-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E3rghpgYYzRlZhWOn/2yMH07GSqYDfW3iEHQ8IpAr8RpJzS+XDh2rFEZE7eLARwK a9xJkZH8+UK0eEH34hWM6g== 0000912057-97-011079.txt : 19970401 0000912057-97-011079.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011079 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOMINGUEZ SERVICES CORP CENTRAL INDEX KEY: 0000860673 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 330391161 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18677 FILM NUMBER: 97568779 BUSINESS ADDRESS: STREET 1: 21718 S ALAMEDA STREET CITY: LONG BEACH STATE: CA ZIP: 90810 BUSINESS PHONE: 3108342625 MAIL ADDRESS: STREET 2: 21718 SOUTH ALAMEDA ST CITY: LONG BEACH STATE: CA ZIP: 90810 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Fiscal Year Ended December 31, 1996 Commission file number 0-18677 ----------------- --------- DOMINGUEZ SERVICES CORPORATION ------------------------------------ (Exact name of registrant as specified in its charter) California 33-0391161 - -------------------------------------------------------------------------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) identification no.) 21718 South Alameda Street, Long Beach, California 90810 - -------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (310)834-2625 ---------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each Class on which registered ------------------- ----------------------- None NASDAQ ---- ------ Securities registered pursuant to Section 12(g) of the Act: Common Shares, $1 Par Value ------------------------------------- (Title of Class) 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 ------ State the aggregate market value of the voting stock held by non-affiliates of the registrant: Common Shares average bid price of $23.50 on March 24, 1997. Aggregate market value $23,602,695 ---------------------------------- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: December 31, 1996 - 1,004,370 shares ------------------------------------ Documents incorporated by reference: (1) Annual report to shareholders for the year ended December 31, 1996, as to Part II, Items 5, 6, 7 and 8. (2) Proxy statement dated April 4, 1997, as to Item 10 (part), Item 11, Item 12, and Item 13. (There are fifteen pages in this 10-K) Page 1 PART I ITEM 1. BUSINESS. GENERAL Dominguez Services Corporation ("Company") is a holding company created in 1990 through an Agreement of Merger with Dominguez Water Company ("Dominguez"). The Company's principal business is the ownership of all the common stock of Dominguez. The holding company structure provides operational and financial flexibility and allows the Company to engage in non-utility activities. The Company has two wholly-owned subsidiaries: Dominguez, which is involved in water supply and distribution and DSC Investments which is involved in non-regulated, water related services and investments. Dominguez, a public utility regulated by the California Public Utilities Commission ("CPUC"), produces and supplies water for residential, commercial, public authority, business and industrial customers. It is comprised of its principal division, the South Bay division and its operating subsidiaries, the Kern River Valley Water Company and the Antelope Valley Water Company (collectively referred to as "Subsidiaries"). The South Bay division has been providing water service for more than 85 years and is the largest service area with 32,228 customers encompassing most of the City of Carson, one-third of Torrance, and portions of the cities of Compton, Long Beach and Harbor City. Antelope Valley Water Company, with 1,242 customers, has four distinct service areas in northern Los Angeles County; whereas, Kern River Valley Water Company, located in Kern County around Isabella Lake, has nine distinct service areas and 3,412 customers. During 1996, DSC Investments income is primarily from the transfer of water rights between third parties. Income from the transfers may significantly vary from year to year due to demands for groundwater by major pumpers in the West and Central Basins. In 1996, DWC Investments invested $350,000 in Chemical Services Corporation ("CSC") and acquired a 20% equity ownership interest with an option to acquire an additional 40% equity ownership interest over the next five years. CSC manufactures and distributes chlorine generators used in the water and wastewater industry to produce safe on-site chlorine disinfectant. Page 2 OPERATIONS In 1996, Dominguez supplied 11,481 million gallons of water to 36,882 customers, compared to 12,371 million gallons of water to 36,739 customers in 1995. The South Bay division produced 11,173 million gallons of water in 1996 and 12,133 million gallons in 1995. Although Dominguez has a diversified customer base, a substantial portion, 46% in 1996 and 53% in 1995, of sales were derived from business and industrial. Furthermore, a single customer, a refinery, accounted for 32% of these business and industrial sales in 1996, and for 37% in 1995.. Page 3 WATER SUPPLY The water supplies for Dominguez are from its own groundwater wells plus two water wholesalers of imported water. All service areas obtain either a portion of or all of their supply from groundwater wells. The quantity that the South Bay division is allowed to pump over a year's time is fixed by court adjudication. The adjudication established distinct groundwater basins which are managed by a court appointed watermaster. The groundwater management fixes the safe yield of the basins and ensures the replenishment of the basins by utilizing impounded storm water, treated recycled water and purchased water when necessary. Groundwater basins have not been adjudicated in the Subsidiaries. Overall groundwater conditions continue to remain at adequate levels. Dominguez continues to drill new wells, so that it can maximize pumping its total adjudicated rights when called upon. The South Bay division and Leona Valley service area of Antelope Valley also purchase water from wholesalers to supplement groundwater. The South Bay division purchases imported water from the Metropolitan Water District (MWD) of Southern California. The Leona Valley service area purchases its imported water from Antelope Valley - East Kern Water Agency (AVEK). Both of these wholesale suppliers obtain water from the California State Water Project (SWP), and MWD also obtains water from the Colorado River. As of March 1996, the water supply outlook is favorable. SWP reservoirs are above average levels. MWD also indicates that a full compliment of Colorado River water is available. Dominguez expects an ample supply of import water to be at hand for the next several years. Long-term imported water supplies are dependent upon the outcome of several factors. Dominguez' future dependency on imported water will be subject to the availability and usage of recycled water in the region as well as customer's long-term water conservation efforts. Dominguez has been and will continue to promote long-term water conservation efforts of its customers and will advance the use of recycled water, when available. Dominguez anticipates that the West Basin Municipal Water District Recycle Project will be delivering recycled water to Dominguez customers in 1997. Dominguez will make the recycled water (which is priced lower) available to its customers. Dominguez' margins will remain equal to that of replaced potable sales. The Company is currently negotiating with the West Basin Municipal Water District ("WBMWD") and ARCO's Los Angeles refinery on an innovative agreement to Page 4 extend recycled water facilities and make available recycled water to some of the Company's largest industrial users. Under the terms of the proposed agreement, the Company will commit to fund $2,000,000 in recycled water system facilities. The agreement is expected to be signed by all parties in 1997. The recycled water is scheduled to be available in 1998, at which time, funds are to be expended. This project is expected to be a major step in drought-proofing the South Bay division. Legislative actions continue to play a role to long-term availability of water for Southern California. The amount of SWP water available from Northern California and water imported from the Colorado River may be significantly reduced around the beginning of the next century. The reduced availability of imported water supplies and an annual population growth in Southern California could create future drought