<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended MARCH 31, 1997 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>
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 May 14, 1997, the number of shares
outstanding of Registrant's Common
Shares, Par Value $2.50, was 8,957,671.
<PAGE> 2
SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1: Financial Statements 1
Balance Sheets as of March 31, 1997 and December 31, 1996 2 - 3
Statements of Income for the Three Months Ended
March 31, 1997 and March 31, 1996 4
Statements of Income for the Twelve Months Ended
March 31, 1997 and March 31, 1996 5
Cash Flow Statements for the Three Months Ended
March 31, 1997 and March 31, 1996 6
Notes to Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operation 8 - 16
PART II OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 2: Changes in Securities 17
Item 3: Defaults Upon Senior Securities 17
Item 4: Submission of Matters to a Vote of Security Holders 17
Item 5: Other Information 17
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 for the year ended December 31, 1996 on Form 10-K.
1
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SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- -----------
(Unaudited)
(in thousands)
<S> <C> <C>
UTILITY PLANT, at cost
Water $412,623 $411,852
Electric 33,553 33,300
--------- ---------
446,176 445,152
Less - Accumulated depreciation ...................... (117,343) (114,086)
--------- ---------
328,833 331,066
Construction work in progress ........................ 30,509 26,710
--------- ---------
359,342 357,776
--------- ---------
OTHER PROPERTY AND INVESTMENTS ....................... 774 774
--------- ---------
CURRENT ASSETS
Cash and cash equivalents ........................ 642 3,783
Accounts receivable -
Customers, less reserves of $308
in 1997 and $345 in 1996 ................. 8,506 7,870
Other ........................................ 1,320 1,713
Unbilled revenue ................................. 11,020 12,596
Materials and supplies, at average cost .......... 1,332 1,292
Supply cost balancing accounts ................... 5,714 6,273
Prepayments ...................................... 5,488 6,933
Accumulated deferred income taxes - net .......... 3,583 3,302
--------- ---------
37,605 43,762
--------- ---------
DEFERRED CHARGES
Regulatory tax-related assets .................... 23,007 23,201
Other deferred charges ........................... 5,160 5,409
--------- ---------
28,167 28,610
--------- ---------
$ 425,888 $ 430,922
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- -----------
(Unaudited)
(in thousands)
<S> <C> <C>
CAPITALIZATION
Common shareholders' equity ........................ $146,749 $146,766
Preferred shares ................................... 1,600 1,600
Preferred shares - mandatory redemption ............ 480 480
Long-term debt ..................................... 109,641 107,190
-------- --------
258,470 256,036
-------- --------
CURRENT LIABILITIES
Notes payable to banks ............................. 12,500 16,000
Long-term debt and preferred shares - current....... 482 482
Accounts payable ................................... 8,809 12,865
Taxes payable ...................................... 4,747 5,777
Accrued interest.................................... 2,338 1,772
Other accrued liabilities........................... 7,998 7,792
-------- --------
36,874 44,688
-------- --------
OTHER CREDITS
Advances for construction .......................... 55,751 55,848
Contributions in aid of construction................ 28,097 28,158
Accumulated deferred income taxes - net ............ 40,987 40,404
Unamortized investment tax credits ................. 1,984 1,995
Regulatory tax-related liability ................... 3,315 3,337
Other .............................................. 410 456
-------- --------
130,544 130,198
-------- --------
$425,888 $430,922
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1996
-------- --------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ....................................................... $ 28,587 $ 27,061
Electric..................................................... 3,619 3,336
-------- --------
32,206 30,397
-------- --------
OPERATING EXPENSES
Water purchased .............................................. 7,839 6,697
Power purchased for pumping .................................. 1,282 1,565
Power purchased for resale ................................... 1,392 1,551
Groundwater production assessment ............................ 1,125 1,397
Supply cost balancing accounts ............................... 558 (176)
Other operating expenses ..................................... 3,478 3,115
Administrative and general expenses .......................... 5,317 4,625
Depreciation ................................................. 2,727 2,526
Maintenance .................................................. 2,067 1,353
Taxes on income .............................................. 1,105 1,618
Other taxes .................................................. 1,578 1,416
-------- --------
28,468 25,687
-------- --------
Operating income ............................................. 3,738 4,710
OTHER INCOME ..................................................... 44 48
--------
Income before interest charges................................ 3,782 4,758
INTEREST CHARGES ................................................. 2,470 2,590
-------- --------
NET INCOME ....................................................... 1,312 2,168
DIVIDENDS ON PREFERRED SHARES .................................... 23 24
-------- --------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ....................... $ 1,289 $ 2,144
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .................... 8,956 7,845
======== ========
Earnings Per Common Share ........................................ $ 0.14 $ 0.27
======== ========
Dividends Declared Per Common Share .............................. $ 0.310 $ 0.305
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
TWELVE MONTHS ENDED
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
MARCH 31,
------------------------
1997 1996
-------- --------
(in thousands, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Water ....................................................... $ 141,524 $ 124,283
Electric .................................................... 11,815 10,950
--------- ---------
153,339 135,233
--------- ---------
OPERATING EXPENSES
Water purchased............................................... 39,497 33,945
Power purchased for pumping .................................. 7,428 8,077
Power purchased for resale.................................... 5,665 5,263
Groundwater production assessment ............................ 5,674 6,240
Supply cost balancing accounts ............................... 2,798 (721)
.........
