-----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, UcwXJgkeM6rQn93u2KryR9P/ICQpBg3upADm66yBRaADwtZQPVJopumMjhk+Y/lX CyrJ2VUlafqiZ1SUBjLrbQ== 0000950150-96-000154.txt : 19960320 0000950150-96-000154.hdr.sgml : 19960320 ACCESSION NUMBER: 0000950150-96-000154 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960319 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN CALIFORNIA WATER CO CENTRAL INDEX KEY: 0000092116 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 951243678 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-01121 FILM NUMBER: 96536136 BUSINESS ADDRESS: STREET 1: 630 E FOOTHILL BLVD CITY: SAN DIMAS STATE: CA ZIP: 91773 BUSINESS PHONE: 9093943600 MAIL ADDRESS: STREET 1: 630 E FOOTHILL CITY: SAN DIMAS STATE: CA ZIP: 91773 10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Fiscal Year Ended DECEMBER 31, 1995 Commission file number 0-1121 SOUTHERN CALIFORNIA WATER COMPANY --------------------------------------------------------------- (Exact Name of Registrant as specified in its charter) CALIFORNIA 95-1243678 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
630 EAST FOOTHILL BOULEVARD, SAN DIMAS, CALIFORNIA 91773 -------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (909) 394-3600 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON SHARES, $2.50 PAR VALUE Title of Each 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 [ ] The aggregate market value of the total voting stock held by non-affiliates of the Registrant was approximately $154,336,000 on March 4, 1996. The closing price per Common Share on that date, as quoted in the Western Edition of The Wall Street Journal, was $19.625. Voting Preferred Shares, for which there is no established market, were valued on March 4, 1996 at $1,367,000 based on a yield of 6.84%. As of March 4, 1996, the number of the Registrant's Common Shares, $2.50 Par Value, outstanding was 7,845,092. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Annual Report to Shareholders for the year ended December 31, 1995 as to Part I, Items 1 and 2, and Part II, Items 5, 6, 7 and 8, in each case, as specifically referenced herein. (2) Portions of the Proxy Statement filed with the Securities and Exchange Commission on or about March 6, 1996 as to Part III, Items 10, 11, 12 and 13, in each case as specifically referenced herein. 2 SOUTHERN CALIFORNIA WATER COMPANY INDEX
Page No. -------- PART I Item 1: Business 1 - 6 Item 2: Properties 6 - 8 Item 3: Legal Proceedings 8 Item 4: Submission of Matters to a Vote of Security Holders 8 PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 8 - 9 Item 6: Selected Financial Data 9 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation 9 Item 8: Financial Statements and Supplementary Data 9 - 10 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 10 PART III Item 10: Directors and Executive Officers of the Registrant 10 Item 11: Executive Compensation 10 Item 12: Security Ownership of Certain Beneficial Owners and Management 10 Item 13: Certain Relationships and Related Transactions 10 PART IV Item 14: Exhibits, Financial Schedules and Reports on Form 8-K 10 - 11 Exhibit Index 11 - 13 Signatures 14
i. 3 PART I ITEM 1. BUSINESS GENERAL Southern California Water Company, hereinafter referred to as the Registrant, is a utility company engaged principally in the purchase, production, distribution and sale of water (SIC No. 4941). The Registrant also distributes electricity in one community (SIC No. 4911). The Registrant, regulated by the California Public Utilities Commission, hereinafter referred to as the CPUC, was incorporated in 1929 under the laws of the State of California as American States Water Services Company of California as the result of the consolidation of 20 water utility companies. From time to time, additional water companies and municipal water districts have been acquired and properties in limited service areas have been sold or subject to condemnation proceedings. The Registrant's present name was adopted in 1936. At December 31, 1995, the Registrant was organized into three regions operating within 75 communities in 10 counties located throughout the State of California and provided water service in 21 separate customer service areas and one electric customer service area. The total population of these service areas on that date was approximately 1 million persons. For each of the years ended December 31, 1995 and 1994, about 73% of the Registrant's water customers were located in the greater metropolitan areas of Los Angeles and Orange Counties. The Registrant provides electric service to the City of Big Bear Lake and surrounding areas in San Bernardino County. The Registrant served 238,962 water customers and 20,475 electric customers at December 31, 1995, or a total of 259,437 customers, compared with 258,236 total customers at December 31, 1994 and 257,116 total customers at December 31, 1993. For the years ended December 31, 1995 and 1994, approximately 92% and 91%, respectively, of the Registrant's operating revenues were derived from water sales and approximately 8% and 9%, respectively, were derived from the sale of electricity. Operating income before taxes on income of the electric district was 8% and 7% of the Registrant's total operating income before taxes for the years ended December 31, 1995 and 1994, respectively. The material contained in Note 10 - Business Segments - of the Notes to Financial Statements in the 1995 Annual Report to Shareholders provides additional information on business segments while Note 11 - Selected Quarterly Financial Data (Unaudited) - of the Notes to Financial Statements in the 1995 Annual Report to Shareholders provides information regarding the seasonal nature of the Registrant's business. The Notes to Financial Statements contained in the 1995 Annual Report to Shareholders are included herein by reference. During 1995, the Registrant supplied, from all sources, a total of 183,108 acre-feet of water compared to 185,490 acre-feet supplied in 1994 and 178,196 acre-feet in 1993. Of the total water supplied in 1995, approximately 41% was purchased from others, principally from member agencies of the Metropolitan Water District of Southern California, hereinafter referred to as the MWD, and the remaining amount was furnished by the Bureau of Reclamation under contract, at no cost, to the Registrant's Arden-Cordova customer service area and to the Registrant's Clearlake customer service area by prescriptive rights to water extracted from Clear Lake. The remainder of water supplied was produced from the Registrant's owned wells. All electric energy sold is purchased from Southern California Edison Company. 1 4 The MWD is a water district organized under the laws of the State of California for the purpose of delivering imported water to areas within its jurisdictions, which include most of coastal Southern California from the County of Ventura south to and including San Diego County. The Registrant has 52 connections to the water distribution facilities of the MWD and other municipal water agencies. The MWD imports water from two principal sources: the Colorado River and the State Water Project, hereinafter referred to as the SWP. Available water supplies from the Colorado River and the SWP have historically been sufficient to meet most of the MWD's requirements. The California Department of Water Resources has approved MWD's full allocation of water for the 1995 - 1996 water year, which began October 1, 1995 and, as such, the Registrant believes that its demand for MWD's water supplies will be met through 1996. The MWD's import of water from the Colorado River is anticipated to decrease in future years due to the requirements of the Central Arizona Project in the State of Arizona. In response, the MWD has taken steps to secure additional storage capacity and to effect transfers of water rights from other sources. The price of water purchased from the MWD, however, is expected to continue to increase. In those districts of the Registrant which pump groundwater, overall groundwater conditions remain at adequate levels allowing the Registrant to use groundwater in its resource mix and decrease its dependence on increasingly expensive purchased water. COMPETITION The business of the Registrant is substantially free from direct and indirect competition with other public utilities, municipalities and other public agencies. RATES AND REGULATION The Registrant is subject to regulation by the CPUC as to its water and electric business and properties. The CPUC has broad powers to regulate public utilities with respect to service and facilities, rates, classifications of accounts, valuation of properties and the purchase, disposition and mortgaging of properties necessary or useful in rendering public utility service. The CPUC also has authority over the issuance of securities, the granting of certificates of convenience and necessity as to the extension of services and facilities and various other matters. The 22 customer service areas of the Registrant are grouped into 16 water districts and one electric district for ratemaking purposes. Water rates of the Registrant vary among the 16 ratemaking districts due to differences in operating conditions and costs. The Registrant continuously monitors operations in each of these districts so that it may file applications for rate changes, when warranted, on a district-by-district basis, in accordance with the CPUC's procedure. Under the CPUC's practices, rates may be increased by three methods: general rate increases, offsets for certain expense increases and advice letter filings related to certain plant additions. General rate increases typically are for three-year periods and include "step" and "attrition" increases in rates for the second and third years, respectively. General rate increases are established by formal proceedings in which the overall rate structure, expenses and rate base of the district are examined. Rates are based on estimated expenses and capital costs for a prospective two-year period. An attrition mechanism is used for setting rates applicable to the third of the three-year test cycle, which assumes that the costs and expenses for the third year of the cycle will change in the same proportion over the second year as the change projected for the second year over the first year. The step and attrition rate increases for the second and third years, respectively, are allowed to compensate for projected cost changes, but are subject to the satisfaction of certain tests, including a demonstration that earnings levels in the district did not exceed the latest rate of return 2 5 authorized for the Registrant. General rate proceedings typically take about twelve months from the filing of an application to the authorization of new rates. Rate increases to offset increases in certain expenses, such as costs of purchased water, energy costs to pump water, costs of power purchased for resale and groundwater production assessments, are accomplished through an abbreviated "offset" procedure that typically takes about two months. The CPUC's regulations require utilities to maintain balancing accounts that reflect differences between specific offset cost increases and the rate increases authorized to offset those costs. The balancing accounts are subject to amortization through the offset procedure or through general rate decisions. An advice letter, or rate base offset, proceeding is generally undertaken on an order of the CPUC in a general rate proceeding and provides for the delayed inclusion of certain projected plant facilities in future rates, pending notification that such facilities have actually been placed in service. The advice letter provides that notification and, after CPUC approval, permits the Registrant to include the costs associated with the facilities in rates. During each of 1995, 1994 and 1993, the Registrant's rates for its water ratemaking districts were changed, among other reasons, to directly offset changes in certain expenses (principally purchased water) and for increased levels of capital improvements. Rates in the Registrant's Bear Valley Electric customer service area have not been changed during the last three years. The following table lists information on rate changes, by major type, approved by CPUC decisions for the Registrant for the last three years:
Supply Balancing General & Step Rate Base Cost Account Rate Offset Year Offset Amortization Increases And Others Total --------------------------------------------------------------------------------------------- 1995 $1,780,000 $ (102,900) $1,426,800 $ 256,500 $ 3,360,400 1994 $9,439,800 $2,847,700 $3,084,600 $(2,070,800) $13,301,300 1993 $ 105,500 $ (67,900) $2,270,700 $ 50,000 $ 2,358,300
