TEN YEAR FINANCIAL REVIEW
(Dollars in thousands except common share and other data)
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
SUMMARY OF OPERATIONS
Operating revenue
Residential $134,035 $119,814 $114,751 $111,526 $101,842 $87,560 $90,178 $84,295 $81,404 $82,254
Business 30,924 28,230 27,023 25,247 23,670 20,759 20,910 19,870 19,480 19,986
Industrial 6,150 5,836 5,478 5,123 4,925 4,490 5,146 5,166 4,754 4,361
Public authorities 9,023 8,149 7,995 7,396 6,892 5,734 6,412 6,225 6,232 6,491
Other 2,632 3,057 2,024 2,424 2,476 8,633 1,741 1,932 1,885 693
Total operating revenue 182,764 165,086 157,271 151,716 139,805 127,176 124,387 117,488 113,755 113,785
Operating expenses 152,397 139,694 131,766 123,861 116,031 102,855 101,017 95,150 91,265 90,587
Interest expense, other
income and expenses, net 11,300 10,694 11,097 12,354 11,245 10,393 9,004 8,566 8,416 8,026
Net income $19,067 $14,698 $14,408 $15,501 $12,529 $13,928 $14,366 $13,772 $14,074 $15,172*
COMMON SHARE DATA
Earnings per share $3.01 $2.33 $2.44 $2.70 $2.18 $2.42 $2.50 $2.40 $2.45 $2.63*
Dividends declared 2.08 2.04 1.98 1.92 1.86 1.80 1.74 1.68 1.60 1.48
Dividend payout ratio 69% 88% 81% 71% 85% 74% 70% 70% 65% 49%
Book value $24.44 $23.44 $23.12 $21.80 $21.02 $20.70 $20.08 $19.32 $18.59 $17.72
Market price at year-end 42.00 32.75 32.00 40.00 33.00 28.00 26.75 28.00 25.50 30.00
Common shares outstanding
at year-end (in thousands) 6,310 6,269 6,247 5,689 5,689 5,689 5,689 5,689 5,672 5,636
Return on common
shareholders' equity 12.7% 10.2% 10.6% 12.4% 10.4% 11.7% 12.4% 12.4% 13.2% 14.8%
Long-term debt interest
coverage 3.6 3.2 3.2 3.2 2.9 3.2 3.6 3.4 3.8 4.3
BALANCE SHEET DATA
Net utility plant $443,588 $422,175 $407,895 $391,703 $374,613 $349,937 $325,409 $307,802 $289,363 $273,619
Utility plant expenditures 35,683 27,250 28,275 28,829 35,188 34,459 26,861 27,277 23,994 19,511
Total assets 512,390 497,626 462,794 446,619 403,448 393,609 369,055 339,348 313,561 290,963
Long-term debt 142,153 145,540 128,944 129,608 122,069 103,505 104,905 86,012 86,959 73,930
Capitalization ratios:
Common shareholders' equity 51.4% 49.7% 52.2% 48.2% 48.8% 52.4% 51.3% 55.1% 53.8% 55.6%
Preferred stock 1.2% 1.2% 1.3% 1.4% 1.4% 1.5% 1.6% 1.8% 1.8% 3.2%
First mortgage bonds 47.4% 49.1% 46.5% 50.4% 49.8% 46.1% 47.1% 43.1% 44.4% 41.2%
OTHER DATA
Water production
(million gallons)
Wells 53,372 49,755 50,325 47,205 52,000 48,930 51,329 51,350 48,828 48,097
Purchased 51,700 49,068 49,300 48,089 40,426 36,686 45,595 45,978 48,254 50,744
Total water production 105,072 98,823 99,625 95,294 92,426 85,616 96,924 97,328 97,082 98,841
Metered customers 298,400 289,200 286,700 282,100 278,700 275,200 272,100 269,200 267,000 261,000
Flat rate Customers 77,700 77,900 78,800 80,800 82,000 82,400 81,200 79,400 77,800 76,800
Customers at year-end 376,100 367,100 365,500 362,900 360,700 357,600 353,300 348,600 344,800 337,800
New customers added 9,000 1,600 2,600 2,200 3,100 4,300 4,700 3,800 7,000 3,600
Revenue per customer $486 $450 $430 $418 $388 $356 $352 $337 $330 $337
Utility plant per customer $1,644 $1,592 $1,530 $1,469 $1,406 $1,327 $1,251 $1,198 $1,140 $1,098
Employees at year-end 633 630 624 614 610 593 581 565 550 534
*Net income excludes $2,196 for a change in accounting for unbilled revenue; $.39 is excluded from earnings per share.
