<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year Ended DECEMBER 31, 1999 Commission file number 0-18677
DOMINGUEZ SERVICES CORPORATION
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(Exact name of registrant as specified in its charter)
California 33-0391161
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(State of other jurisdiction of (I.R.S. Employer identification no.)
incorporation or organization)
21718 South Alameda Street, Long Beach, California 90810
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(Address of principal executive offices) Zip Code)
Registrant's telephone number, including area code (310) 834-2625
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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
NONE The NASDAQ Stock Market
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $1 Par Value
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(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
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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
Yes X No
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State the aggregate market value of the voting stock held by non-affiliates of
the registrant:
Common Shares average bid price of $32.875 on March 27, 2000.
Aggregate Market Value $34,621,550
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
March 27, 2000 - 1,563,779 Shares
---------------------------------
(There are 50 pages in this 10-K)
1
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PART I
ITEM 1. BUSINESS.
FORWARD-LOOKING STATEMENTS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (Reform Act), the Dominguez Services
Corporation (the Company) is hereby filing cautionary statements identifying
important factors that could cause the Company's actual results to differ
materially from those projected in forward-looking statements (as defined in
the Reform Act) made by or on behalf of the Company in this Annual Report.
Any statements that express such statements are often, but not always,
expressed with phrases such as expectations, beliefs, plans, objectives,
assumptions, or future events or performance, through the use of words or
phrases such as "anticipate," "believes," "estimates," "expects," "intends,"
"plans," "predicts," "projects," "will likely result," and "will continue."
Such statements are not statements of historical facts and may be
forward-looking.
Forward-looking statements involve estimates, assumptions, and uncertainties
and are qualified in their entirety by reference to the following important
factors, which are difficult to predict, contain uncertainties, are beyond
the control of the Company, and could cause actual results to differ
materially from those contained in forward-looking statements:
- prevailing governmental policies and regulatory actions,
including those of the California Public Utilities Commission
( the Commission), with respect to allowed rates of return,
authorization of regulated rates, industry and rate structure,
acquisition and disposal of assets and facilities, operation
and construction of plant facilities, recovery of balancing
account, and present or prospective competition;
- economic and geographic factors including political and
economic risks;
- changes in and compliance with environmental and safety laws
and policies;
- water supply and weather conditions;
- customer growth rate;
- merger issues:
- delays or change in anticipated closing date;
- likelihood of approval by regulatory agencies;
- changes in tax rates or policies or in rates of inflation;
- unanticipated changes in operating expenses and capital
expenditures;
- emergency preparedness;
- capital market conditions;
- competition for non-regulatory opportunities; and
- legal and administrative proceedings and settlements that
influence the business and profitability of the Company.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date
on which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the impact of
any such factor on the business, or the extent to which any factor, or
combination of factors, may cause results to differ materially from those
contained in any forward-looking statement.
2
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GENERAL
Dominguez Services Corporation is a holding company formed in 1990 through an
Agreement of Merger with Dominguez Water Company. The Company's principal
business is the ownership of all the common stock of Dominguez Water Company.
The holding company structure provides operational and financial flexibility
and allows the Company to engage in non-regulated activities. The Company has
two wholly-owned subsidiaries: Dominguez Water Company and its operating
subsidiaries (Dominguez), which are involved in regulated water supply and
distribution, and DSC Investments, which is involved in non-regulated,
water-related services and investments. A detailed description of the
regulated and non-regulated businesses is contained in Item 8, Financial
Statements and Supplementary Data, Note 17.
Dominguez is regulated by the Commission and, as such, must obtain the
Commission's approval to increase water rates to recover increases in
operating expenses and authorization to include reinvested capital in
ratebase. Most variations in revenues are due to weather conditions and the
water usage of major industrial customers.
Dominguez is comprised of its principal division, (the South Bay Division,)
and its operating subsidiaries, the Kern River Valley Water Company, the
Antelope Valley Water Company and the Redwood Valley Water Company Division
(collectively referred to as the "Subsidiaries"). The South Bay Division has
been providing water service for more than 88 years. Currently, the South Bay
Division serves approximately 32,637 customers in a 35 square mile area
including most of Carson, one-quarter of Torrance, and parts of Compton, Long
Beach, Los Angeles, Los Angeles County, and Harbor City. The Kern River
Valley Water Company and the Antelope Valley Water Company provide water
service to approximately 4,096 and 1,271 customers, respectively. In 1998,
Dominguez formed the Redwood Valley Water Company Division to acquire certain
water companies located in northern California. Redwood Valley Water Company
Division serves approximately 1,912 customers in six service areas.
DSC Investments is primarily engaged in the transfer of water right leases
between third parties. Income from the transfer of water right leases may
significantly vary from year to year due to demands for groundwater by major
pumpers in the West and Central Groundwater Basins.
FINANCIAL PERFORMANCE AND OPERATIONS
Financial results in 1999 improved significantly over 1998, primarily due to
1998 results including higher non-recurring costs associated with the
Company's merger with California Water Service Group. Earnings per share for
1999 rose to $1.31, compared to $.61 in the same period in 1998, revenues
increased to $28,497,000 from $25,267,000 in the same period last year, and
net income reached $2,052,000, compared to $924,000 at year-end in 1998.
Other factors having a positive impact on 1999 financial results were
customer growth and higher sales. The Company completed the purchase of
Lucerne Water Company, serving 1,242 customers and Armstrong Valley Water
Company, serving 382 customers, in January; Hawkins Water Company, serving 51
customers, in August; and Coast Springs Water Company, serving 237 customers,
in December. All four are located in northern California and are operated by
the Company's newest subsidiary, Redwood Valley Water Company Division.
Sales also increased both to business and residential customers. In 1999,
Dominguez supplied 13,579 million gallons of water to 39,916 customers,
compared to 12,412 million gallons of water to 37,882 customers in 1998.
Although Dominguez South Bay has a diversified customer base, a substantial
portion (51% in 1999 and 50% in 1998) of sales were derived from business and
industrial usage. Furthermore, a single customer, a refinery, accounted for
38% of the business and industrial sales in 1999 and for 34% in 1998.
The Company experienced no interruptions in service or operations as a result
of the Year 2000 (Y2K). Precautionary measures taken by the Company in
anticipation of computer problems that could have been caused by Y2K
included: assessing computer software used in monitoring water and performing
business functions such as billing; making necessary upgrades; working with
vendors and outside service providers to ascertain their level of
preparedness; and having teams on-site in all of the service areas to address
any issues arising with the year change.
THE MERGER
3
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On November 13, 1998, the Company executed an Agreement and Plan of
Reorganization (the Merger Agreement) to merge with California Water Service
Group (CWSG), the parent of California Water Service Company (Cal Water) and
CWS Utility Services. Under the terms of the November 1998 Merger Agreement,
each share of the Company's common stock issued and outstanding on the
closing date would be converted into the right to receive 1.18 shares
of CWSG common stock. The Company's Board of Directors (Board) received the
opinion of its financial advisor, PaineWebber Inc., that this exchange ratio
would be fair to the shareholders of the Company's common stock from a
financial point of view. And, the Company expected that the proposed merger
will be treated as a tax-free transaction under the applicable provisions of the
Internal Revenue Code. Shares of CWSG common stock are traded under the symbol
"CWT" on the New York Stock Exchange. CWSG operations provide water utility
services to over 1.5 million people in 58 California communities.
On March 16, 1999, the Company announced that it had received an unsolicited
proposal from American States Water Company (ASWC) offering to acquire all of
the Company's outstanding common stock in a stock-for-stock merger. Under the
ASWC proposal, each share of the Company's common stock would have been
converted into the right to receive a number of ASWC shares intended to
provide $32.50 of value for each of the Company's shares. The ASWC proposal
also provided for a collar pursuant to which the minimum and maximum
conversion ratios would be 1.11 and 1.35 ASWC shares for each Company share.
The Company's financial advisor advised the Company's Board that this
proposal was more favorable to the Company's shareholders than the terms of
the Merger Agreement.
On March 22, 1999, the Company and CWSG executed an amendment to the November
1998 Merger Agreement which provides that each share of the Company's common
stock will be converted into the right to receive a number of CWSG shares
intended to provide $33.75 of value for each of the Company's shares. The
amendment to the Merger Agreement also provides that the minimum and maximum
conversion ratios will be 1.25 and 1.49 CWSG shares for each Company share.
At a special meeting on May 12, 1999, Company shareholders overwhelmingly
approved the Merger Agreement as amended. All regulatory approvals have been
received, with the exception of that of the Commission. In its initial report
filed in October 1999, the Commission staff recommended disapproval of the
merger. Subsequently, CWSG and the Company issued a guarantee that customer
rates would not increase as a result of the merger, expressing confidence
that synergies achieved by the merger would offset merger costs.
In succeeding discussions with Commission's Ratepayer Representation Branch
(RRB), Cal Water and Dominguez proposed an enhanced guarantee, which included
provisions that customer rates would not increase as a result of the merger,
that Dominguez customers would continue to receive financial benefit of water
rights currently owned by Dominguez, and that a portion of operating
synergies achieved over those needed to offset merger costs be returned to
customers. RRB of the Commission staff testified to its support of the
merger, with the enhanced guarantee, on December 7, 1999. In a proposed
decision issued in February 2000, the Administrative Law Judge recommended
approval of the merger with certain conditions, many of which were proposed
by Cal Water and Dominguez in the enhanced guarantee. Oral arguments were
scheduled for March 2000, with a decision expected in the second quarter.
Pursuant to the Merger Agreement, if regulatory approval is not received or
if either the Company or CWSG decides not to complete the merger, certain
payments are required under the terms of the Merger Agreement.
WATER SUPPLY
Dominguez obtains its water supplies from its own groundwater wells, a
surface water source plus two water wholesalers of imported water.
All Dominguez service areas, except for the Lucerne service area (Lucerne) of
Redwood Valley Water Company Division, obtain either a portion or all of
their supply from groundwater wells. Lucerne has a surface water treatment
plant. The quantity that the South Bay Division is allowed to pump over a
year's time is fixed by court adjudication. The adjudication established
distinct groundwater basins that are managed by a court-appointed
watermaster. The groundwater management fixes the safe yield of the basins
and ensures the replenishment of the basins by utilizing impounded storm
water, treated recycled water and treated purchased water when necessary.
Groundwater basins have not been adjudicated in the Subsidiaries.
4
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In December 1997, Dominguez entered into a recycled water agreement with the
West Basin Municipal Water District (West Basin) and ARCO. Under the terms of
the agreement, Dominguez will sell ARCO recycled water purchased from West
Basin for the same cost margin that Dominguez would otherwise have received
providing ARCO with potable water. Dominguez expects to invest up to
$2,000,000 in recycled water facilities for its South Bay Division service
area, in exchange for which Dominguez will receive the recycled water at
reduced rates.
The recycled water plant was completed in December of 1999, and became fully
operational in January 2000. Dominguez began supplying recycled water from
West Basin to its largest customer from West Basin in December 1999. Having
access to recycled water will reduce the South Bay Division's demand for
imported potable water, the availability of which may be uncertain in the
future. Reduced imported water supplies and annual population growth could
create future drought conditions in Southern California; however, Dominguez
believes that the availability of recycled water will significantly mitigate
the impact of future droughts in the South Bay Division service area.
In 1998, the Water Replenishment District of Southern California (WRD), a
water district responsible for the oversight and management of the West and
Central Groundwater Basins, awarded a grant to Dominguez of $1,820,000, which
was to be paid in two equal installments. Dominguez received the first of its
two payments for $910,000 in 1998, and received the second payment for
$910,000 in 1999. Dominguez has earmarked $1,150,000 to fund its investment
in recycled water facilities.
The South Bay Division and Leona Valley service area of Antelope Valley Water
Company purchase water from wholesalers to supplement groundwater. The South
Bay Division purchases imported water from the Metropolitan Water District
(MWD) of Southern California through West Basin. The Leona Valley service
area purchases its imported water from the Antelope Valley - East Kern Water
Agency (AVEK). Both of these wholesale suppliers obtain water from the
California State Water Project (SWP), and MWD also obtains water from the
Colorado River.
Long-term imported water supplies depend upon several factors. Dominguez'
future dependency on imported water will be subject to the availability and
usage of recycled water in the region as well as customers' long-term water
conservation efforts. Dominguez has and will continue to promote long-term
water conservation efforts and will advance the use of recycled water.
5
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Legislative actions continue to play a role in the long-term availability of
water for Southern California. The amount of SWP water available from
northern California and water imported from the Colorado River may be
significantly reduced in the future. Even with the use of recycled water and
continuing conservation efforts, future drought conditions may require water
rationing by all California water agencies and purveyors, including Dominguez.
WATER QUALITY
Dominguez is subject to water quality regulations promulgated by the United
States Environmental Protection Agency (EPA) and the California Department of
Health Services (DHS). Both groundwater and purchased water are subject to
extensive analysis and testing. With occasional minor exceptions, Dominguez
meets all current primary water standards.
Beginning in mid-1997, Dominguez participated, along with many other large
water companies throughout the United States, in an 18-month water sampling
data acquisition program known as the Information Collection Rule. Data
collected will be used by the EPA to establish future drinking water
standards. Under the Federal Safe Drinking Water Act, the EPA is required to
continue to establish new maximum levels for additional chemicals. The costs
of future compliance are unknown, but Dominguez could be required to perform
more quality testing and treatment. Management believes the Company's
financial reserves will be sufficient to meet these anticipated requirements.
