Ten year financial review
(Dollars in thousands except common share and other data)
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
SUMMARY OF OPERATIONS
Operating revenue
Residential $119,814 $114,751 $111,526 $101,842 $87,560 $90,178 $84,295 $ 81,404 $ 82,254 $79,131
Business 28,230 27,023 25,247 23,670 20,759 20,910 19,870 19,480 19,986 19,095
Industrial 5,836 5,478 5,123 4,925 4,490 5,146 5,166 4,754 4,361 4,539
Public authorities 8,149 7,995 7,396 6,892 5,734 6,412 6,225 6,232 6,491 6,285
Other 3,057 2,024 2,424 2,476 8,633 1,741 1,932 1,885 693 1,385
Total operating revenue 165,086 157,271 151,716 139,805 127,176 124,387 117,488 113,755 113,785 110,435
Operating expenses 139,694 131,766 123,861 116,031 102,855 101,017 95,150 91,265 90,587 87,788
Interest expense, other income
and expenses, net 10,694 11,097 12,354 11,245 10,393 9,004 8,566 8,416 8,026 8,808
Net income $ 14,698 $ 14,408 $ 15,501 $ 12,529 $13,928 $14,366 $13,772 $14,074 $15,172* $13,839
COMMON SHARE DATA
Earnings per share $ 2.33 $ 2.44 $ 2.70 $ 2.18 $ 2.42 $ 2.50 $ 2.40 $ 2.45 $ 2.63* $ 2.40
Dividends declared 2.04 1.98 1.92 1.86 1.80 1.74 1.68 1.60 1.48 1.40
Dividend payout ratio 88% 81% 71% 85% 74% 70% 70% 65% 49% 58%
Cash dividend payout ratio 83% 79% 71% 85% 74% 70% 67% 59% 49% 58%
Book value $ 23.44 $ 23.12 $ 21.80 $ 21.02 $ 20.70 $ 20.08 $ 19.32 $ 18.59 $ 17.72 $ 16.11
Market price at year-end 32.75 32.00 40.00 33.00 28.00 26.75 28.00 25.50 30.00 26.625
Common shares outstanding
at year-end (in thousands) 6,269 6,247 5,689 5,689 5,689 5,689 5,689 5,672 5,636 5,607
Return on common shareholders equity 10.2% 10.6% 12.4% 10.4% 11.7% 12.4% 12.4% 13.2% 14.8% 14.9%
Bond interest coverage 3.2 3.2 3.2 2.9 3.2 3.6 3.4 3.8 4.3 3.9
BALANCE SHEET DATA
Net utility plant $422,175 $407,895 $391,703 $374,613 $349,937 $325,409 $307,802 $289,363 $273,619 $262,216
Utility plant expenditures 27,250 28,275 28,829 35,188 34,459 26,861 27,277 23,994 19,511 22,710
Advances for construction 94,100 92,190 90,812 89,127 84,424 77,202 69,016 59,145 54,887 50,907
Capitalization ratios:
Common shareholders equity 49.7% 52.2% 48.2% 48.8% 52.4% 51.3% 55.1% 53.8% 55.6% 52.1%
Preferred stock 1.2% 1.3% 1.4% 1.4% 1.5% 1.6% 1.8% 1.8% 3.2% 3.4%
Long-term debt 49.1% 46.5% 50.4% 49.8% 46.1% 47.1% 43.1% 44.4% 41.2% 44.5%
OTHER DATA
Water production (million gallons)
Wells 49,755 50,325 47,205 52,000 48,930 51,329 51,350 48,828 48,097 45,222
Purchased 49,068 49,300 48,089 40,426 36,686 45,595 45,978 48,254 50,744 50,782
Total water production 98,823 99,625 95,294 92,426 85,616 96,924 97,328 97,082 98,841 96,004
Metered customers 289,200 286,700 282,100 278,700 275,200 272,100 269,200 267,000 261,000 258,600
Flat rate Customers 77,900 78,800 80,800 82,000 82,400 81,200 79,400 77,800 76,800 75,600
Customers at year-end 367,100 365,500 362,900 360,700 357,600 353,300 348,600 344,800 337,800 334,200
New customers added 1,600 2,600 2,200 3,100 4,300 4,700 3,800 7,000 3,600 3,900
Revenue per customer $ 450 $ 430 $ 418 $ 388 $ 356 $ 352 $ 337 $ 330 $ 337 $ 330
Utility plant per customer $ 1,592 $ 1,530 $ 1,469 $ 1,406 $ 1,327 $ 1,251 $ 1,198 $ 1,140 $ 1,098 $ 1,058
Employees at year-end 630 624 614 610 593 581 565 550 534 528
* 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.
