-----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, HowdRG7dW6gyT8xaKJppMUAIYr3n4VUztpbGFb8+L6SVYUXs0UAs+SjphX1c4iqi QAUpG+mS4kYz0uuUAVDDgw== 0000950150-96-001382.txt : 19961118 0000950150-96-001382.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950150-96-001382 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN CALIFORNIA WATER CO CENTRAL INDEX KEY: 0000092116 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 951243678 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-01121 FILM NUMBER: 96663453 BUSINESS ADDRESS: STREET 1: 630 E FOOTHILL BLVD CITY: SAN DIMAS STATE: CA ZIP: 91773-9016 BUSINESS PHONE: 9093943600 MAIL ADDRESS: STREET 1: 630 E FOOTHILL CITY: SAN DIMAS STATE: CA ZIP: 91773-9016 10-Q 1 QUARTERLY REPORT FOR PERIOD ENDED 9/30/96 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended SEPTEMBER 30, 1996 Commission file number 0-1121 ------------------ ------ SOUTHERN CALIFORNIA WATER COMPANY ------------------------------------------------------ (Exact Name of Registrant as specified in its charter) CALIFORNIA 95-1243678 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 630 EAST FOOTHILL BOULEVARD, SAN DIMAS, CALIFORNIA 91773 -------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (909) 394-3600 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: As of October 31, 1996, the number of shares outstanding of the Registrant's Common Shares, Par Value $2.50, was 7,878,092. 2 SOUTHERN CALIFORNIA WATER COMPANY FORM 10-Q INDEX
Page No. -------- PART I FINANCIAL INFORMATION Item 1: Financial Statements 1 Balance Sheets as of September 30, 1996 and December 31, 1995 2 - 3 Statements of Income for the Three Months Ended September 30, 1996 and September 30, 1995 4 Statements of Income for the Nine Months Ended September 30, 1996 and September 30, 1995 5 Statements of Income for the Twelve Months Ended September 30, 1996 and September 30, 1995 6 Statements of Cash Flows for the Nine Months Ended September 30, 1996 and September 30, 1995 7 Notes to Financial Statements 8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operation 9 - 16 PART II OTHER INFORMATION Item 1: Legal Proceedings 16 Item 2: Changes in Securities 16 Item 3: Defaults Upon Senior Securities 16 Item 4: Submission of Matters to a Vote of Security Holders 16 Item 5: Other Information 16 Item 6: Exhibits and Reports on Form 8-K 17 Signatures 18
i 3 PART I ITEM 1. FINANCIAL STATEMENTS The basic financial statements included herein have been prepared by the Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations, although the Registrant believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments necessary for a fair statement of results for the interim period have been made. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto in the Registrant's latest Annual Report on Form 10-K. 1 4 SOUTHERN CALIFORNIA WATER COMPANY BALANCE SHEETS ASSETS
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (Unaudited) UTILITY PLANT, at cost (in thousands) Water......................................................... $ 390,655 $ 383,368 Electric...................................................... 30,790 30,269 --------- --------- 421,445 413,637 Less - Accumulated depreciation............................... (111,838) (103,018) --------- --------- 309,607 310,619 Construction work in progress................................. 39,821 24,349 --------- --------- 349,428 334,968 --------- --------- OTHER PROPERTY AND INVESTMENTS.................................. 763 755 --------- --------- CURRENT ASSETS Cash and cash equivalents..................................... 7,307 343 Accounts receivable - Customers, less reserves of $444 in 1996 and $648 in 1995.................................. 12,334 8,238 Other......................................................... 1,247 2,563 Unbilled revenue.............................................. 13,923 11,035 Materials and supplies, at average cost....................... 2,115 1,733 Supply cost balancing accounts................................ 5,707 8,073 Prepayments and other......................................... 7,386 7,779 Accumulated deferred income taxes - net....................... 4,439 3,206 --------- --------- 54,458 42,970 --------- --------- Regulatory tax-related assets................................... 22,663 22,986 Other deferred charges.......................................... 4,608 4,576 --------- --------- 27,271 27,562 --------- --------- $ 431,920 $ 406,255 ========= =========
The accompanying notes are an integral part of these financial statements. 2 5 SOUTHERN CALIFORNIA WATER COMPANY BALANCE SHEETS CAPITALIZATION AND LIABILITIES
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (Unaudited) (in thousands) CAPITALIZATION Common shareholders' equity............................. $126,730 $121,576 Preferred Shares........................................ 1,600 1,600 Preferred shares subject to mandatory redemption requirements............................... 520 520 Long-term debt.......................................... 107,278 107,455 -------- -------- 236,128 231,151 -------- -------- CURRENT LIABILITIES Notes payable to banks.................................. 34,000 8,500 Long-term debt and preferred shares due within one year................................... 424 15,624 Accounts payable........................................ 12,134 6,839 Taxes payable........................................... 9,621 5,562 Accrued interest........................................ 2,204 1,955 Other accrued liabilities............................... 8,560 8,061 -------- -------- 66,943 46,541 -------- -------- OTHER CREDITS Advances for construction............................... 55,186 55,385 Contributions in aid of construction.................... 28,127 27,745 Accumulated deferred income taxes - net................. 39,423 39,050 Unamortized investment tax credits...................... 3,360 3,499 Regulatory tax-related liability........................ 2,267 2,300 Other................................................... 486 584 -------- -------- 128,849 128,563 -------- -------- $431,920 $406,255 ======== ========
