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