During 1999, Dominguez expended $1,786,000 on water supply improvements. In
2000, Dominguez anticipates spending $2,622,000 for water supply capital
improvements.
REGULATORY AFFAIRS
In March 1998, the Commission instituted its own proceeding (Investigation
98-03-013) to investigate whether existing standards and policies of the
Commission regarding drinking water quality adequately protect the public
health and safety with respect to contaminants such as Volatile Organic
Compounds, Perchlorate, and MTBE, and whether those standards and policies
are being uniformly complied with by Commission-regulated utilities. On
February 1, 2000, the Administrative Law Judge issued a draft decision
finding all Class A regulated water utilities (including Dominguez)
satisfactorily complied with DHS regulations and testing requirements. The
Company can not predict the outcome of this proceeding but does not
anticipate any financial impact on the Company.
In October 1997, the Commission instituted its own proceeding to set rules
and provide guidelines for the acquisition and merger of water companies.
This proceeding was initiated to develop guidelines necessary to implement a
new law, referred to as Senate Bill 1268, requiring the Commission to use the
standard of fair-market value when establishing the ratebase value for the
acquired distribution system assets of a public water system. On October 22,
1999, the Commission issued its decision adopting the settlement agreement
reached between RRB and the California Water Association. The settlement
agreement sets forth guidelines regarding the regulatory approval process,
establishing purchase price and incentives to encourage the acquisition of
troubled small water companies. The Company believes that the decision will
facilitate the acquisition of small troubled water companies in the future.
In October 1997, the Commission also instituted its own rulemaking proceeding
to develop rules for public-private partnerships. Dominguez participated with
the Commission staff in workshops; however, all participants failed to reach
a settlement and develop necessary guidelines. On February 1, 2000, the
Administrative Law Judge issued a draft decision imposing a number of
accounting and procedural requirements for regulated water utilities to
engage in the sale of non-tariff goods or services. If the proposed draft
decision is adopted, water utilities will be discouraged from and reluctant
to offer non-tariff goods or services due to the imposed requirements.
In the first quarter of 1999, Dominguez filed a joint application with Cal
Water to approve the merger of their regulated utility companies (see "THE
MERGER" above).
In February 1999, Dominguez filed general rate increase applications for the
South Bay Division and its subsidiaries, Antelope Valley Water Company and
Kern River Valley Water Company. The Commission consolidated the applications
into a single proceeding. In December 1999, the Company and RRB filed
settlement agreements to increase rates by $1,416,000 for test year 2000,
$336,000 for test year 2001 and $113,000 for attrition year 2002. In January
2000, the Leona Valley Town Council filed its opposition to the settlement
agreement filed in the Antelope
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Valley Water Company (AVWC) application. The Administrative Law Judge granted
an evidentiary hearing in the proceeding, limiting issues to the AVWC
application, for March 1, 2000, and scheduled briefs to be filed on March 20,
2000. Because all the applications were consolidated into a single
proceeding, the Commission has postponed its decision on the Dominguez South
Bay and Kern River Valley Water Company rate applications. Dominguez
anticipates that a Commission decision approving all settlement agreements
will be ordered by June 2000.
In July 1999, Dominguez received the Commission's approval to acquire the
assets of Hawkins Water Service, serving 51 customers, for $50,000 cash. The
ratebase for the acquired assets was set at $51,000 and the acquisition
became effective on August 6, 1999.
Dominguez also received the Commission's approval in 1999 to acquire the
assets of Coast Springs Water Company, serving 237 customers, for $180,000
cash. The ratebase for the acquired assets was set at $179,000 and the
acquisition became effective on December 8, 1999.
NON-UTILITY SUBSIDIARY OPERATIONS
DSC Investments invested $350,000 in Chemical Services Corporation (CSC) on
December 20, 1996, and acquired a twenty percent equity ownership with the
option to acquire an additional forty percent through the year 2001. Under
the investment agreements, the Company was obligated to provide working cash
and long-term financing to CSC for the leasing of chlorine generators,
subject to the financial condition of CSC.
In April 1999, a contract was drafted pursuant to which DSC Investments would
sell back its equity ownership to CSC at a premium of $250,000, $160,000 of
which would be applied to Dominguez' purchase of chlorine generation
equipment from CSC. Both parties signed the contract in December of 1999 and
payment was received from CSC in January 2000.
During 1999, DSC Investments facilitated transfers of water right leases
between third parties, adding $718,000 to the Company's revenue. The future
income from the transfer of water right leases will depend upon the demands
for groundwater by major industrial users and water purveyors in the West and
Central Groundwater Basins.
EMPLOYEE RELATIONS
As of December 31, 1999, the Company had a total of 70 employees in utility
and non-utility operations. None of the employees is represented by a labor
organization, and there has never been a work stoppage or interruption due to
a labor dispute. In general, wages, hours, and conditions of employment are
equivalent to those found in the industry. All employees receive paid time
off. Dominguez provides and pays the cost of group life, disability, medical
and dental insurance, as well as pensions, for its employees.
Throughout 1999, a significant effort has been made to communicate with
employees about issues related to the merger with CWSG (see above). Pursuant
to the Merger Agreement, all Dominguez employees were offered equivalent
employment with Cal Water in December 1999.
7
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ENVIRONMENTAL MATTERS
Dominguez' operations are subject to pollution control and water quality
control as discussed in the "Water Quality" section.
Other state and local environmental regulations apply to Dominguez operations
and facilities. These regulations are primarily related to the handling,
storage and disposal of hazardous materials. Dominguez is currently in
compliance with all other state and local regulations.
8
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ITEM 2. PROPERTIES.
The Company's general administrative and executive offices are located at
21718 South Alameda Street in Carson, California. The South Bay Division has
prior rights to lay distribution mains and for other uses on much of the
public and private lands in its service area. Dominguez' claim of prior
rights is derived from the original Spanish land grant covering the Dominguez
service area. For this reason, Dominguez, unlike most other public utilities,
generally receives compensation from the appropriate public authority when
the relocation of its facilities is necessitated by the construction of roads
or other projects. It is common for public utilities to bear the entire cost
of such relocation.
Primarily, the Company is comprised of facilities to pump and distribute both
groundwater and purchased water to residential, commercial, and industrial
customers. As of December 31, 1999, the Company has invested $8,531,000 in
water supply, $34,492,000 in distribution, and $11,322,000 in other operating
facilities. The Company believes that its current facilities are adequate to
meet customer demand, subject to the addition of capital facilities, as the
system requires.
Substantially all of the property of Dominguez is subject to the lien of the
Trust Indenture dated August 1, 1954, as supplemented and amended, to Chase
Manhattan Bank and Trust Company, N.A., as Trustee, securing the two
outstanding series of Dominguez' First Mortgage Bonds.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is routinely involved in legal actions. The Company does not
believe these matters will have a material adverse effect, if any, on its
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) MARKET PRICE FOR COMMON SHARES
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<CAPTION>
1999 High Low
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First Quarter $31.500 $26.250
Second Quarter 31.000 27.000
Third Quarter 34.250 28.063
Fourth Quarter 35.000 27.750
<CAPTION>
1998 High Low
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<S> <C> <C>
First Quarter $23.125 $18.500
Second Quarter 19.500 17.000
Third Quarter 23.500 17.500
Fourth Quarter 31.250 21.250
</TABLE>
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON SHARES
The Nasdaq Stock Market maintenance standards require
that Nasdaq National Market companies have at least
400 shareholders of round lots. As of December 31,
1999, the Company complied with the standard with 291
common shareholders of record and more than 779
beneficial shareholders, who have elected to hold
their shares in street name.
(c) DIVIDENDS DECLARED
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<CAPTION>
Dividend Declared 1999 1998
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<S> <C> <C>
First Quarter $0.2400 $0.2300
Second Quarter 0.2400 0.2300
Third Quarter 0.2400 0.2300
Fourth Quarter 0.2400 0.2300
</TABLE>
(d) DIVIDEND RESTRICTION
The Company's available dividends to its shareholders
are substantially dependent on the availability of
dividends from Dominguez to the Company. Under the
terms of its long-term debt agreements, Dominguez is
limited in its payment of dividends (other than stock
dividends) on all classes of stock to the net income
accrued subsequent to December 31, 1992, plus the sum
of $3,000,000. The approximate unrestricted earnings
available for dividend payments amounted to
$7,052,000 as of December 31, 1999.
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(e) NEW SHARES ISSUED DURING 1999
In January 1999, the Company issued 54,467 shares of
its common stock in connection of its acquisition of
certain water companies. The Company stock issued was
exempted from registration under the Security Act of
1933 pursuant to Sec. 5(2) of the Act and or
regulation D promulgated under the Act. In December
1999, the Company issued 2,800 shares of its common
stock in connection with stock options that were
exercised by an executive.
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ITEM 6. SELECTED FINANCIAL DATA.
ELEVEN YEAR STATISTICAL REVIEW
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS: (DOLLARS IN
THOUSANDS)
Operating revenue $ 28,497 $ 25,267 $ 26,818 $ 24,703 $ 25,486
Operating expenses (before taxes) 24,273 22,128 22,652 20,745 21,376
Other taxes 583 566 552 448 455
Other expenses 130 66 40 33 7
Other income (1,134) (718) (590) (475) (165)
Interest cost 964 870 758 659 683
Income taxes 1,439 932 1,385 1,314 1,177
Income before extraordinary item 2,242 1,423 2,021 1,981 1,953
Extraordinary item, net of tax 190 499 -- -- --
Net income 2,052 924 2,021 1,981 1,953
Dividends paid 1,498 1,386 1,306 1,247 1,170
Reinvested in the business 554 (462) 715 734 783
PER COMMON SHARE DATA: *
Earnings-Before extraordinary item $ 1.43 $ 0.94 $ 1.34 $ 1.31 $ 1.29
Earnings-Basic and diluted $ 1.31 $ 0.61 $ 1.34 $ 1.31 $ 1.29
Dividends $ 0.96 $ 0.92 $ 0.87 $ 0.83 $ 0.77
Payout percentage 73.28% 150.82% 64.68% 63.00% 60.00%
Book value $ 11.13 $ 10.54 $ 10.85 $ 10.37 $ 9.89
Return on common equity (average) 12.31% 5.70% 12.60% 13.00% 13.40%
Year end market price $ 30.25 $ 28.00 $ 21.50 $ 15.00 $ 12.33
Market to book ratio at
yearend 271.80% 265.60% 198.20% 144.60% 124.70%
Number shares outstanding 1,563,779 1,506,512 1,506,512 1,506,512 1,506,512
BALANCE SHEET DATA: (DOLLARS IN THOUSANDS)
Gross utility plant $ 75,334 $ 68,701 $ 63,510 $ 60,069 $ 57,271
Net utility plant 54,345 49,724 46,020 43,544 41,358
Non-utility plant -- 101 110 49 67
Total assets 57,889 52,635 51,661 46,875 45,295
CAPITALIZATION: (Dollars in Thousands)
Long-term debt $ 12,294 $ 11,217 $ 11,194 $ 7,036 $ 7,273
Preferred stock -- -- -- -- 98
Common equity 17,402 15,879 16,341 15,626 14,896
Total capitalization 29,696 27,096 27,535 22,662 22,267
Interim debt 400 450 -- 800 --
CAPITALIZATION RATIOS:
Long-term debt 41.40% 41.40% 40.65% 31.00% 32.70%
Preferred stock --% -- -- -- 0.40%
Common equity 58.60% 58.60% 59.35% 69.00% 66.90%
Total 100.00% 100.00% 100.00% 100.00% 100.00%
OTHER UTILITY STATISTICS:
Customers at year-end 39,916 37,882 37,636 36,882 36,739
Water sales (millions of gallons) 13,013 11,569 12,362 11,481 12,371
Average revenue per customer $ 684.99 $ 650.22 $ 688.10 $ 650.07 $ 665.70
Utility employees 70 70 73 77 78
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1994 1993 1992 1991 1990
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<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS: (DOLLARS IN THOUSANDS)
Operating revenue $ 23,569 $ 22,193 $ 21,813 $ 18,706 $ 19,139
Operating expenses (before taxes) 19,419 18,139 18,327 15,677 15,869
Other taxes 432 406 397 323 321
Other expenses 29 20 17 32 41
Other income (297) (353) (85) (73) (186)
Interest cost 714 732 586 606 633
Income taxes 1,340 1,243 1,031 807 1,087
Income before extraordinary item 1,932 2,006 1,540 1,334 1,374
Extraordinary item, net of tax -- -- -- -- --
Net income 1,932 2,006 1,540 1,334 1,374
Dividends paid 1,110 1,070 1,009 989 965
Reinvested in the business 822 936 531 345 409
PER COMMON SHARE DATA: *
Earnings-Before extraordinary item $ 1.28 $ 1.33 $ 1.02 $ 0.88 $ 0.91
Earnings-Basic and diluted $ 1.28 $ 1.33 $ 1.02 $ 0.88 $ 0.91
Dividends $ 0.73 $ 0.71 $ 0.67 $ 0.65 $ 0.64
Payout percentage 57.50% 53.50% 65.40% 74.20% 70.10%
Book value $ 9.35 $ 8.82 $ 8.19 $ 7.85 $ 7.60
Return on common equity (average) 14.10% 15.60% 12.80% 11.40% 12.20%
Year end market price $ 11.17 $ 14.00 $ 10.83 $ 10.00 $ 9.50
Market to book ratio at yearend 119.40% 158.70% 132.20% 127.40% 125.00%
Number shares outstanding 1,506,512 1,506,512 1,506,512 1,506,512 1,497,555
BALANCE SHEET DATA: (DOLLARS IN THOUSANDS)
Gross utility plant $ 55,406 $ 52,260 $ 51,037 $ 50,161 $ 46,710
Net utility plant 40,022 37,977 37,511 33,793 31,713
Non-utility plant 67 51 105 105 104
Total assets 44,652 42,662 40,275 39,596 37,477
CAPITALIZATION: (Dollars in Thousands)
Long-term debt $ 7,326 $ 7,493 $ 7,657 $ 3,829 $ 3,766
Preferred stock 98 98 98 98 98
Common equity 14,092 13,284 12,348 11,817 11,383
Total capitalization 21,516 20,875 20,103 15,744 15,275
Interim debt -- -- -- 3,375 2,725
CAPITALIZATION RATIOS:
Long-term debt 34.00% 35.90% 38.10% 24.30% 24.70%
Preferred stock 0.50% 0.50% 0.50% 0.60% 0.80%
Common equity 65.50% 63.60% 61.40% 75.10% 74.50%
Total 100.00% 100.00% 100.00% 100.00% 100.00%
OTHER UTILITY STATISTICS:
Customers at year-end 36,371 36,107 36,043 35,949 34,444
Water sales (millions of gallons) 12,071 11,359 11,731 10,906 12,957
Average revenue per customer $ 619.90 $ 561.27 $ 481.35 $ 423.35 $ 490.32
Utility employees 76 75 69 71 64
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1989
- -----------------------------------------------------------------
<S> <C>
SUMMARY OF OPERATIONS: (DOLLARS IN THOUSANDS)
Operating revenue $ 20,359
Operating expenses (before taxes) 16,885
Other taxes 330
Other expenses 18
Other income (38)
Interest cost 577
Income taxes 1,110
Income before extraordinary item 1,507
Extraordinary item, net of tax --
Net income 1,507
Dividends paid 940
Reinvested in the business 567
PER COMMON SHARE DATA: *
Earnings-Before extraordinary item $ 0.98
Earnings-Basic and diluted $ 0.98
Dividends $ 0.61
Payout percentage 62.60%
Book value $ 7.32
Return on common equity (average) 14.00
Year end market price $ 9.83
Market to book ratio at yearend 134.30%
Number shares outstanding 1,497,555
BALANCE SHEET DATA: (DOLLARS IN THOUSANDS)
Gross utility plant $ 45,205
Net utility plant 31,233
Non-utility plant 101
Total assets 36,513
CAPITALIZATION: (Dollars in Thousands)
Long-term debt $ 4,059
Preferred stock 142
Common equity 10,968
Total capitalization 15,169
Interim debt 950
CAPITALIZATION RATIOS:
Long-term debt 26.80%
Preferred stock 0.90%
Common equity 72.30%
Total 100.00%
OTHER UTILITY STATISTICS:
Customers at year-end 34,189
Water sales (millions of gallons) 13,339
Average revenue per customer $ 501.95
Utility employees 56
</TABLE>
* Adjusted to reflect 3-for-2 stock split effected
January, 1998.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENT
In connection with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (Reform Act), the Dominguez Services
Corporation (the Company) is hereby filing cautionary statements identifying
important factors that could cause the Company's actual results to differ
materially from those projected in forward-looking statements (as defined in
the Reform Act) made by or on behalf of the Company in this Annual Report.
