-----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, Mw56yqE0dFVH4w2a4BiQeTggT/5NjDLX+btJwxvOp/QEec3xyOP5k2w0BRJioS3u GqpiZKPvDxZmAhkpykQdJQ== 0000016422-97-000003.txt : 19970326 0000016422-97-000003.hdr.sgml : 19970326 ACCESSION NUMBER: 0000016422-97-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 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: 97562135 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 - 32 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, 1996 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, No Par Value 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 non- affiliates of the Registrant - $265,001,940 at February 28, 1997. Common stock outstanding at February 28, 1997 - 6,309,570 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, 1996 ("1996 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/Prospectus of California Water Service Company and California Water Service Group (Proxy Statement/Prospectus), dated March 18, 1997, relating to the 1997 annual meeting of shareholders 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. The Proxy Statement/Prospectus was filed under EDGAR on March 4, 1997. 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........... 9 Water Supply........................ 10 Nonregulated Operations............ 13 Utility Plant Construction Program and Acquisitions.................. 14 Quality of Supplies................. 14 Competition and Condemnation........ 15 Environmental Matters .............. 16 Human Resources..................... 16 d. Financial Information about Foreign and Domestic Operations and Export Sales ............................. 18 Item 2. Properties ......................... 18 Item 3. Legal Proceedings................... 18 Item 4. Submission of Matters to a Vote of Security Holders.................. 19 Executive Officers of the Registrant........ 20 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.... 21 Item 6. Selected Financial Data............. 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 21 Item 8. Financial Statements and Supplementary Data................. 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 22 3 PART III Item 10. Directors and Executive Officers of the Registrant................. 22 Item 11. Executive Compensation.............. 22 Item 12. Security Ownership of Certain Beneficial Owners and Management.. 22 Item 13. Certain Relationships and Related Transactions...................... 22 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 23 Signatures.................................. 24 Independent Auditors' Report................ 26 Schedules................................... 27 Exhibit Index............................... 28 4 PART I Item 1 Business. a. General Development of Business. California Water Service Company ("Company") is a public utility providing water service to 376,100 customers in 56 California cities and communities through 21 separate water systems or districts. In the Company's 20 regulated systems, which serve 370,100 customers, rates and operations are subject to the jurisdiction of the California Public Utilities Commission ("Commission" or "PUC"). An additional 6,000 customers receive service through a long-term lease of the City of Hawthorne water system, which is not subject to Commission regulation. The Company also has contracts with various municipalities to operate water systems and provide billing services to 27,500 other customers. 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 mailing address and principal executive offices are located at 1720 North First Street, San Jose, California; telephone number: 1-408-451-8200. The Company maintains a web site which can be accessed via the Internet at http://www.calwater.com. During the year ended December 31, 1996, 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. In November 1996, the Company announced its intention to form a holding company. Shareholders will vote on this proposal at their annual meeting on April 16, 1997. In January 1997, the Company also announced plans to effectively split its common stock on a two-for-one basis. The split will be accomplished, together with a proportionate adjustment of preferred stock voting rights, during formation of the holding company by a planned conversion of each common share of California Water Service Company stock into two shares of holding company common stock and a conversion of each preferred share of California Water Service Company into one share of holding company preferred stock. By approving the holding company structure, shareholders will also approve the stock split. Rates and Regulations. Rates, service and other matters for the Company's regulated business are subject to the jurisdiction of the Commission. The Commission's decisions and the timing of those decisions can have an important impact on Company operations and results of operations. 5 The Company's 20 regulated systems, each of which is within the State of California, are operated as 20 separate districts, however, the systems 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 considered a separate and distinct entity for ratemaking purposes. Since the Commission requires that water rates for each Company operating district be determined independently, the Company annually files general rate case applications for a portion of its districts, typically requesting rate increases. Thus, the number of customers affected by each filing, varies from year to year. The decision to file a general rate case depends on various factors including the time since the last general rate case was filed, the return being earned in each district, expected current returns and the need for capital spending. 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 between rate case filings. Offset rate adjustments are allowed as required for changes in the costs of purchased water, power and pump taxes. General rate case applications, which had been filed with the Commission during 1995 for five districts serving 47 percent of the Company's customers, were finalized by the Commission in 1996. The applications requested a rate of return on common equity (ROE) of 12.1 percent and additional revenue of $26.7 million over a three-year period. The Commission staff recommended a rate of return of 9.9 percent, however, a stipulation agreement was reached with the staff for a 10.3 percent ROE in January 1996. The Commission's decision for this rate case series was issued in June 1996. During the first full year, the decision is expected to provide $5.4 million of added revenue, including $1.2 million in step rate increases which were effective at the start of 1996. Over a four-year period, the decision will provide about $10.6 million in new revenue. The decision includes a provision to accelerate the recovery of the Company's utility plant investment, resulting in an increase in the annualized depreciation rate for these districts of 2.6 percent compared to a 2.4 percent rate experienced in recent years. In July 1996, general rate cases were filed for two districts representing 11 percent of the regulated customers. The Company requested an ROE of 12.05 percent, while the Commission staff recommended 10.1 percent. In January 1997, the Company and Commission staff stipulated to a ROE of 10.35 percent. Additional 1997 revenue of $1.6 million is anticipated as a 6 result of the decision, along with step rate increases to become effective in the following three years. Although there can be no assurance that the Commission will approve the stipulation agreement, both the Company and Commission staff were signatories to the agreement. The Company expects the Commission's decision to be finalized by mid year. In January 1995, a consultant retained by the Commission's Division of Ratepayer Advocates completed 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 Commission approval prior to 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 eventual Commission consideration. Management 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 Company's business 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. The Company leases the City of Hawthorne water system, has contracts under which it operates three municipally owned water systems and two reclaimed water distribution systems and provides billing services for other municipalities. These 7 operations are discussed in more detail in a following section titled Nonregulated Operations. The Company intends to continue to explore opportunities to expand operating and other revenue sources. The opportunities could include system acquisitions, contracts similar to the City of Hawthorne arrangement, operating contracts, billing contracts and other utility related services. The Company believes that a holding company structure, as discussed above, will make the Company more competitive in providing nonregulated utility services, which would not be subject to Commission jurisdiction. 