<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 JUNE 30, 1994 Commission file number 0-1121
SOUTHERN CALIFORNIA WATER COMPANY
(Exact Name of Registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-1243678
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
630 EAST FOOTHILL BOULEVARD, SAN DIMAS, CALIFORNIA 91773
-------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
</TABLE>
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 July 31, 1994, the number of shares outstanding
of the Registrant's Common Shares, 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 June 30, 1994 and December 31, 1993 2 - 3
Statements of Income for the Three Months Ended
June 30, 1994 and June 30, 1993 4
Statements of Income for the Six Months Ended
June 30, 1994 and June 30, 1993 5
Statements of Income for the Twelve Months Ended
June 30, 1994 and June 30, 1993 6
Statements of Cash Flows for the Six Months Ended
June 30, 1994 and June 30, 1993 7
Notes to Financial Statements 8 - 10
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operation 11 - 18
PART II OTHER INFORMATION
Item 1: Legal Proceedings 18 - 19
Item 2: Changes in Securities 19 - 20
Item 3: Defaults Upon Senior Securities 20
Item 4: Submission of Matters to a Vote of Security Holders 20
Item 5: Other Information 20
Item 6: Exhibits and Reports on Form 8-K 20
</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
<PAGE> 4
SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
---------- ------------
(Unaudited)
<S> <C> <C>
UTILITY PLANT, at cost (in thousands)
Water......................................... $347,156 $341,438
Electric...................................... 25,513 24,820
-------- --------
372,669 366,258
Less - Accumulated depreciation............... (88,748) (84,808)
-------- --------
283,921 281,450
Construction work in progress................. 20,017 13,540
-------- --------
303,938 294,990
-------- --------
OTHER PROPERTY AND INVESTMENTS................ 2,339 921
-------- --------
CURRENT ASSETS
Cash and cash equivalents................... 922 1,726
Accounts receivable -
Customers, less reserves of $378
in 1994 and $370 in 1993................. 8,466 6,815
Other......................................... 2,460 1,520
Unbilled revenue.............................. 9,823 8,106
Materials and supplies, at average cost....... 1,328 1,275
Supply cost balancing accounts................ 6,757 7,022
Prepayments and other......................... 5,394 6,787
Accumulated deferred income taxes - net....... 1,419 1,279
-------- --------
36,569 34,530
-------- --------
DEFERRED CHARGES
Regulatory tax-related assets............... 23,214 23,198
Other deferred charges...................... 4,804 4,894
-------- --------
28,018 28,092
-------- --------
$370,864 $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>
June 30, December 31,
1994 1993
----------- ------------
(Unaudited)
(in thousands)
<S> <C> <C>
CAPITALIZATION
Common shareholders' equity................. $115,874 $116,463
Preferred shares............................ 1,600 1,600
Preferred shares subject to mandatory
redemption requirements.................... 600 600
Long-term debt.............................. 84,189 84,286
-------- --------
202,263 202,949
-------- --------
CURRENT LIABILITIES
Notes payable to banks...................... 24,750 12,000
Long-term debt and preferred shares
due within one year........................ 415 417
Accounts payable............................ 7,937 9,277
Taxes payable............................... 3,116 2,950
Accrued interest............................ 1,588 1,178
Other accrued liabilities................... 7,924 6,846
-------- --------
45,730 32,668
-------- --------
OTHER CREDITS
Advances for construction................... 54,218 55,295
Contributions in aid of construction........ 25,618 25,011
Accumulated deferred income taxes - net..... 35,499 34,969
Unamortized investment tax credits.......... 3,623 3,664
Regulatory tax-related liability............ 2,367 2,389
Other....................................... 1,546 1,588
-------- --------
122,871 122,916
-------- --------
$370,864 $358,533
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 1994 AND 1993
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------
1994 1993
------- -------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water......................................... $28,080 $26,397
Electric...................................... 2,414 2,217
------- -------
30,494 28,614
------- -------
OPERATING EXPENSES
Water......................................... 7,063 6,849
Power purchased for pumping................... 1,545 1,830
