<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended MARCH 31, 1995 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, 1995, 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/A
AMENDMENT NO. 1
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1: Financial Statements 1
Balance Sheets as of March 31, 1995 and December 31, 1994 2 - 3
Statements of Income for the Three Months Ended
March 31, 1995 and March 31, 1994 4
Statements of Income for the Twelve Months Ended
March 31, 1995 and March 31, 1994 5
Cash Flow Statements for the Three Months Ended
March 31, 1995 and March 31, 1994 6
Notes to Financial Statements 7 - 9
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operation 10 - 16
PART II OTHER INFORMATION
Item 1: Not Applicable in this Amendment No. 2
Item 2: Changes in Securities 16
Item 3: Not Applicable in this Amendment No. 2
Item 4: Not Applicable in this Amendment No. 2
Item 5: Not Applicable in this Amendment No. 2
Item 6: Not Applicable in this Amendment No. 2
Signatures 17
</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 on Form 10-K.
1
<PAGE> 4
SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
----------- ------------
(Unaudited)
(in thousands)
<S> <C> <C>
UTILITY PLANT, at cost
Water...................................................................... $356,829 $356,666
Electric................................................................... 27,922 26,642
-------- --------
384,751 383,308
Less - Accumulated depreciation............................................ (95,248) (92,679)
-------- --------
289,503 290,629
Construction work in progress.............................................. 28,301 24,250
-------- --------
317,804 314,879
-------- --------
OTHER PROPERTY AND INVESTMENTS.............................................. 921 921
-------- --------
CURRENT ASSETS
Cash and cash equivalents.................................................. 1,035 2,344
Accounts receivable -
Customers, less reserves of $264
in 1995 and $419 in 1994................................................. 8,091 8,889
Other...................................................................... 1,863 2,015
Unbilled revenue........................................................... 7,129 9,560
Materials and supplies, at average cost.................................... 1,295 1,232
Supply cost balancing accounts............................................. 7,597 7,008
Prepayments and other...................................................... 6,115 6,578
Accumulated deferred income taxes - net.................................... 2,099 2,461
-------- --------
35,224 40,087
-------- --------
DEFERRED CHARGES
Regulatory tax-related assets............................................. 23,073 23,105
Other deferred charges.................................................... 5,061 4,635
-------- --------
28,134 27,740
-------- --------
$382,083 $383,627
======== ========
</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,
1995 1994
--------- ------------
(Unaudited)
(in thousands)
<S> <C> <C>
CAPITALIZATION
Common shareholders equity..................................... $117,701 $118,962
Preferred shares............................................... 1,600 1,600
Preferred shares subject to mandatory
redemption requirements...................................... 560 560
Long-term debt................................................. 92,751 92,891
-------- --------
212,612 214,013
-------- --------
CURRENT LIABILITIES
Notes payable to banks......................................... 25,000 19,500
Long-term debt and preferred shares
due within one year.......................................... 2,524 4,624
Accounts payble................................................ 5,081 8,448
Taxes payable.................................................. 4,083 5,635
Accrued interest............................................... 1,427 1,885
Other accrued liabilities...................................... 7,477 6,504
-------- --------
45,592 46,596
-------- --------
OTHER CREDITS
Advances for construction...................................... 54,908 54,503
Contributions in aid of construction........................... 25,510 25,567
Accumulated deferred income taxes - net........................ 36,850 36,252
Unamortized investment tax credits............................. 3,561 3,582
Regulatory tax-related liability............................... 2,333 2,352
Other.......................................................... 717 762
-------- --------
123,879 123,018
-------- --------
$382,083 $383,627
======== ========
</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 MARCH 31, 1995 AND 1994
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1995 1994
------- -------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water........................................................................... $21,699 $21,212
Electric........................................................................ 3,277 2,969
------- -------
24,976 24,181
------- -------
OPERATING EXPENSES
Water purchased................................................................. 5,381 6,742
Power purchased for pumping..................................................... 1,450 1,221
Power purchased for resale...................................................... 1,503 1,460
Groundwater production assessment............................................... 1,294 635
Supply cost balancing .......................................................... (602) (1,220)
Other operating expenses........................................................ 2,962 2,939
Provision for State Water Project............................................... - 135
Administrative and general expenses............................................. 3,987 3,524
Depreciation.................................................................... 2,124 2,014
Maintenance..................................................................... 1,655 1,808
Taxes on income................................................................. 790 791
Other taxes..................................................................... 1,036 1,237
------- -------
21,580 21,286
------- -------
Operating income................................................................ 3,396 2,895
OTHER INCOME........................................................................ 6 41
------- -------
Income before interest charges.................................................. 3,402 2,936
INTEREST CHARGES.................................................................... 2,284 1,770
------- -------
