-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HQ0TQNykDMsFZ6Jcp4vvZqq7jz48fqFywZxtR9vaMVnsuv4yXPuEsjmoBSs3Dhs4 iq2/ennF1sg9/BVPzhSmaQ== 0000016422-96-000003.txt : 19960326 0000016422-96-000003.hdr.sgml : 19960326 ACCESSION NUMBER: 0000016422-96-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960325 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA WATER SERVICE CO CENTRAL INDEX KEY: 0000016422 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 940362795 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-11309 FILM NUMBER: 96537926 BUSINESS ADDRESS: STREET 1: 1720 N FIRST ST CITY: SAN JOSE STATE: CA ZIP: 95112 BUSINESS PHONE: 4084518200 MAIL ADDRESS: STREET 1: 1720 NORTH FIRST STREET CITY: SAN JOSE STATE: CA ZIP: 95112 10-K405 1 Total Number of Pages - 31 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from .............to.................... Commission file No. 0-464 CALIFORNIA WATER SERVICE COMPANY (Exact name of registrant as specified in its charter) California 94-0362795 (State or other jurisdiction (I.R.S. Employer Identification No.) of Incorporation) 1720 North First Street San Jose, California 95112 (Address of Principal Executive Offices) (Zip Code) 1-408-451-8200 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Cumulative Preferred Stock, Par Value, $25 (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 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 such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] The aggregate market value of the voting stock held by nonaffiliates of the Registrant - $219,000,945 at February 29, 1996. Common stock outstanding at February 29, 1996 - 6,279,597 shares. 1 EXHIBIT INDEX The exhibit index to this Form 10-K is on page 28 DOCUMENTS INCORPORATED BY REFERENCE Designated portions of Registrant's Annual Report to Shareholders for the calendar year ended December 31, 1995 ("1995 Annual Report") are incorporated by reference in Part I (Item 1), Part II (Items 5, 6, 7 and 8) and in Part IV (Item 14(a)(1)). Designated portions of the Registrant's Proxy Statement dated March 13, 1996, relating to the 1996 annual meeting of shareholders ("Proxy Statement") are incorporated by reference in Part III (Items 10, 11 and 12) as of the date the Proxy Statement was filed with the Securities and Exchange Commission. 2 TABLE OF CONTENTS Page PART I Item 1. Business............................ 5 a. General Development of Business..... 5 Regulation and Rates................ 5 b. Financial Information about Industry Segments................. 7 c. Narrative Description of Business... 7 Geographical Service Areas and Number of Customers at year-end.......... 8 Water Supply........................ 9 Non Regulated Operations............ 12 Utility Plant Construction Program and Acquisitions.................. 12 Quality of Supplies................. 13 Competition and Condemnation........ 14 Environmental Matters .............. 14 Human Resources..................... 15 d. Financial Information about Foreign and Domestic Operations and Export Sales 15 Item 2. Properties ......................... 15 Item 3. Legal Proceedings................... 16 Item 4. Submission of Matters to a Vote of Security Holders.................... 16 Executive Officers of the Registrant......... 17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 18 Item 6. Selected Financial Data............. 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 19 Item 8. Financial Statements and Supplementary Data................ 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 19 3 PART III Item 10. Directors and Executive Officers of the Registrant................. 19 Item 11. Executive Compensation.............. 19 Item 12. Security Ownership of Certain Beneficial Owners and Management.. 19 Item 13. Certain Relationships and Related Transactions...................... 20 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 21 Signatures................................... 23 Independent Auditors' Report................. 25 Schedules.................................... 26 Exhibit Index................................ 27 4 PART I Item 1 Business a. General Development of Business. California Water Service Company (the "Company") is a public utility water company which owns and operates 20 water systems serving 38 cities and communities in California with an estimated population of more than 1,500,000. At December 31, 1995 there were 367,100 active accounts of which 289,200 were metered accounts and 77,900 were flat rate accounts. The Company also operates under contracts several municipally owned water systems and has several other contracts under which it provides various billing services to municipalities. See Item 1.c. herein entitled "Non Regulated Operations". The Company, the largest investor-owned water company in California, was incorporated under the laws of the State of California on December 21, 1926. Its principal executive offices are located at 1720 North First Street, San Jose, California, and its mailing address is Post Office Box 1150, San Jose, California 95108 (telephone number:1-408-451-8200). Since April 8, 1994 the Company's Common Stock has traded on the New York Stock Exchange under the symbol CWT. The Company's stock was previously traded in the over-the-counter market and quoted by the National Association of Securities Dealers Automated Quotation System (NASDAQ) under the symbol CWTR. During the fiscal year ended December 31, 1995 (the "1995 fiscal year"), there were no significant changes in the kind of products produced or services rendered by the Company, or in the Company's markets or methods of distribution. Rates and Regulations The Company is subject to regulation of its rates, service and other matters affecting its public utility business by the Public Utilities Commission of the State of California ("Commission" or "PUC"). The Commission's decisions and the timing of those decisions can have an important impact on Company operations and results of operations. The Company's systems, which are operated as 20 separate districts in the State of California, are not integrated with one another, and except for allocation of general office expenses and the determination of cost of capital, the expenses and revenues of individual districts are not affected by operations in other districts. Cost of capital (i.e. return on debt and equity) is determined on a Company- wide basis. Otherwise, the PUC requires that each district be 5 considered a separate and distinct entity for rate-making purposes. The Commission requires that water rates for each Company operating district be determined independently. Each year the Company attempts to file general rate case applications (typically requesting seeking rate increases) for approximately one-third of its operating districts although the number of customers covered by each filing may vary significantly based on the size of the operating districts included. According to its rate case processing procedures for water utilities, the Commission attempts to issue decisions within eight months of acceptance of the general rate case application. Rates are set prospectively for a three-year period, with a provision for step increases, which are designed to maintain the authorized rate of return. Offset rate adjustments are also allowed as required for changes in purchased water, power and pump tax costs. During 1995, general rate case applications were filed with the Commission for five districts serving 47 percent of the Company's customers. The applications requested a rate of return on common equity of 12.1 percent and additional revenue of $26,700,000 over a four year period. The Commission staff recommended a rate of return of 9.9 percent, but stipulated to 10.3 percent in January 1996. The Commission's final decision is anticipated in June 1996. Although there can be no assurance that the Commission will approve the stipulation agreement, the Company expects the Commission will do so. Once effective, the decision is expected to increase 1996 revenue by $5,500,000 with additional step rate increases of $1,218,000 in 1997, and $1,348,000 in 1998 and $1,416,000 in 1999. Additionally, increases of $2,327,000 for offset and step rate increases included in the rate application were effective January 1, 1996. In August 1995, the Commission issued a decision on general rate cases filed in July 1994 for six districts representing 15 percent of the Company's total customers. This decision authorized a return on common equity of 11.05 percent for additional revenue of $1,378,000 in 1995 with a step increase of $536,000 in 1996, $510,000 in 1997 and $510,000 in 1998. Also in 1995, the Commission authorized offset rate increases of $2,832,000 and $1,152,800 for under collections in the Company's expense balancing account related primarily to water production costs. In August 1995, Governor Wilson signed Senate Bill 1025 into law. The new legislation enables the Company to reinvest the proceeds from the sale of surplus real property into new plant, so long as it does so within eight years from the date of sale. Previously the proceeds from the sale of surplus property were required to be distributed to ratepayers or split between ratepayers and shareholders. 6 In January 1995 a consultant retained by the Commission's Division of Ratepayer Advocates delivered a report on the reasonableness of the Second Amended Contract between the Company, Stockton-East Water District, the City of Stockton and San Joaquin County, pertaining to the sale and delivery of water to the Company's Stockton District by the Stockton-East Water District. The report alleges that the Company was required to receive prior Commission approval before entering into the Second Amended Contract and furthermore challenges the reasonableness of the Second Amended Contract for ratemaking purposes. However the report does not include specific ratemaking recommendations. It is difficult to assess the potential impact on the Company if the report were to be adopted by the Commission. However, the Company anticipates that if there is any adverse financial impact as a result of the report, such impact would be prospective, affecting only future rates for the Stockton district. Hearings have not yet been scheduled on the report by the assigned administrative law judge. Following hearings at which the Company intends to present evidence to rebut the report, the assigned administrative law judge will render a proposed decision for comment and then Commission consideration. The management of the Company intends to vigorously defend its position that the Second Amended Contract did not require prior Commission approval and is reasonable for ratemaking purposes. b. Financial Information about Industry Segments. The Company has only one business segment. c. Narrative Description of Business. The business of the Company consists of the production, purchase, storage, purification, distribution and sale of water for domestic, industrial, public, and irrigation uses, and for fire protection. The Company's business fluctuates according to the demand for water, which is partially dictated by seasonal conditions, such as summer temperatures or the amount and timing of precipitation during the year. The Company holds such franchises or permits in the communities it serves as it judges necessary to operate and maintain its facilities in the public streets. The Company distributes its water to customers in accordance with accepted water utility methods, which include pumping from storage and gravity feed from high elevation reservoirs. The Company has various contracts under which it operates three municipally owned water systems and two reclaimed water distribution systems and provides billing services for certain cities. 