief executive officer, and chairman as the company entered the 21st century, spent his entire career at Southwest Water. Raised on a 1,000-acre farm established by his family in the late 19th century, Garnier attended Orange Coast College and San Diego State University. He served a two-year stint in the U.S. Army as a sergeant before joining Suburban Water Systems in 1968, the year before the company acquired New Mexico Utilities, Inc. Early in his career at the company, Garnier earned a Grade V water certificate, the highest level of certification awarded in California. Under Garnier's leadership, Southwest Water kept pace with changes in the water industry, and made the most adventurous leap in its history. During the mid-1980s, when the company operated as one of 18 investor-owned water companies, Garnier led Southwest Water into its first non-regulated business area.

Diversification in 1985

Southwest Water's regulated utility operations provided financial stability, but little opportunity for sizable growth. In New Mexico, the company was achieving gains in growth through the extension of water services and sewage collection services into new residential subdivisions and new commercial property. In southern California, the years of rampant growth had gone, as Suburban Water Systems' service area reached maturity in terms of population. By no means had the company's regulated utility operations lost their worth; rather, the water systems, particularly the assets operated by Suburban Water Systems, had become established and reliable profit generators--properties Garnier had no desire to disassociate Southwest Water from. Instead, Garnier wanted to complement the company's stable money earners with new growth opportunities.

In 1985, Southwest Water entered the contract water and wastewater management services industry by purchasing ECO Resources, Inc. Established in 1972 and incorporated two years later, ECO Resources operated and managed water and wastewater systems near Houston, Texas, that were owned by other entities, generating its revenues from contracts with the systems' owners. The acquisition opened a path toward new growth, both geographically and financially, positioning Southwest Water in an emerging industry that called upon the company's expertise. In 1986, Southwest Water collected $27.9 million in revenue, the bulk of which--$23.3 million--was derived from the company's utility subsidiaries, Suburban Water Systems and New Mexico Utilities, Inc. For the same year, the company's fledgling contract operations, conducted by ECO Resources, accounted for the remaining $4.6 million. A little more than a decade later, contract operations would constitute over half of Southwest Water's entire business, proving to be a source of substantial growth.

By the beginning of the 1990s, Southwest Water's regulated operations supplied water to more than 500,000 customers. As the mainstay of the company's business, the regulated operations, located in southern California's San Gabriel Valley and in New Mexico, served as a steady source of revenues and respectable profit margins. By this point, however, the emphasis was on building the company's contract operations by forging business relationships with cities, municipal utility districts, and private companies. Garnier's progress in this segment of the company's business enabled Southwest Water to reach a financial milestone in 1994, when the company celebrated its 40th anniversary by eclipsing the $50 million-in-sales mark, recording $50.9 million in sales and posting $1 million in net income.

Growth in the Late 1990s

During the latter half of the 1990s, Southwest Water enjoyed the best years in its history. The company's revenue volume nearly doubled during the five-year period, while its profits quadrupled. The growth was attributable to expansion within both segments of the company's business, as substantial gains were made in both regulated and non-regulated sectors. By the end of the decade, the company was ready to enter a new line of business, encouraged by the overwhelming success recorded during the late 1990s.

In the company's regulated utility operations, growth was achieved from modest increases in Suburban Water Systems' existing markets and through the acquisition of water and wastewater systems. In 1996, for example, the company purchased 49 percent of Windermere Utility Company, located near Austin, Texas. Sales efforts, aimed at securing new contracts and renewing existing contracts, provided substantial growth as well. From its base in the Houston area, ECO Resources was expanding its presence in Texas and broadening its geographic scope by securing contracts with utility districts and private companies in California, New Mexico, and Mississippi. One notable contact, obtained in 1995, forged a lasting relationship with the El Paso County Water Authority (EPCWA), a municipal utility district for whom ECO Resources operated water and wastewater systems.

By 1998, Southwest Water supplied water and wastewater services to nearly 750,000 people. The majority of the company's customers resided in California and Texas, where Southwest Water served 300,000 people in each state. Mississippi, with 110,000 customers, and New Mexico, home to 20,000 Southwest Water customers, represented the balance of the company's customer base. Combined, the company's territories of service produced record-high financial totals in 1998, with $72.1 million in revenues and $3.34 million in net income. During the year, the company increased its anticipated future revenues from contractual commitments to $70 million, the result of netting more than 20 new and renewed contracts for water and wastewater services. Southwest Water suffered its losses during the year, such as the decision by the City of Rio Rancho, located in New Mexico, not to renew the company's contract. The loss of Rio Rancho represented $4.5 million in business, but the successes outweighed the failures in 1998.

