Total Number of Pages - 32
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .............to....................
Commission file No. 0-464
CALIFORNIA WATER SERVICE COMPANY
(Exact name of registrant as specified in its charter)
California 94-0362795
(State or other jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)
1720 North First Street San Jose, California 95112
(Address of Principal Executive Offices) (Zip Code)
1-408-451-8200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, No Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Cumulative Preferred Stock, Par Value, $25
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-
affiliates of the Registrant - $265,001,940 at February 28, 1997.
Common stock outstanding at February 28, 1997 - 6,309,570 shares.
1
EXHIBIT INDEX
The exhibit index to this Form 10-K is on page 28
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of Registrant's Annual Report to
Shareholders for the calendar year ended December 31, 1996 ("1996
Annual Report") are incorporated by reference in Part I (Item 1),
Part II (Items 5, 6, 7 and 8) and in Part IV (Item 14(a)(1)).
Designated portions of the Registrant's Proxy
Statement/Prospectus of California Water Service Company and
California Water Service Group (Proxy Statement/Prospectus),
dated March 18, 1997, relating to the 1997 annual meeting of
shareholders are incorporated by reference in Part III (Items 10,
11 and 12) as of the date the Proxy Statement was filed with the
Securities and Exchange Commission. The Proxy Statement/Prospectus
was filed under EDGAR on March 4, 1997.
2
TABLE OF CONTENTS
Page
PART I
Item 1. Business............................ 5
a. General Development of Business..... 5
Regulation and Rates................ 5
b. Financial Information about
Industry Segments................. 7
c. Narrative Description of Business... 7
Geographical Service Areas and Number
of Customers at year-end........... 9
Water Supply........................ 10
Nonregulated Operations............ 13
Utility Plant Construction Program
and Acquisitions.................. 14
Quality of Supplies................. 14
Competition and Condemnation........ 15
Environmental Matters .............. 16
Human Resources..................... 16
d. Financial Information about Foreign and
Domestic Operations and Export
Sales ............................. 18
Item 2. Properties ......................... 18
Item 3. Legal Proceedings................... 18
Item 4. Submission of Matters to a Vote of
Security Holders.................. 19
Executive Officers of the Registrant........ 20
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.... 21
Item 6. Selected Financial Data............. 21
Item 7. Management's Discussion and Analysis
of Financial Condition
and Results of Operations.......... 21
Item 8. Financial Statements and
Supplementary Data................. 22
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.............. 22
3
PART III
Item 10. Directors and Executive Officers
of the Registrant................. 22
Item 11. Executive Compensation.............. 22
Item 12. Security Ownership of Certain
Beneficial Owners and Management.. 22
Item 13. Certain Relationships and Related
Transactions...................... 22
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K........... 23
Signatures.................................. 24
Independent Auditors' Report................ 26
Schedules................................... 27
Exhibit Index............................... 28
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PART I
Item 1 Business.
a. General Development of Business.
California Water Service Company ("Company") is a public
utility providing water service to 376,100 customers in 56
California cities and communities through 21 separate water
systems or districts. In the Company's 20 regulated systems,
which serve 370,100 customers, rates and operations are
subject to the jurisdiction of the California Public Utilities
Commission ("Commission" or "PUC"). An additional 6,000
customers receive service through a long-term lease of the
City of Hawthorne water system, which is not subject to
Commission regulation. The Company also has contracts with
various municipalities to operate water systems and provide
billing services to 27,500 other customers.
The Company, the largest investor-owned water company in
California, was incorporated under the laws of the State of
California on December 21, 1926. Its mailing address and
principal executive offices are located at 1720 North First
Street, San Jose, California; telephone number: 1-408-451-8200.
The Company maintains a web site which can be accessed via the
Internet at http://www.calwater.com.
During the year ended December 31, 1996, there were no
significant changes in the kind of products produced or
services rendered by the Company, or in the Company's markets
or methods of distribution.
In November 1996, the Company announced its intention to form a
holding company. Shareholders will vote on this proposal at
their annual meeting on April 16, 1997. In January 1997, the
Company also announced plans to effectively split its common
stock on a two-for-one basis. The split will be accomplished,
together with a proportionate adjustment of preferred stock
voting rights, during formation of the holding company by a
planned conversion of each common share of California Water
Service Company stock into two shares of holding company common
stock and a conversion of each preferred share of California
Water Service Company into one share of holding company
preferred stock. By approving the holding company structure,
shareholders will also approve the stock split.
Rates and Regulations.
Rates, service and other matters for the Company's regulated
business are subject to the jurisdiction of the Commission.
The Commission's decisions and the timing of those decisions
can have an important impact on Company operations and results
of operations.
5
The Company's 20 regulated systems, each of which is within the
State of California, are operated as 20 separate districts,
however, the systems are not integrated with one another, and
except for allocation of general office expenses and the
determination of cost of capital, the expenses and revenues of
individual districts are not affected by operations in other
districts. Cost of capital (i.e. return on debt and equity) is
determined on a company-wide basis. Otherwise, the PUC
requires that each district be considered a separate and
distinct entity for ratemaking purposes.
Since the Commission requires that water rates for each Company
operating district be determined independently, the Company
annually files general rate case applications for a portion of
its districts, typically requesting rate increases. Thus, the
number of customers affected by each filing, varies from year
to year. The decision to file a general rate case depends on
various factors including the time since the last general rate
case was filed, the return being earned in each district,
expected current returns and the need for capital spending.
According to its rate case processing procedures for water
utilities, the Commission attempts to issue decisions within
eight months of acceptance of the general rate case
application. Rates are set prospectively for a three-year
period, with a provision for step increases, which are designed
to maintain the authorized rate of return between rate case
filings. Offset rate adjustments are allowed as required for
changes in the costs of purchased water, power and pump taxes.
General rate case applications, which had been filed with the
Commission during 1995 for five districts serving 47 percent
of the Company's customers, were finalized by the Commission in
1996. The applications requested a rate of return on common
equity (ROE) of 12.1 percent and additional revenue of $26.7
million over a three-year period. The Commission staff
recommended a rate of return of 9.9 percent, however, a
stipulation agreement was reached with the staff for a 10.3
percent ROE in January 1996. The Commission's decision for this
rate case series was issued in June 1996. During the first
full year, the decision is expected to provide $5.4 million of
added revenue, including $1.2 million in step rate increases
which were effective at the start of 1996. Over a four-year
period, the decision will provide about $10.6 million in new
revenue. The decision includes a provision to accelerate the
recovery of the Company's utility plant investment, resulting
in an increase in the annualized depreciation rate for these
districts of 2.6 percent compared to a 2.4 percent rate
experienced in recent years.
In July 1996, general rate cases were filed for two districts
representing 11 percent of the regulated customers. The
Company requested an ROE of 12.05 percent, while the Commission
staff recommended 10.1 percent. In January 1997, the Company
and Commission staff stipulated to a ROE of 10.35 percent.
Additional 1997 revenue of $1.6 million is anticipated as a
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result of the decision, along with step rate increases to
become effective in the following three years. Although there
can be no assurance that the Commission will approve the
stipulation agreement, both the Company and Commission staff
were signatories to the agreement. The Company expects the
Commission's decision to be finalized by mid year.
In January 1995, a consultant retained by the Commission's
Division of Ratepayer Advocates completed a report on the
reasonableness of the Second Amended Contract between the
Company, Stockton-East Water District, the City of Stockton and
San Joaquin County, pertaining to the sale and delivery of
water to the Company's Stockton District by the Stockton-East
Water District. The report alleges that the Company was
required to receive Commission approval prior to entering into
the Second Amended Contract and furthermore challenges the
reasonableness of the Second Amended Contract for ratemaking
purposes. However, the report does not include specific
ratemaking recommendations. It is difficult to assess the
potential impact on the Company if the report were to be
adopted by the Commission. However, the Company anticipates
that if there is any adverse financial impact as a result of
the report, such impact would be prospective, affecting only
future rates for the Stockton district. Hearings have not yet
been scheduled on the report by the assigned administrative law
judge. Following hearings at which the Company intends to
present evidence to rebut the report, the assigned
administrative law judge will render a proposed decision for
comment and eventual Commission consideration. Management
intends to vigorously defend its position that the Second
Amended Contract did not require prior Commission approval and
is reasonable for ratemaking purposes.
b. Financial Information about Industry Segments.
The Company has only one business segment.
c. Narrative Description of Business.
The Company's business consists of the production, purchase,
storage, purification, distribution and sale of water for
domestic, industrial, public and irrigation uses, and for fire
protection. The Company's business fluctuates according to the
demand for water, which is partially dictated by seasonal
conditions, such as summer temperatures or the amount and
timing of precipitation during the year. The Company holds
such franchises or permits in the communities it serves as it
judges necessary to operate and maintain its facilities in the
public streets. The Company distributes its water to customers
in accordance with accepted water utility methods.
The Company leases the City of Hawthorne water system, has
contracts under which it operates three municipally owned water
systems and two reclaimed water distribution systems and
provides billing services for other municipalities. These
7
operations are discussed in more detail in a following section
titled Nonregulated Operations.
The Company intends to continue to explore opportunities to
expand operating and other revenue sources. The opportunities
could include system acquisitions, contracts similar to the
City of Hawthorne arrangement, operating contracts, billing
contracts and other utility related services. The Company
believes that a holding company structure, as discussed above,
will make the Company more competitive in providing
nonregulated utility services, which would not be subject to
Commission jurisdiction.
8
Geographical Service Areas and Number of Customers at year-end.
The principal markets for the Company's products are users of
water within the Company's service areas. The Company's
geographical service areas or districts for both the regulated and
nonregulated operations and the approximate number of customers
served in each district at December 31, 1996, are listed below.
SAN FRANCISCO BAY AREA
Mid-Peninsula (comprised of San Mateo and San Carlos) 35,600
South San Francisco (including Colma and Broadmoor) 15,400
Bear Gulch (serving Menlo Park, Atherton,
Woodside and Portola Valley) 17,200
Los Altos (including portions of Cupertino,
Los Altos Hills, Mountain View and Sunnyvale) 18,000
Livermore 15,600
101,800
SACRAMENTO VALLEY
Chico (including Hamilton City) 21,300
Oroville 3,500
Marysville 3,800
Dixon 2,700
Willows 2,300
33,600
SALINAS VALLEY
Salinas 23,600
King City 2,000
25,600
SAN JOAQUIN VALLEY
Bakersfield 54,800
Stockton 41,000
Visalia 27,000
Selma 4,800
127,600
LOS ANGELES AREA
East Los Angeles (including portions of
the cities of Commerce and Montebello) 26,300
Hermosa Beach and Redondo Beach (including
a portion of Torrance) 25,000
Palos Verdes (including Palos Verdes
Estates, Rancho Palos Verdes, Rolling
Hills Estates and Rolling Hills) 23,500
Westlake (a portion of Thousand Oaks) 6,700
81,500
TOTAL REGULATED CUSTOMERS 370,100
NONREGULATED OPERATION
Hawthorne 6,000
TOTAL 376,100
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Water Supply
The Company's water supply is obtained from wells, surface runoff
or diversion, and by purchase from public agencies and other
wholesale suppliers. The effects of the six-year California
drought, which ended with the 1992-93 winter, and 1995-96 winter
rains are discussed below. The Company's supply has been adequate
to meet consumption demands, however, during periods of drought,
some districts have required water rationing.
California's rainy season usually begins in November and continues
through March with December, January and February providing the
most rainfall. During winter months reservoirs and underground
aquifers are replenished by rainfall. Snow accumulated in the
mountains provides an additional water source when spring and
summer temperatures melt the snowpack producing runoff into
streams and reservoirs, and also replenishing underground
aquifers.