7 Geographical Service Areas and Number of Customers at year-end. The principal markets for the Company's products are users of water within the Company's service areas. The Company's geographical service areas and the approximate number of customers served in each at December 31, 1995, are as follows: SAN FRANCISCO BAY AREA Mid-Peninsula (San Mateo and San Carlos) 35,500 South San Francisco (including Colma and Broadmoor) 15,300 Bear Gulch (including Menlo Park, Atherton, Woodside and Portola Valley) 17,200 Los Altos (including Los Altos and portions of Cupertino, Los Altos Hills, Mountain View and Sunnyvale) 17,900 Livermore 15,200 101,100 SACRAMENTO VALLEY Chico (including Hamilton City) 21,000 Oroville 3,500 Marysville 3,800 Dixon 2,700 Willows 2,200 33,200 SALINAS VALLEY Salinas 23,100 King City 1,900 25,000 SAN JOAQUIN VALLEY Bakersfield 54,300 Stockton 40,800 Visalia 26,700 Selma 4,700 126,500 LOS ANGELES AREA East Los Angeles (including portions of City of Commerce and Montebello) 26,300 Hermosa Beach and Redondo Beach (including a portion of Torrance) 24,900 Palos Verdes (including Palos Verdes Estates, Rancho Palos Verdes, Rolling Hills Estates and Rolling Hills) 23,400 Westlake (a portion of Thousand Oaks) 6,700 81,300 TOTAL 367,100 8 Water Supply The Company's water supply is obtained from wells, surface runoff or diversion and by purchase from public agencies and other wholesale suppliers. The effects of the six year California drought (which ended after the 1992-93 winter) and 1995 and 1996 winter rains are discussed below. Except for periods of drought, the Company in the past has had adequate water supplies to meet the existing requirements of its service areas. During drought periods, some districts have experienced water rationing. The Company's water business is seasonal in nature and weather conditions can have a pronounced effect on customer usage and operating revenues. Customer demand usually is less during the normally cooler and rainy winter months, increasing in the spring when warmer weather generally returns to California and the rains end. Summer temperatures and warm weather result in increased demand. Water usage declines during the fall as temperatures decrease and the rainy season approaches. California's rainy season usually begins in November and continues through March with December, January and February providing the most rainfall. During winter months reservoirs and underground aquifers are replenished by rainfall. Snow accumulation in the mountain provides an additional water source when spring and summer temperatures melt the snowpack. During years of heavy precipitation or cooler than normal temperatures, customer demand can decrease, generally due to less outdoor water usage. This was the case during 1995, when winter rains continued well into the spring along with cooler than normal temperatures. Likewise, an early start to the rainy season can cause a decline in customer usage during the fall months. During years of less than normal rainfall, customer demand can increase as outdoor water usage continues. However, when rainfall is below average for consecutive years, drought conditions can result and customers may be required to reduce consumption to preserve existing water supplies. California experienced a six year drought which ended with the winter of 1993. During that period some Company districts imposed rationing on customers. The Company delivered approximately 99 billion gallons of water during the 1995 fiscal year of which approximately 50% was obtained from wells and 50% was purchased from the following suppliers: % of Supply District Purchased Source of Purchased Supply SAN FRANCISCO BAY AREA Mid-Peninsula 100% San Francisco Water Department South San Francisco 83% San Francisco Water Department 9 % of Supply District Purchased Source of Purchased Supply Bear Gulch 81% San Francisco Water Department Los Altos 84% Santa Clara Valley Water District Livermore 84% Alameda County Flood Control and Water Conservation District SACRAMENTO VALLEY Oroville 73% Pacific Gas and Electric Co. 6% County of Butte SAN JOAQUIN VALLEY Bakersfield 23% Kern County Water Agency Stockton 70% Stockton-East Water District LOS ANGELES AREA East Los Angeles 80% Central Basin Municipal Water District Hermosa Beach and Redondo Beach 98% West Basin Municipal Water District Palos Verdes 100% West Basin Municipal Water District Westlake 100% Russell Valley Municipal Water District The balance of the required supply for the above districts is obtained from wells, except for Bear Gulch where the balance is obtained from surface runoff from a local watershed. The Chico, Marysville, Dixon and Willows districts in the Sacramento Valley, the Salinas and King City districts in the Salinas Valley, and the Selma and Visalia districts in the San Joaquin Valley obtain their entire supply from wells. Purchases for the Los Altos, Livermore, Oroville, Stockton and Bakersfield districts are pursuant to long-term contracts expiring on various dates after 2011. A new 30 year contract for the Livermore District with Zone 7 of the Alameda County Flood Control and Water Conservation District was signed on November 16, 1994. The supplies for the East Los Angeles, Hermosa-Redondo, Palos Verdes and Westlake districts are provided to the Company by 10 public agencies pursuant to an obligation of continued nonpreferential service to persons within their boundaries. Purchases for the South San Francisco, Mid-Peninsula and Bear Gulch districts are pursuant to long-term contracts with the San Francisco Water Department expiring June 30, 2009. The cost of water purchases are subject to pricing changes imposed by the various wholesale suppliers who deliver water to the Company. Following 1994, which was the fourth driest year on record in California, the 1994-95 water year provided near record levels of precipitation which assured sufficient supply for the year and above normal carryover into 1996. Above normal precipitation throughout the spring, in conjunction with mild temperatures continuing throughout the summer, led to decreases in customer consumption compared to 1994. This development was itself tempered somewhat by a mild, dry fall leading to above normal consumption in the latter part of the year until mid-December when California received its first significant precipitation of the season. Precipitation received to date insures that the 1995-96 water year will provide above normal precipitation and should allow for an abundant carryover in reservoir storage to 1997. Reserves in the groundwater aquifers that supply the Company districts served by well water improved in 1995 due to heavy rains. Almost all regions have recorded positive changes in groundwater levels as compared to 1994. Regional groundwater management planning continues through- out the State as required by Assembly Bill 3030. Enacted in 1992, AB 3030 provides a mechanism for local agencies to maintain control of their groundwater supply. Progress has been made by Consolidated Irrigation District (Selma) and Kaweah Delta Water Conservation District (Visalia) towards the implementation of a water management plan. The Company is participating in the formulation of these plans. Despite the promising supply outlook for 1996, California faces long-term water supply challenges. The Company is actively working to meet them by continuing to educate customers on responsible water use practices, particularly in the six districts with programs approved by the California Public Utilities Commission. Furthermore, the Company is actively participating with the Salinas Valley water users and the Monterey County Water Resources Agency (MCWRA)to address the seawater intrusion threatening the water supply for our Salinas district. MCWRA started construction on the Castroville Seawater Intrusion Project in 1995. When completed, this project will deliver up to 20,000 acre feet of recycled water annually to agricultural users in the Castroville area and help mitigate seawater intrusion in the region by reducing the need to pump groundwater. 11 Non Regulated Operations The Company operates municipally owned water systems for the cities of Bakersfield, Commerce and Montebello and one mutual water company system in the Bakersfield district. The total number of services operated under all contracts is about 23,000. With the exception of the 15 year Hawthorne lease discussed below, the other operating agreements range from one year to three year periods with provisions for renewals. The first operating agreement was signed with the City of Bakersfield in 1977. To date, the Company has not experienced the cancellation of any operating agreement. Recycled water distribution systems are operated for the West Basin and Central Basin municipal water districts located in the Los Angeles Basin. Some engineering department services are also provided for these two recycled water systems. A third recycled water distribution system is operated in the Westlake district. Since October 1995, meter reading, billing and customer service has been provided for the City of Menlo Park's 3,900 water customers. Additionally, sewer and/or refuse billing services are provided to six municipalities, including billing services for the City of Visalia which started in January 1995. In February 1996, the Company commenced operation of the City of Hawthorne's 6,000 account water system under terms of a 15 year lease. Terms of the lease are described in more detail on page 9 of the Company's 1995 Annual Report which is hereby incorporated by reference. The Company leases antenna sites at six Company owned locations to telecommunication companies. Individual lease payments range from $1,000 to $2,200 per month. The antennas are used in cellular phone and personal communication applications. Other leases are being negotiated for similar uses. The Company also provides water quality services to San Jose Water Company. Utility Plant Construction Program and Acquisitions. The Company is continually extending and enlarging its facilities as required to meet increasing demands and to maintain its service. Capital expenditures, including developer financed projects, for additional facilities and for the replacement of existing facilities amounted to approximately $27 million in 1995. Financing was provided by funds from operations, short-term bank borrowings, issuance of senior notes, advances for construction, and contributions in aid of construction as set forth in the section entitled "Statement of Cash Flows" on page 26 of the Company's 1995 Annual Report which is incorporated herein by reference. Advances for construction of main extensions are received by the Company from subdivision developers under the rules of the Commission. These advances are refundable without 12 interest over a period of 40 years. Contributions in aid of construction consist of nonrefundable cash deposits or facilities received from developers. During 1995, the Company took over operation of the Palomar Park County Water District from San Mateo County. This system has been integrated into the Mid Peninsula district. The Company will be able to provide a more reliable supply and additional fire protection to the system's 212 customers. The Company's construction budget for additions and improvements to its facilities during 1996 is approximately $22,200,000 (exclusive of additions and improvements financed through advances for construction and contributions in aid of construction). Financing is expected to be with internally generated funds, remaining proceeds of the 1995 senior note issuance and short-term borrowings. Quality of Supplies. The Company maintains procedures to produce potable water in accordance with accepted water utility practice. All water entering the distribution systems from surface sources is chlorinated and in most cases filtered. Samples of water from each district are analyzed regularly by the Company's state certified water quality laboratory. Over the past few years, federal and state water quality regulations continued to increase. Changes in the federal Safe Drinking Water Act which the Company believes would bring treatment costs more in line with the actual health threat posed by contaminants were adopted by the United States Senate, but seem unlikely to become law prior to 1997. In the meantime, the Company continues to monitor water quality and upgrade its treatment capabilities to promote compliance. These activities include: - - implementing a State approved compliance monitoring program required by Phase II and V rules issued under the Safe Drinking Water Act - - placing additional state-of-the-art laboratory equipment into service - - installing the first of several granular activated carbon (GAC) filtration systems in Bakersfield for removal of hydrogen sulfide taste and odor - - operating a GAC system in Chico installed by the State Environmental Protection Agency for the removal of volatile organic compounds - - placing treatment on two Los Angeles Basin wells which have elevated levels of iron manganese and hydrogen sulfide; the treatment will allow the Company to return the wells to production and thus use less costly well water, rather than purchased water supplies - - Completion of desktop studies for two water systems in compliance with the Federal Lead and Cooper Rule. Chemical water treatment to inhibit and control potential corrosion will be installed in each of these water systems. 