<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended JUNE 30, 1996 Commission file number 0-1121
------------- ------
SOUTHERN CALIFORNIA WATER COMPANY
------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-1243678
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
630 EAST FOOTHILL BOULEVARD, SAN DIMAS, CALIFORNIA 91773
-------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (909) 394-3600
-------------
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of June 30, 1996, the number of shares outstanding
of the Registrant's Common Shares, Par Value $2.50,
was 7,854,862.
<PAGE> 2
SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1: Financial Statements 1
Balance Sheets as of June 30, 1996 and December 31, 1995 2 - 3
Statements of Income for the Three Months Ended
June 30, 1996 and June 30, 1995 4
Statements of Income for the Six Months Ended
June 30, 1996 and June 30, 1995 5
Statements of Income for the Twelve Months Ended
June 30, 1996 and June 30, 1995 6
Statements of Cash Flows for the Six Months Ended
June 30, 1996 and June 30, 1995 7
Notes to Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operation 9 - 15
PART II OTHER INFORMATION
Item 1: Legal Proceedings 15
Item 2: Changes in Securities 15
Item 3: Defaults Upon Senior Securities 15
Item 4: Submission of Matters to a Vote of Security Holders 15
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 16
Signature 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>
JUNE 30, DECEMBER 31,
1996 1995
------------- -------------
(Unaudited)
<S> <C> <C>
UTILITY PLANT, at cost (in thousands)
Water ............................................................. $387,162 $383,368
Electric .......................................................... 30,783 30,269
-------- --------
417,945 413,637
Less - Accumulated depreciation .................................... (108,900) (103,018)
-------- --------
309,045 310,619
Construction work in progress ...................................... 35,960 24,349
-------- --------
345,005 334,968
-------- --------
OTHER PROPERTY AND INVESTMENTS ....................................... 762 755
-------- --------
CURRENT ASSETS
Cash and cash equivalents .......................................... 2,940 343
Accounts receivable -
Customers, less reserves of $624
in 1996 and $648 in 1995 ....................................... 10,961 8,238
Other .............................................................. 1,477 2,563
Unbilled revenue ................................................... 14,473 11,035
Materials and supplies, at average cost ............................ 1,859 1,733
Supply cost balancing accounts ..................................... 6,682 8,073
Prepayments and other .............................................. 5,801 7,779
Accumulated deferred income taxes - net ............................ 2,162 3,206
-------- --------
46,355 42,970
-------- --------
DEFERRED CHARGES
Regulatory tax-related assets ...................................... 22,810 22,986
Other deferred charges ............................................. 4,794 4,576
-------- --------
27,604 27,562
-------- --------
$419,726 $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>
JUNE 30, DECEMBER 31,
1996 1995
----------- -------------
(Unaudited)
(in thousands)
<S> <C> <C>
CAPITALIZATION
Common shareholders' equity ................................................. $123,222 $121,576
Preferred shares ............................................................ 1,600 1,600
Preferred shares subject to mandatory
redemption requirements ................................................... 500 520
Long-term debt .............................................................. 107,328 107,455
-------- --------
232,670 231,151
-------- --------
CURRENT LIABILITIES
Notes payable to banks ...................................................... 32,000 8,500
Long-term debt and preferred shares
due within one year ....................................................... 424 15,624
Accounts payable ............................................................ 11,630 6,839
Taxes payable ............................................................... 4,854 5,562
Accrued interest ............................................................ 1,717 1,955
Other accrued liabilities ................................................... 8,537 8,061
-------- --------
59,162 46,541
-------- --------
OTHER CREDITS
Advances for construction ................................................... 54,872 55,385
Contributions in aid of construction ........................................ 27,992 27,745
Accumulated deferred income taxes - net ..................................... 38,744 39,050
Unamortized investment tax credits .......................................... 3,458 3,499
Regulatory tax-related liability ............................................ 2,278 2,300
Other ....................................................................... 550 584
-------- --------
127,894 128,563
-------- --------
$419,726 $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 JUNE 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------------------
1996 1995
------- -------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water .................................................................... $37,444 $30,096
Electric ................................................................. 2,450 2,276
------- -------
39,894 32,372
------- -------
OPERATING EXPENSES
Water purchased .......................................................... 10,420 7,582
Power purchased for pumping .............................................. 1,681 1,605
Power purchased for resale ............................................... 1,104 1,047
Groundwater production assessment ........................................ 1,489 1,572
Supply cost balancing accounts ........................................... 1,802 992
Other operating expenses ................................................. 3,201 3,169
Administrative and general expenses ...................................... 5,151 4,062