Power purchased for resale.................... 770 992
Groundwater production assessment............. 1,698 1,546
Supply cost balancing accounts................ 1,479 (1,332)
Other operating expenses...................... 3,074 2,798
Provision for State Water Project............. 128 950
Administrative and general expenses........... 3,848 3,317
Depreciation.................................. 2,016 1,864
Maintenance................................... 1,649 1,553
Taxes on income............................... 1,703 2,066
Other taxes................................... 1,258 1,103
------- -------
26,231 23,536
------- -------
Operating income.............................. 4,263 5,078
OTHER INCOME...................................... (46) (75)
------- -------
Income before interest........................ 4,217 5,003
INTEREST CHARGES.................................. 1,890 2,015
------- -------
NET INCOME........................................ 2,327 2,988
DIVIDENDS ON PREFERRED SHARES..................... (25) (25)
------- -------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS........ $2,302 $2,963
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING..... 7,845 6,660
======= =======
Earnings Per Common Share......................... $0.29 $0.44
======= =======
Dividends Declared Per Common Share............... $0.300 $0.300
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 1994 AND 1993
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1994 1993
------- -------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water............................................. $49,292 $45,587
Electric.......................................... 5,383 5,204
------- -------
54,675 50,791
------- -------
OPERATING EXPENSES
Water purchased .................................. 13,805 11,381
Power purchased for pumping....................... 2,766 3,361
Power purchased for resale........................ 2,231 2,385
Groundwater production assessment................. 2,332 3,064
Supply cost balancing accounts.................... 259 (2,897)
Other operating expenses.......................... 6,013 5,540
Provision for State Water Project................. 263 950
Administrative and general expenses............... 7,373 6,404
Depreciation...................................... 4,030 3,696
Maintenance....................................... 3,457 3,030
Taxes on income................................... 2,494 2,914
Other taxes....................................... 2,495 2,218
------- -------
47,518 42,046
------- -------
Operating income.................................. 7,157 8,745
OTHER INCOME.......................................... (5) (39)
------- -------
Income before interest charges.................... 7,152 8,706
INTEREST CHARGES...................................... 3,660 4,176
------- -------
NET INCOME............................................ 3,492 4,530
DIVIDENDS ON PREFERRED SHARES......................... (49) (50)
------- -------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS............ $ 3,443 $ 4,480
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING......... 7,839 6,654
======= =======
Earnings Per Common share............................. $0.44 $0.67
======= =======
Dividends Declared Per Common Share................... $0.600 $0.588
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 8
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED JUNE 30, 1994 AND 1993
(Unaudited)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30,
------------------------------
1994 1993
-------- --------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water. . . . . . . . . . . . . . . . . . . . . . . . . . . . $101,860 $ 96,071
Electric . . . . . . . . . . . . . . . . . . . . . . . . . . 10,530 10,291
-------- --------
112,390 106,362
OPERATING EXPENSES -------- --------
Water purchased. . . . . . . . . . . . . . . . . . . . . . . 31,799 25,417
Power purchased for pumping. . . . . . . . . . . . . . . . . 7,543 7,817
Power purchased for resale . . . . . . . . . . . . . . . . . 3,128 4,455
Groundwater production assessment. . . . . . . . . . . . . . 4,553 5,147
Supply cost balancing accounts . . . . . . . . . . . . . . . (4,804) (6,457)
Other operating expenses . . . . . . . . . . . . . . . . . . 11,396 11,094
Provision for State Water Project . . . . . . . . . . . . . 1,174 950
Administrative and general expenses. . . . . . . . . . . . . 14,471 13,226
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 7,732 6,850
Maintenance. . . . . . . . . . . . . . . . . . . . . . . . . 6,877 5,549
Taxes on income. . . . . . . . . . . . . . . . . . . . . . . 5,071 8,331