NET INCOME.......................................................................... 1,118 1,166
DIVIDENDS ON PREFERRED SHARES....................................................... 24 25
------- -------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS.......................................... $ 1,094 $ 1,141
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING....................................... 7,845 7,834
======= =======
Earnings Per Common Share........................................................... $0.14 $0.15
======= =======
Dividends Declared Per Common Share................................................. $0.30 $0.30
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED MARCH 31, 1995 AND 1994
(Unaudited)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
MARCH 31,
----------------------------
1995 1994
------ ------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water........................................................................... $112,574 $100,176
Electric........................................................................ 10,896 10,333
-------- --------
123,470 110,509
-------- --------
OPERATING EXPENSES
Water purchased................................................................ 29,408 31,585
Power purchased for pumping.................................................... 7,813 7,829
Power purchased for resale..................................................... 4,769 3,349
Groundwater production assessment.............................................. 6,116 4,401
Supply cost balancing accounts................................................. 1,119 (7,616)
Other operating expenses....................................................... 12,170 11,120
Provision for State Water Project.............................................. (331) 1,989
Administrative and general expenses............................................ 14,703 13,946
Depreciation................................................................... 8,160 7,580
Maintenance.................................................................... 6,763 6,781
Taxes on income ............................................................... 8,863 5,434
Other taxes.................................................................... 4,487 4,833
-------- --------
104,040 91,231
-------- --------
Operating income............................................................... 19,430 19,278
-------- --------
OTHER INCOME
Net gain on sale of operating properties....................................... 313 -
Other.......................................................................... (112) 358
-------- --------
201 358
Income before interest charges................................................. 19,631 19,636
INTEREST CHARGES................................................................... 8,341 7,988
-------- --------
NET INCOME......................................................................... 11,290 11,648
DIVIDENDS ON PREFERRED SHARES...................................................... 98 100
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS......................................... $ 11,192 $ 11,548
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING...................................... 7,845 7,478
======== ========
Earnings Per Common Share.......................................................... $1.43 $1.54
======== ========
Dividends Declared Per Common Share................................................. $1.20 $1.20
======== ========
</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, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1995 1994
------- -------
(in thousands)
<C> <C>
CASH FLOWS FROM -
Operating Activities:
Net income....................................................................... $ 1,118 $ 1,166
Adjustments for non-cash items:
Depreciation and amortization.................................................... 2,203 2,107
Deferred income taxes and
investment tax credits....................................................... 931 911
Other - net..................................................................... (408) (542)
Changes in current assets and liabilities:
Accounts receivable............................................................. 950 357
Prepayments..................................................................... 463 710
Supply cost balancing accounts.................................................. (589) (1,216)
Accounts payable................................................................ (3,367) (1,475)
Taxes payable................................................................... (1,552) (1,604)
Unbilled revenue................................................................ 2,431 492
Other........................................................................... 220 702
------- -------
Net Cash Provided............................................................ 2,400 1,608
------- -------
Financing Activities:
Issuance of securities............................................................ - 673
Receipt of advances and contributions............................................. 417 749
Repayments of long-term debt and
redemption of preferred shares.................................................. (2,240) (77)
Refunds on advances............................................................... (27) (577)
Net change in notes payable to banks.............................................. 5,500 5,500
Common and preferred dividends paid............................................... (2,228) (2,216)
------- -------
Net Cash Provided............................................................ 1,422 4,052
------- -------
Investing Activities:
Construction expenditures........................................................... (5,131) (7,185)
------- -------
Net Cash Provided............................................................ (5,131) (7,185)
------- -------
Net Decrease in Cash and Cash Equivalents........................................... (1,309) (1,525)
Cash and Cash Equivalents, Beginning of Period..................................... 2,344 1,726
------- -------
Cash and Cash Equivalents, End of Period............................................ $ 1,035 $ 201
======= =======
</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 24 through 28 of the 1994 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. In June, 1994, the Registrant signed a Water Supply Agreement to
become a participant in the Coastal Aqueduct Extension of the
State Water Project (the "Project") at a level of 500 acre-feet.