The accompanying notes are an integral part of these financial statements. 3 6 SOUTHERN CALIFORNIA WATER COMPANY STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, ----------------------------- 1996 1995 -------- ------- (in thousands, except per share amounts) OPERATING REVENUES Water.................................................... $42,362 $37,062 Electric................................................. 2,856 2,471 -------- ------- 45,218 39,533 -------- ------- OPERATING EXPENSES Water purchased........................................ 12,169 11,095 Power purchased for pumping............................ 2,286 2,594 Power purchased for resale............................. 1,296 1,131 Groundwater production assessment...................... 1,646 1,793 Supply cost balancing accounts......................... 989 (438) Other operating expenses............................... 3,759 3,087 Administrative and general expenses.................... 4,819 4,570 Depreciation........................................... 2,526 2,074 Maintenance............................................ 1,822 1,222 Taxes on income........................................ 4,229 3,582 Other taxes............................................ 1,714 1,270 -------- ------- 37,255 31,980 -------- ------- Operating income....................................... 7,963 7,553 OTHER INCOME............................................... 68 114 -------- ------- Income before interest charges......................... 8,031 7,667 INTEREST CHARGES........................................... 2,621 2,377 -------- ------- NET INCOME................................................. 5,410 5,290 DIVIDENDS ON PREFERRED SHARES.............................. (24) (24) -------- ------- EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS................. $ 5,386 $ 5,266 ======== ======= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.............. 7,864 7,845 ======== ======= Earnings Per Common Share.................................. $0.68 $0.67 ======== ======= Dividends Declared Per Common Share........................ $0.305 $0.30 ======== =======
The accompanying notes are an integral part of these financial statements. 4 7 STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 1996 1995 -------- ------- (in thousands, except per share amounts) OPERATING REVENUES Water.................................................... $106,866 $88,857 Electric................................................. 8,642 8,025 -------- ------- 115,508 96,882 -------- ------- OPERATING EXPENSES Water purchased........................................ 29,287 24,058 Power purchased for pumping............................ 5,531 5,649 Power purchased for resale............................. 3,951 3,682 Groundwater production assessment...................... 4,532 4,659 Supply cost balancing accounts......................... 2,616 (48) Other operating expenses............................... 10,075 9,219 Administrative and general expenses.................... 14,595 12,620 Depreciation........................................... 7,577 6,369 Maintenance............................................ 4,966 4,436 Taxes on income........................................ 8,771 6,627 Other taxes............................................ 4,450 3,394 -------- ------- 96,351 80,665 -------- ------- Operating income....................................... 19,157 16,217 OTHER INCOME............................................... 316 188 -------- ------- Income before interest charges......................... 19,473 16,405 INTEREST CHARGES........................................... 7,795 6,970 -------- ------- NET INCOME................................................. 11,678 9,435 DIVIDENDS ON PREFERRED SHARES.............................. (71) (72) -------- ------- EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS................. $ 11,607 $ 9,363 ======== ======= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.............. 7,853 7,845 ======== ======= Earnings Per Common Share.................................. $1.48 $1.19 ======== ======= Dividends Declared Per Common Share........................ $0.915 $0.90 ======== =======
The accompanying notes are an integral part of these financial statements. 5 8 SOUTHERN CALIFORNIA WATER COMPANY STATEMENTS OF INCOME FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited)
TWELVE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1996 1995 -------- -------- (in thousands, except per share amounts) OPERATING REVENUES Water.................................................. $136,930 $115,301 Electric............................................... 11,509 10,894 -------- -------- 148,439 126,195 -------- -------- OPERATING EXPENSES Water purchased........................................ 37,857 30,840 Power purchased for pumping............................ 7,845 7,837 Power purchased for resale............................. 5,485 5,209 Groundwater production assessment...................... 6,010 6,251 Supply cost balancing accounts......................... 1,517 (516) Other operating expenses............................... 14,207 11,830 Administrative and general expenses.................... 18,365 15,315 Depreciation........................................... 9,690 8,379 Maintenance............................................ 6,284 6,039 Taxes on income........................................ 