-----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, Nk6aHNl9UozoYSGjGXHgsECkf4pdm/NCgveB6uPVWwiPiP9+g8n4HH2US16b3wH4 IyteJbV1YH0UNDSEIDQfKw== 0000950150-97-000353.txt : 19970321 0000950150-97-000353.hdr.sgml : 19970321 ACCESSION NUMBER: 0000950150-97-000353 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970320 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: 001-12008 FILM NUMBER: 97560181 BUSINESS ADDRESS: STREET 1: 630 E FOOTHILL BLVD CITY: SAN DIMAS STATE: CA ZIP: 91773-9016 BUSINESS PHONE: 9093943600 MAIL ADDRESS: STREET 1: 630 E FOOTHILL CITY: SAN DIMAS STATE: CA ZIP: 91773-9016 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, 1996 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: Title of Each Class Name of Each Exchange On Which Registered ------------------- ----------------------------------------- Common Shares, $2.50 Par Value New York Stock Exchange - ------------------------------ ----------------------------------------- - ------------------------------ ----------------------------------------- Securities registered pursuant to Section 12(g) of the Act: NONE 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 $185,271,000 on March 17, 1997. The closing price per Common Share on that date, as quoted in the Western Edition of The Wall Street Journal, was $20.625. Voting Preferred Shares, for which there is no established market, were valued on March 17, 1997 at $1,283,000 based on a yield of 6.60%. As of March 17, 1997, the number of the Registrant's Common Shares, $2.50 Par Value, outstanding was 8,957,671. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Annual Report to Shareholders for the year ended December 31, 1996 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 20, 1997 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 7 - 9 Item 3: Legal Proceedings 9 Item 4: Submission of Matters to a Vote of Security Holders 9 PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 9 - 10 Item 6: Selected Financial Data 10 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation 10 Item 8: Financial Statements and Supplementary Data 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 11 Item 11: Executive Compensation 11 Item 12: Security Ownership of Certain Beneficial Owners and Management 11 Item 13: Certain Relationships and Related Transactions 11 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K 11 Exhibit Index 12 - 14 Signatures 15
i. 3 PART I ITEM 1. BUSINESS GENERAL Southern California Water Company, hereinafter referred to as Registrant, is a utility company engaged principally in the purchase, production, distribution and sale of water (SIC No. 4941). Registrant also distributes electricity in one community (SIC No. 4911). 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 been the subject of condemnation proceedings. Registrant's present name was adopted in 1936. At December 31, 1996, 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, 1996, 1995 and 1994, about 73% of Registrant's water customers were located in the greater metropolitan areas of Los Angeles and Orange Counties. Registrant provides electric service to the City of Big Bear Lake and surrounding areas in San Bernardino County. Beginning in June, 1996, all electric energy sold by Registrant to customers in its Bear Valley Electric customer service area was purchased under an energy brokerage contract with ENOVA Energy Management, Inc. Prior to June, 1996, all energy sold was purchased from the Southern California Edison Company subsidiary of Edison International. Registrant served 240,498 water customers and 20,546 electric customers at December 31, 1996, or a total of 261,044 customers, compared with 259,437 total customers at December 31, 1995 and 258,236 total customers at December 31, 1994. For the years ended December 31, 1996, 1995 and 1994, approximately 92% of Registrant's operating revenues were derived from water sales and approximately 8% were derived from the sale of electricity. Operating income before taxes on income of the electric district was approximately 9%, 8% and 7% of Registrant's total operating income before taxes for the years ended December 31, 1996, 1995 and 1994, respectively. The material contained in Note 11 Business Segments - of the Notes to Financial Statements in the 1996 Annual Report to Shareholders provides additional information on business segments while Note 12 - Selected Quarterly Financial Data (Unaudited) - of the Notes to Financial Statements in the 1996 Annual Report to Shareholders provides information regarding the seasonal nature of Registrant's business. The Notes to Financial Statements contained in the 1996 Annual Report to Shareholders are included herein by reference. During 1996, Registrant supplied, from all sources, a total of 194,397 acre-feet of water compared to 183,108 acre-feet supplied in 1995 and 185,490 acre-feet in 1994. Of the total water supplied in 1996, approximately 43% was purchased from others, principally from member agencies of the Metropolitan Water District of Southern California ("MWD"). The remaining amount was furnished by the Bureau of Reclamation under contract, at no cost, to Registrant's Arden-Cordova customer service area and to Registrant's Clearlake 1 4 customer service area by prescriptive rights to water extracted from Clear Lake. The remainder of water supplied was produced from Registrant's owned wells. MWD is organized to deliver imported water to areas within its jurisdiction. Registrant has 52 connections to the water distribution facilities of MWD and other municipal water agencies. MWD imports water from two principal sources: the Colorado River and the State Water Project ("SWP"). Available water supplies from the Colorado River and the SWP have historically been sufficient to meet most of MWD's requirements and MWD's supplies from these sources are anticipated to remain adequate through 1997. MWD's import of water from the Colorado River is expected to decrease in future years due to the requirements of the Central Arizona Project in the State of Arizona. In response, MWD has taken steps to secure additional storage capacity and increase available water supplies, including effecting transfers of water rights from other sources. The recent storms during the 1996-1997 winter period provided precipitation adequate to fill most of the state's reservoirs to near capacity and the outlook for water supply in 1997 is favorable. In those districts of Registrant which pump groundwater, overall groundwater conditions remain at adequate levels, allowing Registrant to use groundwater in its resource mix and decrease its dependence on increasingly expensive purchased water. Registrant believes that its water supplies from all sources are adequate to meet current year projected demands. COMPETITION The business of Registrant is substantially free from direct and indirect competition with other public utilities, municipalities and other public agencies. WATER-RELATED OPPORTUNITIES Registrant continues to pursue strategic opportunities related to the operation of municipally-owned water systems. Registrant has pursued and continues to pursue opportunities to bid on long-term leases and operation contracts on a stand-alone basis or as part of a joint venture. In December, 1996, Registrant and U.S. Water, L.L.C., a limited liability company owned by United Infrastructure Company, a general partnership formed by the Bechtel and Peter Kiewet organizations, and by Northwest Water Holdings, Inc., a subsidiary of United Utilities PLC, a water and electric utility based in the United Kingdom, formed Golden State Water Company LLC ("GSWC") for the purpose of pursuing potential opportunities to lease, or operate and maintain, municipally owned retail water supply and distribution systems and water treatment, wastewater collection and wastewater treatment facilities in California. GSWC has submitted a bid to the City of Garden Grove ("Garden Grove") to operate and maintain its water system. The bid remains subject to approval by Garden Grove. No assurance can be given that Garden Grove will approve GSWC's bid or that GSWC will ultimately be retained to operate and maintain the city's water system or perform any other services for Garden Grove. There can be no assurance that any such other opportunities will materialize or that, if they do, Registrant (either jointly with GSWC or alone) would be successful in consummating any such lease and/or maintenance and operation arrangements. RATES AND REGULATION 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 Registrant are grouped into 16 water districts and one electric district for ratemaking purposes. Registrant's water rates vary among the 16 ratemaking districts due to differences in operating conditions and costs. 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. 2 5 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 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. The attrition mechanism is to set 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. 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 authorized for Registrant. General rate proceedings typically take about 12 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 the required notification and, after CPUC approval, permits Registrant to include the costs associated with the facilities in rates. During each of 1996, 1995 and 1994, Registrant's rates for most of 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 Registrant's Bear Valley Electric customer service area were adjusted in 1996. The following table lists information on estimated rate changes, by major type, for the last three years:
SUPPLY BALANCING GENERAL AND STEP RATE BASE COST ACCOUNT RATE OFFSET YEAR OFFSET AMORTIZATION INCREASES AND OTHERS TOTAL - ----------------------------------------------------------------------------------------- 1996 $ 102,500 $ (757,700) $16,804,100 $ 2,305,100 $18,297,800 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
In January, 1996, new rates were effective in six of Registrant's rate-making districts which, among other things, authorized a rate of return on common equity of 10.40%, increased depreciation rates, authorized recovery of postretirement medical benefit costs, increased current recovery of labor and labor-related expenses and resulted in an increase in annual water operating revenues of approximately $15 million. Water rates in two additional ratemaking districts were increased on January 1, 1997 to recover costs associated with 1996 and 1997 capital projects in those areas. 3 6 Registrant filed notices of intent to increase water rates in four ratemaking districts in January, 1997. Registrant is unable to predict if the CPUC will authorize all or any of the proposed increases. However, it is not anticipated that new rates, if approved, would be effective before January, 1998. New rates were effective in May, 1996 in Registrant's Bear Valley Electric customer service area. An additional step increase was effective in January, 1997. In November, 1996, Registrant filed an application with the CPUC seeking recovery through rates of costs associated with its participation in the coastal aqueduct extension of the State Water Project. Registrant is currently unable to predict if the CPUC will authorize recovery of all or any of the costs associated with its participation in the Project. EMPLOYEE RELATIONS Registrant had 463 employees as of December 31, 1996. Seventeen employees in Registrant's Bear Valley Electric customer service area were members of the International Brotherhood of Electrical Workers, hereinafter referred to as the IBEW. Registrant's bargaining unit agreement with the IBEW expired on December 1, 1996 but was extended until March 31, 1997. Registrant and the IBEW are negotiating a new contract, but Registrant is unable at this time to predict the final result of those negotiations. Fifty-three of 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 in March, 2001. Registrant has no other unionized employees. ENVIRONMENTAL MATTERS 1996 Amendments to Federal Safe Drinking Water Act On August 6, 1996, amendments (the "1996 SDWA amendments") to the federal Safe Drinking Water Act (the "SDWA") were signed into law. The 1996 SDWA amendments amount to a rewrite of the law that the United States Environmental Protection Agency (the "EPA") has been trying to implement for almost 10 years. The amendments were developed with significant contributions from water purveyors and regulators. The California Department of Health Services, acting on behalf of the EPA, administers the EPA's program in California. The 1996 SDWA amendments revise the 1986 amendments to the SDWA, which required that the EPA set 25 new contaminant standards every three years, with a new process for selecting and regulating contaminants. The EPA can only regulate contaminants that may have adverse health effects, are known or likely to occur at levels of public health concern, and the regulation of which will provide "a meaningful opportunity for health risk reduction." The EPA must, within 18 months of the time that the 1996 SDWA amendments were signed into law, publish a list of contaminants for possible regulation and must update that list every five years. In addition, every five years, the EPA must select at least five contaminants on that list and determine whether to regulate them. The new law allows the EPA to bypass the selection process and adopt interim regulations for contaminants in order to address urgent health threats. Current standards for contaminants, however, remain in place and are not subject to the new standard-setting provisions. The 1996 SDWA amendments allow the EPA for the first time to base primary drinking water regulations on risk assessment and cost/benefit considerations and on minimizing overall risk. The EPA must base regulations on best available, peer-reviewed science and data from best available methods. For proposed regulations that involve the setting of maximum contaminant levels ("MCLs"), the EPA must use, and seek public comment on, an analysis of quantifiable and non-quantifiable risk-reduction benefits and cost for each such MCL. 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. Since the SDWA became effective, Registrant has experienced increased operating costs for testing to determine the levels, if any, of the contaminants in Registrant's sources of supply and additional expense to lower the level of any contaminants in order to meet the MCL standards. Such costs and the costs of controlling any other contaminants may cause Registrant to experience additional capital costs as well as increased operating costs. Registrant is currently unable to predict the ultimate impact that the 1996 SDWA amendments might have on its financial position or its results of operation. The ratemaking process provides Registrant with the opportunity to recover prudently incurred capital and operating costs associated with water quality. Management believes that such incurred costs will be authorized for recovery by the CPUC. 4 7 Proposed Enhanced Surface Water Treatment Rule On July 29, 1994, the EPA proposed an Enhanced Surface Water Treatment Rule ("ESWTR"), which would require increased surface-water treatment to decrease the risk of microbial contamination. The EPA has proposed several different versions of the ESWTR for promulgation. The version selected for promulgation will be determined based on data collected by certain water suppliers and forwarded to the EPA pursuant to the EPA's Information Collection Rule, which requires such water suppliers to monitor certain microbial and other contaminants in their water supplies and to conduct certain tests in respect of such contaminants. The EPA must adopt interim and final rules pertaining to enhanced surface water treatment according to a negotiated schedule or as soon as practicable. The ESWTR, in any of the forms currently proposed, would apply to each of Registrant's five surface water treatment plants. However, because it is impossible to predict the version of the ESWTR that will be promulgated, the Company is unable to predict what additional costs, if any, will be incurred to comply with the ESWTR. Regulation of Disinfection/Disinfection By-Products Registrant will also be subject to new regulations concerning disinfection/disinfection by-products ("DBPs"), Stage I of which regulations are expected to become effective in June, 1998. These regulations will require reduction of tri-halomethane contaminants from 100 micrograms per liter to 80 micrograms per liter and are expected to affect two of Registrant's systems. The EPA must adopt Stage II rules pertaining to DBPs according to a negotiated schedule or as soon as practicable. The EPA is not allowed to utilize the new cost/benefit analysis provided for in the 1996 SDWA amendments for establishing the Stage II rules applicable to DBPs but may utilize the regulatory negotiating process provided for in the 1996 SDWA amendments to develop the Stage II rule. Ground Water Disinfection Rule By December, 1998, the EPA is scheduled to propose regulations requiring disinfection of certain groundwater systems and provide guidance on determining which systems must provide disinfection facilities. The EPA may utilize the cost/benefit analysis provided in the 1996 SDWA amendments to establish such regulations. It is anticipated that the regulations will apply to several of Registrant's systems using groundwater supplies. While no assurance can be given as to the nature and cost of any additional compliance measures, if any, that will ultimately be necessitated by implementation of the proposed regulations, Registrant does not believe that such regulations will impose significant additional compliance costs, since Registrant already currently engages in disinfection of its groundwater systems. Regulation of Radon and Arsenic Registrant will be subject to new regulations regarding radon and arsenic. EPA must propose an arsenic rule by January 1, 2001 and adopt a rule one year later. EPA has 180 days after enactment of the 1996 SDWA amendments to develop a plan to study ways to reduce arsenic health risk uncertainties and is authorized to enter into cooperative agreements to carry out the study. Depending on the MCL eventually established for arsenic, compliance could require 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 EPA must withdraw its proposed radon rule and arrange for the National Academy of Sciences to conduct a risk assessment and a study of risk-reduction benefits associated with various mitigation measures. EPA has 30 months from enactment of the 1996 SDWA amendments in which to seek comment on a risk-reduction and cost analysis for potential radon standards, six more months to propose a standard, and another year to adopt a standard. Although Registrant is unable to predict what the standard for radon might eventually be, Registrant itself is currently conducting studies to determine the best treatment for affected wells, which treatment could range from simple aeration to filtration through granular activated carbon. Voluntary Efforts to Exceed Surface Water Treatment Standards Registrant is a voluntary member of the "Partnership for Safe Water", a national program to further protection of the public from diseases caused by cryptosporidium and other microscopic organisms. As a volunteer in the program, Registrant has committed to exceed current regulations governing surface water treatment to ensure that its surface treatment facilities are performing as efficiently as possible. 