FINANCIAL STATEMENTS
DOMINGUEZ SERVICES CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Dominguez Services Corporation
Long Beach, California
We have audited the accompanying consolidated balance sheets of Dominguez
Services Corporation and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, retained earnings, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dominguez Services Corporation
and subsidiaries as of December 31, 1995 and 1994, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in notes 8 and 9 to the financial statements, and as required by
generally accepted accounting principles, Dominguez Services Corporation changed
its methods of accounting for income taxes and postretirement benefits other
than pensions in 1993.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 6, 1996
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MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the Company's consolidated
financial statements and related information appearing in this annual report.
Management believes that the consolidated financial statements fairly reflect
the form and substance of transactions and that the financial statements
reasonably present the Company's financial position and results of operations in
conformity with generally accepted accounting principles. Management also has
included in the Company's financial statements amounts that are based on
estimates and judgements which it believes are reasonable under the
circumstances.
The independent public accountants audit the Company's consolidated financial
statements in accordance with generally accepted auditing standards and provide
an objective, independent review of the fairness of reported operating results
and financial position.
The Board of Directors of the Company has an Audit Committee composed of three
non-management Directors. The Committee meets periodically with financial
management and the independent public accountants to review accounting, control,
auditing and financial reporting matters.
DOMINGUEZ SERVICES
CORPORATION
John Tootle
Vice President-Finance
TEN YEAR STATISTICAL REVIEW
DOMINGUEZ SERVICES CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
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Summary of Operations:
($ in Thousands)
Operating revenue $25,486 $23,569 $22,193 $21,813 $18,706 $19,139 $20,359 $19,409 $17,423 $16,186
Operating expenses
(before taxes) 21,376 19,419 18,139 18,327 15,677 15,869 16,855 16,054 14,117 12,736
Income taxes 1,177 1,340 1,243 1,031 807 1,087 1,110 1,050 1,042 1,290
Other taxes 455 432 406 397 323 321 330 320 302 280
Other expense 7 29 20 17 32 41 18 51 65 41
Other income (165) (297) (353) (85) (73) (186) (38) (64) (275) (140)
Interest cost 683 714 732 586 606 633 577 569 649 748
Net income 1,953 1,932 2,006 1,540 1,334 1,374 1,507 1,429 1,523 1,231
Dividends paid 1,170 1,110 1,070 1,009 989 965 940 884 827 765
Reinvested in the business 783 822 936 531 345 409 567 545 696 466
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Per Common Share Data:*
Earnings $1.94 $1.92 $1.99 $1.53 $1.32 $1.37 $1.47 $1.42 $1.51 $1.21
Dividends $1.16 $1.10 $1.06 $1.00 $0.98 $0.96 $ .92 $ .86 $ .80 $ .73
Payout percentage 60.0% 57.5% 53.5% 65.4% 74.2% 70.1% 62.6% 60.6% 53.0% 60.6%
Book value $14.83 $14.03 $13.23 $12.29 $11.77 $11.40 $10.98 $10.08 $9.53 $8.81
Return on common equity
(average) 13.4% 14.1% 15.6% 12.8% 11.4% 12.2% 14.0% 14.5% 16.5% 14.1%
Number shares outstanding 1,004,370 1,004,370 1,004,370 1,004,370 1,004,370 998,370 998,370 979,620 979,620 979,620
Year end market price 18.50 16.75 21.00 16.25 15.00 14.25 14.75 15.00 15.50 13.34
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Balance Sheet Data:
($ in Thousands)
Gross utility plant $57,271 $55,406 $52,260 $51,037 $50,161 $46,710 $45,205 $41,536 $39,475 $37,937
Net utility plant 41,358 40,022 37,977 37,511 33,793 31,713 31,233 28,714 27,170 26,111
Non utility plant 67 67 51 105 105 104 101 93 87 55
Total assets 45,295 44,652 42,662 40,275 39,596 37,477 36,513 33,516 31,242 30,647
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Capitalization: ($ in Thousands)
Long-term debt $7,273 $7,326 $7,493 $7,657 $3,829 $3,766 $4,059 $4,583 $5,062 $5,543
Preferred stock 98 98 98 98 98 126 142 784 810 830
Common equity 14,896 14,092 13,284 12,348 11,817 11,383 10,968 9,877 9,329 8,633
Total capitalization 22,267 21,516 20,875 20,103 15,744 15,275 15,169 15,244 15,201 15,006
Interim debt - - - - 3,375 2,725 950 - 1,150 900
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Capitalization Ratios:
Long-term debt 32.7% 34.0% 35.9% 38.1% 24.3% 24.7% 26.8% 30.1% 33.3% 37.0%
Preferred stock .4% .5% .5% .5% .6% .8% .9% 5.1% 5.3% 5.5%
Common equity 66.9% 65.5% 63.6% 61.4% 75.1% 74.5% 72.3% 64.8% 61.4% 57.5%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
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Other Utility Statistics:
Customers at year end 36,739 36,371 36,107 36,043 35,949 34,444 34,189 32,765 32,403 32,348
Average revenue per customer $665.70 $619.90 $561.27 $481.35 $423.35 $490.32 $501.95 $520.58 $488.80 $451.15
Water sales
(millions of gallons) 12,371 12,071 11,359 11,731 10,906 12,957 13,339 13,237 11,794 11,529
Utility employees 78 76 75 69 71 64 56 51 51 50
* Adjusted to reflect 3-for-2 stock split effective September,1987
MANAGEMENT DISCUSSION & ANALYSIS
DOMINGUIEZ SERVICES CORPORATION AND SUBSIDARIES
Dominguez Services Corporation is a holding company with two wholly owned
subsidiaries: Dominguez Water Corporation and Hydro-Metric Service Corporation.
