Merger Terms

The merger is structured as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. The purchase price is $4,039,851, less the amount of any debt owed by Peerless to J. William Zastrow on the closing date. The purchase price includes water rights, land, and infrastructure.

The water rights consist of 986 acre-feet (AF) of allocated water pumping rights in the Central Basin in Los Angeles County, pursuant to the Judgment of Los Angeles Superior Court (Case No. 786656, dated October 11, 1965). The water rights are valued in the merger agreement at $2,958,000, or roughly $3,000 per AF. The application work papers contain an appraisal of water rights at $2,700 per AF. However, recent sales of water rights range from $2,754 to $3,520 per AF.

The land being sold is six parcels with active wells. SCWC had these well sites appraised by a licensed appraiser prior to entering into the merger agreement with Peerless. (Exh. 3.) The book value of this land is $8,693. The total appraised value of these well sites is $226,380.

The remaining facilities include 13 wells, 83,670 linear feet of cement and welded steel mains, approximately 2,000 meters, and service connections. They had a net book value of $285,029 at year-end 1999 and appraised value of $855,470. These assets were appraised by William K. Ferry, P.E. of San Marino, California, using the method required by the Commission-replacement cost new, less depreciation (RCNLD).

ASW will acquire Peerless through an exchange of stock. The merger will be accomplished in three steps. First, ASW (in the merger plan called, "Parent") forms a wholly-owned subsidiary, ASW Merger Company (in the merger plan called, "Merger Subsidiary" or "Disappearing Corporation"). Two officers of ASW (Floyd Wicks and McClellan Harris III) are the sole officers (president and secretary, respectively) and directors of Merger Subsidiary, whose only asset is common shares of ASW. Merger Subsidiary will be merged into Peerless (in the merger plan called, "Company" or "Surviving Corporation") by exchanging all outstanding common shares of Disappearing Corporation for restricted certificates (which will be exchanged for ASW shares over a two-year period). Wicks and Harris will become the sole officers of Peerless. Next, Merger Subsidiary will cease to exist and Peerless will become a wholly owned subsidiary of ASW. Finally, Peerless will merge into SCWC, the Commission-regulated subsidiary of ASW.

Peerless shareholders will receive shares of ASW common stock based on the price of $30.83 per share of ASW stock, and the 54,301 shares of Peerless stock will cease to exist. The number of common shares to be issued will be determined at closing, but in no event will they be greater than 131,036 shares, nor less than 107,538 shares, plus cash in lieu of payment of fractional shares. ASW currently has approximately 9 million common shares outstanding, with a market value of $32.90 per share as of April 30, 2001.

In conjunction with this merger, SCWC has also entered into a three-year consulting agreement with Zastrow to assist in the transition. Zastrow will be paid $115,000 per year, less any dividends paid on the shares received in the merger. However, the dividends are expected to exceed $115,000 in each of the three years, meaning no net increase of cash payment to Zastrow. Zastrow will also be paid at the rate of $75 per hour, plus expenses, for any other work SCWC requests him to perform.

SCWC has also agreed to purchase certain other real property from Zastrow for $104,400 in cash. This land is personally owned by Zastrow, and is not in Peerless' rate base. The land has not been, and will not be, dedicated to public utility service, but instead will be re-sold by SCWC upon completion of this merger. SCWC customers will neither benefit from this acquired property, nor pay any of the costs to acquire or re-sell it.

The agreement includes the following 5-year, $2.64 million improvement plan:

Five-Year Post-Merger Investment Plan

Year	Well	Project	Expense
2001	2, 3, 8, 10	Removal of Iron and Manganese	$480,000
		Replacement of Bowls	$140,000
2002	4, 16	Removal of Iron and Manganese	$120,000
		Removal of Volatile Organic Compounds (VOC)	$250,000
		Replacement of Bowls	$ 70,000
2003	15	Removal of Iron and Manganese	$120,000
		Removal of VOCs	$250,000
		Replacement of Bowls	$ 35,000
2004	6	Removal of Iron and Manganese	$120,000
		Removal of VOCs	$250,000
		Replacement of Bowls	$ 35,000
2005	14	Removal of Iron and Manganese	$120,000
		Removal of VOCs	$250,000
		Installation of New Pump	$100,000
		Total Investment 2001-2005	$2,640,000

Table Source: Exhibit 2, Tab H

In addition, SCWC's engineers identify a total of $11,505,000 in projects (including those listed in the table above) that they state, "need to be made to the system." (Exhibit 2, Tab K.) The comprehensive capital improvement program includes the following projects:

Comprehensive Capital Improvement Plan for Water Systems Now Owned by Peerless

Abandon five non-producing wells	$100,000
Iron and manganese treatment at five wells	$600,000
Filters for VOC problems at three well sites	$750,000
Miscellaneous bowl and pump replacements	$315,000
Replace 8,000 lin. ft. of main 4" and smaller	$800,0001
Replace 1,000 lin. ft. of 5" main	$100,000
Customer meter testing & replacement	$100,000
Treatment at nine well sites & one booster pump site	$90,000
New wells in five areas	$5,250,000
New and replacement fire hydrants	$400,000
Replace 30,000 lin. ft. of 4" mains for fire flows	$3,000,000¹
Total Improvements	$11,505,000

¹ SCWC witnesses Putnam and Connay distinguish these two amounts for 4" mains as follows: 8,000 linear feet (lin. ft.) is the pipe in alleys, back yards, and streets; the 30,000 lin. ft. is pipe connected with fire flow. It is not clear whether the same pipe may be included in both categories. (Exh. 2, p. 11 and Exh. 3, Tab B.)