Depreciation ............................................................. 2,526 2,171
Maintenance .............................................................. 1,791 1,560
Taxes on income .......................................................... 2,924 2,256
Other taxes .............................................................. 1,319 1,088
------- -------
33,408 27,104
------- -------
Operating income ......................................................... 6,486 5,268
OTHER INCOME ................................................................. 200 68
------- -------
Income before interest charges ........................................... 6,686 5,336
INTEREST CHARGES ............................................................. 2,584 2,309
------- -------
NET INCOME ................................................................... 4,102 3,027
DIVIDENDS ON PREFERRED SHARES ................................................ (24) (24)
------- -------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ................................... $4,078 $3,003
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ................................ 7,848 7,845
======= =======
Earnings Per Common Share .................................................... $0.52 $0.38
======= =======
Dividends Declared Per Common Share .......................................... $0.305 $0.300
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1996 1995
-------- --------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water .................................................................... $64,504 $51,795
Electric ................................................................. 5,786 5,554
------- -------
70,290 57,349
------- -------
OPERATING EXPENSES
Water purchased .......................................................... 17,117 12,964
Power purchased for pumping .............................................. 3,246 3,055
Power purchased for resale ............................................... 2,655 2,550
Groundwater production assessment ........................................ 2,886 2,866
Supply cost balancing accounts ........................................... 1,626 390
Other operating expenses ................................................. 6,315 6,132
Administrative and general expenses ...................................... 9,777 8,049
Depreciation ............................................................. 5,051 4,295
Maintenance .............................................................. 3,143 3,215
Taxes on income .......................................................... 4,542 3,045
Other taxes .............................................................. 2,736 2,124
------- -------
59,094 48,685
------- -------
Operating income .......................................................... 11,196 8,664
OTHER INCOME ................................................................. 248 74
------- -------
Income before interest charges ............................................. 11,444 8,738
INTEREST CHARGES ............................................................. 5,174 4,593
------- -------
NET INCOME ................................................................... 6,270 4,145
DIVIDENDS ON PREFERRED SHARES ................................................ (48) (48)
------- -------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ................................... $6,222 $4,097
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ................................ 7,847 7,845
======= =======
Earnings Per Common Share .................................................... $0.79 $0.52
======= =======
Dividends Declared Per Common Share .......................................... $0.61 $0.60
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 8
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED JUNE 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30,
------------------------------
1996 1995
-------- --------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water .................................................................. $131,631 $114,590
Electric ............................................................... 11,123 10,758
-------- --------
142,754 125,348
-------- --------
OPERATING EXPENSES
Water purchased ........................................................ 36,783 29,927
Power purchased for pumping ............................................ 8,154 7,869
Power purchased for resale ............................................. 5,320 5,050
Groundwater production for assessment .................................. 6,157 5,990
Supply cost balancing accounts ......................................... 90 630
Other operating expenses ............................................... 13,536 11,763
Administrative and general expenses .................................... 18,115 14,955
Depreciation ........................................................... 9,238 8,315
Maintenance ............................................................ 5,684 6,680
Taxes on income ........................................................ 10,281 9,416
Other taxes ............................................................ 5,477 4,317
-------- --------
118,835 104,912
-------- --------
Operating income ....................................................... 23,919 20,436
-------- --------
OTHER INCOME .............................................................. 510 314
-------- --------
Income before interest charges .......................................... 24,429 20,750
INTEREST CHARGES ........................................................... 10,139 8,761
-------- --------
NET INCOME ................................................................. 14,290 11,989
DIVIDENDS ON PREFERRED SHARES .............................................. (95) (97)
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ................................. $14,195 $11,892
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .............................. 7,846 7,845