Dominguez Water Corporation is a public utility providing water service for more
than 85 years.
The South Bay division serves 32,092 customers in a 35 square mile area
including most of Carson, one third of Torrance, and parts of Compton, Long
Beach and Harbor City. The subsidiaries Antelope Valley Water Company and Kern
River Valley Water Company serve 1,228 and 3,419 customers respectively.
Hydro-Metric Service Corporation is a non-utility subsidiary which repairs and
maintains large water meters in Southern California.
The utility operations are under the purview of the California Public Utilities
Commission (CPUC). Thus, the Company has no unilateral flexibility on rates
charged for its product or service. Most variations are due to weather
conditions and the usage of industrial customers.
LIQUIDITY AND CAPITAL
RESOURCES
The Company's continuing operations provided sufficient cash to cover operating
expenses and interest and dividends. In 1995, the Company funded capital
improvements with operating earnings for reinvestment and cash remaining from
its Series J bond issuance in 1992. The Company invested $2,622,000 in 1995,
$465,000 of which was funded by developers.
The Company's 1996 capital budget is $4,213,000. Budgeted improvements include
$1,886,500 on supply and storage and $1,065,000 on pipeline replacements. The
Company will fund budgeted improvements from earnings available for
reinvestments, funds remaining from Series J bond issuance and short term
borrowings. Once short term borrowing reaches a level where long term
refinancing is cost effective, the Company plans another issuance of long term
first mortgage bonds.
The Company maintains a line of credit with Bank of America in the amount of
$2,000,000 with interest at the bank's preference rate. In 1995, there was no
borrowing under this line of credit.
REGULATORY AFFAIRS
In August 1995, the Company increased revenues by $1,400,000 annually, or 6.2%,
to recover the increased cost of water production in our South Bay division.
This rate increase substantially recovered the total cost increase of $1,500,000
for higher purchased water costs and pump tax. However, due to the Company's
higher earnings at this time, the total cost increase was not recoverable in
rates. The Company expects to recover the difference, $100,000, in the balancing
account in the future. This rate increase does not increase the earnings to the
Company, but rather offsets the effects of higher water production costs to the
Company.
In 1995, the CPUC undertook a strategic planning process referred to as "Vision
2000." The process was undertaken in response to hearings in the California
Legislature concerning the organization of the CPUC and the effects that
deregulation in other utility industries will have on the CPUC. The CPUC held
workshops throughout the state. The Company participated in these workshops and
submitted comments. The CPUC's Vision 2000 has been presented to the California
Legislature. In 1996, the Legislature will assess the plan and decide if further
legislative action is needed.
Discussions regarding Vision 2000 indicate that the Company will continue to
be subject to traditional regulatory policies and practices. The regulation
may be modified to include performance standards. Using performance-based
rate making, the utility and the CPUC would agree to set operating efficiency
ratios. If the efficiency ratios are exceeded, the shareholders would get to
keep a portion of the cost savings as increased profits.
ENVIRONMENTAL MATTERS
The Company is subject to water quality regulations set by the United States
Environmental Protection Agency (EPA) and the California Department of Health
Services (DHS). Both groundwater and purchased water are subject to extensive
analysis. With the occasional minor exception, the Company met all current
primary water standards. Under the Federal Safe Drinking Water Act, the EPA is
required to continue to establish new maximum levels for additional chemicals.
The costs of future compliance are unknown, but the Company could be required to
perform more quality testing. Management believes that the Company resources are
sufficient to meet these anticipated requirements.
Other applicable environmental regulations relate to the handling, storage and
disposal of hazardous materials. The Company is currently in compliance with all
regulations.
ACCOUNTING STANDARDS
In 1993, the Company adopted a new income tax accounting standard which uses the
balance sheet method to account for income taxes, whereby deferred taxes are
recognized for all temporary differences between book and tax income. Upon
adoption, the Company recorded $1,000,000 for previously unrecorded deferred
taxes on temporary differences. Most of these deferred taxes were offset by
deferred charges representing amounts expected to be recovered in future rates.
The cumulative effect of adoption was not material to the Company's 1993
earnings.
Also in 1993, the Company adopted a new accounting standard for post retirement
benefits other than pen-
16
sions. It requires the expected cost of these benefits to be expensed during
one's employment. Previously, these benefits were expensed when paid. The
Company is amortizing its $588,000 obligation for prior service over 20 years.
The CPUC allows the Company to recover tax-deductible funding for these benefits
in rates. Any difference between expenses determined under the new standard and
amounts authorized for rate recovery is not expected to be material and will be
charged to earnings.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
Operating revenues totaled $25,486,000 for 1995, an increase of $1,917,000 or
8.1% over the $23,569,000 recorded for 1994. The increased revenues are due to
higher water rates and increased water sales. The higher water rates resulted
from the pass-through of increases in water production costs to our South Bay
customers. Higher water sales in all divisions resulted in an increase of 300
million gallons or 2.4% over the prior year. Higher water sales were due
primarily to increased usage by industrial customers.