The Registrant's current investment for this level of
participation is $935,000 and is included in utility plant.
The Registrant intends to file an application with the
California Public Utilities Commission ( 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, which sale must also be approved by
the CPUC.
4. The Registrant and the Contra Costa Water District ("CCWD") have
entered into an agreement which settles CCWD's condemnation
action regarding the Registrant's Bay Point water system. Under
the terms of the settlement, the Registrant will continue to own
and operate the Bay Point system and CCWD withdrew its
condemnation action. CCWD is obligated to construct certain
facilities which will be interconnected to the Registrant's
system in order partially 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 Registrant's portion of the current estimated cost of the
facilities is $2.6 million. One-half, or $1.3 million, of this
amount was paid to CCWD in September, 1994 with the balance due
in seven equal annual installments beginning with completion of
the facilities, anticipated in 1996. The total project cost is
estimated at $5 million.
The initial contribution of $1.3 million was 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 the
condemnation was 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. The Registrant is unable to predict the outcome of the
CPUC's consideration of this matter.
7
<PAGE> 10
5. The Registrant filed for increased rates in six of its water
districts in March, 1995 and anticipates filing for increased
rates in its electric district during the third quarter of 1995.
The Registrant does not anticipate significant rate relief from
such filings until early 1996. See the section entitled "Rates
and Regulation" for more information.
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. As
a result, the Registrant amended its retiree medical plan
substantially reducing benefits for those current employees
retiring after September 30, 1995. No such benefits will be
available to employees hired on or after February 1, 1995.
Based on a study performed by the Registrant's health care
actuary, using a 7.5% discount rate and an sliding scale for
health care cost trends starting at 12%, declining by 1% annually
for the next six years and remaining at 6% thereafter, the
transition obligation for the Registrant's post-retirement
medical plan, after giving effect to the changes discussed above,
is estimated to be approximately $5.1 million. A one percent
(1%) increase in the anticipated health care cost trend
assumption results in an estimated increase of approximately
$656,000 in the accumulated postretirement benefits obligation
("APBO"). The Registrant estimates that its Net Periodic
Postretirement Benefit Costs, under the plan as amended, would
approximate $600,000, including amortization of the transition
APBO over a 20-year period.
The Registrant, for the three-month period ended March 31, 1995,
has capitalized an additional $125,000 of its anticipated Net
Periodic Postretirement Benefit Costs for 1995. The CPUC has
issued a decision which provides for the recovery in rates of
tax-deductible contributions to a separately trusteed fund. The
Registrant is evaluating presently available funding vehicles.
Due to the amendments to the Registrant's plans as described
above, it is estimated that substantially all of the SFAS No. 106
costs will be currently recoverable in rates.
7. Effective January 1, 1995, the Registrant is subject to SFAS No.
119 - Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments. The Registrant has no derivative
financial instruments, financial instruments with off-balance
sheet risk or financial instruments with concentrations of credit
risk and, therefore, this standard will have no present impact on
the Registrant's results of operation or financial condition.