Management's discussion and analysis of financial condition and results of
operations
BUSINESS
California Water Service Company (Company) is a public utility providing water
service to 376,100 customers in 56 California communities through 21 separate
water systems or districts. In the Company's 20 regulated systems serving
370,100 customers, shown on the map on page 4, rates and operations are subject
to the jurisdiction of the California Public Utilities Commission (Commission).
An additional 6,000 customers receive service through a long-term lease of the
City of Hawthorne water system, which is not subject to Commission regulation.
The Company also has contracts with various municipalities to operate water
systems and provide billing services to 27,500 other customers.
The Commission requires that water rates for each regulated district be
determined independently. Each summer the Company files general rate increase
applications for some of these 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. Rates for the
City of Hawthorne system are established in accordance with an operating
agreement and are subject to ratification by the City council. Fees for
other operating agreements are based on contracts negotiated among the parties.
RESULTS OF OPERATIONS
Earnings and Dividends. Net income was $19,067,000 in 1996 compared to
$14,698,000 in 1995 and $14,408,000 in 1994. Earnings per common share were
$3.01 in 1996, $2.33 in 1995 and $2.44 in 1994. Both net income and earnings
per share for 1996 represent the highest ever recorded from continuing
operations. The weighted average number of common shares outstanding in each
of the three years was 6,290,000, 6,253,000 and 5,838,000, respectively.
In January 1996, the Board of Directors increased the dividend rate for
the 29th consecutive year. The annual rate paid in 1996 was $2.08 per share,
an increase of 2.0% compared with the 1995 dividend of $2.04 per share, which
represented an increase of 3.0% over the 1994 dividend of $1.98 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 business.
The dividend payout ratio was 69% in 1996 compared with 88% in 1995 and 81%
in 1994, an average of 79% for the three-year period. The 19% variation in
payout ratios between 1996 and 1995 was primarily attributable to fluctuations
in earnings per share. At its January 1997 meeting, the Board of Directors
increased the annual dividend three cents to $2.11. This increase, which is
less than increases in recent years, is intended to maintain the dividend
payout ratio below 1995's 88% level.
Operating Revenue. Operating revenue, which includes revenue from City of
Hawthorne customers, was a record $182.8 million in 1996, compared with $165.1
million in 1995 and $157.3 million in 1994. The current year increase was
$17.7 million, 11% greater than 1995's revenue. Offset rate adjustments,
primarily for purchased water cost increases, added $2.2 million to revenue
while general and step rate increases contributed $7.8 million. Increased
customer usage added $3.1 million. Average billed water consumption per
metered customer was 303 ccf, an increase of 6% for the year. Following a
wet first quarter, during which heavy rainfall assured an adequate supply for
the year, warm, dry spring and summer weather caused an increase in
consumption. In June, rate increases in five districts, representing 47% of
the Company's customers, became effective and added significantly to revenue
in the second half of the year. The number of customers increased 2.4% for
the year due to the addition of the 6,000 City of Hawthorne customers in
March and other customers added in existing service areas. Sales to a total
of 9,000 new accounts provided $4.6 million in additional revenue.
1995 revenue increased $7.8 million, 5% greater than 1994. Offset rate
adjustments, mainly for purchased water cost increases, added $3.8 million
while general and step rate increases contributed $2.2 million. Increased
customer usage added $1.1 million. Average billed water consumption per
metered customer was 286 ccf, an increase of 1 ccf for the year. Only
consumption in the fourth quarter exceeded that of the prior year, the first
three 1995 quarters recorded usage which 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. Because 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.
Operating and Interest Expenses. Operating expenses, which include those for
the Hawthorne operation, increased $12.7 million in 1996 and $7.9 million in
both 1995 and 1994.
