EXHIBIT XIII
SERVICE AREAS AND CUSTOMERS
A map of State of California indicating the twenty districts in which the
company operates is included on this page.
SAN FRANCISCO BAY AREA
Mid-Peninsula (San Mateo and San Carlos) 35,300
South San Francisco (including Colma and Broadmoor) 15,300
Bear Gulch (including Menlo Park, Atherton,
Woodside and Portola Valley) 17,100
Los Altos (including Los Altos and portions of Cupertino,
Los Altos Hills, Mountain View and Sunnyvale) 17,800
Livermore 14,900
100,400
SACRAMENTO VALLEY
Chico (including Hamilton City) 20,700
Oroville 3,500
Marysville 3,800
Dixon 2,700
Willows 2,200
32,900
SALINAS VALLEY
Salinas 23,000
King City 1,900
24,900
SAN JOAQUIN VALLEY
Bakersfield 54,400
Stockton 40,800
Visalia 26,200
Selma 4,600
126,000
LOS ANGELES AREA
East Los Angeles (including portions of
City of Commerce and Montebello 26,400
Hermosa Beach and Redondo Beach
(including a portion of Torrance) 24,800
Palos Verdes (including Palos Verdes Estates, Rancho
Palos Verdes, Rolling Hills Estates and Rolling Hills) 23,400
Westlake (a portion of Thousand Oaks) 6,700
81,300
365,500
46
NEW BUSINESS DEVELOPMENT
New business activity improved somewhat over 1993. New residential and
commercial services added through installation of new mains totaled 2,018,
up approximately 21 percent from last year.
Nine districts showed an increase in new business activity above the figures
posted in 1993. The Visalia district was by far the growth leader for the
Company in 1994. This district increased its activity by nearly 75 percent
over the already high level of activity experienced in 1993. This year,
Visalia accounted for nearly one-third of the Company's total new business
growth. Net refundable advances and contributions received from developers
in 1994 were $8,800,000 compared with $8,400,000 received in 1993.
The Company, in cooperation with San Mateo County and a local homeowners
association, is acquiring Palomar Park County Water District #3. Palomar
Park, containing about 200 customers, will be a welcome addition to our
Mid-Peninsula district.
The Company has entered into a number of contracts to include municipal
utility bills on customers' monthly water bills. Agreement was reached with
the City of Willows and the City of King to bill city residents for sewer
charges. In Visalia, we were awarded a similar contract for sewer and
refuse billing services. These contracts are a promising area of growth for
the Company. We will continue to seek these opportunities where they arise.
Agreements were signed with the Central and West Basin Municipal Water
Districts in Los Angeles for the operation and maintenance of their recycled
water distribution systems. As with billing contracts, the Company is
quickly developing expertise in the operation of recycled water distribution
systems, and is now involved with three such systems. As California's
growing population continues to exert pressure on the state's water supply,
so too grows the use of recycled water for non-potable uses such as municipal
irrigation and industrial processes. The Company believes this sector is a
promising growth area.
47
RATES AND REGULATION
The California Public Utilities Commission requires that rates for each
district be determined independently. Each year, the Company files general
rate increase applications for approximately one-third of its operating
districts. The Commission attempts to resolve these within eight months of
acceptance. Offset rate adjustments are also allowed for changes in purchased
water, power costs and pump taxes.
During 1994, general rate increase applications were filed with the Commission
requesting rate relief of $3,023,000 in six districts representing 15 percent
of the Company's customer base. The applications requested a rate of return
on common equity of 12 percent. However, the Commission staff has recommended
a rate of return of 10.9 percent. Public hearings for these cases were
completed in early February 1995, the Commission's decision is expected in
mid-May. Step increases authorized in previous rate decisions for 15 districts
totaling approximately $2,102,000 became effective in January 1995.
In July 1994, the Commission issued a decision on general rate cases filed in
July 1993, for three districts representing 13 percent of customer base,
resulting in $540,000 in additional revenue and yielding a return on common
equity of 10.2 percent.
The Commission issued its long awaited decision in its investigation of the
financial and operational risks for water utilities. While the Commission
concluded that no fundamental change in its ratemaking procedures is necessary,
it authorized water utilities to accrue interest on balancing and memorandum
accounts. Additionally, the decision allows water utilities to request
prospective recovery for unanticipated Safe Drinking Water Act compliance
costs.
Effective March 14, 1994, the Commission closed all voluntary conservation
memorandum accounts. The Company is seeking to transfer $1,748,000 in lost
revenue and conservation expenses from the drought memorandum accounts to its
expense balancing accounts. These amounts would be recoverable through the
Commission's offset procedures which allow surcharges to amortize account
balances.
Offset rate increases of $1,944,000 and $2,327,000 were authorized during the
year for water production cost increases and balancing account
undercollections, respectively. Additionally, the Commission approved rate
increases of $292,000 to recover increased costs from the 1993 general
office renovation; $87,000 for a new water tank in the South San Francisco
district; and $215,000 for post-retirement benefits other than pensions. This
latter expense was a result of accounting changes mandated by Statement of
Financial Accounting Standards No. 106.
48
WATER QUALITY AND ENVIRONMENTAL AFFAIRS
The trends of the past few years continued in 1994. Increasing numbers of
stringent federal and state water quality regulations require increased
monitoring and analysis of all sources and distribution systems. Particular
effort was devoted to preparation of reports in compliance with the second
phase of the United States Environmental Protection Agency's lead and copper
rule. Changes in the federal Safe Drinking Water Act which would have brought
treatment costs in line with the actual health threat posed by contaminants
were not adopted by Congress in 1994.
Meanwhile, the Company continued to upgrade its treatment capabilities to
ensure compliance with all regulations now and in the future. These upgrades
include the installation of:
~ Chlorinators on all wells to ensure compliance with bacteriological
regulations.
