<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended MARCH 31, 1994 Commission file number 0-1121
SOUTHERN CALIFORNIA WATER COMPANY
(Exact Name of Registrant as specified in its charter)
CALIFORNIA 95-1243678
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
630 EAST FOOTHILL BOULEVARD, SAN DIMAS, CALIFORNIA 91773
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (909) 394-3600
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of April 30, 1994, the number of shares outstanding
of the Registrant's Common Stock, Par Value $2.50,
was 7,845,092.
<PAGE> 2
SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
---------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1: Financial Statements 1
Balance Sheets as of March 31, 1994 and December 31, 1993 2 - 3
Statements of Income for the Three Months Ended
March 31, 1994 and March 31, 1993 4
Statements of Income for the Twelve Months Ended
March 31, 1994 and March 31,1993 5
Statements of Cash Flows for the Three Months Ended
March 31, 1994 and March 31, 1993 6
Notes to Financial Statements 7 - 8
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operation 9 - 14
PART II OTHER INFORMATION
Item 1: Legal Proceedings 14
Item 2: Changes in Securities 14 - 15
Item 3: Defaults Upon Senior Securities 15
Item 4: Submission of Matters to a Vote of Security Holders 15
Item 5: Other Information 15
Item 6: Exhibits and Reports on Form 8-K 15
</TABLE>
i
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
The basic financial statements included herein have been
prepared by the Registrant, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally
included in financial statements, prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
rules and regulations, although the Registrant believes that the disclosures
are adequate to make the information presented not misleading. In the opinion
of management, all adjustments necessary for a fair statement of results for
the interim period have been made.
It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto in the Registrant's
latest Annual Report of Form 10-K.
1
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SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
----------- -----------
(Unaudited)
(in thousands)
<S> <C> <C>
UTILITY PLANT, at cost
Water $343,235 $341,438
Electric 24,880 24,820
-------- --------
368,115 366,258
Less - Accumulated depreciation (86,983) (84,808)
-------- --------
281,132 281,450
Construction work in progress 19,083 13,540
-------- --------
300,215 294,990
-------- --------
OTHER PROPERTY AND INVESTMENTS 921 921
-------- --------
CURRENT ASSETS
Cash and cash equivalents 201 1,726
Accounts receivable -
Customers, less reserves of $438
in 1994 and $370 in 1993 6,357 6,815
Other 1,621 1,520
Unbilled revenue 7,614 8,106
Materials and supplies, at average cost 1,291 1,275
Supply cost balancing accounts 8,238 7,022
Prepayments and other 6,077 6,787
Accumulated deferred income taxes - net 715 1,279
-------- --------
32,114 34,530
-------- --------
DEFERRED CHARGES
Regulatory tax-related assets 23,231 23,198
Other deferred charges 4,922 4,894
-------- --------
28,153 28,092
-------- --------
$361,403 $358,533
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
--------- ------------
(Unaudited)
(in thousands)
<S> <C> <C>
CAPITALIZATION
Common shareholders' equity $115,924 $116,463
Preferred shares 1,600 1,600
Preferred shares subject to mandatory
redemption requirements 600 600
Long-term debt 84,210 84,286
-------- --------
202,334 202,949
-------- --------
CURRENT LIABILITIES
Notes payable to banks 17,500 12,000
Long-term debt and preferred shares
due within one year 361 417
Accounts payable 7,857 9,277
Taxes payable 1,346 2,950
Accrued interest 1,395 1,178
Other accrued liabilities 7,112 6,846
-------- --------
35,571 32,668
-------- --------
THER CREDITS
Advances for construction 55,177 55,295
Contributions in aid of construction 25,335 25,011
Accumulated deferred income taxes - net 35,380 34,969
Unamortized investment tax credits 3,644 3,664
Regulatory tax-related liability 2,378 2,389
Other 1,584 1,588
-------- --------
123,498 122,916
-------- --------
$361,403 $358,533
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 1994 AND 1993
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1994 1993
------- -------
(in thousands,
except per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water $21,212 $19,190
Electric 2,969 2,987
------- -------
24,181 22,177
------- -------
OPERATING EXPENSES
Water purchased 6,742 4,532
Power purchased for pumping 1,221 1,531
Power purchased for resale 1,460 1,393
Groundwater production assessment 635 1,518
Supply cost balancing accounts (1,220) (1,565)