Operating expenses before taxes increased by $1,957,000, or 10.1%, largely due
to a $2,031,000, or 18.3%, increase in the costs of water. Higher water costs
are due primarily to increased costs of purchased water and higher water sales.
Operations and maintenance costs decreased by $103,000 or 1.4% due mostly to the
reversal of accrued litigation costs.
Other income decreased by $109,000 or 40.7% due to less income from brokering
water rights.
Interest costs decreased by $31,000 or 4.3% due to lower borrowing costs as
Series G bonds were paid off.
Net income increased $21,000 or 1.0% due to higher water sales and lower
expenses as previously stated. Earnings per share on common equity increased
from $1.92 to $1.94 for reasons stated above. The Company raised its annual
dividend to common shareholders from $1.10 in 1994 to $1.16 in 1995, an increase
of 5.4%.
RESULTS OF OPERATIONS
1994 COMPARED TO 1993
Operating revenues for 1994 increased $1,376,000 or 6.2% over 1993. The
increased revenues are attributed to higher water rates and increased water
sales. The water rates were increased for a "step" offset of $281,000, or 1.3%,
and $750,000, or 3.6%, for higher costs of water in the South Bay. General rate
increases raised Antelope Valley Water Company and Kern River Valley Water
Companies revenues by $110,000 and $185,000 respectively. Higher water sales in
all divisions resulted in an increase of 721 million gallons or 6.2% over the
prior year.
Operating expenses before taxes increased $1,280,000, or 7.1%, from 1993 due
primarily to increased costs of water in the amount of $834,000 or 8.1%. Higher
water costs are due to increased costs of purchased water and higher water
sales. Operations and maintenance costs increased $388,000 or 5.7%. Increases
occurred in costs of labor and outside services.
Other income decreased by $65,000 or 19.5% due to the one-time gain on sale of
land which occurred in 1993 but was offset by income from brokering water
rights.
Net income decreased in 1994 by approximately $77,000 or 4.0% primarily due to
gain on sale of land recorded in 1993 which increased non-operating income.
Earnings per share on common equity decreased from $1.99 to $1.92 due to lower
other income as discussed above.
RESULTS OF OPERATIONS
1993 Compared to 1992
Operating revenues for 1993 increased $380,000 over 1992. The increased
revenues are attributable to a general rate increase of $1,500,000 for the South
Bay customers, associated with higher water costs of $1,470,000 and a 1993
annual surcharge of $517,000.
These revenue increases did not include prior year non-recurring recovery of
lost revenues associated with the 1991/1992 drought in the amount of $470,000;
recovery of prior year production costs in the amount of $418,000; and higher
distribution sales in 1993 for Hydro-Metric Service Corporation of $1,700,000.
Operating expenses before taxes decreased $188,000. Water and other production
costs increased approximately $830,000 due to higher costs of purchased water
offset by smaller purchases in 1993. Other operations and maintenance costs
dropped $1,128,000 due to reduced costs of sales for Hydro-Metric Service
Corporation of $1,700,000, which was offset by higher payroll and benefit costs
of approximately $400,000, including adoption costs of $114,000 for FASB 106.
Other income increased by approximately $268,000 due to gain on sale of land in
1993. Under the threat of condemnation, the Company sold approximately 20,000
square feet of non-utility property for $434,000. A provision has been recorded
for $169,000 to relocate its main entrance so the property will be of the same
benefit to customer and utility personnel. The net gain has been allocated to
ratepayers of $45,000 and shareholders of $220,000 to reflect expected
regulatory treatment.
Net income increased in 1993 by $466,000 or 30% due to higher water rates, the
1993 annual surcharge and the sale of land.