5 8 Fluoridation of Water Supplies 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. Matters Relating to Arden-Cordova System Three of the 27 wells in Registrant's Arden-Codova system have, for several years, been subject to contamination by trichloroethylene. GenCorp Aerojet has, by court decree, been responsible for all costs related to the provision of well-head treatment. Although a 10-year agreement with Aerojet Corporation expired in 1996, Aerojet Corporation has agreed to reimburse Registrant for the costs of backwash system modification at all three wells. In January, 1997, Registrant was notified that ammonium perchlorate had been detected in three of its wells in its Arden-Cordova system. GenCorp Aerojet has, in the past, used ammonium perchlorate in their processing as an oxidizer of rocket fuels. Although neither the EPA nor the DOHS has established a drinking water standard for ammonium perchlorate, Registrant has notified customers in its Arden-Cordova customer service area of detection of ammonium perchlorate. Registrant and GenCorp Aerojet are in negotiations on matters related to procedures to address cleanup of the contaminated wells as well as costs associated with the cleanup. Registrant is unable to predict when the negotiations will be completed or the likely outcome of such negotiations. Matters Relating to Culver City System The compound methyl tertiary butyl ether (MTBE) has been detected in the Charnock Basin located in the City of Santa Monica and Culver City, which lie within Registrant's service area. MTBE is an oxygenate used in reformulated fuels. At the request of the Regional Water Quality Control Board, the City of Santa Monica and the California Environmental Protection Agency, Registrant removed two of its wells in the Culver City system from service in November 1996 to help in efforts to avoid further spread of the MTBE contamination plume. Neither these wells nor any of Registrant's other wells have been found to be contaminated with MTBE. Registrant is purchasing water from the Metropolitan Water District at an increased cost to replace the water supply formerly pumped from the two wells removed from service. Several studies are under way to determine the possible sources and causes of the MTBE contamination. The federal EPA is pursuing an enforcement effort to reach a settlement with the potentially responsible parties on matters relating to the cleanup of the contamination as well as to obtain reimbursement from such parties for increased costs incurred by the Company in purchasing replacement water. Registrant is unable to predict the outcome of the EPA's enforcement effort, and no assurance can be given as to whether the Company will obtain reimbursement for the increased costs of purchasing water to replace the water formerly pumped from the affected wells in the Culver City system. Bear Valley Electric There have been no environmental matters that have materially affected or are currently materially affecting Registrant's Bear Valley Electric Service area. 6 9 ITEM 2 - PROPERTIES FRANCHISES, COMPETITION, ACQUISITIONS AND CONDEMNATION OF PROPERTIES Registrant holds all necessary franchises from the incorporated communities and the counties which it serves. Registrant holds certificates of public convenience and necessity granted by the CPUC in each of the ratemaking districts it serves. 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. Within the last three years, Registrant has been involved in activities related to the condemnation of its Bay Point water district by the Contra Costa Water District. Registrant and the Contra Costa Water District have settled all matters related to this action. WATER PROPERTIES As of December 31, 1996, Registrant's physical properties consisted of water transmission and distribution systems which included 2,603 miles of pipeline together with services, meters and fire hydrants and 437 parcels of land, generally less than one acre each, on which are located wells, pumping plants, reservoirs and other water utility facilities including five surface water treatment plants. Registrant's 41 water systems and operating properties have been maintained and improved in the ordinary course of business. As of December 31, 1996, Registrant owned and operated 292 active wells equipped with pumps with an aggregate capacity of approximately 180 million gallons per day. Registrant has 52 connections to the water distribution facilities of the MWD and other municipal water agencies. Registrant's storage reservoirs and tanks have an aggregate capacity of approximately 94 million gallons. Registrant owns no dams in its customer service areas. The table on the following page sets forth, in greater detail, a listing of selected water utility plant by ratemaking district. ELECTRIC PROPERTIES Registrant's electric properties are all located in the Big Bear area of San Bernardino County. As of December 31, 1996, 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 Registrant's system. OFFICE BUILDINGS 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 Registrant. The Registrant also owns and occupies certain facilities housing regional, district and customer service offices while other such facilities are housed in leased premises. 7 10
- ---------------------------------------------------------------------------------------------------------------------- PUMPS DISTRIBUTION FACILITIES RESERVOIRS --------------------------------------------------------------------------------------------------- DISTRICT WELL BOOSTER MAINS (FT) METERS SERVICES HYDRANTS TANKS CAPACITY - ---------------------------------------------------------------------------------------------------------------------- Arden-Cordova 27 15 455,364 2,868 7,637 1,125 2 2,000 Barstow 27 33 840,855 12,497 10,676 975 13 5,025 Bay Point 1 15 133,008 4,607 2,963 289 7 4,046 Calipatria 0 9 134,878 1,036 1,663 69 2 200 Claremont 26 36 706,912 13,907 10,818 1,148 18 17,367 Clearlake 0 14 188,068 2,544 818 72 4 867 Desert 19 24 744,998 6,853 4,520 563 12 1,500 Los Osos 10 11 195,811 3,639 1,371 149 8 1,423 Metropolitan 76 82 4,653,663 136,898 105,385 6,925 41 25,067 Ojai 5 13 234,001 5,004 3,408 348 6 1,536 Orange County 30 37 2,098,429 47,760 38,665 9,697 17 12,153 San Dimas 11 38 1,180,508 18,878 7,269 818 14 10,143 San Gabriel 22 10 546,192 12,071 12,576 769 3 1,520 Santa Maria 29 25 948,833 19,644 7,184 756 8 3,238 Simi Valley 1 19 468,754 13,680 9,453 811 6 6,210 Wrightwood 8 6 215,028 5,403 629 71 7 1,546 - ---------------------------------------------------------------------------------------------------------------------- Total 292 387 13,745,302 307,289 225,035 24,585 168 93,841 - ---------------------------------------------------------------------------------------------------------------------- Capacity is measured in thousands of gallons
MORTGAGE AND OTHER LIENS As of December 31, 1996, Registrant had no mortgage debt outstanding, and its properties were free of any encumbrances or liens securing indebtedness. FINANCING OF CAPITAL EXPENDITURES Registrant's construction program is designed to ensure its customers high quality service. 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, Registrant upgrades its electric and water supply facilities and is aggressively scheduling meter replacements that conform with CPUC requirements. Registrant's Board of Directors has approved anticipated net capital expenditures of approximately $27,500,000 in 1997. Registrant anticipates capital expenditures of approximately $32,000,000 and $33,000,000 in 1998 and 1999, respectively, although such expenditures are subject to final approval by Registrant's Board of Directors. Registrant anticipates that net capital expenditures in excess of its internally generated cash will continue to be financed through a combination of long-term debt and sales of additional Common Shares. Registrant issued 1,000,000 Common Shares in December, 1996 and an additional 71,500 Common Shares in January, 1997 for aggregate net proceeds of $22,062,000. Also during 1996, Registrant issued approximately 41,000 Common Shares through its Dividend Reinvestment and Common Share Purchase and 401(k) Plans for additional aggregate proceeds of approximately $904,000. 8 11 In December, 1996, Registrant sold $8 million in tax-exempt debt that was issued through the California Pollution Control Financing Authority. The funds were deposited with a trustee and will be used to finance water main replacements in several of Registrant's customer service areas. FORWARD-LOOKING INFORMATION Certain matters discussed in this Report (including the documents incorporated herein by reference) are forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as the Company "believes," "anticipates," "expects" or words of similar import. Similarly, statements that describe the Company's future plans, objectives, estimates or goals are also forward-looking statements. Such statements address future events and conditions concerning capital expenditures, earnings, litigation, rate and other regulatory matters, adequacy of water supplies, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those currently anticipated in such statements, by reason of factors such as utility restructuring, including ongoing state and federal activities; future economic conditions, including changes in customer demand; future climatic conditions; legislative, regulatory and competitive developments in markets in which the Company operates; and other circumstances affecting anticipated revenues and costs. ITEM 3. LEGAL PROCEEDINGS Registrant is subject to ordinary course litigation incidental to its business. No legal proceedings are pending (except such incidental litigation) to which Registrant is a party or to which any of its properties is subject which are believed by Registrant to be material. 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 1996 Annual Report to Shareholders under the caption "Stock Listing" located on page 36 thereof, filed by 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 17, 1997, there were 4,078 holders of record of Common Shares. (c) FREQUENCY AND AMOUNT OF ANY DIVIDENDS DECLARED AND DIVIDEND RESTRICTIONS Information responding to Item 201(c) of Regulation S-K is included in the 1996 Annual Report to Shareholders, under the caption "Stock Listing" and located on page 36, filed by 9 12 Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2). For each of the last three years, 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 1996 Annual Report to Shareholders, under Note 2 captioned "Capital Stock" located on pages 28 and 29 of the Notes to Financial Statements, filed by 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 1996 Annual Report to Shareholders, under the caption entitled "Selected Financial Data" located on page 1, filed by 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 1996 Annual Report to Shareholders, under the caption entitled "Management's Discussion and Analysis" located on pages 19 through 22, filed by 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 on pages 23 through 33 of the 1996 Annual Report to Shareholders under the captions listed below, which Report was filed by Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2). Report of Independent Public Accountants Balance Sheets - December 31, 1996 and 1995 Statements of Capitalization - December 31, 1996 and 1995 Statements of Income - for the years ended December 31, 1996, 1995 and 1994 Statements of Changes in Common Shareholders' Equity - for the years ended December 31, 1996, 1995 and 1994 Statements of Cash Flows - for the years ended December 31, 1996, 1995 and 1994 Notes to Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 10 13 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information responding to Item 10 is included in the definitive Proxy Statement, filed by Registrant with the Commission on or about March 20, 1997 pursuant to Regulation 14A, under the captions entitled "Election of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance," 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 definitive Proxy Statement, filed by Registrant with the Commission on or about March 20, 1997 pursuant to Regulation 14A, under the captions entitled "Election of Directors," "Executive Officers - Experience, Security Ownership and Compensation," "Pension Plan," "Deferred Compensation Plan for Directors and Executives," "Compensation Committee Interlocks and Inside Participation," "Report on Executive Compensation," and "Performance Graph," and 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 definitive Proxy Statement, filed by Registrant with the Commission on or about March 20, 1997 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 definitive Proxy Statement, filed by Registrant with the Commission on or about March 20, 1997 pursuant to Regulation 14A, under the caption entitled "Certain Relationships and Related Transactions" 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. All other required schedules may be found in Exhibit 13 filed herewith. 3. See (c) below. (b) The Company filed a Current Report on Form 8-K dated December 9, 1996 relating to the Company's formation, together with U.S. Water, L.L.C., of Golden State Water Company LLC. The Company also filed a Current Report on Form 8-K dated December 16, 1996 to report that the Company entered into an Underwriting Agreement, the form of which was attached as an exhibit to such report. (c) Exhibits - 11 14 3.1 By-Laws as Amended to April 26, 1994* 3.2.1 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 3.2.2 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. 3.2.3 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. 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 4.1 Indenture, dated September 1, 1993 between Registrant and Chemical Trust Company of California, as trustee, relating to 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 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 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 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. 10.5 Third Amendment to Reimbursement Agreement dated September 14, 1987 between 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. 12 15 10.6 Fourth Amendment to Reimbursement Agreement dated September 22, 1988 between 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 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 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 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 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 Agreements 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 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 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. 10.15 Water Supply Agreement dated as of June 1, 1994 between Registrant and Central Coast Water Authority incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1994. Commission File No. 0-1121. 13 16 10.16 Retirement Plan for Non-Employee Directors of Southern California Water Company, as amended, January 25, 1995 incorporated herein by reference to 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 Registrant's 1995 Proxy Statement, Commission File No. 0-1121. 10.19 Energy Management Services Agreement between Registrant and Enova Energy, Inc. 13. Portions of the Annual Report to Shareholders for the year ended December 31, 1996 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 14 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, 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 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated. /s/ W. V. CAVENEY . Date: March 14, 1997 - ------------------------------------------- W. V. Caveney Chairman of the Board and Director /s/ FLOYD E. WICKS . March 14, 1997 - ------------------------------------------- Floyd E. Wicks Principal Executive Officer; President, CEO and Director /s/ JAMES B. GALLAGHER . March 14, 1997 - ------------------------------------------- James B. Gallagher Principal Financial and Accounting Officer; Vice President - Finance, CFO and Secretary /s/ JEAN E. AUER . March 14, 1997 - ------------------------------------------- Jean E. Auer, Director /s/ R. BRADBURY CLARK . March 14, 1997 - ------------------------------------------- R. Bradbury Clark, Director /s/ N. P. DODGE, JR. . March 14, 1997 - ------------------------------------------- N. P. Dodge, Jr., Director /s/ ROBERT F. KATHOL . March 14, 1997 - ------------------------------------------- Robert F. Kathol, Director /s/ LLOYD E. ROSS . March 14, 1997 - ------------------------------------------- Lloyd E. Ross, Director 15 EX-3.1 2 BY-LAWS AS AMENDED TO APRIL 26, 1994 1 EXHIBIT 3.1 BYLAWS of SOUTHERN CALIFORNIA WATER COMPANY (a California corporation) As Amended April 26, 1994 2 INDEX Page ---- ARTICLE 1 - Offices. 1 Section 1. Principal Executive Office. 1 Section 2. Other Offices. 1 ARTICLE II - Shareholders. 1 Section 1. Place of Meetings. 1 Section 2. Annual Meetings. 1 Section 3. Special Meetings. 2 Section 4. Notice of Annual or Special Meetings. 2 Section 5. Quorum. 2 Section 6. Adjourned Meetings and Notice Thereof. 3 Section 7. Voting. 3 Section 8. Record Date. 5 Section 9. Consent of Absentees. 5 Section 10. Action Without Meeting. 6 Section 11. Proxies. 6 Section 12. Inspectors of Election. 6 Section 13. Conduct of Meeting. 7 Section 14. Qualifications of Directors. 7 Section 15. Proper Business for Shareholder Meetings. 8 ARTICLE III - Directors. 9 Section 1. Powers. 9 Section 2. Number of Directors. 9 Section 3. Election and Term of Office. 10 Section 4. Vacancies. 10 Section 5. Place of Meeting. 10 Section 6. Regular Meetings. 10 i 3 Page ---- Section 7. Special Meetings. 11 Section 8. Quorum. 11 Section 9. Participation in Meetings by Conference Telephone. 11 Section 10. Waiver of Notice. 11 Section 11. Adjournment. 12 Section 12. Fees and Compensation. 12 Section 13. Action Without Meeting. 12 Section 14. Rights of Inspection. 12 Section 15. Committees. 12 ARTICLE IV - Officers. 13 Section 1. Officers. 13 Section 2. Election. 13 Section 3. Subordinate Officers. 13 Section 4. Removal and Resignation. 13 Section 5. Vacancies. 14 Section 6. Chairman of the Board. 14 Section 7. President. 14 Section 8. Vice Presidents. 14 Section 9. Secretary. 14 Section 10. Chief Financial Officer. 15 ARTICLE V - Other Provisions. 15 Section 1. Inspection of Corporate Records. 15 Section 2. Inspection of Bylaws. 16 Section 3. Endorsement of Documents, Contracts. 16 Section 4. Certificates of Stock. 17 Section 5. Representation of Shares of Other Corporations. 17 Section 6. Stock Purchase Plans. 17 Section 7. Construction and Definitions. 18 ii 4 Page ARTICLE VI - Indemnification. Section 1. Indemnification of Directors 18 and Officers. 18 Section 2. Indemnification of Employees and Agents. 19 Section 3. Right of Directors and Officers to Bring Suit. 19 Section 4. Successful Defense. 20 Section 5. Indemnity Agreements. 20 Section 6. Subrogation. 20 Section 7. Non-Exclusivity Rights. 20 Section 8. Insurance. 20 Section 9. Expenses as a Witness. 20 Section 10. Nonapplicability to Fiduciaries of Employee Benefit Plans. 20 Section 11. Separability. 21 Section 12. Effect of Repeal or Modification. 21 ARTICLE VII - Emergency Provisions. 21 Section 1. General. 21 Section 2. Unavailable Directors. 21 Section 3. Authorized Number of Directors. 21 Section 4. Quorum. 21 Section 5. Creation of Emergency Committee. 22 Section 6. Constitution of Emergency Committee. 22 Section 7. Powers of Emergency Committee. 22 Section 8. Directors Becoming Available. 22 Section 9. Election of Board of Directors. 22 Section 10. Termination of Emergency Committee. 23 ARTICLE VIII - Amendments. 23 iii 5 4-26-94 BYLAWS for the regulation, except as otherwise provided by statute or its Articles of Incorporation, of SOUTHERN CALIFORNIA WATER COMPANY (a California corporation) ARTICLE 1. Offices. Section 1. PRINCIPAL EXECUTIVE OFFICE. The corporation's principal executive office shall be fixed and located at such place as the Board of Directors (herein called the "Board") shall determine. The Board is granted full power and authority to change said principal executive office from one location to another. Section 2. OTHER OFFICES. Branch or subordinate offices may be established at any time by the Board at any place or places. ARTICLE II. Shareholders. Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held either at the principal executive office of the corporation or at any other place within or without the State of California which may be designated either by the Board or by the written consent of all persons entitled to vote thereat given either before or after the meeting and filed with the Secretary. Section 2. ANNUAL MEETINGS. The annual meetings of shareholders shall be held on such date and at such time as may be fixed by the Board. At such meetings, directors shall be elected and any other proper business may be transacted in accordance with applicable law and these Bylaws. 