Other operating expenses 2,939 2,742
Provision for State Water Project 135 -
Administrative and general expenses 3,524 3,087
Depreciation 2,014 1,832
Maintenance 1,808 1,477
Taxes on income 791 848
Other taxes 1,237 1,115
------- -------
21,286 18,510
------- -------
Operating income 2,895 3,667
OTHER INCOME 41 36
------- -------
Income before interest charges 2,936 3,703
------- -------
INTEREST CHARGES 1,770 2,161
------- -------
NET INCOME 1,166 1,542
DIVIDENDS ON PREFERRED SHARES 25 25
------- -------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 1,141 $ 1,517
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 7,834 6,648
======= =======
Earnings Per Common Share $0.15 $0.23
======= =======
Dividends Declared Per Common Share $0.300 $0.288
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED MARCH 31, 1994 AND 1993
(Unaudited)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
MARCH 31,
------------------------
1994 1993
-------- --------
(in thousands,
except per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water $100,176 $ 91,646
Electric 10,333 10,244
-------- --------
110,509 101,890
-------- --------
OPERATING EXPENSES
Water purchased 31,585 24,020
Power purchased for pumping 7,829 7,558
Power purchased for resale 3,349 3,749
Groundwater production assessment 4,401 4,916
Supply cost balancing accounts (7,616) (4,671)
Other operating expenses 11,120 10,791
Provision for State Water Project 1,989 -
Administrative and general expenses 13,946 12,603
Depreciation 7,580 6,688
Maintenance 6,781 5,249
Taxes on income 5,434 7,732
Other taxes 4,833 4,382
-------- --------
91,231 83,017
-------- --------
Operating income 19,278 18,873
-------- --------
OTHER INCOME
Net gain on sale of operating properties - 849
Other 358 111
-------- --------
358 960
-------- --------
Income before interest charges 19,636 19,833
-------- --------
INTEREST CHARGES 7,988 8,073
-------- --------
NET INCOME 11,648 11,760
DIVIDENDS ON PREFERRED SHARES 100 102
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS $ 11,548 $ 11,658
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 7,478 6,635
======== ========
Earnings Per Common Share $1.54 $1.76
======== ========
Dividends Declared Per Common Share $1.20 $1.15
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 8
SOUTHERN CALIFORNIA WATER COMPANY
CASH FLOW STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1994 1993
------- -------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM -
Operating Activities:
Net income $1,166 $1,542
Adjustments for non-cash items:
Depreciation and amortization 2,107 1,915
Deferred income taxes and
investment tax credits 911 1,010
Other - net (542) (556)
Changes in assets and liabilities:
Accounts receivable 357 2,940
Prepayments 710 809
Supply cost balancing accounts (1,216) 2,422
Rationing penalty reserve - (4,419)
Accounts payable (1,420) (949)
Taxes payable (1,604) (1,344)
Unbilled revenue 492 1,052
Other - net 1,320 905
------ ------
Net Cash Provided 2,281 5,327
------ ------
Financing Activities:
Issuance of securities - 765
Receipt of advances and contributions 749 332
Repayments of long-term debt and
redemption of preferred shares (77) (128)
Refunds on advances (577) (644)
Net change in notes payable to banks 5,500 1,500
Common and preferred dividends paid (2,216) (1,955)
------ ------
Net Cash Provided (Used) 3,379 (130)
------ ------
Investing Activities:
Construction expenditures (7,185) (5,335)
------ ------
Net Cash (Used) (7,185) (5,335)
------ ------
Net Decrease in Cash and Cash Equivalents (1,525) (138)
Cash and Cash Equivalents, Beginning of period 1,726 442
------ ------
Cash and Cash Equivalents, End of period $ 201 $ 304
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 9
SOUTHERN CALIFORNIA WATER COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. For a summary of significant accounting policies and other
information relating to these interim financial statements,
reference is made to pages 30 through 34 of the 1993 Annual
Report to Shareholders under the caption "Notes to Financial
Statements".
2. Earnings per common share are based on the weighted average
number of Common Shares outstanding during each period and net
income after deducting preferred dividend requirements.
3. During 1993, the Registrant, on two separate occasions,
requested that the California Public Utilities Commission
("CPUC") authorize recovery of costs associated with
participation by the Registrant in the construction of the
Coastal Aqueduct Extension of the State Water Project (the
"Project"). On both occasions, the CPUC denied the
Registrant's request for recovery of costs on the terms
contained in the Registrant's applications.