Other operating expenses...................................... 13,785 13,491
Administrative and general expenses .......................... 21,241 17,041
Depreciation ................................................. 10,304 8,884
Maintenance .................................................. 8,459 5,454
Taxes on income .............................................. 9,770 9,594
Other taxes .................................................. 6,261 5,245
--------- ---------
130,882 112,513
--------- ---------
Operating income ............................................. 22,457 22,720
OTHER INCOME ..................................................... 527 359
--------- ---------
Income before interest charges ............................... 22,984 23,079
INTEREST CHARGES ................................................ 10,380 9,865
--------- ---------
NET INCOME........................................................ 12,604 13,214
DIVIDENDS ON PREFERRED SHARES .................................... 93 96
--------- ---------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS ....................... $ 12,511 $ 13,118
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .................... 8,168 7,845
========= =========
Earnings Per Common Share ........................................ $ 1.53 $ 1.67
========= =========
Dividends Declared Per Common Share .............................. $ 1.23 $ 1.21
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE> 8
SOUTHERN CALIFORNIA WATER COMPANY
CASH FLOW STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1996
-------- --------
(in thousands, except
per share amounts)
<S> <C> <C>
CASH FLOWS FROM -
Operating Activities:
Net income ................................................... $ 1,312 $ 2,168
Adjustments for non-cash items:
Depreciation and amortization .............................. 2,831 2,604
Deferred income taxes and
investment tax credits ................................... 463 685
Other - net ................................................ (278) (548)
Changes in current assets and liabilities:
Accounts receivable ........................................ (636) 1,740
Prepayments ................................................ 1,445 1,023
Supply cost balancing accounts.............................. 559 (177)
Accounts payable ........................................... (4,056) 2,765
Taxes payable .............................................. (1,030) (208)
Unbilled revenue ........................................... 1,576 359
Other 1,123 17
-------- --------
Net Cash Provided........................................ 3,309 10,428
-------- --------
Investing Activities:
Construction expenditures ........................................ (4,066) (5,150)
-------- --------
Net Cash Used ........................................... (4,066) (5,150)
-------- --------
Financing Activities:
Receipt of advances and contributions ........................ 487 577
Issuance of securities .......................................
Repayments of long-term debt and ............................. 3,963 --
redemption of preferred shares ............................. (40) (15,319)
Refunds on advances .......................................... (493) (256)
Net change in notes payable to banks ......................... (3,500) 14,500
Common and preferred dividends paid .......................... (2,801) (2,439)
-------- --------
Net Cash Provided ....................................... (2,384) (2,937)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (3,141) 2,341
Cash and Cash Equivalents, Beginning of Period ................. 3,783 343
-------- --------
Cash and Cash Equivalents, End of Period ....................... $ 642 $ 2,684
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 9
SOUTHERN CALIFORNIA WATER COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. For a summary of significant accounting policies and other information
relating to these interim financial statements, reference is made to
pages 28 through 32 of the 1996 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 November, 1996, Registrant filed an application with the California
Public Utilities Commission (CPUC) seeking approval of its recovery
through rates of costs associated with its participation in the Coastal
Aqueduct Extension of the State Water Project (SWP). Registrant's
current investment in SWP is approximately $1.8 million and is included
in utility plant. 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. Registrant implemented increased water rates in six of its rate-making
districts on January 1, 1996 and additional step increases were
effective in January, 1997. Water rates in two additional customer
service areas were increased on January 1, 1997 to recover costs
associated with capital projects in those areas. Registrant filed
Notices of Intent to increase water rates in four rate-making districts
in January, 1997. New rates were effective in May, 1997 in Registrant's
Bear Valley Electric customer service area. An additional step increase
was effective in January, 1997. See the section entitled "Rates and
Regulation" for more information.