10,928 9,432 Other taxes............................................ 5,922 4,468 -------- -------- 124,110 105,084 -------- -------- Operating income....................................... 24,329 21,111 OTHER INCOME............................................... 463 67 -------- -------- Income before interest charges......................... 24,792 21,178 INTEREST CHARGES........................................... 10,383 9,107 -------- -------- NET INCOME................................................. 14,409 12,071 DIVIDENDS ON PREFERRED SHARES.............................. (95) (97) -------- -------- EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS................. $ 14,314 $ 11,974 ======== ======== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.............. 7,851 7,845 ======== ======== Earnings Per Common Share.................................. $1.82 $1.53 ======== ======== Dividends Declared Per Common Share........................ $1.22 $1.205 ======== ========
The accompanying notes are an integral part of these financial statements. 6 9 SOUTHERN CALIFORNIA WATER COMPANY CASH FLOW STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1996 1995 -------- -------- (in thousands) CASH FLOWS FROM - Operating Activities: Net income................................................. $11,678 $9,435 Adjustments for non-cash items: Depreciation and amortization............................. 7,796 6,792 Deferred income taxes and investment tax credits................................... (710) 2,025 Other - net............................................... 231 (1,421) Changes in assets and liabilities: Customer receivables...................................... (2,779) (719) Prepayments............................................... 393 (707) Supply cost balancing accounts............................ 2,366 (159) Accounts payable.......................................... 5,295 483 Taxes payable............................................. 4,059 849 Unbilled revenue.......................................... (2,888) (2,441) Accrued interest.......................................... 249 (270) Other..................................................... (922) 427 -------- -------- Net Cash Provided....................................... 24,768 14,294 -------- -------- Investing Activities: Construction expenditures................................... (21,111) (18,236) -------- -------- Net Cash Used........................................... (21,111) (18,236) -------- -------- Financing Activities: Issuance of securities...................................... 732 30,000 Receipt of advances and contributions....................... 2,334 2,649 Repayments of long-term debt and redemption of preferred shares............................. (15,377) (4,425) Refunds on advances......................................... (2,603) (2,503) Net change in notes payable to banks........................ 25,500 (15,000) Common and preferred dividends paid......................... (7,279) (7,273) -------- -------- Net Cash Provided....................................... 3,307 3,448 -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents......... 6,964 (494) Cash and Cash Equivalents, Beginning of period............... 343 2,344 -------- -------- Cash and Cash Equivalents, End of period..................... $ 7,307 $1,850 ======== ========
The accompanying notes are an integral part of these financial statements. 7 10 SOUTHERN CALIFORNIA WATER COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. For a summary of significant accounting policies and other information relating to these interim financial statements, reference is made to pages 24 through 28 of the 1995 Annual Report to Shareholders under the caption "Notes to Financial Statements." 2. Earnings per common share are based on the weighted average number of Common Shares outstanding during each period and net income after deducting preferred dividend requirements. 3. In June, 1994, the Registrant signed a Water Supply Agreement to become a participant in the Coastal Aqueduct Extension of the State Water Project (the "Project") at a level of 500 acre-feet. The Registrant's current investment for this level of participation is $1,602,000 and is included in utility plant. On November 4, 1996, the Registrant filed an application with the California Public Utilities Commission ( the "CPUC") seeking approval of its recovery through rates of costs associated with that participation. No assurance can be given that the CPUC will deny or approve recovery through rates of all or any costs associated with such participation. 4. The Registrant implemented increased water rates in six of its rate-making districts on January 1, 1996. In addition, the CPUC issued a final decision regarding the settlement stipulation in the registrant's general rate case application affecting its Bear Valley Electric customer service area in May, 1996. In March, 1996, the Registrant filed applications to increase rates in two of its water customer service areas to cover costs associated with 1996 and 1997 capital projects in those two areas. See the section entitled "Rates and Regulation" for more information. 5. On January 1, 1996, the Registrant adopted SFAS No. 121 - "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." This Statement imposes stricter criteria for regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. Adoption of SFAS No. 121 did not have a material impact on the financial position or results of operations of the Registrant, based on the current regulatory structure in which the Registrant operates. 