17
CONSOLIDATED BALANCE SHEETS
DOMINGUEZ SERVICES CORPORATION AND SUBSIDIARIES
December 31,
-----------------------
($ in Thousands) 1995 1994
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Assets:
Property, plant and equipment (Notes 1 & 4):
Utility plant $56,363 $54,069
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Non-utility plant 67 67
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56,430 54,136
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Less: Accumulated depreciation 20,312 19,586
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36,118 34,550
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Land and land rights 459 432
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Water rights and other intangible assets 167 167
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Construction work in progress 292 748
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Total property, plant and equipment 37,036 35,897
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Cash, including restricted cash of
$434 in 1995 and $344 in 1994 (Notes 1 & 5) 764 1,502
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Accounts receivable:
Customers, less an allowance for doubtful
accounts of $250 in 1995 and $196 in 1994 1,523 1,625
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Unbilled revenues 949 756
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Other 546 887
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Materials and supplies at average cost (Note 4) 94 101
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Prepayments and other 440 427
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Production cost balancing account (Note 1) 620 377
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Deferred tax asset (Note 1 & 9) 340 240
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Total current assets 5,276 5,915
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Notes receivable 137 143
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Prepaid taxes and others (Note 1) 1,494 1,367
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Deferred charges, less accumulated amortization of
$83 in 1995 and $68 in 1994 (Note 1) 206 235
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Income tax related deferred charges (Note 1 & 9) 1,146 1,095
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Total Assets $45,295 $44,652
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18
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
December 31,
-----------------------
($ in Thousands) 1995 1994
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Capitalization and Liabilities:
Common shareholders' equity:
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Common shares:
Par value $1
Authorized: 2,000,000 shares
Issued: 1,004,370 $1,004 $1,004
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Paid-in capital 2,512 2,491
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Retained earnings (Note 3) 11,380 10,597
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Total common shareholders' equity 14,896 14,092
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Preferred shares (Note 2)
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Class A, $25 par value per share 98 98
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Long-term debt (Note 4) 7,273 7,326
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Total capitalization 22,267 21,516
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Current maturities of
long-term debt (Note 4) 81 319
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Accounts payable 3,027 2,783
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Current portion of advances
for construction (Note 6) 200 195
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Accrued interest 240 68
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Other accrued expenses 1,179 1,277
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Income taxes (Note 1 & 9) 134 248
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Total current liabilities 4,861 4,890
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Advances for construction (Note 6) 5,240 5,139
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Contributions in aid of construction (Note 7) 6,056 6,264
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Deferred income taxes (Note 1 & 9) 3,399 3,253
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Unamortized investment tax credit (Note 1) 298 310
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Accrued pension cost (Note 8) 1,114 1,323
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Deferred credits 2,060 1,957
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Total Capitalization and Liabilities $45,295 $44,652
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19
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
CONSOLIDATED STATEMENT OF INCOME & RETAINED EARNINGS
DOMINGUEZ SERVICES CORPORATION AND SUBSIDIARIES
For the years ended December 31,
-------------------------------------
($ in Thousands) 1995 1994 1993
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Consolidated Statements of Income
Operating revenue $25,486 $23,569 $22,193
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Operating expenses:
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Purchased water 11,204 11,437 10,872
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Other production costs 1,913 (351) (620)
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Operations 6,006 6,095 5,765
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Maintenance 978 992 938
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Depreciation 1,275 1,246 1,184
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Taxes:
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Property 277 274 258
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Other 179 158 148
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Income taxes (Notes 1 & 9) 1,177 1,340 1,243
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Total operating expenses 23,009 21,191 19,788
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Operating income 2,477 2,378 2,405
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Other income (expenses):
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Interest and amortization of debt (683) (714) (732)
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Gain on sale of property (Note 1) - - 220
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Water brokering 95 198 -
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Other 64 70 113
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Net income $1,953 $1,932 $2,006
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Earnings per common share $1.94 $1.92 $1.99
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-------------------------------------
For the years ended December 31,
($ in Thousands) 1995 1994 1993
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Consolidated Statements of Retained Earnings
Balance at beginning of year $10,597 $9,775 $8,839
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Net income 1,953 1,932 2,006
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Cash dividends:
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Preferred stock, Class A $1.25 per share 5 5 5
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Common stock:1995 - $1.16 per share 1,165 - -
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1994 - $1.10 per share - 1,105 -
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1993 - $1.06 per share - - 1,065
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Balance at end of year $11,380 $10,597 $9,775
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20
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CONSOLIDATED STATEMENT OF CASH FLOW
DOMINGUEZ SERVICES CORPORATION AND SUBSIDIARIES
For the years ended December 31,
-------------------------------------
($ in Thousands) 1995 1994 1993
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Increase (Decrease) in Cash:
Cash flows from operating activities:
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Net income $1,953 $1,932 $2,006
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Adjustments to reconcile net income to net
cash provided by operating activities:
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Depreciation and amortization 1,291 1,262 1,201
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Deferred income taxes and
investment tax credits 134 36 1,602
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Gain on sale of property - - (220)
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Change in assets and liabilities:
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Customer receivables - net 102 (65) 241
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Notes receivable 6 6 6
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Other receivables 341 (85) (224)
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Materials and supplies 7 (1) 162
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Accounts payable 244 762 (275)
Income taxes (receivable) payable (114) (23) 83
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Accrued pension cost (209) 162 -
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Income tax related deferred charges (51) 6 (1,101)
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Other, net (627) (527) 343
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Net cash provided by operating activities 3,077 3,465 3,824
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Cash flows from investing activities:
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Capital expenditures (2,622) (3,318) (1,652)
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Proceeds from the sale of property,
plant and equipment - - 434
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Net cash used for investing activities (2,622) (3,318) (1,218)
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Cash flows from financing activities:
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Proceeds from advances for construction 287 164 3
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Proceeds from contributions
in aid of construction 178 111 115
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Repayment of advances for construction (197) (204) (227)
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Repayment of long-term debt (291) (19) (162)
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Dividends paid (1,170) (1,110) (1,070)
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Net cash used for financing activities (1,193) (1,058) (1,341)
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Net increase (decrease) in cash (738) (911) 1,265
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Cash at beginning of year 1,502 2,413 1,148
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Cash at end of year $764 $1,502 $2,413
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21
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
Note 1 -SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Dominguez Services
Corporation and its subsidiaries. The preparation of financial statements are in
conformity with generally accepted accounting principles which require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities. These principles also require disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates. The Company and its subsidiaries operate in
the water services industry. All significant inter-company transactions have
been eliminated. The Company maintains its accounts in accordance with the
uniform system of accounts prescribed by the California Public Utilities
Commission (CPUC).