5. As permitted by the CPUC, 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.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
Southern California Water Company ("Registrant") is a public
utility company engaged principally in the purchase, production, distribution
and sale of water (SIC No. 4941). Registrant also distributes electricity in one
community (SIC No. 4911). 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.
Registrant's present name was adopted in 1936.
Registrant is organized into three regions operating within 75
communities in 10 counties in the State of California and provides water service
in 21 customer service areas. As of March 31, 1997, about 73% of Registrant's
water customers were located in the greater metropolitan areas of Los Angeles
and Orange Counties. Registrant also provides electric service to the City of
Big Bear Lake and surrounding areas in San Bernardino County. Beginning in June,
1996, all electric energy sold by Registrant to customers in its Bear Valley
Electric customer service area was purchased under an energy brokerage contract
with ENOVA Energy Management, Inc. Prior to June, 1996, all energy sold was
purchased from the Southern California Edison Company subsidiary of Edison
International. Registrant served 240,619 water customers and 20,545 electric
customers at March 31, 1997, or a total of 261,164 customers compared with
259,590 total customers at March 31, 1996.
RESULTS OF OPERATION
Earnings per common share for the three months ended March 31,
1997 decreased by 48.1% to $0.14 per share as compared to $0.27 per share for
the comparable period last year. Earnings for the twelve months ended March 31,
1997 decreased by 8.4% to $1.53 per share as compared to $1.67 per share for the
twelve months ended March 31, 1996. The decline in the recorded results
primarily reflect increased supply costs and maintenance expense during the
first quarter of 1997 as is discussed below.
As compared to last year, water sales volumes for the three and
twelve months ended March 31, 1997 increased by 0.3% and 5.0%, respectively,
over the same periods ended March 31, 1996. Water operating revenues increased
by 5.6% and 13.9%, respectively, for the three and twelve months ended March 31,
1997. The increase in revenues is a result of the effects of general and step
rate increases effective January 1, 1997 as well as the increased sales volumes.
See the section entitled "Rates and Regulation" for more information.
Kilowatt-hour sales of electricity increased by 11.3% and 4.4%
for the three and twelve months ended March 31, 1997, respectively, as compared
to the same periods last year. As a result of the increased kilowatt-hour sales
and, for the three month comparison, a step increase in electric rates, electric
operating revenues for the three and twelve month periods ending March 31, 1997
increased by 8.5% and 7.9%, respectively, over the comparable periods last year.
Purchased water costs increased by 17.1% and 16.4%, respectively,
for the three and twelve months ended March 31, 1997 as compared to the same
periods ending in 1996. These increases reflect the increase in purchased water
volumes as well as an increase in purchased water costs, effective January,
1997.
8
<PAGE> 11
The costs of power purchased for pumping decreased by 18.1% and
8.0%, respectively, for the three and twelve months ended March 31, 1997 as
compared to the same period ended March 31, 1996 due chiefly to a decrease in
pumped groundwater in Registrant's total water supply.
As compared to the three months ended March 31, 1997, the costs
of power purchased for resale decreased by 10.3% chiefly as a result of lower
energy costs obtained through open market purchases. For the twelve months ended
March 31, 1997, the costs of power purchased for resale increased by 7.6% as
compared to the same period last year principally as a result of the increased
kilowatt-hour sales.
Groundwater production assessments are 19.5% and 9.1% lower for
the three and twelve months ended March 31, 1997, respectively, due to the
decreased volumes of pumped water in Registrant's total water supply.
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 and twelve months ended March 31, 1997 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. The balancing
account mechanism insulates earnings from changes in costs of purchased water,
power purchased for pumping and groundwater production assessment, all of which
are outside the immediate control of the Registrant. However, the balancing
account mechanism is not designed to insulate earnings against changes in supply
mix.