In December, 1995, the CPUC issued its final decision on the Registrant's water rate case applications which were filed in March, 1995. The new rates approved by the CPUC went into effect in six of the Registrant's water districts in January, 1996 and are anticipated to increase annual revenues in those districts by approximately $15 million. The CPUC decision also allowed for changes in rates in these six water districts in 1997 and 1998. In February, 1996, the Registrant and other interested parties reached a settlement of issues in the Registrant's rate increase application affecting its Bear Valley electric customer service area. That settlement is subject to approval by the CPUC. The Registrant anticipates that the CPUC will approve the new rates, resulting in a total increase of revenues of approximately $1.5 million over two years. On January 31, 1996, the Registrant filed Notices of Intent to increase water rates in two of its customer service areas to cover costs associated with 1996 and 1997 capital projects. A final decision on these applications by the CPUC is expected by December, 1996. No assurances can be given, however, that the CPUC will either ultimately approve the settlement agreement or approve all or any of the agreed upon rate increase. EMPLOYEE RELATIONS The Registrant had 448 employees as of December 31, 1995. Sixteen employees in the Registrant's Bear Valley Electric customer service area were members of the International Brotherhood of Electrical Workers, hereinafter referred to as the IBEW. The present labor agreement with the IBEW is effective until 3 6 December 1, 1996. Fifty-nine of the Registrant's water utility employees in its Metropolitan ratemaking district are members of the Utility Workers of America, hereinafter referred to as the UWA. The collective bargaining agreement with the UWA expires March 31, 1996. The Registrant and the UWA are currently in negotiations on a new contract and the Registrant is unable at this time to predict what changes, if any, will ultimately transpire. The Registrant has no other unionized employees. ENVIRONMENTAL MATTERS The United States Environmental Protection Agency, hereinafter referred to as the EPA, under provisions of the 1972 Safe Drinking Water Act as amended in 1986 (the SDWA) is required to establish maximum contaminant levels ("MCLs") for 83 potential drinking water contaminants initially listed in the SDWA, and for an additional 25 contaminants every three years thereafter. The California Department of Health Services, acting on behalf of the EPA, administers the EPA's program. The Registrant currently tests its wells and water systems for more than 90 contaminants, covering all contaminants listed in the SDWA. Water from wells found to contain levels of contaminants above the established MCL's is either treated or blended before it is delivered to customers. The Registrant, like any provider of water from surface supplies, is subject to the risk that cryptosporidium, a microscopic organism widely present in the environment, will contaminate its water supply. The Registrant's risk is greatly reduced, however, due in part to the high quality of source water where, according to the MWD, measured amounts of cryptosporidium are 100 to 1,000 times less than the national average. The Registrant is a voluntary member of the "Partnership for Safe Water", a national program developed in conjunction with the EPA, the National Association of Water Companies and the American Water Works Association to further protect the public from diseases caused by cryptosporidium and other organisms. As a volunteer in the program, the Registrant has committed to exceed current regulations governing surface water treatment to ensure that its treatment facilities are performing as efficiently as possible. All 41 of the Registrant's water systems are in compliance with the lead and copper rules as promulgated by the EPA. The Registrant will also be subject to new rules regarding MCLs for radon and arsenic pending implementation of those rules by the EPA. With respect to the radon rule, the EPA did not meet its October 1, 1993 deadline for implementation of the rule. As a result, the radon rule was to be considered as part of the re-authorization of the SDWA presently before the United States Congress. The Registrant believes the EPA may, in the interim, establish a MCL of 3,000 pico-curies per liter, which would affect only one of the Registrant's wells. The Registrant will, however, be required to conduct mandatory public information and educational programs on radon. The Registrant is currently conducting studies to determine the best treatment for any affected wells which could range from simple aeration to filtration through granular activated carbon. The Registrant is currently unable to predict what ultimate effects, if any, this rule, if passed, would have on its financial position or results of operation. The EPA is continuing its review of data before implementing the arsenic rule. In January, 1995, the EPA filed suit in U.S. District Court seeking to delay implementation of the arsenic rule. The proposed SDWA amendments before the last session of Congress would have delayed the implementation of an arsenic 4 7 rule until 2001. Although the Registrant is unable to predict the actions that either the Court or Congress may take, it is believed that, if required to do so without further research, the EPA will establish a MCL for arsenic of from 2 to 5 micrograms per liter. At this level, nearly all of the Registrant's wells and water systems would be affected. Depending on the circumstances associated with each individual well and water system, compliance with such a standard could cause the Registrant to implement costly well-head remedies such as ion exchange or, alternatively, to purchase additional, and more expensive, water supplies already in compliance for blending with well sources. The Registrant is currently unable to predict what ultimate effects, if any, this rule might have on its financial position or results of operation until the final MCL is established. The Registrant will also be subject to the new EPA rule concerning Disinfection/Disinfection By-Products, Stage I of which has been published with an effective date of June, 1998. This rule reduces tri-halomethane contaminants from 100 micrograms per liter to 80 micrograms per liter and will affect only two of the Registrant's systems. As part of its January, 1995 filing in U.S. District Court, the EPA requested an extension of time to complete this rule. The Registrant anticipates that the Enhanced Surface Water Treatment Rule will be proposed in 1997, with an effective date of 1999. This rule would affect each of the Registrant's five surface water treatment plants, although the Registrant is currently unable to predict the ultimate impact that adoption of the rule might have on its financial position or its results of operation. The proposed Information Collection Rule, originally expected to be implemented in October, 1994 and which may affect one of the Registrant's water systems with minor paperwork costs, is presently anticipated to be implemented by the end of 1996. Recent changes in the Rule, however, may allow for a variance from requirements for the Registrant's systems. In addition, a set of primary standards, referred to as "Phase VI," has been postponed indefinitely. Since the SDWA became effective, the Registrant has experienced increased operating costs for testing to determine the levels, if any, of the contaminants in the Registrant's sources of supply and additional expense to, if exceeding the MCL, lower the level of any contaminants found to meet the MCL standards. Such costs and the costs of controlling any other pollutants may cause the Registrant to experience additional capital costs as well as increased operating costs. The rate-making process provides the Registrant with the opportunity to recover capital and operating costs associated with water quality, and management believes that such costs are properly recoverable. However, no assurance can be given that the CPUC will authorize recovery of all or any of such costs in rates. The Registrant is subject to State of California Assembly Bill 733 which requires fluoridation of water supplies for public water systems serving more than 10,000 service connections. Although the bill requires affected systems to install treatment facilities only when public funds have been made available to cover capital and operating costs, the bill requires the CPUC to authorize cost recovery through rates should public funds for operation of the facilities, once installed, become unavailable in future years. Three of the 27 wells in the Registrant's Arden-Codova system have, for several years, been subject to contamination by tricholoroethylene. The Aerojet Corporation has, by court decree, been responsible for all costs related to the provision of well-head treatment. A ten-year agreement, reached with Aerojet in 1986, will expire in 1996, leaving open the question of who will remain financially responsible for continuing well-head treatment. The Registrant is currently negotiating with Aerojet for a renewal of the agreement but is 5 8 unable to predict the outcome of such negotiations or the impact, if any, of such negotiations on the results of operations or financial condition. There have been no environmental matters that have materially affected or are currently materially affecting the Registrant's Bear Valley Electric Service area. ITEM 2 - PROPERTIES FRANCHISES, COMPETITION, ACQUISITIONS AND CONDEMNATION OF PROPERTIES The Registrant holds franchises from the incorporated communities and the counties which it serves. The Registrant holds certificates of public convenience and necessity granted by the CPUC in each of the ratemaking districts it serves. The Registrant's certificates, franchises and similar rights are subject to alteration, suspension or repeal by the respective governmental authorities having jurisdiction. The laws of the State of California provide for the acquisition of public utility property by governmental agencies through their power of eminent domain, also known as condemnation. The Registrant has been, within the last three years, involved in activities related to the condemnation of its Bay Point water district by the Contra Costa Water District. The Registrant and the Contra Costa customer service area have settled all matters related to this action. Note 7 - Contingencies - of the Notes to Financial Statements contained in the 1995 Annual Report to Shareholders, incorporated herein by reference, describes the general terms of the settlement agreement. WATER PROPERTIES As of December 31, 1995, the Registrant's physical properties consisted of water transmission and distribution systems which included approximately 2,587 miles of pipeline together with services, meters and fire hydrants and approximately 437 parcels of land, generally less than 1 acre each, on which are located wells, pumping plants, reservoirs and other water utility facilities including five surface water treatment plants. The Registrant's 41 water systems and operating properties have been maintained and improved in the ordinary course of business. As of December 31, 1995, the Registrant owned and operated 271 active wells equipped with pumps with an aggregate capacity of approximately 180 million gallons per day. The Registrant has 52 connections to the water distribution facilities of the MWD and other municipal water agencies. The Registrant's storage reservoirs and tanks have an aggregate capacity of approximately 95 million gallons. There are no dams in the Registrant's system. The table on the following page provides, in greater detail, a listing of selected water utility plant by ratemaking district. ELECTRIC PROPERTIES The Registrant's electric properties are all located in the Big Bear area of San Bernardino County. As of December 31, 1995, the Registrant operated 28.7 miles of overhead 34.5 KV transmission lines, 0.6 miles of underground 34.5 KV transmission lines, 172.4 miles of 4.16 KV or 2.4 KV distribution lines, 39.5 miles of underground cable and 14 sub-stations. There are no generating plants in the Registrant's system. 6 9
PUMPS DISTRIBUTION FACILITIES RESERVOIRS - --------------------------------------------------------------------------------------------------------- DISTRICT WELL BOOSTER MAINS (FT) METERS SERVICES HYDRANTS TANKS CAPACITY - --------------------------------------------------------------------------------------------------------- Arden-Cordova 27 15 442,615 2,514 7,219 1,092 3 2,000 Barstow 27 31 853,771 12,166 10,491 956 13 5,025 Bay Point 1 13 122,197 4,315 2,796 279 7 4,046 Calipatria 0 9 134,873 681 1,631 62 4 300 Claremont 27 37 705,587 12,960 10,406 1,141 18 17,367 Clearlake - 12 185,914 2,495 793 632 4 867 Desert 20 24 742,148 6,514 4,463 552 12 1,500 Los Osos 10 11 195,809 3,272 1,342 149 8 1,423 Metropolitan 76 84 4,619,750 123,022 103,796 6,871 44 24,263 Ojai 4 13 233,971 2,615 3,091 340 6 1,536 Orange County 30 37 2,087,566 45,463 37,947 5,487 16 11,713 San Dimas 12 38 1,173,943 18,402 7,007 806 15 12,143 San Gabriel 22 10 545,797 11,384 12,439 767 3 1,520 Santa Maria 29 25 944,212 14,696 6,726 185 8 3,238 Simi Valley 1 16 460,019 13,079 9,230 792 6 6,210 Wrightwood 8 6 214,049 3,525 534 69 7 1,546 Total 294 381 13,662,221 277,103 219,911 20,180 174 94,697