13 Competition and Condemnation. The Company is a public utility regulated by the PUC. The Company provides service within filed service areas approved by the PUC. Under the laws of the State of California, no privately owned public utility may compete with the Company in any territory already served by the Company without first obtaining a certificate of public convenience and necessity from the PUC. Under PUC practice, such certificate will be issued only on a showing that the Company's service in such territory is inadequate. California law also provides that whenever a public agency constructs facilities to extend a utility service into the service area of a privately owned public utility, such an act constitutes the taking of property and for such taking the public utility is to be paid just compensation. Under the constitution and statutes of the State of California, municipalities, water districts and other public agencies have been authorized to engage in the ownership and operation of water systems. Such agencies are empowered to condemn properties already operated by privately owned public utilities upon payment of just compensation and are further authorized to issue bonds (including revenue bonds) for the purpose of acquiring or constructing water systems. To the Company's knowledge, no municipality, water district or other public agency has pending any action to condemn any of the Company's systems. Environmental Matters. The Company is subject to environmental regulation by various governmental authorities. Compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, as of the date of filing of this Form 10-K, any material effect on the Company's capital expenditures, earnings or competitive position. No such material effect is anticipated for the fiscal years ending December 31, 1996 and 1997. Stringent air quality regulations continue to present operations problems for facilities with emergency generators. Air quality regulations conflict with the Company's responsibility to provide water service in time of an emergency by subjecting routine testing of these generators to fines. In response the California Water Association, an industry association of California's investor owned public utility water companies, is seeking legislative relief through Assembly Bill 1849 to allow testing of emergency generators without fines. The Company is hopeful that this legislation may be adopted in 1996, but there can be no assurance that this will happen. 14 Human Resources. As of December 31, 1995, the Company had 630 employees, of whom 164 were executive, administrative and supervisory employees, and 466 were members of unions. In December 1995, two-year collective bargaining agreements, expiring December 31, 1997, were successfully negotiated with the Utility Workers of America, AFL- CIO, representing the majority of the union employees, and the International Federation of Professional and Technical Engineers, AFL-CIO, representing certain engineering department employees. The agreements have been successfully renewed in the past without a labor interruption. On December 31, 1995, C. H. Stump retired as Chairman of the Board. Mr. Stump, who had been an employee for 46 years, continues as a Board member. Robert W. Foy, who has been a Board member since 1977, was elected Chairman to replace Mr. Stump. On January 31, 1996, Donald L. Houck retired as President and CEO and was replaced by Peter C. Nelson. Mr. Houck had been an employee for 17 years, serving as President and CEO since 1991. Mr. Nelson previously was employed for 24 years by Pacific Gas & Electric Company, the largest energy utility, most recently as Vice President-Division Operations. d. Financial Information about Foreign and Domestic Operations and Export Sales. The Company makes no export sales. Item 2. Properties. The Company's physical properties consist of offices and water systems for the production, storage, purification, and distribution of water. These properties are located in or near the Geographic Service Areas listed above in the Item 1.c. section entitled "Water Supply." The Company maintains all of its properties in good operating condition. The Company holds all its principal properties in fee simple title, subject to the lien of the indenture securing the Company's first mortgage bonds, of which $125,540,000 in principal amount was outstanding at December 31, 1995. The Company owns 523 wells and operates five leased wells. The Company has 290 storage tanks with a capacity of 216 billion gallons and one reservoir located in the Bear Gulch district with a 210 billion gallon capacity. There are 4,574 miles of supply and distribution mains in the various systems. The Company owns two treatment plants, one in the Bear Gulch district, the other in Oroville. Both treatment plants are designed to process six million gallons per day. During 1996, the Company's average daily water production was 273 million gallons while the maximum production in one day was 493 million gallons 15 Item 3. Legal Proceedings. The State of California's Regional Groundwater Remediation Unit (RGRU) alleges that the Company is a responsible party for cleanup of a toxic contamination in the Chico groundwater. The RGRU has issued a "Preliminary Nonbinding Allocation of Financial Responsibility" for the cleanup which asserts that the Company's share should be ten percent. The RGRU estimates the total cleanup cost to be $8.69 million. The toxic spill occurred when cleaning solvents, which were discharged into the city's sewer system by local dry cleaners, leaked into the underground water supply due to breaks in sewer pipes. The RGRU contends that the Company's responsibility stems from the Company's operation of wells in the surrounding area which caused the contamination plume to spread. The Company denies any responsibility for the contamination or the resulting cleanup and intends to vigorously resist any action brought against it. The Company believes that it has insurance coverage for such a claim and that if the Company was ultimately held responsible for a portion of the cleanup costs, it would not have a material adverse effect on the Company's financial position. The Company is not a party to any other legal matters, other than those which are incidental to the business. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders in the fourth quarter of fiscal year 1995. 16 Executive Officers of the Registrant. Name Positions and Offices with the Company Age C. H. Stump Chairman of the Board from 1991 until 70 his retirement on December 31, 1995; continues as a director of the Company. Director since 1976 and Member of Executive Committee since 1977. Mr. Stump was Secretary of the Company from 1959 to 1966, Secretary and Treasurer from 1966 to 1975, Executive Vice President from 1975 to 1981, President and Chief Operating Officer from 1981 to 1986, and President and Chief Executive Officer from 1986 to May 1992. Robert W. Foy Elected Chairman of the Board effective 59 January 1, 1996. Director since 1977. From 1977 to 1995, Mr. Foy was President and CEO of Pacific Storage Company, a diversified transportation and warehousing company, where he had been employed for 32 years. Donald L. Houck President and Chief Executive Officer 63 from 1992 until retirement on January 31, 1996. Director since 1988. Mr. Houck was Executive Vice President and Chief Operating Officer from 1986 to 1992 and a Vice President since 1977. Prior to that, Mr. Houck was a supervising engineer with the California Public Utilities Commission with eighteen years experience in the rate-making process. Peter C. Nelson Elected President and Chief Executive 48 Officer of the Company effective February 1, 1996. Prior to that, Mr. Nelson was employed for 24 years by Pacific Gas & Electric Company, the nation's largest energy utility, most recently as Vice President-Division Operations. 17 Gerald F. Feeney Vice President, Chief Financial Officer 51 and Treasurer since November 1994. Controller, Assistant Secretary and Assistant Treasurer from 1976 to 1994. From 1970 to 1976, Mr. Feeney was an audit manager with Peat Marwick Mitchell & Co. Francis S. Ferraro Vice President-Regulatory Matters 46 since August 1989. Mr. Ferraro had 15 years experience in regulatory matters with the California Public Utilities Commission, and from June 1985 through August 1989 held the position of administrative law judge. James L. Good Vice President-Corporate Communications 32 and Marketing since December 1994. Mr. Good was Director of Congressional Relations for the National Association of Water Companies from 1991 to 1994. Raymond H. Taylor Vice President-Operations since 50 April 1995. Mr. Taylor had been director of water quality since 1986 and a vice president since 1990. Prior to joining the Company in 1982, he was employed by the Environmental Protection Agency. Calvin L. Breed Controller, Assistant Secretary and Assistant 40 Treasurer since November 1994. Previously Mr. Breed served as Treasurer of TCI International, Inc. John S. Simpson Assistant Secretary since 1991. Mr. Simpson 51 has been Manager of New Business Development for the past twelve years and has held various management positions with the Company since 1967. No officer or director has any family relationship to any other executive officer or director. No executive officer is appointed for any set term. There are no agreements or understandings between any executive officer and any other person pursuant to which he was selected as an executive officer, other than those with directors or officers of the Company acting solely in their capacities as such. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information required by this item is contained in the Section captioned "Quarterly Financial and Common Stock Market Data" on page 34 of the Company's 1995 Annual Report and is incorporated herein by reference. The number of holders listed in such section includes the Company's record holders and also individual participants in security position listings. Item 6. Selected Financial Data. The information required by this item is contained in the section captioned California Water Service Company "Ten Year 18 Financial Review" on pages 16 and 17 of the Company's 1995 Annual Report and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required by this item is contained in the sections captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations," on pages 18 through 21 of the Company's 1995 Annual Report and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. The information required by this item is contained in the sections captioned "Balance Sheet," "Statement of Income," "Statement of Common Shareholders' Equity," "Statement of Cash Flows," "Notes to Financial Statements" and "Independent Auditors' Report" on pages 22 through 35 of the Company's 1995 Annual Report and is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. Information regarding executive officers of the Company is included in a separate item captioned "Executive Officers of the Registrant" contained in Part I of this report. The information required by this item as to directors of the Company is contained in the section captioned "Election of Directors" on pages 3 through 7 of the 1996 Proxy Statement and is incorporated herein by reference. (The Proxy Statement was filed under EDGAR on March 11, 1996). Item 11. Executive Compensation. The information required by this item as to directors and executive officers of the Company is contained in the section captioned "Compensation of Executive Officers" on pages 9 through 13 of the Proxy Statement and is incorporated herein by reference. (The Proxy Statement was filed under EDGAR on March 11, 1996). Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is contained in the sections captioned "Election of Directors," "Security 19 Ownership of Certain Beneficial Owners" and "Security Ownership of Management" pages 3 through 7 and 15, respectively, of the Proxy Statement and is incorporated herein by reference. (The Proxy Statement was filed under EDGAR on March 11, 1996). Item 13. Certain Relationships and Related Transactions. None. 20 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) Financial Statements: Balance Sheet as of December 31, 1995 and 1994. Statement of Income for the years ended December 31, 1995, 1994, and 1993. Statement of Common Shareholders' Equity for the years ended December 31, 1995, 1994, and 1993. Statement of Cash Flows for the years ended December 31, 1995, 1994, and 1993. Notes to Financial Statements, December 31, 1995, 1994, and 1993. The above financial statements are contained in sections bearing the same captions on pages 22 through 34 of the Company's 1995 Annual Report and are incorporated herein by reference. (2) Financial Statement Schedule: Schedule Number Independent Auditors' Report January 19, 1996. II Valuation and Qualifying Accounts and Reserves--years ending December 31, 1995, 1994, and 1993. All other schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. (3) Exhibits required to be filed by Item 601 of Regulation S-K. See Exhibit Index on page 25 of this document which is incorporated herein by reference. The exhibits filed herewith are attached hereto (except as noted)and those indicated on the Exhibit Index which are not filed herewith were previously filed with the Securities and Exchange Commission as indicated. Except where stated otherwise, such exhibits are hereby incorporated by reference. 21 (B) Report on Form 8-K. None required to be filed during the fourth quarter of 1995. 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CALIFORNIA WATER SERVICE COMPANY Date: March 22, 1996 By /s/ Peter C. Nelson PETER C. NELSON, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Date: March 22, 1996 /s/ William E. Ayer WILLIAM E. AYER, Member, Board of Directors Date: March 22, 1996 /s/ Robert W. Foy ROBERT W. FOY, Chairman, Board of Directors Date: March 22, 1996 /s/ Edward D. Harris, Jr. EDWARD D. HARRIS, JR. M.D., Member, Board of Directors Date: March 22, 1996 /s/ Robert K. Jaedicke ROBERT K. JAEDICKE, Member, Board of Directors Date: March 22, 1996 /s/ Linda R. Meier LINDA R. MEIER, Member, Board of Directors Date: March 22, 1996 /s/ Peter C. Nelson PETER C. NELSON President and Chief Executive Officer, Member, Board of Directors Date: March 22, 1996 /s/ C. H. Stump C. H. STUMP, Member, Board of Directors 23 Date: March 22, 1996 /s/ Edwin E. van Bronkhorst EDWIN E. VAN BRONKHORST, Member, Board of Directors Date: March 22, 1996 /s/ J. W. Weinhardt J. W. WEINHARDT, Member, Board of Directors Date: March 22, 1996 /s/ Gerald F. Feeney GERALD F. FEENEY, Vice President, Chief Financial Officer and Treasurer Date: March 22, 1996 /s/ Calvin L. Breed CALVIN L. BREED, Controller, Assistant Secretary and Assistant Treasurer 24 Independent Auditors' Report Shareholders and Board of Directors California Water Service Company: Under date of January 19, 1996, we reported on the balance sheet of California Water Service Company as of December 31, 1995 and 1994, and the related statements of income, common shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995, as contained in the 1995 annual report to shareholders. These financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1995. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement schedule as listed in accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. San Jose, California /s/ KPMG Peat Marwick LLP January 19, 1996 25 CALIFORNIA WATER SERVICE COMPANY Schedule II Valuation and Qualifying Accounts Years Ended December 31, 1995, 1994 and 1993
Additions Balance at Charged to Charged to Balance beginning costs and other at end Description of period expenses accounts Deductions of period 1995 (A) Reserves deducted in the balance sheet from assets to which they apply: Allowance for doubtful accounts $50,816 $429,096 $74,170(3) $477,885(1) $76,197 Allowance for obsolete materials and supplies $3,393 95,000 23,718(2) 74,675 ----------- ---------- ---------- ---------- ----------- (B) Reserves classified as liabilities in the balance sheet: Miscellaneous reserves: General Liability $962,152 $339,960 $475,147(2) $826,965 Employees' group health plan $200,387 2,907,000 14,928 2,722,311(2) 400,004 Retirees' group health plan $425,998 507,000 245,000 507,000(2) 670,998 Workers compensation $107,576 879,423 726,829(2) 260,170 Deferred revenue - contributions in aid of construction $1,917,386 368,180 355,230(6) 1,930,336 Disability insurance $116,130 200,973 269,650(2) 47,453 ----------- ---------- ---------- ---------- ----------- Total $3,729,629 $4,633,383 $829,081 $5,056,167 $4,135,926 ----------- ---------- ---------- ---------- ----------- Contributions in aid of construction $37,866,799 $3,244,258(4) $997,350(5) $40,113,707 ----------- ---------- ---------- ---------- ----------- 1994 (A) Reserves deducted in the balance sheet from assets to which they apply: Allowance for doubtful accounts $72,696 $363,284 $71,235(3) $456,399(1) $50,816 Allowance for obsolete materials and supplies $61,395 11,000 69,002(2) 3,393 ----------- ---------- ---------- ---------- ----------- (B) Reserves classified as liabilities in the balance sheet: Miscellaneous reserves: General Liability $1,064,300 $340,000 $442,148(2) $962,152 Employees' group health plan $882,143 2,549,056 12,262 3,243,074(2) 200,387 Retirees' group health plan $237,000 480,998 189,000 481,000(2) 425,998 Workers compensation $150,523 648,374 691,321(2) 107,576 Deferred revenue - contributions in aid of construction $1,649,386 572,366 304,366(6) 1,917,386 Disability insurance $97,352 256,969 238,191(2) 116,130 ----------- ---------- ---------- ---------- ----------- Total $4,080,704 $4,018,428 $1,030,597 $5,400,100 $3,729,629 ----------- ---------- ---------- ---------- ----------- Contributions in aid of construction $34,915,778 $3,858,961(4) $907,940(5) $37,866,799 ----------- ---------- ---------- ----------- ----------- 1993 (A) Reserves deducted in the balance sheet from assets to which they apply: Allowance for doubtful accounts $75,155 $316,748 $65,280(3) $384,487(1) $72,696 Allowance for obsolete materials and supplies 5,000 72,000 15,605(2) 61,395 ----------- ---------- ---------- ---------- ----------- (B) Reserves classified as liabilities in the balance sheet: Miscellaneous reserves: General Liability $1,200,000 $330,000 $44,401 $510,101(2) $1,064,300 Employees' group health plan 511,985 2,240,000 9,578 1,879,420(2) 882,143 Retirees' group health plan 0 480,000 267,360 510,360(2) 237,000 Workers compensation 226,386 497,043 572,906(2) 150,523 Deferred revenue - contributions in aid of construction 1,247,256 758,380 356,250(6) 1,649,386 Disability insurance 47,113 255,017 204,778(2) 97,352 ----------- ---------- ---------- ---------- ----------- Total $3,232,740 $3,547,043 $1,334,736 $4,033,815 $4,080,704 ----------- ---------- ---------- ---------- ----------- Contributions in aid of construction $32,119,906 $3,637,420(4) $841,548(5) $34,915,778 ----------- ---------- ---------- ---------- ----------- Notes: (1) Accounts written off during the year. (2) Expenditures and other charges made during the year. (3) Recovery of amounts previously charged to reserve. (4) Properties acquired at no cost, cash contributions and net transfer on non-refundable balances from advances to construction. (5) Depreciation of utility plant acquired by contributions charged to a balance sheet account. (6) Amortized to revenue.
26 EXHIBIT INDEX Sequential Page Numbers Exhibit Number in this Report 3. Articles of Incorporation and by-laws: 3.1 Restated Articles of Incorporation dated 27 March 20, 1968; Certificate of Ownership Merging Palos Verdes Water Company into California Water Service Company dated December 22, 1972; Certificate of Amendment of Restated Articles of Incorporation dated April 7, 1975; Certificate of Amendment of Restated Articles of Incorporation dated April 16, 1984; Certificate of Amendment of Restated Articles of Incorporation dated July 31, 1987; Certificate of Amendment of Restated Articles of Incorporation dated October 19, 1987 (Exhibit 3.1 to Form 10-K for fiscal year 1987, File No. 0-464) 3.2 Certificates of Determination of Preferences 27 for Series C Preferred Stock (Exhibit 3.2 to Form 10-K for fiscal year 1987, File No. 0-464) 3.3 Certificate of Amendment of the Company's 27 Restated Articles of Incorporation dated April 27, 1988. (Exhibit 3.3 to Form 10-K for fiscal year 1989, File No. 0-464) 3.4 By-laws dated September 21, 1977, as 27 amended 24 November 19, 1980, April 21, 1982, June 15, 1983, September 17, 1984, and November 16, 1987 (Exhibit 3.3 to Form 10-K for fiscal year 1987, File No. 0-464). 3.5 Amendment to By-laws dated May 16, 1988. 27 (Exhibit 3.5 to Form 10-K for fiscal year 1991, File No. 0-464) 4. Instruments Defining the Rights of Security 27 Holders, including Indentures: Mortgage of Chattels and Trust Indenture 27 dated April 1, 1928; Eighth Supplemental Indenture dated November 1, 1945, covering First Mortgage 3.25% Bonds, Series C; Sixteenth Supplemental Indenture dated November 1, 1966, covering First Mortgage 6.25% Bonds, Series K; Seventeenth Supplemental Indenture dated November 1, 1967, covering First Mortgage 6.75% Bonds, Series L; Twenty-First Supplemental Indenture dated October 1, 1972, cover First Mortgage 7.875% 27 Bonds, Series P; Twenty-Fourth Supplemental Indenture dated November 1, 1973, covering First Mortgage 8.50% Bonds, Series S (Exhibits 2(b), 2(c), 2(d), Registration Statement No. 2-53678, of which certain exhibits are incorporated by reference to Registration Statement Nos. 2-2187, 2-5923, 2-5923, 2-9681, 2-10517 and 2-11093. Thirty-Fourth Supplemental Indenture dated as 28 of November 1, 1990, covering First Mortgage 9.86% Bonds, Series CC. (Exhibit 4 to Form 10-K for fiscal year 1990, File No. 0-464) Thirty-Fifth Supplemental Indenture dated as of 28 November 1, 1992, covering First Mortgage 8.63% Bonds, Series DD. (Exhibit 4 to Form 10-Q dated September 30, 1992, File No. 0-464) Thirty-Sixth Supplemental Indenture dated as of 28 May 1, 1993, covering First Mortgage 7.90% Bonds Series EE (Exhibit 4 to Form 10-Q dated June 30, 1993, File No. 0-464) Thirty-Seventh Supplemental Indenture dated as 28 of September 1, 1993, covering First Mortgage 6.95% Bonds, Series FF (Exhibit 4 to Form 10-Q dated September 30, 1993, File No. 0-464) Thirty-Eighth Supplemental Indenture dated as 28 of October 15, 1993, covering First Mortgage 6.98% Bonds, Series GG (Exhibit 4 to Form 10-K for fiscal year 1994, File No. 0-464) Note Agreement dated August 15, 1995, pertaining 28 to issuance of $20,000,000, 7.28% Series A unsecured Senior Notes, due November 1, 2025 (Exhibit 4 to Form 10-Q dated September 30, 1995 File No. 0-464) 10. Material Contracts. 