8 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 or districts for both the regulated and nonregulated operations and the approximate number of customers served in each district at December 31, 1996, are listed below. SAN FRANCISCO BAY AREA Mid-Peninsula (comprised of San Mateo and San Carlos) 35,600 South San Francisco (including Colma and Broadmoor) 15,400 Bear Gulch (serving Menlo Park, Atherton, Woodside and Portola Valley) 17,200 Los Altos (including portions of Cupertino, Los Altos Hills, Mountain View and Sunnyvale) 18,000 Livermore 15,600 101,800 SACRAMENTO VALLEY Chico (including Hamilton City) 21,300 Oroville 3,500 Marysville 3,800 Dixon 2,700 Willows 2,300 33,600 SALINAS VALLEY Salinas 23,600 King City 2,000 25,600 SAN JOAQUIN VALLEY Bakersfield 54,800 Stockton 41,000 Visalia 27,000 Selma 4,800 127,600 LOS ANGELES AREA East Los Angeles (including portions of the cities of Commerce and Montebello) 26,300 Hermosa Beach and Redondo Beach (including a portion of Torrance) 25,000 Palos Verdes (including Palos Verdes Estates, Rancho Palos Verdes, Rolling Hills Estates and Rolling Hills) 23,500 Westlake (a portion of Thousand Oaks) 6,700 81,500 TOTAL REGULATED CUSTOMERS 370,100 NONREGULATED OPERATION Hawthorne 6,000 TOTAL 376,100 9 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 with the 1992-93 winter, and 1995-96 winter rains are discussed below. The Company's supply has been adequate to meet consumption demands, however, during periods of drought, some districts have required water rationing. 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 accumulated in the mountains provides an additional water source when spring and summer temperatures melt the snowpack producing runoff into streams and reservoirs, and also replenishing underground aquifers. During years in which precipitation is especially heavy or extends beyond the spring into the early summer, customer demand can decrease from historic normal levels, generally due to reduced 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. The Company's water business is seasonal in nature and weather conditions can have a pronounced effect on customer usage and thus operating revenues and net income. Customer demand generally is less during the normally cooler and rainy winter months, increasing in the spring when warmer weather gradually returns to California and the rains end. Temperatures are warm during the generally dry summer months, resulting in increased demand. Water usage declines during the fall as temperatures decrease and the rainy season approaches. During years of less than normal rainfall, customer demand can increase as outdoor water usage continues. When rainfall is below average for consecutive years, drought conditions can result and certain customers may be required to reduce consumption to preserve existing water reserves. California experienced a six- year drought which ended with the winter of 1992-93. During that period some Company districts imposed rationing on customers. The Company delivered 105 billion gallons of water to customers during 1996 of which approximately 50 percent was obtained from wells and 50 percent was purchased from the following suppliers: 10 Supply District Purchased Source of Purchased Supply SAN FRANCISCO BAY AREA Mid-Peninsula 100% San Francisco Water Department South San Francisco 96% San Francisco Water Department Bear Gulch 87% San Francisco Water Department Los Altos 79% Santa Clara Valley Water District Livermore 84% Alameda County Flood Control and Water Conservation District SACRAMENTO VALLEY Oroville 71% Pacific Gas and Electric Co. 6% County of Butte SAN JOAQUIN VALLEY Bakersfield 18% Kern County Water Agency Stockton 72% Stockton-East Water District LOS ANGELES AREA East Los Angeles 79% Central Basin Municipal Water District Hermosa Beach and Redondo Beach 100% West Basin Municipal Water District Palos Verdes 100% West Basin Municipal Water District Westlake 100% Russell Valley Municipal Water District Hawthorne 68% West Basin 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 the local watershed and processed through the Company's treatment plant before being delivered to the system. Historically, groundwater has yielded 10 to 15 percent of the Hermosa-Redondo district supply and 15 to 20 percent of the South San Francisco district supply. During 1996, wells in those two districts, were out of service while treatment facilities were being installed. Once the treatment facilities are operative, which is expected to occur during 1997, the wells will be returned 11 to service. Water produced from wells is generally less expensive than water purchased from wholesale suppliers. 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. The supplies for the East Los Angeles, Hermosa-Redondo, Palos Verdes, Westlake and Hawthorne districts are provided to the Company by 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. The 1995-96 water year provided above average levels of precipitation which assured sufficient supply for the year and above normal carryover into 1997. Heavy rains fell in California during December 1995 through February 1996. Spring weather was drier and warmer than normal, leading to an increase in customer usage which continued into the summer. Groundwater levels in underground aquifers which provide supply to Company districts served by well water improved in 1996 due to heavy rains. Most regions have recorded positive changes in groundwater levels as compared to 1995. Regional groundwater management planning continues throughout 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. The water supply outlook for 1997 is good, however, California faces long-term water supply challenges. The Company is actively working to meet the challenges by continuing to educate customers on responsible water use practices, particularly in the districts with conservation programs approved by the California Public Utilities Commission. On an ongoing basis, the Company is actively participating with the Salinas Valley water users and the Monterey County Water Resources Agency (MCWRA) to address the seawater intrusion concern to the water supply for the Salinas district. MCWRA started construction on the Castroville Seawater Intrusion Project in 1995 and deliveries are expected to commence in 1997. When completed, 12 this project will deliver up to 20,000 acre feet of recycled water annually to agricultural users in the Castroville area and is designed to help mitigate seawater intrusion into the region by reducing the need to pump groundwater. The Company is participating with the City and County of San Francisco, and the cities of San Bruno and Daly City to prepare a groundwater management plan for the Westside Basin from which the Company's South San Francisco District pumps a portion of its supply. Nonregulated Operations The Company operates municipally owned water systems for the cities of Bakersfield, Commerce and Montebello, and two private water company systems in the Bakersfield and Salinas districts. The total number of services operated under these contracts is about 23,800. With the exception of the 15-year Hawthorne lease discussed below, the terms of the 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. The Company has never experienced the cancellation of any of its operating agreements. 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. The Company provides meter reading, billing and customer service for the City of Menlo Park's 3,900 water customers. Additionally, sewer and/or refuse billing services are provided to six municipalities. 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. The system which is near the Company's Hermosa-Redondo district serves about half the City's population. Under terms of the lease, the Company made an up-front $6.5 million lease payment to the City which will be amortized over the lease term. Additionally, the Company will make annual lease payments of $100,000 indexed to changes in water rates, and is responsible for all aspects of system operation including capital improvements, although title to the system and system improvements resides with the City. At the end of the lease, the Company will be reimbursed for the unamortized value of capital improvements. In exchange, the Company receives all system revenues which are estimated to be $4 million annually. The Company leases various antenna sites to telecommunication companies. Individual lease payments range from $750 to $2,200 per month. The antennas are used in cellular phone and personal communication applications. Other leases are being negotiated for similar uses. 13 The Company also provides laboratory services to San Jose Water Company. Utility Plant Construction Program and Acquisitions The Company is continually extending, enlarging and replacing its facilities as required to meet increasing demands and to maintain its systems. Capital expenditures, including the Hawthorne up- front lease payment and developer financed projects, for additional facilities and for the replacement of existing facilities amounted to approximately $35.7 million in 1996. Financing was provided by funds from operations, short-term bank borrowings, dividend reinvestments, issuance of senior notes in 1995, advances for construction, and contributions in aid of construction as set forth in the "Statement of Cash Flows" on page 26 of the Company's 1996 Annual Report which is incorporated herein by reference. Company funded expenditures were $27.6 million including the $6.5 million Hawthorne lease payment. Developer payments accounted for $8.1 million. Advances for construction of main extensions are payments or facilities received by the Company from subdivision developers under rules of the Commission. These advances are refundable without interest over a period of 40 years. Contributions in aid of construction consist of nonrefundable cash deposits or facilities received from developers, primarily for fire protection. The Company's construction budget for additions and improvements to its facilities during 1997 is approximately $23.2 million, exclusive of additions and improvements financed through advances for construction