Through March 31, 1994, the Registrant has incurred
approximately $1.6 million in costs on the Project and, in
addition, had deposited approximately $1.7 million against
future costs of redesigning the Project, should the Registrant
withdraw from participation in the Project. Any redesign
costs associated with the Registrant's withdrawal from the
Project would be borne by the Registrant although the State
agency overseeing the construction of the Project has
estimated that actual redesign costs will be significantly
lower than the amount deposited. The excess deposit, including
interest thereon, will be refunded to the Registrant.
In light of the CPUC actions and the uncertainty surrounding
the Registrant's participation in the Project, the Registrant
has established reserves totalling approximately $2.0 million
against its previously recorded investment in the Project and
the estimated redesign costs. The Registrant currently has
entitlement to 3,000 acre-feet of water in the Project and has
offered 2,500 of this entitlement for sale. The Registrant is
continuing to pursue participation in the Project at a level
of 500 acre-feet per year.
4. The Registrant filed an application for general rate increases
in six of its water operating districts in May, 1992. In
June, 1993, the CPUC issued its decision and the Registrant
requested rehearing on two matters in that decision - the
return on rate base and an authorized rate increase for the
Registrant's Bay Point water district. The CPUC granted the
Registrant's request for rehearing on the two issues and
established an interim rate of return on rate base of 9.50%
applicable to certain attrition, step rate filings and other
earnings test filings with respect to the Registrant's other
operating districts.
Prior to commencement of hearing on these two matters, the
Registrant and the Division of Ratepayer Advocates ("DRA") of
the CPUC stipulated to a rate of return on common equity of
10.10%. In addition, the DRA agreed that an increase in the
Registrant's Bay Point water district was appropriate with
certain modifications as to level of rate base. A final
decision on these two matters is not expected until the summer
of 1994.
7
<PAGE> 10
5. Effective January 1, 1993, the Registrant adopted Statement of
Financial Accounting Standards ("SFAS") No. 106 - Employers'
Accounting for Postretirement Benefits Other Than Pensions,
which requires accrual of the expected costs of providing
benefits such as retiree health care over the employees' years
of service. SFAS No. 106 also requires the recording, either
immediately or on an amortized basis for a period not
exceeding 20 years, of a transition obligation for benefits
accumulated as a result of employees' past service up to the
date of adoption of the statement.
Based on a preliminary study by the Registrant's health care
actuary, using an 8% discount rate and an 8% health care cost
trend rate, the transition obligation for the Registrant's
post-retirement medical plans is estimated to be approximately
$9.3 million. A one percent (1%) increase in the anticipated
health care cost trend assumption results in an estimated
increase of approximately $1.9 million in the accumulated
postretirement benefits obligation ("APBO"). The Registrant's
estimated Net Periodic Postretirement Benefits Cost in 1993
was approximately $1,873,000, including amortization of the
transition APBO over a 20 year period.
The Registrant, for the three-month period ended March 31,
1994, has capitalized an additional $375,000 of its
anticipated Net Periodic Postretirement Benefit Costs for
1994. Since January 1, 1993, the Registrant has capitalized a
total of $2,244,000 of its Net Periodic Postretirement Benefit
costs.
The Registrant has deferred funding any of its SFAS No. 106
liability pending the results of a detailed study of its
existing and alternate post-retirement medical plans. Should
the annual benefit accrual be reduced as a result of any
changes to these plans, the amount of the regulatory asset
will be adjusted accordingly. The Registrant is unable to
predict the impact, if any, a national health care program
would have on its medical plans.
6. Effective January 1, 1993, the Registrant adopted SFAS No. 109
- Accounting for Income Taxes, establishing new financial
accounting standards for income taxes, and requiring a change
from the deferred method to the asset and liability method of
accounting for income taxes. The effect of the new standard
was an increase in assets and liabilities of approximately $22
million, as of January 1, 1993, as the result of recording
additional deferred taxes which were offset by the recording
of a regulatory asset. Because of the expected regulatory
treatment, adoption of SFAS No. 109 is not expected to have a
significant impact on the Registrant's results of operations.