conditions which may require water rationing by all water agencies, including Dominguez. WATER QUALITY Water quality is a primary concern for Dominguez. Groundwater requires only minimal treatment with chlorine for disinfecting, with the exception of minor water supplies in Kern River Valley that are filtered for fluoride, iron and manganese. Purchased water has already gone through an extensive treatment process before Dominguez receives it. Both groundwater and purchased water are subjected to extensive quality analysis. With the occasional minor exception, Dominguez meets all current primary water standards. Dominguez has an ongoing groundwater monitoring program and South Bay division participates in an area-wide water quality program administered by the associations representing the groundwater basins. One of the Subsidiary water systems exceeded the state and federal standard for radioactivity. The Company has ceased using this water source and is providing customers with an alternative source. During 1996 the federal Safe Drinking Water Act (SDWA) was re-authorized. Under the SDWA, Dominguez is subject to regulation by the United States Environmental Protection Agency (EPA) and the California Department of Health Services for the quality of water it supplies. The EPA is required by SDWA to establish new maximum contaminant levels for additional chemicals. The costs of future compliance are currently unknown and Dominguez' water sources may require additional treatment. Management believes that Dominguez' resources are sufficient to meet these anticipated challenges. Page 5 REGULATORY AFFAIRS During 1996, the California Legislature passed legislation calling for the reform of various CPUC policies and procedures. The legislature recommended changes intending to enhance commission involvement in decision making, thereby improving the quality and timeliness of commission decisions. The legislation also called for the restructuring of the division that represents the interests of customers with the CPUC. The Company believes that changes already undertaken by the CPUC will improve the quality of regulation for water utilities. The Company does not anticipate that changes will significantly alter the traditional regulatory environment for water utilities. In 1996, the Company filed for and received approval to increase revenues effective February 1, 1997, for approximately $375,000 annually or 1.6% to recover the increased cost of purchased water effective January 1, 1997. This rate increase does not increase earnings of the Company but rather offsets the effects of higher water production costs to the Company. NON-UTILITY SUBSIDIARY OPERATIONS As previously noted, DSC Investments invested $350,000 CSC on December 20, 1996 and acquired a 20% equity ownership with the option to acquire an additional 40% equity ownership over the next 5 years. The investment is accounted for under the equity method. Under the investment agreements, the Company is obligated to provide working cash and long term financing for the leasing of chlorine generators to CSC subject to the financial conditions of CSC. The maximum loan balances for the following calendar years are $2,000,000 (1997), $2,500,000 (1998), $3,000,000 (1999) and $3,500,000 (2000). As of December 31, 1996, the Company had no outstanding loans to CSC. In accordance with the agreements, the Company did not recognize any income from the CSC investment in 1996. On April 26, 1996, the Company sold the remaining assets of Hydro-Metric Service operation to an officer of the Company, in exchange for a two year note receivable with an outstanding balance of $48,000 as of December 31, 1996. The sale resulted in a net gain of $39,000. During 1996, DSC investments facilitated transfers of water right leases between third parities adding $243,000 to the Company's earnings. The future income from Page 6 the transfer of water right leases will depend upon need to pump groundwater by major industrial users and water purveyors. EMPLOYEE RELATIONS As of December 31, 1996, there were a total of 77 employees in utility and non-utility operations. None of the employees is represented by a labor organization, and there has never been a work stoppage or interruption due to a labor dispute. In general, wages, hours, and conditions of employment are equivalent to those found in the industry. Dominguez considers its relations with its employees as excellent. All employees receive paid annual vacations and sick leave. Dominguez provides and pays the cost of group life, disability, medical and dental insurance, as well as pensions for its employees. ENVIRONMENTAL MATTERS Dominguez's operations are subject to pollution control and water quality control as discussed in the "Water Quality" section. Other state and local environmental regulations apply to Dominguez operations and facilities. These regulations are primarily related to the handling, storage and disposal of hazardous materials. Dominguez is currently in compliance with all other state and local regulations. Page 7 ITEM 2. PROPERTIES. Dominguez general administrative and executive offices are located on 5 1/2 acres of company-owned property at 21718 South Alameda Street, Carson, California. The offices and shops were completed in April 1972. Dominguez maximizes the efficiency of its 56 wells by pumping at the most advantageous power rates, monitoring for productivity, and rehabilitating wells as productivity decreases. Dominguez' proven track record of drilling and maintaining the most productive wells is best reflected in the reduction of wells were used to meet customer demands. Today, Dominguez requires only 37 wells to meet the same demand, with resulting efficiencies contribution to lower operating and maintenance costs. The South Bay division has prior rights to lay distribution mains and for other uses on much of the public and private lands in its service area. Dominguez' claim of prior rights is derived from the original Spanish land grant covering the Dominguez service area. For this reason, Dominguez, unlike most other public utilities, generally receives compensation from the appropriate public authority when the relocation of its facilities is necessitated by the construction of roads or other projects. It is common for public utilities to bear the entire cost of such relocation. Substantially all of the property of Dominguez is subject to the lien of the Trust Indenture dated August 1, 1954, as supplemented and amended, to Chemical Trust Company of California, as Trustee, securing the three outstanding series of Dominguez' First Mortgage Bonds. Page 8 ITEM 3. LEGAL PROCEEDINGS. During 1996 the Company's insurance carrier settled the remaining lawsuit filed in the California Superior Court that arose from the shooting death of an employee by another employee in January 1994. All legal costs accrued in anticipation of litigation have been reversed. The terms of the settlements had no material adverse financial impact on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. Page 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) MARKET PRICE FOR COMMON SHARES Reference is made to Page 22 of the Annual Report to Shareholders. (b) APPROXIMATE NUMBER OF HOLDERS OF COMMON SHARES The NASDAQ Stock Market maintenance standards require that NASDAQ National Market companies have at least 400 shareholders or at least 300 shareholders of round lots. As of December 31, 1996, the company complies with the standard with 322 common shareholders of record and more than 367 beneficial shareholders, who have chosen to hold their shares in street name. (c) FREQUENCY AND AMOUNT OF ANY DIVIDENDS DECLARED Reference is made to Page 22 of the Annual Report to Shareholders. (d) DIVIDEND RESTRICTION Reference is made to page 17, Note 3 of Notes to Consolidated Financial Statements of the Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA. Reference is made to Page 8 and 9 of the Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. Reference is made to Page 10 of the Annual Report to Shareholders. Page 10 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Financial statements incorporated by reference from the Annual Report to Shareholders: - Consolidated Balance Sheets - December 31, 1996 and 1995; - Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994; - Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994; - Notes to Consolidated Financial Statements; - Report of Independent Public Accountants. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None Page 11 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth the names and ages of all directors and executive officers, indicating the positions and offices presently held by each. NAME AGE POSITION AND OFFICE ---- --- ------------------- Dwight C. Baum 84 Director Richard M. Cannon 55 Director Terrill M. Gloege 61 Director Thomas W. Huston 35 Director C. Bradley Olson 56 Director Langdon Owen 66 Director Charles W. Porter 66 Director Debra L. Reed 40 Director Brian J. Brady 48 Chief Executive Officer, President and Director John S. Tootle 42 Chief Financial Officer, Vice President of Finance, Treasurer and Secretary There is no "family relationship" between any of the executive officers. Information responding to Item 10 is included in a proxy statement pursuant to Regulation 14A and is incorporated by reference herein pursuant to General Instruction G(3). ITEM 11. EXECUTIVE COMPENSATION. Information responding to Item 11 was included in a proxy statement (page 12) pursuant to Regulation 14A and is incorporated by reference herein pursuant to General Instruction G(3). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information responding to Item 12 was included in a proxy statement (page 4) pursuant to Regulation 14A and is incorporated by reference herein pursuant to General Instruction G(3). Page 12 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information responding to Item 13 was included in a proxy statement (page 13) pursuant to Regulation 14A and is incorporated by reference herein pursuant to General Instruction G(3). Other information is included in Note 12 of the Notes to Consolidated Financial Statements of the Annual Report to Shareholders. Page 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 9-K. (a) Exhibits: The following exhibits are incorporated as part of this report by reference to Registration Statement No. 33-33401, Form S-4 dated February 13, 1990. 3. By-laws of Dominguez Services Corporation, Articles of Incorporation and Amendment of Dominguez Services Corporation. 22. Subsidiaries of the registrant. (b) Schedule II not included in the Annual Report to Shareholders, and related report of independent public accountants are included after Item 14 in Part IV. (c) Schedules Omitted: All other schedules have been omitted as they are not applicable, not material, or the required information is given in the Financial Statements or Notes. (d) Reference is made to the Financial Statements incorporated herein in Item 8. Page 14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors Dominguez Services Corporation Long Beach, California We have audited in accordance with generally accepted auditing standards the consolidated financial statements included in the 1996 Annual Report to Shareholders of Dominguez Services Corporation, incorporated by reference in this Form 10-K, and have issued our report thereon dated March 5, 1997. Our audits of the consolidated financial statements were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplemental schedule listed in Part IV of this Form 10-K is presented for purposes of complying with the Securities and Exchange Commission's rules and regulations, and is not part of the basic consolidated financial statements. This supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Los Angeles, California March 5, 1997 Page 15 DOMINGUEZ SERVICES CORPORATION And Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E COL. F ADDITION (1) Charged to Balance at Charged to Other (2) Balance at Beginning Costs and Accounts - Deductions - End of Description of Period Expenses Describe Describe Period ----------- ---------- ---------- ---------- ------------ ---------- Allowance for doubtful accounts: Year Ended December 31,1996 $250,140 $132,000 $11,712 $108,467 $285,385 ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ ---------- Year Ended December 31,1995 $196,361 $120,000 $5,490 $71,711 $250,140 ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ ---------- Year Ended December 31, 1994 $122,235 $120,000 $3,309 $49,183 $196,361 ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ ----------
Notes: (1) Receipts on accounts previously written off. (2) Accounts receivable write off. Page 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DOMINGUEZ SERVICES CORPORATION: By_______________________________________ Brian J. Brady, Chief Executive Officer By_______________________________________ John S. Tootle, Chief Financial Officer, Treasurer, Secretary By_______________________________________ Cynthia C. Chu, Corporate Controller By_______________________________________ Debra A. Beliso, Assistant Corporate Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. DIRECTORS: __________________________________________ B. J. Brady, Chairman Date __________________________________________ D. C. Baum Date __________________________________________ R. M. Cannon Date __________________________________________ T. M. Gloege Date __________________________________________ T. W. Huston Date __________________________________________ C. B. Olson Date __________________________________________ L. W. Owen Date __________________________________________ C. W. Porter Date __________________________________________ D. L. Reed Date Page 17 EX-13 2 EXHIBIT 13 - REPORT TO SHAREHOLDERS TEN YEAR STATISTICAL REVIEW
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992 1991 1990 SUMMARY OF OPERATIONS: ($ IN THOUSANDS) Operating revenue $ 24,705 $ 25,486 $ 23,569 $ 22,193 $ 21,813 $ 18,706 $ 19,139 Operating expenses (before taxes) 20,745 21,376 19,419 18,139 18,327 15,677 15,869 Income taxes 1,314 1,177 1,340 1,243 1,031 807 1,087 Other taxes 448 455 432 406 397 323 321 Other expense 33 7 29 20 17 32 41 Other income (475) (165) (297) (353) (85) (73) (186) Interest cost 659 683 714 732 586 606 633 Net income 1,981 1,953 1,932 2,006 1,540 1,334 1,374 Dividends paid 1,247 1,170 1,110 1,070 1,009 989 965 Reinvested in the business 734 783 822 936 531 345 409 PER COMMON SHARE DATA:* Earnings $ 1.97 $ 1.94 $ 1.92 $ 1.99 $ 1.53 $ 1.32 $ 1.37 Dividends $ 1.24 $ 1.16 $ 1.10 $ 1.06 $ 1.00 $ 0.98 $ 0.96 Payout percentage 63.0% 60.0% 57.5% 53.5% 65.4% 74.2% 70.1% Book value $ 15.56 $ 14.83 $ 14.03 $ 13.23 $ 12.29 $ 11.77 $ 11.40 Return on common equity (average) 13.0% 13.4% 14.1% 15.6% 12.8% 11.4% 12.2% Number shares outstanding 1,004,370 1,004,370 1,004,370 1,004,370 1,004,370 1,004,370 998,370 Year end market price $ 22.50 $ 18.50 $ 16.75 $ 21.00 $ 16.25 $ 15.00 $ 14.25 BALANCE SHEET DATA: ($ IN THOUSANDS) Gross utility plant $ 60,059 $ 57,271 $ 55,406 $ 52,260 $ 51,037 $ 50,161 $ 46,710 Net utility plant 43,534 41,358 40,022 37,977 37,511 33,793 31,713 Non utility plant 399 67 67 51 105 105 104 Total Assets 46,875 45,295 44,652 42,662 40,275 39,596 37,477 CAPITALIZATION: ($ IN THOUSANDS) Long-term debt $ 7,036 $ 7,273 $ 7,326 $ 7,493 $ 7,657 $ 3,829 $ 3,766 Preferred stock - 98 98 98 98 98 126 Common equity 15,626 14,896 14,092 13,284 12,348 11,817 11,383 Total capitalization 22,662 22,267 21,516 20,875 20,103 15,744 15,275 Interim debt 800 - - - - 3,375 2,725 CAPITALIZATION RATIOS: Long-term debt 31.0% 32.7% 34.0% 35.9% 38.1% 24.3% 24.7% Preferred stock - 0.4% 0.5% 0.5% 0.5% 0.6% 0.8% Common equity 69.0% 66.9% 65.5% 63.6% 61.4% 75.1% 74.5% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% OTHER UTILITY STATISTICS: Customers at year end 36,882 36,739 36,371 36,107 36,043 35,949 34,444 Average revenue per customer $ 650.92 $ 665.70 $ 619.90 $ 561.27 $ 481.35 $ 423.35 $ 490.32 Water sales (millions of gallons) 11,481 12,371 12,071 11,359 11,731 10,906 12,957 Utility employees 77 78 76 75 69 71 64 FOR THE YEARS ENDED DECEMBER 31, 1989 1988 1987 SUMMARY OF OPERATIONS: ($ IN THOUSANDS) Operating revenue $ 20,359 $ 19,409 $ 17,423 Operating expenses (before taxes) 16,855 16,054 14,117 Income taxes 1,110 1,050 1,042 Other taxes 330 320 302 Other expense 18 51 65 Other income (38) (64) (275) Interest cost 577 569 649 Net income 1,507 1,429 1,523 Dividends paid 940 884 827 Reinvested in the business 567 545 696 PER COMMON SHARE DATA:* Earnings $ 1.47 $ 1.42 $ 1.51 Dividends $ 0.92 $ 0.86 $ 0.80 Payout percentage 62.6% 60.6% 53.0% Book value $ 10.98 $ 10.08 $ 9.53 Return on common equity (average) 14.0% 14.5% 16.5% Number shares outstanding 998,370 979,620 979,620 Year end market price $ 14.75 $ 15.00 $ 15.50 BALANCE SHEET DATA: ($ IN THOUSANDS) Gross utility plant $ 45,205 $ 41,536 $ 39,475 Net utility plant 31,233 28,714 27,170 Non utility plant 101 93 87 Total Assets 36,513 33,516 31,242 CAPITALIZATION: ($ IN THOUSANDS) Long-term debt $ 4,059 $ 4,583 $ 5,062 Preferred stock 142 784 810 Common equity 10,968 9,877 9,329 Total capitalization 15,169 15,244 15,201 Interim debt 950 - 1,150 CAPITALIZATION RATIOS: Long-term debt 26.8% 30.1% 33.3% Preferred stock 0.9% 5.1% 5.3% Common equity 72.3% 64.8% 61.4% Total 100.0% 100.0% 100.0% OTHER UTILITY STATISTICS: Customers at year end 34,189 32,765 32,403 Average revenue per customer $ 501.95 $ 520.58 $ 488.80 Water sales (millions of gallons) 13,339 13,237 11,794 Utility employees 56 51 51