Other operating expenses increased by 11.7% and 2.20%,
respectively, for the three and twelve months ended March 31, 1997 as compared
to the same periods ended March 31, 1996 due chiefly to an increase in the
amount of time being charged to this category as well as the effect. In
addition, there has been a net 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 15.0% and 24.6%
for the three and twelve months ended March 31, 1997, respectively, as compared
to the same periods ended March 31, 1996. These periods are each affected by an
increase in the amount of labor being charged to this category due to the
addition of staff as well as increased costs related to recovery of
postretirement medical benefits, increased pension and 401-k plan costs and
costs of long term incentive compensation plans.
Depreciation expense increased by 8.0% and 16.0%, respectively,
for the three and twelve months ended March 31, 1997 reflecting, among other
things, the effects of recording approximately $31 million in net plant
additions during 1996, depreciation on which began in January, 1997.
Taxes on income decreased by 31.7% for the three months ended
March 31, 1997 as compared to the three months ended March 31, 1996 as a result
of lower pre-tax income and a slightly lower marginal state income tax rate.
Other taxes inceased by 11.4% and 19.4%, respectively, for the
three and twelve months ended March 31, 1997 as compared to last year
principally due to increased property taxes resulting from higher property
valuation.
Maintenance expense increased by 52.8% and 55.1% for the three
and twelve months ended March 31, 1997 as compared to the three and twelve
months ended March 31, 1996, respectively. These increases primarily reflect
increased emphasis on maintenance of wells, hydrants and valves during the
latter part of 1996 and the early part of 1997.
9
<PAGE> 12
Interest expense for the three months ended March 31, 1997
decreased by 4.6% as compared to the same period last year due primarily to
reduced short-term bank borrowing during the three month period. For the twelve
months ended March 31, 1997 interest expense increased by 5.2% over the twelve
months ended March 31, 1996 due to higher short-term bank borrowing during the
period.
LIQUIDITY AND CAPITAL RESOURCES
Registrant's construction program is designed to ensure its
customers high quality service. Registrant maintains an ongoing distribution
main replacement program throughout its customer service areas, based on the
priority of leaks detected, fire protection enhancement and a reflection of the
underlying replacement schedule. In addition, Registrant upgrades its electric
and water supply facilities and is aggressively scheduling meter replacements
that conform with CPUC requirements. Registrant's Board of Directors has
approved anticipated net capital expenditures of approximately $27.5 million in
1997.
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, Registrant
utilizes its short-term borrowing capacity on occasion to finance current
operating expenses.
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 available to Registrant under its three bank lines of credit was $37
million as of March 31, 1997. As of March 31, 1997, Registrant had a total of
$12.5 million in borrowing outstanding under those bank lines of credit.
Registrant routinely employs short-term bank borrowing as an interim financing
source prior to executing either a long-term debt or equity issue. Registrant
anticipates issuing additional long-term debt in 1997, with the net proceeds
initially being used to repay short-term bank borrowings and, after that, fund
construction expenditures.
Registrant has no derivative financial instruments, financial
instruments with significant off-balance sheet risks or financial instruments
with concentrations of credit risk.
WATER SUPPLY
For the three months ended March 31, 1997, Registrant supplied a
total of 37,697 acre-feet of water as compared to 34,643 acre-feet for the three
months ended March 31, 1996. Of the total 37,697 acre-feet of water supplied
during the first quarter of 1997, approximately 54.2% came from pumped sources
and 45.7% was purchased from others, principally the Metropolitan Water District
of Southern California ("MWD") and its member agencies. A minimal amount of
total supply came from the United States Bureau of Reclamation (the "Bureau")
under a no-cost contract. For the three months ended March 31, 1996, 59.4%,
40.5% and 0.1% was supplied from pumped sources, purchased from MWD and the
Bureau, respectively. During the three months ended March 31, 1996, Registrant
had purchased additional water rights to facilitate greater levels of pumping.
There were no such water rights purchased which would allow for increased
pumping during the first quarter of 1997. Registrant has obtained additional
water rights and anticipates increasing its pumping of groundwater supply during
1997.
During the twelve months ended March 31, 1997, Registrant
supplied 196,774 acre-feet of water as compared to 186,379 wazzu acre-feet
supplied during the twelve months ended March 31, 1996. During the twelve month
period ended March 31, 1997, pumped sources provided 54.6% of total supply,
10
<PAGE> 13
44.1% was purchased and the remaining 1.3% was supplied by the Bureau. For the
twelve months ended March 31, 1996, 57.5%, 40.6% and 1.7%, respectively, was
supplied from pumped sources, purchased from MWD and the Bureau.