Any statements that express such statements are often, but not always,
expressed with phrases such as expectations, beliefs, plans, objectives,
assumptions, or future events or performance, through the use of words or
phrases such as "anticipate," "believes," "estimates," "expects," "intends,"
"plans," "predicts," "projects," "will likely result," and "will continue."
Such statements are not statements of historical facts and may be
forward-looking.
Forward-looking statements involve estimates, assumptions, and
uncertainties and are qualified in their entirety by reference to the
following important factors, which are difficult to predict, contain
uncertainties, are beyond the control of the Company, and could cause actual
results to differ materially from those contained in forward-looking
statements:
- prevailing governmental policies and regulatory actions,
including those of the California Public Utilities Commission
( the Commission), with respect to allowed rates of return,
authorization of regulated rates, industry and rate structure,
acquisition and disposal of assets and facilities, operation
and construction of plant facilities, recovery of balancing
account, and present or prospective competition;
- economic and geographic factors including political and
economic risks;
- changes in and compliance with environmental and safety laws
and policies;
- water supply and weather conditions;
- customer growth rate;
- merger issues:
- delays or change in anticipated closing date;
- likelihood of approval by regulatory agencies;
- changes in tax rates or policies or in rates of inflation;
- unanticipated changes in operating expenses and capital
expenditures;
- emergency preparedness;
- capital market conditions;
- competition for non-regulatory opportunities; and
- legal and administrative proceedings and settlements that
influence the business and profitability of the Company.
Any forward-looking statement speaks only as of the date on which
such statement is made, and the Company undertakes no obligation to update
any forward-looking statement to reflect events or circumstances after the
date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time and it is not
possible for management to predict all of such factors, nor can it assess the
impact of any such factor on the business, or the extent to which any factor,
or combination of factors, may cause results to differ materially from those
contained in any forward-looking statement.
14
<PAGE>
GENERAL
The following discussion should be read in conjunction with the
accompanying Consolidated Financial Statements and with the Eleven-Year
Statistical Review in this report. A description of the regulated and
non-regulated businesses is contained in Note 17 of Notes to Consolidated
Financial Statements.
The Company has two wholly-owned subsidiaries: Dominguez Water
Company and its operating subsidiaries (Dominguez), which are involved in
regulated water supply and distribution, and DSC Investments, which is
involved in non-regulated, water-related services and investments.
Dominguez is regulated by the Commission and, as such, must obtain
the Commission's approval to increase water rates to recover increases in
operating expenses and authorization to include reinvested capital in
ratebase. Most variations in revenues are due to weather conditions and the
water usage of major industrial customers.
Dominguez is comprised of its principal division, (the South Bay
Division), and its operating subsidiaries, the Kern River Valley Water
Company, the Antelope Valley Water Company and Redwood Valley Water Company
Division (collectively referred to as the "Subsidiaries"). The South Bay
Division has been providing water service for more than 88 years to its
customers. Currently, the South Bay Division serves approximately 32,637
customers in a 35 square mile area including most of Carson, one-quarter of
Torrance, and parts of Compton, Long Beach, Los Angeles, Los Angeles County,
and Harbor City. The Kern River Valley Water Company and the Antelope Valley
Water Company provide water service to approximately 4,096 and 1,271
customers, respectively. In 1998, Dominguez formed the Redwood Valley Water
Company Division to acquire certain water companies located in northern
California. Redwood Valley Water Company Division serves approximately 1,912
customers in six service areas.
DSC Investments is primarily engaged in the transfer of water right
leases between third parties. Income from the transfer of water right leases
may significantly vary from year to year due to demands for groundwater by
major pumpers in the West and Central Groundwater Basins.
THE MERGER
On November 13, 1998, the Company executed an Agreement and Plan of
Reorganization (the Merger Agreement) to merge with California Water Service
Group (CWSG), the parent of California Water Service Company (Cal Water) and
CWS Utility Services. Under the terms of the November 1998 Merger Agreement,
each share of the Company's common stock issued and outstanding on the
closing date would be converted into the right to receive 1.18 shares of CWSG
common stock. The Company's Board of Directors (Board) received the opinion
of its financial advisor, PaineWebber Inc., that this exchange ratio would be
fair to the shareholders of the Company's common stock from a financial point
of view. And, the Company expected that the proposed merger will be treated
as a tax-free transaction under the applicable provisions of the Internal
Revenue Code. Shares of CWSG common stock are traded under the symbol "CWT"
on the New York Stock Exchange. CWSG operations provide water utility
services to over 1.5 million people in 58 California communities.
On March 16, 1999, the Company announced that it had received an
unsolicited proposal from American States Water Company (ASWC) offering to
acquire all of the Company's outstanding common stock in a stock-for-stock
merger. Under the ASWC proposal, each share of the Company's common stock
would have been converted into the right to receive a number of ASWC shares
intended to provide $32.50 of value for each of the Company's shares. The
ASWC proposal also provided for a collar pursuant to which the minimum and
maximum conversion ratios would be 1.11 and 1.35 ASWC shares for each Company
share. The Company's financial advisor advised the Company's Board that this
proposal was more favorable to the Company's shareholders than the terms of
the Merger Agreement.
15
<PAGE>
On March 22, 1999, the Company and CWSG executed an amendment to the
November 1998 Merger Agreement which provides that each share of the
Company's common stock will be converted into the right to receive a number
of CWSG shares intended to provide $33.75 of value for each of the Company's
shares. The amendment to the Merger Agreement also provides that the minimum
and maximum conversion ratios will be 1.25 and 1.49 CWSG shares for each
Company share.
At a special meeting on May 12, 1999, Company shareholders
overwhelmingly approved the Merger Agreement as amended. All regulatory
approvals have been received, with the exception of that of the Commission.
In its initial report filed in October 1999, the Commission staff recommended
disapproval of the merger. Subsequently, CWSG and the Company issued a
guarantee that customer rates would not increase as a result of the merger,
expressing confidence that synergies achieved by the merger would offset
merger costs.
In succeeding discussions with Commission's Ratepayer Representation
Branch (RRB), Cal Water and Dominguez proposed an enhanced guarantee, which
included provisions that customer rates would not increase as a result of the
merger, that Dominguez customers would continue to receive financial benefit
of water rights currently owned by Dominguez, and that a portion of operating
synergies achieved over those needed to offset merger costs be returned to
customers. RRB of the Commission staff testified to its support of the
merger, with the enhanced guarantee, on December 7, 1999. In a proposed
decision issued in February 2000, the Administrative Law Judge recommended
approval of the merger with certain conditions, many of which were proposed
by Cal Water and Dominguez in the enhanced guarantee. Oral arguments were
scheduled for March 2000, with a decision is expected in the second quarter.
Pursuant to the Merger Agreement, if regulatory approval is not
received or if either the Company or CWSG decide not to complete the merger,
certain payments are required under the terms of the Merger Agreement.
RESULTS OF OPERATIONS 1999 COMPARED TO 1998
Operating revenue totaled $28,497,000 for 1999; an increase of
$3,230,000, or 12.8%, from the $25,267,000 recorded for 1998. Revenue growth
in 1999 was attributable to higher sales and the acquisition of Redwood
Valley Water Company Division. Consumption by residential and multi-family
customers increased by 9.1% and by business-industrial customers by 15.4%.
Redwood brought in $643,000 in sales.
Operating expenses before taxes increased by $2,145,000, or 9.69%,
compared to 1998. Operating expenses are comprised of several different
components, including purchased and pumped water costs, operations and
maintenance expenses and depreciation expense. Pumped and purchased water
cost increases are primarily attributed to the higher sales. During the year
the Company increased its pumping capacity by the completion of the well
rehabilitation program which contributed to increased margin. Operations and
maintenance expenses, and depreciation expense decreased in 1999 by $67,000,
or 1.0%, and increased by $293,000, or 4.2% in 1998.
Other income increased by $416,000, or 58%, due to increased
activity in the transfer of water right leases and operating contracts.
Interest costs increased by $94,000, or 11%. Additional interest
costs came from loans absorbed from the newly acquired water companies during
1999.
The extraordinary item related to merger expenses totaled $290,000
with a tax effect of $100,000 during 1999, comparing to merger expenses of
$814,000 during 1998 with the tax effect of the extraordinary item $315,000.
Net income increased by $1,128,000, or 122%, due to the reasons mentioned
above. Earnings per share increased to $1.31 from $.61. The Company raised
its annual dividend to common shareholders to $.96 in 1999 from $.92 in 1998,
an increase of 4.4%.
16
<PAGE>
RESULTS OF OPERATIONS 1998 COMPARED TO 1997
Operating revenue totaled $25,267,000 for 1998, a decrease of
$1,551,000, or 5.8%, from the $26,818,000 recorded for 1997. The decrease in
revenue is due to a reduction in water sales. Consumption by residential and
multi-family customers decreased by 6.2% and by business-industrial customers
by 5.0%.
Operating expenses before taxes decreased by $524,000, or 2.3%,
compared to 1997. Operating expenses are comprised of several different
components, including purchased and pumped water costs, operations and
maintenance expenses and depreciation expense. Operations and maintenance
expenses, and depreciation expense, increased in 1998 by $293,000, or 4.2%,
and $98,000, or 7.3%, respectively. However, the cost to pump and purchase
water decreased by a combined total of $915,000, or 6.4%. This is primarily
attributed to lower sales and a resulting decrease in production costs.
During 1998, the Company received a grant from the Water Replenishment
District of Southern California (WRD), a water district responsible for the
oversight and management of the West and Central Groundwater Basins, of which
approximately $390,000 was applied to production costs. The reduction in cost
would have been greater if several wells had not been out of service for
rehabilitation. While the wells were not in service, higher priced purchased
water was supplied to our customers.
Other income increased by $102,000, or 19%, due to increased
activity in the transfer of water right leases and operating contracts.
Interest costs increased by $112,000, or 15%, due to a new bond
issuance in December 1997.
The extraordinary item related to merger expenses totaled $814,000.
The tax effect of the extraordinary item is $315,000.
Net income before the extraordinary item decreased by $598,000, or
29.6%, due to the reasons mentioned above. Earnings per share before the
extraordinary item on common equity decreased from $1.34 to $.94. The Company
raised its annual dividend to common shareholders to $.92 in 1998 from $.87
in 1997, an increase of 5.8%.