Well production supplied 50.3% of the water delivered to all systems in
1996, while 49.2% was purchased from wholesale suppliers and 0.5% came from the
Company's Bear Gulch district watershed. Water production was 105 billion
gallons, up 6% from 1995's 99 billion gallons. Production in 1994 was 100
billion gallons. Total cost of water production, including purchased water,
purchased power and pump taxes, was $67.3 million in 1996, $62.2 million in
1995, and $58.3 million in 1994. Purchased water expense continued to be the
largest component of operating expense at $51.5 million, an increase of $5.1
million. The cost increase was due to wholesale suppliers' rate increases and
increased production which resulted in a 5% increase in purchases. Well
production increased 8% in 1996 due to increased demand and resulted in a $0.6
million increase in pump taxes; however, purchased power cost decreased $0.6
million due to the availability of less expensive power in several districts.
The Bear Gulch watershed yielded 0.5 billion gallons, which was processed
through the Company's filter plant, about 75% of the 1995 production. The
estimated purchased water savings provided by the watershed was $0.5 million.
Employee payroll and benefits charged to operations and maintenance
expense was $31.2 million in 1996 compared with $29.9 million in 1995 and $28.0
million in 1994. The increases in payroll and benefits were attributable to
general wage increases effective at the start of each year and additional
employees. At year-end 1996, 1995 and 1994, there were 633, 630 and 624
employees, respectively.
Income taxes were $12.2 million in 1996, $9.9 million in 1995, and $9.6
million in 1994. The changes in taxes are generally due to variations in
taxable income.
Interest on long-term debt increased $0.7 million in 1996 because of the
sale in August, 1995 of $20 million of senior notes that were outstanding for
the full year. In 1995, bond interest expense increased $0.4 million because
of the senior note sale. Long-term debt interest expense decreased $1.4
million in 1994 due to the bond refinancing program completed at lower
interest rates in 1993. Long-term financing is discussed further under the
caption Liquidity and Capital Resources.
Interest on short-term bank borrowings in 1996 decreased $0.2 million.
The expense reduction reflects a reduced requirement for short-term borrowings
due to increased water sales, which resulted in an improved cash flow and funds
available in 1996 from the 1995 senior note sale. Interest on short-term bank
borrowings decreased $0.3 million in 1995, despite higher short-term rates
during 1995 compared to 1994. The reduction in the expense reflects the payoff
of outstanding short-term bank borrowings upon the issuance of senior notes and
a reduced short-term borrowing need. In 1994 interest on short-term borrowings
increased $0.2 million due to increased borrowings at higher interest rates.
Due to improved earnings, interest coverage of long-term debt before income
taxes was 3.6 in 1996. Coverage was 3.2 in 1995 and 1994.
Other Income. Other income is derived from management contracts under which
the Company operates three municipally-owned water systems, contracts for
operation of three privately owned water systems, agreements for operation of
two reclaimed water systems, billing services provided to various cities,
property leases, other nonutility sources and interest on short-term
investments. Total other income was $0.9 million, the same as in 1995. In
1994, it was $0.4 million. Income from the various operating and billing
contracts was $0.8 in 1996, $0.7 in 1995, and $0.4 million in 1994.
Interest earned on temporary investments decreased $0.2 million in 1996
from 1995. Following the August, 1995 senior note issue, available funds
generated significant interest income. This source for temporary investments
was not available in 1996. There were $4.5 million in temporary investments at
the end of 1995, but none at the end of 1996 or 1994.
CORPORATE STRUCTURE
In November 1996, the Company announced its intention to form a holding
company. Shareholders will vote on this proposal at their annual meeting on
April 16, 1997. In January 1997, the Company also announced plans to effect
a two-for-one common stock split. The split will be accomplished, together
with a proportionate adjustment of preferred stock voting rights, during
formation of the holding company by a planned conversion of each common share
of California Water Service Company stock into two shares of the holding
company. By approving the holding company structure, shareholders will also
approve the stock split.
The Company intends to continue to explore opportunities to expand
operating and other revenue sources. The opportunities could include system
acquisitions, contracts similar to the City of Hawthorne arrangement, operating
contracts, billing contracts and other utility related services. The Company
believes that a holding company structure will make the Company more
competitive in providing nonregulated utility services, which would not be
subject to Commission jurisdiction.
RATES AND REGULATION
During 1996, general rate case applications were filed with the Commission for
two districts, Livermore and Palos Verdes, which represent about 11% of the
Company's customers, requesting a return on common equity (ROE) of 12.05%. In
January, the Company and the Commission staff stipulated to a 10.35% ROE. A
final decision from the Commission is expected during the second quarter after
which the new rates for the two districts will become effective. Additional
1997 revenue from the decision is estimated to be $1.6 million with provisions
for step rate increases to become effective in the next three years. The
Commission also authorized increases for 1997 in various districts totaling
$1.6 million for step rate increases, $0.8 million for undercollection of
expense balancing accounts and another $1.5 million in 1998.