REVENUES:
Water service revenues are recognized on an accrual basis. The unbilled revenue
accrual is based on estimated usage from the latest meter reading to the end of
the accounting period.
PROPERTY, PLANT AND EQUIPMENT:
Utility plant is carried at the value established in 1939 by the CPUC with
subsequent additions at cost or donor's basis, which approximates cost, less
cost of retirements, sales and abandonments. Water rights are stated at the
nominal amount of $1 plus purchased water rights at cost and past expenditures
in connection with litigation in defense thereof. Depreciation of utility plant
for financial statement purposes is computed using the CPUC remaining life
accrual method. Under this method, composite straight-line depreciation rates
are determined by periodic estimates of average remaining life of all utility
plant assets. Costs of abandonments and salvages are charged or credited to
accumulated depreciation. The effective composite depreciation rate was 3.0% and
3.1% in 1995 and 1994, respectively. Costs of maintenance and repairs are
charged to operations; renewals and betterments are generally capitalized in the
property accounts.
PREPAID TAXES AND OTHERS:
Beginning in 1987, contributions in aid of construction and advances for
construction became taxable for Federal income tax purposes. The Company is
paying these taxes and deferring them. These taxes will be recovered over the
tax life of the assets for contributions and the life of the contracts for
advances.
DEFERRED CHARGES:
Debt expense on bonds is being amortized based on the percentage of the
principal amount outstanding over the term of the debt.
PRODUCTION COST BALANCING ACCOUNT:
During 1993, the Company collected $517,000 from its customers related to under-
collected cost as of October 1992. These amounts were recorded as revenue during
1993. Based on the order authorizing this collection, the Company adopted a
policy, effective October 1, 1992, to record over or under-collections of
production costs when incurred in its books of accounts and financial
statements. As of December 31,1995 and 1994, the balancing account reflected an
under-collection of $620,000 and $377,000 respectively.
SALE OF PROPERTY:
Under the threat of condemnation, in 1993 the Company sold approximately 20,000
square feet of its property, principally non utility land, to the City of Carson
for the construction of an overhead vehicular viaduct structure to span Alameda
Street and the adjacent railroad tracks for $434,000. A provision for $169,000
has been established to relocate the Company's main entrance so its customers
and utility personnel will retain similar access to and utilization of its main
office property. The net gain has been allocated to ratepayers of $45,000 and
shareholders of $220,000 to reflect expected regulatory treatment.
22
INCOME TAXES:
The Company provides deferred income taxes for certain transactions which are
recognized for income tax purposes in a period different from that in which they
are reported in the financial statements.
Investment Tax Credits (ITC) have been deferred and are being amortized as
reductions to income tax expense proportionately over the lives of the property
giving rise to the credits.
The Company adopted FASB statement 109 in January 1993. Adoption of the new
standard did not have a material effect on results of operations.
EARNINGS PER SHARE:
Per share data is based upon net income after recognition of dividend
requirements for preferred stock and the weighted average number of common
shares outstanding during the year.
RESTRICTED CASH:
Restricted cash represents surcharge proceeds plus interest earned which is
restricted to the payment of principal and interest on the California Safe
Drinking Water Bond.
RECLASSIFICATIONS:
The 1995 and 1994 consolidated financial statements include certain
reclassifications necessary to conform to current year presentation.
Note 2 - SHAREHOLDERS' EQUITY
The Class A Preferred Shares are 5% cumulative, with 30,000 shares authorized,
and 3,901 shares in 1995 and 1994 issued and outstanding. As of March 15, 1996,
the Company has elected to redeem all the outstanding Class A Preferred Shares.
Note 3- RESTRICTIONS ON
DIVIDENDS
Under the terms of its long-term debt agreements, Dominguez Water Corporation is
limited in its payment of dividends (other than stock dividends) on all classes
of stock to the net income accrued subsequent to December 31, 1992 plus the sum
of $3,000,000. The approximate unrestricted earnings available for dividend
payments amounted to $5,541,000 as of December 31, 1995. The Company's available
dividends to its shareholders is substantially dependent on the availability of
dividends from Dominguez Water Corporation to the Company.
Note 4- LONG TERM DEBT
(a) FIRST MORTGAGE BONDS:
Under a trust indenture dated August 1, 1954 and twelve supplemental indentures,
the Company pledged substantially all its property, water rights, and materials
and supplies as collateral under the bonds. At December 31, 1995 and 1994 first
mortgage bonds outstanding were:
Carrying Amount $ in Thousands
1995 1994
- --------------------------------------------------------------------------------
Series F,8% due 1997 $774 $792
- --------------------------------------------------------------------------------
Series G, 10% due 1995 - 240
- --------------------------------------------------------------------------------
Series H, 9-3/8% due 1998 1,330 1,370
- --------------------------------------------------------------------------------
Series J, 8.86% due 2022 4,000 4,000
- --------------------------------------------------------------------------------
Total First
Mortgage Bonds $6,104 $6,402
- --------------------------------------------------------------------------------
(b) SMALL BUSINESS
ADMINISTRATION LOAN:
- --------------------------------------------------------------------------------
4%-due 2000 $53 $61
- --------------------------------------------------------------------------------
(c) DEPARTMENT OF WATER
RESOURCES LOAN:
Under the California Safe Drinking Water Bond Act of 1976
- --------------------------------------------------------------------------------
8.1%-due 2020 $503 $486
- --------------------------------------------------------------------------------
8.1%-due 2032 447 447
- --------------------------------------------------------------------------------
8.1%-due 2034 247 249
- --------------------------------------------------------------------------------
Total Bonds & Notes $7,354 $7,645
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Less: Current Maturities 81 319
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total Long Term Debt $7,273 $7,326
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Aggregate maturities for the five years commencing with 1995 are
approximately $81,000 (1996), $819,000 (1997), $1,273,000 (1998), $23,000
(1999), $20,000 (2000).