7. Effective January 1, 1994, the Registrant is subject to the
reporting requirements of SFAS No. 112 - Employer's Accounting
for Post-employment Benefits and SFAS No. 115 - Accounting for
Certain Investments in Debt and Equity Securities. The
Registrant has determined that it has no reporting obligation
under either of the standards.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
GENERAL
Southern California Water Company (the "Registrant") is a public
utility company engaged principally in the purchase, production, distribution
and sale of water. The Registrant also distributes electricity in one
community. The Registrant, regulated by the California Public Utilities
Commission ("CPUC"), was incorporated in 1929 under the laws of the State of
California as American States Water Services Company of California as the
result of the consolidation of 20 water utility companies. From time to time,
additional water companies and municipal water districts have been acquired and
properties in limited service areas have been sold. The Registrant's present
name was adopted in 1936.
At March 31, 1994, the Registrant provided service in 17
separate operating districts, 16 of which were water districts and one an
electric district, located in 75 communities in ten counties in the State of
California. As of that date, about 73% of the Registrant's water customers
were located in the greater metropolitan areas of Los Angeles and Orange
Counties. The Registrant provided electric service to the City of Big Bear
Lake and surrounding areas in San Bernardino County. All electric energy sold
is purchased from Southern California Edison Company ("SCE") on a resale rate
schedule. The Registrant served 237,153 water customers and 20,087 electric
customers at March 31, 1994, or a total of 257,240, customers compared with
256,145 total customers at March 31, 1993.
RESULTS OF OPERATION
Earnings per common share for the three months ended March 31,
1994 decreased by 34.8% to $0.15 per share as compared to $0.23 per share for
the comparable period last year. Earnings for the twelve months ended March
31, 1994 decreased by 12.5% to $1.54 per share as compared to $1.76 per share
for the twelve months ended March 31, 1993. Excluding a non-recurring
after-tax gain on the sale of the Registrant's Big Bear Water system, earnings
per share were $1.63 for the twelve months ended March 31, 1993. Both the
three and twelve months ended March 31, 1993 include $0.04 per share related to
the recovery of costs in the Registrant's drought memorandum accounts for which
there is no counterpart in 1994.
As compared to the comparable periods last year, water sales
volumes for the three months ended March 31, 1994 increased by 13% attributable
largely to depressed water sales during the first quarter of 1993 due to the
heavy rains experienced in Southern California during January and February of
that year. For the twelve months ended March 31, 1994, water sales volumes
have increased by 4.6% over the same period last year. Water operating
revenues for the three months ended March 31, 1994 increased by 10.5% over the
same period last year as a result of the full impact of $2.3 million in rate
increases effective in 1993, partial effects of step and attrition rate
increases effective in early 1994 and the increased water sales volumes. For
the twelve months ended March 31, 1994, water operating revenues increased by
9.3% over the comparable prior period as a result of increased water sales
volumes as well as general, step and attrition rate increases.
Sales of electricity increased by 5.3% and 1.7% for the three
and twelve months ended March 31, 1994, respectively, as compared to the same
periods last year. Electric operating revenues for the three month period
decreased slightly by 0.6% due to refunds from the Registrant's wholesale power
supplier which shortened the amortization period over which the Registrant was
to collect its supply cost expenses. Electric operating revenues for the
twelve months ended March 31, 1994 increased 0.9% due to the increased sales
volumes.
Purchased water costs increased by 48.8% and 31.5% over 1993,
respectively, for the three and twelve months ended March 31, 1994, primarily
reflecting increases of 47% for the three month period and 10.3% for the twelve
month period, in the amount of water purchased. In addition, the increased
purchased water costs are affected by higher purchased water rates, the latest
series of which were effective in July, 1993. Reduced wholesale water
purchases, as a result of voluntary and price-induced conservation during six
years of
9
<PAGE> 12
drought, has caused wholesale water rates in the State of California to
increase significantly to cover fixed costs of the wholesale water suppliers.
The Metropolitan Water District of Southern California, the agency supplying
most of the Registrant's water purchases, recently announced an additional
seven percent increase in wholesale water rates effective July 1, 1994.
The costs of power purchased for resale increased by 4.8% for
the three months ended March 31, 1994, but declined by 10.7% for the twelve
month period ended March 31, 1994. The increase in expenses for the three
months ended March 31, 1994 reflects the increase in kilowatt-hour sales. The
comparison between the twelve month periods ended March 31, 1994 and March 31,
1993 reflects the effects of approximately $2 million in refunds from the
Registrant's wholesale power supplier related to rate cases decided before the
Federal Energy Regulatory Commission.