The Commission's decision on the Company's 1995 rate case filing was
effective in June, 1996. The decision, which involved five districts
representing 47% of the Company's customers, authorized an ROE of 10.3%. It is
estimated to provide $5.4 million of added revenue during the first full year,
including $1.2 million of step rate increases which were effective at the start
of 1996. Over a four year period, the decision will provide about $10.6
million in new revenue. The decision includes a provision to accelerate
recovery of the Company's utility plant investment, resulting in an
annualized depreciation rate of about 2.6% for the five districts.
Historically, the Company's annual depreciation rate has been 2.4% of utility
plant.
During 1997, 14 districts are eligible for rate increase filings. The
Company will review the earnings levels in those districts and file for
additional rate consideration as appropriate.
WATER SUPPLY
The Company's source of supply varies among the 21 operating districts. Some
districts obtain all of their supply from wells, other districts obtain all of
their supply from wholesale suppliers and other districts obtain their supply
from both sources. In each of the past three years, approximately half of the
total Company supply has been pumped from Company-owned wells and half
purchased from wholesale suppliers. Total water production for 1996, 1995
and 1994 was 105,072, 98,823 and 99,625 million gallons, respectively.
Generally, between mid-spring and mid-fall, there is little precipitation
in the Company's service areas. Water demand is highest during the warm, dry
summer period, and less in the cool, wet winter. Rain and snow during the
winter months replenish underground water basins and fill reservoirs, providing
the water supply for subsequent delivery to customers. Snow and rainfall
accumulation during the 1996-97 winter have exceeded normal levels, and on a
statewide basis, average precipitation has been above 125% of normal. Water
storage in state reservoirs exceeds historic levels. The Company believes that
its source of supply from both underground aquifers and purchased sources is
adequate to meet customer demands in 1997.
ENVIRONMENTAL MATTERS
The Company is subject to regulations of the United States Environmental
Protection Agency (EPA), the California Department of Health Services and
various county health departments concerning water quality matters. It is also
subject to the jurisdiction of various state and local regulatory agencies
relating to environmental matters, including handling and disposal of hazardous
materials.
The Company believes it is in compliance with all monitoring and treatment
requirements set forth by the various agencies. In the past several years,
substantially all of the Company's wells have been equipped with chlorinators
which provide disinfection of water extracted from underground sources. The
cost of the new treatment is being recovered in customer rates as authorized by
the Commission. Water purchased from wholesale suppliers is treated before
delivery to the Company. The Company operates two treatment plants that
process surface water supplies.
The various regulatory agencies could require increased monitoring and
possibly additional treatment of water supplies. If this occurs, the Company
intends to request recovery for additional treatment costs through the rate
application process.
During 1996, amendments were enacted by Congress to the Safe Drinking
Water Act. The revised law provides improvements in establishing regulations
for potential contaminants. Among the considerations by EPA in determining
whether to regulate a particular substance are the impact on public health, the
likelihood of the contaminant's occurrence and a cost/benefit analysis. The
Company believes the amended law provides a prudent approach to safeguarding
potable water supplies.
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. Sources of internally
generated funds 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 increases during the first
six months of the year. With increased summer usage, cash flow from operations
increases and bank borrowings can be repaid. The Company's bank line of credit
has on prior occasions been temporarily increased to $40 million, although the
larger amount has not been drawn upon.
The Company believes that long-term financing is available to it through
equity and debt markets. Standard & Poor's and Moody's have 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 for construction and
contributions in aid of construction are also received for various construction
projects.
No long-term financing was completed in 1996. However, the Company did
receive Commission approval for up to $115 million of debt and/or equity
financing over a three year period. This financing may be used to fund
construction programs, retire maturing long-term debt obligations and repay
short-term borrowings. During August 1995, $20 million of 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 fund the 1995 construction
program.