~ An innovative granular activated carbon system in Bakersfield for removal of
hydrogen sulfide taste and odor.
~ Our third treatment system in Chico for the removal of volatile organic
compounds (VOCs). We also agreed to operate a granular activated carbon
system for the removal of VOCs installed by the State Environmental
Protection Agency.
In other environmental areas, the Company continues to maintain an aggressive
employee training program in recycling, hazardous materials management, and
hazardous waste management. The training program is an essential part of
ensuring that all operations are conducted in accordance with good
environmental practice, and in compliance with all applicable environmental
laws, regulations and rules.
WATER SUPPLY
The 1993-94 water season was California's fourth driest year on record, leading
the Department of Water Resources to declare a 'drought watch' in May. But
these fears began to be allayed as early as November 1994 when a seemingly
endless series of storms began pouring rain and snow throughout the state's
watersheds.
By late January 1995, cumulative average Sierra snowpack was at 175 percent of
normal; storage in the state's 155 reservoirs was at more than 90 percent of
49
average and the drought watch was cancelled. These promising figures guarantee
100 percent of state water project deliveries will be made in 1995.
Substantial water reserves remain in the groundwater aquifers that supply
Company districts served by well water. While recovery from drought-related
depletion of these reserves was interrupted by drier than normal conditions
in 1994, the mean groundwater levels in these districts were stable. In
addition, districts located in regions with existing groundwater management
mechanisms showed noticeable improvements in storage. Regional groundwater
management planning is receiving greater attention throughout the state as
its importance as a tool for addressing long-term water supply concerns is
realized. The passage of legislation that enables management of this resource
by existing local government agencies further stimulated this attention.
Despite the promise of an abundant water year, California is expected to have
long-term water supply problems. To compensate for this trend, the Company
continues to promote water conservation programs initiated during the drought
on a district-by-district basis outlined in our water management plans and as
permitted by the California Public Utilities Commission.
Significant developments affecting future water supply occurred in several of
our districts. On August 16, 1994, the State Water Resources Control Board
(SWRCB) informed the Monterey County Board of Supervisors that it was
initiating an investigation into the groundwater supply issues in the Salinas
Valley. This is a prelude to a possible adjudication of the groundwater basin
by the SWRCB should Monterey County fail to develop short- and long-term
solutions to the nitrate contamination and saltwater intrusion threatening
the aquifers. In a related matter, the SWRCB refused to consider a separate
investigation of groundwater use in our King City district. This action will
save the Company a considerable amount of litigation expenses.
In Solano County, the location of our Dixon district, the Solano County Water
Agency agreed to reimburse the Company for costs it incurred as a party to the
Putah Creek adjudication. This action will determine the rights to water from
Putah Creek which recharges the groundwater from which our Dixon district
derives its water supply.
50
TEN YEAR FINANCIAL REVIEW
(Dollars in thousands except common share and other data)
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
SUMMARY OF OPERATIONS
Operating revenue
Residential $114,751 $111,526 $101,842 $87,560 $90,178 $84,295 $81,404 $82,254 $79,131 $75,508
Business 27,023 25,247 23,670 20,759 20,910 19,870 19,480 19,986 19,095 17,847
Industrial 5,478 5,123 4,925 4,490 5,146 5,166 4,754 4,361 4,539 4,636
Public authorities 7,995 7,396 6,892 5,734 6,412 6,225 6,232 6,491 6,285 6,118
Other 2,024 2,424 2,476 8,633 1,741 1,932 1,885 693 1,385 1,382
TOTAL OPERATING REVENUE 157,271 151,716 139,805 127,176 124,387 117,488 113,755 113,785 110,435 105,491
Operating expenses 131,766 123,861 116,031 102,855 101,017 95,150 91,265 90,587 87,788 83,722
Interest expense, other income and
expenses, net 11,097 12,354 11,245 10,393 9,004 8,566 8,416 8,026 8,808 9,115
Net income $14,408 $15,501 $12,529 $13,928 $14,366 $13,772 $14,074 $15,172* $13,839 $12,654
COMMON SHARE DATA
Earnings per share $2.44 $2.70 $2.18 $2.42 $2.50 $2.40 $2.45 $2.63* $2.40 $2.21
Dividends paid 1.98 1.92 1.86 1.80 1.74 1.68 1.60 1.48 1.40 1.30
DIVIDEND PAYOUT RATIO 81% 71% 85% 74% 70% 70% 65% 49% 58% 59%
Book value at year-end $23.12 $21.80 $21.02 $20.70 $20.08 $19.32 $18.59 $17.72 $16.11 $15.03
Market price at year-end 32.00 40.00 33.00 28.00 26.75 28.00 25.50 30.00 26.625 22.625
Common shares outstanding at year-end
(in thousands) 6,247 5,689 5,689 5,689 5,689 5,689 5,672 5,636 5,607 5,576
Return on common shareholders equity 10.6% 12.4% 10.4% 11.7% 12.4% 12.4% 13.2% 14.8% 14.9% 14.7%
Bond interest coverage 3.2 3.2 2.9 3.2 3.6 3.4 3.8 4.3 3.9 3.5
BALANCE SHEET DATA
Net utility plant $407,895 $391,703 $374,613 $349,937 $325,409 $307,802 $289,363 $273,619 $262,216 $246,467
Utility plant expenditures 28,275 28,829 35,188 34,459 26,861 27,277 23,994 19,511 22,710 16,469
Advances for construction 92,190 90,812 89,127 84,424 77,202 69,016 59,145 54,887 50,907 45,790
Capitalization:
Common shareholders equity 144,447 123,999 119,574 117,779 114,244 109,929 105,435 99,897 90,336 83,818
Preferred stock 3,475 3,475 3,475 3,475 3,475 3,475 3,475 5,783 5,909 6,031
First mortgage bonds 128,944 129,608 122,069 103,505 104,905 86,012 86,959 73,930 77,056 84,009