8. In March 1995, the FASB issued SFAS No. 121 - Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of. This Statement imposes stricter criteria for
regulatory assets by requiring that such assets be probable of
future recovery at each balance sheet date. The Registrant
anticipates adopting this standard on January 1, 1996 and does
not expect that adoption will have a material impact on the
financial position or results of operations of the Registrant
based on the current regulatory structure in which the Registrant
operates.
8
<PAGE> 11
9. As permitted by the CPUC, the Registrant maintains water and
electric supply cost balancing accounts to account for under-
collections and over-collections of revenues designed to recover
such costs. Recoverability of such costs are recorded in income
and charged to balancing accounts when such costs are incurred.
The balancing accounts are credited when such costs are recovered
through rate adjustments. In October 1995, the Registrant
identified and adjusted for an error in the recording of offset
revenue into its electric balancing account. The error arose as
a result of the input in August 1994 of an incorrect rate into a
system which generates the amount of offset revenue to be
recorded. This resulted in a misstatement of the overcollection
in the balancing account and, thus, an understatement in recorded
income. For 1994, income was understated by approximately
$336,000 or $0.043 per common share. The impact of the
adjustment for 1994 was not material and the cumulative effects
of the adjustment through March 31, 1995 are included in the
first quarter results. For the first quarter of 1995, income was
understated by approximately $211,000 or $0.027 per common share.
The error did not affect actual billings to electric customers.
9
<PAGE> 12
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 (SIC No. 4941). The Registrant also distributes
electricity in one community. The Registrant, regulated by the California
Public Utilities Commission ("CPUC"), was incorporated on December 31, 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, 1995, the Registrant, organized into three
regions operating within 75 communities and 10 counties in the State of
California, provided water service in 21 customer service areas. 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 March 31, 1995,
or a total of 257,695, customers compared with 256,327 total customers at March
31, 1994.
RESULTS OF OPERATION
Earnings per common share for the three months ended March
31, 1995 decreased by 4.3% to $0.14 per share as compared to $0.15 per share
for the comparable period last year. Earnings for the twelve months ended March
31, 1995 decreased by 7.6% to $1.43 per share as compared to $1.54 per share
for the twelve months ended March 31, 1994.
As compared to the comparable period last year, water sales
volumes for the three months ended March 31, 1995 decreased by 3.3% due
primarily to the unusually heavy rains experienced in the Registrant's customer
service areas during the first quarter of 1995. In spite of the decrease in
water sales volumes, water operating revenues increased by 2.3% for the three
months ended March 31, 1995. As compared to last year, water sales volumes
increased by 5.1% for the twelve months ended March 31, 1995 and water
operating revenue for the period increased by 12.4%. The increases in revenues
are a result of the effects of $12 million in supply cost offset rate increases
effective in March, 1994 and the effects of step and attrition rate increases
effective in early 1994. See the section entitled "Rates and Regulation" for
more information.
Kilowatt-hour sales of electricity increased by 1.9% and
2.8% for the three and twelve months ended March 31, 1995, respectively, as
compared to the same periods last year. As a result of the increased
kilowatt-hour sales and a slight change in the mix of those sales in favor of
residential and commercial, electric operating revenues for the three and
twelve month periods ending March 31, 1995 increased by 10.4% and 5.4%,
respectively, over the comparable periods last year.
Purchased water costs decreased by 20.2% and 6.9%,
respectively, for the three and twelve months ended March 31, 1995 as compared
to the same periods ending in 1994. These decreases reflect reductions in
purchased water volumes due to the unusually heavy winter rains and the
Registrant's increased reliance on its owned sources of supply to reduce costs
as well as the Registrant's participation last year in a seasonal storage
program.