Other taxes. . . . . . . . . . . . . . . . . . . . . . . . . 4,988 4,418
-------- --------
93,928 86,797
-------- --------
Operating income . . . . . . . . . . . . . . . . . . . . . . 18,462 19,565
-------- --------
OTHER INCOME
Net gain on sale of operating properties . . . . . . . . . . - 849
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 388 11
-------- --------
388 860
-------- --------
Income before interest charges . . . . . . . . . . . . . . . 18,850 20,425
INTEREST CHARGES . . . . . . . . . . . . . . . . . . . . . . . . 7,862 8,127
-------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,988 12,298
DIVIDENDS ON PREFERRED SHARES. . . . . . . . . . . . . . . . . . (99) (101)
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS . . . . . . . . . . . $ 10,889 $ 12,197
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING. . . . . . . . . . 7,773 6,644
======== ========
Earnings Per Common Share . . . . . . . . . . . . . . . . . . . $1.40 $1.84
======== ========
Dividends Declared Per Common Share . . . . . . . . . . . . . . $1.200 $1.163
======== ========
The accompanying notes are an integral part of these financial statements
</TABLE>
6
<PAGE> 9
SOUTHERN CALIFORNIA WATER COMPANY
CASH FLOW STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1993
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1994 1993
-------- --------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM -
Operating Activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,492 $ 4,530
Adjustments for non-cash items:
Depreciation and amortization . . . . . . . . . . . . . . . . . 4,229 3,864
Deferred income taxes and
investment tax credits. . . . . . . . . . . . . . . . . . . 311 2,345
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . (1,475) (1,495)
Changes in assets and liabilities:
Customer receivables . . . . . . . . . . . . . . . . . . . . (2,591) 1,860
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . 1,393 1,416
Supply cost balancing accounts . . . . . . . . . . . . . . . 265 1,265
Rationing penalty reserve . . . . . . . . . . . . . . . . . . - (5,015)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . (1,340) 2,134
Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . 166 (1,476)
Unbilled revenue . . . . . . . . . . . . . . . . . . . . . . (1,717) 38
Accrued interest . . . . . . . . . . . . . . . . . . . . . . 410 (55)
Accrued insurance . . . . . . . . . . . . . . . . . . . . . . 1,087 (381)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403 335
-------- --------
Net Cash Provided . . . . . . . . . . . . . . . . . . . . 4,633 9,365
-------- --------
Financing Activities:
Issuance of securities. . . . . . . . . . . . . . . . . . . . . - 1,017
Receipt of advances and contributions . . . . . . . . . . . . . 1,883 853
Repayments of long-term debt and
redemption of preferred shares. . . . . . . . . . . . . . . . (97) (154)
Refunds on advances . . . . . . . . . . . . . . . . . . . . . . (2,360) (2,584)
Net change in notes payable to banks. . . . . . . . . . . . . . 12,750 6,332
Common and preferred dividends. . . . . . . . . . . . . . . . . (4,748) (3,980)
-------- --------
Net Cash Provided. . . . . . . . . . . . . . . . . . . . . 7,428 1,484
-------- --------
Investing Activities:
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . (12,865) (11,069)
-------- --------
Net Cash Used. . . . . . . . . . . . . . . . . . . . . . . (12,865) (11,069)
-------- --------
Net Decrease in Cash and Cash Equivalents . . . . . . . . . . . . (804) (220)
Cash and Cash Equivalents, Beginning of period. . . . . . . . . . 1,726 442
-------- --------
Cash and Cash Equivalents, End of period. . . . . . . . . . . . . $ 922 $ 222
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
7
<PAGE> 10
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 June 30, 1994, the Registrant has incurred $1.8 million
in costs related to the Project and had deposited approximately
$1.7 million against future costs of the Project.
In light of the CPUC actions and the uncertainty
surrounding the Registrant's participation in the Project, the
Registrant has, since June, 1993, established reserves totaling
approximately $2.1 million against its previously recorded
investment in the Project. In June, 1994, the Registrant
signed a Water Supply Agreement to become a participant in the
Project at a level of 500 acre-feet. The agreement calls for
the Registrant to contribute approximately $650,000 towards the
cost of construction of certain Project facilities and related
costs plus redesign costs of $190,000. This total cost is to
be deducted from the $1.7 million deposit and the balance, plus
interest, is to be refunded to the Registrant.
