<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 SEPTEMBER 30, 1996 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 October 31, 1996, the number of shares outstanding
of the Registrant's Common Shares, Par Value $2.50,
was 7,878,092.
<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 September 30, 1996 and December 31, 1995 2 - 3
Statements of Income for the Three Months Ended
September 30, 1996 and September 30, 1995 4
Statements of Income for the Nine Months Ended
September 30, 1996 and September 30, 1995 5
Statements of Income for the Twelve Months Ended
September 30, 1996 and September 30, 1995 6
Statements of Cash Flows for the Nine Months Ended
September 30, 1996 and September 30, 1995 7
Notes to Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operation 9 - 16
PART II OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 2: Changes in Securities 16
Item 3: Defaults Upon Senior Securities 16
Item 4: Submission of Matters to a Vote of Security Holders 16
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 17
Signatures 18
</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>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
UTILITY PLANT, at cost (in thousands)
Water......................................................... $ 390,655 $ 383,368
Electric...................................................... 30,790 30,269
--------- ---------
421,445 413,637
Less - Accumulated depreciation............................... (111,838) (103,018)
--------- ---------
309,607 310,619
Construction work in progress................................. 39,821 24,349
--------- ---------
349,428 334,968
--------- ---------
OTHER PROPERTY AND INVESTMENTS.................................. 763 755
--------- ---------
CURRENT ASSETS
Cash and cash equivalents..................................... 7,307 343
Accounts receivable -
Customers, less reserves of $444
in 1996 and $648 in 1995.................................. 12,334 8,238
Other......................................................... 1,247 2,563
Unbilled revenue.............................................. 13,923 11,035
Materials and supplies, at average cost....................... 2,115 1,733
Supply cost balancing accounts................................ 5,707 8,073
Prepayments and other......................................... 7,386 7,779
Accumulated deferred income taxes - net....................... 4,439 3,206
--------- ---------
54,458 42,970
--------- ---------
Regulatory tax-related assets................................... 22,663 22,986
Other deferred charges.......................................... 4,608 4,576
--------- ---------
27,271 27,562
--------- ---------
$ 431,920 $ 406,255
========= =========
</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>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(Unaudited)
(in thousands)
<S> <C> <C>
CAPITALIZATION
Common shareholders' equity............................. $126,730 $121,576
Preferred Shares........................................ 1,600 1,600
Preferred shares subject to mandatory
redemption requirements............................... 520 520
Long-term debt.......................................... 107,278 107,455
-------- --------
236,128 231,151
-------- --------
CURRENT LIABILITIES
Notes payable to banks.................................. 34,000 8,500
Long-term debt and preferred shares
due within one year................................... 424 15,624
Accounts payable........................................ 12,134 6,839
Taxes payable........................................... 9,621 5,562
Accrued interest........................................ 2,204 1,955
Other accrued liabilities............................... 8,560 8,061
-------- --------
66,943 46,541
-------- --------
OTHER CREDITS
Advances for construction............................... 55,186 55,385
Contributions in aid of construction.................... 28,127 27,745
Accumulated deferred income taxes - net................. 39,423 39,050
Unamortized investment tax credits...................... 3,360 3,499
Regulatory tax-related liability........................ 2,267 2,300
Other................................................... 486 584
-------- --------
128,849 128,563
-------- --------
$431,920 $406,255
======== ========
</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 SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1996 1995
-------- -------
(in thousands, except per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water.................................................... $42,362 $37,062
Electric................................................. 2,856 2,471
-------- -------
45,218 39,533
-------- -------
OPERATING EXPENSES
Water purchased........................................ 12,169 11,095
Power purchased for pumping............................ 2,286 2,594
Power purchased for resale............................. 1,296 1,131
Groundwater production assessment...................... 1,646 1,793
Supply cost balancing accounts......................... 989 (438)
Other operating expenses............................... 3,759 3,087
Administrative and general expenses.................... 4,819 4,570
Depreciation........................................... 2,526 2,074
Maintenance............................................ 1,822 1,222
Taxes on income........................................ 4,229 3,582
Other taxes............................................ 1,714 1,270
-------- -------
37,255 31,980
-------- -------
Operating income....................................... 7,963 7,553
OTHER INCOME............................................... 68 114
-------- -------
Income before interest charges......................... 8,031 7,667
INTEREST CHARGES........................................... 2,621 2,377
-------- -------
NET INCOME................................................. 5,410 5,290
DIVIDENDS ON PREFERRED SHARES.............................. (24) (24)
-------- -------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS................. $ 5,386 $ 5,266
======== =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.............. 7,864 7,845
======== =======
Earnings Per Common Share.................................. $0.68 $0.67
======== =======
Dividends Declared Per Common Share........................ $0.305 $0.30
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
STATEMENTS OF INCOME
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1996 1995
-------- -------
(in thousands, except per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water.................................................... $106,866 $88,857