The costs of power purchased for pumping decreased by 20.2% for
the three months ended March 31, 1994 as a result of a 9% decline in water
volumes supplied from pumped sources. For the twelve months ended March 31,
1994, expenses for power purchased for pumping increased by 3.6% due to an
equivalent increase in the quantity of water volumes supplied through pumped
sources.
Groundwater production assessments, which are 58.2% lower than
last year's comparable period for the three months ended March 31, 1994,
reflects the decreased amount of water volumes supplied from pumped sources.
The 10.5% decrease for the twelve months ended March 31, 1994 is due to changes
in the supply mix from pumped sources to purchased sources in those districts
which have dual resource availability. In addition, the comparison between
periods is affected by the recording, in February, 1993, of approximately
$621,000 in additional groundwater assessments related to prior period
deliveries. There were no such assessments during 1994.
A negative charge for the provision for cost adjustment
balancing accounts reflects an undercollection of water and electric energy
supply costs. The negative charges in this category for both the three and
twelve months ended March 31, 1994 are the result of higher supply costs. The
Registrant, however, has received approval to increase rates by approximately
$12.2 million annually to recover amortization of these previously
undercollected expenses.
Other operating expenses are higher by 7.2% and 3.0%,
respectively, for the three and twelve months ended March 31, 1994 as compared
to the same periods ended March 31, 1993 due primarily to a net increase in
personnel involved in operating and customer service functions.
During the first quarter of 1994, the Registrant reserved an
additional $135,000 against retention rights related to the Registrant's 3,000
acre-feet entitlement in the Coastal Aqueduct extension of the State Water
Project ("the Project"). The Registrant has reserved a total of $1,989,000
against previously incurred costs related to the Project during the twelve
months ended March 31, 1994 due to denial by the CPUC of the Registrant's
requests for participation in the Project and recovery of costs related
thereto. See Note 3 of Notes to Financial Statements.
Administrative and general expenses increased by 14.2% and 10.7%
for the three and twelve months ended March 31, 1994, respectively, as compared
to the same periods ended March 31, 1993. These periods are each affected by
increased personnel and personnel-related expenditures such as health insurance
and pension expense. These additional persons are necessitated by increased
regulatory, operational and administrative requirements.
Depreciation expense, increased by 9.9% and 13.3%, respectively,
for the three and twelve months ended March 31, 1994 reflecting, among other
things, the effects of recording approximately $28 million in net plant
additions during 1993, depreciation on which is fully reflected in the three
months ended March 31, 1994.
10
<PAGE> 13
Taxes on income decreased by approximately 6.7% for the three
months ended March 31, 1994 as compared to the three months ended March 31,
1993 as a result of lower pre-tax income. Primarily as a result of a reversal
of approximately $1.3 million in previously established tax reserves during the
last quarter of 1993, taxes on income are 29.7% less for the twelve months
ended March 31, 1994 as compared to the prior period.
Maintenance expense for the three months ended March 31, 1994
are 22.4% higher than the three months ended March 31, 1993 due primarily to
increased maintenance of hydrants in the Registrant's Metropolitan district.
The 29.2% increase in maintenance expense for the twelve months ended March 31,
1994 as compared to the prior period reflects the hydrant maintenance
previously discussed as well as the Registrant's main flushing and valve
exercise programs.
The Registrant recorded approximately $849,000 in capital gain
related to the sale of a former water system during 1992 which is included in
the results for the twelve months ended March 31, 1993. There are no similar
amounts reflected in the twelve months ended March 31, 1994.
Interest expense for the three and twelve months ended March 31,
1994 decreased by 18.1% and 1.1%, respectively, over the comparable 1993 time
periods primarily as a result of the Registrant's efforts, during the final
quarter of 1993, to refinance a substantial portion of its long-term debt at
lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant funds the majority of its operating expenses,
interest payments on its debt, dividends on its outstanding common and
preferred shares and makes its mandatory sinking fund payments through internal
sources. These internal sources primarily consist of cash flows from retained
earnings plus cash revenues retained by reason of non-cash charges such as
deferred taxes, amortization of deferred charges and depreciation. However,
because of the seasonal nature of its water and electric businesses, the
Registrant utilizes its short-term borrowing capacity on occasion to finance
current operating expenses.