and contributions in aid of construction. Financing is expected to be from internally generated funds, short-term borrowings and long-term debt financing. Quality of Supplies The Company maintains procedures to produce potable water in accordance with accepted water utility practice. Water entering the distribution systems from surface sources is treated in compliance with Safe Drinking Water Act standards. Samples of water from each district are analyzed regularly by the Company's state certified water quality laboratory. In recent years, federal and state water quality regulations have continued to increase. Changes in the federal Safe Drinking Water Act, which the Company believes will bring treatment costs more in line with the actual health threat posed by contaminants, were enacted by Congress during 1996. The Company continues to monitor water quality and upgrade its treatment capabilities to maintain compliance with the various regulations. These activities include: ~ installation of chlorinators at all well sources ~ maintaining a State approved compliance monitoring program required by Phase II and V of the Safe Drinking Water Act ~ upgrading laboratory equipment 14 ~ operating several granular activated carbon (GAC) filtration systems for removal of hydrogen sulfide or volatile organic chemicals ~ placing treatment on two Los Angeles Basin wells and wells at the South San Francisco well field which have elevated levels of iron and manganese; 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 Copper Rule. Chemical water treatment to inhibit and control potential corrosion will be installed in each of these water systems ~ monitoring all sources for MTBE, the gasoline additive widely used throughout the State Competition and Condemnation The Company is a public utility regulated by the Commission. The Company provides service within filed service areas approved by the Commission. 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 practices, such certificate will be issued only upon showing that the Company's service in such territory is deficient. 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 any pending action to acquire or condemn any of the Company's systems. The water industry is experiencing competitive changes and the potential exists for new growth. The Company has in the past participated in public/private partnerships, such as the lease of a water system, system operation agreements, or billing service contracts, and anticipates future opportunities for further participation and development. The Company has proposed the formation of a holding company structure to enhance its ability to actively compete for the new business. The holding company structure will facilitate the financing, accounting and operation of the nonregulated business activities. 15 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. The Company is unaware of any pending environmental matters which will have a material effect on its operations. Stringent air quality regulations had presented past operational problems for facilities with diesel powered emergency engines. State and local air quality regulations were in conflict with the Company's responsibility to provide water service in times of emergency by subjecting routine testing of these engines to fines if they emitted air pollutants in excess of established air quality standards. In response, the California Water Association, an industry association of California's investor owned public utility water companies, sponsored legislative relief through Assembly Bill 1855 to allow testing of emergency engines without fines. The legislation was enacted in 1996. Human Resources As of December 31, 1996, the Company had 633 employees, of whom 163 were executive, administrative and supervisory employees, and 470 were members of unions. In December 1995, two-year collective bargaining agreements, expiring December 31, 1997, were successfully negotiated with the Utility Workers Union of America, AFL- CIO, representing the majority of the Company's field and clerical union employees, and the International Federation of Professional and Technical Engineers, AFL-CIO, representing certain engineering department and water quality laboratory employees. Agreements have been successfully renewed in the past without a labor interruption. Effective January 1, 1996, Robert W. Foy, who has been a Board member since 1977, was elected Chairman of the Board, replacing C. H. Stump. Mr. Stump, who had been an employee for 45 years, continues as a Board member. On February 1, 1996, Peter C. Nelson replaced Donald L. Houck as President and Chief Executive Officer (CEO). Mr. Nelson was previously employed for 24 years by Pacific Gas & Electric Company, the largest California energy utility, most recently as Vice President-Division Operations. Upon his retirement, Mr. Houck had been an employee for 19 years, serving as President and CEO since 1991. On August 1, 1996, the Board of Directors elected Paul G. Ekstrom, Robert R. Guzzetta, Christine L. McFarlane and Raymond L. Worrell to the officer positions of Corporate Secretary, Vice President - Engineering and Water Quality, Vice President - Human Resources, and Vice President - Chief Information Officer, respectively. Mr. Ekstrom had been Operations Coordinator; Mr. Guzzetta had been Chief Engineer; Ms. McFarlane had been Director of Human 16 Resources; and Mr. Worrell had been Director of Information Systems. Combined they have 100 years of experience with the Company. 17 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 to accomplish the production, storage, purification, and distribution of water. These properties are located in or near the Geographic Service Areas listed above under section Item 1.c. entitled "Narrative Description of the Business." 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 $122,153,000 were outstanding at December 31, 1996. The Company owns 523 wells and operates six leased wells. The Company has 290 storage tanks with a capacity of 216 million gallons and one reservoir located in the Bear Gulch district with a 210 million gallon capacity. There are 4,585 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 283 million gallons, while the maximum production on one day was 497 million gallons. In the systems which the Company leases or operates under contract for cities, title to the various properties is held exclusively by the city. Item 3. Legal Proceedings. The State of California's Department of Toxic Substances Control (DTSC) alleges that the Company is a responsible party for cleanup of a toxic contamination in the Chico groundwater. The DTSC has prepared a draft report titled "Preliminary Nonbinding Allocation of Financial Responsibility" for the cleanup which asserts that the Company's share should be 10 percent. The DTSC 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 DTSC contends that the Company's responsibility stems from the Company's operation of wells in the surrounding vicinity 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 18 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 its 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 year 1996. 19 Executive Officers of the Registrant. Name Positions and Offices with the Company Age Robert W. Foy Chairman of the Board since January 1, 1996. 60 Director of the Company since 1977. Formerly President and Chief Executive Officer of Pacific Storage Company, Stockton, Modesto, Sacramento and San Jose, California, a diversified transportation and warehousing company, where he had been employed for 32 years. Peter C. Nelson President and Chief Executive Officer of the 49 Company since February 1, 1996. Formerly Vice President, Division Operations (1994-1995) and Region Vice President (1989-1994), Pacific Gas & Electric Company, a gas and electric public utility. Gerald F. Feeney Vice President, Chief Financial Officer and 52 Treasurer since November 1994; Controller, Assistant Secretary and Assistant Treasurer from 1976 to 1994. From 1970 to 1976, an audit manager with Peat Marwick Mitchell & Co. Francis S. Vice President, Regulatory Matters since August 47 Ferraro 1989. Employed by the California Public Utilities Commission for 15 years, from 1985 through 1989 as an administrative law judge. James L. Good Vice President, Corporate Communications 33 and Marketing since January 1995. Previously Director of Congressional Relations for the National Association of Water Companies from 1991 to 1994. Robert R. Vice President-Engineering and Water Quality 43 Guzzetta since August 1996; Chief Engineer, 1990 to 1996; Assistant Chief Engineer, 1988 to 1990; various engineering department positions since 1977. Christine L. Vice President-Human Resources since August 50 McFarlane 1996; Director of Human Resources, 1991 to 1996; Assistant Director of Personnel, 1989 to 1991; an employee of the Company since 1969. Raymond H. Vice President, Operations since April 1995; 51 Taylor Vice President and Director of Water Quality, 1990 to 1995; Director of Water Quality, 1986 to 1990. Prior to joining the Company in 1982, he was employed by the United States Environmental Protection Agency. 