TEN YEAR STATISTICAL REVIEW
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992 1991 1990
SUMMARY OF OPERATIONS: ($ IN THOUSANDS)
Operating revenue $ 24,705 $ 25,486 $ 23,569 $ 22,193 $ 21,813 $ 18,706 $ 19,139
Operating expenses (before taxes) 20,745 21,376 19,419 18,139 18,327 15,677 15,869
Income taxes 1,314 1,177 1,340 1,243 1,031 807 1,087
Other taxes 448 455 432 406 397 323 321
Other expense 33 7 29 20 17 32 41
Other income (475) (165) (297) (353) (85) (73) (186)
Interest cost 659 683 714 732 586 606 633
Net income 1,981 1,953 1,932 2,006 1,540 1,334 1,374
Dividends paid 1,247 1,170 1,110 1,070 1,009 989 965
Reinvested in the business 734 783 822 936 531 345 409
PER COMMON SHARE DATA:*
Earnings $ 1.97 $ 1.94 $ 1.92 $ 1.99 $ 1.53 $ 1.32 $ 1.37
Dividends $ 1.24 $ 1.16 $ 1.10 $ 1.06 $ 1.00 $ 0.98 $ 0.96
Payout percentage 63.0% 60.0% 57.5% 53.5% 65.4% 74.2% 70.1%
Book value $ 15.56 $ 14.83 $ 14.03 $ 13.23 $ 12.29 $ 11.77 $ 11.40
Return on common equity (average) 13.0% 13.4% 14.1% 15.6% 12.8% 11.4% 12.2%
Number shares outstanding 1,004,370 1,004,370 1,004,370 1,004,370 1,004,370 1,004,370 998,370
Year end market price $ 22.50 $ 18.50 $ 16.75 $ 21.00 $ 16.25 $ 15.00 $ 14.25
BALANCE SHEET DATA: ($ IN THOUSANDS)
Gross utility plant $ 60,059 $ 57,271 $ 55,406 $ 52,260 $ 51,037 $ 50,161 $ 46,710
Net utility plant 43,534 41,358 40,022 37,977 37,511 33,793 31,713
Non utility plant 399 67 67 51 105 105 104
Total Assets 46,875 45,295 44,652 42,662 40,275 39,596 37,477
CAPITALIZATION: ($ IN THOUSANDS)
Long-term debt $ 7,036 $ 7,273 $ 7,326 $ 7,493 $ 7,657 $ 3,829 $ 3,766
Preferred stock - 98 98 98 98 98 126
Common equity 15,626 14,896 14,092 13,284 12,348 11,817 11,383
Total capitalization 22,662 22,267 21,516 20,875 20,103 15,744 15,275
Interim debt 800 - - - - 3,375 2,725
CAPITALIZATION RATIOS:
Long-term debt 31.0% 32.7% 34.0% 35.9% 38.1% 24.3% 24.7%
Preferred stock - 0.4% 0.5% 0.5% 0.5% 0.6% 0.8%
Common equity 69.0% 66.9% 65.5% 63.6% 61.4% 75.1% 74.5%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
OTHER UTILITY STATISTICS:
Customers at year end 36,882 36,739 36,371 36,107 36,043 35,949 34,444
Average revenue per customer $ 650.92 $ 665.70 $ 619.90 $ 561.27 $ 481.35 $ 423.35 $ 490.32
Water sales (millions of gallons) 11,481 12,371 12,071 11,359 11,731 10,906 12,957
Utility employees 77 78 76 75 69 71 64
FOR THE YEARS ENDED DECEMBER 31, 1989 1988 1987
SUMMARY OF OPERATIONS: ($ IN THOUSANDS)
Operating revenue $ 20,359 $ 19,409 $ 17,423
Operating expenses (before taxes) 16,855 16,054 14,117
Income taxes 1,110 1,050 1,042
Other taxes 330 320 302
Other expense 18 51 65
Other income (38) (64) (275)
Interest cost 577 569 649
Net income 1,507 1,429 1,523
Dividends paid 940 884 827
Reinvested in the business 567 545 696
PER COMMON SHARE DATA:*
Earnings $ 1.47 $ 1.42 $ 1.51
Dividends $ 0.92 $ 0.86 $ 0.80
Payout percentage 62.6% 60.6% 53.0%
Book value $ 10.98 $ 10.08 $ 9.53
Return on common equity (average) 14.0% 14.5% 16.5%
Number shares outstanding 998,370 979,620 979,620
Year end market price $ 14.75 $ 15.00 $ 15.50
BALANCE SHEET DATA: ($ IN THOUSANDS)
Gross utility plant $ 45,205 $ 41,536 $ 39,475
Net utility plant 31,233 28,714 27,170
Non utility plant 101 93 87
Total Assets 36,513 33,516 31,242
CAPITALIZATION: ($ IN THOUSANDS)
Long-term debt $ 4,059 $ 4,583 $ 5,062
Preferred stock 142 784 810
Common equity 10,968 9,877 9,329
Total capitalization 15,169 15,244 15,201
Interim debt 950 - 1,150
CAPITALIZATION RATIOS:
Long-term debt 26.8% 30.1% 33.3%
Preferred stock 0.9% 5.1% 5.3%
Common equity 72.3% 64.8% 61.4%
Total 100.0% 100.0% 100.0%
OTHER UTILITY STATISTICS:
Customers at year end 34,189 32,765 32,403
Average revenue per customer $ 501.95 $ 520.58 $ 488.80