6. Effective January 1, 1996, the Registrant is subject to the reporting requirements contained in SFAS No. 123, "Accounting for Stock- Based Compensation." The Registrant has a Key Executive Long-Term Incentive Plan, the provision of which became effective in January, 1995. Any payout under the plan, which is made in Common Shares of the Registrant, will not occur until 1998. Adoption of SFAS No. 123 did not have a material impact on the financial position or results of operations of the Registrant. 7. As permitted by the CPUC, the Registrant maintains water and electric supply cost balancing accounts to account for undercollections and overcollections of revenues designed to recover such costs. Recoverability of such costs are recorded in income and charged to balancing accounts when such costs are incurred. The balancing accounts are credited when such costs are recovered through rate adjustments. 8 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION GENERAL Southern California Water Company (the "Registrant") is a public utility company engaged principally in the purchase, production, distribution and sale of water (SIC No. 4941). The Registrant also distributes electricity in one community (SIC No. 4911). The Registrant, regulated by the California Public Utilities Commission ("CPUC"), was incorporated on December 31, 1929 under the laws of the State of California as American States Water Services Company of California as the result of the consolidation of 20 water utility companies. From time to time, additional water companies and municipal water districts have been acquired and properties in limited service areas have been sold. The Registrant's present name was adopted in 1936. The Registrant is organized into three regions operating within 75 communities in 10 counties throughout the State of California and provides water service in 21 customer service areas. As of September 30, 1996, about 73% of the Registrant's water customers were located in the greater metropolitan areas of Los Angeles and Orange Counties. The Registrant also provided electric service to the City of Big Bear Lake and surrounding areas in San Bernardino County. The Registrant served 239,979 water customers and 20,456 electric customers at September 30, 1996, or a total of 260,435 customers compared with 258,407 total customers served at September 30, 1995. RESULTS OF OPERATION Earnings per common share for the three months ended September 30, 1996 increased by 1.5% to $0.68 per share as compared to $0.67 per share for the comparable period last year. For the nine months ended September 30, 1996, earnings per share were $1.48 as compared to $1.19 for the nine months ended September 30, 1995, an increase of 24.4%. Earnings for the twelve months ended September 30, 1996 increased by 19.0% to $1.82 per share as compared to $1.53 per share for the twelve months ended September 30, 1995. Water sales volumes for the three, nine and twelve months ended September 30, 1996 increased by 11.2%, 10.8% and 13.7%, respectively, as compared to the same periods ended September 30, 1995. Water operating revenues increased by 14.3%, 20.3% and 18.8%, in each of the three periods ended September 30, 1996 respectively, over the same periods of the prior year as a result of the impact of general, step and attrition rate increases and the increased water sales. Electric operating revenues for the three, nine and twelve month periods ending September 30, 1996 increased by 15.6%, 7.7% and 5.6%, respectively, over the comparable periods ending September 30, 1995 as a result of increased kilowatt-hour sales volumes and increased rates which were effective in May, 1996. Kilowatt-hour sales of electricity increased by 7.8%, 5.6% and 2.9% for the three, nine and twelve months ended September 30, 1996, respectively, as compared to the same periods last year. Purchased water costs increased by 9.7%, 21.7% and 22.8% over 1995, respectively, for the three, nine and twelve months ended September 30, 1996 reflecting increases in purchased water rates, the latest series of which was effective July 1, 1995 as well as increased purchased water volumes. Reduced water purchases generally have caused wholesale water rates in the State of California to increase significantly to cover fixed costs of the wholesale water suppliers. 9 12 Costs of power purchased for pumping decreased by 11.9% and 2.1%, respectively, for the three and nine months ended September 30, 1996 as compared to the same periods ended September 30, 1995 due to the effects of fuel adjustments refunds on power bills received by the Registrant from its electric energy supplier. As compared to the three, nine and twelve months ended September 30, 1995, the costs of power purchased for resale increased by 14.6%, 7.3% and 5.3% for the three, nine and twelve months ended September 30, 1996, respectively, due chiefly to increased kilowatt-hour sales. Groundwater production assessments are 8.2%, 2.7% and 3.9% lower for the three, nine and twelve months ended September 30, 1996 as compared to the same periods ended September 30, 1995 due to an adjustment in the accrual rates. A positive entry for the provision for supply cost balancing accounts reflects recovery of previously under-collected supply costs. Conversely, a negative entry for the provision for supply cost balancing accounts reflects an undercollection of previously incurred supply costs. The positive entries for three, six and twelve months ended September 30, 1996 result from approval by the CPUC of rate increases sufficient to recover previously under-collected purchased water supply costs, supply costs for power purchased for pumping and for resale and groundwater production assessments. Other operating expenses increased by 21.8%, 9.3% and 20.1%, respectively, for the three, nine and twelve months ended September 30, 1996 as compared to the same periods ended