10.1 Water Supply Contract between the Company 28 and the County of Butte relating to the Company's Oroville District; Water Supply Contract between the Company and the Kern County Water Agency relating to the Company's Bakersfield District; Water Supply Contract between the Company and Stockton East Water District relating to the Company's Stockton District. (Exhibits 5(g), 5(h), 5(i), 5(j), Registration Statement No. 2-53678, which incorporates said exhibits by reference to Form 1O-K for fiscal year 1974, File No. 0-464). 28 10.2 Settlement Agreement and Master Water Sales 29 Contract between the City and County of San Francisco and Certain Suburban Purchasers dated August 8, 1984; Supplement to Settlement Agreement and Master Water Sales Contract, dated August 8, 1984; Water Supply Contract between the Company and the City and County of San Francisco relating to the Company's Bear Gulch District dated August 8, 1984; Water Supply Contract between the Company and the City and County of San Francisco relating to the Company's San Carlos District dated August 8, 1984; Water Supply Contract between the Company and the City and County of San Francisco relating to the Company's San Mateo District dated August 8, 1984; Water Supply Contract between the Company and the City and County of San Francisco relating to the Company's South San Francisco District dated August 8, 1984. (Exhibit 10.2 to Form l0-K for fiscal year 1984, File No. 0-464). 10.3 Water Supply Contract dated January 27, 29 1981, between the Company and the Santa Clara Valley Water District relating to the Company's Los Altos District (Exhibit 10.3 to Form 10-K for fiscal year 1992, File No. 0-464) 10.4 Amendments No. 3, 6 and 7 and Amendment 29 dated June 17, 1980, to Water Supply Contract between the Company and the County of Butte relating to the Company's Oroville District. (Exhibit 10.5 to Form 10-K for fiscal year 1992, File No. 0-464) 10.5 Amendment dated May 31, 1977, to Water 29 Supply Contract between the Company and Stockton-East Water District relating to the Company's Stockton District. (Exhibit 10.6 to Form 10-K for fiscal year 1992, File No. 0-464) 10.6 Second Amended Contract dated September 25, 29 1987 among the Stockton East Water District, the California Water Service Company, the City of Stockton, the Lincoln Village Maintenance District, and the Colonial Heights Maintenance District Providing for the Sale of Treated Water. (Exhibit 10.7 to Form 10-K for fiscal year 1987, File No. 0-464). 10.7 Dividend Reinvestment Plan. (Exhibit 10.8 to 29 Form 10-Q dated March 31, 1994, File No. 0-464) 29 10.8 Water Supply Contract dated April 19, 1927, 30 and Supplemental Agreement dated June 5, 1953, between the Company and Pacific Gas and Electric Company relating to the Company's Oroville District. (Exhibit 10.9 to Form 10-K for fiscal year 1992, File No. 0-464) 10.9 California Water Service Company Pension Plan 30 (Exhibit 10.10 to Form 10-K for fiscal year 1992, File No. 0-464) 10.10 California Water Service Company Supplemental 30 Executive Retirement Plan. (Exhibit 10.11 to Form 10-K for fiscal year 1992, File No. 0-464) 10.11 California Water Service Company Salaried 30 Employees' Savings Plan. (Exhibit 10.12 to Form 10-K for fiscal year 1992, File No. 0-464) 10.12 California Water Service Company 30 Directors Deferred Compensation Plan (Exhibit 10.13 to Form 10-K for fiscal year 1992, File No. 0-464) 10.13 Board resolution setting forth 30 the terms of the retirement plan, as amended, for Directors of California Water Service Company (Exhibit 10.14 to Form 10-K for fiscal year 1992, File No. 0-464) 10.14 Registration statement on Form S-3, 30 dated September 8, 1994 regarding the sale of 550,000 shares of Registrant's common stock (filed with the Commission on September 8, 1994, Registration No. 33-55233, File No. 0-464) 10.15 Water Supply Contract dated November 16, 1994, 30 between the Company and Alameda County Flood Control and Water Conservation District relating to the Company's Livermore District Exhibit 10.15 to Form 10-K for fiscal year 1994, File No. 0-464) 10.16 $30,000,000 Business Loan Agreement between 30 California Water Service Company and Bank of America dated April 12, 1995, expiring April 30, 1997 (Exhibit 10.16 to Form 10-Q dated September 30, 1995) 13. Annual Report to Security Holders, Form 10-Q 30 or Quarterly Report to Security Holders: 30 1995 Annual Report. The sections of the 1995 Annual Report which are incorporated by reference in this 10-K filing. This includes those sections referred to in Part II, Item 5, Market for Registrant's Common Equity and Related Shareholder Matters; Part II, Item 6, Selected Financial Data; Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations; and Part II, Item 8, Financial Statement and Supplementary Data. 27. Financial Data Schedule as of December 31, 1995 32 31 EX-13 2 Ten year financial review
(Dollars in thousands except common share and other data) 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 SUMMARY OF OPERATIONS Operating revenue Residential $119,814 $114,751 $111,526 $101,842 $87,560 $90,178 $84,295 $ 81,404 $ 82,254 $79,131 Business 28,230 27,023 25,247 23,670 20,759 20,910 19,870 19,480 19,986 19,095 Industrial 5,836 5,478 5,123 4,925 4,490 5,146 5,166 4,754 4,361 4,539 Public authorities 8,149 7,995 7,396 6,892 5,734 6,412 6,225 6,232 6,491 6,285 Other 3,057 2,024 2,424 2,476 8,633 1,741 1,932 1,885 693 1,385 Total operating revenue 165,086 157,271 151,716 139,805 127,176 124,387 117,488 113,755 113,785 110,435 Operating expenses 139,694 131,766 123,861 116,031 102,855 101,017 95,150 91,265 90,587 87,788 Interest expense, other income and expenses, net 10,694 11,097 12,354 11,245 10,393 9,004 8,566 8,416 8,026 8,808 Net income $ 14,698 $ 14,408 $ 15,501 $ 12,529 $13,928 $14,366 $13,772 $14,074 $15,172* $13,839 COMMON SHARE DATA Earnings per share $ 2.33 $ 2.44 $ 2.70 $ 2.18 $ 2.42 $ 2.50 $ 2.40 $ 2.45 $ 2.63* $ 2.40 Dividends declared 2.04 1.98 1.92 1.86 1.80 1.74 1.68 1.60 1.48 1.40 Dividend payout ratio 88% 81% 71% 85% 74% 70% 70% 65% 49% 58% Cash dividend payout ratio 83% 79% 71% 85% 74% 70% 67% 59% 49% 58% Book value $ 23.44 $ 23.12 $ 21.80 $ 21.02 $ 20.70 $ 20.08 $ 19.32 $ 18.59 $ 17.72 $ 16.11 Market price at year-end 32.75 32.00 40.00 33.00 28.00 26.75 28.00 25.50 30.00 26.625 Common shares outstanding at year-end (in thousands) 6,269 6,247 5,689 5,689 5,689 5,689 5,689 5,672 5,636 5,607 Return on common shareholders equity 10.2% 10.6% 12.4% 10.4% 11.7% 12.4% 12.4% 13.2% 14.8% 14.9% Bond interest coverage 3.2 3.2 3.2 2.9 3.2 3.6 3.4 3.8 4.3 3.9 BALANCE SHEET DATA Net utility plant $422,175 $407,895 $391,703 $374,613 $349,937 $325,409 $307,802 $289,363 $273,619 $262,216 Utility plant expenditures 27,250 28,275 28,829 35,188 34,459 26,861 27,277 23,994 19,511 22,710 Advances for construction 94,100 92,190 90,812 89,127 84,424 77,202 69,016 59,145 54,887 50,907 Capitalization ratios: Common shareholders equity 49.7% 52.2% 48.2% 48.8% 52.4% 51.3% 55.1% 53.8% 55.6% 52.1% Preferred stock 1.2% 1.3% 1.4% 1.4% 1.5% 1.6% 1.8% 1.8% 3.2% 3.4% Long-term debt 49.1% 46.5% 50.4% 49.8% 46.1% 47.1% 43.1% 44.4% 41.2% 44.5% OTHER DATA Water production (million gallons) Wells 49,755 50,325 47,205 52,000 48,930 51,329 51,350 48,828 48,097 45,222 Purchased 49,068 49,300 48,089 40,426 36,686 45,595 45,978 48,254 50,744 50,782 Total water production 98,823 99,625 95,294 92,426 85,616 96,924 97,328 97,082 98,841 96,004 Metered customers 289,200 286,700 282,100 278,700 275,200 272,100 269,200 267,000 261,000 258,600 Flat rate Customers 77,900 78,800 80,800 82,000 82,400 81,200 79,400 77,800 76,800 75,600 Customers at year-end 367,100 365,500 362,900 360,700 357,600 353,300 348,600 344,800 337,800 334,200 New customers added 1,600 2,600 2,200 3,100 4,300 4,700 3,800 7,000 3,600 3,900 Revenue per customer $ 450 $ 430 $ 418 $ 388 $ 356 $ 352 $ 337 $ 330 $ 337 $ 330 Utility plant per customer $ 1,592 $ 1,530 $ 1,469 $ 1,406 $ 1,327 $ 1,251 $ 1,198 $ 1,140 $ 1,098 $ 1,058 Employees at year-end 630 624 614 610 593 581 565 550 534 528 * Net income excludes $2,196 for a change in accounting for unbilled revenue, $.39 is excluded from earnings per share. Common share data is adjusted to reflect the 2 - for - 1 stock split effective October 1987.
Management's discussion and analysis of financial condition and results of operations BUSINESS California Water Service Company is a public utility supplying water service through 20 separate water systems to 367,100 customers living in 38 California communities. These systems, or districts, are located throughout the state as shown in the table on page 5. Additionally, the Company has contracts with various municipalities to operate water systems or provide billing services. The Company's rates and operations are regulated by the California Public Utilities Commission (Commission). The Commission requires that water rates for each district be determined independently. Each summer the Company files general rate increase applications for some of its 20 districts. According to its rate case processing procedures for water utilities, the Commission attempts to issue decisions within eight months of acceptance of a general rate case filing. Commission procedures also allow offset rate adjustments for changes in water production costs through use of expense balancing accounts. A detailed discussion of Rates and Regulation begins on page 10 of this report. The six-year drought in California which required water rationing in a number of the Company's districts was declared officially ended after near-record precipitation in the first three months of 1993. A detailed discussion of Water Supply is on page 6 of this report. RESULTS OF OPERATIONS Earnings and Dividends. Net income was $14,698,000 in 1995 compared with $14,408,000 in 1994 and $15,501,000 in 1993. Earnings per common share were $2.33 in 1995, $2.44 in 1994 and $2.70 in 1993. The weighted average number of shares outstanding in each of the three years was 6,253,000, 5,838,000 and 5,689,000, respectively. The 1995 and 1994 earnings per share amounts were affected by the sale of 550,000 common shares in September 1994. In January 1995, the Board of Directors increased the dividend rate for the twenty-eighth consecutive year. The annual rate paid in 1995 was $2.04 per share, an increase of 3.0% compared with the 1994 dividend of $1.98 per share, which represented an increase of 3.1% over the 1993 dividend of $1.92 per share. The increased dividends were based on projections that the higher dividend could be sustained while still providing the Company with adequate financial flexibility. Earnings not paid as dividends are reinvested in the Company. The dividend payout ratio was 88% in 1995 compared with 81% in 1994 and 71% in 1993, an average of 80% for the three-year period. Operating Revenue. Operating revenue was a record $165.1 million in 1995, compared with $157.3 million in 1994 and $151.7 million in 1993. The current year increase was $7.8 million, or 5% greater than 1994's revenue. Offset rate adjustments, primarily for purchased water cost increases, added $3.8 million to revenue while general and step rate increases contributed $2.2 million. Proceedings involving Commission actions are discussed in more detail