Water sales (millions of gallons) 13,339 13,237 11,794
Utility employees 56 51 51
*adjusted to reflect 3-for-2 stock split effective September, 1987
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the accompanying
Consolidated Financial Statements on page 13 and with the Ten Year
Statistical Review on page 8. Dominguez Services Corporation ("the Company")
has two wholly-owned subsidiaries: Dominguez Water Company ("Dominguez"),
which is involved in water supply and distribution, and DSC Investments,
which is involved in non-regulated, water-related services and investments.
Dominguez and its operating subsidiaries are regulated by the California
Public Utilities Commission (the "CPUC") and, as such, they must obtain
approval to increase water rates to recover increases in operating expenses
and for reinvested capital in rate base. Most variations in revenues are due
to weather conditions and the water usage of major industrial customers.
Dominguez is comprised of its principal division, the South Bay, and its
operating subsidiaries, the Kern River Valley Water Company and the Antelope
Valley Water Company. The South Bay has been providing water service for more
than 85 years to its customers. Today, the South Bay serves a 35 square mile
area including most of Carson, one-third of Torrance, and parts of Compton,
Long Beach and Harbor City with a total of 32,228 customers. The Kern River
Valley Water Company and the Antelope Valley Water Company (collectively
referred to as "Subsidiaries") provide water service to 3,412 and 1,242
customers respectively.
DSC Investments' income is primarily from the transfer of water rights
between third parties. Income from the transfers may significantly vary from
year to year due to demands for groundwater by major pumpers in the West and
Central Basins.
LIQUIDITY AND CAPITAL RESOURCES
The Company's continuing operations provided sufficient cash to cover
operating expenses, interest and dividends. In 1996, the Company and its
subsidiaries invested $3,490,000 in utility plant improvements. Approximately
$520,000 was contributed or advanced by developers. The Subsidiaries borrowed
$814,000 in low interest loans from the Department of Water Resources. Low
interest loans are available only to Subsidiaries to finance capital
improvements needed to meet water quality and supply standards.
The remaining funds for capital improvements were generated from operating
earnings reinvested ($734,000) and short-term borrowings. Under a revolving
credit facility with Bank of America, the Company has available $3,000,000 at
the bank's preference rate. As of December 31, 1996, short-term borrowings
under the facility totaled $800,000. Once short-term borrowings reach a level
where long-term refinancing is cost effective, the Company plans another
issuance of long-term first mortgage bonds.
In 1996, the DSC Investments invested $350,000 in Chemical Services
Corporation ("CSC") and acquired a 20% equity ownership interest with an
option to acquire an additional 40% equity ownership interest over the next
five years. CSC manufactures and distributes chlorine generators used in the
water and wastewater industry to produce safe on-site chlorine disinfectant.
Under the investment agreements, the Company is obligated to provide working
cash and long-term financing for the leasing of chlorine generators to CSC
subject to the financial conditions of CSC.
In 1996, the Company redeemed all of its outstanding preferred stock for
$98,000.
The Company's 1997 capital budget is $4,683,000. Budgeted improvements
include $2,128,000 on supply and storage and $1,009,000 on pipeline
replacements. The Company will fund budgeted improvements from earnings
available for reinvestments and short-term borrowings.