During years in which precipitation is especially heavy or extends
beyond the spring into the early summer, customer demand can
decrease from historic normal levels, generally due to reduced
outdoor water usage. This was the case during 1995, when winter
rains continued well into the spring along with cooler than normal
temperatures. Likewise, an early start to the rainy season can
cause a decline in customer usage during the fall months.
The Company's water business is seasonal in nature and weather
conditions can have a pronounced effect on customer usage and thus
operating revenues and net income. Customer demand generally is
less during the normally cooler and rainy winter months,
increasing in the spring when warmer weather gradually returns to
California and the rains end. Temperatures are warm during the
generally dry summer months, resulting in increased demand. Water
usage declines during the fall as temperatures decrease and the
rainy season approaches.
During years of less than normal rainfall, customer demand can
increase as outdoor water usage continues. When rainfall is below
average for consecutive years, drought conditions can result and
certain customers may be required to reduce consumption to
preserve existing water reserves. California experienced a six-
year drought which ended with the winter of 1992-93. During that
period some Company districts imposed rationing on customers.
The Company delivered 105 billion gallons of water to customers
during 1996 of which approximately 50 percent was obtained from
wells and 50 percent was purchased from the following suppliers:
10
Supply
District Purchased Source of Purchased Supply
SAN FRANCISCO BAY AREA
Mid-Peninsula 100% San Francisco Water Department
South San Francisco 96% San Francisco Water Department
Bear Gulch 87% San Francisco Water Department
Los Altos 79% Santa Clara Valley Water District
Livermore 84% Alameda County Flood Control
and Water Conservation District
SACRAMENTO VALLEY
Oroville 71% Pacific Gas and Electric Co.
6% County of Butte
SAN JOAQUIN VALLEY
Bakersfield 18% Kern County Water Agency
Stockton 72% Stockton-East Water District
LOS ANGELES AREA
East Los Angeles 79% Central Basin Municipal Water District
Hermosa Beach and
Redondo Beach 100% West Basin Municipal Water District
Palos Verdes 100% West Basin Municipal Water District
Westlake 100% Russell Valley Municipal Water District
Hawthorne 68% West Basin Municipal Water District
The balance of the required supply for the above districts is
obtained from wells, except for Bear Gulch where the balance is
obtained from surface runoff from the local watershed and
processed through the Company's treatment plant before being
delivered to the system.
Historically, groundwater has yielded 10 to 15 percent of the
Hermosa-Redondo district supply and 15 to 20 percent of the South
San Francisco district supply. During 1996, wells in those two
districts, were out of service while treatment facilities were
being installed. Once the treatment facilities are operative,
which is expected to occur during 1997, the wells will be returned
11
to service. Water produced from wells is generally less expensive
than water purchased from wholesale suppliers.
The Chico, Marysville, Dixon and Willows districts in the
Sacramento Valley, the Salinas and King City districts in
the Salinas Valley, and the Selma and Visalia districts in
the San Joaquin Valley obtain their entire supply from wells.
Purchases for the Los Altos, Livermore, Oroville, Stockton
and Bakersfield districts are pursuant to long-term contracts
expiring on various dates after 2011. The supplies for the East
Los Angeles, Hermosa-Redondo, Palos Verdes, Westlake and Hawthorne
districts are provided to the Company by public agencies pursuant
to an obligation of continued nonpreferential service to persons
within their boundaries.
Purchases for the South San Francisco, Mid-Peninsula and Bear
Gulch districts are pursuant to long-term contracts with the San
Francisco Water Department expiring June 30, 2009.
The cost of water purchases are subject to pricing changes imposed
by the various wholesale suppliers who deliver water to the
Company.
The 1995-96 water year provided above average levels of
precipitation which assured sufficient supply for the year and
above normal carryover into 1997. Heavy rains fell in California
during December 1995 through February 1996. Spring weather was
drier and warmer than normal, leading to an increase in customer
usage which continued into the summer.
Groundwater levels in underground aquifers which provide supply to
Company districts served by well water improved in 1996 due to
heavy rains. Most regions have recorded positive changes in
groundwater levels as compared to 1995. Regional groundwater
management planning continues throughout the State as required by
Assembly Bill 3030. Enacted in 1992, AB 3030 provides a mechanism
for local agencies to maintain control of their groundwater
supply. Progress has been made by Consolidated Irrigation
District (Selma) and Kaweah Delta Water Conservation District
(Visalia) towards the implementation of a water management plan.
The Company is participating in the formulation of these plans.
The water supply outlook for 1997 is good, however, California
faces long-term water supply challenges. The Company is
actively working to meet the challenges by continuing to educate
customers on responsible water use practices, particularly
in the districts with conservation programs approved by the
California Public Utilities Commission.
On an ongoing basis, the Company is actively participating with
the Salinas Valley water users and the Monterey County Water
Resources Agency (MCWRA) to address the seawater intrusion concern
to the water supply for the Salinas district. MCWRA started
construction on the Castroville Seawater Intrusion Project in 1995
and deliveries are expected to commence in 1997. When completed,
12
this project will deliver up to 20,000 acre feet of recycled water
annually to agricultural users in the Castroville area and is
designed to help mitigate seawater intrusion into the region by
reducing the need to pump groundwater.
The Company is participating with the City and County of San
Francisco, and the cities of San Bruno and Daly City to prepare a
groundwater management plan for the Westside Basin from which the
Company's South San Francisco District pumps a portion of its
supply.
Nonregulated Operations
The Company operates municipally owned water systems for the
cities of Bakersfield, Commerce and Montebello, and two private
water company systems in the Bakersfield and Salinas districts.
The total number of services operated under these contracts is
about 23,800. With the exception of the 15-year Hawthorne lease
discussed below, the terms of the operating agreements range from
one year to three-year periods with provisions for renewals. The
first operating agreement was signed with the City of Bakersfield
in 1977. The Company has never experienced the cancellation of
any of its operating agreements.
Recycled water distribution systems are operated for the West
Basin and Central Basin municipal water districts located in the
Los Angeles Basin. Some engineering department services are also
provided for these two recycled water systems.
The Company provides meter reading, billing and customer service
for the City of Menlo Park's 3,900 water customers. Additionally,
sewer and/or refuse billing services are provided to six
municipalities.
In February 1996, the Company commenced operation of the City of
Hawthorne's 6,000 account water system under terms of a 15-year
lease. The system which is near the Company's Hermosa-Redondo
district serves about half the City's population. Under terms of
the lease, the Company made an up-front $6.5 million lease payment
to the City which will be amortized over the lease term.
Additionally, the Company will make annual lease payments of
$100,000 indexed to changes in water rates, and is responsible for
all aspects of system operation including capital improvements,
although title to the system and system improvements resides with
the City. At the end of the lease, the Company will be reimbursed
for the unamortized value of capital improvements. In exchange,
the Company receives all system revenues which are estimated to be
$4 million annually.
The Company leases various antenna sites to telecommunication
companies. Individual lease payments range from $750 to $2,200
per month. The antennas are used in cellular phone and personal
communication applications. Other leases are being negotiated for
similar uses.
13
The Company also provides laboratory services to San Jose Water
Company.
Utility Plant Construction Program and Acquisitions
The Company is continually extending, enlarging and replacing its
facilities as required to meet increasing demands and to maintain
its systems. Capital expenditures, including the Hawthorne up-
front lease payment and developer financed projects, for
additional facilities and for the replacement of existing
facilities amounted to approximately $35.7 million in 1996.
Financing was provided by funds from operations, short-term bank
borrowings, dividend reinvestments, issuance of senior notes in
1995, advances for construction, and contributions in aid of
construction as set forth in the "Statement of Cash Flows" on page
26 of the Company's 1996 Annual Report which is incorporated
herein by reference. Company funded expenditures were $27.6
million including the $6.5 million Hawthorne lease payment.
Developer payments accounted for $8.1 million. Advances for
construction of main extensions are payments or facilities
received by the Company from subdivision developers under rules of
the Commission. These advances are refundable without interest
over a period of 40 years. Contributions in aid of construction
consist of nonrefundable cash deposits or facilities received from
developers, primarily for fire protection.
The Company's construction budget for additions and improvements
to its facilities during 1997 is approximately $23.2 million,
exclusive of additions and improvements financed through advances
for construction and contributions in aid of construction.
Financing is expected to be from internally generated funds,
short-term borrowings and long-term debt financing.
Quality of Supplies
The Company maintains procedures to produce potable water in
accordance with accepted water utility practice. Water
entering the distribution systems from surface sources is
treated in compliance with Safe Drinking Water Act standards.
Samples of water from each district are analyzed regularly by the
Company's state certified water quality laboratory.
In recent years, federal and state water quality regulations have
continued to increase. Changes in the federal Safe Drinking Water
Act, which the Company believes will bring treatment costs more in
line with the actual health threat posed by contaminants, were
enacted by Congress during 1996. The Company continues to monitor
water quality and upgrade its treatment capabilities to maintain
compliance with the various regulations. These activities
include:
~ installation of chlorinators at all well sources
~ maintaining a State approved compliance monitoring program
required by Phase II and V of the Safe Drinking Water Act
~ upgrading laboratory equipment
14
~ operating several granular activated carbon (GAC) filtration
systems for removal of hydrogen sulfide or volatile organic chemicals
~ placing treatment on two Los Angeles Basin wells and wells at
the South San Francisco well field which have elevated levels
of iron and manganese; the treatment will allow the Company to
return the wells to production and thus use less costly well
water, rather than purchased water supplies
~ Completion of desktop studies for two water systems in compliance
with the Federal Lead and Copper Rule. Chemical water treatment to
inhibit and control potential corrosion will be installed in each of
these water systems
~ monitoring all sources for MTBE, the gasoline additive widely
used throughout the State
Competition and Condemnation
The Company is a public utility regulated by the Commission. The
Company provides service within filed service areas approved by
the Commission. Under the laws of the State of California, no
privately owned public utility may compete with the Company in any
territory already served by the Company without first obtaining a
certificate of public convenience and necessity from the PUC.
Under PUC practices, such certificate will be issued only upon
showing that the Company's service in such territory is deficient.
California law also provides that whenever a public agency
constructs facilities to extend a utility service into the service
area of a privately owned public utility, such an act constitutes
the taking of property and for such taking the public utility is
to be paid just compensation. Under the constitution and statutes
of the State of California, municipalities, water districts and
other public agencies have been authorized to engage in the
ownership and operation of water systems. Such agencies are
empowered to condemn properties already operated by privately
owned public utilities upon payment of just compensation and are
further authorized to issue bonds (including revenue bonds) for
the purpose of acquiring or constructing water systems. To the
Company's knowledge, no municipality, water district or other
public agency has any pending action to acquire or condemn any of
the Company's systems.
The water industry is experiencing competitive changes and the
potential exists for new growth. The Company has in the past
participated in public/private partnerships, such as the lease of
a water system, system operation agreements, or billing service
contracts, and anticipates future opportunities for further
participation and development. The Company has proposed the
formation of a holding company structure to enhance its ability to
actively compete for the new business. The holding company
structure will facilitate the financing, accounting and operation
of the nonregulated business activities.
15
Environmental Matters
The Company is subject to environmental regulation by various
governmental authorities. Compliance with federal, state and
local provisions which have been enacted or adopted regulating the
discharge of materials into the environment, or otherwise relating
to the protection of the environment, has not had, as of the date
of filing of this Form 10-K, any material effect on the Company's
capital expenditures, earnings or competitive position. The
Company is unaware of any pending environmental matters which will
have a material effect on its operations.
Stringent air quality regulations had presented past operational
problems for facilities with diesel powered emergency engines.