The Registrant continues to fund the majority of its
construction expenditures through external sources including short-term bank
borrowing, the receipt of contributions-in-aid-of-construction and advances for
construction and install-and-convey contracts. For the quarter ended March 31,
1994, receipts of contributions-in-aid-of-construction and advances for
construction were approximately $172,000 net of refunds on such advances. For
the three months ended March 31, 1994, the Registrant recorded approximately
$54,000 in install-and-convey contracts as compared to $79,000 recorded during
the same period last year.
The aggregate short-term borrowing capacity currently available
to the Registrant under its three bank lines of credit is $27,068,000. Of this
amount, $8,068,000 is available for use in standby letters of credit, with
unused amounts available for other short-term borrowing. At March 31, 1994,
the Registrant had a total of $17,500,000 in borrowing outstanding under its
bank lines of credit, leaving an unused short-term borrowing capacity of
$9,568,000. The Registrant anticipates that the amount outstanding will
increase in the near term.
Short-term bank borrowing is used by the Registrant preparatory
to executing either a long-term debt or equity issue. The Registrant attempts
to maintain a balance equally between debt and equity for both its book capital
structure and its regulatory capital structure. In order to do so, the
Registrant anticipates it will be necessary to issue long-term debt in order to
finance its construction program. The Registrant currently has $13 million,
registered with the Securities and Exchange Commission, remaining for issuance
under its Medium Term Note Program. In addition, the Registrant is currently
investigating opportunities to issue tax-exempt debt.
In March, 1994, prior to hearings on two matters related to the
Registrant's 1992 general rate case applications, the Registrant agreed to
stipulate to a return on common equity of 10.10%. Because of the reduced return
on common equity, earnings and cash flow of the Registrant may be adversely
affected. See "Rates and Regulation."
11
<PAGE> 14
ACCOUNTING STANDARDS
Effective January 1, 1994, the Registrant is subject to the
Financial Accounting Standards Board's "Statement of Financial Accounting
Standards ("SFAS") No. 112 - Employer's Accounting for Post-employment
Benefits." The Registrant has determined that SFAS does not presently apply
since there are no such benefits, other than those properly accounted for under
other reporting requirements. See Note 7 to the Notes for Financial
Statements.
The Registrant was, on January 1, 1994, subject to the reporting
requirements of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Registrant has determined that it has no debt security
investments that are held-to-maturity or any debt or equity security
investments that are either trading securities or available-for-sale
securities. See Note 7 to the Notes for Financial Statements.
WATER SUPPLY
For the three months ended March 31, 1994, the Registrant
supplied a total of 35,005 acre-feet of water as compared to 30,767 acre-feet
for the three months ended March 31, 1993. Of the total 35,005 acre-feet of
water supplied during the first quarter of 1994, approximately 47.3% came from
pumped sources and 52.5% was purchased from others, principally the
Metropolitan Water District of Southern California ("MWD"). The remaining
amount came from the Bureau of Reclamation under a no-cost contract.
For the twelve months ended March 31, 1994, the Registrant
supplied 182,435 acre-feet of water as compared to 173,120 acre-feet for the
same period last year. Of the total supplied during the twelve months ended
March 31, 1994, approximately 53.3% came from pumped sources, 45.5% came from
purchased sources and the remaining amount was supplied from the Bureau of
Reclamation.
The MWD is a water district organized under the laws of the
State of California for the purpose of delivering imported water to areas
within its jurisdiction which includes most of coastal Southern California from
the County of Ventura south to and including San Diego County. The Registrant
has 52 connections to the water distribution facilities of MWD and other
municipal water agencies. MWD imports water from two principal sources: the
Colorado River and the State Water Project ("SWP"). MWD's 1994 allocation of
SWP entitlement has increased MWD's projected water supply from 1.92 million
acre-feet to 2.21 million acre-feet. In addition, the United States Bureau of
Reclamation has approved MWD's full request for Colorado River water, of which
MWD plans to use 1.2 million acre-feet. Imported supplies from MWD for 1994
demonstrate good probability of adequate supplies and no rationing of water
supplies by MWD is presently anticipated. Available water supplies from the
Colorado River and the SWP have historically been sufficient to meet most of
MWD's requirements.