In 1998, Southwest Water secured more than a dozen new contracts, helping to compensate for unusually wet weather in California. The global weather phenomenon of El Niño was the cause for more than twice the normal seasonal rainfall during the first six months of 1998, leading to a decline in water sales of more than $2 million, but Garnier's decision to enter the contract business in 1985 compensated for the loss. The new contractual relationships Southwest Water secured in 1998 included a five-year, $1.6 million contract with the City of Dos Palos, California, to provide water treatment and distribution, meter reading, and wastewater treatment and collection services for the community's 8,000 residents. A similar arrangement was brokered for a Brazonia County municipal utility district in suburban Houston, giving the company a three-year, $900,000 contract.

In 1999, another year hailed as the best in the company's history, Southwest Water outstripped the accomplishments of the previous year. During the year, the company secured 20 new contracts and renewed contracts with 22 existing clients. A drier 1999 in California also produced gains in the company's regulated operations, leading to a 12 percent increase in water sales. In New Mexico, more good news was to be found, as residential and commercial development expanded the company's utility customer base by 16 percent. Early in the year, Southwest Water signed a five-year, $2.3 million contract with Discovery Bay, a community service district located east of Oakland, California, that added 8,000 new customers. The company also added 22,000 new customers in northwest Mississippi by signing a five-year, $4.1 million contract with the City of Olive Branch. Perhaps the most significant of the company's renewed contracts was a 20-year renewal with EPCWA, a $20 million agreement that included the financing, construction, and operation of a $6.7 million reverse osmosis water treatment facility.

Southwest Water's contract operations expanded by 16 percent in 1999, accounting for 53 percent of the company's total revenues. Regulated utility business, which constituted the company's entire business before 1985, accounted for 45 percent of Southwest Water's revenue volume. Garnier would soon add another dimension to Southwest Water's operations, as the company prepared to enter the 21st century enjoying the most successful years in its history. New contracts continued to arrive in 2000, beginning with an agreement with Lamont, California, that was expected to generate $3.2 million in revenue during the ensuing five years. The addition of the contract in Lamont combined with the contracts signed in 1999 gave the company more than 60,000 new customers. On the regulated utility side of Southwest Water's business, the company's customer count increased as well in February 2000, when the City of West Covina's water distribution system was acquired, increasing the company's customer base in California by 11 percent.

Garnier steered Southwest Water in a new direction in 2000, engineering the company's first foray into a non-governmental market. In April 2000, Southwest Water purchased Master Tek International, Inc., a leading company in the submetering industry. Master Tek's customers were property owners of multi-family housing units for whom Master Tek provided utility metering, billing, and collection services, enabling property owners to bill individual utility usage. The company served customers in 30 states, greatly broadening Southwest Water's geographic scope, and generated approximately $6 million in annual revenues.

Southwest Water's record-setting year also included substantial gains in the company's regulated utility operations. In October 2000, the company acquired an additional 31 percent stake in Windermere Utility Company, bolstering the 49 percent interest the company acquired in 1996. Also in October, the company purchased 100 percent of Hornsby Bend Utility Company, a water utility situated adjacent to Windermere Utility. Collectively, the two companies were referred to as the "Texas Utilities." By the end of the year, thanks largely to the two acquisitions, Southwest Water recorded a 15 percent increase in its regulated utility customer base. The company's contract operations recorded a 29 percent increase in revenues, as compared to the total recorded in 1999.

Strengthened considerably by the achievements during 2000, Southwest Water posted an impressive 30 percent increase in its overall revenue. For the year, the company generated $104.7 million in sales and $5.3 million in net income. With more than one million customers residing in 30 states, the company represented a rising force in the water and wastewater services industry, its decision to diversify, while maintaining the financial stability engendered by regulated operations, holding it in good stead for its second half-century of business.

Principal Subsidiaries: ECO Resources, Inc.; Master Tek International, Inc.; Suburban Water Systems; New Mexico Utilities, Inc.; Hornsby Bend Utility Company; Windermere Utility Company (80%).

Principal Competitors: California Water Service Group; Lower Colorado River Authority; Western Water Company.

Chronology

• Key Dates:
• 1954: Suburban Water Systems is incorporated.
• 1969: Suburban Water Systems acquires New Mexico Utilities, Inc.
• 1975: Suburban Water Systems changes its name to Southwest Water Company.
• 1985: ECO Resources, Inc. is acquired, providing entry into contract operations.
• 1996: A 49 percent stake in Windermere Utility Company is acquired.
• 2000: Master Tek International, Inc. is purchased, adding utility submetering to the company's business activities.