State and local air quality regulations were in conflict with the
Company's responsibility to provide water service in times of
emergency by subjecting routine testing of these engines to fines
if they emitted air pollutants in excess of established air
quality standards. In response, the California Water Association,
an industry association of California's investor owned public
utility water companies, sponsored legislative relief through
Assembly Bill 1855 to allow testing of emergency engines without
fines. The legislation was enacted in 1996.
Human Resources
As of December 31, 1996, the Company had 633 employees, of
whom 163 were executive, administrative and supervisory employees,
and 470 were members of unions. In December 1995, two-year
collective bargaining agreements, expiring December 31, 1997, were
successfully negotiated with the Utility Workers Union of America, AFL-
CIO, representing the majority of the Company's field and clerical
union employees, and the International Federation of Professional
and Technical Engineers, AFL-CIO, representing certain engineering
department and water quality laboratory employees. Agreements
have been successfully renewed in the past without a labor
interruption.
Effective January 1, 1996, Robert W. Foy, who has been a Board
member since 1977, was elected Chairman of the Board, replacing
C. H. Stump. Mr. Stump, who had been an employee for 45 years,
continues as a Board member.
On February 1, 1996, Peter C. Nelson replaced Donald L. Houck as
President and Chief Executive Officer (CEO). Mr. Nelson was
previously employed for 24 years by Pacific Gas & Electric
Company, the largest California energy utility, most recently as
Vice President-Division Operations. Upon his retirement, Mr.
Houck had been an employee for 19 years, serving as President and
CEO since 1991.
On August 1, 1996, the Board of Directors elected Paul G. Ekstrom,
Robert R. Guzzetta, Christine L. McFarlane and Raymond L. Worrell
to the officer positions of Corporate Secretary, Vice President -
Engineering and Water Quality, Vice President - Human Resources,
and Vice President - Chief Information Officer, respectively.
Mr. Ekstrom had been Operations Coordinator; Mr. Guzzetta had been
Chief Engineer; Ms. McFarlane had been Director of Human
16
Resources; and Mr. Worrell had been Director of Information
Systems. Combined they have 100 years of experience with the
Company.
17
d. Financial Information about Foreign and Domestic Operations
and Export Sales.
The Company makes no export sales.
Item 2. Properties.
The Company's physical properties consist of offices and water
systems to accomplish the production, storage, purification, and
distribution of water. These properties are located in or near
the Geographic Service Areas listed above under section Item 1.c.
entitled "Narrative Description of the Business." The Company
maintains all of its properties in good operating condition.
The Company holds all its principal properties in fee simple
title, subject to the lien of the indenture securing the Company's
first mortgage bonds, of which $122,153,000 were outstanding at
December 31, 1996.
The Company owns 523 wells and operates six leased wells. The
Company has 290 storage tanks with a capacity of 216 million
gallons and one reservoir located in the Bear Gulch district with
a 210 million gallon capacity. There are 4,585 miles of supply
and distribution mains in the various systems. The Company owns
two treatment plants, one in the Bear Gulch district, the other in
Oroville. Both treatment plants are designed to process six
million gallons per day. During 1996, the Company's average daily
water production was 283 million gallons, while the maximum
production on one day was 497 million gallons.
In the systems which the Company leases or operates under contract
for cities, title to the various properties is held exclusively by
the city.
Item 3. Legal Proceedings.
The State of California's Department of Toxic Substances Control
(DTSC) alleges that the Company is a responsible party for cleanup
of a toxic contamination in the Chico groundwater. The DTSC has
prepared a draft report titled "Preliminary Nonbinding Allocation
of Financial Responsibility" for the cleanup which asserts that
the Company's share should be 10 percent. The DTSC estimates the
total cleanup cost to be $8.69 million. The toxic spill occurred
when cleaning solvents, which were discharged into the city's
sewer system by local dry cleaners, leaked into the underground
water supply due to breaks in sewer pipes. The DTSC contends that
the Company's responsibility stems from the Company's operation of
wells in the surrounding vicinity which caused the contamination
plume to spread. The Company denies any responsibility for the
contamination or the resulting cleanup and intends to vigorously
resist any action brought against it. The Company believes that
it has insurance coverage for such a claim and that if the Company
was ultimately held responsible for a portion of the cleanup
18
costs, it would not have a material adverse effect on the
Company's financial position.
The Company is not a party to any other legal matters, other than
those which are incidental to its business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders in
the fourth quarter of year 1996.
19
Executive Officers of the Registrant.
Name Positions and Offices with the Company Age
Robert W. Foy Chairman of the Board since January 1, 1996. 60
Director of the Company since 1977. Formerly
President and Chief Executive Officer of
Pacific Storage Company, Stockton, Modesto,
Sacramento and San Jose, California, a
diversified transportation and warehousing
company, where he had been employed for 32 years.
Peter C. Nelson President and Chief Executive Officer of the 49
Company since February 1, 1996. Formerly Vice
President, Division Operations (1994-1995) and
Region Vice President (1989-1994), Pacific Gas
& Electric Company, a gas and electric public
utility.
Gerald F. Feeney Vice President, Chief Financial Officer and 52
Treasurer since November 1994; Controller,
Assistant Secretary and Assistant Treasurer
from 1976 to 1994. From 1970 to 1976, an audit
manager with Peat Marwick Mitchell & Co.
Francis S. Vice President, Regulatory Matters since August 47
Ferraro 1989. Employed by the California Public
Utilities Commission for 15 years, from 1985
through 1989 as an administrative law judge.
James L. Good Vice President, Corporate Communications 33
and Marketing since January 1995. Previously
Director of Congressional Relations for the
National Association of Water Companies from
1991 to 1994.
Robert R. Vice President-Engineering and Water Quality 43
Guzzetta since August 1996; Chief Engineer, 1990 to 1996;
Assistant Chief Engineer, 1988 to 1990; various
engineering department positions since 1977.
Christine L. Vice President-Human Resources since August 50
McFarlane 1996; Director of Human Resources, 1991 to 1996;
Assistant Director of Personnel, 1989 to 1991;
an employee of the Company since 1969.
Raymond H. Vice President, Operations since April 1995; 51
Taylor Vice President and Director of Water Quality,
1990 to 1995; Director of Water Quality, 1986
to 1990. Prior to joining the Company in
1982, he was employed by the United States
Environmental Protection Agency.
20
Raymond L. Vice President-Chief Information Officer since 57
Worrell August 1996; Director of Information Systems,
1991 to 1996; Assistant Manager of Data Processing,
1970 to 1991; Data Processing Supervisor, 1967 to 1970.
Calvin L. Breed Controller, Assistant Secretary and Assistant 41
Treasurer since November 1994. Previously
Treasurer of TCI International, Inc.
Paul G. Ekstrom Corporate Secretary since August 1996; 44
Operations Coordinator, 1993 to 1996;
District Manager, Livermore, 1988 to 1993;
previously served in various field management
positions since 1979; an employee of the Company
since 1972.
John S. Simpson Assistant Secretary, Manager of New Business 52
since 1991; Manager of New Business development
for the past twelve years; served in various
management positions with the Company since 1967.
No officer or director has any family relationship to any other
executive officer or director. No executive officer is appointed
for any set term. There are no agreements or understandings
between any executive officer and any other person pursuant to
which he was selected as an executive officer, other than those
with directors or officers of the Company acting solely in their
capacities as such.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information required by this item is contained in the
Section captioned "Quarterly Financial and Common Stock Market
Data" on page 34 of the Company's 1996 Annual Report and is
incorporated herein by reference. The number of shareholders
listed in such section includes the Company's record holders and
an estimate of shareholders who hold stock in street name.
Item 6. Selected Financial Data.
The information required by this item is contained in the section
captioned California Water Service Company "Ten Year Financial
Review" on pages 14 and 15 of the Company's 1996 Annual Report and
is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The information required by this item is contained in the section
captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations," on pages 16 through 21 of
21
the Company's 1996 Annual Report and is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is contained in the sections
captioned "Balance Sheet", "Statement of Income", "Statement of
Common Shareholders' Equity", "Statement of Cash Flows", "Notes to
Financial Statements" and "Independent Auditors' Report" on pages
22 through 35 of the Company's 1996 Annual Report and is
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item as to directors of the
Company is contained in the section captioned "Election of
Directors" on pages 16 through 18 of the 1997 Proxy Statement/
Prospectus and is incorporated herein by reference. Information
regarding executive officers of the Company is included in a
separate item captioned "Executive Officers of the Registrant"
contained in Part I of this report.
Item 11. Executive Compensation.
The information required by this item as to directors of the
Company is included under the caption "Election of Directors" on
pages 16 through 18 of the 1997 Proxy Statement/Prospectus and is
incorporated herein by reference. The information required by
this item as to compensation of executive officers is included
under the caption "Compensation of Executive Officers" on pages 19
through 21 of the Proxy Statement/Prospectus and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is contained in the sections
captioned "Election of Directors," "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" pages
16, 17 and 23 of the Proxy Statement/Prospectus and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
None.
22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements:
Balance Sheet as of December 31, 1996 and 1995.
Statement of Income for the years ended December 31, 1996, 1995, and 1994.
Statement of Common Shareholders' Equity for the years ended
December 31, 1996, 1995, and 1994.
Statement of Cash Flows for the years ended December 31, 1996, 1995, and 1994.
Notes to Financial Statements, December 31, 1996, 1995, and 1994.
The above financial statements are contained in sections
bearing the same captions on pages 22 through 34 of the
Company's 1996 Annual Report and are incorporated herein by
reference.
(2) Financial Statement Schedule:
Schedule
Number
Independent Auditors' Report dated January 17, 1997.
II Valuation and Qualifying Accounts and Reserves--years ending
December 31, 1996, 1995, and 1994.
All other schedules are omitted as the required
information is inapplicable or the information is
presented in the financial statements or related notes.
(3) Exhibits required to be filed by Item 601 of Regulation S-K.
See Exhibit Index on page 28 of this document which is incorporated
herein by reference.
The exhibits filed herewith are attached hereto (except as
noted) and those indicated on the Exhibit Index which are not
filed herewith were previously filed with the Securities and
Exchange Commission as indicated. Except where stated
otherwise, such exhibits are hereby incorporated by reference.
(B) Report on Form 8-K.
None required to be filed during the fourth quarter of 1996.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CALIFORNIA WATER SERVICE COMPANY
Date: March 19, 1997 By /s/ Peter C. Nelson
PETER C. NELSON, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated:
Date: March 19, 1997 /s/ Robert W. Foy
ROBERT W. FOY, Chairman,
Board of Directors
Date: March 19, 1997 /s/ Edward D. Harris, Jr.