RESULTS OF OPERATIONS 1997 COMPARED TO 1996
Operating revenue totaled $26,818,000 for 1997, an increase of
$2,113,000, or 8.6%, over the $24,705,000 recorded for 1996. The increased
revenue is due to higher sales to industrial customers and higher rates in
the South Bay Division to cover the higher cost of imported water. Industrial
sales increased by $1,419,000, or 13.8%.
Operating expenses before taxes increased by $1,907,000, or 9.2%,
primarily due to an increase in the cost of water. Additional water was
purchased from West Basin to cover the increased water sales. The overall
margin on water sales decreased from 52% to 47% due to additional water
purchased. Operations and maintenance costs decreased by $476,000, or 6.3%.
Other income increased by $108,000, or 24%, due to increased
activity in the transfer of water right leases.
Interest costs increased by $99,000, or 15%, due to additional
borrowings for capital improvements during 1997.
Net income increased $40,000, or 2%, due to the reasons mentioned
above. Earnings per share on common equity increased from $1.31 to $1.34. The
Company raised its annual dividend to common shareholders to $.87 in 1997
from $.83 in 1996, an increase of 4.8%.
Effective January 2, 1998, the Company split its common stock
three-for-two for shareholders of record on December 15, 1997. The Company
paid cash in lieu of issuing fractional shares based on the closing price as
of December 15, 1997. The par value of the common stock remained unchanged.
Financial data in this report is adjusted to reflect the change.
LIQUIDITY AND CAPITAL RESOURCES
The Company's continuing operations provided sufficient cash in 1999
to cover operating expenses, interest and dividends. In 1999, Dominguez
invested $3,450,000 in utility plant improvements. Approximately $264,000 was
contributed or advanced by developers.
17
<PAGE>
The Company has available $4,500,000 under a revolving credit
facility with Bank of America. As of December 31, 1999 and 1998, short-term
borrowing under the facility totaled $400,000 and $450,000 respectively. If
the Merger does not close, the Company will renew the credit facility when it
expires in June 2000.
The Company's 2000 capital budget is $4,274,000. Budgeted
improvements include $2,622,000 for water production facilities and storage,
an $850,000 investment to accommodate a regional recycled water treatment
plant, and $433,000 for pipeline replacements. The Company will fund budgeted
improvements from earnings available for reinvestment and short-term
borrowings, if necessary.
In December 1997, Dominguez entered into a recycled water agreement
with the West Basin Municipal Water District (West Basin) and ARCO. Under the
terms of the agreement, Dominguez will sell ARCO recycled water purchased
from West Basin for the same cost margin that Dominguez would otherwise have
received providing ARCO with potable water. The recycled water plant was
completed in December of 1999, and became fully operational in January 2000.
Having access to recycled water will reduce the South Bay Division's demand
for imported water, the availability of which may be uncertain in the future.
Reduced imported water supplies and annual population growth could create
future drought conditions in Southern California; however, Dominguez believes
that the availability of recycled water will significantly mitigate the
impact of future droughts in the South Bay Division service area.
In 1998, WRD awarded a grant to Dominguez of $1,820,000. Dominguez
received the first of its two payments for $910,000 in 1998 and received the
second payment for $910,000 in 1999. Dominguez used approximately $670,000 to
offset the cost of purchasing higher-priced imported water in lieu of pumping
its groundwater rights. The balance of the funds, approximately $1,150,000,
will be used to meet Dominguez' expected $2,000,000 commitment in recycled
water facilities, leaving a balance of $850,000 to be funded by Dominguez.
REGULATORY AFFAIRS
In March 1998, the Commission instituted its own proceeding
(Investigation 98-03-013) to investigate whether existing standards and
policies of the Commission regarding drinking water quality adequately
protect the public health and safety with respect to contaminants such as
Volatile Organic Compounds, Perchlorate, and MTBE, and whether those
standards and policies are being uniformly complied with by
Commission-regulated utilities. On February 1, 2000, the Administrative Law
Judge issued a draft decision finding all Class A regulated water utilities
(including Dominguez) satisfactorily complied with DHS regulations and
testing requirements. The Company can not predict the outcome of this
proceeding but does not anticipate any financial impact on the Company.
In October 1997, the Commission instituted its own proceeding to set
rules and provide guidelines for the acquisition and merger of water
companies. This proceeding was initiated to develop guidelines necessary to
implement a new law, referred to as Senate Bill 1268, requiring the
Commission to use the standard of fair-market value when establishing the
ratebase value for the acquired distribution system assets of a public water
system. On October 22, 1999, the Commission issued its decision adopting the
settlement agreement reached between RRB and the California Water
Association. The settlement agreement sets forth guidelines regarding the
regulatory approval process, establishing purchase price and incentives to
encourage the acquisition of troubled small water companies. The Company
believes that the decision will facilitate the acquisition of small troubled
water companies in the future.
In October 1997, the Commission also instituted its own rulemaking
proceeding to develop rules for public-private partnerships. Dominguez
participated with the Commission staff in workshops; however, all
participants failed to reach a settlement and develop necessary guidelines.
On February 1, 2000, the Administrative Law Judge issued a draft decision
imposing a number of accounting and procedural requirements for regulated
water utilities to engage in the sale of non-tariff goods or services. If the
proposed draft decision is adopted, water utilities will be discouraged, from
and reluctant to offer non-tariff goods or services due to the imposed
requirements.
In the first quarter of 1999, Dominguez filed a joint application
with Cal Water to approve the merger of their regulated utility companies
(see "THE MERGER" above).
In February 1999, Dominguez filed general rate increase applications
for the South Bay Division and its subsidiaries, Antelope Valley Water
Company and Kern River Valley Water Company. The Commission consolidated the
applications into a single proceeding. In December 1999, the Company and RRB
filed settlement agreements to increase rates by $1,416,000 for test year
2000, $336,000 for test year 2001 and $113,000 for attrition year 2002. In
18
<PAGE>
January 2000, the Leona Valley Town Council filed its opposition to the
settlement agreement filed in the Antelope Valley Water Company (AVWC)
application. The Administrative Law Judge granted an evidentiary hearing in
the proceeding, limiting issues to the AVWC application, for March 1, 2000,
and scheduled briefs to be filed on March 20, 2000. Because all the
applications were consolidated into a single proceeding, the Commission has
postponed its decision on the Dominguez South Bay and Kern River Valley Water
Company rate applications. Dominguez anticipates that a Commission decision
approving all settlement agreements will be ordered by June 2000.
In July 1999, Dominguez received the Commission's approval to
acquire the assets of Hawkins Water Service, serving 51 customers, for
$50,000 cash. The ratebase for the acquired assets was set at $51,000 and the
acquisition became effective on August 6, 1999.
Dominguez also received the Commission's approval in 1999 to acquire
the assets of Coast Springs Water Company, serving 237 customers, for
$180,000 cash. The ratebase for the acquired assets was set at $179,000 and
the acquisition became effective on December 8, 1999.
NON-UTILITY SUBSIDIARY OPERATIONS
DSC Investments invested $350,000 in Chemical Services Corporation
(CSC) on December 20, 1996, and acquired a twenty percent equity ownership
with the option to acquire an additional forty percent through the year 2001.
Under the investment agreements, the Company was obligated to provide working
cash and long-term financing to CSC for the leasing of chlorine generators,
subject to the financial condition of CSC.
In April 1999, a contract was drafted pursuant to which DSC
Investments would sell back its equity ownership to CSC at a premium of
$250,000, $160,000 of which would be applied to Dominguez' purchase of
chlorine generation equipment from CSC. Both parties signed the contract in
December of 1999 and payment was received from CSC in January 2000.
During 1999, DSC Investments facilitated transfers of water right
leases between third parties, adding $718,000 to the Company's revenue. The
future income from the transfer of water right leases will depend upon the
demand for groundwater by major industrial users and water purveyors in the
West and Central Groundwater Basins.
ENVIRONMENTAL MATTERS
Dominguez is subject to water quality regulations promulgated by the
United States Environmental Protection Agency (EPA) and the California
Department of Health Services (DHS). Both groundwater and purchased water are
subject to extensive analysis and testing. With occasional minor exceptions,
Dominguez meets all current primary water standards.
Beginning in mid-1997, Dominguez participated, along with many other
large water companies throughout the United States, in an 18-month water
sampling data acquisition program known as the Information Collection Rule.
Data collected will be used by the EPA to establish future drinking water
standards. Under the Federal Safe Drinking Water Act, the EPA is required to
continue to establish new maximum levels for additional chemicals. The costs
of future compliance are unknown, but Dominguez could be required to perform
more quality testing and treatment. Management believes the Company's
financial reserves will be sufficient to meet these anticipated requirements.
During 1999, Dominguez expended $1,786,000 on water supply improvements. In
2000, Dominguez anticipates spending $2,622,000 for water supply capital
improvements.
WATER SUPPLY
Dominguez obtains its water supplies from its own groundwater wells,
a surface water source plus two water wholesalers of imported water.
All Dominguez' service areas, except for the Lucerne service area
(Lucerne) of Redwood Valley Water Company Division, obtain either a portion
or all of their supply from groundwater wells. Lucerne has a surface water
treatment plant. The quantity that the South Bay Division is allowed to pump
over a year's time is fixed by court adjudication. The adjudication
established distinct groundwater basins that are managed by a court-appointed
watermaster. The groundwater management fixes the safe yield of the basins
and ensures the replenishment of the basins by utilizing impounded storm
water, treated recycled water and treated purchased water when necessary.
Groundwater basins have not been adjudicated in the Subsidiaries.
19
<PAGE>
The South Bay Division and Leona Valley service area of Antelope
Valley Water Company purchase water from wholesalers to supplement
groundwater. The South Bay Division purchases imported water from the
Metropolitan Water District (MWD) of Southern California through West Basin.
The Leona Valley service area purchases its imported water from the Antelope
Valley - East Kern Water Agency (AVEK). Both of these wholesale suppliers
obtain water from the California State Water Project (SWP), and MWD also
obtains water from the Colorado River.
Long-term imported water supplies depend upon several factors.
Dominguez' future dependency on imported water will be subject to the
availability and usage of recycled water in the region as well as customer's
long-term water conservation efforts. Dominguez has and will continue to
promote long-term water conservation efforts and will advance the use of
recycled water.
Legislative actions continue to play a role in the long-term
availability of water for southern California. The amount of SWP water
available from northern California and water imported from the Colorado River
may be significantly reduced around the beginning year 2000. Even with the
use of recycled water and continuing conservation efforts, future drought
conditions may require water rationing by all water agencies and purveyors,
including Dominguez.
20
<PAGE>
ACCOUNTING STANDARDS
The Company currently applies accounting standards that recognize
the economic effects of rate regulation and records regulatory assets and
liabilities related to water distribution operations. If rate recovery of
water-related costs becomes unlikely or uncertain, whether due to competition
or regulatory action, these accounting standards may no longer apply. This
change could result in the write-off of costs in an amount that could be
material. However, based on a current evaluation of the various factors and
conditions that are expected to affect future cost recovery, management
believes that its regulatory assets will likely be recovered in the future.
In 1998, the Financial Accounting Stands Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is to be adopted by 2001. The
Statement establishes new accounting and reporting standards for derivative
financial instruments and hedging activities. The Company does not expect the
adoption of the Standard to have a material impact on the Company's results
of operations or financial statements.
YEAR 2000
The Company successfully transitioned from 1999 to 2000 without
technology or customer service disruptions as a result of preparation efforts
by our employees. Year 2000 (Y2K) project teams were assembled to ensure the
Company's Y2K preparedness.
The estimated cost for Y2K preparedness was approximately $36,000.