Total capitalization 276,866 257,082 245,118 224,759 222,624 199,416 195,869 179,610 173,301 173,858
Capitalization ratios:
Common shareholders equity 52.2% 48.2% 48.8% 52.4% 51.3% 55.1% 53.8% 55.6% 52.1% 48.2%
Preferred stock 1.3% 1.4% 1.4% 1.5% 1.6% 1.8% 1.8% 3.2% 3.4% 3.5%
First mortgage bonds 46.5% 50.4% 49.8% 46.1% 47.1% 43.1% 44.4% 41.2% 44.5% 48.3%
OTHER DATA
Water production (million gallons)
Wells 50,325 47,205 52,000 48,930 51,329 51,350 48,828 48,097 45,222 43,589
Purchased 49,300 48,089 40,426 36,686 45,595 45,978 48,254 50,744 50,782 50,328
Total water production 99,625 95,294 92,426 85,616 96,924 97,328 97,082 98,841 96,004 93,917
Customers
Metered 286,700 282,100 278,700 275,200 272,100 269,200 267,000 261,000 258,600 256,000
Flat rate 78,800 80,800 82,000 82,400 81,200 79,400 77,800 76,800 75,600 74,300
Total customers at year-end 365,500 362,900 360,700 357,600 353,300 348,600 344,800 337,800 334,200 330,300
New customers added 2,600 2,200 3,100 4,300 4,700 3,800 7,000 3,600 3,900 4,200
Revenue per customer $430 $418 $388 $356 $352 $337 $330 $337 $330 $319
Utility plant per customer $1,530 $1,469 $1,406 $1,327 $1,251 $1,198 $1,140 $1,098 $1,058 $1,007
Employees at year-end 624 614 610 593 581 565 550 534 528 525
* Net income excludes $2,196 for a change in accounting for unbilled revenue;$.39 is excluded from earnings per share.
Common share data is adjusted to reflect the 2-for-1 stock split effective October 1987.
51
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
California Water Service Company is a public utility supplying water service
through 20 separate water systems to 365,500 customers living in 38 California
communities. These systems, or districts, are located throughout the state as
shown in the tabulation on page 4.
The Company's rates and operations are regulated by the California Public
Utilities Commission (Commission) with the rates for each district determined
separately. A detailed discussion of Rates and Regulation begins on page 11 of
this report.
The six-year drought in California which required water rationing in a number
of the Company's districts was declared officially ended after near-record
precipitation in the first three months of 1993. A detailed discussion of
Water Supply begins on page 14 of this report.
RESULTS OF OPERATIONS
EARNINGS AND DIVIDENDS
The Company's earnings per share for 1994 were $2.44, compared with $2.70 in
1993 and $2.18 in 1992. Net income was $14,408,000 in 1994 compared with
$15,501,000 in 1993 and $12,529,000 in 1992. Earnings and revenue in 1992 were
impacted by mandatory water rationing in some Company districts and water
conservation in all districts.
In January 1994, the Board of Directors increased the dividend rate for the
twenty-seventh consecutive year. The annual rate paid in 1994 was $1.98 per
share, an increase of 3.1% compared with the 1993 dividend of $1.92 per share,
which represented an increase of 3.2% over the 1992 dividend of $1.86 per
share. The increased dividends were based on projections that the higher
dividend could be sustained while still providing the Company with adequate
financial flexibility. The dividend payout ratio was 81% in 1994 compared with
71% in 1993 and 85% in 1992, an average of 79% for the three-year period.
Earnings not paid as dividends are reinvested in the Company.
OPERATING REVENUE
Operating revenue was a record $157.3 million in 1994, compared with $151.7
million in 1993 and $139.8 million in 1992. The increase was $5.6 million,
or 4% over 1993. Step and general rate increases accounted for $4.1 million
of added revenue. Offset rate adjustments, primarily for purchased water and
pump tax cost increases, added $2.7 million. Average water consumption per
customer increased 4%, adding $2.4 million to revenue. During 1993, $2.9
million of rationing loss recoveries were recorded, and as authorized by the
Commission, conservation penalties totaling $1.6 million were transferred to
revenue to offset undercollections in expense balancing accounts. Since there
were no similar revenue sources in 1994, revenue decreased by $4.5 million.
Sales to 2,600 new customers accounted for $0.9 million in additional revenue.
52
In 1993, operating revenue increased $11.9 million, or 9% from 1992. Step and
general rate increases accounted for $2.7 million of added revenue. Offset
rate adjustments, primarily for purchased water and pump tax rate increases,
added $7.3 million. Average water consumption per customer increased 3%,
adding $2.3 million to revenue. However, rationing loss recoveries declined
$1.2 million from 1992 due to the ending of rationing. Sales to 2,200 new
customers accounted for $0.8 million in additional revenue.
In 1992, operating revenue increased $12.6 million from 1991. Step and general
rate increases accounted for $3.4 million of added revenue. Offset rate
adjustments, primarily for purchased water and pump tax cost increases, added
$7.0 million. Average water consumption per customer increased 6%, adding $3.9
million to revenue. The discontinuance of mandatory rationing in four
districts in April 1992 helped account for higher water consumption. However,
this also resulted in lower rationing loss recoveries of $4.0 million compared
with $6.9 million in 1991. Sales to 3,100 new customers accounted for $1.2
million in additional revenue.
OPERATING AND INTEREST EXPENSES
Operating expenses in 1994 increased $7.9 million compared with increases of
$7.8 million in 1993 and $13.2 million in 1992.
Purchased water expense continued to be the largest component of operating
expense at $42.8 million, an increase of $4.4 million. This was attributable
to a 3% increase in water purchases to 49 billion gallons and to wholesale
water suppliers' rate increases. Total water production, including well
production and surface supplies was up 5% from 1993 to 100 billion gallons.