1 6 Section 3. SPECIAL MEETINGS. Special meetings of the shareholders may be called at any time by the Board, the Chairman of the Board, the President or by the holders of shares entitled to cast not less than ten percent of the votes at such meeting. Upon request in writing to the Chairman of the Board, the President, any Vice President or the Secretary by any person (other than the Board) entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five nor more than sixty days after the receipt of the request. Such request shall be made in accordance with applicable law and these Bylaws. If the notice is not given within twenty days after receipt of the request, the persons entitled to call the meeting may give the notice. Section 4. NOTICE OF ANNUAL OR SPECIAL MEETINGS. Written notice of each annual or special meeting of shareholders shall be given not less than ten nor more than sixty days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (ii) in the case of the annual meeting, those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of applicable law and these Bylaws, any proper matter may be presented at the meeting for such action. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by management for election. Notice of a shareholders' meeting shall be given either personally or by mail or by other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice, or, if no such address appears or is given, at the place where the principal executive office of the corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mails, postage prepaid. Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient. Section 5. QUORUM. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders. If a quorum is present, the affirmative vote of a majority of the shares represented and voting at the meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by law or by the Articles, except as provided in the following sentence. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. 2 7 Section 6. ADJOURNED MEETINGS AND NOTICE THEREOF. Any shareholders' meeting, whether or not a quorum is present, may be adjourned from time to time by the vote of shareholders entitled to exercise a majority of the voting power represented either in person or by proxy, but in the absence of a quorum (except as provided in Section 5 of this Article) no other business may be transacted at such meeting. It shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement at the meeting at which such adjournment is taken; provided, however, when any shareholders' meeting is adjourned for more than forty-five days or, if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. Section 7. VOTING. The shareholders entitled to notice of any meeting or to vote at such meeting shall be only persons in whose name shares stand on the stock records of the corporation on the record date determined in accordance with Section 8 of this Article. Subject to the following sentence and to the provisions of Section 708 of the California General Corporation Law, every shareholder entitled to vote at any election of directors may cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit. No shareholder shall be entitled to cumulate votes for any candidate or candidates pursuant to the preceding sentence unless such candidate or candidates' names have been placed in nomination prior to the voting and the shareholder has given notice at the meeting prior to the voting of the shareholder's intention to cumulate the shareholder's votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. Elections need not be by ballot; provided, however, that all elections for directors must be by ballot upon demand made by a shareholder at the meeting and before the voting begins. In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares are elected. Voting shall in all cases be subject to the provisions of Chapter 7 of the California General Corporation Law, and to the following provisions: (a) Subject to clause (g), shares held by an administrator, executor, guardian, conservator or custodian may be voted by such holder either in person or by proxy, without a transfer of such shares into the holder's name; and shares standing in the name of a trustee may be voted by the trustee, either in person or by proxy, but no trustee shall be entitled to vote shares held by such trustee without a transfer of such shares into the trustee's name. 3 8 (b) Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into the receiver's name if authority to do so is contained in the order of the court by which such receiver was appointed. (c) Subject to the provisions of Section 705 of the California General Corporation Law and except where otherwise agreed in writing between the parties, a shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. (d) Shares standing in the name of a minor may be voted and the corporation may treat all rights incident thereto as exercisable by the minor, in person or by proxy, whether or not the corporation has notice, actual or constructive, of the nonage, unless a guardian of the minor's property has been appointed and written notice of such appointment given to the corporation. (e) Shares outstanding in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxyholder as the bylaws of such other corporation may prescribe or, in the absence of such provision, as the board of directors of such other corporation may determine or, in the absence of such determination, by the chairman of the board, president or any vice president of such other corporation, or by any other person authorized to do so by the chairman of the board, president or any vice president of such other corporation. Shares which are purported to be voted or any proxy purported to be executed in the name of a corporation (whether or not any title of the person signing is indicated) shall be presumed to be voted or the proxy executed in accordance with the provisions of this clause, unless the contrary is shown. (f) Shares of the corporation owned by any subsidiary shall not be entitled to vote on any matter. (G) Shares held by the corporation in a fiduciary capacity, and shares of the issuing corporation held in a fiduciary capacity by any subsidiary, shall not be entitled to vote on any matter, except to the extent that the settlor or beneficial owner possesses and exercises a right to vote or to give the corporation binding instructions as to how to vote such shares. (H) If shares stand of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, husband and wife as community property, tenants by the entirety, voting trustees, persons entitled to vote under a shareholder voting agreement or otherwise, or if two or more persons (including proxyholders) have the same fiduciary relationship respecting the same shares, unless the Secretary of the corporation is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: 4 9 (i) If only one votes, such act binds all; (ii) If more than one vote, the act of the majority so voting binds all; (iii) If more than one vote, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionately. If the instrument is so filed or the registration of the shares shows that any such tenancy is held in unequal interests, a majority or even split for the purpose of this section shall be a majority or even split in interest. Section 8. RECORD DATE. The Board may fix, in advance, a record date for the determination of the shareholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution, or any allotment of rights, or to exercise rights in respect of any other lawful action. The record date so fixed shall be not more than sixty days nor less than ten days prior to the date of the meeting nor more than sixty days prior to any other action. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting or to receive the dividend, distribution, or allotment of rights, or to exercise of the rights, as the case may be, notwithstanding any transfer of shares on the books of the corporation after the record date. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting. The Board shall fix a new record date if the meeting is adjourned for more than forty-five days. If no record date is fixed by the Board, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. The record date for determining shareholders for any purpose other than set forth in this Section 8 or Section 10 of this Article shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth day prior to the date of such other action, whichever is later. Section 9. CONSENT OF ABSENTEES. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of and presence at such meeting, except when the person objects, at the beginning of the meeting, to the transactions of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not waiver of any right to object to the consideration of matters required by the California General Corporation Law to be included in the notice but not so included, if such objection is expressly 5 10 made at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need to be specified in any written waiver of notice, consent to the holding of the meeting or approval of the minutes thereof, except as provided in Section 601(f) of the California General Corporation Law. Section 10. ACTION WITHOUT MEETING. Subject to Section 603 of the California General Corporation Law, any action which, under any provision of the California General Corporation Law, may be taken at any annual or special meeting of shareholders, may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Unless a record date for voting purposes be fixed as provided in Section 8 of this Article, the record date for determining shareholders entitled to give consent pursuant to this Section 10, when no prior action by the Board has been taken, shall be the day on which the first written consent is given. Section 11. PROXIES. Every person entitled to vote shares has the right to do so either in person or by one or more persons authorized by a written proxy executed by such shareholder and filed with the Secretary. Any proxy duly executed is not revoked and continues in full force and effect until revoked by the person executing it prior to the vote pursuant thereto by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or by attendance at the meeting and voting in person by the person executing the proxy; provided, however, that no proxy shall be valid after the expiration of eleven months from the date of its execution unless otherwise provided in the proxy. Section 12. INSPECTORS OF ELECTION. In advance of any meeting of shareholders, the Board may appoint inspectors of election to act at such meeting and any adjournment thereof if inspectors of election be not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of any such meeting may, and on the request of any shareholder or shareholder's proxy shall, make such appointment at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares present shall determine whether one or three inspectors are to appointed. The duties of such inspectors shall be as prescribed by Section 707(b) of the California General Corporation Law and shall include: determining the number of shares outstanding and the voting power of each; determining the shares represented at the meeting; determining the existence of a quorum; determining the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and doing such acts as may be proper to conduct the election or vote with fairness to all shareholders. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. 6 11 Section 13. CONDUCT OF MEETING. The Chairman of the Board shall preside as chairman at all meetings of the shareholders. The chairman shall conduct each such meeting in a businesslike and fair manner, but shall not be obligated to follow any technical, formal or parliamentary rules or principles of procedure. The chairman's rulings on procedural matters shall be conclusive and binding on all shareholders, unless at the time of a ruling a request for a vote is made to the shareholders holding shares entitled to vote and which are represented in person or by proxy at the meeting, in which case the decision of a majority of such shares shall be conclusive and binding on all shareholders. Without limiting the generality of the foregoing, the chairman shall have all of the powers usually vested in the chairman of a meeting of shareholders. Section 14. QUALIFICATIONS OF DIRECTORS. Only persons who are nominated in accordance with the procedures set forth in these Bylaws shall be qualified to serve as directors. Nominations of persons for election to the Board may be made at a meeting of shareholders (a) by or at the direction of the Board or (b) by any shareholder of the corporation who is a shareholder of record at the time of giving of notice provided for in the Bylaw, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Bylaw. Nominations by shareholders shall be made pursuant to timely notice in writing to the Secretary. To be timely as to an annual meeting, a shareholder's notice must be received at the principal executive offices of the corporation not less than 75 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that if the date of the annual meeting is changed by more than 30 days from such anniversary date, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed to shareholders or public disclosure of such date was made. To be timely as to a special meeting at which directors are to be elected, a shareholder's notice must be received not later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed to shareholders or public disclosure of such date was made. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to the shareholder giving the notice (i) the name and address, as they appear on the corporation's books, of such shareholder and (ii) the class and number of shares of the corporation which are beneficially owned by such shareholder and also which are owned of record by such shareholder; and (c) as to the beneficial owner, if any, on whose behalf the nomination is made, (i) the name and address of such person and (ii) the class and number of shares of the corporation which are beneficially owned by such person. At the request of the Board, any person nominated by the Board for election as a director shall furnish to the Secretary that information required to be set forth in the shareholder's notice of nomination which pertains to the nominee. 7 12 No person shall be qualified to serve as a director of the corporation unless nominated in accordance with the procedures set forth in this Bylaw. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if the Chairman should so determine, that the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Bylaw, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Bylaw. Section 15. PROPER BUSINESS FOR SHAREHOLDER MEETINGS. At a meeting of the shareholders, only such business shall be proper as shall be brought before the meeting (a) pursuant to the corporation's notice of meeting, (b) by or at the direction of the Board or (c) by any shareholder of the corporation who is a shareholder of record at the time of giving of the notice provided for in this Bylaw, who shall be entitled to vote at such meeting and who complies with the notice provided for in the Bylaw, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Bylaw. For business to be properly brought before a meeting by a shareholder pursuant to clause (c) of the first paragraph of this Bylaw, the shareholder must have given timely notice thereof in writing to the Secretary. To be timely as to an annual meeting of shareholders, a shareholder's notice must be received at the principal executive offices of the corporation not less than 75 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that if the date of the meeting is changed by more than 30 days from such anniversary date, notice by the shareholder to be timely must be received no later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed to shareholders or public disclosure of such date was made. To be timely as to a special meeting of shareholders, a shareholder's notice must be received not later than the call of the meeting by the Board, the Chairman of the Board or the President, or the date of receipt of a valid request by a person (other than the Board) that the special meeting be called. Such shareholder's notice shall set forth as to each matter the shareholder proposes to bring before the meeting (a) a brief description of such matter and the reasons for proposing such matters(s) at the meeting, (b) the name and address, as they appear on the corporation's books, of the shareholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made, (c) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder of record and by the beneficial owner, if any, on whose behalf the proposal is made and (d) any material interest of such stockholder of record and the beneficial owner, if any, on whose behalf the proposal is made in such proposal. Notwithstanding anything in these Bylaws to the contrary, no business shall be proper at a meeting unless brought before it in accordance with the procedures set forth in this Bylaw. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the procedures prescribed by these Bylaws, and if the Chairman should so determine, that any such 8 13 business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Bylaw, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Bylaw. ARTICLE III. Directors. Section 1. POWERS. Subject to limitations of the Articles, of these Bylaws and of the California General Corporation Law relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board. Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the Board shall have the following powers in addition to the other powers enumerated in these Bylaws: (a) To select and remove all the other officers, agents and employees of the corporation, prescribe the powers and duties for them as may not be inconsistent with law, the Articles or these Bylaws, fix their compensation and require from them security for faithful service. (b) To conduct, manage and control the affairs and business of the corporation and to make such rules and regulations therefor not inconsistent with law, the Articles or these Bylaws, as they may deem best. (c) To adopt, make and use a corporate seal, and to prescribe the forms of certificates of stock, and to alter the form of such seal and of such certificates from time to time, as they may deem best. (d) To authorize the issuance of shares of stock of the corporation from time to time, upon such terms and for such consideration as may be lawful. (e) To borrow money and incur indebtedness for the purposes of the corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations or other evidences of debt and securities therefor. Section 2. NUMBER OF DIRECTORS. The authorized number of directors shall be not less than five nor more than nine until changed by Amendment of the Articles or by a Bylaw duly adopted by the shareholders amending this Section 2. The exact number of directors shall be fixed, within the limits specified, by amendment of the next sentence duly adopted either by the Board or the shareholders. The exact number of directors shall be six until changed as provided in this Section 2. 9 14 Section 3. ELECTION AND TERM OF OFFICE. The directors shall be elected at each annual meeting of the shareholders, but if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. Each director shall hold office until the next annual meeting and until a successor has been elected and qualified. Section 4. VACANCIES. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Vacancies in the Board, except those existing as a result of a removal of a director, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until the next annual meeting and until such director's successor has been elected and qualified. A vacancy or vacancies in the Board shall be deemed to exist in case of the death, resignation or removal of any director, or if the authorized number of directors be increased, or if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting. The Board may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. The shareholders, subject to applicable law and these Bylaws, may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election by written consent, other than to fill a vacancy created by removal, requires the consent of a majority of the outstanding shares entitled to vote. Any such election by written consent to fill a vacancy created by removal requires unanimous consent. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of the director's term of office. Section 5. PLACE OF MEETING. Regular or special meetings of the Board shall be held at any place within or without the State of California which has been designated from time to time by the Board. In the absence of such designation, regular meetings shall be held at the principal executive office of the corporation. Section 6. REGULAR MEETINGS. Immediately following each annual meeting of shareholders, the Board shall hold a regular meeting for the purpose of organization, election of officers and the transaction of other business. 10 15 Other regular meetings of the Board shall be held without call on such dates and at such times as may be fixed by the Board. Call and notice of all regular meetings of the Board are hereby dispensed with. Section 7. SPECIAL MEETINGS. Special meetings of the Board for any purpose or purposes may be called at any time by the Chairman of the Board, the President, any Vice President, the Secretary or by any two directors. Special meetings of the Board shall be held upon four days' written notice or forty-eight hours' notice given personally or by telephone, telegraph, telex, or other similar means of communication. Any such notice shall be addressed or delivered to each director at such director's address as it is shown upon the records of the corporation or as may have been given to the corporation by the director for purposes of notice or, if such address is not shown on such records or is not readily ascertainable, at the place in which the meetings of the directors are regularly held. Notice by mail shall be deemed to have been given at the time a written notice IS deposited in the United States mails, postage prepaid. Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient. Oral notice shall be deemed to have been given at the time it is communicated, in person or by telephone or wireless, to the recipient or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly conununicate it to the recipient. Section 8. QUORUM. A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business, except to adjourn as provided in Section 11 of this Article. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board, unless a greater number be required by law or by the Articles. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 9. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Section 10. WAIVER OF NOTICE. Notice of a meeting need not be given to any director who signs a waiver of notice or consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. 11 16 Section 11. ADJOURNMENT. A majority of the directors present, whether or not a quorum is present, may adjourn any directors' meeting to another time and place. Notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned, except as provided in the next sentence. If the meeting is adjourned for more than twenty-four hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment Section 12. FEES AND COMPENSATION. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by the Board. Section 13. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action. Such consent or consents shall have the same effect as a unanimous vote of the Board and shall be filed with the minutes of the proceedings of the Board. Section 14. RIGHTS OF INSPECTION. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made IN person or by agent or attorney and includes the right to copy and obtain extracts. Section 15. COMMITTEES. The Board may appoint one or more committees, each consisting of two or more directors, and delegate to such committees any of the authority of the Board except with respect to: (a) The approval of any action for which the California General Corporation Law also requires shareholders' approval or approval of the outstanding shares; (b) The filling of vacancies on the Board or on any committee; (c) The fixing of compensation of the directors for service on the Board or on any committee; (d) The amendment or repeal of bylaws or the adoption of new bylaws; (e) The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; (f) A distribution to the shareholders of the corporation except at a rate or in a periodic amount or within a price range determined by the Board; or 12 17 (g) The appointment of other committees of the Board or the members thereof. Any such committee must be designated, and the members or alternate members thereof appointed, by resolution adopted by a majority of the authorized number of directors and any such committee may be designated an Executive Committee or by such other name as the Board shall specify. Alternative members of a committee may replace any absent member at any meeting of the committee. The Board shall have the power to prescribe the manner in which proceedings of any such committee shall be conducted. In the absence of any such prescription, such committee shall have the power to prescribe the manner in which its proceedings shall be conducted. Unless the Board or such committee shall otherwise provide, the regular and special meetings and other actions of any such committee shall be governed by the provisions of this Article applicable to meetings and actions of the Board. Minutes shall be kept of each meeting of each committee. ARTICLE IV. Officers, Section 1. OFFICERS. The officers of the corporation shall be a President, a Secretary and a Chief Financial Officer. The corporation may also have, at the discretion of the Board, a Chairman of the Board, an Executive Vice President, a Senior Vice President, one or more Vice Presidents, a Treasurer, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as may be elected or appointed in accordance with the provisions of Section 3 of this Article. Section 2. ELECTION. The officers of the corporation, except such officers as may be elected or appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen annually by, and shall serve at the pleasure of, the Board, and shall hold their respective offices until their resignation, removal, or other disqualification from service, or until their respective successors shall be elected. Section 3. SUBORDINATE OFFICERS. The Board may elect, and may empower the Chairman of the Board, if there be such an officer, or the President, to appoint such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in these Bylaws or as the Board may from time to time determine. Section 4. REMOVAL AND RESIGNATION. Any officer may be removed, either with or without cause, by the Board at any time or, except in the case of an officer chosen by the Board, by an officer upon whom such power of removal may be conferred by the Board. Any such removal shall be without prejudice to the rights, if any, of the officer under any contract of employment of the officer. 13 18 Any officer may resign at any time by giving written notice to the corporation, but without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 5. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular election or appointment to such office. Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there shall be such an officer, shall be the Chief Executive Officer of the corporation unless, in its sole discretion, the Board should elect the President to be such. The Chief Executive Officer is the general manager and chief executive officer of the corporation and has, subject to the control of the Board, general supervision, direction and control of the business and officers of the corporation. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the shareholders and the Board and exercise and perform such other powers and duties as may be from time to time assigned by the Board. Section 7. PRESIDENT. Subject to such powers, if any, as may be given to the Chairman of the Board, if there be such an officer, the President shall have the general powers and duties of management usually vested in the office of the president of a corporation and such other powers and duties as may be prescribed by the Board or the Chief Executive Officer, if other than the President. In the absence of the Chairman of the Board, or if there be none, the President shall preside at all meetings of the Shareholders and the Board. In the absence or disability of the Chief Executive Officer, if other than the President, the President shall perform all the duties of the Chief Executive Officer and, when so acting, shall have all of the powers of, and be subject to all the restrictions upon, the Chief Executive Officer. Section 8. VICE PRESIDENTS. The Executive Vice President and Senior Vice President, if any, and other Vice Presidents shall have (subject to the authority of the Board) such powers and perform such duties as from time to time determined by the Chief Executive Officer. In the absence or disability of the President, the Vice Presidents, in the following order, shall perform all the duties of the President and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the President: the Executive Vice President, if any, the Senior Vice President, if any, and the Vice Presidents in the order of their rank as fixed by the Board, or if not ranked, the Vice President designated by the Board. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them, respectively, by the Board. Section 9. SECRETARY. The Secretary shall keep or cause to be kept, at the principal executive office and such other place as the Board may order, a book of minutes of all meetings of shareholders, the Board and its committees, with the time and place of holding, whether regular or special, how authorized, the notice thereof given, the names of those present at Board and committee meetings, the number of shares present or represented at shareholders' 14 19 meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, a copy of the Bylaws of the corporation at the principal executive office or business office in accordance with Section 213 of the California General Corporation Law. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar, if one be appointed, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number of classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board and any committees thereof required by these Bylaws or by law to be given, shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board. Section 10. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the corporation, and shall send or cause to be sent to the shareholders of the corporation such financial statements and reports as are by law or these Bylaws required to be sent to them. The books of account shall at all times be open to inspection by any director. The Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board. The Chief Financial Officer shall disburse the funds of the corporation as may be ordered by the Board, shall render to the President and the directors, whenever they request it, an account of all transactions as Chief Financial Officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board. ARTICLE V. Other Provisions. Section 1. INSPECTION OF CORPORATE RECORDS. (a) A shareholder or shareholders holding at least five percent in the aggregate of the outstanding voting shares of the corporation or who hold at least one percent of such voting shares and have filed a Schedule 14B with the United States Securities and Exchange Commission relating to the election of directors of the corporation shall have the absolute right to do either or both of the following: (1) Inspect and copy the record of shareholders' names and addresses and shareholders during usual business hours upon five business days' prior written demand upon the corporation; or 15 20 (ii) Obtain from the transfer agent, if any, for the corporation, upon five business days' prior written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders' names and addresses who are entitled to vote for the election of directors and their shareholdings, as of the most recent complied or as of the date specified by the shareholder subsequent to the date of demand. (b) The record of shareholders shall also be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interest as a shareholder or holder of a voting trust certificate. (c) The accounting books and records and minutes of proceedings of the shareholders and the Board and committees of the Board shall be open to inspection upon written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as a holder of such voting trust certificate. (d) Any inspection and copying under this Article may be made in person or by agent or attorney. Section 2. INSPECTION OF BYLAWS. The corporation shall keep in its principal executive office in the State of California, or if its principal executive office is not in such State at its principal business office in such state, the original or copy of these Bylaws as amended to date, which shall be open to inspection by shareholders at all reasonable times during office hours. If the principal executive office of the corporation is located outside the State of California and the corporation has no principal business office in such state, it shall upon the written request of any shareholder furnish to such shareholder a copy of these Bylaws as amended to date. Section 3. ENDORSEMENT OF DOCUMENTS, CONTRACTS. Subject to the provisions of applicable law, any note, mortgage, evidence of indebtedness, contract, share certificate, conveyance or other instrument in writing and any assignment or endorsements thereof executed or entered into between the corporation and any other person, when signed by the Chairman of the Board, the President or any Vice President and the Secretary, any Assistant Secretary, the Chief Financial Officer, the Treasurer or any Assistant Treasurer of the corporation, shall be valid and binding on the corporation in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same. Any such instruments may be signed by any other person or persons and in such manner as from time 16 21 to time shall be determined by the Board, and, unless so authorized by the Board, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or amount. Section 4. CERTIFICATES OF STOCK. Every holder of shares of the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman of the Board, the President or a Vice President and by the Chief Financial Officer, the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. If any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Certificates for shares may be issued prior to full payment under such restrictions and for such purposes as the Board may provide; provided, however, that on any certificate issued to represent any partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Except as provided in this Section, no new certificate for shares shall be issued in lieu of an old one unless the latter is surrendered and cancelled at the same time. The Board may, however, if any certificate for shares is alleged to have been lost, stolen or destroyed, authorize the issuance of a new certificate in lieu thereof, and the corporation may require that the corporation be given a bond or other adequate security sufficient to indemnify it against any claim that may be made against it (including expense or liability) on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. Section 5. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chief Executive Officer, the President or any other officer or officers authorized by the Board or the Chief Executive Officer are each authorized to vote, represent and exercise on behalf of the corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the corporation. The authority herein granted may be exercised either by any such officer in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officer. Section 6. STOCK PURCHASE PLANS. The corporation may adopt and carry out a stock purchase plan or agreement or stock option plan or agreement providing for the issue and sale for such consideration as may be fixed of its unissued shares, or of issued shares acquired or to be acquired, to one or more of the employees or directors of the corporation or of a subsidiary or to a trustee on their behalf and for the payment for such shares in installments or at one time, and may provide for aiding any such persons in paying for such shares by compensation for services rendered, promissory notes or otherwise. 17 22 Any such stock purchase plan or agreement or stock option plan or agreement may include, among other features, the fixing of eligibility for participation therein, the class and price of shares to be issued or sold under the plan or agreement, the number of shares which may be subscribed for, the method of payment therefor, the reservation of title until full payment therefor, the effect of the termination of employment, an option or obligation on the part of the corporation to repurchase the shares upon termination of employment, restrictions upon transfer of the shares, the time limits of and termination of the plan, and any other matters, not in violation of applicable law, as may be included in the plan as approved or authorized by the Board or any committee of the Board. Section 7. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the General Provisions of the California Corporations Code and in the California General Corporation Law shall govern the construction of these Bylaws. ARTICLE VI. Indemnification, Section 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS. (a) Indemnification. Each person who was or is a party or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or officer of the corporation, or of any predecessor corporation, or is or was a director or officer who is or was serving at the request of the corporation as a director, officer, employee or other agent of another corporation, a partnership, joint venture, trust or other enterprise (including service with respect to corporation-sponsored employee benefit plans), whether the basis of such proceeding is alleged action or inaction in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall, subject to the terms of any agreement between the corporation and such person, be indemnified and held harmless by the corporation to the fullest extent permissible under California law and the corporation's Articles, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) actually and reasonably incurred or suffered by such person in connection therewith; provided, however, that amounts paid in settlement of a proceeding shall be payable only if the settlement is approved in writing by the corporation. Such indemnification shall continue as to a person who has ceased to be a director or officer for acts performed while a director or officer and shall inure to the benefit of his or her heirs, executors and administrators. Not withstanding the foregoing, the corporation shall indemnify any such person in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of the corporation. The right to indemnification conferred in this Article shall include the right to be paid by the corporation the expenses incurred in defending any proceeding in advance of final disposition to the fullest extent permitted by law; provided, however, that the payment under this Article of such expenses in advance of the final disposition of a proceeding shall be conditioned upon the delivery to the corporation of a written request for such advance 18 23 and of an undertaking by or on behalf of the director or officer to repay all amounts so advanced if it shall be ultimately determined that such director or officer is not entitled to be indemnified. (b) Exclusions. Notwithstanding the foregoing or any other provisions under this Article, the corporation shall not be liable under this Article to indemnify a director or officer against expenses, liabilities or losses incurred or suffered in connection with, or make any advances with respect to, any proceeding against a director or officer: (i) as to which the corporation is prohibited by applicable law from paying as an indemnity; (ii) with respect to expenses of defense or investigation, if such expenses were or are incurred without the corporation's consent (which consent may not be unreasonably withheld); (iii) for which payment is actually made to the director or officer under a valid and collectible insurance policy maintained by the corporation, except in respect of any excess beyond the amount of payment under such insurance; (iv) for which payment is actually made to the director or officer under an indemnity by the corporation otherwise than pursuant to this Bylaw Article, except in respect of any excess beyond the amount of payment under such indemnity; (v) based upon or attributable to the director or officer gaining in fact any personal profit or advantage to which he or she was not legally entitled; (vi) for an accounting of profits made from the purchase or sale by the director or officer of securities of the corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; or (vii) based upon acts or omissions involving intentional misconduct or a knowing and culpable violation of law. Section 2. INDEMNIFICATION OF EMPLOYEES AND AGENTS. A person who was or is a party or is threatened to be made a party to or is involved in any proceeding by reason of the fact that he or she is or was an employee or agent of the corporation or is or was an employee or agent of the corporation who is or was serving at the request of the corporation as an employee or agent of another enterprise, including service with respect to corporation-sponsored employee benefits plans, whether the basis of such action is alleged action or inaction in an official capacity or in any other capacity while serving as an employee or agent, may, upon appropriate action by the corporation and subject to the terms of any agreement between the corporation and such person, be indemnified and held harmless by the corporation up to the fullest extent permitted by California law and the corporation's Articles, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) actually and reasonably incurred or suffered by such person in connection therewith. Section 3. RIGHT OF DIRECTORS AND OFFICERS TO BRING SUIT. If a claim under Section 1 of this Article is not paid by the corporation or on its behalf within 90 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim, and, if successful in whole or in part, the claimant also shall be entitled to be paid the expense of prosecuting such claim. 19 24 Section 4. SUCCESSFUL DEFENSE. Notwithstanding any other provision of this Article, to the extent that a director or officer has been successful on the merits or otherwise (including the dismissal of a proceeding without prejudice or the settlement with the written consent of the corporation of a proceeding without admission of liability) in defense of any proceeding referred to in Section 1 or in defense of any claim, issue or matter therein, such director or officer shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred in connection therewith. Section 5. INDEMNITY AGREEMENTS. The corporation may enter into agreements with any director, officer, employee or agent of the corporation providing for indemnification to the fullest extent permissible under applicable law and the corporation's Articles. Section 6. SUBROGATION. In the event of payment by the corporation of a claim under Section 1 of this Article, the corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the indemnified person, who shall execute all papers required and shall do everything that may be necessary or appropriate to secure such rights, including the execution of such documents necessary or appropriate to enable the corporation effectively to bring suit to enforce such rights. Section 7. NON-EXCLUSIVITY RIGHTS. The right to indemnification provided by this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, bylaw, agreement, vote of shareholders or disinterested directors or otherwise. Section 8. INSURANCE. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, a partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under California law. Section 9. EXPENSES AS A WITNESS. To the extent that any director, officer or employee of the corporation is by reason of such position a witness in any action, suit or proceeding, he or she will be indemnified against all costs and expenses actually and reasonably incurred by him or her or on his or her behalf in connection therewith. Section 10. NONAPPLICABILITY TO FIDUCIARIES OF EMPLOYEE BENEFIT PLANS. This Article does not apply to any proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in such person's capacity as such, even though such person may also be an agent of the corporation. The corporation shall have power to indemnify such trustee, investment manager or other fiduciary to the extent permitted by subdivision (f) of Section 207 of the California General Corporation Law. 20 25 Section 11. SEPARABILITY. Each and every paragraph, sentence, term and provision of this Article is separate and distinct so that if any paragraph, sentence, term or provision shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of any other paragraph, sentence, term or provision hereof. To the extent required, any paragraph, sentence, term or provision of this Article may be modified by a court of competent jurisdiction to preserve its validity and to provide the claimant with, subject to the limitations set forth in this Article and any agreement between the corporation and the claimant, the broadest possible indemnification permitted under applicable law. Section 12. EFFECT OF REPEAL OR MODIFICATION. Any repeal or modification of this Article shall not adversely affect any right of indemnification of a director, officer, employee or agent of the corporation existing at the time of such repeal or modification with respect to any action or omission occurring prior to such repeal or modification. ARTICLE VII. Emergency Provisions, Section 1. GENERAL. The provisions of this Article shall be operative only during a national emergency declared by the President of the United States or the person performing the President's functions, or in the event of a nuclear, atomic or other attack on the United States or a disaster making it impossible or impracticable for the corporation to conduct its business without recourse to the provisions of this Article. Said provisions in such event shall override all other Bylaws of the corporation in conflict with any provisions of this Article, and shall remain operative so long as it remains impossible or impracticable to continue the business of the corporation otherwise, but thereafter shall be inoperative; provided that all actions taken in good faith pursuant to such provisions shall thereafter remain in full force and effect unless and until revoked by action taken pursuant to the provisions of the Bylaws other than those contained in this Article. Section 2. UNAVAILABLE DIRECTORS. All directors of the corporation who are not available to perform their duties as directors by reason of physical or mental incapacity or for any other reason or who are unwilling to perform their duties or whose whereabouts are unknown shall automatically cease to be directors, with like effect as if such persons had resigned as directors, so long as such unavailability continues. Section 3. AUTHORIZED NUMBER OF DIRECTORS. The authorized number of directors shall be the number of directors remaining after eliminating those who have ceased to be directors pursuant to Section 2, or the minimum number required by law, whichever number is greater. Section 4 . QUORUM. The number of directors necessary to constitute a quorum shall be one-third of the authorized number of directors as specified in the foregoing Section, or such other minimum number as, pursuant to the law or lawful decree then in force, it is possible for the Bylaws of a corporation to specify. 21 26 Section 5. CREATION OF EMERGENCY COMMITTEE. In the event the number of directors remaining after eliminating those who have ceased to be directors pursuant to Section 2 is less than the minimum number of authorized directors required by law, then until the appointment of additional directors to make up such required minimum, all the powers and authorities which the Board could by law delegate, including all powers and authorities which the Board could delegate to a committee, shall be automatically vested in an emergency committee, and the emergency committee shall thereafter manage the affairs of the corporation pursuant to such powers and authorities and shall have all other powers and authorities as may by law or lawful decree be conferred on any person or body of persons during a period of emergency. Section 6. CONSTITUTION OF EMERGENCY COMMITTEE. The emergency committee shall consist of all the directors remaining after eliminating those who have ceased to be directors pursuant to Section 2, provided that such remaining directors are not less than three in number. In the event such remaining directors are less than three in number the emergency committee shall consist of three persons, who shall be the remaining director or directors and either one or two officers or employees of the corporation, as the remaining director or directors may in writing designate. If there is no remaining director, the emergency committee shall consist of the three most senior officers of the corporation who are available to serve, and if and to the extent that officers are not available, the most senior employees of the corporation. Seniority shall be determined in accordance with any designation of seniority in the minutes of the proceedings of the Board, and in the absence of such designation, shall be determined by rate of remuneration. In the event that there are no remaining directors and no officers or employees of the corporation available, the emergency committee shall consist of three persons designated in writing by the shareholder owning the largest number of shares of record as of the date of the last record date. Section 7. POWERS OF EMERGENCY COMMITTEE. The emergency committee, once appointed, shall govern its own procedures and shall have power to increase the number of members thereof beyond the original number, and in the event of a vacancy or vacancies therein, arising at any time, the remaining member or members of the emergency committee shall have the power to fill such vacancy or vacancies. In the event at any time after its appointment all members of the emergency committee shall die or resign or become unavailable to act for any reason whatsoever, a new emergency committee shall be appointed in accordance with the foregoing provisions of this Article. Section 8. DIRECTORS BECOMING AVAILABLE. Any person who has ceased to be a director pursuant to the provisions of Section 2 and who thereafter becomes available to serve as a director shall automatically become a member of the emergency committee. Section 9. ELECTION OF BOARD OF DIRECTORS. The emergency committee, shall, as soon after its appointment as is practicable, take all requisite action to secure 22 27 Section 10. TERMINATION OF EMERGENCY COMMITTEE. In the event, after the appointment of an emergency committee, a sufficient number of persons who ceased to be directors pursuant to Section 2 become available to serve as directors, so that if they had not ceased to be directors as aforesaid, there would be enough directors to constitute the minimum number of directors required by law, then all such persons shall automatically be deemed to be reappointed as directors and the powers and authorities of the emergency committee shall be at an end. ARTICLE VIII. Amendments. These Bylaws may be amended or repealed either by approval of the outstanding shares (as defined in Section 152 of the California General Corporation Law) or by the approval of the Board; provided, however, that after the issuance of shares, a bylaw specifying or changing a fixed number of directors or the maximum or minimum number or changing from a fixed to a variable number of directors or vice versa may only be adopted by approval of the outstanding shares and a bylaw reducing the fixed number or the minimum number of directors to a number less than five shall be subject to the provisions of Section 212(a) of the California General Corporation Law. 23 EX-10.19 3 LIMITED LIABILITY COMPANY AGREEMENT 1 EXHIBIT 10.19 ENERGY MANAGEMENT SERVICES AGREEMENT ================================================================================ between Southern California Water Company and Enova Energy, Inc. 2 ENERGY MANAGEMENT SERVICES AGREEMENT BETWEEN SOUTHERN CALIFORNIA WATER COMPANY AND ENOVA ENERGY, INC. Table of Contents ----------------- Section Page - ------- ---- 1. Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3. Effective Date, Term and Cancellation of the Agreement . . . . . 1 4. Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 3 6. Billing and Payment . . . . . . . . . . . . . . . . . . . . . . 4 7. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . 4 8. Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 9. No Third Party Rights . . . . . . . . . . . . . . . . . . . . . 6 10. Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 11. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 12. Uncontrollable Forces . . . . . . . . . . . . . . . . . . . . . 7 13. Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 14. Complete Agreement . . . . . . . . . . . . . . . . . . . . . . . 8 15. Representatives and Notices . . . . . . . . . . . . . . . . . . 8 16. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . 9 17. Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 18. Proprietary Information and Ownership Rights . . . . . . . . . . 9 19. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 20. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 10 21. Signature Clause . . . . . . . . . . . . . . . . . . . . . . . . 11 Page i 3 ENERGY MANAGEMENT SERVICES AGREEMENT BETWEEN SOUTHERN CALIFORNIA WATER COMPANY AND ENOVA ENERGY, INC. 1. PARTIES This Energy Management Services Agreement (Agreement) is made between Southern California Water Company (SCWC), a California corporation and Enova Energy, Inc. (Enova), a California corporation, hereinafter sometimes referred to individually as "Party" and collectively as "Parties." 2. AGREEMENT The Parties agree as follows. 3. EFFECTIVE DATE, TERM AND CANCELLATION OF THE AGREEMENT 3.1 Effective Date: This Agreement is effective as of the date when signed by the duly authorized representatives of both SCWC and Enova. 3.2 Termination: Either Party may terminate this Agreement by providing the other Party with six months (6) advance written notice of such termination provided that such notice shall not be given prior to December 31, 1996. 3.3 Cancellation: 3.3.1 SCWC's Rights: If Enova fails to perform any of its material obligations or covenants in the manner required under this Agreement, SCWC may terminate this Agreement by giving Enova a thirty (30) day notice (cure period) of its intention to terminate the Agreement, specifying the default and the manner of cure SCWC contends is required under the Agreement. The termination notice shall be effective to terminate this Agreement unless Enova has cured the default within the cure period. If the default is cured within the cure period, then SCWC shall acknowledge the cure in writing. Page 1 4 3.3.2 Enova's Rights: Enova shall have the option to terminate this Agreement effective upon thirty (30) days' written notice to SCWC if (i) federal, state or local statutes, regulations or other laws are modified or interpreted in such a manner, or (ii) SCWC enters into any energy supply agreement, which is not an Enova Recommendation, so as to: 3.3.2.1 prohibit Enova from providing any of the energy management services covered by this Agreement; 3.3.2.2 adversely affect Enova's ability to perform services in accordance with this Agreement; or 3.3.2.3 adversely affect Enova's ability to achieve cost savings for SCWC under this Agreement. 4. SERVICES 4.1 Resource Planning and Risk Management Services: Enova shall provide integrated resource planning and risk management services to SCWC. These services shall include the annual development of a 5 year resource plan. Such resource plan shall address: 4.1.1 energy cost and reliability; 4.1.2 the risks associated with i) long-term contracts and potential stranded investment and ii) short-term contracts and potential price volatility; and 4.1.3 the use of risk management products to minimize the risks identified pursuant to Section 4.1.2. 4.2 Energy Management Services: Enova shall be the exclusive provider of the following energy management services for SCWC: 4.2.1 For capacity, energy and transmission service transactions of one (1) month or less in duration, Enova shall: 4.2.1.1 perform the scheduling, dispatching and accounting of SCWC's firm and non-firm energy and transmission service purchases, sales and exchanges. Enova shall act in the name of SCWC as an independent contractor utilizing SCWC's enabling contracts that provide for the purchase, sale, and/or exchange of capacity, energy, and transmission service that now or in the future may exist between SCWC and others for the term hereof. Additionally, in order for Enova to perform the accounting, SCWC shall promptly provide Enova copies of all invoices for such energy costs. Page 2 5 4.2.1.2 submit energy schedules to Southern California Edison (SCE) pursuant to the terms of the SCE control area import agreement. 4.2.2 For capacity, energy and transmission service transactions of greater than one (1) month in duration, Enova shall: 4.2.2.1 assess available energy markets, through formal request for proposals (RFP) and informal routine telephone contacts, to identify feasible and economically beneficial resource transactions; 4.2.2.2 analyze market trends, economic conditions, legislation and regulatory actions affecting the availability, cost and utilization of bulk-power; and 4.2.2.3 develop, negotiate and administer contracts for the procurement and/or sale of purchased power or transmission services (each such transaction must be agreed to in writing by SCWC before being acquired for SCWC by Enova). 5. Compensation 5.1 Monthly Service Fee: In recognition of the services provided in Section 4 above, SCWC shall pay to Enova a monthly service fee as specified below: 5.1.1 A fixed monthly service fee of $6,000. 5.1.2 A variable monthly service fee equal to $1.70/MWh for all energy purchased by Enova on behalf of SCWC. 5.1.3 Beginning January, 1997, the fixed monthly service fee shall be adjusted annually, effective January 1 of each calendar year thereafter, by multiplying the previous year's ("Base Year") fixed monthly service fee by a factor equal to the quotient of (i) the average of the 12 month series of the CPI for Los Angeles, Anaheim and Riverside ("CPI") or, if this CPI is no longer available, the U.S. City Average CPI, divided by (ii) the average of the 12 month CPI series, or successor thereto, ending October 31 of the fiscal year immediately prior to the Base Year. 5.2 Communication Equipment and Monthly Costs: SCWC shall be responsible for the cost of establishing and maintaining communications necessary to conduct energy management services pursuant to Section 4.2 hereof. Such costs shall include one- time hardware, software development if required, and monthly communications facility costs. Such costs shall be discussed and agreed to by the Parties before they are incurred. Page 3 6 6. Billing and Payment 6.1 General Billing: Commencing with the month immediately following the month in which services have commenced pursuant to Section 3.1, Enova shall by the seventh day of each month provide SCWC a written statement of services rendered. Each service shall be itemized and subject to the following billing provisions. 