September 30, 1995 due chiefly to an increase in the percentage of labor being charged to this category. In addition, there has been, relative to last year, an increase in the number of persons charging all or a portion of their time to various customer service functions. Administrative and general expenses increased by 5.4%, 15.6% and 19.9% for the three, nine and twelve months ended September 30, 1996, respectively, as compared to the same periods ended September 30, 1995. These periods are each affected by an increase in the amount of labor being charged to this category since, as a part of the settlement stipulation for the rates that were effective January 1, 1996, the Registrant began expensing, and currently recovering, a greater amount of labor for persons engaged in general and administrative functions. As well, this category has increased due to higher personnel-related expenses such as health insurance, post-retirement medical benefits, pension and 401-k plan costs and long-term compensation expenses. Depreciation expense, increased by 21.8%, 19.0% and 15.6%, respectively, for the three, nine and twelve months ended September 30, 1996 principally reflecting the effects of recording approximately $30 million in net plant additions during 1995, depreciation on which began in 1996. Each period is also affected by higher depreciation rates authorized by the CPUC which were effective January 1, 1996. Taxes on income increased by approximately 18.1%, 32.4% and 15.9%, respectively, for the three, nine and twelve months ended September 30, 1996 as compared to the same periods ended September 30, 1995 as a result of higher pre-tax income. 10 13 For the three, nine and twelve months ended September 30, 1996, other taxes increased by 35.0%, 31.1% and 32.5%, respectively, as compared to the same periods ending September 30, 1995. These increases are due to higher payroll taxes resulting from the increase in labor being charged to expense as well as increased property taxes resulting from higher valuation assessments for 1996. Maintenance expense increased by 49.1%, 11.9% and 4.1% for the three, nine and twelve months ended September 30, 1996 as compared to the three, nine and twelve months ended September 30, 1995. Each of the three periods is affected by the increase in maintenance expense during the third quarter of 1996 as a result of the Registrant's shift in its maintenance scheduling from early in 1996 to the latter part of the year. Interest expense for the nine and twelve months ended September 30, 1996 increased by 10.3%, 11.8% and 14.0% over the same period last year primarily as a result of the sale in September, 1995 of $30 million in long-term debt as well as increased short-term bank borrowing during 1996. LIQUIDITY AND CAPITAL RESOURCES The Registrant funds the majority of its operating expenses, interest payments on its debt, dividends on its outstanding common and preferred shares and makes its mandatory sinking fund payments through internal sources. However, because of the seasonal nature of its water and electric businesses, the Registrant utilizes its short-term borrowing capacity on occasion to finance current operating expenses. The Registrant continues to rely on external sources, including short-term bank borrowing, the receipt of contributions-in-aid-of-construction and advances for construction and install-and-convey advances, to fund the majority of its construction expenditures. The aggregate short-term borrowing capacity currently available to the Registrant under its three bank lines of credit is $37,063,000. At September 30, 1996, the Registrant had a total of $34,000,000 in borrowing outstanding under its bank lines of credit, leaving an unused short-term borrowing capacity of $3,063,000. The Registrant routinely employs short-term bank borrowing as an interim financing source prior to executing either a long-term debt or equity issue. During the three-month period ended September 30, 1996, the Registrant received net proceeds of approximately $233,300 from the sale of 10,458 Common Shares under its Dividend Reinvestment and Common Share Purchase Plan and an additional $292,800 from the sale of 13,308 Common Shares to its Investment Incentive Program (401-k plan).. The Registrant anticipates issuing additional Common Shares in December, 1996 with the net proceeds initially being used to repay short-term bank borrowings and, after that, to fund construction expenditures. The Registrant received allocation of $8 million from the California Debt Limit Allocation Committee in August, 1996 which amount will be issued as tax-exempt debt, issued through the California Pollution Control Financing Authority, to fund a portion of its qualifying water main replacement program capital expenditures. The debt is anticipated to be sold in December, 1996. The Registrant has no derivative financial instruments, financial instruments with significant off-balance sheet risks or financial instruments with concentrations of credit risk. 11 14 ACCOUNTING STANDARDS On January 1, 1996, the Registrant adopted SFAS No. 121 - "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." This Statement imposes stricter criteria for regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. Adoption of SFAS No. 121 will not have a material impact on the financial position or results of operations of the Registrant, based on the current regulatory structure in which the Registrant operates. See Note 5 of the Notes to Financial Statements. Effective January 1, 1996, the Registrant is subject to the reporting requirements contained in SFAS No. 123, "Accounting for Stock- Based Compensation." The Registrant has a Key Executive Long-Term Incentive Plan, the provisions of which became effective in January, 