10
<PAGE> 13
The costs of power purchased for pumping increased by 18.8%
for the three months ended March 31, 1995 as compared to the same period ended
March 31, 1994 due chiefly to the effects of an increase in the amount of total
water supplied which came from pumped groundwater sources. For the twelve
months ended March 31, 1995, the costs of power purchased for pumping decreased
slightly by 0.2% as compared to the same period last year.
As compared to the three months ended March 31, 1994, the
costs of power purchased for resale increased by 2.9% for the three months
ended March 31, 1995 chiefly as a result of the increased kilowatt-hour sales
volumes. For the twelve months ended March 31, 1995, the costs of power
purchased for resale increased by 42.4% as compared to the same period last
year due to refunds from the Registrant's wholesale power supplier in 1993.
There were no such refunds affecting the current period.
Groundwater production assessments are 103.8% higher for the
three months ended March 31, 1995 and 39.0% higher for the twelve months ended
March 31, 1995 as compared to the same periods last year due to the increased
volumes of pumped water as well as increased assessment rates.
The negative entry in the provision for supply cost
balancing accounts for the three months ended March 31, 1995 reflects
under-recovery of supply costs during the period. In October 1995, the
Registrant identified and adjusted for an error in the recording of offset
revenue into its electric balancing account. The error arose as a result of
the input in August 1994 of an incorrect rate into a system which generates the
amount of offset revenue to be recorded. This resulted in a misstatement of
the overcollection in the balancing account and, thus, an understatement in
recorded income. For 1994, income was understated by approximately $336,000 or
$0.043 per common share. The impact of the adjustment for 1994 was not
material and the cumulative effects of the adjustment through March 31, 1995
are included in the first quarter results. For the first quarter of 1995,
income was understated by approximately $211,000 or $0.027 per common share.
The error did not affect actual billings to electric customers. A positive
entry for the provision for supply cost balancing accounts reflects recovery of
previously under-collected supply costs. The positive entry for the twelve
months ended March 31, 1995 results from approval by the CPUC in March, 1994 of
rate increases to collect purchased water supply costs, supply costs for power
purchased for pumping and increased groundwater production assessments which
had previously not been collected through rates.
Other operating expenses increased by 0.8% and 9.4%,
respectively, for the three and twelve months ended March 31, 1995 as compared
to the same periods ended March 31, 1995 due chiefly to a net increase in the
number of persons charging time to various operating and customer service
functions.
The Registrant had reserved a maximum of $2.1 million
against previously incurred costs related to its participation in the Coastal
Extension of the State Water Project (the "Project") due to denial by the CPUC
of the Registrant's requests for participation in the Project and recovery of
costs related thereto; presently the reserve is $1.7 million. The Registrant
has signed an agreement to participate in the Project at a level of 500
acre-feet and anticipates selling its remaining 2,500 acre-feet entitlement.
See Note 3 of the Notes to Financial Statements.
Administrative and general expenses increased by 13.1 and
5.4% for the three and twelve months ended March 31, 1995, respectively, as
compared to the same periods ended March 31, 1994. These periods are each
affected by an increase in the number of persons engaged in regulatory,
11
<PAGE> 14
operational and administrative functions as a result of the organization of the
Registrant into three operating regions as well as increased personnel-related
expenditures such as health insurance, pension and 401-k plan costs. In
addition, the three month comparison is affected by certain costs in 1995
associated with reorganization including relocation and severance costs.
Depreciation expense increased by 5.5% and 7.7%,
respectively, for the three and twelve months ended March 31, 1995 reflecting,
among other things, the effects of recording approximately $21.2 million in net
plant additions during 1994, depreciation on which began in January, 1995.
Taxes on income decreased slightly by 0.1% for the three
months ended March 31, 1995 as compared to the three months ended March 31,
1994. Taxes on income for the twelve months ended March 31, 1995 increased by
63.1% over the same period last year. 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 for which there is no corresponding
amount affecting 1995.
Maintenance expense decreased by 8.5% and 0.3% for the three
and twelve months ended March 31, 1995 as compared to the three and twelve
months ended March 31, 1994. The change for the quarter reflects decreased
maintenance on hydrants in the Registrant's Metropolitan district, which
maintenance was performed last year.