MWD is organized to deliver imported water to areas within its
jurisdiction. 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 remain adequate through 1997. 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 steps to secure additional storage capacity and increase available water
supplies, including effecting transfers of water rights from other sources.
Precipitation during the 1996-1997 winter period provided
adequate supply to fill most of the state's reservoirs to near capacity and the
outlook for water supply in 1997 is favorable. In those districts of Registrant
which pump groundwater, overall groundwater conditions remain at adequate levels
allowing Registrant to use groundwater in its resource mix and decrease its
dependence on increasingly expensive purchased water. Registrant believes that
its water supplies from all sources are adequate to meet current year projected
demands.
ENVIRONMENTAL MATTERS
1996 Amendments to Federal Safe Drinking Water Act
On August 6, 1996, amendments (the "1996 SDWA amendments") to the
Safe Drinking Water Act (the "SDWA") 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. The
amendments were developed with significant contributions from water purveyors
and regulators. The California Department of Health Services, acting on behalf
of the EPA, administers the EPA's program in California.
The 1996 SDWA revise the 1986 amendments to the SDWA, which
required that the EPA set 25 new contaminant 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 the regulation of which will provide "a
meaningful opportunity for health risk reduction." The EPA must, within 18
months of the time that the 1996 SDWA amendments were signed into law, 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.
The 1996 SDWA amendments allow the EPA for the first time to base
primary drinking water regulations on risk assessment and cost/benefit
considerations and on minimizing overall risk. The EPA must base regulations on
best available, peer-reviewed science and data from best available methods. For
proposed regulations that involve the setting of maximum contaminant levels
("MCL's"), the EPA must use, and seek public comment on, an analysis of
quantifiable and non-quantifiable risk-reduction benefits and cost for each such
MCL.
11
<PAGE> 14
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.
Since the SDWA became effective, Registrant has experienced
increased operating costs for testing to determine the levels, if any, of the
contaminants in 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 Registrant to
experience additional capital costs as well as increased operating costs.
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 ratemaking process provides Registrant with the
opportunity to recover prudently incurred capital and operating costs associated
with water quality. Management believes that such incurred costs will be
authorized for recovery by the CPUC.
Proposed Enhanced Surface Water Treatment Rule
On July 29, 1994, the EPA proposed an Enhanced Surface Water
Treatment Rule ("ESWTR") which would require increased surface-water treatment
to decrease the risk of microbial contamination. The EPA has proposed several
versions of the ESWTR for promulgation. The version selected for promulgation
will be determined based on data collected by certain water suppliers and
forwarded to the EPA pursuant to EPA's Information Collection Rule, which
requires such water suppliers to monitor microbial and other contaminants in
their water supplies and to conduct certain tests in respect of such
contaminants. The EPA must adopt interim and final rules pertaining to enhanced
surface water treatment according to a negotiated schedule or as soon as
practicable. The ESWTR, in any of the forms currently proposed, would apply to
each of Registrant's five surface water treatment plants. However, because it is
impossible to predict the version of the ESWTR that will be promulgated,
Registrant is unable to predict what additional costs, if any, will be incurred
to comply with the ESWTR.
Regulation of Disinfection/Disinfection By-Products
Registrant will also be subject to the new regulations concerning
disinfection/disinfection by-products ("DBPs"), Stage I of which regulations are
expected to become effective in June, 1998. These regulations will require
reduction of tri-halomethane contaminants from 100 micrograms per liter to 80
micrograms per liter and are expected to affect two of Registrant's systems.
The EPA must adopt Stage II rules pertaining to DBPs according to
a negotiated schedule or as soon as practicable. The EPA is not allowed to use
the new cost/benefit analysis provided for in the 1996 SDWA amendments for
establishing the Stage II rules applicable to DBPs but may utilize the
regulatory negotiating process provided for in the 1996 SDWA amendments to
develop the Stage II rule.
Ground Water Disinfection Rule
By December, 1998, the EPA is scheduled to propose regulations
requiring disinfection of certain groundwater systems and provide guidance on
determining which systems must provide disinfection facilities. The EPA may
utilize the cost/benefit analysis provided in the 1996 SDWA amendments to
establish such regulations. It is anticipated that the regulations will apply to
several of Registrant's systems using groundwater supplies. While no assurance
can be given as to the nature and cost of any additional compliance measures, if
any, Registrant does not believe that such regulations will impose
13
<PAGE> 15
significant compliance costs, since Registrant already currently engages in
disinfection of its groundwater systems.