EDWARD D. HARRIS, JR., M.D., Member,
Board of Directors
Date: March 19, 1997 /s/ Robert K. Jaedicke
ROBERT K. JAEDICKE, Member,
Board of Directors
Date: March 19, 1997 /s/ Richard P. Magnuson
RICHARD P. MAGNUSON, Member,
Board of Directors
Date: March 19, 1997 /s/ Linda R. Meier
LINDA R. MEIER, Member,
Board of Directors
Date: March 19, 1997 /s/ Peter C. Nelson
PETER C. NELSON
President and Chief Executive Officer,
Member, Board of Directors
Date: March 19, 1997 /s/ C. H. Stump
C. H. STUMP, Member,
Board of Directors
24
Date: March 19, 1997 /s/ Edwin E. van Bronkhorst
EDWIN E. VAN BRONKHORST, Member,
Board of Directors
Date: March 19, 1997 /s/ J. W. Weinhardt
J. W. WEINHARDT, Member,
Board of Directors
Date: March 19, 1997 /s/ Gerald F. Feeney
GERALD F. FEENEY,
Vice President, Chief Financial
Officer and Treasurer;
Principal Financial Officer
Date: March 19, 1997 /s/ Calvin L. Breed
CALVIN L. BREED, Controller,
Assistant Secretary and Assistant Treasurer;
Principal Accounting Officer
25
Independent Auditors' Report
Shareholders and Board of Directors
California Water Service Company:
Under date of January 17, 1997, we reported on the balance sheet of
California Water Service Company as of December 31, 1996 and 1995, and
the related statements of income, common shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31,
1996, as contained in the 1996 annual report to shareholders. These
financial statements and our report thereon are incorporated by
reference in the annual report on Form 10-K for the year 1996. In
connection with our audits of the aforementioned financial statements,
we also audited the related financial statement schedule as listed in
the index appearing under Item 14(a)(2). This financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement
schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
San Jose, California /s/ KPMG Peat Marwick LLP
January 17, 1997
26
<TABLE>
CALIFORNIA WATER SERVICE COMPANY Schedule II
Valuation and Qualifying Accounts
Years Ended December 31, 1996, 1995 and 1994
Additions
Balance at Charged to Charged to Balance
beginning costs and other at end
Description of period expenses accounts Deductions of period
1996
<S> <C> <C> <C> <C> <C>
(A) Reserves deducted in the balance sheet from
assets to which they apply:
Allowance for doubtful accounts $76,197 $530,691 $65,445(3) $572,783(1) $99,550
Allowance for obsolete materials and supplies 74,675 48,000 21,598(2) 101,077
(B) Reserves classified as liabilities in the
balance sheet:
Miscellaneous reserves:
General Liability $826,965 $740,000 $569,131(2) $997,834
Employees' group health plan 400,004 2,880,000 14,348 2,826,366(2) 467,986
Retirees' group health plan 670,998 523,000 241,000 523,000(2) 911,998
Workers compensation 260,170 835,430 595,949(2) 499,651
Deferred revenue - contributions in aid
of construction 1,930,336 276,525 407,288(6) 1,799,573
Disability insurance 47,453 199,097 196,179(2) 50,371
$4,135,926 $4,978,430 $730,970 $5,117,913 $4,727,413
Contributions in aid of construction $40,113,707 $4,062,087(4) $1,109,209(5) $43,066,585
1995
(A) Reserves deducted in the balance sheet from
assets to which they apply:
Allowance for doubtful accounts $50,816 $429,096 $74,170(3) $477,885(1) $76,197
Allowance for obsolete materials and supplies $3,393 95,000 23,718(2) 74,675
(B) Reserves classified as liabilities in the
balance sheet:
Miscellaneous reserves:
General Liability $962,152 $339,960 $475,147(2) $826,965
Employees' group health plan $200,387 2,907,000 14,928 2,722,311(2) 400,004
Retirees' group health plan $425,998 507,000 245,000 507,000(2) 670,998
Workers compensation $107,576 879,423 726,829(2) 260,170
Deferred revenue - contributions in aid
of construction $1,917,386 368,180 355,230(6) 1,930,336
Disability insurance $116,130 200,973 269,650(2) 47,453
$3,729,629 $4,633,383 $829,081 $5,056,167 $4,135,926
Contributions in aid of construction $37,866,799 $3,244,258(4) $997,350(5) $40,113,707
1994
(A) Reserves deducted in the balance sheet from
assets to which they apply:
Allowance for doubtful accounts $72,696 $363,284 $71,235(3) $456,399(1) $50,816
Allowance for obsolete materials and supplies $61,395 11,000 69,002(2) 3,393
(B) Reserves classified as liabilities in the
balance sheet:
Miscellaneous reserves:
General Liability $1,064,300 $340,000 $442,148(2) $962,152
Employees' group health plan $882,143 2,549,056 12,262 3,243,074(2) 200,387
Retirees' group health plan $237,000 480,998 189,000 481,000(2) 425,998
Workers compensation $150,523 648,374 691,321(2) 107,576
Deferred revenue - contributions in aid
of construction $1,649,386 572,366 304,366(6) 1,917,386
Disability insurance $97,352 256,969 238,191(2) 116,130
$4,080,704 $4,018,428 $1,030,597 $5,400,100 $3,729,629
Contributions in aid of construction $34,915,778 $3,858,961(4) $907,940(5) $37,866,799
Notes:
(1)Accounts written off during the year.
(2)Expenditures and other charges made during the year.
(3)Recovery of amounts previously charged to reserve.
(4)Properties acquired at no cost, cash contributions and net transfer on non-refundable balances from
advances to construction.
(5)Depreciation of utility plant acquired by contributions charged to a balance sheet account.
(6)Amortized to revenue.
EXHIBIT INDEX
Sequential
Page Numbers
Exhibit Number in this Report
3. Articles of Incorporation and by-laws:
3.1 Restated Articles of Incorporation dated 28
March 20, 1968; Certificate of Ownership
Merging Palos Verdes Water Company into
California Water Service Company dated
December 22, 1972; Certificate of Amendment
of Restated Articles of Incorporation dated
April 7, 1975; Certificate of Amendment of
Restated Articles of Incorporation dated
April 16, 1984; Certificate of Amendment of
Restated Articles of Incorporation dated July
31, 1987; Certificate of Amendment of
Restated Articles of Incorporation dated
October 19, 1987 (Exhibit 3.1 to Form 10-K
for fiscal year 1987, File No. 0-464)
3.2 Certificates of Determination of Preferences 28
for Series C Preferred Stock (Exhibit 3.2 to
Form 10-K for fiscal year 1987, File No. 0-464)
3.3 Certificate of Amendment of the Company's 28
Restated Articles of Incorporation dated
April 27, 1988. (Exhibit 3.3 to Form 10-K
for fiscal year 1989, File No. 0-464)
3.4 By-laws dated September 21, 1977, as 28
amended 24 November 19, 1980, April 21, 1982,
June 15, 1983, September 17, 1984, and
November 16, 1987 (Exhibit 3.3 to Form 10-K
for fiscal year 1987, File No. 0-464).
3.5 Amendment to By-laws dated May 16, 1988. 28
(Exhibit 3.5 to Form 10-K for fiscal year
1991, File No. 0-464)
4. Instruments Defining the Rights of Security 28
Holders, including Indentures:
Mortgage of Chattels and Trust Indenture 28
dated April 1, 1928; Eighth Supplemental Indenture
dated November 1, 1945, covering First Mortgage
3.25% Bonds, Series C; Seventeenth Supplemental
Indenture dated November 1, 1967, covering First
Mortgage 6.75% Bonds, Series L; Twenty-First
Supplemental Indenture dated October 1, 1972,
cover First Mortgage 7.875% Bonds, Series P;
Twenty-Fourth Supplemental Indenture dated
November 1, 1973, covering First Mortgage 8.50%
28
Bonds, Series S (Exhibits 2(b), 2(c), 2(d),
Registration Statement No. 2-53678, of which
certain exhibits are incorporated by reference
to Registration Statement Nos. 2-2187, 2-5923,
2-5923, 2-9681, 2-10517 and 2-11093.
Thirty-Third Supplemental Indenture dated as 29
of May 1, 1988, covering First Mortgage
9.48% Bonds, Series BB. (Exhibit 4 to Form 10-Q
dated September 30, 1988, File No. 0-464)
Thirty-Fourth Supplemental Indenture dated as 29
of November 1, 1990, covering First Mortgage
9.86% Bonds, Series CC. (Exhibit 4 to Form 10-K
for fiscal year 1990, File No. 0-464)
Thirty-Fifth Supplemental Indenture dated as of 29
November 1, 1992, covering First Mortgage 8.63%
Bonds, Series DD. (Exhibit 4 to Form 10-Q
dated September 30, 1992, File No. 0-464)
Thirty-Sixth Supplemental Indenture dated as of 29
May 1, 1993, covering First Mortgage 7.90% Bonds
Series EE (Exhibit 4 to Form 10-Q dated
June 30, 1993, File No. 0-464)
Thirty-Seventh Supplemental Indenture dated as 29
of September 1, 1993, covering First Mortgage
6.95% Bonds, Series FF (Exhibit 4 to Form 10-Q
dated September 30, 1993, File No. 0-464)
Thirty-Eighth Supplemental Indenture dated as 29
of October 15, 1993, covering First Mortgage 6.98%
Bonds, Series GG (Exhibit 4 to Form 10-K for fiscal
year 1994, File No. 0-464)
Note Agreement dated August 15, 1995, pertaining 29
to issuance of $20,000,000, 7.28% Series A
unsecured Senior Notes, due November 1, 2025
(Exhibit 4 to Form 10-Q dated September 30, 1995
File No. 0-464)
10. Material Contracts.
10.1 Water Supply Contract between the Company 29
and the County of Butte relating to the
Company's Oroville District; Water Supply
Contract between the Company and the Kern
County Water Agency relating to the
Company's Bakersfield District; Water
Supply Contract between the Company and
Stockton East Water District relating to
the Company's Stockton District.
(Exhibits 5(g), 5(h), 5(i), 5(j),
Registration Statement No. 2-53678, which
incorporates said exhibits by reference to
29
Form 1O-K for fiscal year 1974, File No. 0-464).
10.2 Settlement Agreement and Master Water Sales 30
Contract between the City and County of San
Francisco and Certain Suburban Purchasers
dated August 8, 1984; Supplement to
Settlement Agreement and Master
Water Sales Contract, dated August 8, 1984;
Water Supply Contract between the Company and
the City and County of San Francisco relating
to the Company's Bear Gulch District dated
August 8, 1984; Water Supply Contract
between the Company and the City and County
of San Francisco relating to the Company's
San Carlos District dated August 8, 1984;
Water Supply Contract between the Company
and the City and County of San Francisco
relating to the Company's San Mateo District
dated August 8, 1984; Water Supply Contract
between the Company and the City and County
of San Francisco relating to the Company's
South San Francisco District dated August 8, 1984.
(Exhibit 10.2 to Form l0-K for fiscal year 1984,
File No. 0-464).
10.3 Water Supply Contract dated January 27, 30
1981, between the Company and the Santa
Clara Valley Water District relating to
the Company's Los Altos District
(Exhibit 10.3 to Form 10-K for fiscal
year 1992, File No. 0-464)
10.4 Amendments No. 3, 6 and 7 and Amendment 30
dated June 17, 1980, to Water Supply
Contract between the Company and the
County of Butte relating to the Company's
Oroville District. (Exhibit 10.5 to Form
10-K for fiscal year 1992, File No. 0-464)
10.5 Amendment dated May 31, 1977, to Water 30
Supply Contract between the Company and
Stockton-East Water District relating to
the Company's Stockton District.
(Exhibit 10.6 to Form 10-K for fiscal
year 1992, File No. 0-464)
10.6 Second Amended Contract dated September 25, 30
1987 among the Stockton East Water District,
the California Water Service Company, the
City of Stockton, the Lincoln Village
Maintenance District, and the Colonial Heights
Maintenance District Providing for the Sale of
Treated Water. (Exhibit 10.7 to Form 10-K for
30
fiscal year 1987, File No. 0-464).
10.7 Dividend Reinvestment Plan. (Exhibit 10.8 to 31
Form 10-Q dated March 31, 1994, File No. 0-464)
10.8 Water Supply Contract dated April 19, 1927, 31
and Supplemental Agreement dated June 5,
1953, between the Company and Pacific Gas
and Electric Company relating to the
Company's Oroville District. (Exhibit 10.9
to Form 10-K for fiscal year 1992, File No. 0-464)
10.9 California Water Service Company Pension Plan 31
(Exhibit 10.10 to Form 10-K for fiscal year
1992, File No. 0-464)
10.10 California Water Service Company Supplemental 31
Executive Retirement Plan. (Exhibit 10.11 to
Form 10-K for fiscal year 1992, File No. 0-464)
10.11 California Water Service Company Salaried 31
Employees' Savings Plan. (Exhibit 10.12 to
Form 10-K for fiscal year 1992, File No. 0-464)
10.12 California Water Service Company Directors 31
Deferred Compensation Plan (Exhibit 10.13 to
Form 10-K for fiscal year 1992, File No. 0-464)
10.13 Board resolution setting forth the terms of 31
the retirement as amended, for Directors of
California Water Service Company (Exhibit 10.14
to Form 10-K for fiscal year 1992, File No. 0-464)
10.14 $30,000,000 Business Loan Agreement between 31
California Water Service Company and Bank of
America dated April 12, 1995, expiring
April 30, 1997 (Exhibit 10.16 to Form 10-Q
dated September 30, 1995)
10.15 Agreement between the City of Hawthorne and 31
California Water Service Company for the 15
year lease of the City's water system.