20 Raymond L. Vice President-Chief Information Officer since 57 Worrell August 1996; Director of Information Systems, 1991 to 1996; Assistant Manager of Data Processing, 1970 to 1991; Data Processing Supervisor, 1967 to 1970. Calvin L. Breed Controller, Assistant Secretary and Assistant 41 Treasurer since November 1994. Previously Treasurer of TCI International, Inc. Paul G. Ekstrom Corporate Secretary since August 1996; 44 Operations Coordinator, 1993 to 1996; District Manager, Livermore, 1988 to 1993; previously served in various field management positions since 1979; an employee of the Company since 1972. John S. Simpson Assistant Secretary, Manager of New Business 52 since 1991; Manager of New Business development for the past twelve years; served in 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 1996 Annual Report and is incorporated herein by reference. The number of shareholders listed in such section includes the Company's record holders and an estimate of shareholders who hold stock in street name. Item 6. Selected Financial Data. The information required by this item is contained in the section captioned California Water Service Company "Ten Year Financial Review" on pages 14 and 15 of the Company's 1996 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 section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations," on pages 16 through 21 of 21 the Company's 1996 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 1996 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. The information required by this item as to directors of the Company is contained in the section captioned "Election of Directors" on pages 16 through 18 of the 1997 Proxy Statement/ Prospectus and is incorporated herein by reference. 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. Item 11. Executive Compensation. The information required by this item as to directors of the Company is included under the caption "Election of Directors" on pages 16 through 18 of the 1997 Proxy Statement/Prospectus and is incorporated herein by reference. The information required by this item as to compensation of executive officers is included under the caption "Compensation of Executive Officers" on pages 19 through 21 of the Proxy Statement/Prospectus and is incorporated herein by reference. 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 Ownership of Certain Beneficial Owners" and "Security Ownership of Management" pages 16, 17 and 23 of the Proxy Statement/Prospectus and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. None. 22 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) Financial Statements: Balance Sheet as of December 31, 1996 and 1995. Statement of Income for the years ended December 31, 1996, 1995, and 1994. Statement of Common Shareholders' Equity for the years ended December 31, 1996, 1995, and 1994. Statement of Cash Flows for the years ended December 31, 1996, 1995, and 1994. Notes to Financial Statements, December 31, 1996, 1995, and 1994. The above financial statements are contained in sections bearing the same captions on pages 22 through 34 of the Company's 1996 Annual Report and are incorporated herein by reference. (2) Financial Statement Schedule: Schedule Number Independent Auditors' Report dated January 17, 1997. II Valuation and Qualifying Accounts and Reserves--years ending December 31, 1996, 1995, and 1994. 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 28 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. (B) Report on Form 8-K. None required to be filed during the fourth quarter of 1996. 23 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 19, 1997 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 19, 1997 /s/ Robert W. Foy ROBERT W. FOY, Chairman, Board of Directors Date: March 19, 1997 /s/ Edward D. Harris, Jr. EDWARD D. HARRIS, JR., M.D., Member, Board of Directors Date: March 19, 1997 /s/ Robert K. Jaedicke ROBERT K. JAEDICKE, Member, Board of Directors Date: March 19, 1997 /s/ Richard P. Magnuson RICHARD P. MAGNUSON, Member, Board of Directors Date: March 19, 1997 /s/ Linda R. Meier LINDA R. MEIER, Member, Board of Directors Date: March 19, 1997 /s/ Peter C. Nelson PETER C. NELSON President and Chief Executive Officer, Member, Board of Directors Date: March 19, 1997 /s/ C. H. Stump C. H. STUMP, Member, Board of Directors 24 Date: March 19, 1997 /s/ Edwin E. van Bronkhorst EDWIN E. VAN BRONKHORST, Member, Board of Directors Date: March 19, 1997 /s/ J. W. Weinhardt J. W. WEINHARDT, Member, Board of Directors Date: March 19, 1997 /s/ Gerald F. Feeney GERALD F. FEENEY, Vice President, Chief Financial Officer and Treasurer; Principal Financial Officer Date: March 19, 1997 /s/ Calvin L. Breed CALVIN L. BREED, Controller, Assistant Secretary and Assistant Treasurer; Principal Accounting Officer 25 Independent Auditors' Report Shareholders and Board of Directors California Water Service Company: Under date of January 17, 1997, we reported on the balance sheet of California Water Service Company as of December 31, 1996 and 1995, 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, 1996, as contained in the 1996 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 1996. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement schedule as listed in the index appearing under Item 14(a)(2). 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 17, 1997 26 CALIFORNIA WATER SERVICE COMPANY Schedule II Valuation and Qualifying Accounts Years Ended December 31, 1996, 1995 and 1994 Additions Balance at Charged to Charged to Balance beginning costs and other at end Description of period expenses accounts Deductions of period 1996 (A) Reserves deducted in the balance sheet from assets to which they apply: Allowance for doubtful accounts $76,197 $530,691 $65,445(3) $572,783(1) $99,550 Allowance for obsolete materials and supplies 74,675 48,000 21,598(2) 101,077 (B) Reserves classified as liabilities in the balance sheet: Miscellaneous reserves: General Liability $826,965 $740,000 $569,131(2) $997,834 Employees' group health plan 400,004 2,880,000 14,348 2,826,366(2) 467,986 Retirees' group health plan 670,998 523,000 241,000 523,000(2) 911,998 Workers compensation 260,170 835,430 595,949(2) 499,651 Deferred revenue - contributions in aid of construction 1,930,336 276,525 407,288(6) 1,799,573 Disability insurance 47,453 199,097 196,179(2) 50,371 $4,135,926 $4,978,430 $730,970 $5,117,913 $4,727,413 Contributions in aid of construction $40,113,707 $4,062,087(4) $1,109,209(5) $43,066,585 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 $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 $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 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. EXHIBIT INDEX Sequential Page Numbers Exhibit Number in this Report 3. Articles of Incorporation and by-laws: 3.1 Restated Articles of Incorporation dated 28 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 28 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 28 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 28 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. 28 (Exhibit 3.5 to Form 10-K for fiscal year 1991, File No. 0-464) 4. Instruments Defining the Rights of Security 28 Holders, including Indentures: Mortgage of Chattels and Trust Indenture 28 dated April 1, 1928; Eighth Supplemental Indenture dated November 1, 1945, covering First Mortgage 3.25% Bonds, Series C; 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% Bonds, Series P; Twenty-Fourth Supplemental Indenture dated November 1, 1973, covering First Mortgage 8.50% 28 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-Third Supplemental Indenture dated as 29 of May 1, 1988, covering First Mortgage 9.48% Bonds, Series BB. (Exhibit 4 to Form 10-Q dated September 30, 1988, File No. 0-464) Thirty-Fourth Supplemental Indenture dated as 29 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 29 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 29 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 29 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 29 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 29 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 29 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 29 Form 1O-K for fiscal year 1974, File No. 0-464). 10.2 Settlement Agreement and Master Water Sales 30 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, 30 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 30 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 30 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, 30 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 30 fiscal year 1987, File No. 0-464). 10.7 Dividend Reinvestment Plan. (Exhibit 10.8 to 31 Form 10-Q dated March 31, 1994, File No. 0-464) 10.8 Water Supply Contract dated April 19, 1927, 31 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 31 (Exhibit 10.10 to Form 10-K for fiscal year 1992, File No. 0-464) 10.10 California Water Service Company Supplemental 31 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 31 Employees' Savings Plan. (Exhibit 10.12 to Form 10-K for fiscal year 1992, File No. 0-464) 10.12 California Water Service Company Directors 31 Deferred Compensation Plan (Exhibit 10.13 to Form 10-K for fiscal year 1992, File No. 0-464) 10.13 Board resolution setting forth the terms of 31 the retirement 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 $30,000,000 Business Loan Agreement between 31 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) 10.15 Agreement between the City of Hawthorne and 31 California Water Service Company for the 15 year lease of the City's water system. (Exhibit 10.17 to Form 10-Q dated March 31, 1996) 10.16 Water Supply Agreement dated September 25, 1996 31 between the City of Bakersfield and California Water Service Company. (Exhibit 10.18 to Form 10-Q dated September 30, 1996) 31 13. Annual Report to Security Holders, Form 10-Q 32 or Quarterly Report to Security Holders: 1996 Annual Report. The sections of the 1996 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, 1996 32 32