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 367,100 customers living in 38 California
communities. These systems, or districts, are located throughout the state
as shown in the table on page 5. Additionally, the Company has contracts with
various municipalities to operate water systems or provide billing services.
The Company's rates and operations are regulated by the California Public
Utilities Commission (Commission). The Commission requires that water rates
for each district be determined independently. Each summer the Company files
general rate increase applications for some of its 20 districts. According
to its rate case processing procedures for water utilities, the Commission
attempts to issue decisions within eight months of acceptance of a general
rate case filing. Commission procedures also allow offset rate adjustments
for changes in water production costs through use of expense balancing
accounts. A detailed discussion of Rates and Regulation begins on page 10 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 is on page 6 of this report.
RESULTS OF OPERATIONS
Earnings and Dividends. Net income was $14,698,000 in 1995 compared with
$14,408,000 in 1994 and $15,501,000 in 1993. Earnings per common share were
$2.33 in 1995, $2.44 in 1994 and $2.70 in 1993. The weighted average number
of shares outstanding in each of the three years was 6,253,000, 5,838,000 and
5,689,000, respectively. The 1995 and 1994 earnings per share amounts were
affected by the sale of 550,000 common shares in September 1994.
In January 1995, the Board of Directors increased the dividend rate for the
twenty-eighth consecutive year. The annual rate paid in 1995 was $2.04 per
share, an increase of 3.0% compared with the 1994 dividend of $1.98 per
share, which represented an increase of 3.1% over the 1993 dividend of $1.92
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. Earnings not paid as dividends are reinvested in the
Company. The dividend payout ratio was 88% in 1995 compared with 81% in 1994
and 71% in 1993, an average of 80% for the three-year period.
Operating Revenue. Operating revenue was a record $165.1 million in 1995,
compared with $157.3 million in 1994 and $151.7 million in 1993. The current
year increase was $7.8 million, or 5% greater than 1994's revenue. Offset
rate adjustments, primarily for purchased water cost increases, added
$3.8 million to revenue while general and step rate increases contributed
$2.2 million. Proceedings involving Commission actions are discussed in more
detail on page 10 under the caption Rates and Regulation. Increased customer
usage added $1.1 million. Average billed water consumption per customer was
286 ccf an increase of only 1 ccf for the year. Only consumption in the fourth
quarter exceeded that of the prior year, the first three quarters of 1995
recorded usage was less than 1994's. The consumption pattern reflects 1995's
weather. The winter was unusually wet.
Rain and cool weather continued through the spring and negatively influenced
summer usage. With the exception of August, which showed a slight increase
in consumption, all months through the third quarter recorded a sales decline
from the prior year. Lack of rain and mild weather in the fourth quarter
resulted in increased average customer usage of 14%. Sales to 1,600 new
customers accounted for $0.7 million in additional revenue.
Revenue increased $5.6 million in 1994 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 $4.5 million. Sales to 2,600 new
customers accounted for $0.9 million in additional revenue.
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.
Operating and Interest Expenses. Operating expenses increased $7.9 million
in 1995 and in 1994 and $7.8 million in 1993.
Well production supplied 49.6% of the water delivered to all systems in 1995,
49.7% was purchased from wholesale suppliers and 0.7% came from the Company's
Bear Gulch district watershed. Water production was 99 billion gallons, down
1% from 1994's 100 billion gallons. Production in 1993 was 95 billion gallons.
Total cost of water production, including purchased water, purchased power and
pump taxes, was $62.2 million in 1995, $58.3 million in 1994, and $52.9 million
in 1993. Purchased water expense continued to be the largest component of
operating expense at $46.4 million, an increase of $3.6 million. The cost
increase was due primarily to wholesale suppliers' rate increases. The
Bear Gulch watershed yielded 731 million gallons which was processed through
the Company's filter plant, more than four times the 1994 production. The
estimated purchased water cost savings provided by the watershed was $0.5
million. Well production declined 2% in 1995, however, increases in power and
pump tax rates resulted in a $0.3 million increase in these two expense
categories.