(Exhibit 10.17 to Form 10-Q dated March 31, 1996)
10.16 Water Supply Agreement dated September 25, 1996 31
between the City of Bakersfield and California
Water Service Company. (Exhibit 10.18 to Form 10-Q
dated September 30, 1996)
31
13. Annual Report to Security Holders, Form 10-Q 32
or Quarterly Report to Security Holders:
1996 Annual Report. The sections of the 1996 Annual
Report which are incorporated by reference in this
10-K filing. This includes those sections referred
to in Part II, Item 5, Market for Registrant's
Common Equity and Related Shareholder Matters;
Part II, Item 6, Selected Financial Data; Part II,
Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations; and
Part II, Item 8, Financial Statement and Supplementary Data.
27. Financial Data Schedule as of December 31, 1996 32
32
</TABLE>
<TABLE>
TEN YEAR FINANCIAL REVIEW
<CAPTION>
(Dollars in thousands except common share and other data)
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Operating revenue
Residential $134,035 $119,814 $114,751 $111,526 $101,842 $87,560 $90,178 $84,295 $81,404 $82,254
Business 30,924 28,230 27,023 25,247 23,670 20,759 20,910 19,870 19,480 19,986
Industrial 6,150 5,836 5,478 5,123 4,925 4,490 5,146 5,166 4,754 4,361
Public authorities 9,023 8,149 7,995 7,396 6,892 5,734 6,412 6,225 6,232 6,491
Other 2,632 3,057 2,024 2,424 2,476 8,633 1,741 1,932 1,885 693
Total operating revenue 182,764 165,086 157,271 151,716 139,805 127,176 124,387 117,488 113,755 113,785
Operating expenses 152,397 139,694 131,766 123,861 116,031 102,855 101,017 95,150 91,265 90,587
Interest expense, other
income and expenses, net 11,300 10,694 11,097 12,354 11,245 10,393 9,004 8,566 8,416 8,026
Net income $19,067 $14,698 $14,408 $15,501 $12,529 $13,928 $14,366 $13,772 $14,074 $15,172*
COMMON SHARE DATA
Earnings per share $3.01 $2.33 $2.44 $2.70 $2.18 $2.42 $2.50 $2.40 $2.45 $2.63*
Dividends declared 2.08 2.04 1.98 1.92 1.86 1.80 1.74 1.68 1.60 1.48
Dividend payout ratio 69% 88% 81% 71% 85% 74% 70% 70% 65% 49%
Book value $24.44 $23.44 $23.12 $21.80 $21.02 $20.70 $20.08 $19.32 $18.59 $17.72
Market price at year-end 42.00 32.75 32.00 40.00 33.00 28.00 26.75 28.00 25.50 30.00
Common shares outstanding
at year-end (in thousands) 6,310 6,269 6,247 5,689 5,689 5,689 5,689 5,689 5,672 5,636
Return on common
shareholders' equity 12.7% 10.2% 10.6% 12.4% 10.4% 11.7% 12.4% 12.4% 13.2% 14.8%
Long-term debt interest
coverage 3.6 3.2 3.2 3.2 2.9 3.2 3.6 3.4 3.8 4.3
BALANCE SHEET DATA
Net utility plant $443,588 $422,175 $407,895 $391,703 $374,613 $349,937 $325,409 $307,802 $289,363 $273,619
Utility plant expenditures 35,683 27,250 28,275 28,829 35,188 34,459 26,861 27,277 23,994 19,511
Total assets 512,390 497,626 462,794 446,619 403,448 393,609 369,055 339,348 313,561 290,963
Long-term debt 142,153 145,540 128,944 129,608 122,069 103,505 104,905 86,012 86,959 73,930
Capitalization ratios:
Common shareholders' equity 51.4% 49.7% 52.2% 48.2% 48.8% 52.4% 51.3% 55.1% 53.8% 55.6%
Preferred stock 1.2% 1.2% 1.3% 1.4% 1.4% 1.5% 1.6% 1.8% 1.8% 3.2%
First mortgage bonds 47.4% 49.1% 46.5% 50.4% 49.8% 46.1% 47.1% 43.1% 44.4% 41.2%
OTHER DATA
Water production
(million gallons)
Wells 53,372 49,755 50,325 47,205 52,000 48,930 51,329 51,350 48,828 48,097
Purchased 51,700 49,068 49,300 48,089 40,426 36,686 45,595 45,978 48,254 50,744
Total water production 105,072 98,823 99,625 95,294 92,426 85,616 96,924 97,328 97,082 98,841
Metered customers 298,400 289,200 286,700 282,100 278,700 275,200 272,100 269,200 267,000 261,000
Flat rate Customers 77,700 77,900 78,800 80,800 82,000 82,400 81,200 79,400 77,800 76,800
Customers at year-end 376,100 367,100 365,500 362,900 360,700 357,600 353,300 348,600 344,800 337,800
New customers added 9,000 1,600 2,600 2,200 3,100 4,300 4,700 3,800 7,000 3,600
Revenue per customer $486 $450 $430 $418 $388 $356 $352 $337 $330 $337
Utility plant per customer $1,644 $1,592 $1,530 $1,469 $1,406 $1,327 $1,251 $1,198 $1,140 $1,098
Employees at year-end 633 630 624 614 610 593 581 565 550 534
*Net income excludes $2,196 for a change in accounting for unbilled revenue; $.39 is excluded from earnings per share.
</TABLE>
Management's discussion and analysis of financial condition and results of
operations
BUSINESS
California Water Service Company (Company) is a public utility providing water
service to 376,100 customers in 56 California communities through 21 separate
water systems or districts. In the Company's 20 regulated systems serving
370,100 customers, shown on the map on page 4, rates and operations are subject
to the jurisdiction of the California Public Utilities Commission (Commission).
An additional 6,000 customers receive service through a long-term lease of the
City of Hawthorne water system, which is not subject to Commission regulation.
The Company also has contracts with various municipalities to operate water
systems and provide billing services to 27,500 other customers.
The Commission requires that water rates for each regulated district be
determined independently. Each summer the Company files general rate increase
applications for some of these districts. According to its rate case
processing procedures for water utilities, the Commission attempts to issue
decisions within eight months of acceptance of a general rate case filing.
Commission procedures also allow offset rate adjustments for changes in water
production costs through use of expense balancing accounts. Rates for the
City of Hawthorne system are established in accordance with an operating
agreement and are subject to ratification by the City council. Fees for
other operating agreements are based on contracts negotiated among the parties.
RESULTS OF OPERATIONS
Earnings and Dividends. Net income was $19,067,000 in 1996 compared to
$14,698,000 in 1995 and $14,408,000 in 1994. Earnings per common share were
$3.01 in 1996, $2.33 in 1995 and $2.44 in 1994. Both net income and earnings
per share for 1996 represent the highest ever recorded from continuing
operations. The weighted average number of common shares outstanding in each
of the three years was 6,290,000, 6,253,000 and 5,838,000, respectively.
In January 1996, the Board of Directors increased the dividend rate for
the 29th consecutive year. The annual rate paid in 1996 was $2.08 per share,
an increase of 2.0% compared with the 1995 dividend of $2.04 per share, which
represented an increase of 3.0% over the 1994 dividend of $1.98 per share. The
increased dividends were based on projections that the higher dividend could be
sustained while still providing the Company with adequate financial
flexibility. Earnings not paid as dividends are reinvested in the business.
The dividend payout ratio was 69% in 1996 compared with 88% in 1995 and 81%
in 1994, an average of 79% for the three-year period. The 19% variation in
payout ratios between 1996 and 1995 was primarily attributable to fluctuations
in earnings per share. At its January 1997 meeting, the Board of Directors
increased the annual dividend three cents to $2.11. This increase, which is
less than increases in recent years, is intended to maintain the dividend
payout ratio below 1995's 88% level.
Operating Revenue. Operating revenue, which includes revenue from City of
Hawthorne customers, was a record $182.8 million in 1996, compared with $165.1
million in 1995 and $157.3 million in 1994. The current year increase was
$17.7 million, 11% greater than 1995's revenue. Offset rate adjustments,
primarily for purchased water cost increases, added $2.2 million to revenue
while general and step rate increases contributed $7.8 million. Increased
customer usage added $3.1 million. Average billed water consumption per
metered customer was 303 ccf, an increase of 6% for the year. Following a
wet first quarter, during which heavy rainfall assured an adequate supply for
the year, warm, dry spring and summer weather caused an increase in
consumption. In June, rate increases in five districts, representing 47% of
the Company's customers, became effective and added significantly to revenue
in the second half of the year. The number of customers increased 2.4% for
the year due to the addition of the 6,000 City of Hawthorne customers in
March and other customers added in existing service areas. Sales to a total
of 9,000 new accounts provided $4.6 million in additional revenue.
1995 revenue increased $7.8 million, 5% greater than 1994. Offset rate
adjustments, mainly for purchased water cost increases, added $3.8 million
while general and step rate increases contributed $2.2 million. Increased
customer usage added $1.1 million. Average billed water consumption per
metered customer was 286 ccf, an increase of 1 ccf for the year. Only
consumption in the fourth quarter exceeded that of the prior year, the first
three 1995 quarters recorded usage which was less than 1994's. The consumption
pattern reflects 1995's weather. The winter was unusually wet. Rain and cool
weather continued through the spring and negatively influenced summer usage.
With the exception of August, which showed a slight increase in consumption,
all months through the third quarter recorded a sales decline from the prior
year. Lack of rain and mild weather in the fourth quarter resulted in
increased average customer usage of 14%. Sales to 1,600 new customers
accounted for $0.7 million in additional revenue.
Revenue increased $5.6 million in 1994 or 4% over 1993. Step and general
rate increases accounted for $4.1 million of added revenue. Offset rate
adjustments, primarily for purchased water and pump tax cost increases, added
$2.7 million. Average water consumption per customer increased 4%, adding $2.4
million to revenue. During 1993, $2.9 million of rationing loss recoveries
were recorded, and as authorized by the Commission, conservation penalties
totaling $1.6 million were transferred to revenue to offset undercollections
in expense balancing accounts. Because there were no similar revenue sources
in 1994, revenue decreased $4.5 million. Sales to 2,600 new customers
accounted for $0.9 million in additional revenue.
Operating and Interest Expenses. Operating expenses, which include those for
the Hawthorne operation, increased $12.7 million in 1996 and $7.9 million in
both 1995 and 1994.
Well production supplied 50.3% of the water delivered to all systems in
1996, while 49.2% was purchased from wholesale suppliers and 0.5% came from the
Company's Bear Gulch district watershed. Water production was 105 billion
gallons, up 6% from 1995's 99 billion gallons. Production in 1994 was 100
billion gallons. Total cost of water production, including purchased water,
purchased power and pump taxes, was $67.3 million in 1996, $62.2 million in
1995, and $58.3 million in 1994. Purchased water expense continued to be the
largest component of operating expense at $51.5 million, an increase of $5.1
million. The cost increase was due to wholesale suppliers' rate increases and
increased production which resulted in a 5% increase in purchases. Well
production increased 8% in 1996 due to increased demand and resulted in a $0.6
million increase in pump taxes; however, purchased power cost decreased $0.6
million due to the availability of less expensive power in several districts.