Electric................................................. 8,642 8,025
-------- -------
115,508 96,882
-------- -------
OPERATING EXPENSES
Water purchased........................................ 29,287 24,058
Power purchased for pumping............................ 5,531 5,649
Power purchased for resale............................. 3,951 3,682
Groundwater production assessment...................... 4,532 4,659
Supply cost balancing accounts......................... 2,616 (48)
Other operating expenses............................... 10,075 9,219
Administrative and general expenses.................... 14,595 12,620
Depreciation........................................... 7,577 6,369
Maintenance............................................ 4,966 4,436
Taxes on income........................................ 8,771 6,627
Other taxes............................................ 4,450 3,394
-------- -------
96,351 80,665
-------- -------
Operating income....................................... 19,157 16,217
OTHER INCOME............................................... 316 188
-------- -------
Income before interest charges......................... 19,473 16,405
INTEREST CHARGES........................................... 7,795 6,970
-------- -------
NET INCOME................................................. 11,678 9,435
DIVIDENDS ON PREFERRED SHARES.............................. (71) (72)
-------- -------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS................. $ 11,607 $ 9,363
======== =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.............. 7,853 7,845
======== =======
Earnings Per Common Share.................................. $1.48 $1.19
======== =======
Dividends Declared Per Common Share........................ $0.915 $0.90
======== =======
</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 SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1995
-------- --------
(in thousands, except per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water.................................................. $136,930 $115,301
Electric............................................... 11,509 10,894
-------- --------
148,439 126,195
-------- --------
OPERATING EXPENSES
Water purchased........................................ 37,857 30,840
Power purchased for pumping............................ 7,845 7,837
Power purchased for resale............................. 5,485 5,209
Groundwater production assessment...................... 6,010 6,251
Supply cost balancing accounts......................... 1,517 (516)
Other operating expenses............................... 14,207 11,830
Administrative and general expenses.................... 18,365 15,315
Depreciation........................................... 9,690 8,379
Maintenance............................................ 6,284 6,039
Taxes on income........................................ 10,928 9,432
Other taxes............................................ 5,922 4,468
-------- --------
124,110 105,084
-------- --------
Operating income....................................... 24,329 21,111
OTHER INCOME............................................... 463 67
-------- --------
Income before interest charges......................... 24,792 21,178
INTEREST CHARGES........................................... 10,383 9,107
-------- --------
NET INCOME................................................. 14,409 12,071
DIVIDENDS ON PREFERRED SHARES.............................. (95) (97)
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS................. $ 14,314 $ 11,974
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.............. 7,851 7,845
======== ========
Earnings Per Common Share.................................. $1.82 $1.53
======== ========
Dividends Declared Per Common Share........................ $1.22 $1.205
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 9
SOUTHERN CALIFORNIA WATER COMPANY
CASH FLOW STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM -
Operating Activities:
Net income................................................. $11,678 $9,435
Adjustments for non-cash items:
Depreciation and amortization............................. 7,796 6,792
Deferred income taxes and
investment tax credits................................... (710) 2,025
Other - net............................................... 231 (1,421)
Changes in assets and liabilities:
Customer receivables...................................... (2,779) (719)
Prepayments............................................... 393 (707)
Supply cost balancing accounts............................ 2,366 (159)
Accounts payable.......................................... 5,295 483
Taxes payable............................................. 4,059 849
Unbilled revenue.......................................... (2,888) (2,441)
Accrued interest.......................................... 249 (270)
Other..................................................... (922) 427
-------- --------
Net Cash Provided....................................... 24,768 14,294
-------- --------
Investing Activities:
Construction expenditures................................... (21,111) (18,236)
-------- --------
Net Cash Used........................................... (21,111) (18,236)
-------- --------
Financing Activities:
Issuance of securities...................................... 732 30,000
Receipt of advances and contributions....................... 2,334 2,649
Repayments of long-term debt and
redemption of preferred shares............................. (15,377) (4,425)
Refunds on advances......................................... (2,603) (2,503)
Net change in notes payable to banks........................ 25,500 (15,000)
Common and preferred dividends paid......................... (7,279) (7,273)
-------- --------
Net Cash Provided....................................... 3,307 3,448
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents......... 6,964 (494)
Cash and Cash Equivalents, Beginning of period............... 343 2,344
-------- --------
Cash and Cash Equivalents, End of period..................... $ 7,307 $1,850
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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 24 through 28 of the 1995 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
$1,602,000 and is included in utility plant. On November 4, 1996,
the Registrant filed an application with the California Public
Utilities Commission ( the "CPUC") seeking approval of its recovery
through rates of costs associated with that participation. No
assurance can be given that the CPUC will deny or approve recovery
through rates of all or any costs associated with such participation.