The State of California has enjoyed only one year during the
last seven without drought conditions. For the first five months of the water
year which began on October 1, 1993, statewide precipitation has averaged 65%
of normal. As of March, 1994, mountain snowpack is estimated at 75% of normal;
much lower than the 180% of average during the same period last year. Stream
runoff is predicted to be below normal at 40% of average. As a result, in May,
1994, the California Department of Water Resources declared a drought watch
warning. Offsetting below normal precipitation for the current year, the 155
major reservoirs in the State of California showed storage at 24,240 million
acre-feet or 93% of average. As such, the Registrant believes that its water
supplies are adequate to meet projected needs.
WATER QUALITY
The Registrant continues to implement the Lead and Copper rules
as promulgated by the United States Environmental Protection Agency ("USEPA").
The second round of sampling for small water systems was
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recently completed with reduced monitoring in effect for medium-sized and large
water systems to begin next quarter. All 41 of the Registrant's water systems
are in compliance with the Lead and Copper Rules.
The Registrant will be subject to new rules pending
implementation by the USEPA with respect to radon and arsenic. With respect to
the radon rule, the USEPA did not meet its October 1, 1993 deadline for
implementation and implementation of the rule is presently the responsibility
of the United States Congress. Congress may establish a minimum contaminant
level ("MCL") of approximately 1,500 pico-curries per liter for radon in order
to implement the rule. At this level, only two of the Registrant's water
systems will be affected. The USEPA is presently reviewing data before
implementation of the rule on arsenic which is expected by November, 1995. If
the MCL for arsenic is established near 2 to 5 parts per billion, as is
presently contemplated, nearly all of the Registrant's water systems will be
impacted.
The Registrant will also be subject to new USEPA rules
concerning Disinfection/Disinfection ByProducts, expected by June, 1994, and
the Information Collection Rule, anticipated by October, 1994.
RATES AND REGULATION
The Registrant is subject to regulation by the CPUC as to its
water and electric business and properties. The CPUC has broad powers of
regulation over public utilities with respect to service and facilities, rates,
classifications of accounts, valuation of properties and the purchase,
disposition and mortgaging of properties necessary or useful in rendering
public utility service. It also has authority over the issuance of securities,
the granting of certificates of convenience and necessity as to the extension
of services and facilities and various other matters.
Water rates of the Registrant vary from district to district due
to differences in operating conditions and costs. Each operating district is
considered a separate entity for rate-making purposes. The Registrant
continuously monitors its operations in all of its districts so that
applications for rate changes may be filed, when warranted, on a
district-by-district basis in accordance with CPUC procedure. Under the CPUC's
practices, rates may be increased by three methods: general rate increases,
offsets for certain expense increases and advice letter filings related to
certain plant additions. General rate increases typically are for three-year
periods and include "step" increases in rates for the second and third years.
The Registrant filed an application for general rate increases
in six of its water operating districts in May, 1992. In June, 1993, the CPUC
issued its decision and the Registrant requested rehearing on two matters in
that decision - the return on rate base and an authorized rate increase for the
Registrant's Bay Point water district. The CPUC granted the Registrant's
request for rehearing on the two issues and established an interim rate of
return on rate base of 9.50% applicable to certain attrition, step rate filings
and other earnings test filings with respect to the Registrant's other
operating districts. See Note 4 of Notes to Financial Statements.
Prior to commencement of hearing on these two matter, which
hearing was held March 15, 1994, the Registrant and the Division of Ratepayer
Advocates ("DRA") of the CPUC stipulated to a rate of return on common equity
of 10.10%. In addition, DRA agreed that an increase in rates applicable to the
Registrant's Bay Point water district was appropriate with certain
modifications as to the level of rate base. A final decision on these two
matters is pending before the CPUC and is not expected until the Summer of
1994.
The reduced return on common equity may reduce future earnings
and cash flow could be significantly and adversely impacted. Consequently, the
Registrant may defer certain capital projects that have not been authorized by
the CPUC. At present, the Registrant intends, however, to continue with its
capital expansion program, including projects previously authorized by the CPUC
in prior rate cases, relying on external financing.