EX-13 2 TEN YEAR FINANCIAL REVIEW
(Dollars in thousands except common share and other data) 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 SUMMARY OF OPERATIONS Operating revenue Residential $134,035 $119,814 $114,751 $111,526 $101,842 $87,560 $90,178 $84,295 $81,404 $82,254 Business 30,924 28,230 27,023 25,247 23,670 20,759 20,910 19,870 19,480 19,986 Industrial 6,150 5,836 5,478 5,123 4,925 4,490 5,146 5,166 4,754 4,361 Public authorities 9,023 8,149 7,995 7,396 6,892 5,734 6,412 6,225 6,232 6,491 Other 2,632 3,057 2,024 2,424 2,476 8,633 1,741 1,932 1,885 693 Total operating revenue 182,764 165,086 157,271 151,716 139,805 127,176 124,387 117,488 113,755 113,785 Operating expenses 152,397 139,694 131,766 123,861 116,031 102,855 101,017 95,150 91,265 90,587 Interest expense, other income and expenses, net 11,300 10,694 11,097 12,354 11,245 10,393 9,004 8,566 8,416 8,026 Net income $19,067 $14,698 $14,408 $15,501 $12,529 $13,928 $14,366 $13,772 $14,074 $15,172* COMMON SHARE DATA Earnings per share $3.01 $2.33 $2.44 $2.70 $2.18 $2.42 $2.50 $2.40 $2.45 $2.63* Dividends declared 2.08 2.04 1.98 1.92 1.86 1.80 1.74 1.68 1.60 1.48 Dividend payout ratio 69% 88% 81% 71% 85% 74% 70% 70% 65% 49% Book value $24.44 $23.44 $23.12 $21.80 $21.02 $20.70 $20.08 $19.32 $18.59 $17.72 Market price at year-end 42.00 32.75 32.00 40.00 33.00 28.00 26.75 28.00 25.50 30.00 Common shares outstanding at year-end (in thousands) 6,310 6,269 6,247 5,689 5,689 5,689 5,689 5,689 5,672 5,636 Return on common shareholders' equity 12.7% 10.2% 10.6% 12.4% 10.4% 11.7% 12.4% 12.4% 13.2% 14.8% Long-term debt interest coverage 3.6 3.2 3.2 3.2 2.9 3.2 3.6 3.4 3.8 4.3 BALANCE SHEET DATA Net utility plant $443,588 $422,175 $407,895 $391,703 $374,613 $349,937 $325,409 $307,802 $289,363 $273,619 Utility plant expenditures 35,683 27,250 28,275 28,829 35,188 34,459 26,861 27,277 23,994 19,511 Total assets 512,390 497,626 462,794 446,619 403,448 393,609 369,055 339,348 313,561 290,963 Long-term debt 142,153 145,540 128,944 129,608 122,069 103,505 104,905 86,012 86,959 73,930 Capitalization ratios: Common shareholders' equity 51.4% 49.7% 52.2% 48.2% 48.8% 52.4% 51.3% 55.1% 53.8% 55.6% Preferred stock 1.2% 1.2% 1.3% 1.4% 1.4% 1.5% 1.6% 1.8% 1.8% 3.2% First mortgage bonds 47.4% 49.1% 46.5% 50.4% 49.8% 46.1% 47.1% 43.1% 44.4% 41.2% OTHER DATA Water production (million gallons) Wells 53,372 49,755 50,325 47,205 52,000 48,930 51,329 51,350 48,828 48,097 Purchased 51,700 49,068 49,300 48,089 40,426 36,686 45,595 45,978 48,254 50,744 Total water production 105,072 98,823 99,625 95,294 92,426 85,616 96,924 97,328 97,082 98,841 Metered customers 298,400 289,200 286,700 282,100 278,700 275,200 272,100 269,200 267,000 261,000 Flat rate Customers 77,700 77,900 78,800 80,800 82,000 82,400 81,200 79,400 77,800 76,800 Customers at year-end 376,100 367,100 365,500 362,900 360,700 357,600 353,300 348,600 344,800 337,800 New customers added 9,000 1,600 2,600 2,200 3,100 4,300 4,700 3,800 7,000 3,600 Revenue per customer $486 $450 $430 $418 $388 $356 $352 $337 $330 $337 Utility plant per customer $1,644 $1,592 $1,530 $1,469 $1,406 $1,327 $1,251 $1,198 $1,140 $1,098 Employees at year-end 633 630 624 614 610 593 581 565 550 534 *Net income excludes $2,196 for a change in accounting for unbilled revenue; $.39 is excluded from earnings per share.
Management's discussion and analysis of financial condition and results of operations BUSINESS California Water Service Company (Company) is a public utility providing water service to 376,100 customers in 56 California communities through 21 separate water systems or districts. In the Company's 20 regulated systems serving 370,100 customers, shown on the map on page 4, rates and operations are subject to the jurisdiction of the California Public Utilities Commission (Commission). An additional 6,000 customers receive service through a long-term lease of the City of Hawthorne water system, which is not subject to Commission regulation. The Company also has contracts with various municipalities to operate water systems and provide billing services to 27,500 other customers. The Commission requires that water rates for each regulated district be determined independently. Each summer the Company files general rate increase applications for some of these 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. Rates for the City of Hawthorne system are established in accordance with an operating agreement and are subject to ratification by the City council. Fees for other operating agreements are based on contracts negotiated among the parties. RESULTS OF OPERATIONS Earnings and Dividends. Net income was $19,067,000 in 1996 compared to $14,698,000 in 1995 and $14,408,000 in 1994. Earnings per common share were $3.01 in 1996, $2.33 in 1995 and $2.44 in 1994. Both net income and earnings per share for 1996 represent the highest ever recorded from continuing operations. The weighted average number of common shares outstanding in each of the three years was 6,290,000, 6,253,000 and 5,838,000, respectively. In January 1996, the Board of Directors increased the dividend rate for the 29th consecutive year. The annual rate paid in 1996 was $2.08 per share, an increase of 2.0% compared with the 1995 dividend of $2.04 per share, which represented an increase of 3.0% over the 1994 dividend of $1.98 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 business. The dividend payout ratio was 69% in 1996 compared with 88% in 1995 and 81% in 1994, an average of 79% for the three-year period. The 19% variation in payout ratios between 1996 and 1995 was primarily attributable to fluctuations in earnings per share. At its January 1997 meeting, the Board of Directors increased the annual dividend three cents to $2.11. This increase, which is less than increases in recent years, is intended to maintain the dividend payout ratio below 1995's 88% level. Operating Revenue. Operating revenue, which includes revenue from City of Hawthorne customers, was a record $182.8 million in 1996, compared with $165.1 million in 1995 and $157.3 million in 1994. The current year increase was $17.7 million, 11% greater than 1995's revenue. Offset rate adjustments, primarily for purchased water cost increases, added $2.2 million to revenue while general and step rate increases contributed $7.8 million. Increased customer usage added $3.1 million. Average billed water consumption per metered customer was 303 ccf, an increase of 6% for the year. Following a wet first quarter, during which heavy rainfall assured an adequate supply for the year, warm, dry spring and summer weather caused an increase in consumption. In June, rate increases in five districts, representing 47% of the Company's customers, became effective and added significantly to revenue in the second half of the year. The number of customers increased 2.4% for the year due to the addition of the 6,000 City of Hawthorne customers in March and other customers added in existing service areas. Sales to a total of 9,000 new accounts provided $4.6 million in additional revenue. 1995 revenue increased $7.8 million, 5% greater than 1994. Offset rate adjustments, mainly for purchased water cost increases, added $3.8 million while general and step rate increases contributed $2.2 million. Increased customer usage added $1.1 million. Average billed water consumption per metered customer was 286 ccf, an increase of 1 ccf for the year. Only consumption in the fourth quarter exceeded that of the prior year, the first three 1995 quarters recorded usage which 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. Because 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. Operating and Interest Expenses. Operating expenses, which include those for the Hawthorne operation, increased $12.7 million in 1996 and $7.9 million in both 1995 and 1994. Well production supplied 50.3% of the water delivered to all systems in 1996, while 49.2% was purchased from wholesale suppliers and 0.5% came from the Company's Bear Gulch district watershed. Water production was 105 billion gallons, up 6% from 1995's 99 billion gallons. Production in 1994 was 100 billion gallons. Total cost of water production, including purchased water, purchased power and pump taxes, was $67.3 million in 1996, $62.2 million in 1995, and $58.3 million in 1994. Purchased water expense continued to be the largest component of operating expense at $51.5 million, an increase of $5.1 million. The cost increase was due to wholesale suppliers' rate increases and increased production which resulted in a 5% increase in purchases. Well production increased 8% in 1996 due to increased demand and resulted in a $0.6 million increase in pump taxes; however, purchased power cost decreased $0.6 million due to the availability of less expensive power in several districts. The Bear Gulch watershed yielded 0.5 billion gallons, which was processed through the Company's filter plant, about 75% of the 1995 production. The estimated purchased water savings provided by the watershed was $0.5 million. Employee payroll and benefits charged to operations and maintenance expense was $31.2 million in 1996 compared with $29.9 million in 1995 and $28.0 million in 1994. The increases in payroll and benefits were attributable to general wage increases effective at the start of each year and additional employees. At year-end 1996, 1995 and 1994, there were 633, 630 and 624 employees, respectively. Income taxes were $12.2 million in 1996, $9.9 