The Registrant intends to file an application with the CPUC
seeking approval of its participation in the Project and
authorizing recovery through rates of costs associated with that
participation. No assurance can be given that the CPUC will
authorize participation in the Project or whether the CPUC will
deny or approve recovery through rates of all or any costs
associated with such participation.
The Registrant has entered negotiations for the sale of
the remaining 2,500 acre-feet of its total 3,000 acre-foot
entitlement in the Project.
8
<PAGE> 11
4. The Registrant and the Contra Costa Water District ("CCWD") have
entered into an agreement to settle CCWD's condemnation action
regarding the Registrant's Bay Point water district. Under the
terms of the settlement, the Registrant will continue to own and
operate the Bay Point system and CCWD will withdraw its
condemnation action. CCWD will construct certain facilities
which will be interconnected to the Registrant's system in order
to provide a long-term source of supplemental supply for the
system. The Registrant will reimburse CCWD for the cost of
constructing these facilities. The current estimate of the costs
of the facilities is $2.6 million. One-half, or $1.3 million, of
this amount will be payable to CCWD in September, 1994 with the
balance due in seven equal annual installments beginning with
completion of the facilities, anticipated in 1996. The
settlement also calls for the Registrant to absorb its litigation
costs in the condemnation proceeding. Such costs have been
deferred and totaled approximately $435,000, as of June 30, 1994.
The initial contribution of $1.3 million will be made from a
portion of the proceeds of $2.3 million received from the County
of Contra Costa for its condemnation of the Registrant's Madison
Treatment Plant. The remaining $1 million of proceeds from this
action will be credited to the Registrant's supply cost balancing
account to offset a portion of the higher cost of purchased water
from the City of Pittsburg immediately following the Registrant's
loss of the Madison plant capacity in 1993.
The terms of the settlement with CCWD are subject to CPUC
approval. A filing will be made with the CPUC during the third
quarter of 1994. The Registrant is unable to predict the outcome
of the CPUC's consideration of such an application.
5. 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 and established an interim rate of return on rate
base of 9.50% applicable to certain attrition and step rate
filings and other earnings test filings with respect to the
Registrant's other operating districts.
Prior to commencement of hearing on the 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 rates of the
Registrant's Bay Point water district was appropriate with
certain modifications. The final decision in this proceeding was
issued in June, 1994 upholding the stipulated return on equity
and granting a small increase in water rates for the Registrant's
Bay Point district.
9
<PAGE> 12
6. 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
employee's past service up to the date of adoption of the
statement.
Based on a 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 $9.1 million. A
one percent (1%) increase in the anticipated health care cost
trend assumption results in an estimated increase of
approximately $2.2 million in the accumulated postretirement
benefits obligation ("APBO"). The Registrant estimates that its
Net Periodic Postretirement Benefit Costs, under the current
plans, would approximate $1.7 million, including amortization of
the transition APBO over a 20-year period.
The Registrant, for the six-month period ended June 30, 1994,
has capitalized an additional $750,000 of its anticipated Net
Periodic Postretirement Benefit Costs for 1994 and is continuing
its review of the funding aspects of SFAS No. 106.
The Registrant has deferred funding any of its SFAS No. 106
liability pending final approval by the Board of Directors of
proposed changes to the Registrant's post-retirement medical
plans. After such approval, the amount of the regulatory asset
will be adjusted accordingly. The Registrant is unable to
predict what effects, if any, a national health care program
would have on its medical plans.
7. 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. The CPUC has consistently permitted the
recovery of previously flowed-through tax benefits. Therefore
the Registrant believes that adoption of SFAS No. 109 will not
have a significant impact on the Registrant's results of
operation.
8. 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.
10
<PAGE> 13
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 June 30, 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 237,576 water customers and 20,119 electric
customers at June 30, 1994, or a total of 257,695, customers compared with
256,327 total customers at June 30, 1993.