The Company has existing contingency plans in place for events such as
extreme heat, storms, equipment failures, and accidents. Y2K contingency
plans were based on the framework of existing emergency management system
preparation and scenario development, and addressed the most reasonably
likely worst case scenarios that could occur in the event that various Y2K
issues are not resolved in a timely manner. Contingency planning is an
ongoing process, which the Company continues to perform.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PAR) DECEMBER 31, 1999 1998
---- ----
<S> <C> <C>
ASSETS:
PROPERTY, PLANT AND EQUIPMENT
UTILITY PLANT $ 72,786 $ 66,402
NON-UTILITY PLANT - 101
--------------------
72,786 66,503
LESS: ACCUMULATED DEPRECIATION 26,298 23,949
--------------------
46,488 42,554
LAND AND LAND RIGHTS 1,016 964
WATER RIGHTS AND OTHER INTANGIBLE ASSETS 611 544
CONSTRUCTION WORK IN PROGRESS 921 791
--------------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 49,036 44,853
CASH AND CASH EQUIVALENTS INCLUDING RESTRICTED CASH OF $724 IN 1999 AND $542
IN 1998 942 709
ACCOUNTS RECEIVABLE
CUSTOMERS, LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $304 IN 1999 AND $301
IN 1998 1,800 1,348
UNBILLED REVENUES 1,054 1,009
OTHER 1,395 162
MATERIALS AND SUPPLIES, AT AVERAGE COST 18 30
PREPAYMENTS AND OTHER 964 1,322
PRODUCTION COST BALANCING ACCOUNT 5 5
INCOME TAXES RECEIVABLE 204 281
DEFERRED TAX ASSETS 174 127
--------------------
TOTAL CURRENT ASSETS 6,556 4,993
--------------------
NOTES RECEIVABLE 137 113
INVESTMENT IN AND LOAN TO CHEMICAL SERVICES COMPANY - 450
PREPAID TAXES AND OTHERS 1,010 1,076
DEFERRED CHARGES 341 341
INCOME TAX RELATED DEFERRED CHARGES 809 809
--------------------
TOTAL ASSETS $ 57,889 $ 52,635
====================
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
<TABLE>
<S> <C> <C>
CAPITALIZATION AND LIABILITIES:
COMMON SHAREHOLDERS' EQUITY
COMMON SHARES:
PAR VALUE $1
AUTHORIZED: 4,000,000 SHARES
ISSUED: 1,563,779 SHARES $ 1,564 $ 1,506
PAID-IN CAPITAL 2,917 2,006
RETAINED EARNINGS 12,921 12,367
--------------------
TOTAL COMMON SHAREHOLDERS' EQUITY 17,402 15,879
LONG-TERM DEBT 12,294 11,217
--------------------
TOTAL CAPITALIZATION 29,696 27,096
CURRENT MATURITIES OF LONG-TERM DEBT 96 56
CURRENT PORTION OF ADVANCES FOR CONSTRUCTION 164 169
ACCOUNTS PAYABLE 3,041 3,115
INTERIM DEBT 400 450
OTHER ACCRUED EXPENSES 2,021 1,367
--------------------
TOTAL CURRENT LIABILITIES 5,722 5,157
--------------------
ADVANCES FOR CONSTRUCTION 5,401 5,487
CONTRIBUTIONS IN AID OF CONSTRUCTION 6,262 6,220
DEFERRED INCOME TAXES 4,369 4,054
UNAMORTIZED INVESTMENT TAX CREDIT 254 265
ACCRUED PENSION COST 1,642 1,343
DEFERRED CREDITS 4,543 3,013
--------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 57,889 $ 52,635
====================
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUE $28,497 $ 25,267 $ 26,818
------------------------------------
OPERATING EXPENSES:
PURCHASED WATER 11,644 10,580 10,235
OTHER PRODUCTION COSTS 3,918 2,770 4,030
OPERATIONS 6,250 6,312 6,060
MAINTENANCE 1,017 1,027 986
DEPRECIATION 1,444 1,439 1,341
PROPERTY TAXES 362 321 298
OTHER TAXES 221 245 254
INCOME TAXES 1,439 932 1,385
------------------------------------
TOTAL OPERATING EXPENSES 26,295 23,626 24,589
------------------------------------
OPERATING INCOME 2,202 1,641 2,229
OTHER INCOME (EXPENSES):
INTEREST AND AMORTIZATION OF DEBT EXPENSE (964) (870) (758)
WATER RIGHTS 718 549 438
OTHER 286 103 112
------------------------------------
NET INCOME BEFORE EXTRAORDINARY ITEM 2,242 1,423 2,021
------------------------------------
EXTRAORDINARY ITEM, NET OF TAXES IN THE AMOUNTS OF $100 AND $315 (190) (499) -
------------------------------------
NET INCOME $ 2,052 $ 924 $ 2,021
====================================
EARNINGS PER COMMON SHARE, BEFORE EXTRAORDINARY ITEM $ 1.43 $ 0.94 $ 1.34
------------------------------------
EARNINGS PER COMMON SHARE, BASIC AND DILUTED $ 1.31 $ 0.61 $ 1.34
------------------------------------
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
COMMON SHARES:
BEGINNING BALANCE $ 1,506 $ 1,506 $ 1,506
STOCK ISSUANCE 58 - -
------------------------------------
ENDING BALANCE 1,564 1,506 1,506
------------------------------------
PAID-IN-CAPITAL:
BEGINNING BALANCE 2,006 2,006 2,006
STOCK ISSUANCE 911 - -
------------------------------------
ENDING BALANCE 2,917 2,006 2,006
------------------------------------
RETAINED EARNINGS:
BEGINNING BALANCE 12,367 12,829 12,114
NET INCOME 2,052 924 2,021
CASH DIVIDENDS, COMMON
1999 - $0.96 PER SHARE (1,498) -
1998 - $0.92 PER SHARE - (1,386) -
1997 - $0.87 PER SHARE - - (1,306)
------------------------------------
ENDING BALANCE 12,921 12,367 12,829
------------------------------------
TOTAL COMMON SHAREHOLDERS' EQUITY $17,402 $ 15,879 $ 16,341
====================================
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 2,052 $ 924 $ 2,021
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 1,444 1,439 1,355
DEFERRED INCOME TAXES AND INVESTMENT TAX CREDITS 304 230 186
GAIN ON SALE OF CHEMICAL SERVICES COMPANY (250) - -
CHANGES IN ASSETS AND LIABILITIES:
CUSTOMER RECEIVABLE, NET (452) 749 (469)
OTHER RECEIVABLE (884) 162 (145)
RECEIVABLE FROM CSC 250 - -
MATERIALS AND SUPPLIES 12 9 7
NOTES RECEIVABLE (24) 9 8
INCOME TAX RELATED DEFERRED CHARGES - 30 (1)
ACCOUNTS PAYABLE (74) (42) 896
INCOME TAXES 77 (415) (102)
ACCRUED PENSION COST 299 343 40
OTHER, NET 1,693 (304) 344
-----------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,449 3,134 4,140
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (4,026) (5,183) (3,580)
PURCHASE OF WATER PROPERTIES (80) - -
PURCHASE OF CHEMICAL SERVICES COMPANY - - (312)
-----------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (4,106) (5,183) (3,892)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM ADVANCES FOR CONSTRUCTION 45 235 347
PROCEEDS FROM CONTRIBUTIONS IN AID OF CONSTRUCTION 219 326 170
REPAYMENT OF ADVANCES FOR CONSTRUCTION (154) (179) (189)
ISSUANCE OF COMMON STOCK 46 - -
ISSUANCE OF FIRST MORTGAGE BOND - - 5,000
REPAYMENT OF LONG-TERM DEBT (78) (52) (2,090)
WORKING CASH (LOAN TO) REPAYMENT FROM CHEMICAL SERVICES COMPANY 450 300 (400)
PROCEEDS FROM THE DEPARTMENT OF WATER RESOURCES LOAN - - 463
WRD GRANT 910 910 -
PROCEEDS FROM (REPAYMENT OF) INTERIM DEBT (50) 450 (800)
DIVIDENDS PAID (1,498) (1,386) (1,306)
-----------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES $ (110) $ 604 $ 1,195
-----------------------------------
NET INCREASE (DECREASE) IN CASH 233 (1,445) 1,433
CASH AT BEGINNING OF YEAR 709 2,154 711
-----------------------------------
CASH AT END OF YEAR $ 942 $ 709 $ 2,154
===================================
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
Notes to Consolidated Financial Statements as of December 31, 1999
NOTE 1
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of
Dominguez Services Corporation (the "Company"), Dominguez Water Company
("Dominguez") and its subsidiaries. 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. These principles also require disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
The Company operates in the water services industry. All significant
intercompany transactions have been eliminated. Dominguez maintains its
accounts in accordance with the uniform system of accounts prescribed by the
California Public Utilities Commission (the Commission).
ESTIMATES:
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 revenue and expenses during the
reporting period. Actual results could differ from these estimates.
REVENUES:
Water service revenues are recognized on an accrual basis. Unbilled
revenue accrual is based on estimated usage from the latest meter reading to
the end of the accounting period.
PROPERTY, PLANT AND EQUIPMENT:
Utility plant is carried at historical cost with subsequent
additions at cost or donor's basis, which approximates cost, less cost of
retirements, sales, and abandonments. Water rights are stated at the nominal
amount of $1 plus purchased water rights at cost and past expenditures in
connection with litigation in defense thereof. Depreciation of utility plant
for financial statement purposes is computed using the Commission's remaining
life accrual method. Under this method, composite straight-line depreciation
rates are determined by periodic estimates of average remaining life of all
utility plant assets. Costs of abandonment and salvages are charged or
credited to accumulated depreciation. The effective composite depreciation
rate was 2.5% in 1999 and 2.9% in 1998. Costs of maintenance and repairs are
charged to operations; renewals and betterments are generally capitalized in
the property accounts.
PREPAID TAXES AND OTHERS:
From 1987 through 1997, contributions in aid of construction and
advances for construction were taxable for federal and state income tax
purposes. The Company has paid these taxes and recorded deferred taxes in
these consolidated financial statements. These taxes will be recovered over
the tax life of the assets for contributions and the life of the contracts
for advances.
DEFERRED CHARGES:
Debt expense on bonds is being amortized based on the percentage of
the principal amount outstanding over the term of the debt.
PRODUCTION COST BALANCING ACCOUNT:
The Company records over- or under-collections of production costs
when incurred in its books of accounts and financial statements based on the
regulatory treatment afforded these costs. As of December 31, 1999 and 1998,
the balancing account reflected an under-collection of $5,000.
INVESTMENTS:
The Company assumes all investments with maturities of three months
or less to be cash equivalents. Investments in entities that are 50% or less
owned are accounted for by the equity method.
26
<PAGE>
INCOME TAXES:
The Company provides deferred income taxes for certain transactions
which are recognized for income tax purposes in a period different from that
in which they are reported in the financial statements.
Investment Tax Credits (ITC) have been deferred and are being
amortized as reductions to income tax expense proportionately over the lives
of the properties giving rise to the credits.
REGULATORY ASSETS:
The Company currently applies accounting standards that recognize
the economic effects of rate regulation and records regulatory assets and
liabilities related to water distribution operations. If rate recovery of
water-related costs becomes unlikely or uncertain, whether due to competition
or regulatory action, these accounting standards may no longer apply. This
change could result in the write-off of costs in an amount that could be
material. However, based on a current evaluation of the various factors and
conditions that are expected to affect future cost recovery, management
believes that its regulatory assets will likely be recovered in the future.
RESTRICTED CASH:
Restricted cash represents surcharge proceeds plus interest earned,
which is restricted to the payment of principal and interest on the
California Safe Drinking Water Bonds.
RECLASSIFICATIONS:
The 1999 and 1998 consolidated financial statements include certain
reclassifications necessary to conform to current year presentation.
NOTE 2
CAPITAL STRUCTURE
The Company has authorized issuance of up to 4,000,000 shares of
common stock with par value of $1.00. As of December 31, 1999, 1,563,779
shares of stock were issued and outstanding and 40,740 options were granted
with a weighted average exercise price of $16.94. At December 31, 1999, 2,800
options were exercised and 13,835 options were exercisable. As described in
Note 15, the Company has executed a Merger Agreement to be acquired by CWSG.
The Merger Agreement provides that all options become exercisable prior to
the closing date.
Effective January 2, 1998, the Company split its common stock
three-for-two for shareholders of record on December 15, 1997. The Company
paid cash in lieu of issuing fractional shares based on the closing price as
of December 15, 1997. The par value of the common stock remained unchanged.
Share information and the capital accounts in the consolidated financial
statements have been retroactively restated to reflect the change. This
restatement resulted in the transfer of $502,000 from paid-in-capital to
common shares equity.
NOTE 3
RESTRICTIONS ON DIVIDENDS
The Company's available dividends to its shareholders are
substantially dependent on the availability of dividends from Dominguez to
the Company. Under the terms of its long-term debt agreements, Dominguez is
limited in its payment of dividends (other than stock dividends) on all
classes of stock to the net income accrued subsequent to December 31, 1992,
plus the sum of $3,000,000. The approximate unrestricted earnings available
for dividend payments amounted to $7,052,000 as of December 31, 1999.
27
<PAGE>
NOTE 4
LONG-TERM DEBT
Under a trust indenture dated August 1, 1954, and twelve
supplemental indentures, the Company pledged substantially all its property,
water rights, and materials and supplies as collateral under the bonds. At
December 31, 1999 and 1998, long-term debt outstanding was:
<TABLE>
<CAPTION>
Carrying Amount (Dollars in Thousands) 1999 1998
---- ----
<S> <C> <C>
First Mortgage Bonds
Series J, 8.86%, due 2023 $4,000 $4,000
Series K, 6.94%, due 2012 5,000 5,000
-------------------------
Total First Mortgage Bonds $9,000 $9,000
-------------------------
Small Business Administration Loan
4% - due 2000 $4 $15
-------------------------
Department of Water Resources Loan:
Under the California Safe Drinking Water Bond Act
7.4% - due 2020 $453 $463
7.4% - due 2011 266 272
7.4% - due 2013 187 190
3.0% - due 2032 801 831
3.4% - due 2027 485 502
7.4% - due 2011 176 -
7.4% - due 2007 72 -
7.4% - due 2016 59 -
7.4% - due 2019 38 -
7.4% - due 2021 699 -
-------------------------
Total Bonds & Notes $12,240 $11,273
-------------------------
Other notes 150 -
Less : Current Maturities 96 56
-------------------------
Total Long Term Debt $12,294 $11,217
=========================
</TABLE>
Aggregate maturities for the five years commencing with 2000 are
approximately $96,000 (2000), $113,000 (2001), $131,000 (2002), $140,000
(2003), and $349,000 (2004).
NOTE 5
INTERIM DEBT
The Company maintained an available line of credit of $4,500,000 in
1999 and 1998 with Bank of America. At the end of 1999 and 1998, the Company
had $400,000 and $450,000 outstanding, respectively. Borrowing bears
interest at the preference lending rate.
28
<PAGE>
NOTE 6
ADVANCES FOR CONSTRUCTION
Advances for construction of main extensions are primarily
refundable to depositors over a 20- or 40- year period. Refund amounts under
the 20-year contracts are based on annual revenues from the extension.
Balances at the end of the contract period are refunded in five equal annual
installments. Beginning in June 1982, contracts provided for full refund at a
2-1/2% rate per year for 40 years. Estimated refunds for 2000 for all main
extension contracts are $164,000.