million in 1995, and $9.6 million in 1994. The changes in taxes are generally due to variations in taxable income. Interest on long-term debt increased $0.7 million in 1996 because of the sale in August, 1995 of $20 million of senior notes that were outstanding for the full year. In 1995, bond interest expense increased $0.4 million because of the senior note sale. Long-term debt interest expense decreased $1.4 million in 1994 due to the bond refinancing program completed at lower interest rates in 1993. Long-term financing is discussed further under the caption Liquidity and Capital Resources. Interest on short-term bank borrowings in 1996 decreased $0.2 million. The expense reduction reflects a reduced requirement for short-term borrowings due to increased water sales, which resulted in an improved cash flow and funds available in 1996 from the 1995 senior note sale. Interest on short-term bank borrowings decreased $0.3 million in 1995, despite higher short-term rates during 1995 compared to 1994. The reduction in the expense reflects the payoff of outstanding short-term bank borrowings upon the issuance of senior notes and a reduced short-term borrowing need. In 1994 interest on short-term borrowings increased $0.2 million due to increased borrowings at higher interest rates. Due to improved earnings, interest coverage of long-term debt before income taxes was 3.6 in 1996. Coverage was 3.2 in 1995 and 1994. Other Income. Other income is derived from management contracts under which the Company operates three municipally-owned water systems, contracts for operation of three privately owned water systems, agreements for operation of two reclaimed water systems, billing services provided to various cities, property leases, other nonutility sources and interest on short-term investments. Total other income was $0.9 million, the same as in 1995. In 1994, it was $0.4 million. Income from the various operating and billing contracts was $0.8 in 1996, $0.7 in 1995, and $0.4 million in 1994. Interest earned on temporary investments decreased $0.2 million in 1996 from 1995. Following the August, 1995 senior note issue, available funds generated significant interest income. This source for temporary investments was not available in 1996. There were $4.5 million in temporary investments at the end of 1995, but none at the end of 1996 or 1994. CORPORATE STRUCTURE In November 1996, the Company announced its intention to form a holding company. Shareholders will vote on this proposal at their annual meeting on April 16, 1997. In January 1997, the Company also announced plans to effect a two-for-one common stock split. The split will be accomplished, together with a proportionate adjustment of preferred stock voting rights, during formation of the holding company by a planned conversion of each common share of California Water Service Company stock into two shares of the holding company. By approving the holding company structure, shareholders will also approve the stock split. The Company intends to continue to explore opportunities to expand operating and other revenue sources. The opportunities could include system acquisitions, contracts similar to the City of Hawthorne arrangement, operating contracts, billing contracts and other utility related services. The Company believes that a holding company structure will make the Company more competitive in providing nonregulated utility services, which would not be subject to Commission jurisdiction. RATES AND REGULATION During 1996, general rate case applications were filed with the Commission for two districts, Livermore and Palos Verdes, which represent about 11% of the Company's customers, requesting a return on common equity (ROE) of 12.05%. In January, the Company and the Commission staff stipulated to a 10.35% ROE. A final decision from the Commission is expected during the second quarter after which the new rates for the two districts will become effective. Additional 1997 revenue from the decision is estimated to be $1.6 million with provisions for step rate increases to become effective in the next three years. The Commission also authorized increases for 1997 in various districts totaling $1.6 million for step rate increases, $0.8 million for undercollection of expense balancing accounts and another $1.5 million in 1998. The Commission's decision on the Company's 1995 rate case filing was effective in June, 1996. The decision, which involved five districts representing 47% of the Company's customers, authorized an ROE of 10.3%. It is estimated to provide $5.4 million of added revenue during the first full year, including $1.2 million of step rate increases which were effective at the start of 1996. Over a four year period, the decision will provide about $10.6 million in new revenue. The decision includes a provision to accelerate recovery of the Company's utility plant investment, resulting in an annualized depreciation rate of about 2.6% for the five districts. Historically, the Company's annual depreciation rate has been 2.4% of utility plant. During 1997, 14 districts are eligible for rate increase filings. The Company will review the earnings levels in those districts and file for additional rate consideration as appropriate. WATER SUPPLY The Company's source of supply varies among the 21 operating districts. Some districts obtain all of their supply from wells, other districts obtain all of their supply from wholesale suppliers and other districts obtain their supply from both sources. In each of the past three years, approximately half of the total Company supply has been pumped from Company-owned wells and half purchased from wholesale suppliers. Total water production for 1996, 1995 and 1994 was 105,072, 98,823 and 99,625 million gallons, respectively. Generally, between mid-spring and mid-fall, there is little precipitation in the Company's service areas. Water demand is highest during the warm, dry summer period, and less in the cool, wet winter. Rain and snow during the winter months replenish underground water basins and fill reservoirs, providing the water supply for subsequent delivery to customers. Snow and rainfall accumulation during the 1996-97 winter have exceeded normal levels, and on a statewide basis, average precipitation has been above 125% of normal. Water storage in state reservoirs exceeds historic levels. The Company believes that its source of supply from both underground aquifers and purchased sources is adequate to meet customer demands in 1997. ENVIRONMENTAL MATTERS The Company is subject to regulations of the United States Environmental Protection Agency (EPA), the California Department of Health Services and various county health departments concerning water quality matters. It is also subject to the jurisdiction of various state and local regulatory agencies relating to environmental matters, including handling and disposal of hazardous materials. The Company believes it is in compliance with all monitoring and treatment requirements set forth by the various agencies. In the past several years, substantially all of the Company's wells have been equipped with chlorinators which provide disinfection of water extracted from underground sources. The cost of the new treatment is being recovered in customer rates as authorized by the Commission. Water purchased from wholesale suppliers is treated before delivery to the Company. The Company operates two treatment plants that process surface water supplies. The various regulatory agencies could require increased monitoring and possibly additional treatment of water supplies. If this occurs, the Company intends to request recovery for additional treatment costs through the rate application process. During 1996, amendments were enacted by Congress to the Safe Drinking Water Act. The revised law provides improvements in establishing regulations for potential contaminants. Among the considerations by EPA in determining whether to regulate a particular substance are the impact on public health, the likelihood of the contaminant's occurrence and a cost/benefit analysis. The Company believes the amended law provides a prudent approach to safeguarding potable water supplies. 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. Sources of internally generated funds 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 increases during the first six months of the year. With increased summer usage, cash flow from operations increases and bank borrowings can be repaid. The Company's bank line of credit has on prior occasions been temporarily increased to $40 million, although the larger amount has not been drawn upon. The Company believes that long-term financing is available to it through equity and debt markets. Standard & Poor's and Moody's have 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 for construction and contributions in aid of construction are also received for various construction projects. No long-term financing was completed in 1996. However, the Company did receive Commission approval for up to $115 million of debt and/or equity financing over a three year period. This financing may be used to fund construction programs, retire maturing long-term debt obligations and repay short-term borrowings. During August 1995, $20 million of 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 fund the 1995 construction program. In 1996, under the Dividend Reinvestment Plan (Plan), 40,219 new common shares were issued to shareholders who elected to reinvest their dividends, providing the Company with $1.4 million in additional equity. In 1995, 22,317 new shares were issued under the Plan during the third and fourth quarters providing equity of $0.7 million. Reinvestment shares required for the 1995 first and second quarter dividends and for three 1994 quarters were purchased on the open market and redistributed to Plan participants. Under the Plan, the Company may satisfy the reinvestment requirement by issuing new shares or purchasing shares on the open market and redistributing them to Plan participants. Issuance of new shares reduces cash required to fund quarterly dividend payments by about $1.4 million annually, based on current shareholder participation of 11% in the Plan. Issuance of additional shares will have a minor 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. 