Regulation of Radon and Arsenic
Registrant will be subject to new regulations 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
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 Registrant
is unable to predict what the standard for radon might eventually be, 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.
Voluntary Efforts to Exceed Surface Water treatment Standards
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, Registrant has committed to exceed current regulations governing
surface water treatment to ensure that its surface treatment facilities are
performing as efficiently as possible.
Fluoridation of Water Supplies
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.
Matters Relating to Arden-Cordova System
Three of the 27 wells in Registrant's Arden-Codova system have,
for several years, been subject to contamination by tricholoroethylene. GenCorp
Aerojet 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
Registrant for the costs of backwash system modification at all three wells.
In January, 1997, Registrant was notified that ammonium
perchlorate had been detected in three of its wells in its Arden-Cordova system.
GenCorp Aerojet has, in the past, used ammonium perchlorate in their processing
as an oxidizer of rocket fuels. Although neither the EPA nor the DOHS has
established a drinking water standard for ammonium perchlorate, Registrant has
notified customers in its
13
<PAGE> 16
Arden-Cordova customer service area of detection of ammonium perchlorate.
Registrant has taken the three wells detected with ammonium perchlorate out of
service. In April, 1997, Registrant found ammonium perchlorate in three
additional wells and has removed those wells from service as well. GenCorp
Aerojet has agreed to reimburse Registrant for all necessary and reasonable
activities in the construction of a pipeline to for interconnection of the
Folsom City and Arden-Cordova water systems to provide an alternative source(s)
of water supply in Registrant's Arden-Cordova customer service area.
Registrant and GenCorp Aerojet are in negotiations on other
matters related to procedures to address cleanup of the contaminated wells,
costs associated with the cleanup and costs associated with increased costs of
purchased water as compared to pumped sources. Registrant is unable to predict
when the negotiations will be completed or the likely outcome of such
negotiations.
Matters Relating to Culver City System
The compound methyl tertiary butyl ether ("MTBE") has been
detected in the Charnock Basin located in the city of Santa Monica and Culver
City, which lies within Registrant's service area. MTBE is an oxygenate used in
reformulated fuels. At the request of the Regional Water Qualify Control Board,
the city of Santa Monica and the California Environmental Protection Agency,
Registrant removed two of its wells in the Culver City system from service in
November, 1996 to help in efforts to avoid further spread of the MTBE
contamination plume. Neither of these wells nor any of Registrant's other wells
have been found to be contaminated with MTBE. Registrant is purchasing water
from the Metropolitan Water District at an increased cost to replace the water
supply formerly pumped from the two wells removed from service.
Several studies are under way to determine the possible sources
and causes of the MTBE contamination. The federal EPA is pursuing an enforcement
effort to reach a settlement with the potentially responsible parties on matters
relating to the cleanup of the contamination as well as to obtain reimbursement
from such parties for increased costs incurred by Registrant in purchasing
replacement water. Registrant is unable to predict the outcome of the EPA's
enforcement effort, and no assurance can be given as to whether Registrant will
obtain reimbursement for the increased costs of purchasing water to replace the
water formerly pumped from the affected wells in the Culver City system.
Bear Valley Electric
There have been no environmental matters that have materially
affected or are currently materially affecting Registrant's Bear Valley Electric
customer service area.
RATES AND REGULATION
Registrant is subject to regulation by the CPUC as to its water
and electric business and properties. The CPUC has broad powers to regulate
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. The CPUC 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.
The 22 customer service areas of Registrant are grouped into 16
water districts and one electric district for ratemaking purposes. Registrant's
water rates vary among the 16 ratemaking districts due to differences in
operating conditions and costs. Registrant continuously monitors operations in
each of these districts so that it may file applications for rate changes, when
warranted, on a district-by-district
15
<PAGE> 17
basis, in accordance with the CPUC's 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.
In January, 1996, new rates were effective in six of Registrant's
rate-making districts which, among other things, authorized a rate of return on
common equity of 10.40%, increased depreciation rates, authorized recovery of
postretirement medical benefit costs, increased current recovery of labor and
labor-related expenses and resulted in an increase in annual water operating
revenues of approximately $15 million. Water rates in two additional ratemaking
districts were increased on January 1, 1997 to recover costs associated with
1996 and 1997 capital projects in those areas.