6.1.1 Billing: Enova shall provide by the seventh (7th ) day of each month a bill to SCWC itemizing all services for which there are charges that month. 6.1.2 Payment: Each month, by the twentieth (20th ) day, SCWC shall pay to Enova the amount billed for that month. 6.2 Energy Management Services: The monthly amount, pursuant to Section 5.1 above, shall be noted on each monthly bill. 6.3 Communication Costs: Communication costs for equipment, software and monthly services, pursuant to Section 5.2, shall be itemized in the monthly statement submitted by Enova to SCWC. 6.4 Late Payments: If either Party fails to make payment when the same is due, interest thereon shall accrue and be payable at the rate of one percent (1%) compounded per month or the maximum legal rate, whichever is less, prorated by days until payment is received. Interest shall be computed on the basis of a thirty (30) day month and applied to the actual number of days from the due date until payment is made. 6.5 Billing Disputes: In the event either Party (the "Disputing Party") should in good faih dispute any portion of the amount shown on any statement, the Disputing Party shall pay all of that statement, including the disputed amount. Any amount which is disputed by the Disputing Party in good faith and which is thereafter determined not to be owing by the Disputing Party, shall be refunded by the non-Disputing Party, together with interest on such amount as provided in Section 6.4, within twenty (20) days of final resolution of such dispute by written agreement of the Parties or final decision of the Arbiters if the disputes are submitted to arbitration as provided in Section 16 hereof. 7. FURTHER ASSURANCES 7.1 Purchasing Practices: Each Party shall use its best commercially reasonable efforts to take, or cause to be taken, any action to do, or cause to be done, all things necessary, proper or advisable under applicable laws to consummate and make effective the transactions and activities contemplated by this Agreement, including, but not Page 4 7 limited to, amendment of SCWC's current purchasing practices and procedures to allow Enova to perform services pursuant to this Agreement. 7.2 Allocation of Non-Firm Resources: Enova represents and SCWC acknowledges that Enova shall provide similar services contemplated by this Agreement for others, in addition to SCWC. To avoid the appearance and the possibility of a conflict of interest with SCWC or a claim that Enova may not be acting in SCWC's best interests to reduce purchased power costs, Enova shall allocate non-firm energy and non-firm transmission, and other electric services, pro rata among Enova's customers, including SCWC, on the basis of each customer's megawatt-hour and, as appropriate megawatt requirement during any hour of service; provided, however, that SCWC's firm power and firm transmission resources shall not be so allocated. SCWC acknowledges and agrees that the allocation method described herein adequately addresses any potential conflict with SCWC's interest which is served by Enova and waives any and all claims it may have against Enova arising from such allocation method. 7.3 Control and Payment of Subordinates: SCWC retains Enova on an independent contractor basis and not as an employee. The personnel performing the services contemplated by this Agreement on behalf of SCWC shall at all times be under Enova's exclusive direction and control and are not employees of SCWC. Enova shall pay all wages, salaries, and other amounts due such personnel in, connection with their performance of services under this Agreement and as required by law. Enova shall be responsible for all reports and obligations regarding such personnel including, but not limited to: social security taxes, income tax withholding, unemployment insurance, and workers compensation insurance. 8. AUDITS 8.1 Right to Audit: Upon prior notice, either Party shall have the right to designate its own employee representative(s) or its contracted representative(s) with a certified public accounting firm who shall have the right to examine those accounts, books, records, or supporting documentation to verify the accuracy of any statement, charge, computation or demand made under or pursuant to this Agreement and related capacity, energy, transmission or other electric services agreements. Any such audit(s) shall be at the auditing Party's expense and undertaken at reasonable times and in conformance with generally accepted auditing standards. The other Party agrees to fully cooperate with any such audit(s). Page 5 8 8.2 Audit Period: The right to audit shall extend during the length of this Agreement and for a period of not more than one (1) year following the month in which services were performed. The Parties shall retain all necessary records and documentation for the entire length of this audit period. 8.3 Remedy of Errors: In the event any exceptions are found during an audit, the Party finding the exceptions shall promptly notify the other Party of such exception in writing. The Parties shall attempt to resolve all audit exceptions as soon as possible thereafter. To the extent that resolution of an audit exception involves a monetary payment from one Party to the other, the Party making payment shall do so within sixty (60) days of the audit exception resolution. The payment amount shall include interest calculated at the rate of one percent (1 %) compounded per month or the maximum legal rate, whichever is less, of the unpaid balance prorated by days from the date of resolution until payment is received. Interest shall be computed on the basis of a thirty (30) day month and applied to the actual number of days from the due date until payment is made. 9. NO THIRD PARTY RIGHTS Except as otherwise specifically provided in this Agreement, the Parties do not intend to create rights in, or to grant remedies to, any third party as a beneficiary of this Agreement or of any duty, covenant, obligation or undertaking established herein. 10. WAIVERS Any waiver at any time by either Party of its rights with respect to a default under this Agreement, or with respect to any other matter arising in connection with this Agreement, shall not be deemed a waiver with respect to any subsequent default or other matter arising in connection therewith or otherwise. Any delay, short of the statutory period of limitation in asserting or enforcing any right, shall not be deemed a waiver of such right. 11. ASSIGNMENT No transfer or assignment of all or any part of this Agreement or any rights, benefits or duties under it by any Party shall be effective without the prior written consent of the other Party which consent shall not be unreasonably withheld; provided, that this Section shall not apply to interests which arise by reason of any deeds of trust, mortgages, indentures or security agreements heretofore granted or executed by a Party. Any successor to or transferee or assignee of the rights of a Party, whether by voluntary Page 6 9 transfer, judicial sale, foreclosure sale, or otherwise, shall be subject to all terms and conditions of this Agreement to the same extent as though such successor, transferee or assignee were an original Party. 12. UNCONTROLLABLE FORCES Neither Party shall be considered in default in the performance of any of its obligations under this Agreement (other than obligations of said Party to make payments hereunder) when a failure of performance shall be due to uncontrollable forces. A Party rendered unable to fulfill any of its obligations under this Agreement by reason of an uncontrollable force shall exercise due diligence to remove such inability with all reasonable dispatch. Nothing contained herein shall be construed so as to require a Party to settle any strike or labor dispute in which it may be involved. For the purposes of this Agreement, an uncontrollable force shall be any cause beyond the control of the Party affected, including but not limited to, failure of or threat of failure of facilities, flood, earthquake, storm, fire, lightning, epidemic, famine, war, riot, civil disturbance or disobedience, labor dispute, labor or material shortage, restraint by court order or public authority, and action or non-action by, or inability to obtain necessary authorizations or approvals from any governmental agency or authority which, by exercise of due diligence and foresight, such Party could not reasonably have been expected to avoid and which, by exercise of due diligence, it has been unable to overcome. 13. LIABILITY 13.1 Willful Action: Except for any loss, damage, claim, cost, charge or expense resulting from willful action, no Party, its directors, or other governing body, officers, or employees shall be liable to the other Party for any loss, damage, claim, cost, charge, or expense of any loss, damage, claim, cost, charge, or expense of any kind or nature (including direct, indirect, or consequential loss, damage, claim, cost, charge, or expense) incurred by the other Party, resulting whether or not from the negligence of any Party, its directors, or other governing body, officers, employees, or any other person or entity whose negligence would be imputed by such Party from the performance or nonperformance of the obligations of any Party under this Agreement. 13.2 Release: Except for any loss, damage, claim, cost, charge, or expense resulting from willful action, each Party releases the other Party, its directors, or other governing body, officers, and employees, from any such liability referred to in Section 13.1. Page 7 10 14. COMPLETE AGREEMENT This Agreement constitutes the complete and entire agreement between the Parties. Any previous communications, representations, or agreement, whether oral or written, with respect to the subject matter thereof are withdrawn. There are no additions to, or deletions from, or changes in, any of the provisions hereof, and no understanding, representations, or agreements concerning any of the same, which are not expressed herein. The invalidity of any part of this Agreement shall not affect the validity of the remaining parts of the Agreement. 15. REPRESENTATIVES AND NOTICES 15.1 Representatives: Each Party shall designate an Authorized Representative and an alternate who shall be authorized to act on its behalf with respect to matters contained herein which are the functions and responsibilities of the Authorized Representatives. Within thirty (30) calendar days after execution of this Agreement, each Party shall give written notice to the other Party of its designation, and shall promptly notify the other Party of any subsequent changes in such designation. The Authorized Representatives shall have no authority to modify any of the provisions of this Agreement. 15.2 Notifications: Any notice, request, demand, or statement shall be given in writing and delivered by prepaid first class mail, facsimile, or by hand to a Party at the addresses provided below or such other addresses as the Parties hereto may designate in writing from time to time: TO ENOVA: 12555 High Bluff Drive Suite 155 San Diego, CA 92130 FAX Number: (619) 792-2926 TO SCWC: 2143 East D St., Suite 110 Ontario, CA 91761 FAX Number: (909) 390-5299 15.3 Timing of Notices: Notices or demands delivered personally or by facsimile shall be deemed served as of actual receipt. Mailed notices or demands shall be deemed served seventy-two (72) hours after deposit in the United States mail. Page 8 11 16. ARBITRATION 16.1 If any controversy, dispute or claim arises out of this Agreement which cannot be resolved by the personnel directly involved, either Party may invoke this dispute resolution procedure by giving written notice to the other Party. This process shall be a compromise negotiation. All offers, promises, conduct and statements, whether oral or written made pursuant to this negotiation shall be confidential, inadmissible, and not discoverable for any purpose, including impeachment, in any subsequent arbitration between the Parties. 16.2 If any dispute arises, as to any factual matter, the Parities shall submit the factual dispute to binding arbitration. The Party wanting to pursue such arbitration shall prepare and serve on the other Party a detailed explanation of the dispute, including the issues to be resolved and the requested relief, to which the other Party shall reply within thirty (30) days. Within ten (10) days after service of the reply, each Party shall choose an arbitrator, who together shall choose a third (neutral) arbitrator, and the three shall determine the issues. In all other respects, the arbitration shall be governed by the rules of the American Arbitration Association. The arbiters shall render a decision in writing not later than thirty (30) days after the matter has been submitted to them, and the decision of a majority shall be binding upon the Parties. The arbiters may, in their discretion, award arbitration costs and attorneys' fees to either Party. The Parties intend that this Agreement to arbitrate be valid, enforceable, and irrevocable. 16.3 The decision of the arbiters shall be binding, final and unappealable and shall have the effect of a judgment. If the decision is not complied with by a Party within twenty (20) days of the time of receipt of a written copy of the award of the arbiters, the other Party may apply to a court of competent jurisdiction for entry of a judgment based on such award, together with the costs, including a reasonable attorney's fee, incurred in obtaining such judgment. 17. SURVIVAL Obligations and rights set forth in Sections 5, 6, 8, 10, 11, 12, 13, 16 and 19 hereof pertaining to or affecting each Party's obligation to make payments hereunder shall survive until fully satisfied. 18. PROPRIETARY INFORMATION AND OWNERSHIP RIGHTS 18.1 Enova agrees to use reasonable steps to keep confidential all information related to projects, methods of manufacture, trade Page 9 12 secrets or processes (except such information as may belong in the public domain), and the business or affairs of SCWC which may be acquired in the performance of work pursuant to Section 4 hereof, provided all such information requiring confidential treatment has a legend to that effect on it at the time it is given to Enova. 18.2 Previously developed reports, computer programs, recommendations, specifications, drawings, technical data, sketches and all the information used by Enova in connection with its performance pursuant to Section 4 hereof shall remain the exclusive property of Enova. Performance under Section 4 hereof shall not convey to SCWC any right to use (either temporarily or permanently) such previously developed materials unless specifically provided in writing as part of this Agreement. 18.3 The reports, computer programs, recommendations, specifications, drawings, technical data, sketches and all other information developed and furnished by Enova in connection with its performance pursuant to Section 4 hereof shall remain the exclusive property of Enova, subject to SCWC's permanent right to use same for its own purposes. Enova shall have the unrestricted right to use and reproduce all such information, unless such use would violate Enova's obligation to SCWC pursuant to Section 18.1 hereof. 19. TAXES In the event foreign, federal, state or local taxes (other than corporate taxes) are assessed on any transaction undertaken by Enova for and on behalf of SCWC which is contemplated by this Agreement, SCWC shall reimburse Enova for the amount of such tax which shall be invoiced in a separate statement to SCWC as an additional direct expense under Section 6 hereof. 20. GOVERNING LAW This Agreement shall be interpreted, governed by, and construed under the laws of the state of California or the laws of the United States, as applicable, as if executed and to be performed wholly in the state of California. Page 10 13 21. SIGNATURE CLAUSE The signatories hereto represent that they have been authorized to enter into this Agreement on behalf of the Party for whom they sign. BY /s/ DWAIN M. BOETTCHER DATE 3/26/96 --------------------------------- ------------------------- Dwain M. Boettcher Vice-President Enova Energy, Inc. BY /s/ JOEL A. DICKSON DATE 3/25/96 --------------------------------- ------------------------- Joel A. Dickson Vice President Customer Service Southern California Water Company Page 11 EX-13 4 EXCERPTS FROM THE 1996 ANNUAL REPORT 1 EXHIBIT 13 Southern California Water Company Excerpts from 1996 Annual Report 2 Southern California Water Company selected financial data 1
For the years ended December 31, -------------------------------------------------------------- (in thousands, except per share amounts) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------- Total Operating Revenues $151,529 $129,813 $122,675 $108,506 $100,660 Total Operating Expenses 128,100 108,425 103,745 88,456 81,562 Operating Income 23,429 21,388 18,930 20,050 19,098 Other Income 531 366 236 354 934 Interest Charges 10,500 9,559 7,828 8,378 7,890 Net Income 13,460 12,165 11,338 12,026 12,142 Earnings Available for Common Shareholders 13,366 12,069 11,240 11,926 12,040 Earnings per Common Share 1.69 1.54 1.43 1.66 1.82 Dividends Declared per Common Share 1.23 1.21 1.20 1.19 1.15 Total Assets 430,922 406,255 383,627 358,533 312,491 Long-Term Debt 107,190 107,455 92,891 84,286 84,195 Preferred Shares-Mandatory Redemption 480 520 560 600 640 Total Capitalization $256,036 $231,151 $214,013 $202,949 $174,664 Average Share Outstanding 7,891 7,845 7,842 7,186 6,627