4. The Registrant implemented increased water rates in six of its
rate-making districts on January 1, 1996. In addition, the CPUC
issued a final decision regarding the settlement stipulation in the
registrant's general rate case application affecting its Bear Valley
Electric customer service area in May, 1996. In March, 1996, the
Registrant filed applications to increase rates in two of its water
customer service areas to cover costs associated with 1996 and 1997
capital projects in those two areas. See the section entitled "Rates
and Regulation" for more information.
5. On January 1, 1996, the Registrant adopted 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. Adoption of SFAS No. 121 did not 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.
6. Effective January 1, 1996, the Registrant is subject to the reporting
requirements contained in SFAS No. 123, "Accounting for Stock- Based
Compensation." The Registrant has a Key Executive Long-Term Incentive
Plan, the provision of which became effective in January, 1995. Any
payout under the plan, which is made in Common Shares of the
Registrant, will not occur until 1998. Adoption of SFAS No. 123 did
not have a material impact on the financial position or results of
operations of the Registrant.
7. As permitted by the CPUC, the Registrant maintains water and electric
supply cost balancing accounts to account for undercollections and
overcollections 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.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
Southern California Water Company (the "Registrant") is a public
utility company engaged principally in the purchase, production, distribution
and sale of water (SIC No. 4941). The Registrant also distributes electricity
in one community (SIC No. 4911). 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.
The Registrant is organized into three regions operating within 75
communities in 10 counties throughout the State of California and provides
water service in 21 customer service areas. As of September 30, 1996, about 73%
of the Registrant's water customers were located in the greater metropolitan
areas of Los Angeles and Orange Counties. The Registrant also provided electric
service to the City of Big Bear Lake and surrounding areas in San Bernardino
County. The Registrant served 239,979 water customers and 20,456 electric
customers at September 30, 1996, or a total of 260,435 customers compared with
258,407 total customers served at September 30, 1995.
RESULTS OF OPERATION
Earnings per common share for the three months ended September 30,
1996 increased by 1.5% to $0.68 per share as compared to $0.67 per share for
the comparable period last year. For the nine months ended September 30, 1996,
earnings per share were $1.48 as compared to $1.19 for the nine months ended
September 30, 1995, an increase of 24.4%. Earnings for the twelve months ended
September 30, 1996 increased by 19.0% to $1.82 per share as compared to $1.53
per share for the twelve months ended September 30, 1995.
Water sales volumes for the three, nine and twelve months ended
September 30, 1996 increased by 11.2%, 10.8% and 13.7%, respectively, as
compared to the same periods ended September 30, 1995. Water operating
revenues increased by 14.3%, 20.3% and 18.8%, in each of the three periods
ended September 30, 1996 respectively, over the same periods of the prior year
as a result of the impact of general, step and attrition rate increases and the
increased water sales.
Electric operating revenues for the three, nine and twelve month
periods ending September 30, 1996 increased by 15.6%, 7.7% and 5.6%,
respectively, over the comparable periods ending September 30, 1995 as a result
of increased kilowatt-hour sales volumes and increased rates which were
effective in May, 1996. Kilowatt-hour sales of electricity increased by 7.8%,
5.6% and 2.9% for the three, nine and twelve months ended September 30, 1996,
respectively, as compared to the same periods last year.