The Bear Gulch watershed yielded 0.5 billion gallons, which was processed
through the Company's filter plant, about 75% of the 1995 production. The
estimated purchased water savings provided by the watershed was $0.5 million.
Employee payroll and benefits charged to operations and maintenance
expense was $31.2 million in 1996 compared with $29.9 million in 1995 and $28.0
million in 1994. The increases in payroll and benefits were attributable to
general wage increases effective at the start of each year and additional
employees. At year-end 1996, 1995 and 1994, there were 633, 630 and 624
employees, respectively.
Income taxes were $12.2 million in 1996, $9.9 million in 1995, and $9.6
million in 1994. The changes in taxes are generally due to variations in
taxable income.
Interest on long-term debt increased $0.7 million in 1996 because of the
sale in August, 1995 of $20 million of senior notes that were outstanding for
the full year. In 1995, bond interest expense increased $0.4 million because
of the senior note sale. Long-term debt interest expense decreased $1.4
million in 1994 due to the bond refinancing program completed at lower
interest rates in 1993. Long-term financing is discussed further under the
caption Liquidity and Capital Resources.
Interest on short-term bank borrowings in 1996 decreased $0.2 million.
The expense reduction reflects a reduced requirement for short-term borrowings
due to increased water sales, which resulted in an improved cash flow and funds
available in 1996 from the 1995 senior note sale. Interest on short-term bank
borrowings decreased $0.3 million in 1995, despite higher short-term rates
during 1995 compared to 1994. The reduction in the expense reflects the payoff
of outstanding short-term bank borrowings upon the issuance of senior notes and
a reduced short-term borrowing need. In 1994 interest on short-term borrowings
increased $0.2 million due to increased borrowings at higher interest rates.
Due to improved earnings, interest coverage of long-term debt before income
taxes was 3.6 in 1996. Coverage was 3.2 in 1995 and 1994.
Other Income. Other income is derived from management contracts under which
the Company operates three municipally-owned water systems, contracts for
operation of three privately owned water systems, agreements for operation of
two reclaimed water systems, billing services provided to various cities,
property leases, other nonutility sources and interest on short-term
investments. Total other income was $0.9 million, the same as in 1995. In
1994, it was $0.4 million. Income from the various operating and billing
contracts was $0.8 in 1996, $0.7 in 1995, and $0.4 million in 1994.
Interest earned on temporary investments decreased $0.2 million in 1996
from 1995. Following the August, 1995 senior note issue, available funds
generated significant interest income. This source for temporary investments
was not available in 1996. There were $4.5 million in temporary investments at
the end of 1995, but none at the end of 1996 or 1994.
CORPORATE STRUCTURE
In November 1996, the Company announced its intention to form a holding
company. Shareholders will vote on this proposal at their annual meeting on
April 16, 1997. In January 1997, the Company also announced plans to effect
a two-for-one common stock split. The split will be accomplished, together
with a proportionate adjustment of preferred stock voting rights, during
formation of the holding company by a planned conversion of each common share
of California Water Service Company stock into two shares of the holding
company. By approving the holding company structure, shareholders will also
approve the stock split.
The Company intends to continue to explore opportunities to expand
operating and other revenue sources. The opportunities could include system
acquisitions, contracts similar to the City of Hawthorne arrangement, operating
contracts, billing contracts and other utility related services. The Company
believes that a holding company structure will make the Company more
competitive in providing nonregulated utility services, which would not be
subject to Commission jurisdiction.
RATES AND REGULATION
During 1996, general rate case applications were filed with the Commission for
two districts, Livermore and Palos Verdes, which represent about 11% of the
Company's customers, requesting a return on common equity (ROE) of 12.05%. In
January, the Company and the Commission staff stipulated to a 10.35% ROE. A
final decision from the Commission is expected during the second quarter after
which the new rates for the two districts will become effective. Additional
1997 revenue from the decision is estimated to be $1.6 million with provisions
for step rate increases to become effective in the next three years. The
Commission also authorized increases for 1997 in various districts totaling
$1.6 million for step rate increases, $0.8 million for undercollection of
expense balancing accounts and another $1.5 million in 1998.
The Commission's decision on the Company's 1995 rate case filing was
effective in June, 1996. The decision, which involved five districts
representing 47% of the Company's customers, authorized an ROE of 10.3%. It is
estimated to provide $5.4 million of added revenue during the first full year,
including $1.2 million of step rate increases which were effective at the start
of 1996. Over a four year period, the decision will provide about $10.6
million in new revenue. The decision includes a provision to accelerate
recovery of the Company's utility plant investment, resulting in an
annualized depreciation rate of about 2.6% for the five districts.
Historically, the Company's annual depreciation rate has been 2.4% of utility
plant.
During 1997, 14 districts are eligible for rate increase filings. The
Company will review the earnings levels in those districts and file for
additional rate consideration as appropriate.
WATER SUPPLY
The Company's source of supply varies among the 21 operating districts. Some
districts obtain all of their supply from wells, other districts obtain all of
their supply from wholesale suppliers and other districts obtain their supply
from both sources. In each of the past three years, approximately half of the
total Company supply has been pumped from Company-owned wells and half
purchased from wholesale suppliers. Total water production for 1996, 1995
and 1994 was 105,072, 98,823 and 99,625 million gallons, respectively.
Generally, between mid-spring and mid-fall, there is little precipitation
in the Company's service areas. Water demand is highest during the warm, dry
summer period, and less in the cool, wet winter. Rain and snow during the
winter months replenish underground water basins and fill reservoirs, providing
the water supply for subsequent delivery to customers. Snow and rainfall
accumulation during the 1996-97 winter have exceeded normal levels, and on a
statewide basis, average precipitation has been above 125% of normal. Water
storage in state reservoirs exceeds historic levels. The Company believes that
its source of supply from both underground aquifers and purchased sources is
adequate to meet customer demands in 1997.
ENVIRONMENTAL MATTERS
The Company is subject to regulations of the United States Environmental
Protection Agency (EPA), the California Department of Health Services and
various county health departments concerning water quality matters. It is also
subject to the jurisdiction of various state and local regulatory agencies
relating to environmental matters, including handling and disposal of hazardous
materials.
The Company believes it is in compliance with all monitoring and treatment
requirements set forth by the various agencies. In the past several years,
substantially all of the Company's wells have been equipped with chlorinators
which provide disinfection of water extracted from underground sources. The
cost of the new treatment is being recovered in customer rates as authorized by
the Commission. Water purchased from wholesale suppliers is treated before
delivery to the Company. The Company operates two treatment plants that
process surface water supplies.
The various regulatory agencies could require increased monitoring and
possibly additional treatment of water supplies. If this occurs, the Company
intends to request recovery for additional treatment costs through the rate
application process.
During 1996, amendments were enacted by Congress to the Safe Drinking
Water Act. The revised law provides improvements in establishing regulations
for potential contaminants. Among the considerations by EPA in determining
whether to regulate a particular substance are the impact on public health, the
likelihood of the contaminant's occurrence and a cost/benefit analysis. The
Company believes the amended law provides a prudent approach to safeguarding
potable water supplies.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The Company's liquidity is primarily provided by utilization of a
short-term $30 million bank line of credit as described in Note 3 to the
financial statements and by internally generated funds. Sources of internally
generated funds include retention of a portion of earnings, depreciation and
deferred income taxes.
Because of the seasonal nature of the water business, the need for short-
term borrowings under the line of credit generally increases during the first
six months of the year. With increased summer usage, cash flow from operations
increases and bank borrowings can be repaid. The Company's bank line of credit
has on prior occasions been temporarily increased to $40 million, although the
larger amount has not been drawn upon.
The Company believes that long-term financing is available to it through
equity and debt markets. Standard & Poor's and Moody's have maintained their
bond ratings of AA- and Aa3, respectively, on the Company's first mortgage
bonds. Long-term financing, which includes issuance of common stock, first
mortgage bonds, senior notes and other debt securities is used to replace short
term borrowings and fund construction. Developer advances for construction and
contributions in aid of construction are also received for various construction
projects.
No long-term financing was completed in 1996. However, the Company did
receive Commission approval for up to $115 million of debt and/or equity
financing over a three year period. This financing may be used to fund
construction programs, retire maturing long-term debt obligations and repay
short-term borrowings. During August 1995, $20 million of Series A, 7.28%, 30-
year senior notes were issued. The proceeds from the issue were used to repay
outstanding bank borrowings, redeem upon maturity on November 1 the outstanding
$2,565,000 Series J first mortgage bonds and fund the 1995 construction
program.
In 1996, under the Dividend Reinvestment Plan (Plan), 40,219 new common
shares were issued to shareholders who elected to reinvest their dividends,
providing the Company with $1.4 million in additional equity. In 1995, 22,317
new shares were issued under the Plan during the third and fourth quarters
providing equity of $0.7 million. Reinvestment shares required for the 1995
first and second quarter dividends and for three 1994 quarters were purchased
on the open market and redistributed to Plan participants. Under the Plan,
the Company may satisfy the reinvestment requirement by issuing new shares or
purchasing shares on the open market and redistributing them to Plan
participants. Issuance of new shares reduces cash required to fund quarterly
dividend payments by about $1.4 million annually, based on current shareholder
participation of 11% in the Plan. Issuance of additional shares will have a
minor dilutive effect on earnings per share calculations because of the added
shares outstanding, and upon existing equity of shareholders not participating
in the Plan.
The sale of 550,000 common shares was completed in September 1994 at an
offer price of $33.375. Proceeds of $17.4 million, net of underwriters'
commissions and issuance costs, were used to repay $15.5 million of short-term
bank borrowings which had been incurred to fund the 1994 construction program
and for temporary working capital requirements. For the first quarter 1994
dividend, 8,280 new common shares were issued for the reinvestment plan.
Capital Requirements. Capital requirements consist primarily of new
construction expenditures for expanding and replacing the Company's utility
plant facilities. They also include refunds of advances for construction and
retirement of bonds.
During 1996, utility plant expenditures totaled $35.7 million compared to
$27.3 million in 1995. The expenditures included $27.6 million provided by
Company funding and $8.1 million received from developers through refundable
advances and contributions in aid of construction. Company funded expenditures
were in the following areas: wells, pumping and water treatment equipment and
storage facilities, $6.3 million; distribution systems, $8.7 million; services
and meters, $4.6 million; equipment, $1.5 million; and City of Hawthorne lease,
$6.5 million. Company projects were funded through cash generated from
operations, the use of the short-term line of credit and the proceeds from the
senior notes issued in August 1995.
The 1997 Company construction program has been authorized by the Board of
Directors for $23.2 million. Expenditures are expected to be in the following
areas: wells, pumping and water treatment equipment and storage facilities,
$6.8 million; distribution systems, $7.9 million; services and meters, $5.4
million; and equipment, $3.1 million. The funds for this program are
expected to be provided by cash from operations, bank borrowings and long-term
debt financing. New subdivision construction will be financed primarily by
developers' refundable advances and contributions. Company funded construction
budgets over the next five years are projected to total $115 million.
Since 1986, proceeds received from developers for installation of new
facilities have been subject to income tax. During 1996, Congress enacted
legislation which exempted from taxable income proceeds received from
developers to fund advances for construction and contributions in aid of
construction. As part of the legislation, future water utility plant
additions will generally be depreciated for tax purposes on a straight-line,
25-year life basis. The federal tax exemption of developer funds will reduce
the Company's cash flow requirement for income taxes. Developer advances
remain subject to California income tax.