Interest expense for the three and twelve months ended March
31, 1995 increased by 29.0% and 4.4%, respectively, over the comparable 1994
time periods. The increases are primarily as a result of the Registrant's
issue, in April, 1994, of $13 million in long-term debt.
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. 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 rely on external sources,
including short-term bank borrowing, the receipt of contributions-in-
aid-of-construction and advances for construction and install-and-convey
advances, to fund the majority of its construction expenditures. For the
quarter ended March 31, 1995, receipts of contributions-in-aid-of-construction
and advances for construction were $390,000 net of refunds on such advances, as
compared to $172,000 for the quarter ended March 31, 1994. For the three
months ended March 31, 1995, the Registrant recorded approximately $82,000 in
install-and-convey contracts as compared to $54,000 for the prior year quarter
ended March 31, 1994.
The aggregate short-term borrowing capacity currently
available to the Registrant under its three bank lines of credit is
$37,063,000. At March 31, 1995, the Registrant had a total of $25,000,000 in
borrowing outstanding under its bank lines of credit, leaving an unused
short-term borrowing capacity of $12,063,000. The Registrant routinely employs
short-term bank borrowing as an interim financing source prior to executing
either a long-term debt or equity issue. The Registrant intends to issue
additional long-term debt under its Medium-Term Note Program with the net
proceeds initially being used to repay short-term bank borrowings and, after
that, fund construction expenditures. The Registrant is currently
investigating funding a portion of its qualifying capital expenditures through
issuance of tax-exempt debt.
12
<PAGE> 15
ACCOUNTING STANDARDS
Effective January 1, 1995, the Registrant is subject to the
reporting requirements contained in the Financial Accounting Standards Board's
Statement of Financial Accounting Standards ("SFAS") No. 119 - "Disclosure
about Derivative Financial Instruments and Fair Value of Financial
Instruments." The Registrant has determined that SFAS does not presently apply
since the Registrant has no derivative financial instruments, financial
instruments with off-balance sheet risk or financial instruments with
concentrations of credit risk. See Note 7 of the Notes to Financial Statements.
In March 1995, the FASB issued SFAS No. 121 - "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of." This Statement imposes stricter criteria for regulatory assets by
requiring that such assets be probable of future recovery at each balance sheet
date. The Registrant anticipates adopting this standard on January 1, 1996 and
does not expect that adoption will have a material impact on the financial
position or results of operations of the Registrant based on the current
regulatory structure in which the Registrant operates. See Note 8 of the Notes
to Financial Statements.
WATER SUPPLY
For the three months ended March 31, 1995, the Registrant
supplied a total of 31,345 acre-feet of water as compared to 35,005 acre-feet
for the three months ended March 31, 1994. Of the total 31,345 acre-feet of
water supplied during the first quarter of 1995, approximately 59.4% came from
pumped sources and 40.5% was purchased from others, principally the
Metropolitan Water District ("MWD") and its member agencies. The remaining
0.1% came from the United States Bureau of Reclamation (the "Bureau") under a
no-cost contract.
During the twelve months ended March 31, 1995, the
Registrant supplied 181,828 acre-feet of water. This amount represents a 0.3%
decrease from the 182,435 acre-feet supplied during the twelve months ended
March 31, 1994. During the twelve month period ended March 31, 1995, pumped
sources provided 57.7% of total supply, 40.6% was purchased and the remaining
1.7% 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. 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"). Available water supplies from the Colorado River and the SWP
have historically been sufficient to meet most of MWD's requirements and the
significant precipitation during the last quarter of 1994 and first quarter of
1995 bode well for adequate water supplies through 1995.