Purchased water costs increased by 9.7%, 21.7% and 22.8% over 1995,
respectively, for the three, nine and twelve months ended September 30, 1996
reflecting increases in purchased water rates, the latest series of which was
effective July 1, 1995 as well as increased purchased water volumes. Reduced
water purchases generally have caused wholesale water rates in the State of
California to increase significantly to cover fixed costs of the wholesale
water suppliers.
9
<PAGE> 12
Costs of power purchased for pumping decreased by 11.9% and 2.1%,
respectively, for the three and nine months ended September 30, 1996 as
compared to the same periods ended September 30, 1995 due to the effects of
fuel adjustments refunds on power bills received by the Registrant from its
electric energy supplier.
As compared to the three, nine and twelve months ended September 30,
1995, the costs of power purchased for resale increased by 14.6%, 7.3% and 5.3%
for the three, nine and twelve months ended September 30, 1996, respectively,
due chiefly to increased kilowatt-hour sales.
Groundwater production assessments are 8.2%, 2.7% and 3.9% lower for
the three, nine and twelve months ended September 30, 1996 as compared to the
same periods ended September 30, 1995 due to an adjustment in the accrual
rates.
A positive entry for the provision for supply cost balancing accounts
reflects recovery of previously under-collected supply costs. Conversely, a
negative entry for the provision for supply cost balancing accounts reflects an
undercollection of previously incurred supply costs. The positive entries for
three, six and twelve months ended September 30, 1996 result from approval by
the CPUC of rate increases sufficient to recover previously under-collected
purchased water supply costs, supply costs for power purchased for pumping and
for resale and groundwater production assessments.
Other operating expenses increased by 21.8%, 9.3% and 20.1%,
respectively, for the three, nine and twelve months ended September 30, 1996 as
compared to the same periods ended September 30, 1995 due chiefly to an
increase in the percentage of labor being charged to this category. In
addition, there has been, relative to last year, an increase in the number of
persons charging all or a portion of their time to various customer service
functions.
Administrative and general expenses increased by 5.4%, 15.6% and 19.9%
for the three, nine and twelve months ended September 30, 1996, respectively, as
compared to the same periods ended September 30, 1995. These periods are each
affected by an increase in the amount of labor being charged to this category
since, as a part of the settlement stipulation for the rates that were effective
January 1, 1996, the Registrant began expensing, and currently recovering, a
greater amount of labor for persons engaged in general and administrative
functions. As well, this category has increased due to higher personnel-related
expenses such as health insurance, post-retirement medical benefits, pension and
401-k plan costs and long-term compensation expenses.
Depreciation expense, increased by 21.8%, 19.0% and 15.6%,
respectively, for the three, nine and twelve months ended September 30, 1996
principally reflecting the effects of recording approximately $30 million in
net plant additions during 1995, depreciation on which began in 1996. Each
period is also affected by higher depreciation rates authorized by the CPUC
which were effective January 1, 1996.
Taxes on income increased by approximately 18.1%, 32.4% and 15.9%,
respectively, for the three, nine and twelve months ended September 30, 1996 as
compared to the same periods ended September 30, 1995 as a result of higher
pre-tax income.
10
<PAGE> 13
For the three, nine and twelve months ended September 30, 1996, other
taxes increased by 35.0%, 31.1% and 32.5%, respectively, as compared to the
same periods ending September 30, 1995. These increases are due to higher
payroll taxes resulting from the increase in labor being charged to expense as
well as increased property taxes resulting from higher valuation assessments
for 1996.
Maintenance expense increased by 49.1%, 11.9% and 4.1% for the three,
nine and twelve months ended September 30, 1996 as compared to the three, nine
and twelve months ended September 30, 1995. Each of the three periods is
affected by the increase in maintenance expense during the third quarter of
1996 as a result of the Registrant's shift in its maintenance scheduling from
early in 1996 to the latter part of the year.
Interest expense for the nine and twelve months ended September 30,
1996 increased by 10.3%, 11.8% and 14.0% over the same period last year
primarily as a result of the sale in September, 1995 of $30 million in
long-term debt as well as increased short-term bank borrowing during 1996.
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.
The aggregate short-term borrowing capacity currently available to the
Registrant under its three bank lines of credit is $37,063,000. At September
30, 1996, the Registrant had a total of $34,000,000 in borrowing outstanding
under its bank lines of credit, leaving an unused short-term borrowing capacity
of $3,063,000. The Registrant routinely employs short-term bank borrowing as an
interim financing source prior to executing either a long-term debt or equity
issue.