Note 5 - INTERIM DEBT
The Company maintains an available line of credit of $2,000,000 with Bank of
America. During the year there were no borrowings outstanding under the line of
credit. The Company intends to renew the line of credit which expires in June
1996. In connection with the line of credit, the Company maintains on deposit
with the bank an average compensating balance equal to 5% of the line of credit.
Borrowing bears interest at the preference lending rate.
23
Note 6 - ADVANCES FOR
CONSTRUCTION
Advances for construction of main extensions are primarily refundable to
depositors over a 20 year or 40 year period. Refund amounts under the 20 year
contracts are based on annual revenues from the extension. Balances at the end
of the contract period are refunded in five equal yearly installments. Beginning
in June 1982 contracts provide for full refund at a 2-1/2% rate per year for 40
years. Estimated refunds for 1996 for all main extension contracts are $200,000.
Note 7- CONTRIBUTIONS IN AID OF CONSTRUCTION
Contributions in aid of construction are donations or contributions in cash,
services or property from governmental agencies, or individuals for the purpose
of constructing utility facilities. Depreciation applicable to such plants is
charged to the contributions in aid account rather than to depreciation expense.
The charges continue until the cost applicable to such properties has been fully
depreciated or the asset has been retired.
$ in Thousands
1995 1994
- --------------------------------------------------------------------------------
Beginning balance $6,264 $6,471
- --------------------------------------------------------------------------------
Add net contributions
during the year 18 31
- --------------------------------------------------------------------------------
Deduct depreciation for
the year charged on
plant acquired
through donations (226) (238)
- --------------------------------------------------------------------------------
Ending Balance $6,056 $6,264
- --------------------------------------------------------------------------------
Note 8- EMPLOYEE BENEFITS
The Company provides a qualified defined benefit plan for all its full-time
employees.
Benefits under this plan reflect the employee's compensation, years of service
and age at retirement. Funding is based upon actuarially determined
contributions that take into account the amount deductible for income tax
purposes and the minimum contribution required under the Employee Retirement
Income Security Act of 1974, as amended. Pension costs were $401,000 in 1995,
$505,000 in 1994 and $448,000 in 1993.
Beginning January 1, 1987, costs for pensions are determined under the rules
prescribed by Statement of Financial Accounting Standards (SFAS) No. 87,
including the use of the projected unit credit actuarial cost method. For rate
making purposes, the Company recovers pension expense based on the method in
place prior to SFAS No. 87. The effects of this change in accounting were not
material to the financial statements.
The components of the 1995, 1994 and 1993 provisions are summarized as follows:
$ in Thousands
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Service cost
(including expense) $498 $549 $516
- --------------------------------------------------------------------------------
Interest cost 574 545 518
- --------------------------------------------------------------------------------
Actual return
on assets (1111) (55) (656)
- --------------------------------------------------------------------------------
Amortization of:
Unrecognized
- --------------------------------------------------------------------------------
Net asset (58) (58) (58)
- --------------------------------------------------------------------------------
Unrecognized
net gain (loss) 498 (476) 128
- --------------------------------------------------------------------------------
Net Pension Cost $401 $505 $448
- --------------------------------------------------------------------------------
The obligations for pension benefits and the amount recognized in the
Consolidated Balance Sheets are re-conciled as follows:
$ in Thousands
1995 1994
- --------------------------------------------------------------------------------
Plan assets, at fair
value, invested in
stocks and bonds $9,127 $7,597
- --------------------------------------------------------------------------------
Actuarial present value
of projected benefit
obligation (8,511) (7,409)
- --------------------------------------------------------------------------------
Plan assets in excess
(deficit) of projected
benefit obligation $616 $188
- --------------------------------------------------------------------------------
Unrecognized prior
service cost 201 -
- --------------------------------------------------------------------------------
Unrecognized net asset (350) (408)
- --------------------------------------------------------------------------------
Unrecognized net gain (1581) (1,103)
- --------------------------------------------------------------------------------
Accrued pension cost $(1114) $(1,323)
- --------------------------------------------------------------------------------
Discount rate 7.50% 7.75%
- --------------------------------------------------------------------------------
Rate of compensation
increase 4.50% 5.0%
- --------------------------------------------------------------------------------
Expected return on assets 7.50% 7.75%
- --------------------------------------------------------------------------------
The accumulated benefit obligation of $7,037,000 at December 31, 1995 including
vested benefits of $6,904,000 represents the present value of future pension
benefit payments and is based on the Plan's benefit formulas without considering
expected future salary increases. The projected benefit obligation considers
future salary increases.