*adjusted to reflect 3-for-2 stock split effective September, 1987 MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements on page 13 and with the Ten Year Statistical Review on page 8. Dominguez Services Corporation ("the Company") has two wholly-owned subsidiaries: Dominguez Water Company ("Dominguez"), which is involved in water supply and distribution, and DSC Investments, which is involved in non-regulated, water-related services and investments. Dominguez and its operating subsidiaries are regulated by the California Public Utilities Commission (the "CPUC") and, as such, they must obtain approval to increase water rates to recover increases in operating expenses and for reinvested capital in rate base. Most variations in revenues are due to weather conditions and the water usage of major industrial customers. Dominguez is comprised of its principal division, the South Bay, and its operating subsidiaries, the Kern River Valley Water Company and the Antelope Valley Water Company. The South Bay has been providing water service for more than 85 years to its customers. Today, the South Bay serves a 35 square mile area including most of Carson, one-third of Torrance, and parts of Compton, Long Beach and Harbor City with a total of 32,228 customers. The Kern River Valley Water Company and the Antelope Valley Water Company (collectively referred to as "Subsidiaries") provide water service to 3,412 and 1,242 customers respectively. DSC Investments' income is primarily from the transfer of water rights between third parties. Income from the transfers may significantly vary from year to year due to demands for groundwater by major pumpers in the West and Central Basins. LIQUIDITY AND CAPITAL RESOURCES The Company's continuing operations provided sufficient cash to cover operating expenses, interest and dividends. In 1996, the Company and its subsidiaries invested $3,490,000 in utility plant improvements. Approximately $520,000 was contributed or advanced by developers. The Subsidiaries borrowed $814,000 in low interest loans from the Department of Water Resources. Low interest loans are available only to Subsidiaries to finance capital improvements needed to meet water quality and supply standards. The remaining funds for capital improvements were generated from operating earnings reinvested ($734,000) and short-term borrowings. Under a revolving credit facility with Bank of America, the Company has available $3,000,000 at the bank's preference rate. As of December 31, 1996, short-term borrowings under the facility totaled $800,000. Once short-term borrowings reach a level where long-term refinancing is cost effective, the Company plans another issuance of long-term first mortgage bonds. In 1996, the DSC Investments invested $350,000 in Chemical Services Corporation ("CSC") and acquired a 20% equity ownership interest with an option to acquire an additional 40% equity ownership interest over the next five years. CSC manufactures and distributes chlorine generators used in the water and wastewater industry to produce safe on-site chlorine disinfectant. Under the investment agreements, the Company is obligated to provide working cash and long-term financing for the leasing of chlorine generators to CSC subject to the financial conditions of CSC. In 1996, the Company redeemed all of its outstanding preferred stock for $98,000. The Company's 1997 capital budget is $4,683,000. Budgeted improvements include $2,128,000 on supply and storage and $1,009,000 on pipeline replacements. The Company will fund budgeted improvements from earnings available for reinvestments and short-term borrowings. REGULATORY AFFAIRS During 1996, the California Legislature passed legislation calling for the reform of various CPUC policies and procedures. The legislature recommended changes intended to enhance commission involvement in decision making, thereby improving the quality and timeliness of commission decisions. The legislation also called for the restructuring of the division that represents the interests of customers with the CPUC. The Company believes that changes already undertaken by the CPUC will improve the quality of regulation for water utilities. The Company does not anticipate that changes will significantly alter the traditional regulatory environment for water utilities. MANAGEMENT'S DISCUSSION AND ANALYSIS In 1996, the Company filed for and received approval to increase revenues effective February 1, 1997, for approximately $375,000 annually, or 1.6%, to recover the increased cost of purchased water effective January 1, 1997. This rate increase does not increase earnings of the Company but rather offsets the effects of higher water production costs to the Company. ENVIRONMENTAL MATTERS The Company is subject to water quality regulations set by the United States Environmental Protection Agency (EPA) and the California Department of Health Services (DHS). Both groundwater and purchased water are subject to extensive analysis. With the occasional minor exception, the Company met all current primary water standards. One of the Subsidiary water systems exceeded the state and federal standard for radioactivity. The Company has ceased using this water source and is providing customers with an alternative source. Under the Federal Safe Drinking Water Act, the EPA is required to continue to establish new maximum levels for additional chemicals. The costs of future compliance are unknown, but the Company could be required to perform more quality testing. Management believes that Company resources are sufficient to meet these anticipated requirements. Other applicable environmental regulations relate to the handling, storage and disposal of hazardous materials. The Company is currently in compliance with all regulations. ACCOUNTING STANDARDS Effective January 1, 1996, the Company adopted SFAS 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of. This statement imposes a stricter criterion for regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. Based on the current regulatory structure in which the Company operates, adoption of this standard did not have a material impact on the Company's financial position or results of operations. However, the Company's ability to meet the criterion may change in the future as competitive factors influence the water industry. RESULTS OF OPERATIONS 1996 COMPARED TO 1995 Operating revenue totaled $24,705,000 for 1996, a decrease of $781,000, or 3%, lower than the $25,486,000 recorded for 1995. The decreased revenues are due to lower sales to industrial customers which was partially offset by higher residential sales. The industrial sales dropped by $1,480,000, or 18%. Total residential sales were up by $982,000, or 6%. Operating expenses before taxes decreased by $631,000, or 2.9%, a combination of lower water costs and higher operation and maintenance costs. In 1996, water costs decreased as the South Bay division was able to purchase less imported water from the West Basin Municipal Water District with increased pumping of its wells. The overall margin on water sales improved from 49% to 52% due to fewer water sales to large industrial customers at a lower tariff water rate. Operations and maintenance costs increased by $538,000, or 7.7%, due primarily to increases in consulting costs. Other income increased by $310,000. Income from the transfer of water right leases increased by $243,000 for the year. Sale of Hydro-Metric resulted in a gain of $39,000. Interest costs decreased by $24,000, or 3.6%, due to lower borrowing costs as Series G bonds were paid off during 1995. Net income increased $28,000, or 1.5%, due to improved margins on water sales and other income. Earnings per share on common equity increased from $1.94 to $1.97 for reasons stated above. The Company raised its annual dividend to