1995. Any payout under the plan, which is made in Common Shares of the Registrant, will not occur until 1998. Adoption of SFAS No. 123 will not have a material impact on the financial position or results of operation of the Registrant. See Note 6 of the Notes to Financial Statements. WATER SUPPLY The Metropolitan Water District of Southern California ("MWD") is organized under the laws of the State of California for the purpose of delivering imported water to areas within its jurisdiction. The Registrant has 52 connections to the water distribution facilities of MWD and other municipal water agencies. MWD imports water from two principal sources: the Colorado River and the State Water Project ("SWP"). Available water supplies from the Colorado River and the SWP have historically been sufficient to meet most of MWD's requirements and MWD's supplies from these sources are anticipated to continue to remain adequate through 1996. MWD's import of water from the Colorado River is expected to decrease in future years due to the requirements of the Central Arizona Project in the State of Arizona. In response, MWD has taken a number of steps to secure additional storage capacity and increase available water supplies, including effecting transfers of water rights from other sources. For the three months ended September 30, 1996, the Registrant produced a total of 62,091 acre-feet of water as compared to 59,627 acre- feet for the three months ended September 30, 1995. Of the total 62,091 acre-feet of water produced during the third quarter of 1996, approximately 54% came from pumped sources and 44% was purchased from others, principally the MWD. The remaining 2% came from the Bureau of Reclamation (the "Bureau") under a no-cost contract. For the nine months ended September 30, 1996, the Registrant produced 148,982 acre-feet of water as compared to 136,868 acre-feet for the same period last year. Of this total amount produced, 57% came from pumped sources, 42% was produced from purchased sources and the remaining amount was supplied from the Bureau. During the twelve months ended September 30, 1996, the Registrant produced 192,650 acre-feet of water of which 57% of total supply came from pumped sources, 42% was purchased and the remaining was produced by the Bureau. The Registrant produced 177,900 acre-feet produced during the twelve months ended September 30, 1995. In those customer service areas of the Registrant which pump groundwater, overall groundwater conditions remain at adequate levels. As such, the Registrant believes that its water supplies are adequate to meet projected current year demands. 12 15 WATER QUALITY On August 6, 1996, amendments to the Safe Drinking Water Act (the "1996 SDWA amendments") were signed into law. The 1996 SDWA amendments amount to a rewrite of the law that the United States Environmental Protection Agency ("EPA") has been trying to implement for almost ten years. In contrast to the 1986 amendments, which were crafted with very little input from water purveyors, the 1996 amendments were developed with significant contributions from water purveyors and regulators and embody a partnership that includes major infusion of federal funds (in the form of State Revolving Funds) to help water utilities comply with the law. The California Department of Health Services, acting on behalf of the EPA, administers the EPA's program. The 1996 SDWA amendments replace the requirement that EPA set 25 new standards every three years with a new process for selecting and regulating contaminants. The EPA can only regulate contaminants that may have adverse health effects, are known or likely to occur at levels of public health concern, and provide "a meaningful opportunity for health risk reduction." The EPA must, within eighteen months, publish a list of contaminants for possible regulation and must update that list every five years. In addition, every five years, the EPA must select at least five contaminants on that list and determine whether to regulate them. The new law allows the EPA to bypass the selection process and adopt interim regulations for contaminants in order to address urgent health threats. Current regulations, however, remain in place and are not subject to the new standard-setting provisions. For the first time, the 1996 SDWA amendments allow EPA to base primary drinking water regulations on risk assessment and cost/benefit considerations and on minimizing overall risk. The 1996 SDWA amendments do not, however, make any changes to language regarding the setting of maximum contaminant levels ("MCL's"). EPA must base regulations on best available, peer-reviewed science and data from best available methods. For proposed regulations that include MCL's, EPA must use, and seek public comment on, an analysis of quantifiable and non-quantifiable risk- reduction benefits and cost for each such MCL. The Enhanced Surface Water Treatment Rule ("ESWTR") has been previously proposed and includes several options for promulgation. These options will be determined based on data collected during compliance with the Information Collection Rule. The ESWTR would affect each of the Registrant's five surface water treatment plants. The Registrant will be subject to the new rules concerning Disinfection/Disinfection By-Products, Stage I of which has been previously published, with an effective date of June, 1998. This rule reduces tri-halomethane contaminants from 100 micrograms per liter to 80 micrograms per liter and will affect only two of the Registrant's systems. EPA must adopt Stage I and II disinfection by-product ("DBPs")rules and interim and final enhanced surface water treatment rules according to a negotiated schedule or as soon as practicable. EPA is not allowed to use the new