In 1996, under the Dividend Reinvestment Plan (Plan), 40,219 new common
shares were issued to shareholders who elected to reinvest their dividends,
providing the Company with $1.4 million in additional equity. In 1995, 22,317
new shares were issued under the Plan during the third and fourth quarters
providing equity of $0.7 million. Reinvestment shares required for the 1995
first and second quarter dividends and for three 1994 quarters were purchased
on the open market and redistributed to Plan participants. Under the Plan,
the Company may satisfy the reinvestment requirement by issuing new shares or
purchasing shares on the open market and redistributing them to Plan
participants. Issuance of new shares reduces cash required to fund quarterly
dividend payments by about $1.4 million annually, based on current shareholder
participation of 11% in the Plan. Issuance of additional shares will have a
minor 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.
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 1996, utility plant expenditures totaled $35.7 million compared to
$27.3 million in 1995. The expenditures included $27.6 million provided by
Company funding and $8.1 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, $6.3 million; distribution systems, $8.7 million; services
and meters, $4.6 million; equipment, $1.5 million; and City of Hawthorne lease,
$6.5 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 issued in August 1995.
The 1997 Company construction program has been authorized by the Board of
Directors for $23.2 million. Expenditures are expected to be in the following
areas: wells, pumping and water treatment equipment and storage facilities,
$6.8 million; distribution systems, $7.9 million; services and meters, $5.4
million; and equipment, $3.1 million. The funds for this program are
expected to be provided by cash from operations, bank borrowings and long-term
debt financing. New subdivision construction will be financed primarily by
developers' refundable advances and contributions. Company funded construction
budgets over the next five years are projected to total $115 million.
Since 1986, proceeds received from developers for installation of new
facilities have been subject to income tax. During 1996, Congress enacted
legislation which exempted from taxable income proceeds received from
developers to fund advances for construction and contributions in aid of
construction. As part of the legislation, future water utility plant
additions will generally be depreciated for tax purposes on a straight-line,
25-year life basis. The federal tax exemption of developer funds will reduce
the Company's cash flow requirement for income taxes. Developer advances
remain subject to California income tax.
Capital Structure. The Company's total capitalization at December 31, 1996 and
1995 was $299.9 million and $296.0 million, respectively. Capital ratios were:
1996 1995
Common equity 51.4% 49.7%
Preferred stock 1.2% 1.2%
Long-term debt 47.4% 49.1%
The increase in the common equity percentage from 1995 to 1996 and the
corresponding decrease in the long-term debt percentage were primarily caused
by strong earnings in 1996 which contributed to shareholders' equity, the
issuance of new shares under the Dividend Reinvestment Plan and the retirement
of Series K, first mortgage bonds along with the annual bond sinking fund
payments in November, 1996.
The 1996 return on average common equity was 12.7% compared with 10.2% in
1995 and 10.6% in 1994.
balance sheet
December 31, 1996 1995
(In thousands)
ASSETS
Utility plant:
Land $ 7,536 $ 7,320
Depreciable plant and equipment 600,329 572,799
Construction work in progress 3,300 3,615
Intangible assets 7,267 658
Total utility plant 618,432 584,392
Less depreciation and amortization 174,844 162,217
Net utility plant 443,588 422,175
Current assets:
Cash and cash equivalents 1,368 6,273
Accounts receivable:
Customers 11,437 10,747
Other 1,528 2,916
Unbilled revenue 5,577 6,306
Materials and supplies at average cost 2,324 2,518
Taxes and other prepaid expenses 4,537 3,949
Total current assets 26,771 32,709
Other assets:
Regulatory assets 37,556 38,059
Unamortized debt premium and expense 3,943 4,162
Other 532 521
Total other assets 42,031 42,742
$512,390 $497,626
See accompanying notes to financial statements.