The State of California has experienced unusually heavy
precipitation during the first four months of 1995. As of April 30, 1995, the
Northern Sierra 8-station index has recorded seasonal rainfall of 78.4 inches,
or 157% of the average water year which began October 1, 1994. Statewide, the
snowpack water content is 195% of average and seasonal runoff is 160% of
average. Storage in the State's 8 major reservoirs has increased to almost 83%
of capacity. In those districts of the Registrant which pump groundwater,
overall groundwater conditions have improved and remain at
13
<PAGE> 16
adequate levels. As such, the Registrant believes that its water supplies are
adequate to meet projected current year demands.
WATER QUALITY
The United States Environmental Protection Agency ("USEPA"),
under provisions of the Safe Drinking Water Act as amended (the "SDWA"), is
required to establish maximum contaminant levels ("MCLs") for the 83 potential
drinking water contaminants initially listed in the SDWA in 1992, and for an
additional 25 contaminants every three years thereafter. The California
Department of Health Services, acting on behalf of the USEPA, administers the
USEPA's program. The Registrant currently tests its wells and water systems for
more than 90 contaminants. Water from wells found to contain levels of
contaminants above the established MCL's has either been treated or blended
before it is delivered to customers.
The Registrant, like any provider of water from surface
supplies, has a small risk of contamination from Cryptosporidium, a microscopic
organism widely present in the environment, reaching the water supply. The
Registrant's risk is greatly reduced, however, due in part to the high quality
of source water where, according to the MWD, measured amounts of
Cryptosporidium are 100 to 1000 times less than the national average. In
addition, in those systems where the Registrant treats surface water, the
Registrant's treatment plants meet the most recent requirements under the
Surface Water Treatment Rule.
Also, the Registrant is a voluntary member of the "Partnership
for Safe Water", a national program developed in conjunction with the USEPA,
the National Association of Water Companies (the "NAWC") and the American Water
Works Association (the "AWWA") to further protect the public from diseases
caused by Cryptosporidium and other organisms. As a volunteer in the program,
the Registrant has committed to go above and beyond current regulation
governing surface water treatment to ensure that its treatment facilities are
performing as efficiently as possible.
The Registrant continues to implement the lead and copper rules
as promulgated by the USEPA. The second round of sampling for small water
systems was 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 also be subject to new rules regarding MCLs
for radon and arsenic pending implementation by the USEPA. With respect to the
radon rule, the USEPA did not meet its October 1, 1993 deadline for
implementation of the rule. As a result, the radon rule was to be considered
as part of the re-authorization of the SDWA presently before the United States
Congress. The 1994 Congress adjourned prior to taking any action with respect
to the radon rule. The Registrant believes the USEPA will consequently
establish a MCL of 200 pico-curies per liter, which would affect nearly 75% of
the Registrant's wells. The Registrant is currently conducting studies to
determine the best treatment for the affected systems which could range from
simple aeration to filtration through granular activated carbon.
Implementation of the MCL, however, is postponed for at least a year pending
budget appropriation of funds for the USEPA to monitor compliance with the
rule. The Registrant is currently unable to predict what ultimate effects, if
any, this rule will have on its financial condition or results of operation
until the MCL is established.
The USEPA is continuing its review of data before implementing
the arsenic rule. In January, 1995, the USEPA filed in U.S. District Court
for a six-year delay of the arsenic rule. While
14
<PAGE> 17
the Registrant is unable to predict the outcome of that action, it is believed
that, if required to do so without further research, the USEPA will establish a
MCL near 2 to 5 micrograms per liter. At this level, nearly all of the
Registrant's wells and water systems will be affected. Depending on the
circumstances associated with each individual well and water system, compliance
with such a standard could cause the Registrant to implement costly wellhead
remedies such as ion exchange or, alternatively, to purchase additional, and
more expensive, water supplies already in compliance for blending with well
sources. The Registrant is currently unable to predict what ultimate effects,
if any, this rule will have on its financial condition or results of operation
until the MCL is established.