RESULTS OF OPERATION
Earnings per common share for the three months ended June
30, 1994 decreased by 34.0% to $0.29 per share as compared to $0.44 per share
for the comparable period last year. For the six months ended June 30, 1994,
earnings per share were $0.44 as compared to $0.67 for the six months ended
June 30, 1993. Earnings for the twelve months ended June 30, 1994 decreased by
23.7% to $1.40 per share as compared to $1.84 per share for the twelve months
ended June 30, 1993. Excluding a non-recurring after-tax gain on the sale of
the Registrant's Big Bear Water Systems, earnings per share were $1.71 for the
twelve months ended June 30, 1993. The three, six and twelve month periods
ended June 30, 1993 also include $0.09, $0.13 and $0.13 per share respectively,
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 six and twelve months ended June 30, 1994 increased by 3.4% and
1.3%, respectively. However, water sales volumes for the three months ended
June 30, 1994 decreased by 3.6% compared to the same period last year. Water
operating revenues increased by 6.4%, 8.1% and 6.0%, in each of the three
periods ended June 30, 1994 respectively, over the same periods of last year as
a result of the full impact of $2.3 million in general rate increases
11
<PAGE> 14
effective during 1993, partial effects of step and attrition rate increases
effective in early 1994 and the partial effects of $12 million in supply cost
offset rate increases effective in March, 1994. In addition, the comparison
between the six and twelve month periods is affected by the recording of
approximately $467,000 and $950,000 in income in February, 1993 and June, 1993,
respectively, related to the recoverability of net revenue losses, caused by
drought conditions, and extraordinary conservation expenses.
Kilowatt-hour sales of electricity increased by 5.6%, 6.3%
and 2.4% for the three, six and twelve months ended June 30, 1994,
respectively, as compared to the same periods last year. Electric operating
revenues for the three, six and twelve month periods ending June 30, 1994
increased by 8.9%, 3.4% and 2.3%, respectively, over the comparable periods
last year as a result of the increased kilowatt-hour sales volumes.
Purchased water costs increased by 3.1%, 21.3% and 25.1%
over 1993, respectively, for the three, six and twelve months ended June 30,
1994. These increases reflect increases in the amount of water volumes
purchased as well as increases in purchased water rates, the latest series of
which were effective July 1, 1993. Reduced water purchases generally, as a
result of voluntary and price-induced conservation during the drought, has
caused wholesale water rates in the State of California to increase
significantly to cover fixed costs of the wholesale water suppliers. Recently,
the Registrant's major wholesale water supplier announced a seven percent (7%)
increase in water rates effective July 1, 1994.
The costs of power purchased for pumping decreased by 15.6%,
17.7% and 3.5%, respectively, for the three, six and twelve months ended June
30, 1994 as compared to the same periods ended June 30, 1993 due chiefly to the
effects of a decrease in the proportion of total water supplied which comes
from pumped sources.
As compared to the three, six and twelve months ended June
30, 1993, the costs of power purchased for resale declined by 22.4%, 6.5% and
29.8% for the three, six and twelve months ended June 30, 1994, respectively.
The three and six month ended comparisons are affected by approximately
$315,000 in refunds from SCE which, for the six month comparison, is partially
offset by an increase in kilowatt-hour sales. The twelve month comparison is
also affected by additional refunds from SCE of approximately $2 million.
Groundwater production assessments are 9.8% higher for the
three months ended June 30, 1994 as compared to June 30, 1993 due to the
effects of the Registrant's participation in a seasonal storage program. This
program allows the Registrant to purchase water from the Metropolitan Water
District of Southern California ("MWD"), the Registrant's wholesale water
supplier, at a reduced rate, in lieu of pumping water. During the summer
months, the Registrant pumps groundwater that it otherwise would have pumped
during the winter. The total cost of the seasonal storage water rights
program, although it changes the Registrant's resource mix, is less than
pumping in the winter and purchasing water from MWD in the summer as the
Registrant normally has done. In June, the Registrant began paying for its
seasonal storage water rights thereby increasing its groundwater production
assessments.