Registrant filed notices of intent to increase water rates in
four ratemaking districts in January, 1997. Registrant is unable to predict if
the CPUC will authorize all or any of the proposed increases although it is not
anticipated that new rates, if approved, would be effective before January,
1998.
New rates were effective in May, 1996 in Registrant's Bear Valley
Electric customer service area. An additional step increase was effective in
January, 1997.
In November, 1996, 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. Registrant is currently
unable to predict if the CPUC will authorize recovery of all or any of the costs
associated with its participation in the Project. See Notes to Financial
Statements for more information.
WATER-RELATED OPPORTUNITIES
Registrant continues to pursue strategic opportunities related to
the operation of municipally-owned water systems. Registrant 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.
In December, 1996, Registrant and U.S. Water, L.L.C., a limited
liability company owned by United Infrastructure Company, a general partnership
formed by the Bechtel and Peter Kiewet organizations, and by Northwest Water
Holdings, Inc., a subsidiary of United Utilities PLC, a water and electric
utility based in the United Kingdom, formed Golden State Water Company LLC
("GSWC") for the purpose of pursuing potential opportunities to lease, or
operate and maintain, municipally owned retail water supply and distribution
systems and water treatment, wastewater collection and wastewater treatment
facilities in California. GSWC has submitted a bid to the city of Garden Grove
("Garden Grove") to operate and maintain its water system. The bid remains
subject to approval by Garden Grove. No assurance can be given that Garden Grove
will approve GSWC's bid or that GSWC will ultimately be retained to operate and
maintain the city's water system or perform any other services for Garden Grove.
There can be no assurance that any other such opportunities will materialize or
that, if they do, Registrant (either jointly with GSWC or alone) would be
successful in consummating any such lease and/or maintenance and operation
arrangements.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this Report (including the documents
incorporated herein by reference) are forward-looking statements intended to
qualify for the safe harbors from liability established by the Private
Securities Litigation Reform Act of 1995. These forward-looking statements can
generally
15
<PAGE> 18
be identified as such because the context of the statement will include words
such as Registrant "believes," "anticipates," "expects" or words of similar
import. Similarly, statements that describe Registrant's future plans,
objectives, estimates or goals are also forward-looking statements. Such
statements address future events and conditions concerning capital expenditures,
earnings, litigation, rate and other regulatory matters, adequacy of water
supplies, liquidity and capital resources, and accounting matters. Actual
results in each case could differ materially from those currently anticipated in
such statements, by reason of factors such as utility restructuring, including
ongoing state and federal activities; future economic conditions, including
changes in customer demand; future climatic conditions; legislative, regulatory
and other circumstance affecting anticipated revenues and costs.
PART II
ITEM 1. LEGAL PROCEEDINGS
On April 24, 1997, a complaint for negligence, wrongful death,
strict liability, trespass, public nuisance, private nuisance, negligence per
se, strict liability for ultrahazardous activities and fraudulent concealment
was filed in Los Angeles Superior Court on behalf of more than 140 plaintiffs.
The plaintiffs allege that (i) they are, and at all relevant times were
customers of Registrant, (ii) for a period of more than twenty years, Registrant
has provided and continues to provide them with contaminated water from wells
located in an area of the San Gabriel Valley that has been designated a federal
environmental (EPA) superfund site, and (iii) the maintenance of this
contaminated well water has resulted in the contamination of the ground water,
soil, subsurface soil and air with trichloroethylene, percholoroethene and
carbon tetrachloride and other solvents. The plaintiffs allege that Registrant's
actions were the direct and legal cause of injuries to the plaintiffs' person,
personal property and financial interests in undetermined amounts to be
determined at trial. Plaintiffs seek damages, including general, special, and
punitive damages, according to proof at trial, as well as reasonable attorney's
fees and costs of suit, and other appropriate relief. Registrant has not yet
been served in this action and has therefore not responded to the allegations in
court.
Registrant has provided water service in portions of the San
Gabriel Valley for over 60 years and portions of the San Gabriel Valley have
been designated federal environmental superfund sites. Registrant has not been
notified that it is a potentially responsible party with respect to any of these
sites. Registrant has commenced a review and evaluation of the plaintiff's
claims and its insurance coverage for environmental liabilities during the past
25 years. In light of the breadth and nonspecificity of the plaintiff's claims,
the fact that the complaint was recently filed, Registrant has not yet been
served and discovery has not yet commenced and the lack of factual information
regarding the plaintiff's claims, Registrant is unable to determine at this time
what, if any, potential liability it may have with respect to these claims.