on page 10 under the caption Rates and Regulation. Increased customer usage added $1.1 million. Average billed water consumption per customer was 286 ccf an increase of only 1 ccf for the year. Only consumption in the fourth quarter exceeded that of the prior year, the first three quarters of 1995 recorded usage was less than 1994's. The consumption pattern reflects 1995's weather. The winter was unusually wet. Rain and cool weather continued through the spring and negatively influenced summer usage. With the exception of August, which showed a slight increase in consumption, all months through the third quarter recorded a sales decline from the prior year. Lack of rain and mild weather in the fourth quarter resulted in increased average customer usage of 14%. Sales to 1,600 new customers accounted for $0.7 million in additional revenue. Revenue increased $5.6 million in 1994 or 4% over 1993. Step and general rate increases accounted for $4.1 million of added revenue. Offset rate adjustments, primarily for purchased water and pump tax cost increases, added $2.7 million. Average water consumption per customer increased 4%, adding $2.4 million to revenue. During 1993, $2.9 million of rationing loss recoveries were recorded, and as authorized by the Commission, conservation penalties totaling $1.6 million were transferred to revenue to offset undercollections in expense balancing accounts. Since there were no similar revenue sources in 1994, revenue decreased $4.5 million. Sales to 2,600 new customers accounted for $0.9 million in additional revenue. In 1993, operating revenue increased $11.9 million, or 9% from 1992. Step and general rate increases accounted for $2.7 million of added revenue. Offset rate adjustments, primarily for purchased water and pump tax rate increases, added $7.3 million. Average water consumption per customer increased 3%, adding $2.3 million to revenue. However, rationing loss recoveries declined $1.2 million from 1992 due to the ending of rationing. Sales to 2,200 new customers accounted for $0.8 million in additional revenue. Operating and Interest Expenses. Operating expenses increased $7.9 million in 1995 and in 1994 and $7.8 million in 1993. Well production supplied 49.6% of the water delivered to all systems in 1995, 49.7% was purchased from wholesale suppliers and 0.7% came from the Company's Bear Gulch district watershed. Water production was 99 billion gallons, down 1% from 1994's 100 billion gallons. Production in 1993 was 95 billion gallons. Total cost of water production, including purchased water, purchased power and pump taxes, was $62.2 million in 1995, $58.3 million in 1994, and $52.9 million in 1993. Purchased water expense continued to be the largest component of operating expense at $46.4 million, an increase of $3.6 million. The cost increase was due primarily to wholesale suppliers' rate increases. The Bear Gulch watershed yielded 731 million gallons which was processed through the Company's filter plant, more than four times the 1994 production. The estimated purchased water cost savings provided by the watershed was $0.5 million. Well production declined 2% in 1995, however, increases in power and pump tax rates resulted in a $0.3 million increase in these two expense categories. Employee payroll and benefits charged to operations and maintenance expense was $29.9 million in 1995 compared with $28.0 million in 1994 and $26.2 million in 1993. The increases in payroll and benefits are generally attributable to wage increases and additional employees. At year-end 1995, 1994 and 1993 there were 630, 624 and 614 employees, respectively. Income taxes were $9.9 million in 1995, $9.6 million in 1994, and $10.6 million in 1993. The changes in taxes are due to variations in taxable income and the increase in the federal tax rate to 35% from 34% effective in 1993. Interest on long-term debt increased $0.4 million in 1995 due to the sale in August of $20 million of senior notes. Long-term debt interest in 1994 decreased $1.4 million due to the bond refinancing program completed at lower interest rates in 1993. In 1993, bond interest expense increased $1.5 million because of the sale of $20 million of new bonds in November 1992 and the sale of additional new bonds in 1993. Long-term financing is discussed further under the caption Liquidity and Capital Resources. Interest on short-term bank borrowings in 1995 decreased $0.3 million, despite higher short-term rates during 1995 compared to 1994. The reduction in the expense reflects the payoff of outstanding short-term borrowings upon the issuance of senior notes and a reduced requirement for short-term borrowings. In 1994 interest on short-term borrowings increased $0.2 million due to increased borrowings at higher interest rates. The increase in 1993 bond interest was partially offset by a $0.3 million reduction in interest on short-term debt due to reduced borrowings. Interest coverage of long-term debt before income taxes was 3.2 in each of the three years. Other Income. Other income increased 129% in 1995 to $0.9 million. Other income was $0.4 million in 1994 and $0.3 million in 1993. Other income is derived from management contracts under which the Company operates three municipally owned water systems, agreements for operation of two reclaimed water systems, billing services provided to various cities, interest on short-term investments and other nonutility sources. The Company intends to continue to pursue opportunities to expand these revenue sources. Additional information regarding other income is provided on page 9 of this report. Interest earned on temporary investment of excess funds generated from operations and from the senior notes sale totaled $0.2 million. At year-end 1995, temporary investments were $4.5 million. There were no temporary investments at the end of 1994 or 1993. Income from the various operating and billing contracts was $0.7 million in 1995, $0.4 million in 1994 and $0.3 million in 1993. LIQUIDITY AND CAPITAL RESOURCES Liquidity. The Company's liquidity is primarily provided by utilization of a short-term $30 million bank line of credit as described in Note 3 to the financial statements and by internally generated funds. Internally generated fund sources include retention of a portion of earnings, depreciation and deferred income taxes. Because of the seasonal nature of the water business, the need for short-term borrowings under the line of credit generally increase during the first six months of the year. With increased summer usage, cash flow from operations increases and bank borrowings can be paid down. The bank credit line was temporarily increased to $40 million during the bond refinancing periods in May and November 1993 to allow for short-term cash requirements between the calling of bonds and the issuance of new bonds. The Company believes that long-term financing is available to it through equity and debt markets. In 1995, Standard & Poor's and Moody's maintained their bond ratings of AA- and Aa3, respectively, on the Company's first mortgage bonds. Long-term financing, which includes issuance of common stock, first mortgage bonds, senior notes and other debt securities is used to replace short-term borrowings and fund construction. Developer advances and contributions are also received for various construction projects. During August 1995, Series A, 7.28%, 30-year senior notes were issued. The proceeds from the issue were used to repay outstanding bank borrowings, redeem upon maturity on November 1 the outstanding $2,565,000 Series J, first mortgage bonds, and to fund the 1995 construction program. In 1995 under the Dividend Reinvestment Plan (Plan), 22,317 new common shares were issued to shareholders who elected to reinvest their third and fourth quarter dividends. Issuance of the new shares increased shareholders equity by $0.7 million. Shares required for the first and second quarter dividends were purchased on the open market and redistributed to Plan participants. The Company intends to continue to issue new shares required for the Plan's quarterly dividend reinvestments. The change to issuing new shares will reduce cash required to fund quarterly dividend payments by about $1.4 million annually, based on current shareholder participation of about 11% in the Plan. Issuance of the additional shares will have a dilutive effect on earnings per share calculations because of the added shares outstanding, and upon existing equity of shareholders not participating in the Plan. The sale of 550,000 common shares was completed in September 1994 at an offer price of $33.375. Proceeds of $17.4 million, net of underwriters commissions and issuance costs, were used to repay $15.5 million of short-term bank borrowings which had been incurred to fund the 1994 construction program and for temporary working capital requirements. For the first quarter 1994 dividend, 8,280 new common shares were issued for the reinvestment plan. A major refinancing program was completed in 1993. Eight series of first mortgage bonds in the principal amount of $49,593,000 and bearing coupons ranging from 8.6% to 12-7/8% were called prior to maturity using a portion of the proceeds from the sale of three $20 million dollar bond issues: Series EE, 7.9%, first mortgage bonds issued in June 1993, Series FF, 6.95%, bonds issued in October 1993 and Series GG, 6.98%, bonds issued in November 1993. Interest savings from the refinancing will be approximately $1.9 million annually. Capital Requirements. Capital requirements consist primarily of new construction expenditures for expanding and replacing the Company's utility plant facilities. They also include refunds of advances for construction and retirement of bonds. During 1995, utility plant expenditures totaled $27.3 million compared to $28.3 million in 1994. The expenditures included $20.0 million provided by Company funding and $7.3 million received from developers through refundable advances and contributions in aid of construction. Company funded expenditures were in the following areas: wells, pumping and water treatment equipment, and storage facilities, $5.3 million; distribution systems, $7.2 million; services and meters, $5.0 million; equipment, $2.5 million. Company projects were funded through cash generated from operations, the use of the short-term line of credit and the proceeds from the senior notes issue. The 1996 Company construction program has been authorized by the Directors for $22.2 million. Expenditures are expected to be in the following areas: wells, pumping and water treatment equipment, and storage facilities, $4.8 million; distribution systems, $10.0 million; services and meters, $5.0 million; and equipment, $2.4 million. The funds for this program are expected to be provided by cash from operations, bank borrowings and the remaining proceeds from the senior notes sale. New subdivision construction will be financed generally by developers refundable advances and contributions. Company funded construction budgets over the next five years are projected to be $110 million. Capital Structure. The Company's total capitalization at December 31, 1995 and 1994 was $296.0 million and $276.9 million, respectively. Capital ratios were: 1995 1994 Common equity 49.7% 52.2% Preferred stock 1.2% 1.3% Long-term debt 49.1% 46.5% The decrease in the common equity percentage from 1994 to 1995 and the corresponding increase in the long-term debt percentage were primarily caused by the sale of $20 million senior notes, completed in August 1995. The 1995 return on year-end common equity was 10.2% compared with 10.6% in 1994 and 12.4% in 1993. Balance Sheet December 31, 1995 1994 (In thousands) ASSETS Utility plant: Land $ 7,320 $ 6,904 Depreciable plant and equipment 572,799 549,044 Construction work in progress 3,615 2,589 Intangible assets 658 643 Total utility plant 584,392 559,180 