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For the six and twelve months ended June 30, 1994, groundwater production
assessment decreased by 23.9% and 11.5%, respectively, as compared to prior
year periods due primarily to the effects of recording, in February, 1993,
approximately $621,000 in additional groundwater assessments related to prior
period deliveries. There were no such prior period assessment during 1994.
A positive entry for the provision for supply cost balancing
accounts reflects recovery of previously under-collected supply costs. The
positive entries for both the three and six months ended June 30, 1994 result
from approval by the CPUC in March, 1994 of rate increases to collect these
amounts. A negative charge for the provision for supply cost balancing accounts
reflects an undercollection of water and electric energy supply costs. The
negative charge in this category for the twelve months ended June 30, 1994
results from higher purchased water supply costs, supply costs for power
purchased for pumping and resale and increased groundwater production
assessments which have not yet been collected through rates.
Other operating expenses increased by 9.9%, 8.5% and 2.7%,
respectively, for the three, six and twelve months ended June 30, 1994 as
compared to the same periods ended June 30, 1993 due chiefly to a net increase
in personnel involved in various operating and customer service functions.
During the second quarter of 1994, the Registrant reserved
an additional $128,000 against retention rights associated with the
Registrant's 3000 acre-feet entitlement in the State Water Project ("the
Project"). The Registrant has reserved a total of $2,124,000 against
previously incurred costs related to the Project due to denial by the CPUC of
the Registrant's requests for participation in the Project and recovery of
costs related thereto. Of this amount, $950,000 was reserved in June, 1993.
See Note 3 of the Notes to Financial Statements.
Administrative and general expenses increased by
16.0%, 15.1% and 9.4% for the three, six and twelve months ended June 30, 1994,
respectively, as compared to the same periods ended June 30, 1993. These
periods are each affected by increased personnel necessitated by increased
regulatory, operational and administrative requirements as well as associated
personnel-related expenditures such as health insurance and increased customer
accounting costs.
Depreciation expense, increased by 8.2%, 9.0% and 12.9%,
respectively, for the three, six and twelve months ended June 30, 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 and six months ended June 30, 1994.
Taxes on income decreased by approximately 17.6%, 14.4% and
39.1%, respectively, for the three, six and twelve months ended June 30, 1994
as compared to the three, six and twelve months ended June 30, 1993 as a result
of lower pre-tax income. In addition, the twelve month comparison is affected
by a reversal of approximately $1.3 million in previously established tax
reserves during the last quarter of 1993.
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Maintenance expense increased by 6.2%, 14.1% and 23.9% for
the three, six and twelve months ended June 30, 1994 as compared to the three,
six and twelve months ended June 30, 1993. These increases are primarily a
result of work performed on the Registrant's water pumping equipment, emphasis
on hydrant maintenance and extensive main flushing and valve exercise programs.
Interest expense for the three, six and twelve months ended
June 30, 1994 decreased by 6.2%, 12.4% and 3.3%, respectively, over the
comparable 1993 time periods primarily as a result of the Registrant's
refinancing, during the last quarter of 1993, of a substantial portion of its
outstanding 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 primarily consisting of cash flows from retained earnings plus cash
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 advances. For the quarter ended June 30,
1994, receipts of contributions-in-aid-of-construction and advances for
construction were $477,000, net of refunds on such advances. For the three
months ended June 30, 1994, the Registrant recorded approximately $58,000 in
install-and-convey contracts as compared to $321,000 for the prior year quarter
ended June 30, 1993.
On June 30, 1994, the aggregate short-term borrowing
capacity available to the Registrant under its three bank lines of credit is
$27,063,000. Of this amount, $8,063,000 is available for use in standby
letters of credit, with unused amounts available for other short-term
borrowing. At June 30, 1994, the Registrant had a total of $24,750,000 in
borrowing outstanding under its bank lines of credit, leaving an unused
short-term borrowing capacity of $2,313,000. In July, 1994, the Registrant
sold the remaining $13 million in principal amount authorized under its
Medium-Term Note Program. Net proceeds from the sale of these Notes were used
to repay short-term bank borrowings thereby increasing the availability of
short-term bank borrowing to $15,313,000. It is anticipated that borrowing
under the lines of bank credit will continue to increase. The Board of
Directors recently authorized an increase in the Registrant's aggregate
borrowing capacity to $35 million. The Registrant has been notified by its
banks that such an aggregate increase has been approved; thus the Registrant
currently has $22,313,000 in unused short-term bank borrowing capacity.