======== ========
Earnings Per Common Share .................................................. $1.81 $1.52
======== ========
Dividends Declared Per Common Share ........................................ $1.215 $1.200
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 9
SOUTHERN CALIFORNIA WATER COMPANY
CASH FLOW STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM -
Operating Activities:
Net income ............................................ $6,270 $4,145
Adjustments for non-cash items:
Depreciation and amortization .......................... 5,199 4,461
Deferred income taxes and
investment tax credits ............................. 851 751
Other - net .......................................... (546) (447)
Changes in assets and liabilities:
Accounts receivable .................................. (1,638) 1,007
Prepayments .......................................... 1,978 1,319
Supply cost balancing accounts ....................... 1,391 410
Accounts payable ..................................... 4,629 (2,130)
Taxes payable ........................................ (546) 1,018
Unbilled revenue ..................................... (3,438) (528)
Other ................................................ (6) 408
-------- --------
Net Cash Provided ............................. 14,144 10,414
-------- --------
Financing Activities:
Issuance of securities ................................. 206 -
Receipt of advances and contributions .................. 1,646 1,651
Repayments of long-term debt and
redemption of preferred shares ....................... (15,327) (4,347)
Refunds on advances .................................... (2,162) (942)
Net change in notes payable to banks ................... 23,500 13,500
Common and preferred dividends paid .................... (4,861) (4,719)
-------- --------
Net Cash Provided ................................. 3,002 5,143
-------- --------
Investing Activities:
Construction expenditures ............................... (14,549) (13,011)
-------- --------
Net Cash Used ..................................... (14,549) (13,011)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents ..... 2,597 2,546
Cash and Cash Equivalents, Beginning of period ........... 343 2,344
-------- --------
Cash and Cash Equivalents, End of period ................. $2,940 $4,890
======== ========
</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 27 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 $1,481,000 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
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. At
that time, the registrant intends to utilize the footnote option
of SFAS No. 123 to disclose the effects of any such awards.
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 June 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
provides electric service to the City of Big Bear Lake and surrounding areas in
San Bernardino County. The Registrant served 239,612 water customers and
20,353 electric customers at June 30, 1996, or a total of 259,965 customers,
compared with 258,403 total customers at June 30, 1995.
RESULTS OF OPERATION
Earnings per common share for the three months ended June
30, 1996 increased by 36.8% to $0.52 per share as compared to $0.38 per share
for the comparable period last year. For the six months ended June 30, 1996,
earnings per share were $0.79 as compared to $0.52 for the six months ended
June 30, 1995. Earnings for the twelve months ended June 30, 1996 increased by
19.1% to $1.81 per share as compared to $1.52 per share for the twelve months
ended June 30, 1995.
As compared to the same periods last year, water sales
volumes for the three, six and twelve months ended June 30, 1996 increased by
12.6%, 9.7% and 7.8%, respectively. Water operating revenues increased by
24.2%, 24.5% and 14.9%, in each of the three periods ended June 30, 1996
respectively, over the same periods of last year as a result of the impact of
both increased sales and general, step and attrition rate increases.
Kilowatt-hour sales of electricity increased by 3.2%, 4.0%
and 3.7% for the three, six and twelve months ended June 30, 1996,
respectively, as compared to the same periods last year. As a result of the
increased sales and a slight shift in the composition of those sales in favor
of residential and commercial customers, which have higher unit rate, electric
operating revenues for the three, six and twelve month periods ending June 30,
1996 increased by 7.6%, 4.2% and 3.4%, respectively, over the comparable
periods ending June 30, 1995.
Purchased water costs are 37.4%, 32.0% and 22.9% greater,
respectively, for the three, six and twelve months ended June 30, 1996 as
compared to the same periods last year reflecting increased amounts of
purchased water in the Registrant's resource mix, as well as increased
purchased water rates the latest of which was effective July 1, 1995.
9
<PAGE> 12
The costs of power purchased for pumping increased by 4.7%,
6.3% and 3.6%, respectively, for the three, six and twelve months ended June
30, 1996 as compared to the same periods ended June 30, 1995 due to increased
pumped water volumes in the Registrant's resource mix.
Chiefly as a result of increased electric kilowatt-hour
sales volumes, as compared to the three, six and twelve months ended June 30,
1995, the costs of power purchased for resale increased by 5.4%, 4.1% and 5.3%
for the three, six and twelve months ended June 30, 1996, respectively.
Groundwater production assessments are 5.3% lower for the
three months ended June 30, 1996 as compared to June 30, 1995 due principally
to a refund received in June, 1996 from the Water Replenishment District of
Southern California ("WRDSC"). There were no such refunds received in the
comparable period last year. For the six and twelve months ended June 30,
1996, groundwater production assessment increased by 0.7% and 2.8%,
respectively, as compared to prior year periods due primarily to the effects of
additional supply from pumped sources which effects were partially offset by
the refund from WRDSC.