Capacity is measured in thousands of gallons OFFICE BUILDINGS The Registrant's general offices are housed in a single-story office building located in San Dimas, California. The land and the building, which was completed and occupied in early 1990, are owned by the Registrant. The Registrant also owns and occupies certain offices located in its customer service areas while other such offices are housed in leased premises. MORTGAGE AND OTHER LIENS As of December 31, 1995, the Registrant had no mortgage debt outstanding, and its properties were free of any encumbrances or liens securing indebtedness. FINANCING OF CAPITAL EXPENDITURES The Registrant's construction program is designed to ensure its customers high quality service. The Registrant maintains an ongoing distribution main replacement program throughout its customer service areas, based on the priority of leaks detected, fire protection enhancement and a reflection of the underlying replacement schedule. In addition, the Registrant upgrades its electric and water supply facilities and is aggressively scheduling meter replacements that conform with CPUC requirements. The Board of Directors of the Registrant has approved anticipated net capital expenditures of approximately $25,000,000 in 1996. The Registrant anticipates net capital expenditures of approximately $35,200,000 and $35,000,000 in 1997 and 1998, respectively, although such expenditures are subject to final approval by the Board of Directors of the Registrant. The Registrant anticipates that net capital expenditures in excess of its internally generated cash will be financed through a combination of long-term debt and additional common equity. 7 10 During 1995 and 1994, the Registrant issued no common equity to raise capital through either a public offering or a private placement or through its Dividend Reinvestment and Common Share Purchase Plan or 401-k Plan. All common shares scheduled to be issued through the Plans was purchased on the open market. In January, 1994, the Registrant issued 39,597 Common Shares pursuant to the Merger Agreement between the Registrant and Lemon Heights Mutual Water Company. During 1993, the Registrant issued 1,107,000 Common Shares in two separate public offerings for aggregate net proceeds of $23,935,000. The net proceeds were applied against then outstanding short-term bank borrowing incurred to temporarily finance construction expenditures. The Registrant issued 47,828 and 7,741 Common Shares through its Dividend Reinvestment and Common Share Purchase Plan and its 401-k Plan, respectively, for the year ended December 31, 1993. The Registrant has sold $30,000,000, $13,000,000 and $37,000,000 in long-term debt under its Medium Term Note program during the years ended December 31, 1995, 1994 and 1993, respectively. The net proceeds were used to pay off then existing short-term debt incurred to fund construction expenditures and to refinance then-existing higher coupon debt. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings. There is, however, ordinary routine litigation incidental to the business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION RELATING TO COMMON SHARES - Information responding to Item 201(a) of Regulation S-K is included in the 1995 Annual Report to Shareholders, under the caption "Stock Listing" and located on page 28, filed by the Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2). (b) APPROXIMATE NUMBER OF HOLDERS OF COMMON SHARES - As of March 4, 1996, there were 4,233 holders of record of Common Shares. (c) FREQUENCY AND AMOUNT OF ANY DIVIDENDS DECLARED AND DIVIDEND RESTRICTIONS 8 11 Information responding to Item 201(c) of Regulation S-K is included in the 1995 Annual Report to Shareholders, under the caption "Stock Listing" and located on page 28, filed by the Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2). For the last three years, the Registrant has paid dividends on its Common Shares on March 1, June 1, September 1 and December 1. Additional information responding to Item 201(c) of Regulation S-K with respect to dividend restrictions is included in the 1995 Annual Report to Shareholders, under Note 2 captioned "Capital Stock" located on Page 24 of the Notes to Financial Statements, filed by the Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2). ITEM 6. SELECTED FINANCIAL DATA Information responding to Item 6 is included in the 1995 Annual Report to Shareholders, under the caption entitled "1995 Financial Highlights" located on Page 1, filed by the Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Information responding to Item 7 is included in the 1995 Annual Report to Shareholders, under the caption entitled "Management's Discussion and Analysis" located on Pages 13 through 15, filed by the Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information responding to Item 8 is included in the 1995 Annual Report to Shareholders, filed by the Registrant with the Commission pursuant to Regulation 14A, under the following captions located on Pages 17 through 27 and is incorporated herein by reference pursuant to General Instruction G(2). Report of Independent Public Accountants Balance Sheets - December 31, 1995 and 1994 Statements of Capitalization - December 31, 1995 and 1994 Statements of Income - for the years ended December 31, 1995, 1994 and 1993 Statements of Changes in Common Shareholders' Equity - for the years ended December 31, 1995, 1994 and 1993 Statements of Cash Flows - for the years ended December 31, 1995, 1994 and 1993 Notes to Financial Statements 9 12 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information responding to Item 10 is included in the Proxy Statement, filed by the Registrant with the Commission on or about March 6, 1996 pursuant to Regulation 14A, under the captions entitled "Election of Directors" and "Executive Officers - Experience, Security Ownership and Compensation" and is incorporated herein by reference pursuant to General Instruction G(3). ITEM 11. EXECUTIVE COMPENSATION Information responding to Item 11 is included in the Proxy Statement, filed by the Registrant with the Commission on or about March 6, 1996 pursuant to Regulation 14A, under the captions entitled "Election of Directors," "Executive Officers - Experience, Security Ownership and Compensation" and "Performance Graph" is incorporated herein by reference pursuant to General Instruction G(3). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information responding to Item 12 is included in the Proxy Statement, filed by the Registrant with the Commission on or about March 6, 1996 pursuant to Regulation 14A, under the captions entitled "Election of Directors" and "Executive Officers - Experience, Security Ownership and Compensation" and is incorporated herein by reference pursuant to General Instruction G(3). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information responding to Item 13 is included in the Proxy Statement, filed by the Registrant with the Commission on or about March 6, 1996 pursuant to Regulation 14A, under the caption entitled "Election of Directors" and is incorporated herein by reference pursuant to General Instruction G(3). PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Reference is made to the Financial Statements incorporated herein by reference to Item 8 hereof. 2. Schedules I, III, IV, and V are omitted as they are not applicable. 3. See (c) below. (b) No events have been reported on Form 8-K during the last quarter of the period covered by this report. 10 13 (c) Exhibits - 3.1 By-Laws as Amended to April 30, 1991 incorporated herein by reference to Registrant's Form 10-Q with respect to the quarter ended March 31, 1991. Commission File No. 0-1121 3.2 Restated Articles of Incorporation as Amended to December 4, 1990 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121 3.3 Certificate of Ownership dated August 10, 1978 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121 3.4 Certificate of Amendment of Articles of Incorporation dated December 3, 1992 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1992. Commission File No. 0-1121. 3.5 Certificate of Amendment of Articles of Incorporation dated February 17, 1994 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1993. Commission File No. 0-1121. 4.1 Indenture, dated September 1, 1993 between the Registrant and Chemical Trust Company of California, as trustee, relating to the Registrant's Medium Term Notes, Series A, incorporated herein by reference to Registrant's Form 8-K. Commission File No. 33-62832. 10.1 Deferred Compensation Plan for Directors and Executives incorporated herein by reference to Registrant's Registration Statement on Form S-2 (Registration No. 33-5151). 10.2 Reimbursement Agreement dated November 1, 1984 between the Registrant and Barclays Bank International Limited incorporated herein by reference to Registrant's Registration Statement on Form S-2 (Registration No. 33-5151). 10.3 First Amendment to Reimbursement Agreement dated January 1, 1986 between the Registrant and Barclays Bank PLC (formerly Barclays Bank International Limited) incorporated herein by reference to Registrant's Registration Statement on Form S-2 ( Registration No. 33-5151). 10.4 Second Amendment to Reimbursement Agreement dated April 9, 1987 between the Registrant and Barclays Bank PLC incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121. 11 14 10.5 Third Amendment to Reimbursement Agreement dated September 14, 1987 between the Registrant and Barclays Bank PLC incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121. 10.6 Fourth Amendment to Reimbursement Agreement dated September 22, 1988 between the Registrant and Barclays Bank PLC incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121. 10.7 Fifth Amendment to Reimbursement Agreement dated March 9, 1990 between the Registrant and Barclays Bank PLC incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121. 10.8 Sixth Amendment to Reimbursement Agreement dated November 29, 1990 between the Registrant and Barclays Bank PLC incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121. 10.9 Second Sublease dated October 5, 1984 between the Registrant and Three Valleys Municipal Water District incorporated herein by reference to Registrant's Registration Statement on Form S-2 (Registration No. 33- 5151). 10.10 Note Agreement dated as of February 1, 1989 between the Registrant and First Colony Life Insurance incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121. 10.11 Schedule of omitted Note Agreement incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121. 10.12 Note Agreement dated as of May 15, 1991 between the Registrant and Transamerica Occidental Life Insurance Company incorporated herein by reference to Registrant's Form 10-Q with respect to the quarter ended June 30, 1991. Commission File No. 0-1121. 10.13 Schedule of omitted Note Agreements incorporated herein by reference to Registrant's Form 10-Q with respect to the quarter ended June 30, 1991. Commission File No. 0-1121. 10.14 Agreement for Financing Capital Improvement dated as of June 2, 1992 between the Registrant and Three Valleys Municipal Water District incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1992. Commission File No. 0-1121. 12 15 10.15 Water Supply Agreement dated as of June 1, 1994 between the Registrant and Central Coast Water Authority incorporated herein by reference to the Registrant's Form 10-K with respect to the year ended December 31, 1994. Commission File No. 0-1121. 10.16 Retirement Plan for Non-Employee Directors of Southern California Water Company, as amended, January 25, 1995 incorporated herein by reference to the Registrant's Form 10-K with respect to the year ended December 31, 1994. Commission File No. 0-1121. 10.17 Dividend Reinvestment and Common Share Purchase Plan incorporated herein by reference to Registrant's Post-Effective Amendment No. 1 to Form S-3 (Registration No. 33-42218). 10.18 Key Executive Long-Term Incentive Plan incorporated herein by reference to the Registrant's 1995 Proxy Statement, Commission File No. 0-1121. 13. Portions of the Annual Report to Shareholders* for the year ended December 31, 1995 which are expressly incorporated herein by reference. 21. Subsidiaries of Registrant - Exhibit not included as subsidiaries in the aggregate are not significant. 23. Consent of Independent Public Accountants*. 27. Schedule UT*. (d) None. _____________________ *Filed concurrently herewith 13 16 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. SOUTHERN CALIFORNIA WATER COMPANY By: s/ JAMES B. GALLAGHER . -------------------------- James B. Gallagher Vice President - Finance, Chief Financial Officer and Secretary Date: March 5, 1996 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. s/ W. V. CAVENEY . Date: March 5, 1996 - ------------------------------------------- W. V. Caveney Chairman of the Board and Director s/ FLOYD E. WICKS . March 5, 1996 - ------------------------------------------ Floyd E. Wicks Principal Executive Officer; President, CEO and Director s/ JAMES B. GALLAGHER . March 5, 1996 - --------------------------------------- James B. Gallagher Principal Financial and Accounting Officer; Vice President - Finance, CFO and Secretary s/ JEAN E. AUER . March 5, 1996 - ------------------------------------------------- Jean E. Auer, Director s/ R. BRADBURY CLARK . March 5, 1996 - --------------------------------------- R. Bradbury Clark, Director s/ N. P. DODGE, JR. . March 5, 1996 - ------------------------------------------------- N. P. Dodge, Jr., Director s/ ROBERT F. KATHOL . March 5, 1996 - ------------------------------------------ Robert F. Kathol, Director s/ LLOYD E. ROSS . March 5, 1996 - ----------------------------------------------- Lloyd E. Ross, Director