NOTE 7
CONTRIBUTIONS IN AID OF CONSTRUCTION
Contributions in aid of construction are donations or contributions
in cash, services or property from governmental agencies or individuals for
the purpose of constructing utility facilities. Depreciation applicable to
such plants is charged to the contributions in aid account rather than to
depreciation expense.
The charges continue until the cost applicable to such properties
has been fully depreciated or the asset has been retired.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1999 1998
---- ----
<S> <C> <C>
Beginning balance $ 6,220 $ 6,118
Add net contributions during the year 206 308
Deduct depreciation for the year charged on plant
acquired through donations (164) (206)
--------------------------
Ending balance $ 6,262 $ 6,220
==========================
</TABLE>
NOTE 8
EMPLOYEE BENEFITS
PENSION PLAN:
The Company provides a qualified defined benefit pension plan for
all its full-time employees. Benefits under this plan reflect the employee's
compensation, years of service and age at retirement. Funding is based upon
actuarially determined contributions that take into account the amount
deductible for income tax purposes and the minimum contribution required
under the Employee Retirement Income Security Act of 1974, as amended.
Pension costs are determined in accordance with Statement of
Financial Accounting Standards (SFAS) No. 87, including the use of the
projected unit credit actuarial cost method. For ratemaking purposes, the
Company recovers pension expense based on the method in place prior to SFAS
No. 87. In 1998, the Company implemented SFAS No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits," which
standardizes disclosure requirements but does not affect the measurement of
plan obligations. Prior periods have been restated to conform to the current
year presentation.
29
<PAGE>
The components of the 1999 and 1998 provisions are summarized below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1999 1998
---- ----
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
BENEFIT OBLIGATION AT BEGINNING OF YEAR $11,462 $10,155
SERVICE COST 560 500
INTEREST COST 745 736
ACTUARIAL (GAIN)/LOSS (1,522) 613
BENEFITS PAID (468) (542)
BENEFIT OBLIGATION AT END OF YEAR $10,777 $11,462
--------------------------------------
CHANGE IN PLAN ASSETS:
FAIR VALUE OF PLAN ASSETS AT BEGINNING OF YEAR $12,104 $11,726
ACTUAL RETURN ON PLAN ASSETS 1,343 1,046
EMPLOYER CONTRIBUTION - (126)
BENEFITS PAID (468) (542)
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $12,980 $12,104
--------------------------------------
FUNDED STATUS: $2,203 $642
UNRECOGNIZED NET ACTUARIAL GAIN (3,872) (1,968)
UNRECOGNIZED PRIOR SERVICE COST 143 158
UNRECOGNIZED NET INITIAL ASSETS (117) (175)
ACCRUED BENEFIT COST $(1,642) $(1,343)
--------------------------------------
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
DISCOUNT RATE 7.50% 6.50%
EXPECTED RETURN ON PLAN ASSETS 7.50% 7.50%
RATE OF COMPENSATION INCREASE 4.50% 4.00%
COMPONENTS OF NET PERIODIC BENEFIT COST:
SERVICE COST $560 $500
INTEREST COST 745 736
EXPECTED RETURN ON PLAN ASSETS (908) (879)
AMORTIZATION OF PRIOR SERVICE COST 14 14
RECOGNIZED ACTUARIAL GAIN (55) (96)
RECOGNIZED NET INITIAL ASSETS (58) (58)
NET PERIODIC BENEFIT COST $299 $217
--------------------------------------
</TABLE>
30
<PAGE>
POSTRETIREMENT BENEFITS
OTHER THAN PENSIONS:
The Company charges the costs associated with its postretirement
benefits other than pensions to expense during the employee's years of
service. The Company is amortizing its $588,000 transition obligation related
to prior service over 20 years.
The Company provides health care benefits for retired employees
until both the employee and his/her spouse have reached 65 years of age.
Health care benefits are subject to deductibles, co-payment provisions and
other limitations. The Company funds the plan up to tax-deductible limits, in
accordance with ratemaking practices. Differences between expense determined
under the new standard and amounts authorized for rate recovery are not
expected to be material and are charged to earnings.
The components of postretirement benefits other than pensions are
summarized below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1999 1998
---- ----
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
BENEFIT OBLIGATION AT BEGINNING OF YEAR $679 $654
SERVICE COST 42 35
INTEREST COST 43 46
ACTUARIAL GAIN (74) (32)
BENEFITS PAID (28) (24)
BENEFIT OBLIGATION AT END OF YEAR $662 $679
-------------------------
CHANGE IN PLAN ASSETS:
FAIR VALUE OF PLAN ASSETS AT BEGINNING OF YEAR $509 $471
ACTUAL RETURN ON PLAN ASSETS 70 38
EMPLOYER CONTRIBUTION 28 24
BENEFITS PAID (28) (24)
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $579 $509
-------------------------
FUNDED STATUS: $(83) $(170)
UNRECOGNIZED NET ACTUARIAL GAIN (408) (317)
UNRECOGNIZED NET INITIAL OBLIGATION 369 397
ACCRUED BENEFIT COST $(122) $(90)
-------------------------
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
DISCOUNT RATE 7.50% 6.50%
EXPECTED RETURN ON PLAN ASSETS 7.50% 7.50%
RATE OF MEDICAL TREND 6.00% 6.00%
COMPONENTS OF NET PERIODIC BENEFIT COST:
SERVICE COST $42 $35
INTEREST COST 43 46
EXPECTED RETURN ON PLAN ASSETS (37) (34)
RECOGNIZED ACTUARIAL GAIN (16) (14)
RECOGNIZED NET INITIAL OBLIGATION 28 28
NET PERIODIC BENEFIT COST $60 $61
-------------------------
</TABLE>
31
<PAGE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in the
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
1999 INCREASE DECREASE
-------- --------
<S> <C> <C>
EFFECT ON SERVICE AND INTEREST COST COMPONENTS $14 $(10)
EFFECT ON POSTRETIREMENT BENEFIT OBLIGATION 66 (56)
<CAPTION>
1998 INCREASE DECREASE
-------- --------
<S> <C> <C>
EFFECT ON SERVICE AND INTEREST COST COMPONENTS $14 $(10)
EFFECT ON POSTRETIREMENT BENEFIT OBLIGATION 73 (62)
</TABLE>
The Company also offers its employees a 401(k) plan. Employees make
all contributions under the plan.
STOCK-BASED COMPENSATION PLANS:
The Company's 1997 Stock Incentive Plan (the Plan) was adopted by
the Board on February 25, 1997, and contains provisions for four types of
awards: (i) stock options to purchase shares of the Company's common stock,
(ii) payment of awards earned under the Company's Annual Incentive Plan (AIP)
in shares of stock, (iii) issuance of restricted stock, and (iv) payment of
dividend equivalents which, at the discretion of the compensation committee,
may be granted in conjunction with stock options or restricted stock awards
to provide cash payments prior to the time the option is exercised or the
shares are vested.
SFAS No. 123, "Accounting for Stock-Based Compensation," if fully
adopted, changes the methods for recognition of cost on plans similar to
those of the Company. Adoption of the accounting requirements under SFAS No.
123 is optional; however, pro forma disclosures as if the Company had adopted
the cost recognition method are required. Had compensation cost for stock
options awarded under this plan been determined consistent with SFAS No. 123,
the Company's net income and earnings per share would have reflected the
following pro forma amounts:
<TABLE>
<CAPTION>
(Dollars in Thousands, except per share data) 1999 1998
---- ----
<S> <C> <C>
Net income:
As reported $2,052 $924
Pro forma 2,052 914
Earnings per share, basic and diluted:
As reported $1.31 $0.61
Pro forma 1.31 0.61
</TABLE>
The Company may grant up to 75,000 options under the Plan. The
Company has granted 40,740 through December 31, 1999. The options are issued
at fair market value with exercise prices equal to the Company's stock price
at the date of grant. Options vest over a four-year period, are exercisable
in whole or in installments, and expire ten years from date of grant. In
accordance with the Plan and the granted option agreements as of December 31,
1999, vesting of options granted will be accelerated so such options will be
exercisable prior to a change in control of the Company.
24
<PAGE>
A summary of the status of the Company's stock option plan at December
31, 1999 and 1998, and changes during the years then ended, are presented in the
table and narrative below:
<TABLE>
<CAPTION>
1999 1998
Wtd Avg Wtd Avg
Shares Ex Price Shares Ex Price
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 40,740 $16.94 25,800 $16.33
Granted - - 14,940 18.00
Exercised 2,700 $16.33 - N/A
100 $18.00
Forfeited/Expired - N/A - N/A
-------- ---------- -------- ----------
Outstanding at the end of year 37,940 16.99 40,740 16.94
======== ========== ======== ==========
Exercisable at end of year 13,835 16.33 6,450 16.33
======== ========== ======== ==========
Weighted average fair value of options granted 1.94 1.94
========== ==========
</TABLE>
Amounts shown reflect the 3-for-2 stock split effected January 1998.
14,840 options outstanding at December 31, 1999, have an exercise
price of $18.00 and a weighted average remaining contractual life of 9.54
years. The remaining 23,100 options have an exercise price of $16.33 and a
weighted average remaining contractual life of 8.48 years.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes pricing model with the following assumptions
used for the grants in fiscal 1998: weighted average risk-free interest rate
of 5.67%; weighted average volatility of 18.46%; expected life of 10 years;
and a weighted average dividend yield of 6.36%.
33
<PAGE>
NOTE 9
INCOME TAXES
The Company utilizes SFAS No. 109, "Accounting for Income Taxes,"
which requires the recognition of deferred taxes for all temporary
differences between book and tax income.
CURRENT AND DEFERRED TAXES:
Income tax expense includes the current tax liability from
operations and the change in deferred income taxes during the year.
Investment tax credits are amortized over the life of related properties.
The components of the net accumulated deferred income tax
liabilities are:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Pension plan $794 $626
Other 27 148
-------------------------
Total deferred tax assets $821 $774
-------------------------
Deferred tax liabilities:
Depreciation $4,083 $3,814
Property-related 1,110 1,110
Other (176) (223)
-------------------------
Total deferred tax liabilities $5,017 $4,701
-------------------------
Net accumulated deferred income taxes $4,196 $3,927
Classification of accumulated deferred income taxes:
Included in current assets 174 127
-------------------------
Included in deferred taxes $4,369 $4,054
-------------------------
</TABLE>
The current and deferred components of income tax expense are:
<TABLE>
<CAPTION>
(Dollar in Thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current income tax expenses:
Current federal $904 $555 $814
Current state 231 177 266
Investment tax credit (11) (11) (10)
----------------------------------------
1,124 721 1,070
Tax benefit of extraordinary item (100) (315) -
----------------------------------------
Total current taxes expenses $1,024 $406 $1,070
----------------------------------------
Deferred income tax expenses:
Depreciation $345 $316 $296
Pensions (165) (136) -
Other 135 31 19
----------------------------------------
Total deferred tax expenses $315 $211 $315
----------------------------------------
</TABLE>
34
<PAGE>
A reconciliation of the federal statutory income tax rate to the
effective rate is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected income tax expense 34% 34% 34%
State income taxes 5% 5% 5%
Other (1)% 2% 2%
Total 38% 41% 41%
</TABLE>
The Company has no net operating loss carryforward at December 31,
1999.
NOTE 10
NEW BUSINESS AND DISPOSITIONS
BUSINESS INVESTMENTS:
DSC Investments invested $350,000 in Chemical Services Corporation
(CSC) on December 20, 1996, and acquired a twenty percent equity ownership
with the option to acquire an additional forty percent through the year 2001.
Under the investment agreements, the Company was obligated to provide working
cash and long-term financing to CSC for the leasing of chlorine generators,
subject to the financial condition of CSC.
In April 1999, a contract was drafted pursuant to which DSC
Investments would sell back its equity ownership to CSC at a premium of
$250,000, $160,000 of which would be applied to Dominguez' purchase of
chlorine generation equipment from CSC. Both parties signed the contract in
December of 1999 and payment was received from CSC in January 2000.
In December 1997, Dominguez entered into a recycled water agreement
with the West Basin Municipal Water District (West Basin) and ARCO. Under the
terms of the agreement, Dominguez will sell ARCO recycled water purchased
from West Basin for the same cost margin that Dominguez would otherwise have
received providing ARCO with potable water. The recycled water plant was
completed in December of 1999, and became fully operational in January 2000.
Having access to recycled water will reduce the South Bay Division's demand
for imported water, the availability of which may be uncertain in the future.
Reduced imported water supplies and annual population growth could create
future drought conditions in Southern California; however, Dominguez believes
that the availability of recycled water will significantly mitigate the
impact of future droughts in the South Bay Division service area.
In 1998, the Water Replenishment District of Southern California
(WRD), a water district responsible for the oversight and management of the
West and Central Groundwater Basins, awarded a grant to Dominguez of
$1,820,000. Dominguez received the first of its two payments for $910,000 in
1998 and received the second payment for $910,000 in 1999. Dominguez used
approximately $670,000 to offset the cost of purchasing higher-priced
imported water in lieu of pumping its groundwater rights. The balance of the
funds, approximately $1,150,000, will be used to meet Dominguez' expected
$2,000,000, commitment in recycled water facilities, leaving a balance of
$850,000 to be funded by Dominguez.