Total cost of water production, including purchased water, purchased power and
pump taxes, was $58.3 million in 1994, $52.9 million in 1993, and $50.2 million
in 1992. Commission regulatory procedures allow offset rate adjustments for
changes in these costs through use of balancing accounts. However, there was
a delay in recovery of some cost increases as discussed under the caption
Rates and Regulation on page 11.
Employee payroll and benefits charged to operations and maintenance expense was
$28.0 million in 1994 compared with $26.2 million in 1993 and $24.8 million in
1992. The increases in payroll and benefits is attributable to wage increases
and additional employees. At year-end 1994, 1993 and 1992 there were 624, 614
and 610 employees, respectively.
Income taxes were $9.6 million in 1994, $10.6 million in 1993, and $8.2 million
in 1992. The changes in taxes are due to variations in taxable income and the
increase in the Federal tax rate to 35% from 34% effective in 1993.
Interest on first mortgage bonds decreased $1.4 million in 1994 due to the bond
refinancing program completed at lower interest rates in 1993. In 1993, bond
interest expense increased $1.5 million over 1992 due to the sale of $20
million new bonds in November 1992 and the sale of additional new bonds in
1993. Bond financing is discussed under the caption Liquidity and Capital
Resources. Interest on short-term bank borrowings in 1994 increased $.2
million due to increased borrowings at higher interest rates than in the
prior year. The increase in 1993 bond interest was partially offset by a
$.3 million reduction in interest on short-term debt due to reduced borrowings.
Bond interest coverage before income taxes was 3.2 in 1994 and 1993, and 2.9 in
1992.
53
OTHER INCOME
Other income increased to $.4 million in 1994. Other income in 1993 was $.3
million and $.2 million in 1992. Other income is derived from management
contracts under which the Company operates three municipally owned water
systems, agreements for operation of two reclaimed water systems, billing
services provided to various cities, interest on short-term investments and
other non-utility sources. The Company intends to continue to pursue
opportunities to expand these revenue sources.
ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued three new statements which
affected the financial statements in 1993 or 1992. These are Statement No.
106 "Employers' Accounting for Postretirement Benefits Other Than Pensions",
Statement No. 107 "Disclosures About Fair Value of Financial Instruments",
and Statement No. 109 "Accounting for Income Taxes". The effect of these
statements is discussed in Notes to Financial Statements: Note 5-Income
Taxes; Note 6-Employee Benefit Plans; and Note 7-Fair Value of Financial
Instruments.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's liquidity is primarily provided by cash generated from operations
and the utilization of a short-term bank line of credit of $30 million as
described in Note 3 to the financial statements. The credit line was
temporarily increased to $40 million during the bond refinancing periods in
May and November 1993 to allow for short-term cash requirements between the
calling of bonds and the issuance of new bonds.
The sale of 550,000 common shares was completed in September 1994 at an offer
price of $33.375. Proceeds of $17.4 million, net of underwriters' commissions
and issuance costs, were used to repay $15.5 million of short-term bank
borrowings which had been incurred to fund the 1994 construction program and
for temporary working capital requirements. The Company's regular practice
has been to purchase shares for the dividend reinvestment plan in the market,
however, for the first quarter 1994 dividend, 8,280 new common shares were
issued under the reinvestment plan.
A major refinancing program was completed in 1993. Eight series of bonds in
he principal amount of $49,593,000 and bearing coupons ranging from 8.6% to
12-7/8% were called prior to maturity using a portion of the proceeds from the
sale of three $20 million dollar bond issues. Series EE 7.9% first mortgage
bonds were issued in June 1993, Series FF 6.95% bonds were issued in October
1993 and Series GG 6.98% bonds were issued in November 1993. Interest savings
from the refunding was approximately $1.9 million annually. Standard & Poor's
and Moody's maintained their bond ratings of AA- and Aa3 respectively on
the new Series GG bond issue. Capital requirements consist primarily of new
construction expenditures for expanding and replacing the Company's utility
plant facilities. They also include refunds of advances for construction and
retirement of bonds.
54
CAPITAL REQUIREMENTS
During 1994, utility plant expenditures totaled $28.3 million including $20.8
million covered by Company funding and $7.5 million received from developers
through refundable advances and contributions in aid of construction. Company
funded expenditures were in the following areas: wells, pumping and water
treatment equipment, and storage facilities, $5.7 million; distribution
systems, $8.0 million; services and meters, $4.7 million; equipment, $2.4
million. Company projects were funded through cash generated from operations,
the use of the short-term line of credit and the proceeds from the common stock
offering.
The 1995 Company construction program has been authorized by the Directors for
$20.7 million. Expenditures are expected to be in the following areas: wells,
pumping and water treatment equipment, and storage facilities, $4.6 million;
distribution systems, $7.4 million; services and meters, $6.0 million; and
equipment, $2.7 million. The funds for this program are expected to be
provided by cash from operations and a new bond issue. New subdivision
construction will be financed generally by developers' refundable advances and
contributions. Company funded construction budgets over the next five years
are projected to total $110 million.
CAPITAL STRUCTURE
The Company's total capitalization at December 31, 1994 and 1993 was $276.9
million and $257.1 million, respectively. Capital ratios were:
1994 1993
Common shareholders' equity 52.2% 48.2%
Preferred stock 1.3% 1.4%
Long-term debt 46.5% 50.4%
The increase in the common equity percentage from 1993 to 1994 and the
corresponding decrease in the long-term debt percentage were primarily caused
by the common stock offering, completed in September 1994.
The return on year-end common equity was 10.6% compared with 12.4% in 1993 and
10.4% in 1992.