14 EX-13 2 PORTIONS OF THE ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 1995 Financial Highlights --------------------------------------------------------
For the years ended December 31, -------------------------------- Increase (in thousands, except per share amounts) 1995 1994 (Decrease) Percent - --------------------------------------------------------------------------------------------------------- Total Operating Revenues $129,813 $122,675 $ 7,138 5.82% Total Operating Expenses 108,425 103,745 4,680 4.51% Operating Income 21,388 18,930 2,458 12.98% Other Income 336 236 100 42.37% Interest Charges 9,559 7,828 1,731 22.11% Net Income 12,165 11,338 827 7.29% Earnings Available for Common Shareholders 12,069 11,240 829 7.38% Earnings per Share from Operations Only 1.50 1.40 0.10 7.14% Earnings per Common Share 1.54 1.43 0.11 7.69% Dividends Paid per Common Share 1.21 1.20 0.01 0.42% Book Value per Common Share 15.50 15.16 0.34 2.24% Total Assets 406,255 383,627 22,628 5.90% Total Capitalization $231,151 $214,013 $17,138 8.01% Average Shares Outstanding 7,845 7,842 3 0.04%
one --- 2 Management's Discussion and Analysis -------------------------------------------------------- Southern California Water Company is an investor-owned public utility engaged principally in the purchase, production, distribution and sale of water. The company also distributes electricity in one community. The company is subject to the jurisdiction of the California Public Utilities Commission (CPUC) as to its water and electric business and properties. The CPUC has broad powers of regulation over the company with respect to rates, service, facilities and various other matters. Results of Operations --------------------- Years Ended December 31, 1995 and 1994 Earnings per common share in 1995 increased by 7.7% to $1.54 from the $1.43 reported in 1994. Earnings from utility operations only were $1.50 in 1995 as compared to $1.40 reported in 1994, an increase of 7.1%. Other income contributed $0.04 per share in 1995 compared to $0.03 per share in 1994. Water operating revenues increased by 6.1% to $118.9 million in 1995 from the $112.1 million reported in 1994 due to the impact of general, step, attrition and offset rate increases which went into effect throughout 1994 and 1995. Water sales volumes in 1995 decreased by 2.6% as compared to 1994. Electric operating revenues of $10.9 million were 2.9% greater in 1995 as compared to last year as a result of a 1.2% increase in kilowatt-hour sales and a slight shift in sales volumes from industrial customers in favor of residential and commercial customers, who have a higher unit rate. Purchased water costs increased by 6.0% to $32.6 million in 1995 as a result of increased prices from the company's wholesale water suppliers which went into effect in July, 1995. These price increases were partially offset by a 6.1% decrease in purchased water volumes. Costs of power purchased for resale increased by 10.3% to $5.2 million, reflecting the slight increase in kilowatt-hour sales and the effect of refunds received from the company's wholesale electric supplier in 1994, for which there are no counterparts in 1995. In 1995, costs of power purchased for pumping increased by approximately 5.0% to $8.0 million as a result of the increased proportion of total water supplied that was derived from pumped sources. Groundwater production assessments increased to $6.1 million in 1995, an increase of 12.5% from the $5.5 million reported in 1994. The increase reflects both higher assessment rates, the latest of which was effective in July, 1995, as well as increased volumes of pumped water in the company's resource mix. A negative entry for the provision for supply cost balancing accounts reflects an under-collection of water and electric supply costs. The credit in this category primarily reflects higher purchased water costs and groundwater production assessments which have not yet been collected through rates. Other operating expenses increased by 9.9% to approximately $13.4 million in 1995. The increase is primarily due to a $450,000 increase in the reserve for uncollectible accounts and approximately $555,000 incurred in an extensive water main flushing program in the Southwest customer service area of Region II. In 1994, the company established additional reserves of $263,000 against retention rights associated with its participation in the Coastal Aqueduct Extension of the State Water Project (the Project) which was offset by a reversal of approximately $456,000 in recognition of the company's participation in the Project at a level of 500 acre-feet. In 1995, the company reversed an additional $639,000 in recognition of the sale of its remaining 2,500 acre-foot entitlement to the Goleta Water District. Administrative and general expense increased by 19.6% to $17 million in 1995 compared to $14.2 million in 1994. The increase in expense reflects additional costs associated with pension and 401-k plan contributions, personnel training and relocation expenses, rent for new and remodeled office space and travel and communication expenses. In addition, this category was affected by an increase in the amount of labor expense being charged to this category. Depreciation expense increased by 5.4% to $8.5 million in 1995 reflecting, among other things, the effects of recording approximately $22 million in net plant additions during 1994, depreciation on which began in 1995. Maintenance expense decreased by 16.8% in 1995 compared to 1994, primarily as a result of work performed in 1994 on the company's water pumping equipment, emphasis on hydrant maintenance and extensive main flushing and valve exercise programs for which there is no direct counterpart in 1995. Other income increased by 42.4% in 1995 due principally to an increase of $132,000 in billings to the city of Folsom for the lease of a portion of the company's water rights in the American River. Interest expense in 1995 was approximately $9.6 million. The 22.1% increase from 1994 is due to both additional long-term debt and short-term bank borrowing utilized to finance the company's capital improvement program. Years Ended December 31, 1994 and 1993 Earnings per common share of $1.43 in 1994 were 13.9% lower than the $1.66 earnings per common share recorded for 1993. Earnings from operations of $1.40 per share in 1994 were 13.0% lower than the $1.61 recorded in 1993. Other income contributed $0.03 per share in 1994, as compared to $0.05 per share in 1993. Water operating revenues for 1994 increased by 14.2% over 1993 to $112.1 million, principally due to the full effects of approximately $2.3 million in general rate increases effective during 1993 and the partial effects of $12 million in supply cost offset rate increases effective in March, 1994. Water sales volumes in 1994 increased by 7.5%. Electric operating revenues were 2.3% greater than 1993 as a result of a 3.8% increase in kilowatt-hour sales. Purchased water expense increased $1.4 million, 4.7%, from 1993 to 1994. This increase is a result of both a higher volume of water purchased as well as increased prices from the company's wholesale suppliers. Expense for power purchased for resale increased by approximately 44.0% to $4.7 million in 1994 and reflected the effects of approximately $1.6 million in additional refunds in 1993 received from the company's wholesale electric supplier, which was partially offset by the 3.8% increase in electric sales volumes. thirteen -------- 3 As compared to 1993, the recorded expense for power purchased for pumping declined by 6.8% to $7.6 million in 1994 due chiefly to the effects of an increase in the amount of total water supplied which was derived from purchased sources. A positive entry for the provision for supply cost balancing accounts reflects recovery of previously under-collected supply costs resulting from approval by the CPUC in March, 1994 of rate increases to collect these under-recovered amounts. Other operating expenses in 1994 were $12.1 million, 11.2% higher than the $10.9 million recorded in 1993 due to a net increase in personnel involved in various operating and customer service functions. In 1993, the company established a reserve of approximately $1.9 million against previously incurred costs related to its participation in the Coastal Aqueduct Extension of the State Water Project. Additional reserves of $263,000 offset by a reversal of $456,000 in recognition of participation in the Project at a level of 500 acre-feet constitute the net credit for 1994. Administrative and general expenses increased by approximately 5.4%, or $728,000, in 1994. This increase reflects costs associated with increased levels of personnel performing regulatory, administrative and operational requirements as well as personnel-related expenses such as health insurance and pension expenses. In 1994, the company wrote off $435,000 of legal expenses associated with the settled condemnation action in the company's Bay Point district. Maintenance expense increased by 7.2% in 1994 to $6.9 million as a result of continuing work performed on the company's water pumping equipment, increased emphasis on hydrant maintenance and extensive main flushing and valve exercise programs. Depreciation expense increased $651,000 in 1994, which was 8.8% higher than 1993, primarily reflecting the effects of recording approximately $28 million in net plant additions during 1993, depreciation on which is fully reflected during 1994. Taxes on income, $8.9 million in 1994, increased by 61.4% over the $5.5 million recorded in 1993 as a result of higher pte-tax book income. Additionally, in 1994 the company booked adjustments for prior tax years of approximately $671,000. Tax expense in 1993 reflected the effects of a reversal of approximately $1.3 million in previously established tax reserves. Total interest expense decreased by 6.6% to $7.8 million in 1994 from $8.4 million in 1993, chiefly as a result of the company's refinancing, during the last quarter of 1993, of a substantial portion of its outstanding long-term debt at lower interest rates. Financial Condition ------------------- Liquidity and Capital Resources The company funds the majority of its operating expenses, interest on its debt, sinking fund requirements and dividends through internal sources. However, the seasonal nature of the company's water and electric business periodically necessitates that the company utilize its short-term borrowing capacity to finance current operations. The company relies on external sources, including advances and contributions from developers, to fund the majority of its capital expenditures program. The company also relies on short-term bank borrowing to temporarily finance its construction expenditures. Bank borrowing is repaid as internal sources of cash allow and is ultimately financed with equity or long-term debt. At December 31, 1995, the company had utilized $8,500,000 of its aggregate short-term borrowing capacity of $37,063,000. Of its total short-term borrowing capacity, $5,063,000 is also available to support letters of credit. It is anticipated that borrowing under the three bank lines of credit will increase during 1996. During 1995, the company issued $30 million in debt under its Medium Term Note Program. The net proceeds paid down then-existing bank borrowing. The company anticipates selling