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 1996, utility plant expenditures totaled $35.7 million compared to $27.3 million in 1995. The expenditures included $27.6 million provided by Company funding and $8.1 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, $6.3 million; distribution systems, $8.7 million; services and meters, $4.6 million; equipment, $1.5 million; and City of Hawthorne lease, $6.5 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 issued in August 1995. The 1997 Company construction program has been authorized by the Board of Directors for $23.2 million. Expenditures are expected to be in the following areas: wells, pumping and water treatment equipment and storage facilities, $6.8 million; distribution systems, $7.9 million; services and meters, $5.4 million; and equipment, $3.1 million. The funds for this program are expected to be provided by cash from operations, bank borrowings and long-term debt financing. New subdivision construction will be financed primarily by developers' refundable advances and contributions. Company funded construction budgets over the next five years are projected to total $115 million. Since 1986, proceeds received from developers for installation of new facilities have been subject to income tax. During 1996, Congress enacted legislation which exempted from taxable income proceeds received from developers to fund advances for construction and contributions in aid of construction. As part of the legislation, future water utility plant additions will generally be depreciated for tax purposes on a straight-line, 25-year life basis. The federal tax exemption of developer funds will reduce the Company's cash flow requirement for income taxes. Developer advances remain subject to California income tax. Capital Structure. The Company's total capitalization at December 31, 1996 and 1995 was $299.9 million and $296.0 million, respectively. Capital ratios were: 1996 1995 Common equity 51.4% 49.7% Preferred stock 1.2% 1.2% Long-term debt 47.4% 49.1% The increase in the common equity percentage from 1995 to 1996 and the corresponding decrease in the long-term debt percentage were primarily caused by strong earnings in 1996 which contributed to shareholders' equity, the issuance of new shares under the Dividend Reinvestment Plan and the retirement of Series K, first mortgage bonds along with the annual bond sinking fund payments in November, 1996. The 1996 return on average common equity was 12.7% compared with 10.2% in 1995 and 10.6% in 1994. balance sheet December 31, 1996 1995 (In thousands) ASSETS Utility plant: Land $ 7,536 $ 7,320 Depreciable plant and equipment 600,329 572,799 Construction work in progress 3,300 3,615 Intangible assets 7,267 658 Total utility plant 618,432 584,392 Less depreciation and amortization 174,844 162,217 Net utility plant 443,588 422,175 Current assets: Cash and cash equivalents 1,368 6,273 Accounts receivable: Customers 11,437 10,747 Other 1,528 2,916 Unbilled revenue 5,577 6,306 Materials and supplies at average cost 2,324 2,518 Taxes and other prepaid expenses 4,537 3,949 Total current assets 26,771 32,709 Other assets: Regulatory assets 37,556 38,059 Unamortized debt premium and expense 3,943 4,162 Other 532 521 Total other assets 42,031 42,742 $512,390 $497,626 See accompanying notes to financial statements. 1996 1995 CAPITALIZATION AND LIABILITIES Capitalization: Common stock $ 44,941 $ 43,507 Retained earnings 109,285 103,442 Total common shareholders' equity 154,226 146,949 Preferred stock without mandatory redemption provision 3,475 3,475 Long-term debt 142,153 145,540 Total capitalization 299,854 295,964 Current liabilities: Short-term borrowings 7,500 - Accounts payable 14,692 14,807 Accrued taxes 3,002 2,104 Accrued interest 1,947 1,979 Other accrued liabilities 7,653 6,940 Total current liabilities 34,794 25,830 Unamortized investment tax credits 3,086 3,352 Deferred income taxes 23,736 25,639 Regulatory liabilities 12,627 12,627 Advances for construction 95,226 94,100 Contributions in aid of construction 43,067 40,114 $512,390 $497,626 statement of income for the years ended December 31, 1996 1995 1994 (In thousands, except per share data ) Operating revenue $182,764 $165,086 $157,271 Operating expenses: Operations: Purchased water 51,514 46,370 42,812 Purchased power 12,075 12,689 12,641 Pump taxes 3,753 3,151 2,859 Administrative and general 21,664 19,989 18,210 Other 23,000 21,635 20,405 Maintenance 8,317 7,722 7,855 Depreciation and amortization 12,665 11,436 10,958 Income taxes 12,150 9,850 9,600 Property and other taxes 7,259 6,852 6,426 Total operating expenses 152,397 139,694 131,766 Net operating income 30,367 25,392 25,505 Other income and expenses, net 607 768 287 Income before interest expense 30,974 26,160 25,792 Interest expense: Long-term debt interest 11,663 10,984 10,557 Other interest 244 478 827 Total interest expense 11,907 11,462 11,384 Net income $ 19,067 $ 14,698 $ 14,408 Earnings per share of common stock $ 3.01 $ 2.33 $ 2.44 Average number of common shares outstanding 6,290 6,253 5,838 See accompanying notes to financial statements. statement of common shareholders' equity common shares common retained outstanding stock earnings total (In thousands, except shares) 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 - 304 Issuance of common stock 550,000 17,437 - 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 - 707 Balance at December 31, 1995 6,269,351 43,507 103,442 146,949 Net income 19,067 19,067 Dividends paid: Preferred stock 153 153 Common stock 13,071 13,071 Total dividends paid 13,224 13,224 Income reinvested in business 5,843 5,843 Dividend reinvestment 40,219 1,434 - 1,434 Balance at December 31, 1996 6,309,570 $44,941 $109,285 $154,226 See accompanying notes to financial statements. statement of cash flows for the years ended December 31, 1996 1995 1994 (In thousands) Operating activities Net income $ 19,067 $ 14,698 $ 14,408 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,665 11,436 10,958 Deferred income taxes and investment tax credits, net (2,169) 1,698 (477) Regulatory assets and liabilities, net 503 (1,181) 1,070 Changes in operating assets and liabilities: Accounts receivable 698 (1,936) (2,326) Unbilled revenue 729 (314) 1,556 Accounts payable (115) 2,576 997 Other current liabilities 1,579 1,560 (825) Other changes, net 235 1,258 130 Net adjustments 14,125 15,097 11,083 Net cash provided by operating activities 33,192 29,795 25,491 Investing activities: Utility plant expenditures Company funded (27,631) (20,039) (20,790) Developer advances and contributions in aid of construction (8,052) (7,211) (7,485) Net cash used in investing activities (35,683) (27,250) (28,275) Financing activities: Net short-term borrowings 7,500 (7,000) (8,000) Proceeds from issuance of long-term debt - 20,000 - Proceeds from issuance of common stock 1,434 707 17,741 Advances for construction 4,998 5,368 4,980 Refunds of advances for construction (3,631) (3,524) (3,565) Contributions in aid of construction 3,896 3,183 3,833 Retirements of first mortgage bonds including premiums (3,387) (3,404) (664) Dividends paid (13,224) (12,903) (11,701) Net cash provided by (used in) financing activities (2,414) 2,427 2,624 Change in cash and cash equivalents (4,905) 4,972 (160) Cash and cash equivalents at beginning of year 6,273 1,301 1,461 Cash and cash equivalents at end of year $ 1,368 $ 6,273 $ 1,301 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amounts capitalized) $ 11,721 $ 11,050 $ 11,165 Income taxes $ 12,775 $ 8,258 $ 10,950 See accompanying notes to financial statements. notes to financial statements December 31, 1996, 1995 and 1994 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 customer billings for regulated water service at rates authorized by the Commission and billings to Hawthorne customers. 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 pro rata basis for the portion applicable to the current accounting period. As permitted by the Commission, 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 from customers who had exceeded their monthly allotments. 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. In 1996, $175,000 was recovered through customer surcharges while $98,000 was written off as unrecovered revenue. As of December 31, 1996, $224,000 of lost water conservation revenue remained in unbilled revenue which is anticipated to be recovered in 1997. 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 $261,000 in 1996, $207,000 in 1995, and $195,000 in 1994. 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. 