Capital Structure. The Company's total capitalization at December 31, 1996 and
1995 was $299.9 million and $296.0 million, respectively. Capital ratios were:
1996 1995
Common equity 51.4% 49.7%
Preferred stock 1.2% 1.2%
Long-term debt 47.4% 49.1%
The increase in the common equity percentage from 1995 to 1996 and the
corresponding decrease in the long-term debt percentage were primarily caused
by strong earnings in 1996 which contributed to shareholders' equity, the
issuance of new shares under the Dividend Reinvestment Plan and the retirement
of Series K, first mortgage bonds along with the annual bond sinking fund
payments in November, 1996.
The 1996 return on average common equity was 12.7% compared with 10.2% in
1995 and 10.6% in 1994.
balance sheet
December 31, 1996 1995
(In thousands)
ASSETS
Utility plant:
Land $ 7,536 $ 7,320
Depreciable plant and equipment 600,329 572,799
Construction work in progress 3,300 3,615
Intangible assets 7,267 658
Total utility plant 618,432 584,392
Less depreciation and amortization 174,844 162,217
Net utility plant 443,588 422,175
Current assets:
Cash and cash equivalents 1,368 6,273
Accounts receivable:
Customers 11,437 10,747
Other 1,528 2,916
Unbilled revenue 5,577 6,306
Materials and supplies at average cost 2,324 2,518
Taxes and other prepaid expenses 4,537 3,949
Total current assets 26,771 32,709
Other assets:
Regulatory assets 37,556 38,059
Unamortized debt premium and expense 3,943 4,162
Other 532 521
Total other assets 42,031 42,742
$512,390 $497,626
See accompanying notes to financial statements.
1996 1995
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock $ 44,941 $ 43,507
Retained earnings 109,285 103,442
Total common shareholders' equity 154,226 146,949
Preferred stock without mandatory
redemption provision 3,475 3,475
Long-term debt 142,153 145,540
Total capitalization 299,854 295,964
Current liabilities:
Short-term borrowings 7,500 -
Accounts payable 14,692 14,807
Accrued taxes 3,002 2,104
Accrued interest 1,947 1,979
Other accrued liabilities 7,653 6,940
Total current liabilities 34,794 25,830
Unamortized investment tax credits 3,086 3,352
Deferred income taxes 23,736 25,639
Regulatory liabilities 12,627 12,627
Advances for construction 95,226 94,100
Contributions in aid of construction 43,067 40,114
$512,390 $497,626
statement of income
for the years ended December 31, 1996 1995 1994
(In thousands, except per share data )
Operating revenue $182,764 $165,086 $157,271
Operating expenses:
Operations:
Purchased water 51,514 46,370 42,812
Purchased power 12,075 12,689 12,641
Pump taxes 3,753 3,151 2,859
Administrative and general 21,664 19,989 18,210
Other 23,000 21,635 20,405
Maintenance 8,317 7,722 7,855
Depreciation and amortization 12,665 11,436 10,958
Income taxes 12,150 9,850 9,600
Property and other taxes 7,259 6,852 6,426
Total operating expenses 152,397 139,694 131,766
Net operating income 30,367 25,392 25,505
Other income and expenses, net 607 768 287
Income before interest expense 30,974 26,160 25,792
Interest expense:
Long-term debt interest 11,663 10,984 10,557
Other interest 244 478 827
Total interest expense 11,907 11,462 11,384
Net income $ 19,067 $ 14,698 $ 14,408
Earnings per share of common stock $ 3.01 $ 2.33 $ 2.44
Average number of common shares
outstanding 6,290 6,253 5,838
See accompanying notes to financial statements.
statement of common shareholders' equity
common
shares common retained
outstanding stock earnings total
(In thousands, except shares)
Balance at December 31, 1993 5,688,754 $25,059 $ 98,940 $123,999
Net income 14,408 14,408
Dividends paid:
Preferred stock 153 153
Common stock 11,548 11,548
Total dividends paid 11,701 11,701
Income reinvested in business 2,707 2,707
Dividend reinvestment 8,280 304 - 304
Issuance of common stock 550,000 17,437 - 17,437
Balance at December 31, 1994 6,247,034 42,800 101,647 144,447
Net income 14,698 14,698
Dividends paid:
Preferred stock 153 153
Common stock 12,750 12,750
Total dividends paid 12,903 12,903
Income reinvested in business 1,795 1,795
Dividend reinvestment 22,317 707 - 707
Balance at December 31, 1995 6,269,351 43,507 103,442 146,949
Net income 19,067 19,067
Dividends paid:
Preferred stock 153 153
Common stock 13,071 13,071
Total dividends paid 13,224 13,224
Income reinvested in business 5,843 5,843
Dividend reinvestment 40,219 1,434 - 1,434
Balance at December 31, 1996 6,309,570 $44,941 $109,285 $154,226
See accompanying notes to financial statements.
statement of cash flows
for the years ended December 31, 1996 1995 1994
(In thousands)
Operating activities
Net income $ 19,067 $ 14,698 $ 14,408
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 12,665 11,436 10,958
Deferred income taxes and investment
tax credits, net (2,169) 1,698 (477)
Regulatory assets and liabilities, net 503 (1,181) 1,070
Changes in operating assets and liabilities:
Accounts receivable 698 (1,936) (2,326)
Unbilled revenue 729 (314) 1,556
Accounts payable (115) 2,576 997
Other current liabilities 1,579 1,560 (825)
Other changes, net 235 1,258 130
Net adjustments 14,125 15,097 11,083
Net cash provided by operating activities 33,192 29,795 25,491
Investing activities:
Utility plant expenditures
Company funded (27,631) (20,039) (20,790)
Developer advances and contributions
in aid of construction (8,052) (7,211) (7,485)
Net cash used in investing activities (35,683) (27,250) (28,275)
Financing activities:
Net short-term borrowings 7,500 (7,000) (8,000)
Proceeds from issuance of long-term debt - 20,000 -
Proceeds from issuance of common stock 1,434 707 17,741
Advances for construction 4,998 5,368 4,980
Refunds of advances for construction (3,631) (3,524) (3,565)
Contributions in aid of construction 3,896 3,183 3,833
Retirements of first mortgage
bonds including premiums (3,387) (3,404) (664)
Dividends paid (13,224) (12,903) (11,701)
Net cash provided by (used in) financing
activities (2,414) 2,427 2,624
Change in cash and cash equivalents (4,905) 4,972 (160)
Cash and cash equivalents at beginning of year 6,273 1,301 1,461
Cash and cash equivalents at end of year $ 1,368 $ 6,273 $ 1,301
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 11,721 $ 11,050 $ 11,165
Income taxes $ 12,775 $ 8,258 $ 10,950
See accompanying notes to financial statements.
notes to financial statements
December 31, 1996, 1995 and 1994
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting records of the Company are maintained in accordance with the
uniform system of accounts prescribed by the California Public Utilities
Commission (Commission). Certain prior years' amounts have been reclassified,
where necessary, to conform to the current presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue. Revenue consists of monthly customer billings for regulated water
service at rates authorized by the Commission and billings to Hawthorne
customers. Revenue from metered accounts includes unbilled amounts based on
the estimated usage from the latest meter reading to the end of the accounting
period. Flat rate accounts which are billed at the beginning of the service
period are included in revenue on a pro rata basis for the portion applicable
to the current accounting period.
As permitted by the Commission, in 1994, $32,000 was recorded as lost
water conservation revenue and accrued in unbilled revenue, while $1,445,000
was recovered through customer surcharges and penalty charge transfers from
customers who had exceeded their monthly allotments. In 1995, $351,000 was
recovered through customer surcharges while $163,000 was written-off as
unrecoverable revenue. As of December 31, 1995, $497,000 of lost water
conservation revenue remained in unbilled revenue. In 1996, $175,000 was
recovered through customer surcharges while $98,000 was written off as
unrecovered revenue. As of December 31, 1996, $224,000 of lost water
conservation revenue remained in unbilled revenue which is anticipated to be
recovered in 1997.
Utility Plant. Utility plant is carried at original cost when first
constructed or purchased, except for certain minor units of property recorded
at estimated fair values at dates of acquisition. Cost of depreciable plant
retired is eliminated from utility plant accounts and such costs are charged
against accumulated depreciation. Maintenance of utility plant, other than
transportation equipment, is charged to operation expenses. Maintenance and
depreciation of transportation equipment are charged to a clearing account and
subsequently distributed, primarily to operations. Interest is capitalized on
plant expenditures during the construction period and amounted to $261,000 in
1996, $207,000 in 1995, and $195,000 in 1994.
Intangible assets arising during the period of initial development of the
Company and those acquired as parts of water systems purchased are stated at
amounts as prescribed by the Commission. All other intangibles have been
recorded at cost.
Long-Term Debt Premium, Discount and Expense. The discount and expense on
long-term debt is being amortized over the original lives of the related debt
issues. Premiums paid on the early redemption of certain debt issues and
unamortized original issue discount and expense of such issues are amortized
over the life of new debt issued in conjunction with the early redemption.
Cash Equivalents. Cash equivalents include highly liquid investments,
primarily U.S. Treasury and U.S. Government agency interest bearing securities,
stated at cost with original maturities of three months or less.
Depreciation. Depreciation of utility plant for financial statement purposes
is computed on the straight-line remaining life method at rates based on the
estimated useful lives of the assets. The provision for depreciation expressed
as a percentage of the aggregate depreciable asset balances was 2.5% in 1996
and 2.4% in 1995 and 1994. For income tax purposes, the Company computes
depreciation using the accelerated methods allowed by the respective taxing
authorities.
Advances for Construction. Advances for Construction consist of payments
received from developers for installation of water production and distribution
facilities to serve new developments. Advances are excluded from rate base.
Such payments are refundable to the developer without interest over a 20-year
or 40-year period. Refundable amounts under the 20-year contracts are based
on annual revenues from the extensions. Unrefunded balances at the end of the
contract period are credited to Contributions in Aid of Construction and are no
longer refundable. Refunds on contracts entered into since 1982 are made in
equal annual amounts over 40 years. At December 31,1996, the amounts
refundable under the 20-year contracts was $10,888,000 and under 40-year
contracts $84,338,000. Estimated refunds in 1997 for all water main extension
contracts are $3,800,000.
Contributions in Aid of Construction. Contributions in Aid of Construction
represent payments received from developers, primarily for fire protection
purposes, which are not subject to refund. Facilities funded by contributions
are included in utility plant, but excluded from rate base. Depreciation
related to contributions is charged to Contributions in Aid of Construction.
Income Taxes. The Company accounts for income taxes using the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Measurement of the deferred tax assets and liabilities
is at enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in the period that includes the enactment date.
It is anticipated that future rate action by the Commission will reflect
revenue requirements for the tax effects of temporary differences recognized
which have previously been flowed through to customers.
The Commission has granted the Company customer rate increases to reflect
the normalization of the tax benefits of the federal accelerated methods and
available investment tax credits (ITC) for all assets placed in service after
1980. ITC are deferred and amortized over the lives of the related properties.
Advances for Construction and Contributions in Aid of Construction
received from developers subsequent to 1986 are taxable for federal income tax
purposes and subsequent to 1991 subject to state income tax. In 1996, the
federal tax law changed and a portion of advances and contributions received
after June 12, 1996, are nontaxable.
Earnings per Share. Earnings per share are calculated using the weighted
average number of common shares outstanding during the year after deducting
dividend requirements on preferred stock.
NOTE 2. PREFERRED AND COMMON STOCK
As of December 31, 1996, 380,000 shares of preferred stock were authorized.
Dividends on outstanding shares are payable quarterly at a fixed rate before
any dividends can be paid on common stock. Preferred shares are entitled to
eight votes each with the right to cumulative votes at any elections of
directors.