Postretirement Benefits Other Than Pensions
In January 1993, the Company adopted a new accounting standard for
postretirement benefits other than pensions, which requires the expected cost of
these benefits to be charged to expense during employees' years of service. The
Company will amortize its $588,000 obligation related to prior service over 20
years.
The Company provides health care benefits for retired employees until both the
employee and their
24
spouse have reached 65 years of age. Health care benefits are subject to
deductibles, co-payment provisions and other limitations. The Company funds the
plan up to tax-deductible limits, in accordance with rate-making practices.
Total expense was $90,000 in 1995. Any difference between expense determined
under the new standard and amounts authorized for rate recovery is not expected
to be material and will be charged to earnings.
The components of postretirement benefits other than pensions expense were:
$ in Thousands
1995 1994
- -----------------------------------------------------------
Service cost for benefits earned $39 $ 46
- -----------------------------------------------------------
Interest cost 45 47
- -----------------------------------------------------------
Actual return on assets (1) -
- -----------------------------------------------------------
Amortization of losses
from prior periods (6) -
- -----------------------------------------------------------
Amortization of transition
obligation 28 28
- -----------------------------------------------------------
Assets gain (loss) deferred (15) (8)
- -----------------------------------------------------------
Total $90 $113
- -----------------------------------------------------------
The assumed rate of future increases in the per-capita cost of health care
benefits is 6.5%. Increasing the health care cost trend rate by one percentage
point would increase the accumulated obligation as of December 31,1995 from
$647,000 to $725,000,a $78,000 increase, and annual aggregate service and
interest costs from $84,000 to $98,000, a $14,000 increase. The actuarial
assumptions used were discount rates of 7.5% at December 31, 1995 and 7.75% at
January 1, 1995 and an expected long-term rate of return on plan assets of 7.5%
and 7.75% respectively.
The Company offers its employees a 401(K) plan. Employees make all contributions
under the plan.
Note 9- INCOME TAXES
In January 1993, the Company adopted a new income tax accounting standard. This
standard requires the balance sheet method to account for income taxes, where
deferred taxes are recognized for all temporary differences between book and tax
income. Upon adoption of the standard, the Company recorded balance sheet
adjustments of $1,000,000 for previously unrecorded deferred taxes on temporary
differences. Substantially all of these deferred taxes were offset by deferred
charges representing amounts expected to be recovered in future rates.
CURRENT AND DEFERRED TAXES
Income tax expenses include the current tax liability from operations and the
change in deferred income taxes during the year. Investment tax credits are
amortized over the life of related properties.
The components of the net accumulated deferred income tax liabilities were:
$ in Thousands
1995 1994
- ---------------------------------------------------------------------
Deferred tax assets:
- ---------------------------------------------------------------------
Pension plan $495 $495
- ---------------------------------------------------------------------
Other 531 461
- ---------------------------------------------------------------------
Total deferred tax assets $1,026 $956
- ---------------------------------------------------------------------
Deferred tax liabilities:
- ---------------------------------------------------------------------
Depreciation $2,749 $2,482
- ---------------------------------------------------------------------
Property-related 1,300 1,336
- ---------------------------------------------------------------------
Other 36 151
- ---------------------------------------------------------------------
Total deferred tax liabilities $4,085 $3,969
- ---------------------------------------------------------------------
Net accumulated deferred
income taxes $3,059 $3,013
- ---------------------------------------------------------------------
Classification of accumulated
deferred income taxes:
- ---------------------------------------------------------------------
Included in current assets 340 240
- ---------------------------------------------------------------------
Included in deferred taxes $3,399 $3,253
- ---------------------------------------------------------------------
The current and deferred components of income tax expenses were:
$ in Thousands
1995 1994 1993
- --------------------------------------------------------------------------------
Current income taxes:
- --------------------------------------------------------------------------------
Current federal $842 $955 $825
- --------------------------------------------------------------------------------
Current state 271 310 274
- --------------------------------------------------------------------------------
Investment tax credit (12) (12) (13)
- --------------------------------------------------------------------------------
Total current taxes $1,101 $1,253 $1,086
- --------------------------------------------------------------------------------
Deferred income taxes:
- --------------------------------------------------------------------------------
Depreciation $267 $188 $188
- --------------------------------------------------------------------------------
Contributions
and advances (158) (78) (14)
- --------------------------------------------------------------------------------
Pension plan - (47) n -
- --------------------------------------------------------------------------------
Other (33) 27 (17)
- --------------------------------------------------------------------------------
Total deferred taxes $76 $90 $157
- --------------------------------------------------------------------------------
A reconciliation of the federal statutory income tax rate to the effective rate
is presented below:
Percent
1995 1994 1993
- --------------------------------------------------------------------------------
Expected income
tax expense 34% 34% 34%
- --------------------------------------------------------------------------------
Increase (decrease)
in expected income
tax resulting from:
Effect of state
income tax 6% 6% 6%
- --------------------------------------------------------------------------------
Gain on sale of
property - - (3%)
- --------------------------------------------------------------------------------
Abandonments (2%) - 1%
- --------------------------------------------------------------------------------
Other - 1% -
- --------------------------------------------------------------------------------
Total 38% 41% 38%
- --------------------------------------------------------------------------------
25
NOTES TO THE FINANCIAL STATEMENTS
DOMINGUEZ SERVICES CORPORATION AND SUBSIDIARIES
Note 10- BUSINESS RISKS AND CONCENTRATION OF SALES
Fifty percent of the Company's water supplies comes from its own groundwater
wells, and 50% comes from wholesalers of imported water. The long term
availability of imported water supplies are dependent upon several factors.