During the three-month period ended September 30, 1996, the Registrant
received net proceeds of approximately $233,300 from the sale of 10,458 Common
Shares under its Dividend Reinvestment and Common Share Purchase Plan and an
additional $292,800 from the sale of 13,308 Common Shares to its Investment
Incentive Program (401-k plan)..
The Registrant anticipates issuing additional Common Shares in
December, 1996 with the net proceeds initially being used to repay short-term
bank borrowings and, after that, to fund construction expenditures.
The Registrant received allocation of $8 million from the California
Debt Limit Allocation Committee in August, 1996 which amount will be issued as
tax-exempt debt, issued through the California Pollution Control Financing
Authority, to fund a portion of its qualifying water main replacement program
capital expenditures. The debt is anticipated to be sold in December, 1996.
The Registrant has no derivative financial instruments, financial
instruments with significant off-balance sheet risks or financial instruments
with concentrations of credit risk.
11
<PAGE> 14
ACCOUNTING STANDARDS
On January 1, 1996, the Registrant adopted 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. Adoption of SFAS No. 121 will not 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 5 of the Notes
to Financial Statements.
Effective January 1, 1996, the Registrant is subject to the reporting
requirements contained in SFAS No. 123, "Accounting for Stock- Based
Compensation." The Registrant has a Key Executive Long-Term Incentive Plan,
the provisions of which became effective in January, 1995. Any payout under
the plan, which is made in Common Shares of the Registrant, will not occur
until 1998. Adoption of SFAS No. 123 will not have a material impact on the
financial position or results of operation of the Registrant. See Note 6 of
the Notes to Financial Statements.
WATER SUPPLY
The Metropolitan Water District of Southern California ("MWD") is
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 MWD's supplies from these sources are anticipated to
continue to remain adequate through 1996. MWD's import of water from the
Colorado River is expected to decrease in future years due to the requirements
of the Central Arizona Project in the State of Arizona. In response, MWD has
taken a number of steps to secure additional storage capacity and increase
available water supplies, including effecting transfers of water rights from
other sources.
For the three months ended September 30, 1996, the Registrant produced
a total of 62,091 acre-feet of water as compared to 59,627 acre- feet for the
three months ended September 30, 1995. Of the total 62,091 acre-feet of water
produced during the third quarter of 1996, approximately 54% came from pumped
sources and 44% was purchased from others, principally the MWD. The remaining
2% came from the Bureau of Reclamation (the "Bureau") under a no-cost contract.
For the nine months ended September 30, 1996, the Registrant produced
148,982 acre-feet of water as compared to 136,868 acre-feet for the same period
last year. Of this total amount produced, 57% came from pumped sources, 42%
was produced from purchased sources and the remaining amount was supplied from
the Bureau.
During the twelve months ended September 30, 1996, the Registrant
produced 192,650 acre-feet of water of which 57% of total supply came from
pumped sources, 42% was purchased and the remaining was produced by the Bureau.
The Registrant produced 177,900 acre-feet produced during the twelve months
ended September 30, 1995.
In those customer service areas of the Registrant which pump
groundwater, overall groundwater conditions remain at adequate levels. As
such, the Registrant believes that its water supplies are adequate to meet
projected current year demands.
12
<PAGE> 15
WATER QUALITY
On August 6, 1996, amendments to the Safe Drinking Water Act (the
"1996 SDWA amendments") were signed into law. The 1996 SDWA amendments amount
to a rewrite of the law that the United States Environmental Protection Agency
("EPA") has been trying to implement for almost ten years. In contrast to the
1986 amendments, which were crafted with very little input from water
purveyors, the 1996 amendments were developed with significant contributions
from water purveyors and regulators and embody a partnership that includes
major infusion of federal funds (in the form of State Revolving Funds) to help
water utilities comply with the law. The California Department of Health
Services, acting on behalf of the EPA, administers the EPA's program.