additional long-term debt and possibly issuing common shares in 1996 to finance its construction requirements and refund approximately $15 million in debt which matures in 1996. The company anticipates that over the next five years it will be necessary to issue new debt and equity securities to repay bank borrowing and pay for capital expenditures. The timing, type and amount of future financing will reflect both the company's internal financial policies and external market conditions, all of which will be consistent with maintenance of the company's A+/A2 debt ratings. In December, 1995, the company completed the sale of 2,500 acre-feet of its total 3,000 acre-foot entitlement in the Coastal Aqueduct Extension of the State Water Project. Net proceeds from the sale of approximately $1.2 million were received in February, 1996. See Note 7 of the Notes to Financial Statements. Construction Program Net construction expenditures for 1996 are estimated at approximately $24.9 million. Capital expenditures for years after 1996 are expected to increase. The company's capital expenditure program is not only affected by various federal, state and local regulations but also by a number of operational factors including, among others, age of the various water systems and customer growth. In the past, the CPUC has, through the regulatory process, approved the recovery of and return on prudently incurred construction expenditures. No assurance can be given, however, that the CPUC will grant all or any portion of the rate increases necessary to fully recover the company's capital investments. Regulatory Matters Water and electric rates of the company vary among its 22 customer service areas due to differences in operating conditions, capital investment and costs. The customer service areas are currently grouped into 16 water tariff areas and one electric district for rate-making purposes. The company continuously monitors its operations in each district so that applications for rate changes, when warranted and as permitted, may be filed on a district-by-district basis with the CPUC. Under the CPUC's practices, rates may be increased by three methods: general rate increases, offsets for certain supply cost increases and advice letter filings related to certain plant additions. General rate increases typically are for three-year periods and include "step" increases in rates for the second and third years. The company filed applications for general rate relief, including step and attrition year increases, in six of its water operating districts in March, 1995. In December, 1995, the CPUC issued its final decision on those applications which, among other things, authorized a 10.4% return on common equity, increased depreciation rates, authorized recovery of postretirement benefit costs (See Note 6 of the Notes to fourteen -------- 4 Financial Statements) and resulted in an approximate increase in annual water operating revenues of $15 million, effective January 1, 1996. The company filed an application for a general rate increase in its Bear Valley Electric customer service area in September, 1995. In February, 1996, the company reached a stipulated settlement agreement among all parties which, among other things, authorized a return on equity of 10.4% and increased depreciation rates. The settlement agreement is based on a number of other items stipulated in the company's water rate cases described earlier. New rates, resulting in a total increase in revenues of approximately $1.5 million over two years, are expected to be approved by the CPUC by mid-year, 1996. On January 31, 1996, the company filed Notices of Intent to increase water rates in two of its customer service areas to recover costs associated with 1996 and 1997 capital projects in those areas. A final decision by the CPUC is anticipated by December, 1996. Environmental Matters The company is subject to regulations established by the United States Environmental Protection Agency (the EPA) and administered by the California Department of Health Services regarding water quality issues. The Safe Drinking Water Act (the SDWA) requires the EPA to set standards for contaminants and water treatment processes. To date, the company has not been significantly affected, from an operational standpoint, from contamination of its pumped water supplies, and water purchased from its wholesale suppliers is already treated. Anticipated amendments to the SDWA and/or interim regulations set by the EPA may result in increased costs for testing and, where necessary, treatment of the company's groundwater supplies. The rate-making process has provided the company with recovery of these costs in the past and it is anticipated that costs associated with any new standards will also be recoverable, although no assurance can be given that the CPUC will authorize such future recovery. There have been no material environmental matters affecting the company's Bear Valley Electric customer service area. Water Supply During 1995, the company supplied, from all sources, a total of 183,108 acre-feet of water compared to 185,490 acre-feet supplied in 1994. Of the total water supplied in 1995, approximately 41% was purchased from others, principally from member agencies of the Metropolitan Water District of Southern California, and 1.6% was furnished by the Bureau of Reclamation under contract, at no cost, for the company's Arden-Cordova customer service area and to the company's Clearlake customer service area by prescriptive right to water extracted from Clear Lake. The remainder of water supplied was produced from the company's own wells. The water supply outlook for the 1996 water year, which began on October 1, 1995, assumed below average precipitation for the winter months. In spite of this, the Department of Water Resources, which operates the State Water Project, has allocated 100% of the water requested by the Metropolitan Water District of Southern California. This allocation provides assurance that the company's purchased water requirements will be met in 1996. Winter precipitation, especially in Northern and Central California, has been in excess of normal through February, 1996. Statewide, the snowpack water content is approximately 85% of average through February, 1996. For the same period, storage in the state's major reservoirs stood at about 73% of capacity. Overall groundwater conditions, in those customer service areas of the company which pump groundwater, remain at adequate levels. In light of all of these conditions, it is not anticipated that the company will experience any water supply problems during 1996. Accounting Standards In March, 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement imposes a stricter criterion for regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. The company will adopt this standard on January 1, 1996, however it does not expect that adoption will have a material impact on the financial position or results of operations based on the current regulatory structure in which the company operates. This conclusion may change in the future should competitive factors influence wholesale and retail pricing in this industry. Effective January 1, 1996, the company is subject to the reporting requirements contained in SFAS No. 123, "Accounting for Stock-Based Compensation." The company has a Key Executive Long-Term Incentive Plan, the provisions of which became effective in January, 1995. Any payouts under the plan, which are made in Common Shares of the company, will not occur prior to 1998. At that time, the company intends to utilize the footnote option to disclose the effects of any such awards, in compliance with SFAS No. 123. fifteen ------- 5 Report of Management -------------------------------------------------------- The financial statements contained in this annual report were prepared by the management of Southern California Water Company, which is responsible for their integrity and objectivity. The financial statements were prepared in accordance with generally accepted accounting principles and include, where necessary, amounts based upon management's best estimates and judgments. All other financial information in the annual report is consistent with the financial statements and is also the responsibility of management. The company maintains systems of internal control which are designed to help safeguard the assets of the company and provide reasonable assurance that accounting and financial records can be relied upon to generate accurate financial statements. These systems include the hiring and training of qualified personnel, appropriate segregation of duties, delegation of authority and an internal audit function which has reporting responsibility to the Audit Committee of the Board of Directors. The Audit Committee, composed of three outside directors, exercises oversight of management's discharge of its responsibilities regarding the systems of internal control and financial reporting. The committee periodically meets with management, the internal auditor and the independent accountants to review the work and findings of each. The committee also reviews the qualifications of, and recommends to the Board of Directors, a firm of independent accountants. The independent accountants, Arthur Andersen LLP, have performed an audit of the financial statements in accordance with generally accepted auditing standards. Their audit gave consideration to the company's system of internal accounting control as a basis for establishing the nature, timing and scope of their work. The result of their work is expressed in their Report of Independent Public Accountants. /s/ FLOYD E. WICKS Floyd E. Wicks President, Chief Executive Officer /s/ JAMES B. GALLAGHER James B. Gallagher Vice President - Finance, Chief Financial Officer and Secretary February 15, 1996 Report of Independent Public Accountants -------------------------------------------------------- To the Shareholders and the Board of Directors of Southern California Water Company: We have audited the balance sheets and statements of capitalization of Southern California Water Company (a California corporation) as of December 31, 1995 and 1994 and the related statements of income, changes in common shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Southern California Water Company as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Notes 5 and 6 to the financial statements, and as required by generally accepted accounting principles, the company changed its methods of accounting for income taxes and post-retirement benefits other than pensions in 1993. /s/ ARTHUR ANDERSEN LLP Arthur Andersen LLP Los Angeles, California February 15, 1996 seventeen --------- 6 Balance Sheets --------------------------------------------------------
December 31, ---------------------------- (in thousands) 1995 1994 - ----------------------------------------------------------------------------------------------------------------- Assets Utility Plant, at cost Water $383,368 $356,666 Electric 30,269 26,642 ---------------------------- 413,637 383,308 Less - Accumulated depreciation (103,018) (92,679) ---------------------------- 310,619 290,629 Construction work in progress 24,349 24,250 ---------------------------- Net utility plant 334,968 314,879 ---------------------------- Other Property and Investments 755 921 ---------------------------- Current Assets Cash and cash equivalents 343 2,344 Accounts receivable - Customers, less reserves of $648 in 1995 and $419 in 1994 8,238 8,889 Other 2,563 2,015 Unbilled revenue 11,035 9,560 Materials and supplies, at average cost 1,733 1,232 Supply cost balancing accounts 8,073 7,008 Prepayments 7,779 6,578 Accumulated deferred income taxes - net 3,206 2,461 ---------------------------- Total current assets 42,970 40,087 ---------------------------- Deferred Charges Regulatory tax-related assets 22,986 23,105 Other 4,576 4,635 ---------------------------- Total deferred charges 27,562 27,740 ---------------------------- Total Assets $406,255 $383,627 ----------------------------
The accompanying notes are an integral part of these financial statements. eighteen -------- 7
December 31, ---------------------------- (in thousands) 1995 1994 - ----------------------------------------------------------------------------------------------------------------- Capitalization and Liabilities Capitalization Common shareholders' equity $121,576 $118,962 Preferred shares 1,600 1,600 Preferred shares - mandatory redemption 520 560 Long-term debt 107,455 92,891 ---------------------------- Total capitalization 231,151 214,013 ---------------------------- Current Liabilities Notes payable to banks 8,500 19,500 Long-term debt and preferred shares - current 15,624 4,624 Accounts payable 6,839 8,448 Taxes payable 5,562 5,635 Accrued interest 1,955 1,885 Other 8,061 6,504 ---------------------------- Total current liabilities 46,541 46,596 ---------------------------- Other Credits Advances for construction 55,385 54,503 Contributions in aid of construction 27,745 25,567 Accumulated deferred income taxes - net 39,050 36,252 Unamortized investment tax credits 2,300 2,352 Regulatory tax-related liability 3,499 3,582 Other 584 762 ---------------------------- Total other credits 128,563 123,018 ---------------------------- Total Capitalization and Liabilities $406,255 $383,627 ============================