Employee payroll and benefits charged to operations and maintenance expense
was $29.9 million in 1995 compared with $28.0 million in 1994 and $26.2 million
in 1993. The increases in payroll and benefits are generally attributable to
wage increases and additional employees. At year-end 1995, 1994 and 1993
there were 630, 624 and 614 employees, respectively.
Income taxes were $9.9 million in 1995, $9.6 million in 1994, and $10.6 million
in 1993. 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 long-term debt increased $0.4 million in 1995 due to the sale in
August of $20 million of senior notes. Long-term debt interest in 1994
decreased $1.4 million due to the bond refinancing program completed at
lower interest rates in 1993. In 1993, bond interest expense increased
$1.5 million because of the sale of $20 million of new bonds in November
1992 and the sale of additional new bonds in 1993. Long-term financing is
discussed further under the caption Liquidity and Capital Resources.
Interest on short-term bank borrowings in 1995 decreased $0.3 million,
despite higher short-term rates during 1995 compared to 1994. The reduction
in the expense reflects the payoff of outstanding short-term borrowings upon
the issuance of senior notes and a reduced requirement for short-term
borrowings. In 1994 interest on short-term borrowings increased $0.2 million
due to increased borrowings at higher interest rates. The increase in 1993
bond interest was partially offset by a $0.3 million reduction in interest on
short-term debt due to reduced borrowings. Interest coverage of long-term debt
before income taxes was 3.2 in each of the three years.
Other Income. Other income increased 129% in 1995 to $0.9 million. Other
income was $0.4 million in 1994 and $0.3 million in 1993. 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 nonutility sources. The Company intends to
continue to pursue opportunities to expand these revenue sources. Additional
information regarding other income is provided on page 9 of this report.
Interest earned on temporary investment of excess funds generated from
operations and from the senior notes sale totaled $0.2 million. At year-end
1995, temporary investments were $4.5 million. There were no temporary
investments at the end of 1994 or 1993. Income from the various operating
and billing contracts was $0.7 million in 1995, $0.4 million in 1994 and
$0.3 million in 1993.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The Company's liquidity is primarily provided by utilization of a
short-term $30 million bank line of credit as described in Note 3 to the
financial statements and by internally generated funds. Internally generated
fund sources include retention of a portion of earnings, depreciation and
deferred income taxes.
Because of the seasonal nature of the water business, the need for short-term
borrowings under the line of credit generally increase during the first six
months of the year. With increased summer usage, cash flow from operations
increases and bank borrowings can be paid down. The bank 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 Company believes that long-term financing is available to it through equity
and debt markets. In 1995, Standard & Poor's and Moody's maintained their
bond ratings of AA- and Aa3, respectively, on the Company's first mortgage
bonds. Long-term financing, which includes issuance of common stock, first
mortgage bonds, senior notes and other debt securities is used to replace
short-term borrowings and fund construction. Developer advances and
contributions are also received for various construction projects.
During August 1995, Series A, 7.28%, 30-year senior notes were issued. The
proceeds from the issue were used to repay outstanding bank borrowings,
redeem upon maturity on November 1 the outstanding $2,565,000 Series
J, first mortgage bonds, and to fund the 1995 construction program.
In 1995 under the Dividend Reinvestment Plan (Plan), 22,317 new common shares
were issued to shareholders who elected to reinvest their third and fourth
quarter dividends. Issuance of the new shares increased shareholders equity
by $0.7 million. Shares required for the first and second quarter dividends
were purchased on the open market and redistributed to Plan participants.
The Company intends to continue to issue new shares required for the Plan's
quarterly dividend reinvestments. The change to issuing new shares will
reduce cash required to fund quarterly dividend payments by about $1.4 million
annually, based on current shareholder participation of about 11% in the Plan.
Issuance of the additional shares will have a dilutive effect on earnings per
share calculations because of the added shares outstanding, and upon existing
equity of shareholders not participating in the Plan.
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. For the first
quarter 1994 dividend, 8,280 new common shares were issued for the reinvestment
plan.
A major refinancing program was completed in 1993. Eight series of first
mortgage bonds in the 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 issued in June 1993, Series FF, 6.95%,
bonds issued in October 1993 and Series GG, 6.98%, bonds issued in November
1993. Interest savings from the refinancing will be approximately $1.9
million annually.