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The Registrant employs short-term bank borrowing as an
interim financing source prior to executing either a long-term debt or equity
issue. The Registrant anticipates that it will be necessary, in order to
continue to finance its capital expenditure program while maintaining an equal
balance between equity and debt in its capital structure, to issue additional
long-term debt in 1995. The Registrant anticipates selling such debt in the
public market through another Medium-Term Note Program. The Registrant is
currently investigating funding a portion of its qualifying capital through
issuance of tax-exempt debt.
In March, 1994, prior to hearing 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%. The final decision, issued
in June, 1994, upheld the 10.10% return on equity. Please see the section
entitled "Rates and Regulation" for more information.
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 of the Notes to 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
investments that are either trading securities or available-for-sale
securities. See Note 7 of the Notes to Financial Statements.
WATER SUPPLY
For the three months ended June 30, 1994, the Registrant
supplied a total of 48,217 acre-feet of water as compared to 49,297 acre-feet
for the three months ended June 30, 1993. Of the total 48,217 acre-feet of
water supplied during the second quarter of 1994, approximately 58.6% came from
pumped sources and 40.4% was purchased from others, principally the MWD. The
remaining 1% came from the Bureau of Reclamation (the "Bureau") under a no-cost
contract.
For the six months ended June 30, 1994, the Registrant
supplied 83,222 acre-feet of water as compared to 80,064 acre-feet for the same
period last year. Of this total amount supplied, 53.9% came from pumped
sources, 45.5% was supplied from purchased sources and the remaining amount was
supplied from the Bureau.
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During the twelve months ended June 30, 1994, the Registrant
supplied 181,354 acre-feet of water. This amount represent a 3.3% increase
from the 175,549 acre-feet supplied during the twelve months ended June 30,
1993. During the twelve month period ended June 30, 1994, 53.6% of total
supply came from pumped sources, 45.3% was purchased and the remaining was
supplied by the Bureau.
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 water supplied from MWD
demonstrate good probability that no rationing of water supplies by MWD will
occur in 1994. Available water supplies from the Colorado River and the SWP
have historically been sufficient to meet most of MWD's requirements with the
exception of the recent six-year drought.
The State of California has enjoyed only one year during the
last seven without drought conditions. For the first eight months of the
current water year, which began October 1, 1993, statewide precipitation has
averaged 65% of normal. Seasonal runoff remains below normal at 40% of
average; by comparison, seasonal runoff at this time last year was about 120%
of normal. As a result in May, 1994, the California Department of Water
Resources declared a drought watch warning. A dry winter period may result in
the imposition of water rationing during 1995. However, offsetting below
normal precipitation for the current year, the 155 major reservoirs in the
State of California show storage at between 24 and 25 million acre-feet or
approximately 85% or normal. As such, the Registrant believes that its water
supplies are adequate to meet projected current year demands.
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 recently
completed with second annual reduced monitoring in effect for medium-sized and
large water systems. 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 of the rule is presently the responsibility of the United States
Congress. The Registrant believes that if Congress establishes a minimum
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contaminant level ("MCL") of approximately 1,500 pico-curies per liter for
radon in order to implement the rule, that it will do so within the next sixty
days. At this level, only two of the Registrant's systems will be affected.
Aeration treatment for the affected systems will be relatively inexpensive.
However, the USEPA has recommended a level of 200 pico-curies per liter, which
would affect most of the Registrant's wells. The USEPA continues to review
data before implementation of the arsenic rule, which implementation is
expected by November, 1995. If the MCL is established near 2 to 5 micrograms
per liter, as is presently contemplated, nearly all of the Registrant's systems
will be impacted. Compliance with such a standard would cause the Registrant
to implement costly wellhead remedies or, alternatively, to purchase additional
water supplies which are already in compliance, to the extent such supplies are
available.