ACQUISITIONS:
During 1998, Dominguez received the Commission's approval to acquire
the assets of the Lucerne Water Company, an investor-owned water system
serving 1,242 customers, in exchange for 42,092 shares of the Company's
common stock. This acquisition, effective January 1, 1999, was accounted for
using the purchase method. Ratebase for the acquired assets was set at
$713,000, resulting in an additional credit of $262,000 recorded in paid in
capital.
35
<PAGE>
Also in 1998, Dominguez received Commission approval to acquire the
assets of the Rancho del Paradiso and Armstrong Valley Water Companies,
investor-owned water systems serving 60 and 322 customers respectively, in
exchange for 12,375 shares of the Company's common stock. This acquisition,
effective January 1, 1999, was accounted for using the purchase method.
Ratebase for the acquired assets was set at $188,000, resulting in an
additional credit of $55,000 recorded in paid in capital.
In July 1999, Dominguez received the Commission's approval to
acquire the assets of Hawkins Water Service, serving 51 customers, for
$50,000 cash. The ratebase for the acquired assets was set at $51,000 and the
acquisition became effective on August 6, 1999.
Dominguez also received the Commission's approval in 1999 to acquire
the assets of Coast Springs Water Company, serving 237 customers, for
$180,000 cash. The ratebase for the acquired assets was set at $179,000 and
the acquisition became effective on December 8, 1999.
NOTE 11
BUSINESS RISKS AND CONCENTRATION
OF SALES
Forty-six percent of the Company's water supply comes from its own
groundwater wells, and fifty-four percent comes from wholesalers of imported
water. The long-term availability of imported water supplies is dependent
upon several factors. Drought conditions throughout the state, increases in
population, tightening of water quality standards, and legislation may reduce
water supplies. At this time, the Company does not anticipate any constraints
on its imported water supplies due primarily to above-average precipitation
in recent years. The Company is taking steps to reduce its dependence on
imported water supplies, including working with the West Basin to bring
recycled water into its South Bay Division service area. The Company
continues to drill new wells in order to enable it to utilize its total
adjudicated groundwater rights.
Dominguez is subject to water quality regulations promulgated by the
United States Environmental Protection Agency (EPA) and the California
Department of Health Services (DHS). Both groundwater and purchased water are
subject to extensive analysis and testing. With occasional minor exceptions,
Dominguez meets all current primary water standards.
Beginning in mid-1997, Dominguez participated, along with many other
large water companies throughout the United States, in an 18-month water
sampling data acquisition program known as the Information Collection Rule.
Data collected will be used by the EPA to establish future drinking water
standards. Under the Federal Safe Drinking Water Act, the EPA is required to
continue to establish new maximum levels for additional chemicals. The costs
of future compliance are unknown, but Dominguez could be required to perform
more quality testing and treatment. Management believes the Company's
financial reserves will be sufficient to meet these anticipated requirements.
During 1999, Dominguez expended $1,786,000 on water supply improvements. In
2000, Dominguez anticipates spending $2,622,000 for water supply capital
improvements.
The Company's utility operations are performed under the purview of the
Commission. Thus, the Company has no unilateral flexibility with regards to
water charge for its utility products or services. Most variations are due
primarily to weather conditions and the usage of major industrial customers.
The Company is required to provide service to customers within its
defined service territories. Although the Company has a diversified base of
residential, business-industrial and public authority customers, a
substantial portion of water consumption, 51% in 1999 and 50% in 1998, is
attributable to business-industrial customers. One single refinery was
responsible for 38% of this business-industrial consumption in 1999, and for
34% in 1998.
36
<PAGE>
Revenue details for 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Residential - Multi-Family $12,492 $11,473 $11,964
Business - Industrial 12,775 11,174 11,698
Public Authority 1,382 1,286 1,537
All Other 1,848 1,334 1,619
--------------------------------------
Total $28,497 $25,267 $26,818
======================================
</TABLE>
NOTE 12
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH PAID FOR:
Interest, net $896 $603 $774
Income taxes $650 $650 $1,000
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1999
------
<S> <C>
SUMMARY OF NON-CASH TRANSACTIONS:
Stock issued in acquisition of assets $923
Debt assumed in acquisition of assets $1,108
Note received for sale of investment in CSC $350
</TABLE>
NOTE 13
RELATED PARTY TRANSACTIONS
Dominguez annually refunds a portion of revenue received from
several water mains for which Watson Land Company, Carson Estate Company, and
Dominguez Properties advanced the construction funds to Dominguez. The
refunds to Watson Land Company were $14,922 in 1999 and $17,250 in 1998. The
refunds to Carson Estate Company were $1,110 in 1999 and $1,339 in 1998. The
refunds to Dominguez Properties were $6,176 in 1999 and $6,176 in 1998.
Dominguez also leases sites used for wells from Watson Land Company,
Carson Estate Company, and Dominguez Properties. The rental costs for Watson
Land Company were $40,735 in 1999 and 1998. The rental costs to Carson Estate
Company were $21,095 in 1999 and $19,674 in 1998. The rental costs for
Dominguez Properties were $3,846 in 1999 and 1998.
Dominguez provides water service to these entities to the extent
that they have property within it's division.
37
<PAGE>
NOTE 14
SUBSEQUENT EVENTS
In February 1999, Dominguez filed general rate increase applications
for the South Bay Division and its subsidiaries, Antelope Valley Water
Company and Kern River Valley Water Company. The Commission consolidated the
applications into a single proceeding. In December 1999, the Company and RRB
filed settlement agreements to increase rates by $1,416,000 for test year
2000, $336,000 for test year 2001 and $113,000 for attrition year 2002. In
January 2000, the Leona Valley Town Council filed its opposition to the
settlement agreement filed in the Antelope Valley Water Company (AVWC)
application. The Administrative Law Judge granted an evidentiary hearing in
the proceeding, limiting issues to the AVWC application, for March 1, 2000,
and scheduled briefs to be filed on March 20, 2000. Because all the
applications were consolidated into a single proceeding, the Commission has
postponed its decision on the Dominguez South Bay and Kern River Valley Water
Company rate applications. Dominguez anticipates that a Commission decision
approving all settlement agreements will be ordered by June 2000.
NOTE 15
THE MERGER
On November 13, 1998, the Company executed an Agreement and Plan of
Reorganization (the Merger Agreement) to merge with California Water Service
Group (CWSG), the parent of California Water Service Company (Cal Water) and
CWS Utility Services. Under the terms of the November 1998 Merger Agreement,
each share of the Company's common stock issued and outstanding on the
closing date would be converted into the right to receive 1.18 shares of CWSG
common stock. The Company's Board of Directors (Board) received the opinion
of its financial advisor, PaineWebber Inc., that this exchange ratio would be
fair to the shareholders of the Company's common stock from a financial point
of view. And, the Company expected that the proposed merger will be treated
as a tax-free transaction under the applicable provisions of the Internal
Revenue Code. Shares of CWSG common stock are traded under the symbol "CWT"
on the New York Stock Exchange. CWSG operations provide water utility
services to over 1.5 million people in 58 California communities.
On March 16, 1999, the Company announced that it had received an
unsolicited proposal from American States Water Company (ASWC) offering to
acquire all of the Company's outstanding common stock in a stock-for-stock
merger. Under the ASWC proposal, each share of the Company's common stock
would have been converted into the right to receive a number of ASWC shares
intended to provide $32.50 of value for each of the Company's shares. The
ASWC proposal also provided for a collar pursuant to which the minimum and
maximum conversion ratios would be 1.11 and 1.35 ASWC shares for each Company
share. The Company's financial advisor advised the Company's Board that this
proposal was more favorable to the Company's shareholders than the terms of
the Merger Agreement.
On March 22, 1999, the Company and CWSG executed an amendment to the
November 1998 Merger Agreement which provides that each share of the
Company's common stock will be converted into the right to receive a number
of CWSG shares intended to provide $33.75 of value for each of the Company's
shares. The amendment to the Merger Agreement also provides that the minimum
and maximum conversion ratios will be 1.25 and 1.49 CWSG shares for each
Company share.
At a special meeting on May 12, 1999, Company shareholders
overwhelmingly approved the Merger Agreement as amended. All regulatory
approvals have been received, with the exception of that of the Commission.
In its initial report filed in October 1999, the Commission staff recommended
disapproval of the merger. Subsequently, CWSG and the Company issued a
guarantee that customer rates would not increase as a result of the merger,
expressing confidence that synergies achieved by the merger would offset
merger costs.
38
<PAGE>
In succeeding discussions with Commission's Ratepayer Representation
Branch (RRB), Cal Water and Dominguez proposed an enhanced guarantee, which
included provisions that customer rates would not increase as a result of the
merger, that Dominguez customers would continue to receive financial benefit
of water rights currently owned by Dominguez, and that a portion of operating
synergies achieved over those needed to offset merger costs be returned to
customers. RRB staff testified to its support of the merger, with the
enhanced guarantee, on December 7, 1999. In a proposed decision issued in
February 2000, the Administrative Law Judge recommended approval of the
merger with certain conditions, many of which were proposed by Cal Water and
Dominguez in the enhanced guarantee. Oral arguments were scheduled for March
2000, with a decision expected in the second quarter.
Pursuant to the Merger Agreement, if regulatory approval is not
received or if either the Company or CWSG decide not to complete the merger,
certain payments are required under the terms of the Merger Agreement by the
terminating party.
NOTE 16
EARNINGS PER SHARE
The following table reconciles basic and diluted earnings per share
calculations. Shares in the table below have been restated to reflect the
Company's stock split in January 1998 (See Note 2).
<TABLE>
<CAPTION>
INCOME
(DOLLARS IN
THOUSANDS) SHARES PER-SHARE AMOUNT
<S> <C> <C> <C>
FOR YEAR ENDED DECEMBER 31, 1999
Basic Earnings Per Share:
Net income available to common shareholders,
weighted average $2,052 1,561,096 $1.31
Options issued to executives 9,982
Diluted Earnings Per Share:
Net income available to common shareholders $2,052 1,571,078 $1.31
===================================================
FOR YEAR ENDED DECEMBER 31, 1998
Basic Earnings Per Share:
Net income available to common shareholders $924 1,506,512 $0.61
Options issued to executives 4,838
Diluted Earnings Per Share:
Net income available to common shareholders $924 1,511,350 $0.61
===================================================
FOR YEAR ENDED DECEMBER 31, 1997
Basic Earnings Per Share:
Net income available to common shareholders $2,021 1,506,512 $1.34
Options issued to executives 361
Diluted Earnings Per Share:
Net income available to common shareholders $2,021 1,506,873 $1.34
================================================
</TABLE>
39
<PAGE>
NOTE 17
BUSINESS SEGMENTS
In 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The Company is a
diversified water resource management company specializing in the delivery of
high quality water supplies and has operations in two business segments,
"Regulated" and "Non-Regulated," as well as general corporate charges.
"Other" captures extraordinary items related to the merger with CWSG.
The Regulated business segment is comprised of water utilities, the
largest of which is Dominguez Water Company, serving 100,000 people in the
South Bay area of Los Angeles County. The Company's other water utilities,
all located in California, are: Kern River Valley Water Company in Kern
County, Antelope Valley Water Company in northern Los Angeles and Kern
Counties, and Redwood Valley Water Company Division in Lake, Sonoma and Marin
County. These subsidiaries in aggregate serve an additional 20,000 people.
In the area of Non-Regulated water-related business segments, the
Company in 1998 and 1997 held a twenty percent equity stake in Chemical Services
Company, the developer, manufacturer, and marketer of proprietary chlorine
generation and treatment products. The Company accounted for the CSC investment
under the equity method. In 1999, the Company sold its investment in CSC. The
Company is also active in water rights brokerage and water supply and system
operation contracts. See note 10 for additional information. Income from water
right brokerage is derived from the selling and purchasing of leased water
rights to pump groundwater located from the central and west basins located in
Los Angeles County.
Profits and assets for each segment are presented below:
<TABLE>
<CAPTION>
REGULATED NON-REGULATED OTHER TOTAL
--------- ------------- ----- -----
<S> <C> <C> <C> <C>
1999 (Dollars in Thousands)
Operating revenue $28,497 $- $- $28,497
Other income 36 1,098 - 1,134
Interest revenue 3 25 - 28
Interest and amortization expense 900 64 - 964
Depreciation 1,444 - - 1,444
Extraordinary item, net of tax - - 190 190
Segment net income 1,723 519 (190) 2,052
Segment assets 56,220 1,669 - 57,889
1998 (Dollars in Thousands)
Operating revenue $25,267 $- $- $25,267
Inter-segment revenues (expenses) 275 (275) - -
Other income 34 639 - 673
Interest revenue 17 29 - 46
Interest and amortization expense 804 66 - 870
Depreciation 1,439 - - 1,439
Extraordinary item, net of tax - - 499 499
Segment net income 1,119 304 (499) 924
Segment assets 51,575 1,060 - 52,635
1997 (Dollars in Thousands)
Operating revenue $26,818 $- $- $26,818
Other income 57 496 - 553
Interest revenue 8 49 - 57
Interest and amortization expense 673 85 - 758
Depreciation 1,341 - - 1,341
Segment net income 1,779 242 - 2,021
Segment assets 50,782 879 - 51,661
</TABLE>
40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Dominguez Services Corporation:
We have audited the accompanying consolidated balance sheets of Dominguez
Services Corporation and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, common shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dominguez
Services Corporation and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
- ----------------------------------
Arthur Andersen LLP
Los Angeles, California
March 24, 2000
41
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
42
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names and ages of all directors and
executive officers, indicating the positions and offices presently held by
each.