cost/benefit provisions for regulating disinfectants, DBPs, and Cryptosporidium, but EPA may apply the risk and cost considerations used to develop the Stage I DBP rule when developing the Stage II rule. No earlier than three years after enactment of the 1996 SDWA amendments and no later than the date EPA adopts the Stage II DBP rule, EPA must adopt a rule requiring disinfection of certain groundwater systems and provide guidance on determining which systems must provide disinfection facilities. EPA may utilize the cost/benefit provisions to establish this regulation. While the Registrant 13 16 anticipates that this rule will affect several of its systems using groundwater supplies, the Registrant is unable to predict the ultimate impact this rule may have on its financial condition or results of operation. The Registrant will be subject to new rules regarding radon and arsenic. EPA must propose an arsenic rule by January 1, 2001 and adopt a rule one year later. EPA has 180 days after enactment of the 1996 SDWA amendments to develop a plan to study ways to reduce arsenic health risk uncertainties and is authorized to enter into cooperative agreements to carry out the study. Depending on the MCL eventually established for arsenic, compliance could cause the Registrant to implement costly well-head remedies such as ion exchange or, alternatively, to purchase additional and more expensive water supplies already in compliance, for blending with well sources. The EPA must withdraw its proposed radon rule and arrange for the National Academy of Sciences to conduct a risk assessment and a study of risk-reduction benefits associated with various mitigation measures. EPA has 30 months from enactment of the 1996 SDWA amendments to seek comment on a risk-reduction and cost analysis for potential radon standards, six more months to propose a standard, and another year to adopt a standard. Although the Registrant is unable to predict what the standard for radon might eventually be, the Registrant itself is currently conducting studies to determine the best treatment for affected wells, which treatment could range from simple aeration to filtration through granular activated carbon. The Registrant is a voluntary member of the "Partnership for Safe Water", a national program, to further protection of the public from diseases caused by cryptosporidium and other microscopic organisms. As a volunteer in the program, the Registrant has committed to exceed current regulations governing surface water treatment to ensure that its surface treatment facilities are performing as efficiently as possible. The Registrant currently tests its wells and water systems for more than 90 contaminants, covering all contaminants listed in the SDWA. Water from wells found to contain levels of contaminants above the established MCL's is either treated or blended before it is delivered to customers. The Information Collection Rule has been promulgated and may affect two of the Registrant's water systems with minor monitoring and paperwork costs. The Registrant has received waiver from the EPA for the required monitoring in one system and expects, but can offer no assurances that, the EPA will grant the waivers for the other system. A set of primary standards, referred to as "Phase VI," has been postponed indefinitely. Since the SDWA became effective, the Registrant has experienced increased operating costs for testing to determine the levels, if any, of the contaminants in the Registrant's sources of supply and additional expense to lower the level of any contaminants in order to meet the MCL standards. Such costs and the costs of controlling any other contaminants may cause the Registrant to experience additional capital costs as well as increased operating costs. The Registrant is currently unable to predict the ultimate impact that the 1996 SDWA amendments might have on its financial position or its results of operation. The rate-making process provides the Registrant with the opportunity to recover prudently incurred capital and operating costs associated with water quality, and management believes that such prudently incurred costs will be authorized for recovery by the CPUC. 14 17 The Registrant is subject to State of California Assembly Bill 733 which requires fluoridation of water supplies for public water systems serving more than 10,000 service connections. Although the bill requires affected systems to install treatment facilities only when public funds have been made available to cover capital and operating costs, the bill requires the CPUC to authorize cost recovery through rates should public funds for operation of the facilities, once installed, become unavailable in future years. Three of the 27 wells in the Registrant's Arden-Codova system have, for several years, been subject to contamination by tricholoroethylene. The Aerojet Corporation has, by court decree, been responsible for all costs related to the provision of well-head treatment. Although a ten-year agreement with Aerojet Corporation expired in 1996, Aerojet Corporation has agreed to reimburse the Registrant for the costs of backwash system modification at all three wells. There have been no environmental matters that have materially affected or are currently materially affecting the Registrant's Bear Valley Electric Service area. RATES AND REGULATION The Registrant is subject to regulation by the CPUC as to its water and electric business and properties. The CPUC has broad powers of regulation over public utilities with respect to service and facilities, rates, classifications of accounts, valuation of properties and the purchase, disposition and mortgaging of properties necessary or useful in rendering public utility service. It also has authority over the issuance