55
BALANCE SHEET
December 31, 1994 1993
(In thousands)
ASSETS
UTILITY PLANT:
Land $ 6,904 $ 6,742
Depreciable plant and equipment 549,044 522,614
Construction work in progress 2,589 3,466
Intangible assets 643 391
Total utility plant 559,180 533,213
Less depreciation 151,285 141,510
Net utility plant 407,895 391,703
CURRENT ASSETS:
Cash and cash equivalents 1,301 1,461
Accounts receivable:
Customers 9,121 8,984
Other 4,040 1,851
Unbilled revenue 5,992 7,548
Materials and supplies at average cost 3,018 2,853
Taxes and other prepaid expenses 3,927 3,716
Total current assets 27,399 26,413
OTHER ASSETS:
Regulatory assets 24,135 23,404
Unamortized debt premium
and expense 4,247 4,467
Other 552 632
Total other assets 28,934 28,503
$464,228 $446,619
See accompanying notes to financial statements.
56
1994 1993
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stock $ 42,800 $ 25,059
Retained earnings 101,647 98,940
Total common shareholders' equity 144,447 123,999
Preferred stock without mandatory
redemption provision 3,475 3,475
First mortgage bonds 128,944 129,608
Total capitalization 276,866 257,082
CURRENT LIABILITIES:
Short-term borrowings 7,000 15,000
Accounts payable 12,231 11,234
Accrued taxes 2,561 2,810
Accrued interest 1,788 1,788
Other accrued liabilities 6,548 7,124
Total current liabilities 30,128 37,956
Unamortized investment tax credits 3,265 3,341
Deferred income taxes 12,445 11,045
Regulatory liabilities 11,467 11,467
Advances for construction 92,190 90,812
Contributions in aid of construction 37,867 34,916
$464,228 $446,619
57
STATEMENT OF INCOME
For the years ended December 31, 1994 1993 1992
(In thousands, except per share data)
Operating revenue $157,271 $151,716 $139,805
Operating expenses:
Operations:
Purchased water 42,812 38,454 33,065
Purchased power 12,641 11,852 12,766
Pump taxes 2,859 2,601 4,370
Administrative and general 18,210 16,910 16,349
Other 20,405 19,718 19,051
Maintenance 7,855 7,250 6,965
Depreciation 10,958 10,304 9,412
Income taxes 9,600 10,600 8,250
Property and other taxes 6,426 6,172 5,803
Total operating expenses 131,766 123,861 116,031
Net operating income 25,505 27,855 23,774
Other income and expenses, net 287 273 169
Income before interest expense 25,792 28,128 23,943
Interest expense:
Bond interest 10,557 11,992 10,443
Other interest 827 635 971
Total interest expense 11,384 12,627 11,414
Net income $ 14,408 $ 15,501 $ 12,529
Earnings per share of
common stock $ 2.44 $ 2.70 $ 2.18
Average number of common
shares outstanding 5,838 5,689 5,689
See accompanying notes to financial statements.
58
STATEMENT OF COMMON SHAREHOLDERS' EQUITY
COMMON
For the years ended December 31, SHARES COMMON RETAINED
(In thousands, except shares) OUTSTANDING STOCK EARNINGS TOTAL
Balance at December 31, 1991 5,688,754 $ 25,059 $ 92,720 $117,779
Net income 12,529 12,529
Dividends paid:
preferred stock 153 153
common stock 10,581 10,581
Total dividends paid 10,734 10,734
Income reinvested in business 1,795 1,795
Balance at December 31, 1992 5,688,754 25,059 94,515 119,574
Net income 15,501 15,501
Dividends paid:
preferred stock 153 153
common stock 10,923 10,923
Total dividends paid 11,076 11,076
Income reinvested in business 4,425 4,425
Balance at December 31, 1993 5,688,754 25,059 98,940 123,999
Net income 14,408 14,408
Dividends paid:
preferred stock 153 153
common stock 11,548 11,548
Total dividends paid 11,701 11,701
Income reinvested in business 2,707 2,707
Dividend reinvestment shares issued 8,280 304 304
Issuance of common stock, net 550,000 17,437 17,437
Balance at December 31, 1994 6,247,034 $ 42,800 $101,647 $144,447
See accompanying notes to financial statements.
59
STATEMENT OF CASH FLOWS
For the years ended December 31, 1994 1993 1992
(In thousands)
Operating activities:
Net income $ 14,408 $ 15,501 $ 12,529
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 10,958 10,304 9,412
Deferred income taxes and investment tax
credits, net 1,324 12,355 (821)
Regulatory assets and liabilities, net (731) (11,937) 0
Changes in operating assets and liabilities:
Accounts receivable (2,326) 908 (2,633)
Unbilled revenue 1,556 (804) 842
Accounts payable 997 2,124 1,218
Other current liabilities (825) (1,338) 1,084
Other changes, net 130 247 645
Net adjustments 11,083 11,859 9,747
Net cash provided by operating activities 25,491 27,360 22,276
Investing activities:
Utility plant expenditures (28,275) (28,829) (35,188)
Financing activities:
Net short-term borrowings (8,000) 3,500 (2,500)
Proceeds from issuance of common stock, net 17,741 0 0
Proceeds from sale of first mortgage bonds 0 60,000 20,000
Advances for construction 4,980 5,024 8,187
Refunds of advances for construction (3,565) (3,428) (3,443)
Contributions in aid of construction 3,833 3,402 3,446
Retirements of first mortgage bonds
including premiums (664) (55,391) (1,458)
Dividends paid (11,701) (11,076) (10,734)
Net cash provided by financing activities 2,624 2,031 13,498
Change in cash and cash equivalents (160) 562 586
Cash and cash equivalents at beginning of year 1,461 899 313
Cash and cash equivalents at end of year $1,301 $1,461 $899
Supplemental disclosures of
cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized) $ 11,165 $ 12,763 $ 11,042
Income taxes $ 10,950 $ 9,188 $ 11,384
See accompanying notes to financial statements.