Capital Requirements. 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.
During 1995, utility plant expenditures totaled $27.3 million compared to
$28.3 million in 1994. The expenditures included $20.0 million provided by
Company funding and $7.3 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, $5.3 million; distribution systems, $7.2 million; services
and meters, $5.0 million; equipment, $2.5 million. Company projects were
funded through cash generated from operations, the use of the short-term line
of credit and the proceeds from the senior notes issue.
The 1996 Company construction program has been authorized by the Directors for
$22.2 million. Expenditures are expected to be in the following areas: wells,
pumping and water treatment equipment, and storage facilities, $4.8 million;
distribution systems, $10.0 million; services and meters, $5.0 million; and
equipment, $2.4 million. The funds for this program are expected to be
provided by cash from operations, bank borrowings and the remaining proceeds
from the senior notes sale. 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 be
$110 million.
Capital Structure. The Company's total capitalization at December 31, 1995
and 1994 was $296.0 million and $276.9 million, respectively. Capital ratios
were:
1995 1994
Common equity 49.7% 52.2%
Preferred stock 1.2% 1.3%
Long-term debt 49.1% 46.5%
The decrease in the common equity percentage from 1994 to 1995 and the
corresponding increase in the long-term debt percentage were primarily
caused by the sale of $20 million senior notes, completed in August 1995.
The 1995 return on year-end common equity was 10.2% compared with 10.6% in 1994
and 12.4% in 1993.
Balance Sheet
December 31, 1995 1994
(In thousands)
ASSETS
Utility plant:
Land $ 7,320 $ 6,904
Depreciable plant and equipment 572,799 549,044
Construction work in progress 3,615 2,589
Intangible assets 658 643
Total utility plant 584,392 559,180
Less depreciation 162,217 151,285
Net utility plant 422,175 407,895
Current assets:
Cash and cash equivalents 6,273 1,301
Accounts receivable:
Customers 10,747 9,121
Other 2,916 2,606
Unbilled revenue 6,306 5,992
Materials and supplies at average cost 2,518 3,018
Taxes and other prepaid expenses 3,949 3,927
Total current assets 32,709 25,965
Other assets:
Regulatory assets 25,316 24,135
Unamortized debt premium and expense 4,162 4,247
Other 521 552
Total other assets 29,999 28,934
$484,883 $ 462,794
See accompanying notes to financial statements.
December 31, 1995 1994
(In thousands)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock $ 43,507 $ 42,800
Retained earnings 103,442 101,647
Total common shareholders equity 146,949 144,447
Preferred stock without mandatory
redemption provision 3,475 3,475
Long-term debt 145,540 128,944
Total capitalization 295,964 276,866
Current liabilities:
Short-term borrowings 0 7,000
Accounts payable 14,807 12,231
Accrued taxes 2,104 1,127
Accrued interest 1,979 1,788
Other accrued liabilities 6,940 6,548
Total current liabilities 25,830 28,694
Unamortized investment tax credits 3,352 3,265
Deferred income taxes 14,056 12,445
Regulatory liabilities 11,467 11,467
Advances for construction 94,100 92,190
Contributions in aid of construction 40,114 37,867
$484,883 $462,794
Statement of income
For the years ended December 31, 1995 1994 1993
(In thousands, except per share data)
Operating revenue $165,086 $157,271 $151,716
Operating expenses:
Operations:
Purchased water 46,370 42,812 38,454
Purchased power 12,689 12,641 11,852
Pump taxes 3,151 2,859 2,601
Administrative and general 19,989 18,210 16,910
Other 21,635 20,405 19,718
Maintenance 7,722 7,855 7,250
Depreciation 11,436 10,958 10,304
Income taxes 9,850 9,600 10,600
Property and other taxes 6,852 6,426 6,172
Total operating expenses 139,694 131,766 123,861
Net operating income 25,392 25,505 27,855
Other income and expenses, net 768 287 273
Income before interest expense 26,160 25,792 28,128
Interest expense:
Long-term debt interest 10,984 10,557 11,992
Other interest 478 827 635
Total interest expense 11,462 11,384 12,627
Net income $ 14,698 $ 14,408 $ 15,501
Earnings per share of common stock $ 2.33 $ 2.44 $ 2.70
Average number of common shares outstanding 6,253 5,838 5,689
See accompanying notes to financial statements.