nineteen -------- 8 Statements of Capitalization --------------------------------------------------------
December 31, ------------------------------- (in thousands) 1995 1994 - -------------------------------------------------------------------------------------------------------------------- Common Shareholders' Equity: Common shares, $2.50 par value - Authorized 10,000,000 shares Outstanding 7,845,092 in 1995 and 1994 $ 19,613 $ 19,613 Additional paid-in capital 54,753 54,753 Earnings reinvested in the business 47,210 44,596 ------------------------------ 121,576 118,962 ------------------------------ Preferred Shares: $25 par value Authorized 64,000 shares Outstanding 32,000 shares, 4% Series 800 800 Outstanding 32,000 shares, 4G% Series 800 800 ------------------------------ 1,600 1,600 ------------------------------ Preferred Shares Subject to Mandatory Redemption Requirements: $25 par value Authorized and outstanding 22,400 shares in 1995 and 24,000 shares in 1994, 5% Series 560 600 Less: Preferred shares to be redeemed within one year (40) (40) ------------------------------ 520 560 ------------------------------ Long-Term Debt 3.90% notes due 1995 - 2,100 4.16% notes due 1995 - 2,100 4.30% notes due 1996 2,200 2,200 6.40% notes due 1996 13,000 13,000 5.82% notes due 2003 12,500 12,500 10.10% notes due 2009 10,000 10,000 6.64% notes due 2013 1,100 1,100 6.80% notes due 2013 2,000 2,000 8.50% fixed rate obligation due 2013 2,077 2,130 Variable rate obligation due 2014 6,000 6,000 6.87% notes due 2023 5,000 5,000 7.00% notes due 2023 10,000 10,000 7.55% notes due 2025 8,000 - 7.65% notes due 2025 22,000 - 9.56% notes due 2031 28,000 28,000 Other 1,162 1,345 ------------------------------ 123,039 97,475 Less: Current maturities (15,584) (4,584) ------------------------------ 107,455 92,891 ------------------------------ Total Capitalization $231,151 $214,013 ==============================
The accompanying notes are an integral part of these financial statements. twenty ------ 9 Statements of Income --------------------------------------------------------
For the years ended December 31, ---------------------------------------------------- (in thousands, except per share amounts) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------- Operating Revenues Water $118,922 $112,087 $98,155 Electric 10,891 10,588 10,351 ----------------------------------------------------- Total operating revenues 129,813 122,675 108,506 ----------------------------------------------------- Operating Expenses Water purchased 32,629 30,768 29,375 Power purchased for resale 5,215 4,726 3,282 Power purchased for pumping 7,963 7,584 8,139 Groundwater production assessment 6,137 5,457 5,284 Supply cost balancing accounts (1,146) 500 (7,960) Other operating expenses 13,351 12,148 10,923 Provision for State Water Project (639) (193) 1,854 Administrative and general expenses 17,029 14,237 13,509 Depreciation 8,483 8,049 7,398 Maintenance 5,754 6,916 6,450 Taxes on income 8,784 8,865 5,491 Property and other taxes 4,865 4,688 4,711 ----------------------------------------------------- Total operating expenses 108,425 103,745 88,456 ----------------------------------------------------- Operating Income 21,388 18,930 20,050 ----------------------------------------------------- Other Income Net gain from sale of operating properties - 313 - Provision for non-operating assets - - (943) Other - net 336 (77) 1,297 ----------------------------------------------------- Total other income 336 236 354 ----------------------------------------------------- Income before interest charges 21,724 19,166 20,404 ----------------------------------------------------- Interest Charges Interest on long-term debt 7,807 6,694 7,607 Other interest and amortization of debt expense 1,752 1,134 771 ----------------------------------------------------- Total interest charges 9,559 7,828 8,378 ----------------------------------------------------- Net Income 12,165 11,338 12,026 Dividends on Preferred Shares (96) (98) (100) ----------------------------------------------------- Earnings Available For Common Shareholders $ 12,069 $ 11,240 $11,926 ----------------------------------------------------- Earnings Per Common Share $ 1.54 $ 1.43 $ 1.66 ----------------------------------------------------- Weighted Average Number of Common Shares Outstanding 7,845 7,842 7,186 =====================================================
The accompanying notes are an integral part of these financial statements. twenty-one ---------- 10 Statements of Changes in Common Shareholders' Equity --------------------------------------------------------
Common Shares ----------------------- Additional Earnings Number Paid-in Reinvested in (in thousands) of Shares Amount Capital the Business - ----------------------------------------------------------------------------------------------------------------- Balances at December 31, 1992 6,642 $16,607 $32,234 $39,388 Add: Issuances of Common Shares for Public Offerings 1,107 2,768 21,167 under Dividend Reinvestment & 401-k Plans 56 139 778 Net Income 12,026 Deduct: Dividends on Preferred Shares 100 Dividends on Common Shares - $1.1875 per share 8,544 - ------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1993 7,805 $19,514 $54,179 $42,770 Add: Issuances of Common Shares for acquisition of water system 40 99 574 Net Income 11,338 Deduct: Dividends on Preferred Shares 98 Dividends on Common Shares - $1.20 per share 9,414 - ------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1994 7,845 $19,613 $54,753 $44,596 Add: Net Income 12,165 Deduct: Dividends on Preferred Shares 96 Dividends on Common Shares - $1.205 per share 9,455 - ------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1995 7,845 $19,613 $54,753 $47,210 - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. twenty-two ---------- 11 Statements of Cash Flows --------------------------------------------------------
For the years ended December 31, ----------------------------------------------------- (in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ Cash Flows From Operating Activities: Net income $ 12,165 $ 11,338 $ 12,026 Adjustments for non-cash items: Depreciation and amortization 9,033 8,476 7,682 Deferred income taxes and investment tax credits 2,016 75 5,693 Gain on sale of properties - (532) - Other - net 416 (185) (830) Changes in assets and liabilities: Customer receivables 651 (2,074) 1,215 Supply cost balancing accounts (1,065) 14 (3,798) Rationing penalty reserve - - (5,015) Accounts payable (1,609) (829) 2,538 Taxes payable (73) 2,685 (3,040) Other - net (2,587) (1,393) (309) ----------------------------------------------------- Net cash provided 18,947 17,575 16,162 ----------------------------------------------------- Cash Flows from Financing Activities: Issuance of Common Shares - - 24,852 Issuance of long-term debt and lease obligations 30,000 13,000 38,143 Debt issuance costs - - (427) Receipt of advances for and contributions in aid of construction 2,761 2,335 2,157 Refunds on advances for construction (2,812) (2,694) (2,903) Repayments of long-term debt and redemption of preferred shares (4,477) (228) (233) Early retirement of long-term debt - - (41,103) Net change in notes payable to banks (11,000) 7,500 (2,668) Common and preferred dividends paid (9,614) (9,496) (8,651) ----------------------------------------------------- Net cash provided 4,858 10,417 9,167 ----------------------------------------------------- Cash Flows from Investing Activities: Construction expenditures (25,808) (28,620) (22,248) Acquisition of water systems - (100) (1,797) Proceeds from sale of properties - 1,346 - ----------------------------------------------------- Net cash used (25,808) (27,374) (24,045) ----------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents (2,001) 618 1,284 Cash and Cash Equivalents, Beginning of Year 2,344 1,726 442 ----------------------------------------------------- Cash and Cash Equivalents, End of Year $ 343 $ 2,344 $ 1,726 ----------------------------------------------------- Taxes and Interest Paid: Income taxes paid $ 6,955 $ 6,261 $ 1,484 Interest paid 9,043 6,846 8,354 ----------------------------------------------------- Non-Cash Transactions: Property installed by developers and conveyed to company $ 2,764 $ 564 $ 818 Capital leases - 53 1,142 Acquisition of water system for common shares - 673 - -----------------------------------------------------
The accompanying notes are an integral part of these financial statements. twenty-three ------------ 12 Notes to Financial Statements -------------------------------------------------------- Note 1 ------ Summary of Significant Accounting Policies The accounting records are maintained in accordance with the Uniform System of Accounts prescribed by the California Public Utilities Commission (CPUC). The preparation of these financial statements required the use of certain estimates by management in determining the company's assets, liabilities, revenues and expenses. Property and Depreciation - The company capitalizes as utility plant the cost of additions and replacements of retirement units. Such cost includes labor, material and certain indirect charges. Depreciation is computed on the straight-line, remaining-life basis. For the years 1995, 1994 and 1993, the aggregate provisions for depreciation approximated 2.52%, 2.50% and 2.47% of beginning of the year depreciable plant, respectively. Interest is generally not capitalized for financial reporting purposes as such procedure is generally not followed for rate-making purposes. Revenues - Revenues include amounts billed to customers and an amount of unbilled revenue representing amounts to be billed for usage from the last meter reading date to the end of the accounting period. Earnings Per Common Share - Earnings per Common Share are based upon the weighted average number of Common Shares outstanding and net income after deducting preferred dividend requirements. Supply Cost Balancing Accounts - As permitted by the CPUC, the company maintains water and electric supply cost balancing accounts to account for under-collections and over-collections of revenues designed to recover such costs. Recoverability of such costs is recorded in income and charged to balancing accounts when such costs are incurred. The balancing accounts are credited when such costs are recovered through rate adjustments. The company accrues interest on its supply cost balancing accounts at the rate prevailing for 90-day commercial paper. Debt Issue Expense and Redemption Premiums - Original debt issue expenses are amortized over the lives of the respective issues. Premiums paid on the early redemption of debt which is reacquired through refunding are deferred and amortized over the life of the debt issued to finance the refunding. The redemption premium on debt reacquired without refunding is amortized over the remaining period the debt would have been outstanding. Other Credits - Advances for construction represent amounts advanced by developers which are generally refundable at either a rate of 22% of the revenue received from the installations for which funds were advanced or in equal annual installments over a forty-year period. Contributions in aid of construction are similar to advances, but require no refunding and are amortized over the useful lives of the related property. Cash and Cash Equivalents - For purposes of the Statements of Cash Flows, cash and cash equivalents include short-term cash investments with an original maturity of three months or less. Financial Instrument Risk - The company does not carry any financial instruments with off-balance sheet risk nor do its operations result in concentrations of credit risk. Fair Value of Financial Instruments - The following methods and assumptions were used to estimate the fair value, as shown in the table below, of each class of financial instrument for which it is practicable to estimate that value: Cash and Cash Equivalents, Accounts Receivable and Short-term Debt - The carrying amount. Long-term Debt - Rates available to the company at December 31, 1995 and 1994 for debt with similar terms and remaining maturities were used to estimate fair value. Changes in the assumptions will produce differing results.