The 1996 SDWA amendments replace the requirement that EPA set 25 new
standards every three years with a new process for selecting and regulating
contaminants. The EPA can only regulate contaminants that may have adverse
health effects, are known or likely to occur at levels of public health
concern, and provide "a meaningful opportunity for health risk reduction." The
EPA must, within eighteen months, publish a list of contaminants for possible
regulation and must update that list every five years. In addition, every five
years, the EPA must select at least five contaminants on that list and
determine whether to regulate them. The new law allows the EPA to bypass the
selection process and adopt interim regulations for contaminants in order to
address urgent health threats. Current regulations, however, remain in place
and are not subject to the new standard-setting provisions.
For the first time, the 1996 SDWA amendments allow EPA to base primary
drinking water regulations on risk assessment and cost/benefit considerations
and on minimizing overall risk. The 1996 SDWA amendments do not, however, make
any changes to language regarding the setting of maximum contaminant levels
("MCL's"). EPA must base regulations on best available, peer-reviewed science
and data from best available methods. For proposed regulations that include
MCL's, EPA must use, and seek public comment on, an analysis of quantifiable
and non-quantifiable risk- reduction benefits and cost for each such MCL.
The Enhanced Surface Water Treatment Rule ("ESWTR") has been
previously proposed and includes several options for promulgation. These
options will be determined based on data collected during compliance with the
Information Collection Rule. The ESWTR would affect each of the Registrant's
five surface water treatment plants.
The Registrant will be subject to the new rules concerning
Disinfection/Disinfection By-Products, Stage I of which has been previously
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 will affect only two of the Registrant's systems.
EPA must adopt Stage I and II disinfection by-product ("DBPs")rules
and interim and final enhanced surface water treatment rules according to a
negotiated schedule or as soon as practicable. EPA is not allowed to use the
new cost/benefit provisions for regulating disinfectants, DBPs, and
Cryptosporidium, but EPA may apply the risk and cost considerations used to
develop the Stage I DBP rule when developing the Stage II rule.
No earlier than three years after enactment of the 1996 SDWA
amendments and no later than the date EPA adopts the Stage II DBP rule, EPA
must adopt a rule requiring disinfection of certain groundwater systems and
provide guidance on determining which systems must provide disinfection
facilities. EPA may utilize the cost/benefit provisions to establish this
regulation. While the Registrant
13
<PAGE> 16
anticipates that this rule will affect several of its systems using groundwater
supplies, the Registrant is unable to predict the ultimate impact this rule may
have on its financial condition or results of operation.
The Registrant will be subject to new rules regarding radon and
arsenic. EPA must propose an arsenic rule by January 1, 2001 and adopt a rule
one year later. EPA has 180 days after enactment of the 1996 SDWA amendments
to develop a plan to study ways to reduce arsenic health risk uncertainties and
is authorized to enter into cooperative agreements to carry out the study.
Depending on the MCL eventually established for arsenic, compliance could cause
the Registrant to implement costly well-head remedies such as ion exchange or,
alternatively, to purchase additional and more expensive water supplies already
in compliance, for blending with well sources.
The EPA must withdraw its proposed radon rule and arrange for the
National Academy of Sciences to conduct a risk assessment and a study of
risk-reduction benefits associated with various mitigation measures. EPA has
30 months from enactment of the 1996 SDWA amendments to seek comment on a
risk-reduction and cost analysis for potential radon standards, six more months
to propose a standard, and another year to adopt a standard. Although the
Registrant is unable to predict what the standard for radon might eventually
be, the Registrant itself is currently conducting studies to determine the best
treatment for affected wells, which treatment could range from simple aeration
to filtration through granular activated carbon.
The Registrant is a voluntary member of the "Partnership for Safe
Water", a national program, to further protection of the public from diseases
caused by cryptosporidium and other microscopic organisms. As a volunteer in
the program, the Registrant has committed to exceed current regulations
governing surface water treatment to ensure that its surface treatment
facilities are performing as efficiently as possible.
The Registrant currently tests its wells and water systems for more
than 90 contaminants, covering all contaminants listed in the SDWA. Water from
wells found to contain levels of contaminants above the established MCL's is
either treated or blended before it is delivered to customers.
The Information Collection Rule has been promulgated and may affect
two of the Registrant's water systems with minor monitoring and paperwork
costs. The Registrant has received waiver from the EPA for the required
monitoring in one system and expects, but can offer no assurances that, the EPA
will grant the waivers for the other system. A set of primary standards,
referred to as "Phase VI," has been postponed indefinitely.