Statement of common shareholders equity
common
shares common retained
For the years ended December 31, outstanding stock earnings total
(In thousands, except shares)
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 8,280 304 0 304
Issuance of common stock 550,000 17,437 0 17,437
Balance at December 31, 1994 6,247,034 42,800 101,647 144,447
Net income 14,698 14,698
Dividends paid:
preferred stock 153 153
common stock 12,750 12,750
Total dividends paid 12,903 12,903
Income reinvested in business 1,795 1,795
Dividend reinvestment 22,317 707 0 707
Balance at December 31, 1995 6,269,351 $43,507 $103,442 $146,949
See accompanying notes to financial statements.
Statement of cash flows
For the years ended December 31, 1995 1994 1993
(In thousands)
Operating activities:
Net income $ 14,698 $ 14,408 $ 15,501
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 11,436 10,958 10,304
Deferred income taxes and investment
tax credits, net 1,698 1,324 12,355
Regulatory assets and liabilities, net (1,181) (731) (11,937)
Changes in operating assets and liabilities:
Accounts receivable (1,936) (2,326) 908
Unbilled revenue (314) 1,556 (804)
Accounts payable 2,576 997 2,124
Other current liabilities 1,560 (825) (1,338)
Other changes, net 1,258 130 247
Net adjustments 15,097 11,083 11,859
Net cash provided by operating activities 29,795 25,491 27,360
Investing activities:
Utility plant expenditures (27,250) (28,275) (28,829)
Financing activities:
Net short-term borrowings (7,000) (8,000) 3,500
Proceeds from issuance of long-term debt 20,000 0 60,000
Proceeds from issuance of common stock 707 17,741 0
Advances for construction 5,368 4,980 5,024
Refunds of advances for construction (3,524) (3,565) (3,428)
Contributions in aid of construction 3,183 3,833 3,402
Retirements of first mortgage bonds
including premiums (3,404) (664) (55,391)
Dividends paid (12,903) (11,701) (11,076)
Net cash provided by financing activities 2,427 2,624 2,031
Change in cash and cash equivalents 4,972 (160) 562
Cash and cash equivalents at beginning of year 1,301 1,461 899
Cash and cash equivalents at end of year $ 6,273 $ 1,301 $ 1,461
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 11,050 $ 11,165 $12,763
Income taxes $ 8,258 $ 10,950 $ 9,188
See accompanying notes to financial statements.
Notes to financial statements
December 31, 1995, 1994 and 1993
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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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 prorated 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. In March 1994, the Commission closed all voluntary conservation
memorandum accounts. 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 from
customers who had exceeded their monthly allotments. 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 remained in unbilled revenue. In 1995, $351,000 was recovered through
customer surcharges while $163,000 was written-off as unrecoverable revenue.
As of December 31, 1995, $497,000 of lost water conservation revenue remained
in unbilled revenue. Commission authorization to collect the unbilled revenue
is anticipated to be granted in current rate case proceedings.
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. Cost of depreciable plant
retired is 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 $207,000
in 1995, $195,000 in 1994 and $141,000 in 1993.
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.
Long-Term Debt Premium, Discount and Expense. The discount and expense on
long-term debt is being amortized over the original lives of the related debt
issues. Premiums paid on the early redemption of certain debt issues and
unamortized original issue discount and expense of such issues are amortized
over the life of new debt issued in conjunction with the early redemption.
Cash Equivalents. Cash equivalents include highly liquid investments,
primarily U.S. Treasury and U.S. Government agency interest bearing securities,
stated at cost with original maturities of three months or less. As of
December 31, 1995 and 1994, cash equivalents were $4,659,000 and $124,000,
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 1995, 1994 and 1993. 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 without interest 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. Refunds on contracts entered into since 1982 are
made in equal annual amounts over 40 years. Estimated refunds for 1996 for
all water main extension contracts are $3,800,000.
Income Taxes. The Company accounts for income taxes using the asset and
liability method. 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.
The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the period that includes the enactment date.
It is anticipated that future rate action by the Commission will reflect
revenue requirements for the tax effects of temporary differences recognized
which have previously been flowed through to customers.