1995 1994 -------------------------------------------------- Carrying Fair Carrying Fair amount value amount value - ----------------------------------------------------------------------------- (in thousands) Financial assets: Cash $ 343 $ 343 $ 2,344 $ 2,344 Accounts receivable 21,836 21,836 20,464 20,464 Financial liabilities: Short-term debt 8,500 8,500 19,500 19,500 Long-term debt $123,039 $136,191 $97,475 $100,146 - -----------------------------------------------------------------------------
Note 2 -------- Capital Stock All of the series of Preferred Shares outstanding at December 31, 1995 are redeemable at the option of the company. At December 31, 1995, the redemption price per share for each series of $25 Preferred Shares was $27.00, $26.50 and $25.25 for the 4%, 4G% and 5% Series, respectively. To each of the redemption prices must be added accrued and unpaid dividends to the redemption date. The $25 Preferred Shares, 5% Series, are subject to mandatory redemption provisions of 1,600 shares per year. The annual aggregate mandatory redemption requirements for this Series for the five years subsequent to December 31, 1995 is $40,000 each year. During the year ended December 31, 1993, the company issued 47,828 and 7,741 Common Shares under the Dividend Reinvestment Plan (DRP) and the 401-k Plan, respectively. All shares due under the DRP and the 401-k programs during the years ended December 31, 1994 and 1995 were purchased on the open market. There are 109,454 and 92,259 Common Shares reserved for issuance under the DRP and the 401-k Plan, respectively, at December 31, 1995. Shares reserved for the 401-k Plan are in relation to company matching contributions and for investment purposes by participants. As of December 31, 1995, retained earnings of $27,183,000 were restricted as to the payment of cash dividends on Common Shares. Note 3 ------ Long-Term Debt During 1995, the company issued a total of $30 million of unsecured Notes, the proceeds of which were used to pay down short-term bank borrowing. The company has no mortgage debt, and leases and other similar financial arrangements are not material. The company has posted an Irrevocable Letter of Credit, which expires July 31, 1996, in the amount of $551,000 as twenty-four ----------- 13 security for its self-insured workers' compensation plan. The company has also provided an Irrevocable Letter of Credit in the amount of $6,296,000 to a trustee with respect to the variable rate obligation issued by the Three Valleys Municipal Water District. Annual maturities of all long-term debt, including capitalized leases, amount to $15,584,000, $174,000, $180,000, $187,000 and $1,193,000 for each of the years ending December 31, 1996 through 2000, respectively. Note 4 ------ Compensating Balances and Bank Debt At December 31, 1995, the company maintained $37,063,000 in aggregate borrowing capacity with three commercial banks with no compensating balances required. Loans can be obtained at the option of the company and bear interest at rates based on floating prime borrowing rates or at money market rates. Of the $37,063,000 aggregate borrowing capacity, $8,500,000 was outstanding at December 31, 1995. Short-term bank borrowing activities for the last three years were as follows:
1995 1994 1993 - ----------------------------------------------------------------------- (in thousands, except percent) Balance Outstanding at December 31, $ 8,500 $19,500 $12,000 Interest Rate at December 31, 6.39% 7.53% 3.76% Average Amount Outstanding $17,897 $16,527 $ 9,862 Weighted Average Annual Interest Rate 6.92% 4.65% 3.76% Maximum Amount Outstanding $27,500 $24,750 $21,500 - -----------------------------------------------------------------------
Note 5 ------ Taxes on Income The company provides deferred income taxes for temporary differences under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109) for certain transactions which are recognized for income tax purposes in a period different from that in which they are reported in the financial statements. The most significant items are the tax effects of accelerated depreciation, the supply cost balancing accounts and advances for and contributions in aid of construction. SFAS No. 109 also requires that rate-regulated enterprises record deferred income taxes for temporary differences accorded flow-through treatment at the direction of a regulatory commission. The resulting deferred tax assets and liabilities are recorded at the expected cash flow to be reflected in future rates. Since the CPUC has consistently permitted the recovery of previously flowed-through tax effects, the company has established regulatory liabilities and assets offsetting such deferred tax assets and liabilities. Deferred investment tax credits are being amortized to other income ratably over the lives of the property giving rise to the credits. The significant components of deferred tax assets and deferred tax liabilities, as reflected in the balance sheets, and the accumulated net deferred income tax liabilities at December 31, 1995 and 1994 were:
December 31, 1995 1994 - -------------------------------------------------------------- (in thousands) Deferred tax assets: Balancing accounts $ 1,706 $ 1,234 State tax effect 1,500 1,227 - -------------------------------------------------------------- 3,206 2,461 - -------------------------------------------------------------- Deferred tax liabilities Depreciation (36,604) (33,618) Advances and contributions 15,637 13,761 Other property related (10,796) (10,344) Other non-property related (7,287) (6,051) - -------------------------------------------------------------- (39,050) (36,252) - -------------------------------------------------------------- Accumulated deferred income taxes - net $(35,844) $(33,791) - --------------------------------------------------------------
The current and deferred components of income tax expense are as follows:
December 31, 1995 1994 1993 - -------------------------------------------------------------------------------------- (in thousands) Current Federal $ 5,432 $ 6,650 $ (2,503) State 2,110 2,435 (92) - -------------------------------------------------------------------------------------- Total current tax expense 7,542 9,085 (2,595) - -------------------------------------------------------------------------------------- Deferred - Federal and State: Accelerated depreciation 3,273 3,087 2,819 Balancing accounts 472 (6) 505 State Water Project (296) (116) 821 Excess use penalties - - 3,660 Advances and contributions (477) (1,204) (1,465) California privilege year franchise tax (394) (1,085) 142 Adjustments to prior year provision (855) - - Other (520) (476) (203) - -------------------------------------------------------------------------------------- Total deferred tax expense 1,203 200 6,279 - -------------------------------------------------------------------------------------- Total income tax expense $ 8,745 $ 9,285 $ 3,684 - -------------------------------------------------------------------------------------- Income taxes included in operating expenses $ 8,784 $ 8,865 $ 5,491 Income taxes included in other income and expenses - net (39) 420 (1,807) - -------------------------------------------------------------------------------------- Total income tax expense $ 8,745 $ 9,285 $ 3,684 - --------------------------------------------------------------------------------------
Additional information regarding taxes on income is set forth in the following table:
December 31, 1995 1994 1993 - -------------------------------------------------------------------------------------- (in thousands) Federal taxes on pre-tax income at statutory rates $ 7,318 $ 7,217 $ 5,496 Increase (decrease) in taxes resulting from: State income tax expense 1,725 2,022 559 Depreciation 426 321 220 Federal benefit of state taxes (604) (708) (196) Adjustments to prior years' provisions 76 342 (1,067) Payment of premium on redemption - - (984) Other - net (196) 91 (344) - -------------------------------------------------------------------------------------- Total income tax expense $ 8,745 $ 9,285 $ 3,684 - -------------------------------------------------------------------------------------- Pre-tax income $20,910 $20,623 $15,710 - -------------------------------------------------------------------------------------- Effective income tax rate 41.8% 45.0% 23.5% - --------------------------------------------------------------------------------------
twenty-five ----------- 14 Note 6 ------ Employee Benefit Plans The company maintains a pension plan (the Plan) which provides eligible employees (those age 21, with one year of service) monthly benefits upon retirement based on average salaries and length of service. The normal retirement benefit is equal to 2% of the five highest consecutive years average earnings multiplied by the number of years of credited service, up to a maximum of 40 years, reduced by a percentage of primary social security benefits. There is also an early retirement option. Annual contributions are made to the Plan which comply with the funding requirements of the Employee Retirement Income Security Act. The weighted-average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of projected benefit obligations for 1995 and 1994 were 7% and 4% and 7.5% and 4%, respectively. The expected long-term rate of return on assets, which consist primarily of fixed income securities, was 8% for 1995 and 1994. The following table sets forth the Plan's funded status and amounts recognized in the company's balance sheets at December 31, 1995 and 1994 and the components of net pension cost for 1995 and 1994:
- -------------------------------------------------------------------- December 31, 1995 1994 - -------------------------------------------------------------------- (in thousands) Accumulated benefit obligation: Vested $ 21,031 $ 18,225 Nonvested 1,722 1,523 - -------------------------------------------------------------------- Total $ 22,753 $ 19,748 - -------------------------------------------------------------------- Projected benefit obligation for service rendered to date (28,712) $(24,419) Plan assets at fair value 26,396 22,157 Unrecognized net loss/(gain) due to past experience different from assumptions made 3,194 3,763 Unrecognized net obligation at January 1, 1986 being recognized over 15 years 285 342 Unrecognized prior service cost due to Plan amendments 533 577 - -------------------------------------------------------------------- Accrued pension asset $ 1,696 $ 2,420 - -------------------------------------------------------------------- Service cost benefits earned during the period $ 1,145 $ 1,019 Interest cost on projected benefit obligation 1,790 1,623 Return on Plan assets (4,713) 785 Net amortization and deferral 3,133 (2,506) - -------------------------------------------------------------------- Net pension cost $ 1,355 $ 921 - --------------------------------------------------------------------
The company also provides all active employees medical, dental and vision care benefits through a medical insurance plan. Eligible employees who retired prior to age 65, and/or their spouses, were able to retain the benefits under the active plan until reaching age 65. Upon reaching age 65, and for those employees retiring at or after age 65, and/or their spouses, continued coverage was provided through a Medicare supplement insurance policy paid for by the company. Effective January 1, 1993, the company adopted theprovisions of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." As a result, the company amended the retiree medical plan, substantially reducing benefits for those current employees retiring after September 30, 1995. No such benefits are available to employees hired on or after February 1, 1995. The CPUC has issued a decision which provides for the recovery in rates of tax-deductible contributions made to a separately trusteed fund. In accordance with that decision, the company established two separate trusts in 1995, one for those retirees who were subject to a collectively bargained agreement and another for all other retirees. The company's funding policy is to contribute annually an amount at least equal to the revenues authorized to be collected through rates for postretirement benefit costs. Assets in these trusts amounted to approximately $646,000 as of December 31, 1995. The following table presents information on the plan's funded status and the accrued postretirement liability as of December 31, 1995 and 1994:
December 31, 1995 1994 - ------------------------------------------------------------ (in thousands) Accumulated postretirement benefit obligation (APBO): Retirees and dependents $ 3,345 $ 3,364 Other fully eligible participants 322 572 Other active participants 1,409 1,142 - ------------------------------------------------------------ Total $ 5,076 $ 5,078 - ------------------------------------------------------------ Plan assets at fair value - - Accumulated postretirement benefit obligation in excess of plan assets 5,076 5,078 Unrecognized transition obligation (7,965) (8,384) Unrecognized prior service cost 4,026 4,306 Unrecognized net (gain)/loss 465 - - ------------------------------------------------------------ Accrued postretirement benefit liability $ 1,602 $ 1,000 - ------------------------------------------------------------
The components of net periodic postretirement benefits cost for 1995 are as follows:
December 31, 1995 - ------------------------------------------------------- (in thousands) Service cost - benefits earned during year $ 92 Interest cost on APBO 370 Actual return on plan assets - Net amortization and deferral 140 - ------------------------------------------------------- Net periodic postretirement benefit cost $602 - -------------------------------------------------------
Postretirement benefit costs for 1993 and 1994, $500,000 per year, which were estimated based upon the actuarially determined cost level for 1995, and for 1995 have been recorded as a regulatory asset for recovery over a 20 year period. The weighted average discount rate used in determining the accumulated postretirement benefit obligation at December 31, 1995 and 1994 was 7.0% and 7.5%, respectively. A sliding scale for assumed health care cost increases starting at 12% in 1994 declining 1% per year for six years and then remaining at 6% thereafter was used for both periods. A 1% increase in the health care cost trend would increase the accumulated postretirement benefit obligation at December 31, 1995 by $326,000 and the net periodic postretirement benefit cost for 1995 by $49,000. The company has a 401-k Investment Incentive Program (the 401-k) under which employees may invest a percentage of their pay, up to a maximum investment prescribed by law, in an investment program managed by an outside investment manager. Company contributions to the 401-k are based upon a percentage of individual employee contributions and, for 1995, twenty-six ---------- 15 1994 and 1993, totaled $389,000, $222,000 and $197,000, respectively. Note 7 ------ Contingencies As a result of a settlement agreement with the Contra Costa Water District (CCWD) concerning CCWD's condemnation, initiated in July, 1992, of the company's Bay Point customer service area, the company is responsible for reimbursing CCWD for additional facilities to provide for a long-term supplemental source of treated water supply for the company's system. The estimated cost of the company's portion of these facilities, based upon the company's current capacity needs, is approximately $2.6 million. One-half, or $1.3 million, was paid in September, 1994 with the balance payable in 84 monthly installments following completion of the facilities, estimated to be in 1997. The terms of the agreement were approved by the CPUC in August, 1995. The company has signed a Water Supply Agreement to participate in the Coastal Aqueduct Extension of the State Water Project (the Project) at a level of 500 acre-feet. The company's investment to date for this level of participation is $1,032,000 and is included in net utility plant. The company anticipates filing a request with the CPUC to include these and future costs associated with this level of participation in rates pursuant to normal regulatory procedures. In December, 1995, the company sold its remaining 2,500 acre-feet of entitlement for approximately $1.2 million. Proceeds from the sale were received in February, 1996. Note 8 ------ Construction Program The company's 1996 construction budget provides for gross expenditures of approximately $31,300,000. Management anticipates that $6,300,000 of the 1996 budgeted amount will be obtained from developers and others. Note 9 ------ Allowance for Doubtful Accounts The table below presents the company's provision for doubtful accounts charged to expense and accounts written off, net of recoveries for the last three years.