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 the three, six and twelve months ended June 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 groundwater production assessments.
Other operating expenses increased by 3.0% and 15.1%,
respectively, for the six and twelve months ended June 30, 1996 as compared to
the same periods ended June 30, 1995 due chiefly to an increase in the
percentage of labor being charged to this category. In addition, there has
been, relative to the periods 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
26.8%, 21.5% and 21.1% for the three, six and twelve months ended June 30,
1996, respectively, as compared to the same periods ended June 30, 1995. These
periods are each affected by an increase in the amount of labor being charged
to this category since, as part of the settlement stipulation for the rates
that were effective January 1, 1996, the Registrant began expensing, and
subsequently recovering, a greater amount of labor for persons engaged in
general and administrative functions. As well, this category has increased due
to increased personnel-related expenditures such as health insurance,
postretirement medical benefits and pension and 401-k plan costs.
Depreciation expense, increased by 16.4%, 17.6% and 11.1%,
respectively, for the three, six and twelve months ended June 30, 1996
reflecting, among other things, the effects of recording approximately $30
million in net plant additions during 1995, depreciation on which began in
January, 1996. Each period is also affected by the higher depreciation rates,
effective January 1, 1996, authorized by the CPUC.
Taxes on income increased by approximately 29.6%, 49.2% and
9.2%, respectively, for the three, six and twelve months ended June 30, 1996 as
compared to the three, six and twelve months ended June 30, 1995 primarily as a
result of higher pre-tax income.
10
<PAGE> 13
For the three, six and twelve month periods ending June 30,
1996, other taxes increased by 21.2%, 28.8% and 26.9%, respectively, as
compared to the same time periods ending June 30, 1995 primarily due increased
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 14.8% for the three months
ended June 30, 1996 as compared to last year. However, maintenance expense
decreased by 2.2% and 14.9% for the six and twelve months ended June 30, 1996
as compared to the six and twelve months ended June 30, 1995. The decreases
result from changes in maintenance scheduling from the first quarter of 1996 to
the remainder of the year.
Interest expense for the three, six and twelve months ended
June 30, 1996 increased by 11.9%, 12.6% and 15.7%, respectively, over the
comparable 1995 time periods. These increases are primarily the result of the
Registrant's issue 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 June 30, 1996, the Registrant had a total of $32,000,000 in
borrowing outstanding under its bank lines of credit, leaving an unused
short-term borrowing capacity of $5,063,000. 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 received net proceeds of approximately
$206,000 from the sale of 9,770 Common Shares under its Dividend Reinvestment
and Common Share Purchase Plan in the three-month period ended June 30, 1996.
The Registrant anticipates issuing additional Common Shares as well as
additional long-term debt, with the net proceeds initially being used to repay
short-term bank borrowings and, after that, to fund construction expenditures.
The Registrant currently has an application pending with the
California Pollution Control Financing Authority to fund a portion of its
qualifying capital expenditures through issuance of tax-exempt debt.
The Registrant has no derivative financial instruments,
financial instruments with significant off-balance sheet risks or financial
instruments with concentrations of credit risk.
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
11
<PAGE> 14
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 provision of which became effective in January, 1995. Any payout under the
plan, which are made in Common Shares of the Registrant, will not occur until
1998. At that time, the registrant intends to utilize the footnote option of
SFAS No. 123 to disclose the effects of any such awards. See Note 6 of the
Notes to Financial Statements.
WATER SUPPLY
For the three months ended June 30, 1996, the Registrant
produced a total of 52,944 acre-feet of water as compared to 45,900 acre-feet
for the three months ended June 30, 1995. Of the total 52,944 acre-feet of
water produced during the second quarter of 1996, approximately 56.6% came from
pumped sources and 42.6% was purchased from others, principally the
Metropolitan Water District of Southern California ("MWD"). The remaining
amount was supplied by the Bureau of Reclamation (the "Bureau") under a no-cost
contract.
For the six months ended June 30, 1996, the Registrant
produced 87,595 acre-feet of water as compared to 77,246 acre-feet for the same
period last year. Of this total amount produced, 58.3% came from pumped
sources, 41.2% was produced from purchased sources and the remaining amount was
supplied by the Bureau.
During the twelve months ended June 30, 1996, the Registrant
produced 192,993 acre-feet of water. The Registrant produced 179,509 acre-feet
produced during the twelve months ended June 30, 1995. During the twelve month
period ended June 30, 1996, 57.4% of total supply came from pumped sources,
41.2% was purchased and the remaining was supplied by the Bureau.