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
after 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, 1995, 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 common shares in a public
offering with net proceeds of $17,437,000. As of December 31, 1995 and 1994,
6,269,351 and 6,247,034 shares, respectively, of common stock were issued and
outstanding. All shares of common stock are eligible to participate in the
Company's dividend reinvestment plan. Approximately 11% of shareholders
participate in the plan. New shares of common stock of 22,317 and 8,280 were
issued in 1995 and 1994, respectively.
NOTE 3. SHORT-TERM BORROWINGS
As of December 31, 1995, the Company maintained a bank line of credit providing
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 the bank line of credit.
Dollars in Thousands
1995 1994 1993
Maximum short-term borrowings $13,000 $21,500 $33,500
Average amount outstanding 5,142 13,196 11,746
Weighted average interest rate 7.26% 5.4% 4.31%
Interest rate at December 31 - 7.38% 4.38%
NOTE 4. LONG-TERM DEBT
As of December 31, 1995 and 1994 long-term debt outstanding was:
In Thousands
1995 1994
First Mortgage Bonds:
Series J, 4.85% due 1995 $ 0 $ 2,565
Series K, 6.25% due 1996 2,565 2,580
Series L, 6.75% due 1997 2,150 2,164
Series P, 7.875% due 2002 2,655 2,670
Series S, 8.50% due 2003 2,670 2,685
Series BB, 9.48% due 2008 17,100 17,280
Series CC, 9.86% due 2020 19,300 19,500
Series DD, 8.63% due 2022 19,700 19,800
Series EE, 7.90% due 2023 19,800 19,900
Series FF, 6.95% due 2023 19,800 19,900
Series GG, 6.98% due 2023 19,800 19,900
125,540 128,944
Senior Notes:
Series A, 7.28% due 2025 20,000 0
Total long-term debt $145,540 $128,944
The first mortgage bonds are held by institutional investors and secured by
substantially all of the Company's utility plant. Aggregate maturities and
sinking fund requirements for each of the succeeding five years 1996 through
2000 are $3,197,000, $2,758,000, $620,000, $2,240,000 and $2,240,000
respectively.
The senior notes are held by institutional investors and are unsecured and
require interest only payments until maturity.
NOTE 5. INCOME TAXES
Income tax expense consists of the following:
In Thousands
federal state total
1995
Current $6,839 $2,729 $9,568
Deferred 1,161 (879) 282
Total $8,000 $1,850 $9,850
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
Income tax expense computed by applying the current federal tax rate of 35% to
pretax book income differs from the amount shown in the Statement of Income.
The difference is reconciled in the table below:
In Thousands
1995 1994 1993
Computed expected tax expense $8,592 $8,401 $9,135
Increase (reduction) in taxes due to:
State income taxes net of federal tax benefit 1,203 1,444 1,565
Investment tax credits (132) (132) (100)
Other 187 (113) 0
Total income tax $9,850 $9,600 $10,600
The components of deferred income tax expense in 1995, 1994 and 1993 were:
In Thousands
1995 1994 1993
Depreciation $3,854 $3,748 $3,858
Developer advances and contributions (3,455) (3,536) (3,951)
Bond redemption premiums (75) (75) 1,333
Investment tax credits (90) (90) (72)
Other 48 494 224
Total deferred income tax expense $ 282 $ 541 $1,392
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1995
and 1994 are presented in the following table:
In Thousands
1995 1994
Deferred tax assets:
Developer deposits for extension
agreements and contributions in
aid of construction $42,316 $37,359
Federal benefit of state tax deductions 3,831 3,895
Book plant cost reduction for future
deferred ITC amortization 1,805 1,758
Insurance loss provisions 475 617
Total deferred tax assets 48,427 43,629
Deferred tax liabilities:
Utility plant, principally due to
depreciation differences 54,479 47,670
Premium on early retirement of bonds 1,972 2,081
Other 6,032 6,323
Total deferred tax liabilities 62,483 56,074
Net deferred tax liabilities $14,056 $12,445
A valuation allowance was not required during 1995 and 1994. 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.
NOTE 6. EMPLOYEE BENEFIT PLANS
Pension Plan. 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 mutual funds, pooled equity, bond and short-term investment
accounts. The data below includes the unfunded, non-qualified, supplemental
executive retirement plan.