<TABLE>
<CAPTION>
NAME, PRINCIPAL OCCUPATION OR EMPLOYMENT DIRECTOR
POSITION AND OFFICE AGE AND ALL OTHER POSITIONS WITH THE COMPANY SINCE
- ------------------- --- ---------------------------------------- -----
<S> <C> <C> <C>
Dwight C. Baum 87 Senior Vice President of Paine Webber Incorporated (and 1962
Director Predecessors), a brokerage house.
Brian J. Brady 51 President, Chief Executive Officer, and Chairman of the Board 1995
Director, of the Company since May 1996; President and Chief Executive
Chief Executive Officer and Officer of the Company since November 1995; Director, Irvine
President Ranch Water District, since 1998; prior, Assistant General
Manager Public Utilities, City of Anaheim, since 1992; prior,
Vice President and General Manager, Energy Services, Inc., a
Subsidiary of Southern California Edison, since 1988.
Richard M. Cannon 58 Chief Executive Officer and President of Watson Land Company, 1991
Director a privately held developer and owner of industrial centers and
buildings, since 1994; prior, President of Watson Land Company,
since 1989.
Terrill M. Gloege 64 Senior Vice President, Chief Financial Officer of Carson Estate 1991
Director Company and affiliated entities, a privately held investment
company since 1989.
Thomas W. Huston 38 Director of Leasing and Asset Management for Watson Land 1995
Director Company since 1995; prior, Assistant Director of Leasing and
Asset Management; prior, Leasing Agent for Watson Land
Company.
James D. Flynn 42 President of Carson Estate Company since 1999: prior, Managing 1999
Director Director of AEW Capital Management, L.P.
Langdon W. Owen 69 President of Don Owen & Associates since 1973; Consulting 1994
Director Engineer and Financial Advisor.
Charles W. Porter 69 Business Consultant since January 1996; prior, President, Chief 1977
Director Executive Officer of the Company since 1980.
Debra L. Reed 43 President, Energy Distribution Services and Chief Financial 1995
Director Officer, Southern California Gas Company, since 1998; prior,
Senior Vice President of Southern California Gas Company, since
1995; prior, Vice President, Southern California Gas Company
since 1988.
John S. Tootle 46 Vice President of Finance and Chief Financial Officer of the NA
Chief Financial Officer, Company since April 1987.
Vice President of Finance,
Treasurer and Secretary
</TABLE>
There is no "family relationship" between any of the executive officers.
43
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
Set for below is certain information with respect to each of the Company's
executive officers. All officers have served at the discretion of the Board
of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY YEARS AS OFFICER
---- --- ------------------------- ----------------
<S> <C> <C> <C>
Brian J. Brady 51 President, Chief Executive Officer, and 4
Chairman of the Board
John S. Tootle 46 Chief Financial Officer, Vice President of 13
Finance, Treasurer and Secretary
</TABLE>
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company and options
and long-term incentive plans awarded in 1999 and its two prior fiscal years
to the Company's Chief Executive Officer and five other executive officers
of the Company whose total annual salary and bonus exceeded $90,000 in 1999.
<TABLE>
<CAPTION>
AUTO & OTHER
NAME & PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
------------------------- ---- ------ ---- ------------
<S> <C> <C> <C> <C>
Brian J. Brady 1999 $178,551.75 $- $5,754.33
President & Chief Executive Officer 1998 158,226.29 26,402.00 3,600.00
1997 150,009.60 16,200.00 3,920.54
John S. Tootle 1999 118,397.73 - 46,139.39
Chief Financial Officer, Treasurer, Vice 1998 113,834.92 15,295.00 4,275.00
President of Finance, Secretary 1997 113,297.61 8,800.00 4,140.23
John R. Foth 1999 97,275.67 - 1,255.17
Director of Operation 1998 90,126.88 7,435.00 1,446.02
1997 90,105.60 6,600.00 906.01
Daniel C. Howell 1999 99,307.75 - 1,320.67
Director of Operation 1998 54,085.98 - 22,721.42
1997 - - -
Susan L. Leone 1999 93,584.48 - 1,678.97
Director of Integrated Services 1998 88,237.36 11,815.00 6,503.50
1997 87,721.66 - 6,672.71
Terry H. Witthoft 1999 94,138.14 - 1,642.73
Director of Resource Development 1998 90,771.15 12,015.00 660.00
1997 90,232.02 6,900.00 660.00
</TABLE>
44
<PAGE>
OPTIONS AND LONG-TERM INCENTIVE PLANS
<TABLE>
<CAPTION>
Number of
Securities
Underlying Performances or Other Period Until Expiration Date
Year Name Options Maturation or Payout
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 Brian J. Brady 4,500 1,125 options exercisable and 1,125 July 14, 2008
options every year for the next
three years.
- --------------------------------------------------------------------------------------------------------
John S. Tootle 2,700 675 options exercisable and 675 July 14, 2008
options every year for the next
three years.
- --------------------------------------------------------------------------------------------------------
John R. Foth 2,100 525 options exercisable and 525 July 14, 2008
options every year for the next
three years.
- --------------------------------------------------------------------------------------------------------
Daniel C. Howell 1,400 350 options exercisable and 350 July 14, 2008
options every year for the next
three years.
- --------------------------------------------------------------------------------------------------------
Susan L. Leone 2,100 525 shares exercisable and 525 July 14, 2008
options every year for the next
three years.
- --------------------------------------------------------------------------------------------------------
Terry H. Witthoft 2,100 525 shares exercisable and 525 July 14, 2008
options every year for the next
three years.
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
1997 Brian J. Brady 9,000 4,500 options exercisable and 2,250 June 23, 2007
options every year for the next two
years.
- --------------------------------------------------------------------------------------------------------
John S. Tootle 5,400 2,700 options exercisable and 1,350 June 23, 2007
options every year for the next two
years.
- --------------------------------------------------------------------------------------------------------
John R. Foth 4,200 2,100 options exercisable and 1,050 June 23, 2007
options every year for the next two
years.
- --------------------------------------------------------------------------------------------------------
Susan L. Leone 3,000 1,500 options exercisable and June 23, 2007
750 options every year for the next
two years.
- --------------------------------------------------------------------------------------------------------
Terry H. Witthoft 4,200 2,100 options exercisable and 1,050 June 23, 2007
options every year for the next two
years.
- --------------------------------------------------------------------------------------------------------
</TABLE>
In accordance with the Plan and the granted option agreements as of December
31, 1999, vesting of options granted will be accelerated so such options will
be exercisable prior to a change in control of the Company.
45
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of March 24, 2000, with
respect to the beneficial ownership of the Company's common stock by (i) each
person known by the Company to own beneficially five percent or more of any
class of the Company's outstanding common stock, (ii) each director nominee and
named executive officer, and (iii) all directors and executive officers as a
group. Each shareholder has sole voting and investment power with respect to
such shares unless otherwise indicated.
<TABLE>
<CAPTION>
Number of Shares
and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership Common Stock
------------------------------------ --------------------- ------------
<S> <C> <C>
Carson Estate Company 148,293 9.4%
18710 South Wilmington, Suite 200
Rancho Dominguez, CA 90220
Carson Dominguez Real Estate Corporation 159,364 10.1%
18710 South Wilmington, Suite 200
Rancho Dominguez, CA 90220
Watson Land Company 132,894 8.5%
515 South Figueroa Street, Suite 1910
Los Angeles, CA 90071
Dwight C. Baum 33,750(1) 2.2%
200 South Los Robles Avenue, Suite 645
Pasadena, CA 91101-2431
Richard M. Cannon 132,894(2) 8.5%
22010 South Wilmington Avenue, Suite 400
Carson, CA 90745
Terrill M. Gloege 160,864(3) 10.2%
18710 South Wilmington Avenue, Suite 200
Rancho Dominguez, CA 90220
Thomas W. Huston 750 *
22010 South Wilmington Avenue, Suite 400
Carson, CA 90745
James D. Flynn 307,657(4) 19.6%
18710 South Wilmington Avenue, Suite 200
Rancho Dominguez, CA 90220
Langdon W. Owen 10,450 *
1300 Bristol North, Suite 290
Newport Beach, CA 92660
Charles W. Porter 8,491 *
400 Paseo Dorado
Long Beach, CA 90803
Debra L. Reed 239 *
555 West 5th Street
Los Angeles, CA 90013
Brian J. Brady 7,755(5) *
21718 South Alameda Street
Long Beach, CA 90810
John S. Tootle 7,166(6) *
21718 South Alameda Street
Long Beach, CA 90810
All Directors and Officers as a group, (10 persons) 510,652(6) 32.5%
</TABLE>
*Less than one percent
1) All of such shares are owned by Mr. Baum as trustee of the Dwight C. Baum
and Hildagarde E. Baum Trust. Mr. Baum has voting and investment powers
with respect to such shares
2) All of such shares are owned by Watson Land Company, of which Mr. Cannon
is president, chief executive officer, and a director. Mr. Cannon shares
voting and investing powers with respect to such shares with the other
directors of Watson Land Company.
3) 159,364 of such shares are owned by the Carson Dominguez Real Estate
Corporation, of which Mr. Gloege is a director. Mr. Gloege shares voting
and investing powers with respect to such shares with the other directors
of Carson Dominguez Real Estate Corporation. The remaining 1,500 shares
are owned by Mr. Gloege individually.
4) 148,293 of such shares are owned by the Carson Estate Company, of which
Mr. Flynn is president and a director. Mr. Flynn shares voting and
investing powers with respect to such shares with the other directors of
Carson Estate Company. 159,364 of such shares are owned by the Carson
Dominguez Real Estate Corporation, of which Mr. Flynn is president and a
director. Mr. Flynn shares voting and investing powers with respect to
such shares with the other directors of Carson Dominguez Real Estate
Corporation.
5) This includes 2,130 shares owned by Mr. Brady individually and 5,625
currently exercisable options held by Mr. Brady.
6) This includes 6,591 shares owned by Mr. Tootle individually and 575
currently exercisable options held by Mr. Tootle.
7) Includes shares described in footnotes (2), (3) and (4) above, and
includes 5,625 currently exercisable options held by Mr. Brady and 575
currently exercisable options held by Mr. Tootle.
46
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Dominguez annually refunds a portion of revenue received from
several water mains for which Watson Land Company, Carson Estate Company, and
Dominguez Properties advanced the construction funds to Dominguez. The
refunds to Watson Land Company were $14,922 in 1999 and $17,250 in 1998. The
refunds to Carson Estate Company were $1,110 in 1999 and $1,339 in 1998. The
refunds to Dominguez Properties were $6,176 in 1999 and $6,176 in 1998.
Dominguez also leases sites used for wells from Watson Land Company,
Carson Estate Company, and Dominguez Properties. The rental costs for Watson
Land Company were $40,735 in 1999 and 1998.. The rental costs to Carson
Estate Company were $21,095 in 1999 and $19,674 in 1998. The rental costs
for Dominguez Properties were $3,846 in 1999 and 1998.
Dominguez provides water service to these entities to the extent that they
have property within its divisions.
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K.
None
48
<PAGE>
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.
DOMINGUEZ SERVICES CORPORATION:
By /s/ Brian J. Brady
----------------------------------
Brian J. Brady, Chief Executive Officer
By /s/ John S. Tootle
----------------------------------
John S. Tootle, Chief Financial
Officer, Treasurer, Secretary
By /s/ Cynthia C. Chu
----------------------------------
Cynthia C. Chu, Corporate Controller
Assistant Secretary
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.
<TABLE>
<S> <C>
DIRECTORS:
/s/ B. J. Brady 3/27/00
---------------------------- -------------------
B. J. Brady, Chairman Date
/s/ D. C. Baum 3/27/00
---------------------------- -------------------
D. C. Baum Date
/s/ R. M. Cannon 3/27/00
---------------------------- -------------------
R. M. Cannon Date
/s/ T. M. Gloege 3/27/00
---------------------------- -------------------
T. M. Gloege Date
/s/ T. W. Huston 3/27/00
---------------------------- -------------------
T. W. Huston Date
/s/ J. D. Flynn 3/27/00
---------------------------- -------------------
J. D. Flynn Date
/s/ L. W. Owen 3/27/00
---------------------------- -------------------
L. W. Owen Date
/s/ C. W. Porter 3/27/00
---------------------------- -------------------
C. W. Porter Date
/s/ D. L. Reed 3/27/00
---------------------------- -------------------
D. L. Reed Date
</TABLE>
49
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED INCOME STATEMENTS FOR THE PERIOD
ENDING DECEMBER 31, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 942,307
<SECURITIES> 0
<RECEIVABLES> 3,157,943
<ALLOWANCES> (303,882)
<INVENTORY> 18,244
<CURRENT-ASSETS> 6,378,563
<PP&E> 74,387,031
<DEPRECIATION> 26,298,422
<TOTAL-ASSETS> 57,685,383
<CURRENT-LIABILITIES> 6,967,125
<BONDS> 12,294,212
0
0
<COMMON> 1,563,779
<OTHER-SE> 15,838,300
<TOTAL-LIABILITY-AND-EQUITY> 57,685,383
<SALES> 16,649,283
<TOTAL-REVENUES> 28,496,762
<CGS> 15,561,914
<TOTAL-COSTS> 24,857,178
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 963,772
<INCOME-PRETAX> 3,680,125
<INCOME-TAX> 1,438,726
<INCOME-CONTINUING> 2,241,399
<DISCONTINUED> 0
<EXTRAORDINARY> 189,687
<CHANGES> 0
<NET-INCOME> 2,051,712
<EPS-BASIC> 1.31
<EPS-DILUTED> 1.31
</TABLE>