The MWD is a water district organized under the laws
of the State of California for the purpose of delivering imported water to
areas within its jurisdiction. 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.
WATER QUALITY
The United States Environmental Protection Agency (the
"EPA"), under provisions of the 1972 Safe Drinking Water Act as amended in 1986
(the "SDWA") is required to establish maximum contaminant levels ("MCLs") for
83 potential drinking water contaminants listed in the 1986 amendments to the
SDWA, and for an additional 25 contaminants every three years thereafter. The
California Department of Health Services, acting on behalf of the EPA,
administers the EPA's program. Re-authorization of the SDWA was signed into law
on August 6, 1996.
12
<PAGE> 15
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 organisms. As a volunteer in the
program, the Registrant has committed to exceed current regulations governing
surface water treatment to ensure that its 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 Registrant will be subject to new rules regarding MCLs for
radon and arsenic. The SDWA mandates continued research for both arsenic and
radon. The National Academy of Sciences is responsible for conducting the
research necessary to establish an appropriate MCL for radon. The Registrant is
unable to predict at what level or when an MCL for radon will be established.
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, however, is
currently unable to predict what ultimate effects, if any, this rule would have
on its financial position or results of operation.
The EPA is continuing its review of data before implementing the
arsenic rule. Research necessary to establish an MCL for arsenic is being
jointly conducted by EPA and the American Water Works Association Research
Institute. The Registrant is unable to predict at what level or when an MCL
for arsenic will be established. Depending on the MCL eventually established,
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 Registrant will be subject to the new EPA rule concerning
Disinfection/Disinfection By-Products, Stage I of which 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 will
affect only two of the Registrant's systems. As part of its January, 1995
filing in U.S. District Court, the EPA requested an extension of time to
complete this rule.
The Enhanced Surface Water Treatment Rule has been proposed and
includes several options for promulgation. These options will be determined
based on data collected during compliance with the Information Collection Rule.
Once requirements of the Information Collection Rule have been completed, the
Registrant believes that the EPA will select one option for promulgation. The
final proposal is anticipated by 1998. This rule would affect each of the
Registrant's five surface water treatment plants.
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.
The EPA is drafting the Groundwater Disinfection Rule for
proposal by mid-1998. While the Registrant 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.
13
<PAGE> 16
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 found to meet the MCL standards.
Such costs and the costs of controlling any other pollutants 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 adoption of proposed rules might have on its financial position or
its results of operation, although 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. However, no assurance can be given that the CPUC will
authorize recovery of all or any of such costs in rates.
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. A ten-year agreement, reached
with the Aerojet Corporation in 1986, has expired, leaving open the question of
who will remain financially responsible for continuing well-head treatment.
The Registrant is currently negotiating with the Aerojet Corporation for a
renewal of the agreement but is unable to predict the outcome of such
negotiations or the impact, if any, of such negotiations on the results of
operations or financial condition.
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.
14
<PAGE> 17
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, 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.
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 will be
subject to approval by the Administrative Law Judge. A final decision by the
CPUC is anticipated by December, 1996 with rates effective in January, 1997.
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 June 30, 1996, earned surplus amounted to $48,651,000.
Of this amount, $27,801,000 was restricted as to payment of cash dividends on
the Registrant's Common Shares.
On June 1, 1996, 9,770 Common Shares were issued under the
provisions of the Registrant's Dividend Reinvestment and Common Share Purchase
Plan ("DRP"). As of June 30, 1996, authorized but unissued common shares
includes 99,684 and 92,259 common shares reserved for issuance under the
Registrant's DRP and Investment Incentive Program ("401-k"), respectively.
Common Shares reserved for the 401-k Plan are in relation to the matching
contributions made by the Registrant and for investment purposes by
participants.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the second quarter of the
fiscal year covered by this report to a vote of security holders through the
solicitation of proxies or otherwise.
15
<PAGE> 18
ITEM 5. OTHER INFORMATION
On July 29, 1996, the Board of Directors of the Registrant
declared a regular quarterly dividend of $0.305 per Common Share. 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 on common and
preferred shares will be paid September 1, 1996 to shareholders of record as of
the close of business on August 12, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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
Date: August 13, 1996
17
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS AND INCOME STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS FILED
HEREWITH AS EXHIBIT NO. 27.
</LEGEND>
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