Net pension cost for the years ending December 31, 1995, 1994 and 1993 included
the following components:
In Thousands
1995 1994 1993
Service cost-benefits earned
during the period $ 1,265 $ 1,333 $ 1,167
Interest cost on projected obligation 2,360 2,154 2,153
Actual loss (return) on plan assets (5,817) 627 (3,672)
Net amortization and deferral 4,220 (2,286) 2,132
Net pension cost $ 2,028 $ 1,828 $ 1,780
The following table sets forth the plan's funded status and the plan's accrued
assets (liabilities) as of December 31, 1995 and 1994:
In Thousands
1995 1994
Accumulated benefit obligation, including
vested benefits of $25,218 in 1995 and
$19,824 in 1994 $(25,974) $(20,329)
Projected benefit obligation $(37,271) $(30,246)
Plan assets at fair value 33,798 27,833
Projected benefit obligation in
excess of plan assets (3,473) (2,413)
Unrecognized net gain (1,991) (3,540)
Prior service cost not yet recognized
in net periodic pension cost 3,161 3,543
Remaining net transition obligation at
adoption date January 1, 1987 1,716 2,002
Accrued pension liability recognized
in the balance sheet $ (587) $ (408)
The projected long-term rate of return on plan assets used in determining
pension cost was 8.0% for the years 1995, 1994 and 1993. A discount rate of
7.0% in 1995 and 1993, and 8.0% in 1994 and future compensation increases of
4.5% in 1995, 5.0% in 1994 and 4.75% in 1993 were used to calculate the
projected benefit obligations for the respective years.
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. During 1995, 1994 and 1993 the Company matched fifty cents for
each dollar contributed by the employee up to a maximum Company match of 3%
of the employees' compensation. Company contributions were $711,000,
$678,000 and $606,000 for the years 1995, 1994 and 1993, respectively.
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 by a payment of a premium. Retired employees are also provided with
a $5,000 life insurance benefit.
The Company records the costs of postretirement benefits during the employees
years of active service. The Commission has issued a decision which
authorizes rate recovery of tax deductible funding of 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, 1995, 1994
and 1993, included the following components:
In Thousands
1995 1994 1993
Service cost benefits earned $131 $120 $ 85
Interest cost on accumulated
postretirement benefit obligation 391 326 384
Actual return on plan assets (30) (4) 0
Net amortization of transition obligation 260 228 248
Net periodic postretirement benefit cost $752 $670 $717
Postretirement benefit expense recorded in 1995, 1994 and 1993, was $507,000,
$481,000 and $480,000, respectively. The remaining $671,000 which is
recoverable through future customer rates, is 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 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 assets (liabilities) as of December 31, 1995 and 1994:
In Thousands
1995 1994
Accumulated postretirement benefit obligation:
Retirees $(3,423) $(2,882)
Other fully eligible participants (571) (366)
Other active participants (1,942) (1,150)
Total (5,936) (4,398)
Plan assets at fair value 348 172
Accumulated postretirement benefit
obligation in excess of plan assets (5,588) (4,226)
Unrecognized net (gain) or loss 697 (668)
Remaining unrecognized transition obligation 4,220 4,468
Net postretirement benefit liability
included in current liabilities $ (671) $ (426)
For 1995 measurement purposes, a 7% 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, 1995, by $822,000 and the aggregate of
the service and interest cost components of the net periodic postretirement
benefit cost for the year ended December 31, 1995, by $81,000.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7% at December 31, 1995, 8% at December 31, 1994 and 7% at
December 31, 1993. The long-term rate of return on plan assets was 8% for
1995, 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.
Long-term Debt. The fair value of the Company's long-term debt is estimated
at $162,427,000 as of December 31, 1995, and $126,584,000 as of December 31,
1994, 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, 1995 and 1994, 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, 1995. Quarterly dividends have been paid on
common stock for 204 consecutive quarters and the quarterly rate has been
increased during each year since 1968. The 1995 and 1994 quarterly range of
common stock market prices was supplied by The New York Stock Exchange
Composite Tape since April 8, 1994, and by NASDAQ for earlier periods.
1995
(In thousands, except per share amounts) first second third fourth
Operating revenue $30,416 $40,371 $53,276 $41,023
Net operating income 3,685 6,161 9,096 6,450
Net income 1,039 3,467 6,472 3,720
Earnings per share .16 .55 1.03 .59
Common stock market price range:
High 32-3/8 32-5/8 32-7/8 35-1/4
Low 29-5/8 29-3/4 29-5/8 32-3/8
Dividends paid .51 .51 .51 .51
1994
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