60
NOTES TO FINANCIAL STATEMENTS
December 31, 1994, 1993 and 1992
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting records of the Company are maintained in accordance with the
uniform system of accounts prescribed by the California Public Utilities
Commission (Commission). Certain prior years' amounts have been reclassified,
where necessary, to conform to the current presentation.
REVENUE
Revenue consists of monthly cycle customer billings for water service at rates
authorized by the Commission. Revenue from metered accounts includes unbilled
amounts based on the estimated usage from the latest meter reading to the end
of the accounting period. Flat rate accounts, which are billed at the
beginning of the service period are included in revenue on a pro rata basis for
the portion applicable to the current accounting period.
In October 1991 the Commission issued a decision on its investigation into the
effects of the drought on water utilities which permitted the Company to
recover revenue lost through water conservation as recorded in memorandum
accounts.
During 1992, $4,087,000 of revenue lost due to water conservation was recorded
as revenue and accrued in unbilled revenue. Of that amount, $2,355,000 was
recovered through customer surcharges and penalty charge transfers collected
from customers who had exceeded their monthly allotments. As of December 31,
1992, a total of $2,151,000 of revenue lost due to water conservation was
included in unbilled revenue.
In 1993, $2,904,000 was recorded as lost water conservation revenue and accrued
in unbilled revenue, while $2,631,000 was recovered through customer surcharges
and penalty charge transfers. As of December 31, 1993, $2,424,000 of lost water
conservation revenue was included in unbilled revenue.
In 1994, $32,000 was recorded as lost water conservation revenue and accrued in
unbilled revenue, while $1,445,000 was recovered through customer surcharges
and penalty charge transfers. As of December 31, 1994, $1,011,000 of lost water
conservation revenue remains in unbilled revenue.
UTILITY PLANT
Utility plant is carried at original cost when first constructed or purchased,
except for certain minor units of property recorded at estimated fair values at
dates of acquisition. Costs of depreciable plant retired are eliminated from
utility plant accounts and such costs are charged against accumulated
depreciation. Maintenance of utility plant, other than transportation
equipment, is charged to operation expenses. Maintenance and depreciation of
transportation equipment are charged to a clearing account and subsequently
distributed, primarily to operations. Interest is capitalized on plant
expenditures during the construction period and amounted to $195,000 in 1994,
$141,000 in 1993, and $523,000 in 1992.
Intangible assets arising during the period of initial development of the
Company and those acquired as parts of water systems purchased are stated at
amounts as prescribed by the Commission. All other intangibles have been
recorded at cost.
61
BOND PREMIUM, DISCOUNT AND EXPENSE
The discount and expense on first mortgage bonds is being amortized over the
original lives of the related bond issues. Premiums paid on the early
redemption of bonds and unamortized original issue discount and expense of
those bonds are amortized over the life of new bonds issued in conjunction with
the early redemption.
CASH EQUIVALENTS
Cash equivalents include highly liquid investments, primarily a money market
mutual fund, stated at cost with original maturities of three months or less.
As of December 31, 1994, and 1993, cash equivalents were $124,000 and $135,000,
respectively.
DEPRECIATION
Depreciation of utility plant for financial statement purposes is computed on
the straight-line remaining life method at rates based on the estimated useful
lives of the assets. The provision for depreciation expressed as a percentage
of the aggregate depreciable asset balances was 2.4% in 1994 and 1993 and 2.3%
in 1992. For income tax purposes, the Company computes depreciation using the
accelerated methods allowed by the respective taxing authorities.
ADVANCES FOR CONSTRUCTION
Advances for construction of water 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 extensions. Unrefunded
balances at the end of the contract period are credited to Contributions in Aid
of Construction and are no longer refundable. Contracts entered into since
1982 provide for full refunds at a 2.5% rate per year for 40 years. Estimated
refunds for 1995 for all water main extension contracts are $3,800,000.
INCOME TAXES
Effective January 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
SFAS 109 requires a change from the deferred method of accounting for income
taxes under APB Opinion 11 to the asset and liability method. Under SFAS 109
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Measurement of the deferred tax assets and liabilities is at enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS 109,
the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the period that includes the enactment date.
Due to the implementation of SFAS 109 as of January 1, 1993, the Company
recorded an increase in both net regulatory assets and net deferred income
taxes of $9,905,000. There was no impact on the results of operations. It is
anticipated that future rate action by the Commission will reflect revenue
requirements for the tax effects of temporary differences recognized under SFAS
109 which have previously been flowed through to customers.
62
Prior to 1993, the provision for income taxes was based on income and expenses
included in the Statement of Income as prescribed by APB Opinion 11. In
accordance with Commission requirements, deferred taxes were not provided for
items flowed through for rate-making and accounting purposes. Flow through
items included excess state tax depreciation and excess federal depreciation on
assets placed in service prior to 1981. Prior year amounts have not been
restated to apply the provisions of SFAS 109.
The Commission has granted the Company customer rate increases to reflect the
normalization of the tax benefits of the federal accelerated methods and
available investment tax credits (ITC) for all assets placed in service since
1980. ITC are deferred and amortized over the lives of the related properties.
Advances for Construction and Contributions in Aid of Construction received
from developers subsequent to 1986 are taxable for federal income tax purposes
and subsequent to 1991 subject to state income tax.
EARNINGS PER SHARE
Earnings per share are calculated using the weighted average number of common
shares outstanding during the year after deducting dividend requirements on
preferred stock.
NOTE 2 - PREFERRED AND COMMON STOCK
As of December 31, 1994, 380,000 shares of preferred stock were authorized.
Dividends on outstanding shares are payable quarterly at a fixed rate before
any dividends can be paid on common stock. Preferred shares are entitled to
eight votes each with the right to cumulative votes at any elections of
directors.
The outstanding 139,000 shares of $25 par value cumulative, 4.4% Series C
preferred shares are not convertible to common stock. A premium of $243,250
would be due upon voluntary liquidation of Series C. There is no premium in
the event of an involuntary liquidation.