1996 1995
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock $ 44,941 $ 43,507
Retained earnings 109,285 103,442
Total common shareholders' equity 154,226 146,949
Preferred stock without mandatory
redemption provision 3,475 3,475
Long-term debt 142,153 145,540
Total capitalization 299,854 295,964
Current liabilities:
Short-term borrowings 7,500 -
Accounts payable 14,692 14,807
Accrued taxes 3,002 2,104
Accrued interest 1,947 1,979
Other accrued liabilities 7,653 6,940
Total current liabilities 34,794 25,830
Unamortized investment tax credits 3,086 3,352
Deferred income taxes 23,736 25,639
Regulatory liabilities 12,627 12,627
Advances for construction 95,226 94,100
Contributions in aid of construction 43,067 40,114
$512,390 $497,626
statement of income
for the years ended December 31, 1996 1995 1994
(In thousands, except per share data )
Operating revenue $182,764 $165,086 $157,271
Operating expenses:
Operations:
Purchased water 51,514 46,370 42,812
Purchased power 12,075 12,689 12,641
Pump taxes 3,753 3,151 2,859
Administrative and general 21,664 19,989 18,210
Other 23,000 21,635 20,405
Maintenance 8,317 7,722 7,855
Depreciation and amortization 12,665 11,436 10,958
Income taxes 12,150 9,850 9,600
Property and other taxes 7,259 6,852 6,426
Total operating expenses 152,397 139,694 131,766
Net operating income 30,367 25,392 25,505
Other income and expenses, net 607 768 287
Income before interest expense 30,974 26,160 25,792
Interest expense:
Long-term debt interest 11,663 10,984 10,557
Other interest 244 478 827
Total interest expense 11,907 11,462 11,384
Net income $ 19,067 $ 14,698 $ 14,408
Earnings per share of common stock $ 3.01 $ 2.33 $ 2.44
Average number of common shares
outstanding 6,290 6,253 5,838
See accompanying notes to financial statements.
statement of common shareholders' equity
common
shares common retained
outstanding stock earnings total
(In thousands, except shares)
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 - 304
Issuance of common stock 550,000 17,437 - 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 - 707
Balance at December 31, 1995 6,269,351 43,507 103,442 146,949
Net income 19,067 19,067
Dividends paid:
Preferred stock 153 153
Common stock 13,071 13,071
Total dividends paid 13,224 13,224
Income reinvested in business 5,843 5,843
Dividend reinvestment 40,219 1,434 - 1,434
Balance at December 31, 1996 6,309,570 $44,941 $109,285 $154,226
See accompanying notes to financial statements.
statement of cash flows
for the years ended December 31, 1996 1995 1994
(In thousands)
Operating activities
Net income $ 19,067 $ 14,698 $ 14,408
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 12,665 11,436 10,958
Deferred income taxes and investment
tax credits, net (2,169) 1,698 (477)
Regulatory assets and liabilities, net 503 (1,181) 1,070
Changes in operating assets and liabilities:
Accounts receivable 698 (1,936) (2,326)
Unbilled revenue 729 (314) 1,556
Accounts payable (115) 2,576 997
Other current liabilities 1,579 1,560 (825)
Other changes, net 235 1,258 130
Net adjustments 14,125 15,097 11,083
Net cash provided by operating activities 33,192 29,795 25,491
Investing activities:
Utility plant expenditures
Company funded (27,631) (20,039) (20,790)
Developer advances and contributions
in aid of construction (8,052) (7,211) (7,485)
Net cash used in investing activities (35,683) (27,250) (28,275)
Financing activities:
Net short-term borrowings 7,500 (7,000) (8,000)
Proceeds from issuance of long-term debt - 20,000 -
Proceeds from issuance of common stock 1,434 707 17,741
Advances for construction 4,998 5,368 4,980
Refunds of advances for construction (3,631) (3,524) (3,565)
Contributions in aid of construction 3,896 3,183 3,833
Retirements of first mortgage
bonds including premiums (3,387) (3,404) (664)
Dividends paid (13,224) (12,903) (11,701)
Net cash provided by (used in) financing
activities (2,414) 2,427 2,624
Change in cash and cash equivalents (4,905) 4,972 (160)
Cash and cash equivalents at beginning of year 6,273 1,301 1,461
Cash and cash equivalents at end of year $ 1,368 $ 6,273 $ 1,301
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 11,721 $ 11,050 $ 11,165
Income taxes $ 12,775 $ 8,258 $ 10,950
See accompanying notes to financial statements.
notes to financial statements
December 31, 1996, 1995 and 1994
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 customer billings for regulated water
service at rates authorized by the Commission and billings to Hawthorne
customers. 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.
As permitted by the Commission, 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 from
customers who had exceeded their monthly allotments. 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. In 1996, $175,000 was
recovered through customer surcharges while $98,000 was written off as
unrecovered revenue. As of December 31, 1996, $224,000 of lost water
conservation revenue remained in unbilled revenue which is anticipated to be
recovered in 1997.
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 $261,000 in
1996, $207,000 in 1995, and $195,000 in 1994.
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.
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 2.5% in 1996
and 2.4% in 1995 and 1994. For income tax purposes, the Company computes
depreciation using the accelerated methods allowed by the respective taxing
authorities.