of securities, the granting of certificates of convenience and necessity as to the extension of services and facilities and various other matters. Rates to customers of the Registrant vary among its 21 water customer service areas due to differences in operating conditions and costs. The customer service areas are currently grouped into 16 water districts for rate-making purposes. The Registrant's one electric customer service area is also a separate ratemaking district. The Registrant continuously monitors its operations in all of its districts so that applications for rate changes may be filed, when warranted, on a district-by-district basis in accordance with CPUC procedure. Under the CPUC's practices, rates may be increased by three methods: general rate increases, offsets for certain expense increases and advice letter filings related to certain plant additions. General rate increases typically are for three-year periods and include "step" increases in rates for the second and third years. The Registrant filed an application for general rate relief, including step and attrition year changes, in six of its water rate-making districts in March, 1995. In December, 1995, the CPUC issued its final decision on those applications which, among other things, authorized a rate of return on common equity of 10.40%, increased depreciation rates and authorized recovery of postretirement medical benefit costs and resulted in an approximate increase in annual water operating revenues of $15 million. Rates approved by the CPUC were effective on January 1, 1996. The Registrant filed an application with the CPUC for a general rate increase in its Bear Valley Electric customer service area in September, 1995. In February, 1996, the Registrant reached a stipulated settlement among all parties which included the 10.40% return on common equity, stipulated in the Registrant's water rate cases discussed previously. The CPUC issued its final decision in this matter, which approved the settlement stipulation, on May 14, 1996. Rates approved by the CPUC went into effect on May 19, 1996. 15 18 In March, 1996, the Registrant filed applications to increase water rates in two of its customer service areas to recover costs associated with 1996 and 1997 capital projects in those areas. The Registrant and the CPUC staff have worked out terms of a settlement stipulation, which was supported by an opinion of the Administrative Law Judge assigned to the case. A final decision by the CPUC is anticipated by December, 1996 with rates effective in January, 1997. On November 4, 1996, the Registrant filed an application with the CPUC seeking recovery through rates of costs associated with its participation the coastal aqueduct extension of the State Water Project (the "Project"). The Registrant is currently unable to predict if the CPUC will authorize recovery of all or any of the costs associated with the Project. See Note 3 of the Notes to Financial Statements. WATER RELATED OPPORTUNITIES The Company continues to pursue strategic opportunities related to the operation of municipally owned water systems. The Company has pursued and continues to pursue opportunities to bid on long-term leases and operation contracts on a stand alone basis or as part of a joint venture. PART II ITEM 1. LEGAL PROCEEDINGS The Registrant is subject to ordinary routine litigation incidental to its business. Except as discussed in Note 4 of the Notes to Financial Statements and as disclosed in previous filings with the SEC, there are no other pending legal proceedings, other than such incidental litigation, to which the Registrant is a party or of which any of its properties is the subject which are believed by the Registrant to be material. ITEM 2. CHANGES IN SECURITIES As of September 30, 1996, earned surplus amounted to $51,632,000. Of this amount, $29,174,000 was restricted, under the most restrictive of the Registrant's credit agreements, as to payment of cash dividends on the Common Shares of the Registrant. As of September 30, 1996, authorized but unissued common shares includes 89,226 and 78,951 common shares reserved for issuance under the Registrant's Dividend Reinvestment and Common Shares Purchase Program and Investment Incentive Program ("401-k"), respectively. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the third quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise. ITEM 5. OTHER INFORMATION On October 28, 1996, the Board of Directors of the Registrant declared a regular quarterly dividend of $0.31 per common share, an increase of 1.6%. In other actions, the Board of Directors declared regular quarterly dividends of $0.25 per share, $0.265625 per share and $0.3125 per share on its 4%, 4-1/4% and 5% Cumulative Preferred Shares, respectively. The dividends will be paid December 1, 1996 to shareholders of record as of the close of business on November 15, 1996. 16 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None. 17 20 SIGNATURES Pursuant to the requirements of Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized officer and chief financial officer. SOUTHERN CALIFORNIA WATER COMPANY By: s/ JAMES B. GALLAGHER ------------------------------- James B. Gallagher Vice President - Finance, Chief Financial Officer and Secretary Date: November 14, 1996 18 EX-27 2 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEETS AND INCOME STATEMENTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS FILED HEREWITH. 1,000 3-MOS DEC-31-1996 JUL-01-1996 SEP-30-1996 PER-BOOK 349,428 763 54,458 27,271 0 431,920 19,697 55,401 51,632 126,730 520 1,600 106,253 34,000 0 0 98 40 779 246 161,368 431,920 45,218 4,229 33,026 37,255 7,963 68 8,031 2,621 5,410 24 5,386 2,364 0 10,624 .68 .68
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