The Registrant will also be subject to the new USEPA rules
concerning Disinfection/Disinfection By-Products and the Information Collection
rule. Compliance with the latter rule, expected in October, 1994, will affect
only two of the Registrant's systems with minor paperwork costs. Stage 1 of
the Disinfection/Disinfection By-Products rule has been published with an
effective date of June, 1998. This rule reduces tri-halomethane contaminants
from 100 micrograms per liter to 80 micrograms per liter and affects only two
of the Registrant's systems.
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
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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 matters, 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 was issued in June, 1994 which upheld the stipulated rate of return on
common equity and granted a small increase in water rates applicable to the
Registrant's Bay Point water district.
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
including bank loans.
The Registrant filed applications with the CPUC in June, 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, on July 29, 1994,
filed for an increase in rates in one of its water operating districts. Final
decisions with respect to these filings are expected during the first half of
1995. The Registrant anticipates filing for general rate relief, including step
and attrition year increases, in six of its water operating districts in
January, 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 actions as necessary.
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The Registrant and CCWD have entered into a settlement
agreement concerning CCWD's condemnation of the Registrant's Bay Point water
district. Under the terms of the settlement, the Registrant will continue to
own and operate the Bay Point system and CCWD will withdraw its condemnation
action. The Registrant is responsible for reimbursing CCWD for additional
facilities to provide for a long-term supplemental source of treated water
supply for the Registrant's system. The estimated cost of these facilities,
based upon the Registrant's current capacity needs, is approximately $2.6
million. One-half, or $1.3 million, will be payable in September, 1994 with
the balance payable in 84 monthly installments following completion of the
facilities, estimated to be in 1996. The terms of the agreement are subject to
approval by the CPUC which approval is not expected before mid 1995.
In addition to CCWD's actions, 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 district. The
Contra Costa Highway Department took possession of the property on September 1,
1993.
On March 8, 1994, the Registrant and the Board of
Supervisors reached a settlement of issues related to their acquisition of the
Registrant's Madison Treatment Plant. The Registrant has received the
settlement of $2.3 million, which includes remuneration for the value of the
real property taken and reimbursement for treated water purchased from the City
of Pittsburg. In addition, the Board of Supervisors agreed to pay nearly $1
million for relocation of certain pipelines owned by the Registrant.
The Registrant and the Internal Revenue Service ("IRS") have
signed the settlement agreement related to the IRS examination of the
Registrant's 1987, 1988 and 1989 tax returns. As part of the settlement, the
Registrant was only required to remit $438,000 in additional taxes for those
years out of almost $5 million in assessments made by the IRS.
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 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 June 30, 1994, earned surplus amounted to $41,508,000.
Of this amount, $26,997,000 was restricted as to payment of cash dividends on
the Registrant's common shares.
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As of June 30, 1994, authorized but unissued common shares
includes 109,454 and 92,259 common shares reserved for issuance under the
Registrant's Dividend Reinvestment and Common Shares Purchase Program and
Investment Incentive Program ("401-k"), respectively.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the second quarter of the
fiscal year covered by this report to a vote of security holders through the
solicitation of proxies or otherwise.
ITEM 5. OTHER INFORMATION
On July 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 September 1, 1994 to shareholders of record as of the close of
business on August 12, 1994. In other actions, the Board of Directors declared
regular quarterly dividends of $0.25 per share, $0.265625 per share and $0.3125
per share on its 4%, 4-1/4% and 5% Cumulative Preferred Shares, respectively.
On July 25, 1994, the Board of Directors of the Registrant
accepted the resignation of William M. Kizer as a member of the Board. Mr.
Kizer indicated his desires were to concentrate on his personal endeavors. The
Board of Directors is currently interviewing possible candidates to fill the
remaining term of Mr. Kizer.
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: August 10, 1994
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