The outstanding 139,000 shares of $25 par value cumulative, 4.4% Series C
preferred shares are not convertible to common stock. A premium of $243,250
would be due upon voluntary liquidation of Series C. There is no premium in
the event of an involuntary liquidation.
The Company is authorized to issue 8,000,000 shares of no par value common
stock. As of December 31, 1996 and 1995, 6,309,570 and 6,269,351 shares,
respectively, of common stock were issued and outstanding. All shares of
common stock are eligible to participate in the Company's Dividend Reinvestment
Plan. Approximately 11% of shareholders participate in the plan. In 1996 and
1995, 40,219 and 22,317, respectively, new shares were issued under the
reinvestment plan.
NOTE 3. SHORT-TERM BORROWINGS
As of December 31, 1996, the Company maintained a bank line of credit providing
unsecured borrowings of up to $30,000,000 at the prime lending rate or lower
rates as quoted by the bank. The agreement does not require minimum or
specific compensating balances. The following table represents borrowings
under the bank line of credit.
Dollars in Thousands
1996 1995 1994
Maximum short-term borrowings $9,500 $13,000 $21,500
Average amount outstanding 1,662 5,142 13,196
Weighted average interest rate 6.94% 7.26% 5.40%
Interest rate at December 31 6.98% - 7.38%
NOTE 4. LONG-TERM DEBT
As of December 31, 1996 and 1995, long-term debt outstanding was:
In Thousands
1996 1995
First Mortgage Bonds:
Series K, 6.25% due 1996 $ - $ 2,565
Series L, 6.75% due 1997 2,138 2,150
Series P, 7.875% due 2002 2,640 2,655
Series S, 8.50% due 2003 2,655 2,670
Series BB, 9.48% due 2008 16,920 17,100
Series CC, 9.86% due 2020 19,100 19,300
Series DD, 8.63% due 2022 19,600 19,700
Series EE, 7.90% due 2023 19,700 19,800
Series FF, 6.95% due 2023 19,700 19,800
Series GG, 6.98% due 2023 19,700 19,800
122,153 125,540
Senior Notes:
Series A, 7.28% due 2025 20,000 20,000
Total long-term debt $ 142,153 $ 145,540
The first mortgage bonds are held by institutional investors and secured
by substantially all of the Company's utility plant. Aggregate maturities and
sinking fund requirements for each of the succeeding five years 1997 through
2001 are $2,758,000, $620,000, $2,240,000, $2,240,000, and $2,240,000,
respectively.
The senior notes are held by institutional investors, are unsecured and
require interest-only payments until maturity.
NOTE 5. INCOME TAXES
Income tax expense consists of the following:
In Thousands
Federal State Total
1996
Current $ 9,356 $ 3,274 $12,630
Deferred 444 (924) (480)
Total $ 9,800 $ 2,350 $12,150
1995
Current $ 6,839 $ 2,729 $ 9,568
Deferred 1,161 (879) 282
Total $ 8,000 $ 1,850 $ 9,850
1994
Current $ 6,492 $ 2,567 $ 9,059
Deferred 908 (367) 541
Total $ 7,400 $ 2,200 $ 9,600
Income tax expense computed by applying the current federal tax rate of
35% to pretax book income differs from the amount shown in the Statement of
Income. The difference is reconciled in the table below:
In Thousands
1996 1995 1994
Computed expected tax expense $10,926 $ 8,592 $ 8,401
Increase (reduction) in taxes due to:
State income taxes net of federal tax
benefit 1,528 1,203 1,444
Investment tax credits (119) (132) (132)
Other (185) 187 (113)
Total income tax $12,150 $ 9,850 $ 9,600
The components of deferred income tax expense in 1996, 1995 and 1994 were:
In Thousands
1996 1995 1994
Depreciation $ 3,544 $ 3,854 $ 3,748
Developer advances and contributions (3,749) (3,455) (3,536)
Bond redemption premiums (73) (75) (75)
Investment tax credits (93) (90) (90)
Other (109) 48 494
Total deferred income tax expense $ (480) $ 282 $ 541
The tax effects of differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995 are presented in the following table:
In Thousands
1996 1995
Deferred tax assets:
Developer deposits for extension agreements
and contributions in aid of construction $45,901 $40,966
Federal benefit of state tax deductions 4,177 3,909
Book plant cost reduction for future deferred
ITC amortization 1,832 1,990
Insurance loss provisions 286 328
Total deferred tax assets 52,196 47,193
Deferred tax liabilities:
Utility plant, principally due to depreciation
differences 74,407 70,871
Premium on early retirement of bonds 1,290 1,363
Other 235 598
Total deferred tax liabilities 75,932 72,832
Net deferred tax liabilities $23,736 $25,639
A valuation allowance was not required during 1996 and 1995. Based on
historical taxable income and future taxable income projections over the
periods in which the deferred assets are deductible, management believes it
is more likely than not the Company will realize the benefits of the deductible
differences.
NOTE 6. EMPLOYEE BENEFIT PLANS
Pension Plan. The Company provides a qualified defined benefit,
noncontributory pension plan for substantially all employees. The cost of
the plan is charged to expense and utility plant. The Company makes annual
contributions to fund the amounts accrued for pension cost. Plan assets are
invested in mutual funds, pooled equity, bond and short-term investment
accounts. The data below includes the unfunded, nonqualified, supplemental
executive retirement plan.
Net pension cost for the years ending December 31, 1996, 1995 and 1994
included the following components:
In Thousands
1996 1995 1994
Service cost benefits earned during the year $ 1,543 $ 1,265 $ 1,333
Interest cost on projected obligation 2,583 2,360 2,154
Actual loss (return) on plan assets (4,784) (5,817) 627
Net amortization and deferral 2,789 4,220 (2,286)
Net pension cost $ 2,131 $ 2,028 $ 1,828
The following table sets forth the plan's funded status and the plan's
accrued assets (liabilities) as of December 31, 1996 and 1995:
In Thousands
1996 1995
Accumulated benefit obligation, including vested
benefits of $28,059 in 1996 and $25,218 in 1995 $(28,679) $(25,974)
Projected benefit obligation $(39,296) $(37,271)
Plan assets at fair value 38,293 33,798
Projected benefit obligation in excess of plan
assets (1,003) (3,473)
Unrecognized net gain (6,120) (1,991)
Prior service cost not yet recognized in net
periodic pension cost 4,991 3,161
Remaining net transition obligation at adoption
date January 1, 1987 1,430 1,716
Accrued pension liability recognized in
the balance sheet $ (702) $ (587)
The projected long-term rate of return on plan assets used in determining
pension cost was 8.0% for the years 1996, 1995 and 1994. A discount rate of
7.4% in 1996, 7.0% in 1995, and 8.0% in 1994 and future compensation increases
of 4.5% in 1996 and 1995, and 5.0% in 1994 were used to calculate the projected
benefit obligations for the respective years.
Savings Plan. The Company sponsors a 401(k) qualified, defined contribution
savings plan that allows participants to contribute up to 15% of pre-tax
compensation. The Company matched fifty cents for each dollar contributed by
the employee up to a maximum Company match of 3.5% of the employees'
compensation in 1996 and 3% of the employees' compensation in 1995 and 1994.
Company contributions were $858,000, $711,000, and $678,000 for the years 1996,
1995 and 1994, respectively.
Other Postretirement Plans. The Company provides substantially all active
employees with medical, dental and vision benefits through a self-insured
plan. Employees retiring at or after age 58 with 10 or more years of service
are offered, along with their spouses and dependents, continued participation
in the plan by payment of a premium. Retired employees are also provided
with a $5,000 life insurance benefit.
The Company records the costs of postretirement benefits during the
employees' years of active service. The Commission has issued a decision which
authorizes rate recovery of tax deductible funding of postretirement benefits
and permits recording of a regulatory asset for the portion of costs that will
be recoverable in future rates.
Net postretirement benefit cost for the years ending December 31, 1996, 1995
and 1994, included the following components:
In Thousands
1996 1995 1994
Service cost benefits earned $166 $131 $120
Interest cost on accumulated
postretirement benefit obligation 383 391 326
Actual return on plan assets (63) (30) (4)
Net amortization of transition obligation 278 260 228
Net periodic postretirement benefit cost $764 $752 $670
Postretirement benefit expense recorded in 1996, 1995 and 1994, was
$523,000, $507,000, and $481,000, respectively. $912,000, which is recoverable
through future customer rates, is recorded as a regulatory asset. The Company
intends to make annual contributions to the plan up to the amount deductible
for tax purposes. Plan assets are invested in mutual funds, short-term money
market instruments and commercial paper.
The following table sets forth the plan's funded status and the plan's
accrued assets (liabilities) as of December 31, 1996 and 1995:
In Thousands
1996 1995
Accumulated postretirement benefit obligation:
Retirees $(2,959) $(3,423)
Other fully eligible participants (604) (571)
Other active participants (2,310) (1,942)
Total (5,873) (5,936)
Plan assets at fair value 582 348
Accumulated postretirement benefit
obligation in excess of plan assets (5,291) (5,588)
Unrecognized net (gain) or loss 407 697
Remaining unrecognized transition obligation 3,972 4,220
Net postretirement benefit liability
included in current liabilities $ (912) $ (671)
For 1996 measurement purposes, a 6.5% annual rate of increase in the per
capita cost of covered benefits was assumed; the rate was assumed to decrease
gradually to 5% in the year 2000 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. Increasing the assumed health care cost trend rates by one
percentage point in each year, would increase the accumulated postretirement
benefit obligation as of December 31, 1996, by $804,000 and the aggregate of
the service and interest cost components of the net periodic postretirement
benefit cost for the year ended December 31, 1996, by $99,000.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.4% at December 31, 1996, 7.0% at December 31, 1995 and
8.0% at December 31, 1994. The long-term rate of return on plan assets was
8.0% for 1996, 1995 and 1994.
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS
For those financial instruments for which it is practicable to estimate a fair
value the following methods and assumptions were used to estimate the fair
value.
Cash Equivalents. The carrying amount of cash equivalents approximates fair
value because of the short-term maturity of the instruments.
Long-term Debt. The fair value of the Company's long-term debt is estimated at
$159,000,000 as of December 31, 1996, and $162,427,000 as of December 31, 1995,
using a discounted cash flow analysis, based on the current rates available to
the Company for debt of similar maturities.
Advances for Construction. The fair value of advances for construction
contracts is estimated at $21,000,000 as of December 31, 1996 and 1995, based
on data provided by brokers.
NOTE 8. QUARTERLY FINANCIAL AND COMMON STOCK MARKET DATA (Unaudited)
The Company's common stock is traded on the New York Stock Exchange under the
symbol CWT. There were approximately 6,000 holders of common stock at
December 31, 1996. Quarterly dividends have been paid on common stock for 208
consecutive quarters and the quarterly rate has been increased each year since
1968. The 1996 and 1995 quarterly range of common stock market prices was
supplied by the New York Stock Exchange Composite Tape.
1996
First Second Third Fourth
(In thousands, except per share amounts)
Operating revenue $32,298 $49,048 $59,230 $42,187
Net operating income 4,028 8,698 11,488 6,153
Net income 1,177 5,836 8,673 3,381
Earnings per share .18 .92 1.37 .53
Common stock market price range:
High 37-1/4 35-5/8 38-1/4 43-3/4
Low 32-1/2 33-1/2 32-1/2 35-7/8
Dividends paid .52 .52 .52 .52
1995
First Second Third Fourth
Operating revenue $30,416 $40,371 $53,276 $41,023
Net operating income 3,685 6,161 9,096 6,450
Net income 1,039 3,467 6,472 3,720
Earnings per share .16 .55 1.03 .59
Common stock market price range:
High 32-3/8 32-5/8 32-7/8 35-1/4
Low 29-5/8 29-3/4 29-5/8 32-3/8
Dividends paid .51 .51 .51 .51
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