Less depreciation 162,217 151,285 Net utility plant 422,175 407,895 Current assets: Cash and cash equivalents 6,273 1,301 Accounts receivable: Customers 10,747 9,121 Other 2,916 2,606 Unbilled revenue 6,306 5,992 Materials and supplies at average cost 2,518 3,018 Taxes and other prepaid expenses 3,949 3,927 Total current assets 32,709 25,965 Other assets: Regulatory assets 25,316 24,135 Unamortized debt premium and expense 4,162 4,247 Other 521 552 Total other assets 29,999 28,934 $484,883 $ 462,794 See accompanying notes to financial statements. December 31, 1995 1994 (In thousands) CAPITALIZATION AND LIABILITIES Capitalization: Common stock $ 43,507 $ 42,800 Retained earnings 103,442 101,647 Total common shareholders equity 146,949 144,447 Preferred stock without mandatory redemption provision 3,475 3,475 Long-term debt 145,540 128,944 Total capitalization 295,964 276,866 Current liabilities: Short-term borrowings 0 7,000 Accounts payable 14,807 12,231 Accrued taxes 2,104 1,127 Accrued interest 1,979 1,788 Other accrued liabilities 6,940 6,548 Total current liabilities 25,830 28,694 Unamortized investment tax credits 3,352 3,265 Deferred income taxes 14,056 12,445 Regulatory liabilities 11,467 11,467 Advances for construction 94,100 92,190 Contributions in aid of construction 40,114 37,867 $484,883 $462,794 Statement of income For the years ended December 31, 1995 1994 1993 (In thousands, except per share data) Operating revenue $165,086 $157,271 $151,716 Operating expenses: Operations: Purchased water 46,370 42,812 38,454 Purchased power 12,689 12,641 11,852 Pump taxes 3,151 2,859 2,601 Administrative and general 19,989 18,210 16,910 Other 21,635 20,405 19,718 Maintenance 7,722 7,855 7,250 Depreciation 11,436 10,958 10,304 Income taxes 9,850 9,600 10,600 Property and other taxes 6,852 6,426 6,172 Total operating expenses 139,694 131,766 123,861 Net operating income 25,392 25,505 27,855 Other income and expenses, net 768 287 273 Income before interest expense 26,160 25,792 28,128 Interest expense: Long-term debt interest 10,984 10,557 11,992 Other interest 478 827 635 Total interest expense 11,462 11,384 12,627 Net income $ 14,698 $ 14,408 $ 15,501 Earnings per share of common stock $ 2.33 $ 2.44 $ 2.70 Average number of common shares outstanding 6,253 5,838 5,689 See accompanying notes to financial statements. Statement of common shareholders equity common shares common retained For the years ended December 31, outstanding stock earnings total (In thousands, except shares) Balance at December 31, 1992 5,688,754 $25,059 $ 94,515 $119,574 Net income 15,501 15,501 Dividends paid: preferred stock 153 153 common stock 10,923 10,923 Total dividends paid 11,076 11,076 Income reinvested in business 4,425 4,425 Balance at December 31, 1993 5,688,754 25,059 98,940 123,999 Net income 14,408 14,408 Dividends paid: preferred stock 153 153 common stock 11,548 11,548 Total dividends paid 11,701 11,701 Income reinvested in business 2,707 2,707 Dividend reinvestment 8,280 304 0 304 Issuance of common stock 550,000 17,437 0 17,437 Balance at December 31, 1994 6,247,034 42,800 101,647 144,447 Net income 14,698 14,698 Dividends paid: preferred stock 153 153 common stock 12,750 12,750 Total dividends paid 12,903 12,903 Income reinvested in business 1,795 1,795 Dividend reinvestment 22,317 707 0 707 Balance at December 31, 1995 6,269,351 $43,507 $103,442 $146,949 See accompanying notes to financial statements. Statement of cash flows For the years ended December 31, 1995 1994 1993 (In thousands) Operating activities: Net income $ 14,698 $ 14,408 $ 15,501 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 11,436 10,958 10,304 Deferred income taxes and investment tax credits, net 1,698 1,324 12,355 Regulatory assets and liabilities, net (1,181) (731) (11,937) Changes in operating assets and liabilities: Accounts receivable (1,936) (2,326) 908 Unbilled revenue (314) 1,556 (804) Accounts payable 2,576 997 2,124 Other current liabilities 1,560 (825) (1,338) Other changes, net 1,258 130 247 Net adjustments 15,097 11,083 11,859 Net cash provided by operating activities 29,795 25,491 27,360 Investing activities: Utility plant expenditures (27,250) (28,275) (28,829) Financing activities: Net short-term borrowings (7,000) (8,000) 3,500 Proceeds from issuance of long-term debt 20,000 0 60,000 Proceeds from issuance of common stock 707 17,741 0 Advances for construction 5,368 4,980 5,024 Refunds of advances for construction (3,524) (3,565) (3,428) Contributions in aid of construction 3,183 3,833 3,402 Retirements of first mortgage bonds including premiums (3,404) (664) (55,391) Dividends paid (12,903) (11,701) (11,076) Net cash provided by financing activities 2,427 2,624 2,031 Change in cash and cash equivalents 4,972 (160) 562 Cash and cash equivalents at beginning of year 1,301 1,461 899 Cash and cash equivalents at end of year $ 6,273 $ 1,301 $ 1,461 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amounts capitalized) $ 11,050 $ 11,165 $12,763 Income taxes $ 8,258 $ 10,950 $ 9,188 See accompanying notes to financial statements. Notes to financial statements December 31, 1995, 1994 and 1993 Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting records of the Company are maintained in accordance with the uniform system of accounts prescribed by the California Public Utilities Commission (Commission). Certain prior years' amounts have been reclassified, where necessary, to conform to the current presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue. Revenue consists of monthly cycle customer billings for water service at rates authorized by the Commission. Revenue from metered accounts includes unbilled amounts based on the estimated usage from the latest meter reading to the end of the accounting period. Flat rate accounts which are billed at the beginning of the service period are included in revenue on a prorated basis for the portion applicable to the current accounting period. In October 1991, the Commission issued a decision on its investigation into the effects of the drought on water utilities which permitted the Company to recover revenue lost through water conservation as recorded in memorandum accounts. In March 1994, the Commission closed all voluntary conservation memorandum accounts. In 1993, $2,904,000 was recorded as lost water conservation revenue and accrued in unbilled revenue, while $2,631,000 was recovered through customer surcharges and penalty charge transfers from customers who had exceeded their monthly allotments. In 1994, $32,000 was recorded as lost water conservation revenue and accrued in unbilled revenue, while $1,445,000 was recovered through customer surcharges and penalty charge transfers. As of December 31, 1994, $1,011,000 of lost water conservation revenue remained in unbilled revenue. In 1995, $351,000 was recovered through customer surcharges while $163,000 was written-off as unrecoverable revenue. As of December 31, 1995, $497,000 of lost water conservation revenue remained in unbilled revenue. Commission authorization to collect the unbilled revenue is anticipated to be granted in current rate case proceedings. Utility Plant. Utility plant is carried at original cost when first constructed or purchased, except for certain minor units of property recorded at estimated fair values at dates of acquisition. Cost of depreciable plant retired is eliminated from utility plant accounts and such costs are charged against accumulated depreciation. Maintenance of utility plant, other than transportation equipment, is charged to operation expenses. Maintenance and depreciation of transportation equipment are charged to a clearing account and subsequently distributed primarily to operations. Interest is capitalized on plant expenditures during the construction period and amounted to $207,000 in 1995, $195,000 in 1994 and $141,000 in 1993. Intangible assets arising during the period of initial development of the Company and those acquired as parts of water systems purchased are stated at amounts as prescribed by the Commission. All other intangibles have been recorded at cost. Long-Term Debt Premium, Discount and Expense. The discount and expense on long-term debt is being amortized over the original lives of the related debt issues. Premiums paid on the early redemption of certain debt issues and unamortized original issue discount and expense of such issues are amortized over the life of new debt issued in conjunction with the early redemption. Cash Equivalents. Cash equivalents include highly liquid investments, primarily U.S. Treasury and U.S. Government agency interest bearing securities, stated at cost with original maturities of three months or less. As of December 31, 1995 and 1994, cash equivalents were $4,659,000 and $124,000, respectively. Depreciation. Depreciation of utility plant for financial statement purposes is computed on the straight-line remaining life method at rates based on the estimated useful lives of the assets. The provision for depreciation expressed as a percentage of the aggregate depreciable asset balances was 2.4% in 1995, 1994 and 1993. For income tax purposes, the Company computes depreciation using the accelerated methods allowed by the respective taxing authorities. Advances for Construction. Advances for construction of water main extensions are primarily refundable to depositors without interest over a 20-year or 40-year period. Refund amounts under the 20-year contracts are based on annual revenues from the extensions. Unrefunded balances at the end of the contract period are credited to Contributions in Aid of Construction and are no longer refundable. Refunds on contracts entered into since 1982 are made in equal annual amounts over 40 years. Estimated refunds for 1996 for all water main extension contracts are $3,800,000. Income Taxes. The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Measurement of the deferred tax assets and liabilities is at enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. It is anticipated that future rate action by the Commission will reflect revenue requirements for the tax effects of temporary differences recognized which have previously been flowed through to customers. The Commission has granted the Company customer rate increases to reflect the normalization of the tax benefits of the federal accelerated methods and available investment tax credits (ITC) for all assets placed in service after 1980. ITC are deferred and amortized over the lives of the related properties. Advances for Construction and Contributions in Aid of Construction received from developers subsequent to 1986 are taxable for federal income tax purposes, and subsequent to 1991, subject to state income tax. Earnings per Share. Earnings per share are calculated using the weighted average number of common shares outstanding during the year after deducting dividend requirements on preferred stock. NOTE 2. PREFERRED AND COMMON STOCK As of December 31, 1995, 380,000 shares of preferred stock were authorized. Dividends on outstanding shares are payable quarterly at a fixed rate before any dividends can be paid on common stock. Preferred shares are entitled to eight votes each with the right to cumulative votes at any elections of directors. The outstanding 139,000 shares of $25 par value cumulative, 4.4% Series C, preferred shares are not convertible to common stock. A premium of $243,250 would be due upon voluntary liquidation of Series C. There is no premium in the event of an involuntary liquidation. The Company is authorized to issue 8,000,000 shares of no par value common stock. In September 1994, the Company sold 550,000 common shares in a public offering with net proceeds of $17,437,000. As of December 31, 1995 and 1994, 6,269,351 and 6,247,034 shares, respectively, of common stock were issued and outstanding. All shares of common stock are eligible to participate