common shareholders from $1.16 in 1995 to $1.24 in 1996, an increase of 6.9%. RESULTS OF OPERATIONS 1995 COMPARED TO 1994 Operating revenues totaled $25,486,000 for 1995, an increase of $1,917,000, or 8.1%, over the $23,569,000 recorded for 1994. The increased revenues are due to higher water rates and increased water sales. The higher water rates resulted from the pass-through of increases in water production costs to our South Bay customers. Higher water sales in all divisions resulted in an increase of 300 million gallons, or 2.4%, over the prior year. Higher water sales were due primarily to increased usage by industrial customers. MANAGEMENT'S DISCUSSION AND ANALYSIS Operating expenses before taxes increased by $1,957,000, or 10.1%, largely due to a $2,031,000, or 18.3%, increase in the costs of water. Higher water costs are due primarily to increased costs of purchased water and higher water sales. Operations and maintenance costs decreased by $103,000, or 1.4%, due mostly to the reversal of accrued litigation costs. Other income decreased by $109,000, or 40.7%, due to less income from brokering water rights. Interest costs decreased by $31,000, or 4.3%, due to lower borrowing costs as Series G bonds were paid off. Net income increased $21,000, or 1.0%, due to higher water sales and lower expenses as previously stated. Earnings per share on common equity increased from $1.92 to $1.94 for reasons stated above. The Company raised its annual dividend to common shareholders from $1.10 in 1994 to $1.16 in 1995, an increase of 5.4%. RESULTS OF OPERATIONS 1994 COMPARED TO 1993 Operating revenues for 1994 increased $1,376,000, or 6.2%, over 1993. The increased revenues are attributed to higher water rates and increased water sales. The water rates were increased for a "step" offset of $281,000, or 1.3%, and $750,000, or 3.6%, for higher costs of water in the South Bay. General rate increases raised Antelope Valley Water Company and Kern River Valley Water Company revenues by $110,000 and $185,000 respectively. Higher water sales in all divisions resulted in an increase of 721 million gallons, or 6.2%, over the prior year. Operating expenses before taxes increased $1,280,000, or 7.1%, from 1993 due primarily to increased costs of water in the amount of $834,000, or 8.1%. Higher water costs are due to increased costs of purchased water and higher water sales. Operations and maintenance costs increased $388,000, or 5.7%. Increases occurred in costs of labor and outside services. Other income decreased by $65,000, or 19.5%, due to the one-time gain on sale of land which occurred in 1993 but was offset by income from brokering water rights. Net income decreased in 1994 by approximately $77,000, or 4.0%, primarily due to gain on sale of land recorded in 1993 which increased non-operating income. Earnings per share on common equity decreased from $1.99 to $1.92 due to lower other income as discussed above. CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, ($ IN THOUSANDS, EXCEPT SHARE DATA) 1996 1995 ASSETS: Property, plant and equipment (Notes 1 & 4): Utility plant $ 59,016 $ 56,363 Non-utility plant 399 67 --------- --------- 59,415 56,430 Less: Accumulated depreciation 21,080 20,312 --------- --------- 38,335 36,118 Land and land rights 459 459 Water rights and other intangible assets 167 167 Construction work in progress 427 292 --------- --------- Total property, plant and equipment 39,388 37,036 Cash, including restricted cash of $499 in 1996 and $434 in 1995 (Notes 1 & 5) 711 764 Accounts receivable: Customers, less an allowance for doubtful accounts of $285 in 1996 and $250 in 1995 1,629 1,523 Unbilled revenues 909 949 Other 179 546 Materials and supplies at average cost (Note 4) 46 94 Prepayments and other 777 440 Production cost balancing account (Note 1) 320 620 Deferred tax assets (Note 1 & 9) 426 340 --------- --------- Total current assets 4,997 5,276 Notes receivable 130 137 Prepaid taxes and others (Note 1) 1,357 1,494 Deferred charges, less accumulated amortization of $97 in 1996 and $83 in 1995 (Note 1) 165 206 Income tax related deferred charges (Note 1 & 9) 838 1,146 --------- --------- Total Assets $ 46,875 $ 45,295 --------- --------- --------- --------- CAPITALIZATION AND LIABILITIES: Common shareholders' equity: Common shares: Par value $1 Authorized: 2,000,000 shares Issued: 1,004,370 shares $ 1,004 $ 1,004 Paid-in capital 2,508 2,512 Retained earnings (Note 3) 12,114 11,380 --------- --------- Total common shareholders' equity 15,626 14,896 Preferred shares (Note 2) Class A, $25 par value per share - 98 Long-term debt (Note 4) 7,036 7,273 --------- --------- Total capitalization 22,662 22,267 Current maturities of long-term debt (Note 4) 849 81 Accounts payable 2,260 3,027 Interim debt (Note 5) 800 - Current portion of advances for construction (Note 6) 169 200 Accrued interest 60 240 Other accrued expenses 1,208 1,179 Income taxes (Note 1 & 9) 236 134 --------- --------- Total current liabilities 5,582 4,861 Advances for construction (Note 6) 5,236 5,240 Contributions in aid of construction (Note 7) 6,076 6,056 Deferred income taxes (Note 1 & 9) 3,617 3,399 Unamortized investment tax credit (Note 1) 287 298 Accrued pension cost (Note 8) 959 1,114 Deferred credits 2,456 2,060 --------- --------- Total Capitalization and Liabilities $ 46,875 $ 45,295 --------- --------- --------- ---------
The accompanying notes are an integral part of these statements. CONSOLIDATED STATEMENT OF INCOME & RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, ($ IN THOUSANDS) 1996 1995 1994 CONSOLIDATED STATEMENT OF INCOME Operating revenue $ 24,705 $ 25,486 $ 23,569 ----------- ----------- ----------- Operating expenses: Purchased water 7,797 11,204 11,437 Other production costs 4,119 1,913 (351) Operations 6,469 6,006 6,095 Maintenance 1,053 978 992 Depreciation 1,307 1,275 1,246 Taxes: Property 289 277 274 Other 159 179 158 Income taxes (Notes 1 & 9) 1,314 1,177 1,340 ----------- ----------- ----------- Total operating expenses 22,507 23,009 21,191 ----------- ----------- ----------- ----------- ----------- ----------- Operating income 2,198 2,477 2,378 Other income (expenses): Interest and amortization of debt (659) (683) (714) Water rights 338 95 198 Other 104 64 70 ----------- ----------- ----------- Net income $ 1,981 $ 1,953 $ 1,932 ----------- ----------- ----------- ----------- ----------- ----------- Earnings per common share (in Dollars) $ 1.97 $ 1.94 $ 1.92 ----------- ----------- -----------
FOR THE YEARS ENDED DECEMBER 31, ($ IN THOUSANDS) 1996 1995 1994 CONSOLIDATED STATEMENT OF RETAINED EARNINGS Balance at beginning of year $ 11,380 $ 10,597 $ 9,775 Net income 1,981 1,953 1,932 Cash dividends: Preferred stock, Class A $1.25 per share 1 5 5 Common stock: 1996 - $1.24 per share 1,246 - - 1995 - $1.16 per share - 1,165 - 1994 - $1.10 per share - - 1,105 ----------- ----------- ---------- Balance at end of year $ 12,114 $ 11,380 $ 10,597 ----------- ----------- ---------- ----------- ----------- ----------
The accompanying notes are an integral part of these statements. CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, ($ IN THOUSANDS) 1996 1995 1994 INCREASE(DECREASE) IN CASH: Cash flows from operating activities: Net income $ 1,981 $ 1,953 $ 1,932 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,321 1,291 1,262 Deferred income taxes and investment tax credits 207 134 36 Change in assets and liabilities: Customer receivables - net (106) 102 (65) Notes receivable 7 6 6 Other receivables 367 341 (85) Materials and supplies 48 7 (1) Accounts payable (767) 244 762 Income taxes (receivable) payable 102 (114) (23) Accrued pension cost (155) (209) 162 Income tax related deferred charges 308 (51) 6 Other, net 199 (627) (527) ---------- ---------- ---------- Net cash provided by operating activities 3,512 3,077 3,465 ---------- ---------- ---------- ---------- ---------- ---------- Cash flows from investing activities: Capital expenditures (3,490) (2,622) (3,318) Purchase of Chemical Service Corporation (399) - - ---------- ---------- ---------- Net cash used for investing activities (3,889) (2,622) (3,318) ---------- ---------- ---------- ---------- ---------- ---------- Cash flows from financing activities: Proceeds from advances for construction 219 287 164 Proceeds from contributions in aid of construction 301 178 111 Repayment of advances for construction (182) (197) (204) Repayment of long-term debt (283) (291) (19) Department of Water Resources Loan 