3 Southern California Water Company management's discussion and analysis 19 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, 1996 and 1995 Earnings per common share in 1996 increased by 9.7% to $1.69 per share as compared to $1.54 per share for the comparable period last year. Earnings from operations only were $1.62 per share in 1996, an increase of 8% from the $1.50 reported in 1995. Other income in 1996 increased by 75% to $0.07 per share as compared to $0.04 per share last year. Water operating revenues increased by 17.7% in 1996 to $140 million from the $118.9 reported in 1995 due principally to the impacts of general rate increases, which went into effect in January, 1996, and to a 7.5% increase in water sales volumes in 1996 as compared to 1995. Electric operating revenues of $11.5 million were 5.9% higher in 1996 as compared to last year due to the impacts of a general rate increase effective in May, 1996 as well as a 5% increase in kilowatt-hour sales. Purchased water costs increased by 17.5% to $38.4 million in 1996 reflecting increases in purchased water rates, the latest series of which was effective July 1, 1995, as well as increased purchased water volumes. Costs of power purchased for pumping decreased by 3.2% to $7.7 million in 1996 chiefly as the result of increased usage of purchased water in the resource mix. In 1996, costs of power purchased for resale increased by 11.7% to $5.8 million due to increased kilowatt-hour sales and recovery of costs in the electric supply cost balancing account. Groundwater production assessments of $5.9 million in 1996 are 3.1% lower due to the increased amount of purchased water in the resource mix. A positive entry for the provision for supply cost balancing accounts reflects recovery of previously under-collected supply costs. Conversely, a negative entry for the provision for supply cost balancing accounts reflects an undercollection of previously incurred supply costs. The positive entry for 1996 results from approval by the CPUC of rate increases sufficient to recover previously under-collected purchased water supply costs, supply costs for power purchased for pumping and for resale and groundwater production assessments. Although other operating expenses remained relatively unchanged in 1996 as compared to last year, administrative and general expenses of $20.5 million were 20.7% greater than in 1995. This increase reflects an increase in the amount of labor being charged to this category since, as a part of the settlement stipulation for the rates that were effective January 1, 1996, the company began expensing, and currently recovering, a greater percentage of labor for persons engaged in general and administrative functions. Moreover, this category has increased due to higher personnel-related expenses such as health insurance, post-retirement medical benefits, pension and 401(k) plan costs and long-term compensation expenses. In addition, in 1995, the company reversed approximately $639,000 in costs related to its participation in the State Water Project for which there is no corresponding entry in 1996. Depreciation expense in 1996 increased by 19.1% to $10.1 million reflecting the effects of recording approximately $30 million in net plant additions during 1995, depreciation on which began in 1996 as well as higher depreciation rates authorized by the CPUC that became effective January 1, 1996. Taxes on income increased by approximately 17.1% to $10.3 million in 1996 as compared to last year as a result of higher pre-tax income. For 1996, other taxes increased by 25.4% due to increased franchise fees as a result of increased revenues, as well as increased property taxes resulting from higher valuation assessments in 1996. Maintenance expense of $7.7 million in 1996 was 34.6% greater than last year reflecting increased maintenance emphasis on pumping, hydrant and valve equipment. Other income increased by 58% in 1996 due principally to an increase 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 for 1996 increased by 9.8% to $10.5 million primarily as a result of the sale in September, 1995 of $30 million in long-term debt as well as increased short-term bank borrowing during 1996. 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, 4 Southern California Water Company 20 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. Financial Condition Liquidity and Capital Resources The company funds the majority of its operating expenses, interest payments on its debt, dividends on its outstanding common and preferred shares and makes its mandatory sinking fund payments through internal sources. However, because of the seasonal nature of its water and electric businesses, the company utilizes its short-term borrowing capacity on occasion to finance current operating expenses. The company continues to rely on external sources, including short-term bank borrowing, the receipt of contributions-in-aid-of-construction and advances for construction and install-and-convey advances, to fund the majority of its construction expenditures. The aggregate short-term borrowing capacity currently available to the company under its three bank lines of credit is $37 million. At December 31, 1996, the company had a total of $16 million in borrowing outstanding under its bank lines of credit, leaving an unused short-term borrowing capacity of $21 million which management believes is sufficient to finance any current capital requirements not funded from internal sources. 5 Southern California Water Company management's discussion and analysis 21 The company routinely employs short-term bank borrowing as an interim financing source prior to executing either a long-term debt or equity issue. The company issued 1,000,000 new common shares in December, 1996 and an additional 71,500 common shares in January, 1997 for aggregate net proceeds of $22,062,000. These funds were used to repay a portion of then-outstanding short-term bank debt. In December, 1996, the company sold $8 million in tax-exempt debt which was issued through the California Pollution Control Financing Authority. The funds were deposited with a trustee and will be used to reimburse the company for costs incurred to replace water main facilities in many of its customer service areas. The company anticipates selling additional debt in 1997 with the net proceeds initially being used to repay short-term bank borrowings and, after that, to fund construction expenditures. The company has no derivative financial instruments, financial instruments with significant off-balance sheet risks or financial instruments with concentrations of credit risk. Construction Program Net construction expenditures for 1997 are estimated at approximately $27.5 million. Capital expenditures for years after 1997 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 Rates to the company's customers vary among its 21 water customer service areas due to differences in operating conditions and costs. The customer service areas are currently grouped into 16 water districts for rate-making purposes. The company's one electric customer service area is also a separate ratemaking district. The company continuously monitors its operations in all of its districts so that applications for rate changes may be filed, when warranted, on a district-by-district basis in accordance with CPUC 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" increases in rates for the second and third years. In January, 1996, new rates were effective in six water customer service areas which, among other things, authorized a rate of return on common equity of 10.40%, increased depreciation rates, authorized recovery of postretirement medical benefit costs, increased current recovery of labor expenses and resulted in an increase in annual water operating revenues of approximately $15 million. Water rates in two customer service areas were increased on January 1, 1997 to recover costs associated with 1996 and 1997 capital projects in those areas. The company filed notices of intent to increase water rates in four of its customer service areas in January, 1997. The company is unable to predict if the CPUC will authorize all or any of the proposed increases although it is not anticipated that new rates, if approved, would be effective prior to January, 1998. New rates were effective in May, 1996 in the company's Bear Valley Electric customer service area. An additional step increase in electric rates was effective in January, 1997. In November, 1996, the company filed an application with the CPUC seeking recovery through rates of costs associated with its participation the coastal aqueduct extension of the State Water Project. The company is currently unable to predict if the CPUC will authorize recovery of all or any of the costs associated with the Project. Environmental Matters The 1996 amendments to the Safe Drinking Water Act ("SDWA") amount to a rewrite of the law that the United States Environmental Protection Agency ("EPA") has been trying to implement for almost ten years. In contrast to the 1986 amendments to SDWA, which were crafted with very little input from water purveyors, the 1996 amendments were developed with significant contributions from water purveyors and regulators. The California Department of Health Services, acting on behalf of the EPA, administers the EPA's program. The 1996 SDWA amendments replace the requirement that EPA set 25 new standards every three years with a new process for selecting and regulating contaminants. The EPA can only regulate contaminants that may have adverse health effects, are known or are likely to occur at levels of public health concern, and provide "a meaningful opportunity for health risk reduction." The EPA must, within 18 months, publish a list of contaminants for possible regulation and must update such list every five years. In addition, every five years, 6 Southern California Water Company 22 the EPA must select at least five contaminants on the list and determine whether to regulate them. The new law allows the EPA to bypass the selection process and adopt interim regulations for contaminants in order to address urgent health threats. Current regulations, however, remain in place and are not subject to the new standard-setting provisions. The company 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 maximum contaminant limits (MCL's) is either treated or blended before it is delivered to customers. Since the SDWA became effective, the company has experienced increased operating costs for testing to determine the levels, if any, of the contaminants in the company's sources of supply as well as additional expense to lower the level of any contaminants in order to meet the MCL standards. Such costs and the costs of controlling any other contaminants may cause the company to incur additional capital costs as well as increased operating costs. However, the rate-making process provides the company with the opportunity to recover prudently incurred capital and operating costs associated with water quality, and management believes that such prudently incurred costs will be authorized for recovery by the CPUC. There have been no environmental matters that have materially affected or are currently materially affecting the company's Bear Valley Electric customer service area. Water Supply During 1996, the company supplied from all sources, a total of 194,397 acre-feet of water compared to 183,108 in 1995. Of the total water supplied in 1996, 56% was produced from the company's wells and 1.5% 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 rights to water extracted from Clear Lake. The remainder was purchased from the Metropolitan Water District of Southern California ("MWD"). MWD imports water from two principal sources: the Colorado River and the State Water Project. Available water supplies from these sources have historically been sufficient to meet MWD's requirements and MWD's supplies from these sources are anticipated to continue to remain adequate through 1997. MWD's importation of water from the Colorado River is expected to decrease in future years due to the requirements of the Central Arizona Project in the State of Arizona. In response, MWD has taken a number of steps to secure additional storage capacity and increase available water supplies, including effecting transfers of water rights from other sources. The recent storms in the 1996-1997 winter period provided precipitation adequate to fill most of the state's reservoirs to capacity and the outlook for water supply in 1997 is favorable. In those customer service areas of the company that pump groundwater, overall groundwater conditions remain at adequate levels. The company believes that its water supplies from all sources are adequate to meet projected current year demands. Water-Related Opportunities The company continues to pursue strategic opportunities related to the operation of municipally owned water systems. The company has pursued and continues to pursue opportunities to bid on long-term leases and operation contracts on a stand-alone basis or as part of a joint venture. In 1996, the company formed Golden State Water Company LLC to pursue these opportunities. 7 Southern California Water Company balance sheets 23
December 31, ------------------------ (in thousands) 1996 1995 - -------------------------------------------------------------------------------- Assets Utility Plant, at cost Water $ 411,852 $ 383,368 Electric 33,300 30,269 ------------------------ 445,152 413,637 Less - Accumulated depreciation (114,086) (103,018) ------------------------ 331,066 310,619 Construction work in progress 26,710 24,349 ------------------------ Net utility plant 357,776 334,968 ------------------------ Other Property and Investments 774 755 ------------------------ Current Assets Cash and cash equivalents 3,783 343 Accounts receivable-- Customers, less 7,870 8,238 reserves of $387 in 1996 and $648 in 1995 Other 1,713 2,563 Unbilled revenue 12,596 11,035 Materials and supplies, at average cost 1,292 1,733 Supply cost balancing accounts 6,273 8,073 Prepayments 6,933 7,779 Accumulated deferred income taxes - net 3,302 3,206 ------------------------ Total current assets 43,762 42,970 ------------------------ Deferred Charges Regulatory tax-related assets 23,201 22,986 Other 5,409 4,576 ------------------------ Total deferred charges 28,610 27,562 ------------------------ Total Assets $ 430,922 $ 406,255 ======================== Capitalization and Liabilities Capitalization Common shareholders' equity $ 146,766 $ 121,576 Preferred shares 1,600 1,600 Preferred shares - mandatory redemption 480 520 Long-term debt 107,190 107,455 ------------------------ Total capitalization 256,036 231,151 ------------------------ Current Liabilities Notes payable to banks 16,000 8,500 Long-term debt and preferred shares - current 482 15,624 Accounts payable 12,865 6,839 Taxes payable 5,777 5,562 Accrued interest 1,772 1,955 Other 7,792 8,061 ------------------------ Total current liabilities 44,688 46,541 ------------------------ Other Credits Advances for construction 55,848 55,385 Contributions in aid of construction 28,158 27,745 Accumulated deferred income taxes - net 40,404 39,050 Unamortized investment tax credits 1,995 2,300 Regulatory tax-related liability 3,337 3,499 Other 456 584 ------------------------ Total other credits 130,198 128,563 ------------------------ Total Capitalization and Liabilities $ 430,922 $ 406,255 ========================
The accompanying notes are an integral part of these financial statements 8 Southern California Water Company statements of capitalization 24
December 31, ------------------------ (in thousands) 1996 1995 - -------------------------------------------------------------------------------- Common Shareholders' Equity: Common shares, $2.50 par value-- Authorized 10,000,000 shares Outstanding 8,886,171 in 1996 and 7,845,092 in 1995 $ 22,215 $ 19,613 Additional paid-in capital 73,645 54,753 Earnings reinvested in the business 50,906 47,210 ----------------------- 146,766 121,576 ----------------------- 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 20,800 shares in 1996 and 22,400 shares in 1995, 5% Series 520 560 Less: Preferred shares to be redeemed within one year (40) (40) ----------------------- 480 520 ----------------------- Long-Term Debt 4.30% notes due 1996 -- 2,200 6.40% notes due 1996 -- 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 2,018 2,077 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 8,000 7.65% notes due 2025 22,000 22,000 5.50% notes due 2026 8,000 -- less funds held by trustee (8,000) -- 9.56% notes due 2031 28,000 28,000 Other 1,014 1,162 ----------------------- 107,632 123,039 Less: Current maturities (442) (15,584) ----------------------- 107,190 107,455 ----------------------- Total Capitalization $ 256,036 $ 231,151 =======================
The accompanying notes are an integral part of these financial statements 9 Southern California Water Company statements of income 25
For the years ended December 31, ----------------------------------- (in thousands, except per share amounts) 1996 1995 1994 - ---------------------------------------------------------------------------------------- Operating Revenues Water $ 139,997 $118,922 $ 112,087 Electric 11,532 10,891 10,588 ----------------------------------- Total operating revenues 151,529 129,813 122,675 Operating Expenses Water purchased 38,355 32,629 30,768 Power purchased for resale 5,825 5,215 4,726 Power purchased for pumping 7,711 7,963 7,584 Groundwater production assessment 5,946 6,137 5,457 Supply cost balancing accounts 2,064 (1,146) 500 Other operating expenses 13,421 13,351 12,148 Provision for State Water Project -- (639) (193) Administrative and general expenses 20,549 17,029 14,237 Depreciation 10,102 8,483 8,049 Maintenance 7,745 5,754 6,916 Taxes on income 10,283 8,784 8,865 Property and other taxes 6,099 4,865 4,688 ----------------------------------- Total operating expenses 128,100 108,425 103,745 ----------------------------------- Operating Income 23,429 21,388 18,930 ----------------------------------- Other Income Net gain from sale of operating properties -- -- 313 Other - net 531 336 (77) ----------------------------------- Total other income 531 336 236 ----------------------------------- Income before interest charges 23,960 21,724 19,166 Interest Charges Interest on long-term debt 8,551 7,807 6,694 Other interest and amortization of debt expense 1,949 1,752 1,134 ----------------------------------- Total interest charges 10,500 9,559 7,828 ----------------------------------- Net Income 13,460 12,165 11,338 Dividends on Preferred Shares (94) (96) (98) ----------------------------------- Earnings Available For Common Shareholders $ 13,366 $ 12,069 $ 11,240 =================================== Earnings Per Common Share $ 1.69 $ 1.54 $ 1.43 =================================== Weighted Average Number of Common Shares Outstanding 7,891 7,845 7,842 ===================================
The accompanying notes are an integral part of these financial statements 10 Southern California Water Company statements of changes in 26 common shareholders' equity
Common Shares ---------------------- Additional Earnings Number Paid-in Reinvested in (in thousands) of Shares Amount Capital the Business - ----------------------------------------------------------------------------------------------------- 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 Add: Net Income 13,460 Issuance of Common Shares for public offering 1,000 2,500 18,090 under Dividend Reinvestment and 401(k) Plans 41 102 802 Deduct: Dividends on Preferred Shares 94 Dividends on Common Shares - $1.225 per share 9,670 - ----------------------------------------------------------------------------------------------------- Balances at December 31, 1996 8,886 $22,215 $73,645 $50,906 - -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements 11 Southern California Water Company statements of cash flows 27
For the years ended December 31, --------------------------------------------- (in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $ 13,460 $ 12,165 11,338 Adjustments for non-cash items: Depreciation and amortization 10,389 9,033 8,476 Deferred income taxes and investment tax credits 577 2,016 75 Gain on sale of properties - - (532) Other - net (1,660) 416 (185) Changes in assets and liabilities: Customer receivables 368 651 (2,074) Supply cost balancing accounts 1,800 (1,065) 14 Accounts payable 6,026 (1,609) (829) Taxes payable 215 (73) 2,685 Other - net 122 (2,587) (1,393) - -------------------------------------------------------------------------------------------------------------------- Net cash provided 31,297 18,947 17,575 Cash Flows from Investing Activities Construction expenditures (31,953) (25,808) (28,620) Acquisition of water systems - - (100) Proceeds from sale of properties - - 1,346 - -------------------------------------------------------------------------------------------------------------------- Net cash used (31,953) (25,808) (27,374) Cash Flows from Financing Activities Issuance of Common Shares 21,494 - - Issuance of long-term debt and lease obligations - 30,000 13,000 Receipt of advances for and contributions in aid of construction 2,462 2,761 2,335 Refunds on advances for construction (2,088) (2,812) (2,694) Repayments of long-term debt and redemption of preferred shares (15,447) (4,477) (228) Net change in notes payable to banks 7,500 (11,000) 7,500 Common and preferred dividends paid (9,825) (9,614) (9,496) - -------------------------------------------------------------------------------------------------------------------- Net cash provided 4,096 4,858 10,417 Net Increase (Decrease) in Cash and Cash Equivalents 3,440 (2,001) 618 Cash and Cash Equivalents, Beginning of Year 343 2,344 1,726 - -------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents, End of Year $ 3,783 $ 343 $ 2,344 Taxes and Interest Paid Income taxes paid $ 10,767 $ 6,955 $ 6,261 Interest paid 10,128 9,043 6,846 - -------------------------------------------------------------------------------------------------------------------- Non-Cash Transactions Property installed by developers and conveyed to company $ 957 $ 2,764 $ 564 Capital leases - - 53 Acquisition of water system for common shares - - 673 - --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements 12 Southern California Water Company notes to financial statements 28 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 1996, 1995 and 1994, the aggregate provisions for depreciation approximated 2.71%, 2.52% and 2.50% 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 40-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, 1996 and 1995 for debt with similar terms and remaining maturities were used to estimate fair value. Changes in the assumptions will produce differing results.