The Company is authorized to issue 8,000,000 shares of no par value common
stock. In September 1994, the Company sold 550,000 shares of common stock in a
public offering with net proceeds of $17,437,000. As of December 31, 1994 and
1993, 6,247,034 and 5,688,754 shares, respectively, of common stock were issued
and outstanding.
NOTE 3 - SHORT-TERM BORROWINGS
As of December 31, 1994, the Company maintained a bank line of credit which
provided for unsecured borrowings of up to $30,000,000 at the prime lending
rate or lower rates as quoted by the bank. The agreement does not require
minimum or specific compensating balances. The following table represents
borrowings under bank line of credit.
IN THOUSANDS
1994 1993 1992
Maximum short-term borrowings $21,500 $33,500 $24,500
Average amount outstanding 13,196 11,746 17,431
Weighted average interest rate 5.40% 4.31% 4.85%
Interest rate at December 31 7.38% 4.38% 4.48%
63
NOTE 4 - FIRST MORTGAGE BONDS
As of December 31, 1994 and 1993 first mortgage bonds outstanding were:
IN THOUSANDS
1994 1993
Series J 4.85% due 1995 $ 2,565 $ 2,581
Series K 6.25% due 1996 2,580 2,595
Series L 6.75% due 1997 2,164 2,177
Series P 7.875% due 2002 2,670 2,685
Series S 8.50% due 2003 2,685 2,700
Series BB 9.48% due 2008 17,280 17,370
Series CC 9.86% due 2020 19,500 19,600
Series DD 8.63% due 2022 19,800 19,900
Series EE 7.90% due 2023 19,900 20,000
Series FF 6.95% due 2023 19,900 20,000
Series GG 6.98% due 2023 19,900 20,000
$128,944 $129,608
Aggregate maturities and sinking fund requirements for each of the succeeding
five years 1995 through 1999 are $3,215,000, $3,197,000, $2,758,000, $620,000,
and $2,240,000, respectively. The first mortgage bonds are secured by
substantially all of the Company's utility plant.
NOTE 5 - INCOME TAXES
Income tax expense consists of the following:
IN THOUSANDS
FEDERAL STATE TOTAL
1994
Current $ 6,492 $ 2,567 $ 9,059
Deferred 908 (367) 541
Total $ 7,400 $ 2,200 $ 9,600
1993
Current $ 6,800 $ 2,408 $ 9,208
Deferred 1,400 (8) 1,392
Total $ 8,200 $ 2,400 $ 10,600
1992
Current $ 3,371 $ 1,650 $ 5,021
Deferred 3,229 3,229
Total $ 6,600 $ 1,650 $ 8,250
64
Income tax expense differs from the amount computed by applying the current
federal tax rates of 35% in 1994 and 1993 and and 34% in 1992, to pretax book
income from the amount shown in the Statement of Income. The differences are
listed in the table below:
IN THOUSANDS
1994 1993 1992
Computed "expected" tax expense $ 8,401 $ 9,135 $ 7,065
Increase (reduction) in taxes due to:
State income taxes net of federal tax benefit 1,444 1,565 1,089
Investment tax credits (132) (100) (85)
Other (113) 181
Total income tax $ 9,600 $10,600 $ 8,250
The components of deferred income tax expense in 1994, 1993 and 1992 were:
IN THOUSANDS
1994 1993 1992
Depreciation $ 3,748 $ 3,858 $ 3,314
Developer advances and contributions (3,536) (3,951)
Bond redemption premiums 75 1,333
Investment tax credits (90) (72) (85)
Other 344 224
Total deferred income tax expense $ 541 $ 1,392 $ 3,229
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1994
and 1993 are presented in the following table:
IN THOUSANDS
1994 1993
Deferred tax assets:
Developer deposits for extension agreements
and contributions in aid of construction $37,359 $31,270
Federal benefit of state tax deductions 3,895 3,798
Book plant cost reduction for
future deferred ITC amortization 1,758 1,799
Insurance loss provisions 617 682
Total deferred tax assets 43,629 37,549
Deferred tax liabilities:
Utility plant, principally due to
depreciation differences 47,670 42,796
Premium on early retirement of bonds 2,081 1,918
Miscellaneous 6,323 3,880
Total deferred tax liabilities 56,074 48,594
Net deferred tax liability $12,445 $11,045
A valuation allowance was not required during 1994 and 1993. Based on
historical taxable income and future taxable income projections over the
periods in which the deferred assets are deductible, management believes it is
more likely than not the Company will realize the benefits of the deductible
differences.
65
NOTE 6 - EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company provides a qualified, defined benefit, noncontributory pension plan
for substantially all employees. The cost of the plan was charged to expense
and utility plant. The Company makes annual contributions to fund the amounts
accrued for pension cost. Plan assets are invested in pooled equity, bond and
short-term investment accounts. The data below includes an unfunded,
non-qualified supplemental executive retirement plan.
Net pension cost for the years ending December 31, 1994, 1993 and 1992 included
the following components:
IN THOUSANDS
1994 1993 1992
Service cost-benefits earned during the period $1,333 $1,167 $1,076
Interest cost on projected obligation 2,154 2,153 1,970
Actual loss (return) on plan assets 627 (3,672) (1,410)
Net amortization and deferral (2,286) 2,132 (262)
Net pension cost $1,828 $1,780 $1,374
The following table sets forth the plan's funded status as of December 31, 1994
and 1993:
IN THOUSANDS
1994 1993
Accumulated benefit obligation, including vested
benefits of $19,824 in 1994 and $20,719 in 1993 $(20,329) $(21,386)
Projected benefit obligation $(30,246) $(31,179)
Plan assets at fair value 27,833 29,319
Projected benefit obligation in excess of plan assets (2,413) (1,860)
Unrecognized net gain (3,540) (4,556)
Prior service cost not yet recognized
in net periodic pension cost 3,543 3,925
Remaining net transition obligation at
adoption date January 1, 1987 2,002 2,288
Accrued pension liability recognized
in the balance sheet $ (408) $ (203)
The projected long-term rate of return on plan assets used in determining
pension cost was 8.0% for the years 1994 and 1993. A discount rate of 8.0% in
1994 and 7.0% in 1993 and future compensation increases of 5.0% in 1994 and
4.75% in 1993 were used to calculate the projected benefit obligations for 1994
and 1993.