The Registrant will also be subject to the new USEPA rules
concerning Disinfection/Disinfection By-Products and the Enhanced Surface Water
Treatment Rule. 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. As part of its January,
1995 filing in U.S. District Court, the USEPA requested an extension of time to
complete this rule.
The proposed Information Collection Rule, originally expected in
October, 1994 and which will affect only two of the Registrant's water systems
with minor paperwork costs, has been temporarily postponed. In addition, it
appears that a set of primary standards, referred to as "Phase VI," will be
postponed until at least August, 1995.
Since promulgation of the SDWA, the Registrant has experienced
increased operating costs for testing to determine the levels, if any, of the
contaminants in the Registrant's sources of supply and additional expense to
lower the level of any contaminants found to a level that meets the MCL
standards. Such costs and the control of any other pollutants may cause the
Registrant to experience additional capital costs as well as increased
operating costs. The rate-making process provides the Registrant with the
opportunity to recover capital and operating costs associated with water
quality, and management believes that such costs are properly recoverable,
although no assurance can be given that the CPUC will authorize all or any of
such costs in rates.
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 among its 22 customer
service areas due to differences in operating conditions and costs. The
customer service areas are currently grouped into 16 water districts and one
electric district 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 rate-making districts in May, 1992. In June, 1993, the
CPUC issued its decision and the Registrant
15
<PAGE> 18
requested rehearing on two matters in that decision - the return on rate base
and an authorized rate increase for the Registrant's Bay Point customer service
area. A final decision on these two matters was issued in June, 1994 which
upheld the previously stipulated rate of return on common equity of 10.10% and
granted a small increase in water rates applicable to the Registrant's Bay
Point customer service area. The reduced return on common equity contributed
to reduced earnings and cash flow in 1994 and has further impacted 1995.
Rates currently in effect include approximately $12 million
in increases authorized by the CPUC for recovery of previously uncollected
supply costs including purchased water, electric energy and groundwater
production assessments. These increased revenues do not produce additional
earnings although they significantly increase the Registrant's cash flow. Step
and attrition year rate increases, authorized in previous general rate cases,
resulted in additional annualized revenues of approximately $1.6 million.
The Registrant filed applications with the CPUC in June, 1994
to increase rates, on a total-Company basis, by approximately $2.2 million to
recover costs associated with implementation of certain recommendations made in
a recently completed management audit authorized by the CPUC. In February,
1995, the CPUC issued a decision that the Registrant's application be dismissed
without prejudice, even though the CPUC found that implementation would be
proper and the costs were found reasonable, and that the Registrant be required
to seek the same or similar relief in general rate case applications.
On July 29, 1994, the Registrant filed for a general rate
increase in one of its Arden-Cordova customer service area. A final decision
with respect to this filing is expected during the second quarter of 1995. The
Registrant filed for general rate relief, including step and attrition
increases, in six of its water rate-making districts in March, 1995. The March,
1995 filings included the $2.2 million associated with recovery of costs
associated with implementation of recommendations included in the management
audit. The Registrant anticipates filing for general rate relief in its
electric customer service are during the second quarter of 1995. However, the
Registrant does not anticipate significant rate relief from these rate filings
until early 1996. As a result, earnings from operations are expected to remain
at or possibly below levels experienced in recent years. No assurance can be
given that the CPUC will authorize any or all of the rates for which the
Registrant applies.
PART II
ITEM 2. CHANGES IN SECURITIES
As of March 31, 1995, earned surplus amounted to
$43,336,000. Of this amount, $27,228,000 was restricted as to payment of cash
dividends on the Registrant's Common Shares.
As of March 31, 1995, authorized but unissued Common
Shares includes 109,454 and 92,259 Common Shares reserved for issuance under
the Registrant's Dividend Reinvestment and common Share Purchase Program and
Investment Incentive Program ("401-k"), respectively. Common Shares reserved
for the 401-k Plan are in relation to the matching contributions by the
Registrant and for investment purposes by participants.
16
<PAGE> 19
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
Dated: November 13, 1995
17
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