Nonetheless, Registrant will vigorously defend itself against the allegations.
Registrant is also subject to ordinary routine litigation
incidental to its business. Other than as disclosed above, no legal proceedings
are pending (except such incidental litigation) to which Registrant is a party
or of which any of its properties is the subject which are believed by
Registrant to be material.
ITEM 2. CHANGES IN SECURITIES
As of March 31, 1997, earned surplus amounted to $49,418,000. Of
this amount, $27,197,000 was restricted as to payment of cash dividends on
Registrant's Common Shares.
16
<PAGE> 19
As of March 31, 1997, authorized but unissued Common Shares
includes 89,226 and 71,408 Common Shares reserved for issuance under
Registrant's Dividend Reinvestment and Common Share Purchase Program and
Investment Incentive Program ("401-k"), respectively. Common Shares reserved for
the 401-k Plan are in relation to the matching contributions by 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
On or about March 27, 1997, common and preferred shareholders of
Registrant were mailed a Notice of Annual Meeting and a Proxy Statement.
Shareholders were requested to vote their shares for the election of a slate of
seven directors to serve until the next annual meeting and until their
successors are chosen and qualified. The following table presents the results of
the election presented at the Annual Meeting of Shareholders on April 29, 1997:
<TABLE>
<CAPTION>
PERCENT VOTE PERCENT VOTE
NAME "FOR" "AGAINST"
---- ------------ ------------
<S> <C> <C>
James L. Anderson 94.38% 5.62%
Jean E. Auer 94.47% 5.53%
William V. Caveney 94.36% 5.64%
N.P. Dodge, Jr. 94.40% 5.60%
Robert F. Kathol 94.50% 5.50%
Lloyd E. Ross 94.45% 5.55%
</TABLE>
In addition, at the Annual Meeting of Shareholders on April 29,
1997, shareholders approved by a 81.23% affirmative vote, an amendment to
Registrant's Articles Of Incorporation to increase the number of authorized
Common Shares from 10,000,000 to 30,000,000.
ITEM 5. OTHER INFORMATION
On April 28, 1997, the Board of Directors of Registrant declared
a regular quarterly dividend of $0.31 per common share. The dividend will be
paid June 1, 1997 to shareholders of record as of the close of business on May
12, 1997. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934,
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/ McCLELLAN HARRIS III
----------------------------------
McClellan Harris III
Vice President - Finance,
Chief Financial Officer,
Treasurer and Secretary
Dated: May 14, 1997
18
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM (A) BALANCE SHEETS
AND INCOME STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS FILED
HEREWITH.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 359,342
<OTHER-PROPERTY-AND-INVEST> 774
<TOTAL-CURRENT-ASSETS> 37,605
<TOTAL-DEFERRED-CHARGES> 28,167
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 425,888
<COMMON> 22,394
<CAPITAL-SURPLUS-PAID-IN> 74,937
<RETAINED-EARNINGS> 49,418
<TOTAL-COMMON-STOCKHOLDERS-EQ> 146,749
480
1,600
<LONG-TERM-DEBT-NET> 109,033
<SHORT-TERM-NOTES> 12,500
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 63
40
<CAPITAL-LEASE-OBLIGATIONS> 608
<LEASES-CURRENT> 379
<OTHER-ITEMS-CAPITAL-AND-LIAB> 154,436
<TOT-CAPITALIZATION-AND-LIAB> 425,888
<GROSS-OPERATING-REVENUE> 32,206
<INCOME-TAX-EXPENSE> 1,105
<OTHER-OPERATING-EXPENSES> 27,363
<TOTAL-OPERATING-EXPENSES> 28,468
<OPERATING-INCOME-LOSS> 3,738
<OTHER-INCOME-NET> 44
<INCOME-BEFORE-INTEREST-EXPEN> 3,782
<TOTAL-INTEREST-EXPENSE> 2,470
<NET-INCOME> 1,312
23
<EARNINGS-AVAILABLE-FOR-COMM> 1,289
<COMMON-STOCK-DIVIDENDS> 2,777
<TOTAL-INTEREST-ON-BONDS> 0
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<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