Advances for Construction. Advances for Construction consist of payments
received from developers for installation of water production and distribution
facilities to serve new developments. Advances are excluded from rate base.
Such payments are refundable to the developer without interest over a 20-year
or 40-year period. Refundable 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. At December 31,1996, the amounts
refundable under the 20-year contracts was $10,888,000 and under 40-year
contracts $84,338,000. Estimated refunds in 1997 for all water main extension
contracts are $3,800,000.
Contributions in Aid of Construction. Contributions in Aid of Construction
represent payments received from developers, primarily for fire protection
purposes, which are not subject to refund. Facilities funded by contributions
are included in utility plant, but excluded from rate base. Depreciation
related to contributions is charged to Contributions in Aid of Construction.
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. In 1996, the
federal tax law changed and a portion of advances and contributions received
after June 12, 1996, are nontaxable.
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, 1996, 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. As of December 31, 1996 and 1995, 6,309,570 and 6,269,351 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. In 1996 and
1995, 40,219 and 22,317, respectively, new shares were issued under the
reinvestment plan.
NOTE 3. SHORT-TERM BORROWINGS
As of December 31, 1996, 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
1996 1995 1994
Maximum short-term borrowings $9,500 $13,000 $21,500
Average amount outstanding 1,662 5,142 13,196
Weighted average interest rate 6.94% 7.26% 5.40%
Interest rate at December 31 6.98% - 7.38%
NOTE 4. LONG-TERM DEBT
As of December 31, 1996 and 1995, long-term debt outstanding was:
In Thousands
1996 1995
First Mortgage Bonds:
Series K, 6.25% due 1996 $ - $ 2,565
Series L, 6.75% due 1997 2,138 2,150
Series P, 7.875% due 2002 2,640 2,655
Series S, 8.50% due 2003 2,655 2,670
Series BB, 9.48% due 2008 16,920 17,100
Series CC, 9.86% due 2020 19,100 19,300
Series DD, 8.63% due 2022 19,600 19,700
Series EE, 7.90% due 2023 19,700 19,800
Series FF, 6.95% due 2023 19,700 19,800
Series GG, 6.98% due 2023 19,700 19,800
122,153 125,540
Senior Notes:
Series A, 7.28% due 2025 20,000 20,000
Total long-term debt $ 142,153 $ 145,540
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 1997 through
2001 are $2,758,000, $620,000, $2,240,000, $2,240,000, and $2,240,000,
respectively.
The senior notes are held by institutional investors, 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
1996
Current $ 9,356 $ 3,274 $12,630
Deferred 444 (924) (480)
Total $ 9,800 $ 2,350 $12,150
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
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
1996 1995 1994
Computed expected tax expense $10,926 $ 8,592 $ 8,401
Increase (reduction) in taxes due to:
State income taxes net of federal tax
benefit 1,528 1,203 1,444
Investment tax credits (119) (132) (132)
Other (185) 187 (113)
Total income tax $12,150 $ 9,850 $ 9,600
The components of deferred income tax expense in 1996, 1995 and 1994 were:
In Thousands
1996 1995 1994
Depreciation $ 3,544 $ 3,854 $ 3,748
Developer advances and contributions (3,749) (3,455) (3,536)
Bond redemption premiums (73) (75) (75)
Investment tax credits (93) (90) (90)
Other (109) 48 494
Total deferred income tax expense $ (480) $ 282 $ 541
The tax effects of differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995 are presented in the following table:
In Thousands
1996 1995
Deferred tax assets:
Developer deposits for extension agreements
and contributions in aid of construction $45,901 $40,966
Federal benefit of state tax deductions 4,177 3,909
Book plant cost reduction for future deferred
ITC amortization 1,832 1,990
Insurance loss provisions 286 328
Total deferred tax assets 52,196 47,193
Deferred tax liabilities:
Utility plant, principally due to depreciation
differences 74,407 70,871
Premium on early retirement of bonds 1,290 1,363
Other 235 598
Total deferred tax liabilities 75,932 72,832
Net deferred tax liabilities $23,736 $25,639
A valuation allowance was not required during 1996 and 1995. 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 is 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, nonqualified, supplemental
executive retirement plan.