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 2.5% in 1996 and 2.4% in 1995 and 1994. For income tax purposes, the Company computes depreciation using the accelerated methods allowed by the respective taxing authorities. Advances for Construction. Advances for Construction consist of payments received from developers for installation of water production and distribution facilities to serve new developments. Advances are excluded from rate base. Such payments are refundable to the developer without interest over a 20-year or 40-year period. Refundable 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. At December 31,1996, the amounts refundable under the 20-year contracts was $10,888,000 and under 40-year contracts $84,338,000. Estimated refunds in 1997 for all water main extension contracts are $3,800,000. Contributions in Aid of Construction. Contributions in Aid of Construction represent payments received from developers, primarily for fire protection purposes, which are not subject to refund. Facilities funded by contributions are included in utility plant, but excluded from rate base. Depreciation related to contributions is charged to Contributions in Aid of Construction. 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. In 1996, the federal tax law changed and a portion of advances and contributions received after June 12, 1996, are nontaxable. 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, 1996, 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. As of December 31, 1996 and 1995, 6,309,570 and 6,269,351 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. In 1996 and 1995, 40,219 and 22,317, respectively, new shares were issued under the reinvestment plan. NOTE 3. SHORT-TERM BORROWINGS As of December 31, 1996, 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 1996 1995 1994 Maximum short-term borrowings $9,500 $13,000 $21,500 Average amount outstanding 1,662 5,142 13,196 Weighted average interest rate 6.94% 7.26% 5.40% Interest rate at December 31 6.98% - 7.38% NOTE 4. LONG-TERM DEBT As of December 31, 1996 and 1995, long-term debt outstanding was: In Thousands 1996 1995 First Mortgage Bonds: Series K, 6.25% due 1996 $ - $ 2,565 Series L, 6.75% due 1997 2,138 2,150 Series P, 7.875% due 2002 2,640 2,655 Series S, 8.50% due 2003 2,655 2,670 Series BB, 9.48% due 2008 16,920 17,100 Series CC, 9.86% due 2020 19,100 19,300 Series DD, 8.63% due 2022 19,600 19,700 Series EE, 7.90% due 2023 19,700 19,800 Series FF, 6.95% due 2023 19,700 19,800 Series GG, 6.98% due 2023 19,700 19,800 122,153 125,540 Senior Notes: Series A, 7.28% due 2025 20,000 20,000 Total long-term debt $ 142,153 $ 145,540 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 1997 through 2001 are $2,758,000, $620,000, $2,240,000, $2,240,000, and $2,240,000, respectively. The senior notes are held by institutional investors, 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 1996 Current $ 9,356 $ 3,274 $12,630 Deferred 444 (924) (480) Total $ 9,800 $ 2,350 $12,150 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 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 1996 1995 1994 Computed expected tax expense $10,926 $ 8,592 $ 8,401 Increase (reduction) in taxes due to: State income taxes net of federal tax benefit 1,528 1,203 1,444 Investment tax credits (119) (132) (132) Other (185) 187 (113) Total income tax $12,150 $ 9,850 $ 9,600 The components of deferred income tax expense in 1996, 1995 and 1994 were: In Thousands 1996 1995 1994 Depreciation $ 3,544 $ 3,854 $ 3,748 Developer advances and contributions (3,749) (3,455) (3,536) Bond redemption premiums (73) (75) (75) Investment tax credits (93) (90) (90) Other (109) 48 494 Total deferred income tax expense $ (480) $ 282 $ 541 The tax effects of differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented in the following table: In Thousands 1996 1995 Deferred tax assets: Developer deposits for extension agreements and contributions in aid of construction $45,901 $40,966 Federal benefit of state tax deductions 4,177 3,909 Book plant cost reduction for future deferred ITC amortization 1,832 1,990 Insurance loss provisions 286 328 Total deferred tax assets 52,196 47,193 Deferred tax liabilities: Utility plant, principally due to depreciation differences 74,407 70,871 Premium on early retirement of bonds 1,290 1,363 Other 235 598 Total deferred tax liabilities 75,932 72,832 Net deferred tax liabilities $23,736 $25,639 A valuation allowance was not required during 1996 and 1995. 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 is 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, nonqualified, supplemental executive retirement plan. Net pension cost for the years ending December 31, 1996, 1995 and 1994 included the following components: In Thousands 1996 1995 1994 Service cost benefits earned during the year $ 1,543 $ 1,265 $ 1,333 Interest cost on projected obligation 2,583 2,360 2,154 Actual loss (return) on plan assets (4,784) (5,817) 627 Net amortization and deferral 2,789 4,220 (2,286) Net pension cost $ 2,131 $ 2,028 $ 1,828 The following table sets forth the plan's funded status and the plan's accrued assets (liabilities) as of December 31, 1996 and 1995: In Thousands 1996 1995 Accumulated benefit obligation, including vested benefits of $28,059 in 1996 and $25,218 in 1995 $(28,679) $(25,974) Projected benefit obligation $(39,296) $(37,271) Plan assets at fair value 38,293 33,798 Projected benefit obligation in excess of plan assets (1,003) (3,473) Unrecognized net gain (6,120) (1,991) Prior service cost not yet recognized in net periodic pension cost 4,991 3,161 Remaining net transition obligation at adoption date January 1, 1987 1,430 1,716 Accrued pension liability recognized in the balance sheet $ (702) $ (587) The projected long-term rate of return on plan assets used in determining pension cost was 8.0% for the years 1996, 1995 and 1994. A discount rate of 7.4% in 1996, 7.0% in 1995, and 8.0% in 1994 and future compensation increases of 4.5% in 1996 and 1995, and 5.0% in 1994 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 that allows participants to contribute up to 15% of pre-tax compensation. The Company matched fifty cents for each dollar contributed by the employee up to a maximum Company match of 3.5% of the employees' compensation in 1996 and 3% of the employees' compensation in 1995 and 1994. Company contributions were $858,000, $711,000, and $678,000 for the years 1996, 1995 and 1994, respectively. Other Postretirement Plans. The Company provides substantially all active employees with 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 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, 1996, 1995 and 1994, included the following components: In Thousands 1996 1995 1994 Service cost benefits earned $166 $131 $120 Interest cost on accumulated postretirement benefit obligation 383 391 326 Actual return on plan assets (63) (30) (4) Net amortization of transition obligation 278 260 228 Net periodic postretirement benefit cost $764 $752 $670 Postretirement benefit expense recorded in 1996, 1995 and 1994, was $523,000, $507,000, and $481,000, respectively. $912,000, 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 mutual funds, 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, 1996 and 1995: In Thousands 1996 1995 Accumulated postretirement benefit obligation: Retirees $(2,959) $(3,423) Other fully eligible participants (604) (571) Other active participants (2,310) (1,942) Total (5,873) (5,936) Plan assets at fair value 582 348 Accumulated postretirement benefit obligation in excess of plan assets (5,291) (5,588) Unrecognized net (gain) or loss 407 697 Remaining unrecognized transition obligation 3,972 4,220 Net postretirement benefit liability included in current liabilities $ (912) $ (671) For 1996 measurement purposes, a 6.5% 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, 1996, by $804,000 and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for the year ended December 31, 1996, by $99,000. The discount rate used in determining the accumulated postretirement benefit obligation was 7.4% at December 31, 1996, 7.0% at December 31, 1995 and 8.0% at December 31, 1994. The long-term rate of return on plan assets was 8.0% for 1996, 1995 and 1994. 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 $159,000,000 as of December 31, 1996, and $162,427,000 as of December 31, 1995, 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, 1996 and 1995, based on data provided by brokers. NOTE 8. QUARTERLY FINANCIAL AND COMMON STOCK MARKET DATA (Unaudited) The Company's common stock is traded on the New York Stock Exchange under the symbol CWT. There were approximately 6,000 holders of common stock at December 31, 1996. Quarterly dividends have been paid on common stock for 208 consecutive quarters and the quarterly rate has been increased each year since 1968. The 1996 and 1995 quarterly range of common stock market prices was supplied by the New York Stock Exchange Composite Tape. 1996 First Second Third Fourth (In thousands, except per share amounts) Operating revenue $32,298 $49,048 $59,230 $42,187 Net operating income 4,028 8,698 11,488 6,153 Net income 1,177 5,836 8,673 3,381 Earnings per share .18 .92 1.37 .53 Common stock market price range: High 37-1/4 35-5/8 38-1/4 43-3/4 Low 32-1/2 33-1/2 32-1/2 35-7/8 Dividends paid .52 .52 .52 .52 1995 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 EX-27 3
UT 12-MOS DEC-31-1996 DEC-31-1996 PER-BOOK 443588000 0 26771000 4475000 37556000 512390000 44941000 0 109285000 154226000 0 3475000 142153000 7500000 0 0 0 0 0 0 205036000 512390000 182764000 12150000 140247000 152397000 30367000 607000 30974000 11907000 19067000 153000 18914000 13071000 11663000 33192000 3.01 0
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