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The Registrant anticipates filing applications with the CPUC in
1994 to increase rates by approximately $2.3 million to recover costs
associated with implementation of certain recommendations made in a recently
completed management audit authorized by the CPUC. The Registrant further
anticipates filing for general rate relief including step increases in ten of
its water operating districts in 1995. However, the Registrant does not
anticipate significant rate relief from such filings until early 1996. No
assurance can be given that the CPUC will authorize any or all of the rates for
which the Registrant applies.
PART II
ITEM 1. LEGAL PROCEEDINGS
The laws of the State of California provide for the acquisition
of public utility property by governmental agencies through their power of
eminent domain, also known as condemnation. On July 9, 1992 the Contra Costa
Water District ("CCWD") filed a condemnation action in Contra Costa County
Superior Court seeking to acquire the Registrant's Bay Point water district.
A hearing on the necessity of CCWD's actions was held in late October, 1993.
A ruling on that issue was issued on November 1, 1993 which upheld CCWD's
resolution of necessity.
The Registrant and CCWD are continuing negotiations concerning
CCWD's condemnation of the Registrant's Bay Point water district. At this
time, however, the Registrant is unable to predict the final outcome of those
negotiations.
On May 4, 1993, the County Board of Supervisors of Contra Costa
County ("Board of Supervisors") adopted a resolution of necessity to acquire
the Registrant's Madison Plant and certain other real property owned by the
Registrant in its Bay Point water district. The Contra Costa County Highway
Department took possession of the property on September 1, 1993.
On March 8, 1994, the Registrant and the Board of Supervisors
reached a tentative settlement of issues related to their acquisition of the
Registrant's Madison Treatment plant. The tentative settlement of $2.3
million includes remuneration to the Registrant for the value of the property
taken, severance damages, if any, and reimbursement for treated water
purchased from the City of Pittsburg. The amount determined as remuneration
for the value of the property taken is to be applied against the value of the
Registrant's Bay Point district.
On October 20, 1993, the Registrant and the Internal Revenue
Service ("IRS") reached a settlement on the results of the IRS examination of
the Registrant's 1987, 1988 and 1989 tax returns. The Registrant has
remitted $438,000 in additional taxes for these years. Additional amounts
due in light of the settlement are immaterial. The Registrant signed the
settlement agreement in April, 1994 and the IRS is expected to sign in May,
1994.
The Registrant is also subject to ordinary litigation incidental
to its business. Except as disclosed above and in previous filings with the
SEC, there are no other material pending legal proceedings, other than such
incidental litigation, to which the Registrant is a party or of which any of
its properties is the subject which are believed by the Registrant to be
material.
ITEM 2. CHANGES IN SECURITIES
As of March 31, 1994, earned surplus amounted to $54,753,000. Of
this amount, $26,873,000 was restricted as to payment of cash dividends on the
Registrant's common shares.
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In January, 1994, the Registrant issued 39,597 common shares
pursuant to the terms of the Merger Agreement between the Registrant and
Lemon Heights Mutual Water Company ("LHMWC").
As of March 30, 1994, authorized but unissued common shares
includes 109,454 and 92,259 common shares reserved under the Registrant's DRP
and 401-k Program, respectively.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders, held April 26, 1994, a
slate of six directors was elected to serve until the next annual meeting and
until their successors are chosen and qualified. The following persons were
elected to the Registrant's Board of Directors: W.V. Caveney, F.E. Wicks,
R.B. Clark, D.E. Brown, W.M. Kizer and N.P. Dodge, Jr. All directors of the
Registrant serve one year terms. No nominee standing for election received
less than a 98.4% affirmative vote.
Also at the Annual Meeting of Shareholders, the shareholders
approved, by a 95.03% affirmative vote, an amendment to the Registrant's
Bylaws to establish a variable Board of Directors of between five and nine
persons, with the exact number of directors to be six until changed by the
Board of Directors or the shareholders by amendment of the Articles of
Incorporation or Bylaws.
ITEM 5. OTHER INFORMATION
On April 25, 1994, the Board of Directors of the Registrant
declared a regular quarterly dividend of $0.30 per common share. The
dividend will be paid June 1, 1994 to shareholders of record as of the close
of business on May 13, 1994.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer and chief financial officer.
SOUTHERN CALIFORNIA WATER COMPANY
By: s/ JAMES B. GALLAGHER
-----------------------------
James B. Gallagher
Vice President - Finance,
Chief Financial Officer and Secretary
Date: May 9, 1994
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