Drought conditions throughout the state, increases in population, tightening of
water quality standards and legislation may reduce water supplies. At this time,
the Company does not anticipate any constraints on its imported water supplies
due primarily to above average precipitation in prior years. The Company is
taking steps to reduce its dependence on imported water supplies. The Company is
working with the West Basin Municipal Water District to bring reclaimed water
into its South Bay service area. The Company continues to drill new wells, so
that it can utilize its total adjudicated groundwater rights.
The Company's utility operations are engaged in supplying water to the public.
The Company is required to provide service and grant credit to customers within
its defined service territories.
Although the Company has a diversified base of residential, business/industrial
and public authority customers, a substantial portion, 53% in 1995 and 50% in
1994, of business and industrial sales are dependent upon the refineries. One
single refinery was responsible for 37% of this business/industrial consumption
in 1995, and for 38% in 1994.
Sales for 1995 and 1994 are as follows:
$ in Thousands
1995 1994
- ------------------------------------------------------------------------
Residential/
Multi Family $10,584 $10,196
- -----------------------------------------------------------------------
Business/
Industrial 11,759 10,291
- -----------------------------------------------------------------------
Public Authority 1,436 1,402
- -----------------------------------------------------------------------
All Other 1,488 1,465
- -----------------------------------------------------------------------
Total $25,267 $23,354
- -----------------------------------------------------------------------
Note 11 - SUPPLEMENTAL CASH FLOW INFORMATION
$ in Thousands
1995 1994 1993
- ---------------------------------------------------------------------
Cash paid for:
- ---------------------------------------------------------------------
Interest, net $501 $523 $678
- ---------------------------------------------------------------------
Income taxes $1,270 $1,075 $643
- ---------------------------------------------------------------------
Note 12 - RELATED PARTY TRANSACTIONS
The Company annually refunds a portion of revenue received from several water
mains for which Watson Land Company, Carson Estate Company and Dominguez
Properties advanced the construction funds to the Company. The refunds to
Watson Land Company were $16,516 in 1995 and $15,307 for 1994. The refunds to
Carson Estate Company were $1,110 for 1995 and $1,110 for 1994. The refunds to
Dominguez Properties were $6,176 for 1995 and $6,176 for 1994.
The Company also leases sites used for wells from Watson Land Company and
Dominguez Properties. The rental costs for 1995 were $38,652 and $2,678
respectively. The Company provides water service to these entities to the
extent that they have property within the division.
Note 13 - LITIGATION
The Company's insurance carrier has settled the two lawsuits filed in the
California Superior Court that arose from the shooting death of an employee by
another employee in January 1994. Legal costs accrued in anticipation of
litigation have been reversed. The terms of the settlements had no material
adverse financial impact on the Company.
26
QUARTERLY FINANCIAL DATA (Unaudited)
Operating Revenue Net Income Earnings
($ in thousands) ($ in thousands) Per Share
1995 1994 1995 1994 1995 1994
- --------------------------------------------------------------------------------
First Quarter $5,094 $4,840 $233 $223 $.23 $.22
- --------------------------------------------------------------------------------
Second Quarter 6,868 5,867 605 653 .60 .65
- --------------------------------------------------------------------------------
Third Quarter 7,552 7,736 749 693 .75 .69
- --------------------------------------------------------------------------------
Fourth Quarter 5,972 5,126 366 363 .36 .36
- --------------------------------------------------------------------------------
Year $25,486 $23,569 $1,953 $1,932 $1.94 $1.92
MARKET INFORMATION (Unaudited)
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Common stock trades on NASDAQ under the symbol DOMZ. NASDAQ is an automated
quotations system developed by the National Association of Security Dealers for
the over-the-counter market. There were 336 common shareholders of record as of
December 31, 1995, as well as 314 common shareholders held in street name.
Quarterly dividends have been paid since 1964. We cannot predict future actions
of the Board of Directors, but at the present time, there is no change
contemplated in the Company's dividend policy. The following record of common
stock prices for 1995 and 1994 was obtained from the National Association of
Securities Dealers, Inc., 1735 K Street Northwest, Washington, D.C. 20006:
1995 High Low Div.
- -----------------------------------------------------------
1st Quarter 17-3/4 16-3/4 .29
- -----------------------------------------------------------
2nd Quarter 17-3/4 16-1/2 .29
- -----------------------------------------------------------
3rd Quarter 17-1/2 16 .29
- -----------------------------------------------------------
4th Quarter 19 16 .29
- -----------------------------------------------------------
1994 High Low Div.
- -----------------------------------------------------------
1st Quarter 20-1/2 19-1/4 .275
- -----------------------------------------------------------
2nd Quarter 19-1/2 17 .275
- -----------------------------------------------------------
3rd Quarter 18-1/4 17 .275
- -----------------------------------------------------------
4th Quarter 17-1/4 16-1/2 .275
- -----------------------------------------------------------
27