SAVINGS PLAN
The Company sponsors a 401(k) qualified, defined contribution savings plan
which allows participants to contribute up to 15% of pre-tax compensation.
The Company matches fifty cents for each dollar contributed by the employee up
to a maximum Company match of 3% of the employees' compensation. Company
contributions were $678,000, $606,000 and $561,000 for the years 1994, 1993,
and 1992, respectively.
66
OTHER POSTRETIREMENT PLANS
The Company provides substantially all active employees medical, dental and
vision benefits through a self-insured plan. Employees retiring at or after
age 58 with 10 or more years of service are offered, along with their spouses
and dependents, continued participation in the plan. Prior to 1993 the
Company's share of the costs of this plan were recorded as expense as they
were paid. Retired employees are also provided with a $5,000 life insurance
benefit.
In 1993 the Company adopted SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" which requires that the costs of
postretirement benefits be accrued during the employees' years of active
service. The Commission has issued a decision which authorizes rate recovery
of tax deductible funding for postretirement benefits and permits recording of
a regulatory asset for the portion of costs that will be recoverable in future
rates.
Net postretirement benefit cost for the years ending December 31, 1994 and 1993
included the following components:
IN THOUSANDS
1994 1993
Service cost - benefits earned $120 $ 85
Interest cost on accumulated postretirement benefit
obligation 326 384
Actual return on plan assets (4)
Net amortization of transition obligation 228 248
Net periodic postretirement benefit cost $670 $717
Postretirement benefit expense recorded in 1994 and 1993 was $481,000 and
$480,000, respectively. The remaining $426,000 which is recoverable through
future customer rates, was recorded as a regulatory asset. The Company intends
to make annual contributions to the plan up to the amount deductible for tax
purposes. Plan assets are invested in a balanced mutual fund, short-term money
market instruments and commercial paper.
The following table sets forth the plan's funded status and the plan's accrued
liability as of December 31, 1994 and 1993:
IN THOUSANDS
1994 1993
Accumulated postretirement benefit obligation:
Retirees $(2,882) $(2,850)
Other fully eligible participants (366) (657)
Other active participants (1,150) (1,542)
Total (4,398) (5,049)
Plan assets at fair value 172 215
Accumulated postretirement benefit obligation
in excess of plan assets (4,226) (4,834)
Unrecognized net gain (668) (119)
Remaining unrecognized transition obligation 4,468 4,716
Net postretirement benefit liability included
in current liabilities $ (426) $ (237)
67
For 1994 measurement purposes, an 8% annual rate of increase in the per capita
cost of covered benefits was assumed; the rate was assumed to decrease
gradually to 5% in the year 2000 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. Increasing the assumed health care cost trend rates by one percentage
point in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1994, by $527,000 and the aggregate of the
service and interest cost components of the net periodic postretirement benefit
cost for the year ended December 31, 1994, by $77,000.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8% at December 31, 1994 and 7% at
December 31, 1993. The long-term rate of return on plan assets was 8% for 1994
and 1993.
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
For those financial instruments for which it is practicable to estimate a fair
value the following methods and assumptions were used to estimate the fair
value.
CASH EQUIVALENTS
The carrying amount of cash equivalents approximates fair value because of the
short term maturity of the instruments.
FIRST MORTGAGE BONDS
The fair value of the Company's first mortgage bonds is estimated at
$126,584,000 as of December 31,1994, and $133,415,000 as of December 31, 1993,
using a discounted cash flow analysis, based on the current rates available to
the Company for debt of similar maturities.
ADVANCES FOR CONSTRUCTION
The fair value of advances for construction contracts is estimated at
$21,000,000 as of December 31, 1994, and $22,000,000 as of December 31, 1993,
based on data provided by brokers.
NOTE 8 - QUARTERLY FINANCIAL AND COMMON STOCK MARKET DATA
(unaudited)
The Company's common stock has traded on the New York Stock Exchange since
April 8, 1994, under the symbol "CWT". Prior to April 8, 1994, the common
stock was traded in the over-the-counter market and quoted in the NASDAQ
National Market System under the symbol "CWTR". There were approximately
6,000 holders of common stock at December 31, 1994. Quarterly dividends have
been paid on common stock for 200 consecutive quarters and the quarterly rate
has been increased during each year since 1968. The 1994 and 1993 quarterly
range of common stock market prices was supplied by The New York Stock Exchange
since April 8, 1994, and by NASDAQ for earlier periods.
68
1994
(In Thousands, except per share amounts)
first second third fourth
Operating revenue $30,579 $40,147 $50,303 $36,242
Net operating income 4,164 6,892 8,730 5,719
Net income 1,395 4,070 5,857 3,086
Earnings per share .24 .71 1.02 .49
Common stock market price range:
High 41 36-3/4 36 33-1/8
Low 34-1/4 33-3/4 32-7/8 29-3/8
Dividends paid .49-1/2 .49-1/2 .49-1/2 .49-1/2
1993
first second third fourth
Operating revenue $27,833 $40,504 $47,431 $35,948
Net operating income 4,116 7,747 9,377 6,615
Net income 979 4,689 6,221 3,612
Earnings per share .17 .82 1.09 .62
Common stock market price range:
High 37-1/4 36-3/4 40-1/2 41-1/4
Low 32-1/2 32-1/4 33-1/2 37-1/2
Dividends paid .48 .48 .48 .48
69