814 - - Preferred stock redemption (98) - - Proceeds from interim debt 800 - - Dividends paid (1,247) (1,170) (1,110) ---------- ---------- ---------- Net cash provided (used) for financing activities 324 (1,193) (1,058) ---------- ---------- ---------- ---------- ---------- ---------- Net decrease in cash (53) (738) (911) Cash at beginning of year 764 1,502 2,413 ---------- ---------- ---------- Cash at end of year $ 711 $ 764 $ 1,502 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Dominguez Services Corporation and its subsidiaries. The preparation of financial statements are in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities. These principles also require disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company and its subsidiaries operate in the water services industry. All significant inter-company transactions have been eliminated. The Subsidiaries maintain their accounts in accordance with the uniform system of accounts prescribed by the California Public Utilities Commission (CPUC). REVENUES: Water service revenues are recognized on an accrual basis. The unbilled revenue accrual is based on estimated usage from the latest meter reading to the end of the accounting period. PROPERTY, PLANT AND EQUIPMENT: Utility plant is carried at the value established in 1939 by the CPUC with subsequent additions at cost or donor's basis, which approximates cost, less cost of retirements, sales and abandonment. Water rights are stated at the nominal amount of $1 plus purchased water rights at cost and past expenditures in connection with litigation in defense thereof. Depreciation of utility plant for financial statement purposes is computed using the CPUC remaining life accrual method. Under this method, composite straight-line depreciation rates are determined by periodic estimates of average remaining life of all utility plant assets. Costs of abandonment and salvages are charged or credited to accumulated depreciation. The effective composite depreciation rate was 2.9% and 3.0% in 1996 and 1995, respectively. Costs of maintenance and repairs are charged to operations; renewals and betterment are generally capitalized in the property accounts. PREPAID TAXES AND OTHERS: Beginning in 1987, contributions in aid of construction and advances for construction became taxable for Federal income tax purposes. The Company is paying these taxes and deferring them. These taxes will be recovered over the tax life of the assets for contributions and the life of the contracts for advances. DEFERRED CHARGES: Debt expense on bonds is being amortized based on the percentage of the principal amount outstanding over the term of the debt. PRODUCTION COST BALANCING ACCOUNT: The Company adopted a policy, effective October 1, 1992, to record over or under-collections of production costs when incurred in its books of accounts and financial statements based on the regulatory treatment afforded these costs. As of December 31, 1996 and 1995, the balancing account reflected an under-collection of $320,000 and $620,000 respectively. INCOME TAXES: The Company provides deferred income taxes for certain transactions which are recognized for income tax purposes in a period different from that in which they are reported in the financial statements. Investment Tax Credits (ITC) have been deferred and are being amortized as reductions to income tax expense proportionately over the lives of the property giving rise to the credits. REGULATORY ASSETS: Effective January 1, 1996, the Company adopted SFAS 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of. This statement imposes a stricter criterion for regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. Based on the current regulatory structure in which the Company operates, adoption of this standard did not have a material impact on the Company's financial position or results of operations. However, the Company's ability to meet the criterion may change in the future as competitive factors influence the water industry. EARNINGS PER SHARE: Per share data is based upon net income after recognition of dividend requirements for preferred stock and the weighted average number of common shares outstanding during the year. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RESTRICTED CASH: Restricted cash represents surcharge proceeds plus interest earned which is restricted to the payment of principal and interest on the California Safe Drinking Water Bond. NEW BUSINESS: On December 20, 1996, DSC Investments invested $350,000 in Chemical Services Corporation and acquired a 20% equity ownership with the option to acquire an additional 40% equity ownership over the next 5 years. The investment is accounted for under the equity method. Under the investment agreements, the Company is obligated to provide working cash and long term financing for the leasing of chlorine generators to CSC subject to the financial conditions of CSC. The maximum loan balance for the following calendar years are $2,000,000 (1997), $2,500,000 (1998), $3,000,000 (1999) and $3,500,000 (2000). As of December 31, 1996, the Company had no outstanding loans to CSC. In accordance with the agreements, the Company did not recognize any income from the CSC investment in 1996. SALE OF BUSINESS: On April 26, 1996, the Company sold the remaining assets of Hydro-Metric Services to an officer of the Company in exchange for a two year note receivable with outstanding balance of $48,000 as of December 31, 1996. The sale resulted in a gain of $39,000. RECLASSIFICATIONS: The 1996 and 1995 consolidated financial statements include certain reclassifications necessary to conform to current year presentation. NOTE 2 - SHAREHOLDERS EQUITY As of March 15, 1996, the Company redeemed all the remaining outstanding Class A Preferred Shares for $98,000. The Class A Preferred Shares were 5% cumulative, with 30,000 shares authorized, with zero and 3,901 shares in 1996 and 1995 issued and outstanding. NOTE 3 - RESTRICTIONS ON DIVIDENDS Under the terms of its long-term debt agreements, Dominguez is limited in its payment of dividends (other than stock dividends) on all classes of stock to the net income accrued subsequent to December 31, 1992, plus the sum of $3,000,000. The approximate unrestricted earnings available for dividend payments amounted to $6,275,000 as of December 31, 1996. The Company's available dividends to its shareholders are substantially dependent on the availability of dividends from Dominguez to the Company. NOTE 4 - LONG-TERM DEBT Under a trust indenture dated August 1, 1954 and twelve supplemental indentures, the Company pledged substantially all its property, water rights, and materials and supplies as collateral under the bonds. At December 31, 1996 and 1995 long-term debt outstanding was: - -------------------------------------------------------- CARRYING AMOUNT ($ IN THOUSANDS) 1996 1995 - -------------------------------------------------------- First Mortgage Bonds: Series F, 8% due 1997 $ 756 $ 774 Series H, 9.375% due 1998 1,290 1,330 Series J, 8.86% due 2022 4,000 4,000 -------------------- Total First Mortgage Bonds $6,046 $6,104 -------------------- SMALL BUSINESS ADMINISTRATION LOAN: - -------------------------------------------------------- 4% - due 2000 $ 39 $ 53 -------------------- DEPARTMENT OF WATER RESOURCES LOAN: - -------------------------------------------------------- Under the California Safe Drinking Water Bond Act of 1976 7.4% - due 2020 $ 478 $ 503 7.4% - due 2011 304 447 7.4% - due 2013 204 247 3.0% - due 2032 547 - 3.4% - due 2027 267 - -------------------- Total Bonds & Notes $7,885 $7,354 Less: Current Maturities 849 81 -------------------- Total Long Term Debt $7,036 $7,273 -------------------- - -------------------------------------------------------- Aggregate maturities for the five years commencing with 1996 are approximately $849,000 (1997), $1,305,000 (1998), $57,000 (1999), $55,000 (2000) and $52,000 (2001). NOTE 5 - INTERIM DEBT The Company maintained an available line of credit of $3,000,000 in 1996 and $2,000,000 in 1995 with Bank of America. At the end of December 31, 1996, the outstanding borrowing was $800,000. At the end of 1995, it was zero. The Company intends to renew the line of credit which expires in July 1997. In connection with the line of credit, the Company maintains on deposit with the bank an average compensating balance equal to 5% of the line of credit. Borrowing bears interest at the preference lending rate. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - ADVANCES FOR CONSTRUCTION Advances for construction of main extensions are primarily refundable to depositors over a 20 year or 40 year period. Refund amounts under the 20 year contracts are based on annual revenues from the extension. Balances at the end of the contract period are refunded in five equal yearly installments. Beginning in June 1982 contracts provide for full refund at a 2-1/2% rate per year for 40 years. Estimated refunds for 1997 for all main extension contracts are $169,000. NOTE 7 - CONTRIBUTIONS IN AID OF CONSTRUCTION Contributions in aid of construction are donations or contributions in cash, services or property from governmental agencies or individuals for the purpose of constructing utility facilities. Depreciation applicable to such plants is charged to the contributions in aid account rather than to depreciation expense. The charges continue until the cost applicable to such properties has been fully depreciated or the asset has been retired. - ---------------------------------------------------------- ($ IN THOUSANDS) 1996 1995 - ---------------------------------------------------------- Beginning balance $6,056 $6,264 Add net contributions during the year 236 18 Deduct depreciation for the year charged on plant acquired through donations (216) (226) ----------------- Ending Balance $6,076 $6,056 - ---------------------------------------------------------- NOTE 8 - EMPLOYEE BENEFITS The Company provides a qualified defined benefit plan for all its full-time employees. Benefits under this plan reflect the employee's compensation, years of service and age at retirement. Funding is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended. Pension costs were $363,000 in 1996, $401,000 in 1995 and $505,000 in 1994. Beginning January 1, 1987, costs for pensions were determined under the rules prescribed by Statement of Financial Accounting Standards (SFAS) No. 87, including the use of the projected unit credit actuarial cost method. For rate making purposes, the Company recovers pension expense based on the method in place prior to SFAS No. 87. The components of the 1996, 1995 and 1994 provisions are summarized as follows: - ------------------------------------------------------------ ($ IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------ Service cost (including expense) $ 501 $ 498 $ 549 Interest cost 638 574 545 Actual return on assets (1164) (1,111) (55) Amortization of unrecognized net asset (58) (58) (58) Unrecognized net gain (loss) 446 498 (476) -------------------------- Net pension cost $ 363 $ 401 $ 505 - ------------------------------------------------------------ The obligations for pension benefits and the amount recognized in the Consolidated Balance Sheets are reconciled as follows: - ------------------------------------------------------------ ($ IN THOUSANDS) 1996 1995 - ------------------------------------------------------------ Plan assets, at fair value, invested in stocks and bonds $10,503 $ 9,127 Actuarial present value of projected benefit obligation (9,015) (8,511) ------------------ Plan assets in excess of projected benefit obligation $ 1,488 $ 616 Unrecognized prior service cost 186 201 Unrecognized net asset (292) (350) Unrecognized net gain (2,341) (1,581) ------------------ Accrued pension cost $ (959) $(1,114) ------------------ Discount rate 7.50% 7.50% Rate of compensation increase 4.50% 4.50% Expected return on assets 7.50% 7.50% - ------------------------------------------------------------ The accumulated benefit obligation of $7,770,000 at December 31, 1996, including vested benefits of $7,066,000 represents the present value of future pension benefit payments and is based on the Plan's benefit formulas without considering expected future salary increases. The projected benefit obligation considers future salary increases. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS In January 1993, the Company adopted a new accounting standard for post-retirement benefits other than pensions, which requires the expected cost of these benefits to be charged to expense during employees' years of service. The Company will amortize its $588,000 obligation related to prior service over 20 years. The Company provides health care benefits for retired employees until both the employee and his/her spouse have reached 65 years of age. Health care benefits are subject to deductibles, co-payment provisions and other limitations. The Company funds the plan up to tax-deductible limits, in accordance NOTES TO CONSOLIDATED FINANCIAL STATEMENTS with rate-making practices. Total expense was $87,000 in 1996. Differences between expense determined under the new standard and amounts authorized for rate recovery are not expected to be material and are charged to earnings. The components of post-retirement benefits other than pensions expense were: - ------------------------------------------------------------ ($ IN THOUSANDS) 1996 1995 - ------------------------------------------------------------ Service cost for benefits earned $ 39 $ 39 Interest cost 47 45 Actual return on assets (52) (1) Amortization of losses from prior periods (5) (6) Amortization of transition obligation 28 28 Assets gain (loss) deferred 30 (15) ------------------ Total $ 87 $ 90 ------------------ - ------------------------------------------------------------ The assumed rate of future increases in the per-capita cost of health care benefits is 6.5%. Increasing the health care cost trend rate by one percentage point would increase the accumulated obligation as of December 31, 1996, from $543,000 to $608,000, a $65,000 increase, and annual aggregate service and interest costs from $86,000 to $100,000, a $14,000 increase. The actuarial assumptions used were discount rates of 7.5% at December 31, 1996, and 7.5% at January 1, 1996, and an expected long-term rate of return on plan assets of 7.5% and 7.5% respectively. The Company offers its employees a 401(K) plan. Employees make all contributions under the plan. NOTE 9 - INCOME TAXES In January 1993, the Company adopted a new income tax accounting standard. This standard requires the balance sheet method to account for income taxes, where deferred taxes are recognized for all temporary differences between book and tax income. Upon adoption of the standard, the Company recorded balance sheet adjustments of $1,000,000 for previously unrecorded deferred taxes on temporary differences. Substantially all of these deferred taxes were offset by deferred charges representing amounts expected to be recovered in future rates. CURRENT AND DEFERRED TAXES Income tax expenses include the current tax liability from operations and the change in deferred income taxes during the year. Investment tax credits are amortized over the life of related properties. The components of the net accumulated deferred income tax liabilities were: - ------------------------------------------------------------ ($ IN THOUSANDS) 1996 1995 - ------------------------------------------------------------ Deferred tax assets: Pension plan $ 450 $ 495 Other 616 531 ----------------- Total deferred tax assets $1,066 $1,026 ----------------- Deferred tax liabilities: Depreciation $3,031 $2,749 Property-related 1,250 1,300 Other (25) 36 ----------------- Total deferred tax liabilities $4,256 $4,085 ----------------- Net accumulated deferred income taxes $3,190 $3,059 Classification of accumulated deferred income taxes: Included in current assets 427 340 Included in deferred taxes $3,617 $3,399 - ------------------------------------------------------------ The current and deferred components of income tax expenses were: - ------------------------------------------------------------ ($ IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------ Current income taxes: Current federal $ 887 $ 842 $ 955 Current state 276 271 310 Investment tax credit (12) (12) (12) ---------------------------- Total current taxes $1,151 $1,101 $1,253 ---------------------------- Deferred income taxes: Depreciation $ 282 $ 267 $ 188 Contributions and advances (156) (158) (78) Pension plan - - (47) Other 37 (33) 24 ---------------------------- Total deferred taxes $ 163 $ 76 $ 87 ---------------------------- - ------------------------------------------------------------- A reconciliation of the federal statutory income tax rate to the effective rate is presented below: - -------------------------------------------------------------- PERCENT 1996 1995 1994 - -------------------------------------------------------------- Expected income tax expense 34% 34% 34% Increase in expected income tax resulting from effect of state income tax 6% 6% 6% Abandonment (1%) (2%) - Other 1% - 1% ------------------------- Total 40% 38% 41% - -------------------------------------------------------------- NOTE 10 - BUSINESS RISKS AND CONCENTRATION OF SALES Fifty-four percent of the Company's water supplies comes from its own groundwater wells, and forty-six percent comes from wholesalers of imported water. The long term availability of imported water supplies are dependent upon several factors. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Drought conditions throughout the state, increases in population, tightening of water quality standards and legislation may reduce water supplies. At this time, the Company does not anticipate any constraints on its imported water supplies due primarily to above average precipitation in prior years. The Company is taking steps to reduce its dependence on imported water supplies. The Company is working with the West Basin Municipal Water District to bring reclaimed water into its South Bay service area. The Company continues to drill new wells, so that it can utilize its total adjudicated groundwater rights. The Company's utility operations are engaged in supplying water to the public. The Company's utility operations are subject to regulation by various government agencies. The water quality is regulated by the United States Environmental Protection Agency (EPA) and the California Department of Health Services (DHS). Both groundwater and purchased water are subject to extensive analysis. With the occasional minor exception, the Company met all current primary water standards. One of the Subsidiary water systems exceeded the State and Federal standard for radioactivity. The Company has ceased using this water source and is providing customers with an alternative source. The Company is required to provide service and grant credit to customers within its defined service territories. Although the Company has a diversified base of residential, business-industrial and public authority customers, a substantial portion, 46% in 1996 and 53% in 1995, of business and industrial sales are dependent upon the refineries. One single refinery was responsible for 32% of this business/industrial consumption in 1996, and for 37% in 1995. Sales for 1996 and 1995 are as follows: - ------------------------------------------------------------ ($ IN THOUSANDS) 1996 1995 - ------------------------------------------------------------ Residential-Multi Family $ 11,566 $ 10,584 Business-Industrial 10,279 11,759 Public Authority 1,486 1,436 All Other 1,374 1,707 -------------------- Total $ 24,705 $ 25,486 -------------------- - ------------------------------------------------------------ NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION - ------------------------------------------------------------ ($ IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------ Cash paid for: Interest, net $ 824 $ 501 $ 523 Income taxes $1,095 $1,270 $1,075 - ------------------------------------------------------------ NOTE 12 - RELATED PARTY TRANSACTIONS The Company annually refunds a portion of revenue received from several water mains for which Watson Land Company, Carson Estate Company and Dominguez Energy L.P. advanced the construction funds to the Company. The refunds to Watson Land Company were $15,442 in 1996 and $16,516 for 1995. The refunds to Carson Estate Company were $1,110 for 1996 and $1,110 for 1995. The refunds to Dominguez Energy L.P.were $6,176 for 1996 and $6,176 for 1995. The Company also leases sites used for wells from Watson Land Company, Carson Estate Company and Dominguez Energy L.P. The rental costs for Watson Land Company were $38,778 in 1996 and $38,652 for 1995. The rental costs for Carson Estate Company were $13,500 for 1996 and none for 1995. The rental costs for Dominguez Energy L.P. were $2,901 for 1996 and $2,678 for 1995. The Company provides water service to these entities to the extent that they have property within the division. NOTE 13 - COMMITMENTS AND CONTINGENCIES During 1996 the Company's insurance carrier settled the remaining lawsuit filed in the California Superior Court that arose from the shooting death of an employee by another employee in January 1994. All legal costs accrued in anticipation of litigation have been reversed. The terms of the settlements had no material adverse financial impact on the Company. Under the terms of the proposed agreement between ARCO Los Angeles Refinery and the West Basin Municipal Water District, the Company will commit to fund $2,000,000 in recycled water system facilities. This agreement is expected to be signed by all parties in 1997. The funds will be expended when recycled water service is available to ARCO, which is tentatively scheduled for mid-1998. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors Dominguez Services Corporation Long Beach, California We have audited the accompanying consolidated balance sheets of Dominguez Services Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dominguez Services Corporation and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP /s/ Arthur Andersen LLP Los Angeles, California March 5, 1997 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS Management is responsible for the preparation of the Company's consolidated financial statements and related information appearing in this annual report. Management believes that the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements reasonably present the Company's financial position and results of operations in conformity with generally accepted accounting principles. Management also has included in the Company's financial statements amounts that are based on estimates and judgments which it believes are reasonable under the circumstances. The independent public accountants audit the Company's consolidated financial statements in accordance with generally accepted auditing standards and provide an objective, independent review of the fairness of reported operating results and financial position. The Board of Directors of the Company has an Audit Committee composed of three non-management Directors. The Committee meets periodically with financial management and the independent public accountants to review accounting, control, auditing and financial reporting matters. DOMINGUEZ SERVICES CORPORATION /s/ John S. Tootle John S. Tootle Vice President-Finance QUARTERLY FINANCIAL DATA (UNAUDITED)
OPERATING REVENUE NET INCOME EARNINGS ($ IN THOUSANDS) ($ IN THOUSANDS) PER SHARE 1996 1995 1996 1995 1996 1995 First Quarter $ 5,225 $ 5,094 $ 270 $ 233 $ .27 $ .23 Second Quarter 6,356 6,868 535 605 .53 .60 Third Quarter 7,404 7,552 787 749 .78 .75 Fourth Quarter 5,720 5,972 389 366 .39 .36 ---------- ---------- -------- -------- -------- -------- Total $ 24,705 $ 25,486 $ 1,981 $ 1,953 $ 1.97 $ 1.94 ---------- ---------- -------- -------- -------- -------- ---------- ---------- -------- -------- -------- --------
MARKET INFORMATION (UNAUDITED) MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol "DOMZ". There were 322 common shareholders of record as of December 31, 1996, as well as 367 common shareholders held in street name. Quarterly dividends have been paid since 1964. We cannot predict future actions of the Board of Directors, but at the present time, there is no change contemplated in the Company's dividend policy. The following record of common stock prices for 1996 and 1995 was obtained from the National Association of Securities Dealers, Inc., 1735 K Street Northwest, Washington, D.C. 20006:
1996 HIGH LOW DIVIDEND First Quarter 19 17-3/4 .31 Second Quarter 23 18 .31 Third Quarter 23-1/2 20-1/2 .31 Fourth Quarter 23-1/2 22-1/4 .31 ------ ------ --- 1995 First Quarter 17-3/4 16-3/4 .29 Second Quarter 17-3/4 16-1/2 .29 Third Quarter 17-1/2 16 .29 Fourth Quarter 19 16 .29 ------ ------ ---
EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED INCOME STATEMENT FOR THE PERIOD ENDING DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 708,817 0 2,823,570 (285,385) 46,385 5,004,365 60,079,551 21,079,569 46,874,799 5,137,365 5,212,000 0 0 1,004,370 14,622,075 46,874,799 23,331,018 24,704,786 7,797,136 19,437,920 0 153,960 659,264 3,295,267 1,313,969 1,981,298 0 0 0 1,981,298 1.97 1.97
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