1996 1995 - ------------------------------------------------------------------- Carrying Fair Carrying Fair (in thousands) amount value amount value - ------------------------------------------------------------------- Financial assets: Cash $ 3,783 $ 3,783 $ 343 $ 343 Accounts receivable 22,179 22,179 21,836 21,836 Financial liabilities: Short-term debt 16,000 16,000 8,500 8,500 Long-term debt $107,632 $114,892 $123,039 $136,191 -----------------------------------------
Note 2 Capital Stock All of the series of Preferred Shares outstanding at December 31, 1996 are redeemable at the option of the Company. At December 31, 1996, 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, 1996 is $40,000 each year. During the year ended December 31, 1996, the company issued 20,228 and 20,851 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, 1995 and 1994 were purchased on the open market. 13 Southern California Water Company 29 There are 89,226 and 71,408 Common Shares reserved for issuance under the DRP and the 401(k) Plan, respectively, at December 31, 1996. Shares reserved for the 401(k) Plan are in relation to company matching contributions and for investment purposes by participants. As of December 31, 1996, retained earnings of $28,228,000 were restricted as to the payment of cash dividends on Common Shares. Note 3 Compensating Balances and Bank Debt At December 31, 1996, the company maintained $37,000,000 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 $37,000,000 aggregate borrowing capacity, $16,000,000 was outstanding at December 31, 1996. Short-term bank borrowing activities for the last three years were as follows:
(in thousands, except percent) 1996 1995 1994 - ---------------------------------------------------------------- Balance Outstanding at December 31, $16,000 $8,500 $ 19,500 Interest Rate at December 31, 6.17% 6.39% 7.53% Average Amount Outstanding $26,109 $17,897 $16,527 Weighted Average Annual Interest Rate 5.97% 6.92% 4.65% Maximum Amount Outstanding $36,000 $27,500 $24,750 - ----------------------------------------------------------------
Note 4 Long-Term Debt In December, 1996, the company sold $8 million in tax-exempt debt that was issued through the California Pollution Control Financing Authority. The funds were deposited with a trustee and will be used to finance water main replacements. 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, 1997, in the amount of $451,000 as 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 $442,000, $157,000, $163,000, $1,168,000 and $1,175,000 for each of the years ending December 31, 1997 through 2001, respectively. 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, 1996 and 1995 were:
December 31, (in thousands) 1996 1995 - --------------------------------------------------------------- Deferred tax assets: Balancing accounts $ 908 $1,706 State tax effect 2,394 1,500 -------- --------- 3,302 3,206 -------- --------- Deferred tax liabilities Depreciation (38,888) (36,604) Advances and contributions 17,805 15,637 Other property related (10,170) (10,796) Other non-property related (9,151) (7,287) -------- --------- (40,404) (39,050) Accumulated deferred income taxes - net $(37,102) $ (35,844) -------- ---------
14 Southern California Water Company 30 The current and deferred components of income tax expense are as follows:
December 31, (in thousands) 1996 1995 1994 - --------------------------------------------------------------- Current Federal $ 7,224 $ 5,432 $ 6,650 State 2,452 2,110 2,435 Total current tax expense 9,676 7,542 9,085 Deferred - Federal and State: Accelerated depreciation 3,175 3,273 3,087 Balancing accounts (798) 472 (6) State Water Project 296 (296) (116) Advances and contributions (894) (477) (1,204) California privilege year franchise tax (683) (394) (1,085) Adjustments to prior year provision 410 (855) - Other (732) (520) (476) -------------------------------- Total deferred tax expense 774 1,203 200 -------------------------------- Total income tax expense $10,450 $ 8,745 $ 9,285 -------------------------------- Income taxes included in operating expenses $10,283 $ 8,784 $ 8,865 Income taxes included in other income and expenses - net 167 (39) 420 Total income tax expense $10,450 $ 8,745 $ 9,285
Additional information regarding taxes on income is set forth in the following table:
December 31, (in thousands) 1996 1995 1994 - ----------------------------------------------------------------------- Federal taxes on pre-tax income at statutory rates $ 8,368 $ 7,318 $ 7,217 Increase (decrease) in taxes resulting from: State income tax expense 2,051 1,725 2,022 Depreciation 716 426 321 Federal benefit of state taxes (718) (604) (708) Adjustments to prior years' provisions 254 76 342 Other - net (221) (196) 91 ---------------------------------- Total income tax expense $ 10,450 $ 8,745 $ 9,285 ---------------------------------- Pre-tax income $ 23,910 $ 20,910 $ 20,623 ---------------------------------- Effective income tax rate 43.7% 41.8% 45.0% ----------------------------------
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 1996 and 1995 were 7.5% and 4% and 7% and 4% respectively. The expected long-term rate of return on assets, which consist primarily of fixed income securities, was 8% for 1996 and 1995. The following table sets forth the Plan's funded status and amounts recognized in the company's balance sheets at December 31, 1996 and 1995 and the components of net pension cost for 1996 and 1995:
December 31, (in thousands) 1996 1995 - ---------------------------------------------------------------- Accumulated benefit obligation: Vested $ 21,078 $ 21,031 Nonvested 1,862 1,722 -------------------- Total $ 22,940 $ 22,753 -------------------- Projected benefit obligation for service rendered to date $(28,733) $(28,712) Plan assets at fair value 29,240 26,396 Unrecognized net loss/(gain) due to past experience different from assumptions made 936 3,194 Unrecognized net obligation at January 1, 1986 being recognized over 15 years 228 285 Unrecognized prior service cost due to Plan amendments 489 533 -------------------- Accrued pension asset $ 2,160 $ 1,696 -------------------- Service cost benefits earned during the period $ 1,406 $ 1,145 Interest cost on projected benefit obligation 1,970 1,790 Return on Plan assets (2,169) (4,713) Net amortization and deferral 165 3,133 -------------------- Net pension cost $ 1,372 $ 1,355 --------------------
15 Southern California Water Company notes to financial statements 31 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 the provisions 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 post-retirement benefit costs. Assets in these trusts amounted to approximately $549,000 as of December 31, 1996. The following table presents information on the plan's funded status and the accrued postretirement liability as of December 31, 1996 and 1995:
December 31, (in thousands) 1996 1995 - -------------------------------------------------------------------------- Accumulated postretirement benefit obligation (APBO): Retirees and dependents $ 2,248 $ 3,345 Other fully eligible participants 307 322 Other active participants 1,458 1,409 ------------------ Total $ 4,013 $ 5,076 ------------------ Plan assets at fair value $ 549 $ -- ------------------ Accumulated postretirement benefit obligation in excess of plan assets 3,464 5,076 Unrecognized transition obligation (7,545) (7,965) Unrecognized prior service cost 3,826 4,026 Unrecognized net (gain)/loss 2,000 465 ------------------ Accrued postretirement benefit liability $ 1,745 $ 1,602 ------------------
The components of net periodic postretirement benefits cost for 1996 are as follows:
December 31, (in thousands) 1996 - ------------------------------------------------------------------ Service cost - benefits earned during year $ 127 Interest cost on APBO 345 Actual return on plan assets - Net amortization and deferral 220 ----------- Net periodic postretirement benefit cost $ 692 -----------
Postretirement benefit costs for 1993, 1994 and 1995 were estimated at a total of approximately $1.6 million and have been recorded as a regulatory asset for recovery over a 20 year period. During 1996, approximately $52,000 was recovered leaving a balance to be amortized of $1.55 million. The weighted average discount rate used in determining the accumulated postretirement benefit obligation at December 31, 1996 and 1995 was 7.5% and 7%, respectively. A sliding scale for assumed health care cost increases starting at 11% in 1995 declining 1% per year for five 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, 1996 by $196,000 and the net periodic postretirement benefit cost for 1996 by $23,000. The company has a 401(k) Investment Incentive Program 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 1996, 1995 and 1994, totaled $839,000, $389,000 and $222,000, respectively. Contributions in 1996 include contributions for a short plan year in 1995. Note 7 Business Risks and Concentration of Sales The company's utility operations are engaged in supplying water and electric service to the public. The company is required to provide service and grant credit to customers within its defined service areas. Although the company has a diversified base of residential, industrial and other customers, revenues derived from commercial and residential water customers accounted for approximately 90% of total company revenues in 1996 and 1995. 16 Southern California Water Company 32 Approximately forty percent of the company's water supplies comes from wholesalers of imported water with the remainder produced from company-owned wells. The long term availability of imported water supplies is dependent upon, among other things, drought conditions throughout the state, increases in population, water quality standards and legislation that may potentially reduce water supplies. SCW does not anticipate any constraints on its imported water supplies due to the above average precipitation received in the 1996-1997 winter period. The company continues to reduce its reliance on imported water supplies by acquiring groundwater rights. Note 8 Contingencies On November 4, 1996, the company filed an application with the CPUC seeking approval of recovery through rates of costs associated with its participation in the State Water Project. SCW's current investment in the project is $1.8 million and is included in utility plant. No assurance can be given that the CPUC will authorize recovery of all or any of these costs. Management believes that proper insurance coverage and reserves are in place to insure against property, general and product liability and workers' compensation claims. Note 9 Construction Program The company's 1997 construction budget provides for gross expenditures of approximately $32,850,000. Management anticipates that $5,356,000 of the 1997 budgeted amount will be obtained from developers and others. Note 10 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.
(in thousands) 1996 1995 1994 - --------------------------------------------------------------- Balance at beginning of year $ 648 $ 419 $ 370 Provision charged to expense 571 1,501 765 Accounts written off, net of recoveries (832) (1,272) (716) Balance at end of year $ 387 $ 648 $ 419 - ---------------------------------------------------------------
Note 11 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 12 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 and changes in the company's operations. Business Segments
Years Ended December 31, (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Water Electric Water Electric Water Electric ------------------------------------------------------------------------------------------- Operating revenues $139,997 $11,532 $118,922 $10,891 $112,087 $10,588 Operating income before income taxes 30,294 3,418 27,776 2,396 25,858 1,936 Identifiable assets 333,377 24,399 303,367 31,601 294,343 20,536 Depreciation expense 9,235 867 7,717 766 7,308 741 Capital additions 31,295 2,644 25,753 2,985 27,878 3,057 -------------------------------------------------------------------------------------------
Quarterly Operating Operating Earnings Financial Data (in thousands, Revenues Income Net Income per Share except per share amounts) 1996 1995 1996 1995 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ First Quarter $ 30,397 $ 24,976 $ 4,710 $ 3,396 $ 2,168 $ 1,118 $0.27 $0.14 Second Quarter 39,894 32,372 6,486 5,268 4,102 3,027 0.52 0.38 Third Quarter 45,218 39,533 7,963 7,553 5,410 5,290 0.68 0.67 Fourth Quarter 36,020 32,932 4,270 5,171 1,780 2,730 0.22 0.34 - ------------------------------------------------------------------------------------------------------------------------------------ Year $151,529 $ 129,813 $23,429 $21,388 $ 13,460 $12,165 $1.69 $1.54 - ------------------------------------------------------------------------------------------------------------------------------------
17 Southern California Water Company report of management 33 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 13, 1997 Southern California Water Company 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, 1996 and 1995 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, 1996. 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, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN, LLP Arthur Andersen LLP Los Angeles, California February 13, 1997 18 Southern California Water Company shareholder information 36 Annual Meeting of Shareholders All shareholders are invited to attend the Annual Meeting on Tuesday, April 29, 1997, beginning at 10:00 am, at The Sheraton Suites Fairplex, 601 West McKinley Avenue, Pomona, California, 91768. Notice of meeting and proxy materials will be mailed. Stock Listing Common Shares of Southern California Water Company are traded on the New York Stock Exchange under the symbol SCW. The high and low sales prices and dividends paid on the Common Shares for the past two years were:
Dividends 1996 High Low Paid - --------------------------------------------------------------- First Quarter 22 18I $0.305 Second Quarter 22L 19I 0.305 Third Quarter 23K 19K 0.305 Fourth Quarter 24J 21 0.310 --------------------------- $ 1.225 --------------------------- Dividends 1995 High Low Paid - --------------------------------------------------------------- First Quarter 18G 15I $0.300 Second Quarter 19M 15M 0.300 Third Quarter 19K 16I 0.300 Fourth Quarter 21 18K 0.305 --------------------------- $ 1.205 ---------------------------
Independent Certified Public Accountants Arthur Andersen LLP 633 West Fifth Street Los Angeles, CA 90071 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 Attn: McClellan Harris iii 630 East Foothill Boulevard San Dimas, CA 91773 Phone: (909) 394-3600, extension 705 Fax: (909) 394-0711 Shareholder Assistance Shareholders with questions about replacement of dividend checks, transferring stock, replacing lost or stolen certificates or other matters related to their ownership of stock, should contact: Chase Mellon Shareholder Services, Inc. P.O. Box 30609 Los Angeles, CA 90030 (800) 522-6645 http://www.cmssonline.com 1997 Dividend Schedule The following schedule shows the anticipated Common and Preferred Share record and payment dates for 1997:
Record Dates Payment Dates - -------------------------------------------------- February 10 March 1 May 12 June 1 August 11 September 1 November 17 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 Chase Mellon Shareholder Services. Internet Address http://www.scwater.com 19 Southern California Water Company corporate information Board of Directors W. V. Caveney (70, 16) (a,c) Chairman of the Board Floyd E. Wicks (53, 7) (c,d) President, Chief Executive Officer Jean E. Auer (60, 2) (a,c,d) Consultant and member of the Board of Directors of the Water Education Foundation Hillsborough, California R. Bradbury Clark (72, 27) (a,b,c) Of Counsel to the law firm of O'Melveny & Myers Los Angeles, California N. P. Dodge, Jr. (60, 7) (a,b) President, N.P. Dodge Company Omaha, Nebraska Robert F. Kathol (55, 2) (a,b) Executive Vice President Kirkpatrick, Pettis, Smith, Polian Inc. Omaha, Nebraska Lloyd E. Ross (55, 2) (a,c,d) Managing Partner, Invermex L.P. Irvine, California (a) Member - Compensation Committee (b) Member - Audit Committee (c) Member - Business Opportunities Committee (d) Member - Nominating Committee Elected Officers W. V. Caveney (70, 28) Chairman of the Board Floyd E. Wicks (53, 9) President, Chief Executive Officer Donald K. Saddoris (53, 29) Vice President - Customer Service, Region I Thomas J. Bunosky (42, 6) Vice President - Customer Service, Region II Joel A. Dickson (44, 6) Vice President - Customer Service, Region III James B. Gallagher (42, 9) Vice President - Finance, Chief Financial Officer and Secretary McClellan Harris iii (45, 6) Vice President and Treasurer Randell J. Vogel (61, 4) Vice President - Customer and Operations Support Joseph F. Young (51, 19) Vice President - Regulatory Affairs (age, years of service) EX-23 5 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 13, 1997 included in the 1996 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, 1996. We further consent to the incorporation by reference of the above-mentioned report, 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 Los Angeles, California March 13, 1997 EX-27 6 SCHEDULE UT
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEETS AND INCOME STATEMENTS FOR THE 12 MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (In thousands, except per share data) YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 PER-BOOK 357,776 774 43,762 28,610 0 430,922 22,215 73,645 50,906 146,766 480 1,600 107,190 16,000 0 0 62 40 1,014 380 157,390 430,922 151,529 10,283 117,817 128,100 23,429 531 23,960 10,500 13,460 94 13,366 9,670 0 31,297 1.69 1.69
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