Since the SDWA became effective, 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 in order to meet the MCL standards. Such
costs and the costs of controlling any other contaminants may cause the
Registrant to experience additional capital costs as well as increased
operating costs.
The Registrant is currently unable to predict the ultimate impact that
the 1996 SDWA amendments might have on its financial position or its results of
operation. The rate-making process provides the Registrant with the
opportunity to recover prudently incurred capital and operating costs
associated with water quality, and management believes that such prudently
incurred costs will be authorized for recovery by the CPUC.
14
<PAGE> 17
The Registrant is subject to State of California Assembly Bill 733
which requires fluoridation of water supplies for public water systems serving
more than 10,000 service connections. Although the bill requires affected
systems to install treatment facilities only when public funds have been made
available to cover capital and operating costs, the bill requires the CPUC to
authorize cost recovery through rates should public funds for operation of the
facilities, once installed, become unavailable in future years.
Three of the 27 wells in the Registrant's Arden-Codova system have,
for several years, been subject to contamination by tricholoroethylene. The
Aerojet Corporation has, by court decree, been responsible for all costs
related to the provision of well-head treatment. Although a ten-year agreement
with Aerojet Corporation expired in 1996, Aerojet Corporation has agreed to
reimburse the Registrant for the costs of backwash system modification at all
three wells.
There have been no environmental matters that have materially affected
or are currently materially affecting the Registrant's Bear Valley Electric
Service area.
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.
Rates to customers of the Registrant vary among its 21 water customer
service areas due to differences in operating conditions and costs. The
customer service areas are currently grouped into 16 water districts for
rate-making purposes. The Registrant's one electric customer service area is
also a separate ratemaking district. 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 relief, including
step and attrition year changes, in six of its water rate-making districts in
March, 1995. In December, 1995, the CPUC issued its final decision on those
applications which, among other things, authorized a rate of return on common
equity of 10.40%, increased depreciation rates and authorized recovery of
postretirement medical benefit costs and resulted in an approximate increase in
annual water operating revenues of $15 million. Rates approved by the CPUC
were effective on January 1, 1996.
The Registrant filed an application with the CPUC for a general rate
increase in its Bear Valley Electric customer service area in September, 1995.
In February, 1996, the Registrant reached a stipulated settlement among all
parties which included the 10.40% return on common equity, stipulated in the
Registrant's water rate cases discussed previously. The CPUC issued its final
decision in this matter, which approved the settlement stipulation, on May 14,
1996. Rates approved by the CPUC went into effect on May 19, 1996.
15
<PAGE> 18
In March, 1996, the Registrant filed applications to increase water
rates in two of its customer service areas to recover costs associated with
1996 and 1997 capital projects in those areas. The Registrant and the CPUC
staff have worked out terms of a settlement stipulation, which was supported by
an opinion of the Administrative Law Judge assigned to the case. A final
decision by the CPUC is anticipated by December, 1996 with rates effective in
January, 1997.
On November 4, 1996, the Registrant filed an application with the CPUC
seeking recovery through rates of costs associated with its participation the
coastal aqueduct extension of the State Water Project (the "Project"). The
Registrant is currently unable to predict if the CPUC will authorize recovery
of all or any of the costs associated with the Project. See Note 3 of the
Notes to Financial Statements.
WATER RELATED OPPORTUNITIES
The Company continues to pursue strategic opportunities related to the
operation of municipally owned water systems. The Company has pursued and
continues to pursue opportunities to bid on long-term leases and operation
contracts on a stand alone basis or as part of a joint venture.
PART II
ITEM 1. LEGAL PROCEEDINGS
The Registrant is subject to ordinary routine litigation incidental to
its business. Except as discussed in Note 4 of the Notes to Financial
Statements and as disclosed 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 September 30, 1996, earned surplus amounted to $51,632,000. Of
this amount, $29,174,000 was restricted, under the most restrictive of the
Registrant's credit agreements, as to payment of cash dividends on the Common
Shares of the Registrant.
As of September 30, 1996, authorized but unissued common shares
includes 89,226 and 78,951 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 third 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 October 28, 1996, the Board of Directors of the Registrant declared
a regular quarterly dividend of $0.31 per common share, an increase of 1.6%.
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. The dividends will be paid
December 1, 1996 to shareholders of record as of the close of business on
November 15, 1996.
16
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
17
<PAGE> 20
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: November 14, 1996
18
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
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