Net pension cost for the years ending December 31, 1996, 1995 and 1994
included the following components:
In Thousands
1996 1995 1994
Service cost benefits earned during the year $ 1,543 $ 1,265 $ 1,333
Interest cost on projected obligation 2,583 2,360 2,154
Actual loss (return) on plan assets (4,784) (5,817) 627
Net amortization and deferral 2,789 4,220 (2,286)
Net pension cost $ 2,131 $ 2,028 $ 1,828
The following table sets forth the plan's funded status and the plan's
accrued assets (liabilities) as of December 31, 1996 and 1995:
In Thousands
1996 1995
Accumulated benefit obligation, including vested
benefits of $28,059 in 1996 and $25,218 in 1995 $(28,679) $(25,974)
Projected benefit obligation $(39,296) $(37,271)
Plan assets at fair value 38,293 33,798
Projected benefit obligation in excess of plan
assets (1,003) (3,473)
Unrecognized net gain (6,120) (1,991)
Prior service cost not yet recognized in net
periodic pension cost 4,991 3,161
Remaining net transition obligation at adoption
date January 1, 1987 1,430 1,716
Accrued pension liability recognized in
the balance sheet $ (702) $ (587)
The projected long-term rate of return on plan assets used in determining
pension cost was 8.0% for the years 1996, 1995 and 1994. A discount rate of
7.4% in 1996, 7.0% in 1995, and 8.0% in 1994 and future compensation increases
of 4.5% in 1996 and 1995, and 5.0% in 1994 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 that allows participants to contribute up to 15% of pre-tax
compensation. The Company matched fifty cents for each dollar contributed by
the employee up to a maximum Company match of 3.5% of the employees'
compensation in 1996 and 3% of the employees' compensation in 1995 and 1994.
Company contributions were $858,000, $711,000, and $678,000 for the years 1996,
1995 and 1994, respectively.
Other Postretirement Plans. The Company provides substantially all active
employees with 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 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, 1996, 1995
and 1994, included the following components:
In Thousands
1996 1995 1994
Service cost benefits earned $166 $131 $120
Interest cost on accumulated
postretirement benefit obligation 383 391 326
Actual return on plan assets (63) (30) (4)
Net amortization of transition obligation 278 260 228
Net periodic postretirement benefit cost $764 $752 $670
Postretirement benefit expense recorded in 1996, 1995 and 1994, was
$523,000, $507,000, and $481,000, respectively. $912,000, 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 mutual funds, 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, 1996 and 1995:
In Thousands
1996 1995
Accumulated postretirement benefit obligation:
Retirees $(2,959) $(3,423)
Other fully eligible participants (604) (571)
Other active participants (2,310) (1,942)
Total (5,873) (5,936)
Plan assets at fair value 582 348
Accumulated postretirement benefit
obligation in excess of plan assets (5,291) (5,588)
Unrecognized net (gain) or loss 407 697
Remaining unrecognized transition obligation 3,972 4,220
Net postretirement benefit liability
included in current liabilities $ (912) $ (671)
For 1996 measurement purposes, a 6.5% 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, 1996, by $804,000 and the aggregate of
the service and interest cost components of the net periodic postretirement
benefit cost for the year ended December 31, 1996, by $99,000.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.4% at December 31, 1996, 7.0% at December 31, 1995 and
8.0% at December 31, 1994. The long-term rate of return on plan assets was
8.0% for 1996, 1995 and 1994.
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
$159,000,000 as of December 31, 1996, and $162,427,000 as of December 31, 1995,
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, 1996 and 1995, based
on data provided by brokers.
NOTE 8. QUARTERLY FINANCIAL AND COMMON STOCK MARKET DATA (Unaudited)
The Company's common stock is traded on the New York Stock Exchange under the
symbol CWT. There were approximately 6,000 holders of common stock at
December 31, 1996. Quarterly dividends have been paid on common stock for 208
consecutive quarters and the quarterly rate has been increased each year since
1968. The 1996 and 1995 quarterly range of common stock market prices was
supplied by the New York Stock Exchange Composite Tape.
1996
First Second Third Fourth
(In thousands, except per share amounts)
Operating revenue $32,298 $49,048 $59,230 $42,187
Net operating income 4,028 8,698 11,488 6,153
Net income 1,177 5,836 8,673 3,381
Earnings per share .18 .92 1.37 .53
Common stock market price range:
High 37-1/4 35-5/8 38-1/4 43-3/4
Low 32-1/2 33-1/2 32-1/2 35-7/8
Dividends paid .52 .52 .52 .52
1995
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