in the Company's dividend reinvestment plan. Approximately 11% of shareholders participate in the plan. New shares of common stock of 22,317 and 8,280 were issued in 1995 and 1994, respectively. NOTE 3. SHORT-TERM BORROWINGS As of December 31, 1995, the Company maintained a bank line of credit providing unsecured borrowings of up to $30,000,000 at the prime lending rate or lower rates as quoted by the bank. The agreement does not require minimum or specific compensating balances. The following table represents borrowings under the bank line of credit. Dollars in Thousands 1995 1994 1993 Maximum short-term borrowings $13,000 $21,500 $33,500 Average amount outstanding 5,142 13,196 11,746 Weighted average interest rate 7.26% 5.4% 4.31% Interest rate at December 31 - 7.38% 4.38% NOTE 4. LONG-TERM DEBT As of December 31, 1995 and 1994 long-term debt outstanding was: In Thousands 1995 1994 First Mortgage Bonds: Series J, 4.85% due 1995 $ 0 $ 2,565 Series K, 6.25% due 1996 2,565 2,580 Series L, 6.75% due 1997 2,150 2,164 Series P, 7.875% due 2002 2,655 2,670 Series S, 8.50% due 2003 2,670 2,685 Series BB, 9.48% due 2008 17,100 17,280 Series CC, 9.86% due 2020 19,300 19,500 Series DD, 8.63% due 2022 19,700 19,800 Series EE, 7.90% due 2023 19,800 19,900 Series FF, 6.95% due 2023 19,800 19,900 Series GG, 6.98% due 2023 19,800 19,900 125,540 128,944 Senior Notes: Series A, 7.28% due 2025 20,000 0 Total long-term debt $145,540 $128,944 The first mortgage bonds are held by institutional investors and secured by substantially all of the Company's utility plant. Aggregate maturities and sinking fund requirements for each of the succeeding five years 1996 through 2000 are $3,197,000, $2,758,000, $620,000, $2,240,000 and $2,240,000 respectively. The senior notes are held by institutional investors and are unsecured and require interest only payments until maturity. NOTE 5. INCOME TAXES Income tax expense consists of the following: In Thousands federal state total 1995 Current $6,839 $2,729 $9,568 Deferred 1,161 (879) 282 Total $8,000 $1,850 $9,850 1994 Current $6,492 $2,567 $9,059 Deferred 908 (367) 541 Total $7,400 $2,200 $9,600 1993 Current $6,800 $2,408 $9,208 Deferred 1,400 (8) 1,392 Total $8,200 $2,400 $10,600 Income tax expense computed by applying the current federal tax rate of 35% to pretax book income differs from the amount shown in the Statement of Income. The difference is reconciled in the table below: In Thousands 1995 1994 1993 Computed expected tax expense $8,592 $8,401 $9,135 Increase (reduction) in taxes due to: State income taxes net of federal tax benefit 1,203 1,444 1,565 Investment tax credits (132) (132) (100) Other 187 (113) 0 Total income tax $9,850 $9,600 $10,600 The components of deferred income tax expense in 1995, 1994 and 1993 were: In Thousands 1995 1994 1993 Depreciation $3,854 $3,748 $3,858 Developer advances and contributions (3,455) (3,536) (3,951) Bond redemption premiums (75) (75) 1,333 Investment tax credits (90) (90) (72) Other 48 494 224 Total deferred income tax expense $ 282 $ 541 $1,392 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 are presented in the following table: In Thousands 1995 1994 Deferred tax assets: Developer deposits for extension agreements and contributions in aid of construction $42,316 $37,359 Federal benefit of state tax deductions 3,831 3,895 Book plant cost reduction for future deferred ITC amortization 1,805 1,758 Insurance loss provisions 475 617 Total deferred tax assets 48,427 43,629 Deferred tax liabilities: Utility plant, principally due to depreciation differences 54,479 47,670 Premium on early retirement of bonds 1,972 2,081 Other 6,032 6,323 Total deferred tax liabilities 62,483 56,074 Net deferred tax liabilities $14,056 $12,445 A valuation allowance was not required during 1995 and 1994. Based on historical taxable income and future taxable income projections over the periods in which the deferred assets are deductible, management believes it is more likely than not the Company will realize the benefits of the deductible differences. NOTE 6. EMPLOYEE BENEFIT PLANS Pension Plan. The Company provides a qualified, defined benefit, noncontributory, pension plan for substantially all employees. The cost of the plan was charged to expense and utility plant. The Company makes annual contributions to fund the amounts accrued for pension cost. Plan assets are invested in mutual funds, pooled equity, bond and short-term investment accounts. The data below includes the unfunded, non-qualified, supplemental executive retirement plan. Net pension cost for the years ending December 31, 1995, 1994 and 1993 included the following components: In Thousands 1995 1994 1993 Service cost-benefits earned during the period $ 1,265 $ 1,333 $ 1,167 Interest cost on projected obligation 2,360 2,154 2,153 Actual loss (return) on plan assets (5,817) 627 (3,672) Net amortization and deferral 4,220 (2,286) 2,132 Net pension cost $ 2,028 $ 1,828 $ 1,780 The following table sets forth the plan's funded status and the plan's accrued assets (liabilities) as of December 31, 1995 and 1994: In Thousands 1995 1994 Accumulated benefit obligation, including vested benefits of $25,218 in 1995 and $19,824 in 1994 $(25,974) $(20,329) Projected benefit obligation $(37,271) $(30,246) Plan assets at fair value 33,798 27,833 Projected benefit obligation in excess of plan assets (3,473) (2,413) Unrecognized net gain (1,991) (3,540) Prior service cost not yet recognized in net periodic pension cost 3,161 3,543 Remaining net transition obligation at adoption date January 1, 1987 1,716 2,002 Accrued pension liability recognized in the balance sheet $ (587) $ (408) The projected long-term rate of return on plan assets used in determining pension cost was 8.0% for the years 1995, 1994 and 1993. A discount rate of 7.0% in 1995 and 1993, and 8.0% in 1994 and future compensation increases of 4.5% in 1995, 5.0% in 1994 and 4.75% in 1993 were used to calculate the projected benefit obligations for the respective years. Savings Plan. The Company sponsors a 401(k) qualified defined contribution savings plan which allows participants to contribute up to 15% of pre-tax compensation. During 1995, 1994 and 1993 the Company matched fifty cents for each dollar contributed by the employee up to a maximum Company match of 3% of the employees' compensation. Company contributions were $711,000, $678,000 and $606,000 for the years 1995, 1994 and 1993, respectively. Other Postretirement Plans. The Company provides substantially all active employees medical, dental and vision benefits through a self-insured plan. Employees retiring at or after age 58 with 10 or more years of service are offered, along with their spouses and dependents, continued participation in the plan by a payment of a premium. Retired employees are also provided with a $5,000 life insurance benefit. The Company records the costs of postretirement benefits during the employees years of active service. The Commission has issued a decision which authorizes rate recovery of tax deductible funding of postretirement benefits and permits recording of a regulatory asset for the portion of costs that will be recoverable in future rates. Net postretirement benefit cost for the years ending December 31, 1995, 1994 and 1993, included the following components: In Thousands 1995 1994 1993 Service cost benefits earned $131 $120 $ 85 Interest cost on accumulated postretirement benefit obligation 391 326 384 Actual return on plan assets (30) (4) 0 Net amortization of transition obligation 260 228 248 Net periodic postretirement benefit cost $752 $670 $717 Postretirement benefit expense recorded in 1995, 1994 and 1993, was $507,000, $481,000 and $480,000, respectively. The remaining $671,000 which is recoverable through future customer rates, is recorded as a regulatory asset. The Company intends to make annual contributions to the plan up to the amount deductible for tax purposes. Plan assets are invested in a mutual fund, short-term money market instruments and commercial paper. The following table sets forth the plan's funded status and the plan's accrued assets (liabilities) as of December 31, 1995 and 1994: In Thousands 1995 1994 Accumulated postretirement benefit obligation: Retirees $(3,423) $(2,882) Other fully eligible participants (571) (366) Other active participants (1,942) (1,150) Total (5,936) (4,398) Plan assets at fair value 348 172 Accumulated postretirement benefit obligation in excess of plan assets (5,588) (4,226) Unrecognized net (gain) or loss 697 (668) Remaining unrecognized transition obligation 4,220 4,468 Net postretirement benefit liability included in current liabilities $ (671) $ (426) For 1995 measurement purposes, a 7% annual rate of increase in the per capita cost of covered benefits was assumed; the rate was assumed to decrease gradually to 5% in the year 2000 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995, by $822,000 and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for the year ended December 31, 1995, by $81,000. The discount rate used in determining the accumulated postretirement benefit obligation was 7% at December 31, 1995, 8% at December 31, 1994 and 7% at December 31, 1993. The long-term rate of return on plan assets was 8% for 1995, 1994 and 1993. NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS For those financial instruments for which it is practicable to estimate a fair value the following methods and assumptions were used to estimate the fair value. Cash Equivalents. The carrying amount of cash equivalents approximates fair value because of the short-term maturity of the instruments. Long-term Debt. The fair value of the Company's long-term debt is estimated at $162,427,000 as of December 31, 1995, and $126,584,000 as of December 31, 1994, using a discounted cash flow analysis, based on the current rates available to the Company for debt of similar maturities. Advances for Construction. The fair value of advances for construction contracts is estimated at $21,000,000 as of December 31, 1995 and 1994, based on data provided by brokers. NOTE 8. QUARTERLY FINANCIAL AND COMMON STOCK MARKET DATA (Unaudited) The Company's common stock has traded on the New York Stock Exchange since April 8, 1994 under the symbol CWT. Prior to April 8, 1994, the common stock was traded in the over-the-counter market and quoted in the NASDAQ National Market System under the symbol CWTR. There were approximately 6,000 holders of common stock at December 31, 1995. Quarterly dividends have been paid on common stock for 204 consecutive quarters and the quarterly rate has been increased during each year since 1968. The 1995 and 1994 quarterly range of common stock market prices was supplied by The New York Stock Exchange Composite Tape since April 8, 1994, and by NASDAQ for earlier periods. 1995 (In thousands, except per share amounts) first second third fourth Operating revenue $30,416 $40,371 $53,276 $41,023 Net operating income 3,685 6,161 9,096 6,450 Net income 1,039 3,467 6,472 3,720 Earnings per share .16 .55 1.03 .59 Common stock market price range: High 32-3/8 32-5/8 32-7/8 35-1/4 Low 29-5/8 29-3/4 29-5/8 32-3/8 Dividends paid .51 .51 .51 .51 1994 first second third fourth Operating revenue $30,579 $40,147 $50,303 $36,242 Net operating income 4,164 6,892 8,730 5,719 Net income 1,395 4,070 5,857 3,086 Earnings per share .24 .71 1.02 .49 Common stock market price range: High 41 36-3/4 36 33-1/8 Low 34-1/4 33-3/4 32-7/8 29-3/8 Dividends paid .49-1/2 .49-1/2 .49-1/2 .49-1/2 EX-27 3
UT 12-MOS DEC-31-1995 DEC-31-1995 PER-BOOK 422175000 0 32709000 4683000 25316000 484883000 43507000 0 103442000 146949000 0 3475000 145540000 0 0 0 0 0 0 0 188919000 484883000 165086000 9850000 129844000 139694000 25392000 76800 26160000 11462000 14698000 153000 14545000 12750000 10984000 29795000 2.33 0
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