1995 1994 1993 - ---------------------------------------------------------------------- (in thousands) Balance at beginning of year $ 419 $ 370 $ 333 Provision charged to expense 1,501 765 706 Accounts written off, net of recoveries (1,272) (716) (669) - ---------------------------------------------------------------------- Balance at end of year $ 648 $ 419 $ 370 - ----------------------------------------------------------------------
Note 10 ------- Business Segments The table below sets forth information relating to the company's operating segments; however, the company is a regulated public utility and such information does not reflect the rate-making treatment allowed by the regulatory agency. In addition to amounts set forth, certain assets have not been allocated. The identifiable assets are net of respective accumulated provisions for depreciation. Note 11 ------- Selected Quarterly Financial Data (Unaudited) The quarterly financial information presented below is unaudited. The business of the company is of a seasonal nature and it is management's opinion that comparisons of earnings for the quarterly periods do not reflect overall trends
Years Ended December 31, ---------------------------------------------------------------------------- Business Segments 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------- (in thousands) Water Electric Water Electric Water Electric Operating revenues $118,922 $10,891 $112,087 $10,588 $ 98,155 $10,351 Operating income before income taxes 27,776 2,396 25,858 1,936 23,192 2,349 Identifiable assets 303,367 31,601 294,343 20,536 276,710 18,280 Depreciation expense 7,717 766 7,308 741 6,715 683 Capital additions 25,753 2,985 27,878 3,057 26,443 2,057 - -----------------------------------------------------------------------------------------------------------------
Operating Operating Earnings Revenues Income Net Income per Share --------------------- ------------------ ------------------- ------------- Quarterly Financial Data 1995 1994 1995 1994 1995 1994 1995 1994 - ----------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) First Quarter $ 24,976 $ 24,181 $ 3,396 $ 2,895 $ 1,118 $ 1,166 $0.14 $0.15 Second Quarter 32,372 30,494 5,268 4,263 3,027 2,327 0.38 0.29 Third Quarter 39,533 38,686 7,553 6,877 5,290 5,208 0.67 0.66 Fourth Quarter 32,932 29,314 5,171 4,895 2,730 2,637 0.34 0.33 - ----------------------------------------------------------------------------------------------------------------- Year $129,813 $122,675 $21,388 $18,930 $12,165 $11,338 $1.54 $1.43 - -----------------------------------------------------------------------------------------------------------------
twenty-seven ------------ 16 and changes in the company's operations. 1996 Annual Meeting of Shareholders All shareholders are invited to attend the 1996 Annual Meeting on Tuesday, April 30, 1996, beginning at 10:00 am, at Industry Hills Sheraton, One Industry Hills Parkway, City of Industry, California. Stock Listing Common Shares of Southern California Water Company are traded on the New York Stock Exchange under the symbol SCW. Common Share prices and dividends for the past two years were:
Dividends 1995 High Low Paid - ------------------------------------------------------- First Quarter 18 1/4 15 3/4 $0.300 Second Quarter 19 7/8 15 7/8 0.300 Third Quarter 19 3/8 16 3/4 0.300 Fourth Quarter 21 18 3/8 0.305 - ------------------------------------------------------- $1.205 - -------------------------------------------------------
Dividends 1994 High Low Paid - ------------------------------------------------------- First Quarter 22 17 1/4 $0.300 Second Quarter 20 3/4 18 1/8 0.300 Third Quarter 18 7/8 16 0.300 Fourth Quarter 17 5/8 15 1/4 0.300 - ------------------------------------------------------- $1.200 - -------------------------------------------------------
Independent Certified Public Accountants Arthur Andersen LLP First Interstate World Center 633 West Fifth Street Los Angeles, CA 90071 Shareholder Assistance and Corporate Reports Shareholders with questions, or who wish to obtain a copy of the company's reports to the Securities and Exchange Commission without charge, should contact: Southern California Water Company Office of the Treasurer 630 East Foothill Boulevard San Dimas, CA 91773 Phone: (909) 394-3600, Extension 705 Fax: (909) 394-0711 Transfer Agent, Registrar and Dividend Paying Agent First Interstate Bank of California Stock Transfer Department P.O. Box 30609 Los Angeles, CA 90030 (800) 522-6645 Replacement of Dividend Checks If a dividend check is not received within seven working days after the dividend payment date, or if a check is lost or has been destroyed, please notify the transfer agent to stop payment and issue a replacement check. 1996 Dividend Schedule The following schedule is the estimated Common and Preferred Share record and payment dates for 1996:
Record Dates Payment Dates - -------------------------------------------------------- February 12 March 1 May 13 June 1 August 12 September 1 November 15 December 1
Dividend Reinvestment and Common Share Purchase Plan The company has a Dividend Reinvestment and Common Share Purchase Plan that offers shareholders of record a convenient way to increase their holdings by reinvesting all or part of their cash dividends in additional Common Shares of the company. The Plan also provides for receipt of optional cash payments for the purchase of additional Common Shares. A prospectus and authorization form may be obtained from the transfer agent. Transferring Stock A stock transfer is required whenever a shareholder changes the registration of their stock. To transfer stock, fill in the name, address and taxpayer identification number on the back of the certificate and sign exactly as it appears on the front. The signature must be guaranteed by a member of the Gold Medallion Signature Guarantee Program. A certificate, fully endorsed, should be sent to the transfer agent by registered or certified mail. Lost or Stolen Certificates If a certificate should become lost, stolen or destroyed, notify the transfer agent to issue a stop transfer order against the missing certificate. The transfer agent will send documents required to replace the missing certificates as well as providing any other requirements. A surety bond must be purchased in order to protect the interests of all parties against the possibility of the missing certificates returning to circulation. The fee for the surety bond is approximately 2% of the current market value of the missing shares. Duplicate Mailings Some shareholders maintain separate accounts on the transfer agent's records due to slight variations in the registered ownership. Even though the mailing address and taxpayer identification numbers are identical, the transfer agent is required to mail separate dividend checks, proxy material and annual and quarterly reports to each account. To maintain separate accounts but eliminate duplicate mailings, please notify the transfer agent in writing, listing the account for which mailings should continue and the accounts for which these mailings should be discontinued. Dividend checks and proxy materials will still be sent to each separate account. To consolidate accounts into one, please notify the transfer agent in writing as to which account is to remain open and which accounts are to be consolidated. If it is necessary to reissue stock certificates to consolidate the accounts, the shareholder will be notified in advance by the transfer agent. twenty-eight ------------ EX-23 3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated February 15, 1996 included in the 1995 Annual Report to Shareholders of Southern California Water Company. It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 1995 or performed any audit procedures subsequent to the date of our report. We further consent to the incorporation by reference of the above-mentioned Report of Independent Public Accountants, incorporated by reference in this Annual Report on Form 10-K in the Southern California Water Company Registration Statements which follow:
------------------------------------------------------------------- Registration Form File No. Effective Date ------------------------------------------------------------------- S - 3 33-42218 August 22, 1991 S - 8 33-71226 November 4, 1993 S - 3 33-60441 August 11, 1995 -------------------------------------------------------------------
/s/ Arthur Andersen LLP ------------------------- ARTHUR ANDERSEN LLP Los Angeles, California March 19, 1996 EX-27 4 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEETS AND INCOME STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS FILED HEREWITH AS EXHIBIT NO. 13. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 PER-BOOK 334,968 755 42,970 27,562 0 406,255 19,613 54,753 47,210 121,576 520 1,600 107,455 8,500 0 0 15,200 40 1,111 384 149,869 406,255 129,813 8,784 99,641 108,425 21,388 336 21,724 9,559 12,165 96 12,069 9,614 0 18,947 1.54 1.54
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