REGULATORY AFFAIRS
During 1996, the California Legislature passed legislation calling for the
reform of various CPUC policies and procedures. The legislature recommended
changes intended to enhance commission involvement in decision making,
thereby improving the quality and timeliness of commission decisions. The
legislation also called for the restructuring of the division that represents
the interests of customers with the CPUC.
The Company believes that changes already undertaken by the CPUC will improve
the quality of regulation for water utilities. The Company does not
anticipate that changes will significantly alter the traditional regulatory
environment for water utilities.
MANAGEMENT'S DISCUSSION AND ANALYSIS
In 1996, the Company filed for and received approval to increase revenues
effective February 1, 1997, for approximately $375,000 annually, or 1.6%, to
recover the increased cost of purchased water effective January 1, 1997. This
rate increase does not increase earnings of the Company but rather offsets
the effects of higher water production costs to the Company.
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. One of the Subsidiary water systems exceeded the
state and federal standard for radioactivity. The Company has ceased using
this water source and is providing customers with an alternative source.
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 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
Effective January 1, 1996, the Company adopted SFAS 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of. This
statement imposes a stricter criterion for regulatory assets by requiring
that such assets be probable of future recovery at each balance sheet date.
Based on the current regulatory structure in which the Company operates,
adoption of this standard did not have a material impact on the Company's
financial position or results of operations. However, the Company's ability
to meet the criterion may change in the future as competitive factors
influence the water industry.
RESULTS OF OPERATIONS 1996 COMPARED TO 1995
Operating revenue totaled $24,705,000 for 1996, a decrease of $781,000, or
3%, lower than the $25,486,000 recorded for 1995. The decreased revenues are
due to lower sales to industrial customers which was partially offset by
higher residential sales. The industrial sales dropped by $1,480,000, or 18%.
Total residential sales were up by $982,000, or 6%.
Operating expenses before taxes decreased by $631,000, or 2.9%, a combination
of lower water costs and higher operation and maintenance costs. In 1996,
water costs decreased as the South Bay division was able to purchase less
imported water from the West Basin Municipal Water District with increased
pumping of its wells. The overall margin on water sales improved from 49% to
52% due to fewer water sales to large industrial customers at a lower tariff
water rate. Operations and maintenance costs increased by $538,000, or 7.7%,
due primarily to increases in consulting costs.
Other income increased by $310,000. Income from the transfer of water right
leases increased by $243,000 for the year. Sale of Hydro-Metric resulted in a
gain of $39,000.
Interest costs decreased by $24,000, or 3.6%, due to lower borrowing costs as
Series G bonds were paid off during 1995.
Net income increased $28,000, or 1.5%, due to improved margins on water sales
and other income. Earnings per share on common equity increased from $1.94 to
$1.97 for reasons stated above. The Company raised its annual dividend to
common shareholders from $1.16 in 1995 to $1.24 in 1996, an increase of 6.9%.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 Company 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 $1.92 due to
lower other income as discussed above.
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, ($ IN THOUSANDS, EXCEPT SHARE DATA) 1996 1995
ASSETS:
Property, plant and equipment (Notes 1 & 4):
Utility plant $ 59,016 $ 56,363
Non-utility plant 399 67
--------- ---------
59,415 56,430
Less: Accumulated depreciation 21,080 20,312
--------- ---------
38,335 36,118
Land and land rights 459 459
Water rights and other intangible assets 167 167
Construction work in progress 427 292
--------- ---------
Total property, plant and equipment 39,388 37,036
Cash, including restricted cash of $499 in 1996 and $434 in 1995 (Notes 1 & 5) 711 764
Accounts receivable:
Customers, less an allowance for doubtful accounts
of $285 in 1996 and $250 in 1995 1,629 1,523
Unbilled revenues 909 949
Other 179 546
Materials and supplies at average cost (Note 4) 46 94
Prepayments and other 777 440
Production cost balancing account (Note 1) 320 620
Deferred tax assets (Note 1 & 9) 426 340
--------- ---------
Total current assets 4,997 5,276
Notes receivable 130 137
Prepaid taxes and others (Note 1) 1,357 1,494
Deferred charges, less accumulated amortization
of $97 in 1996 and $83 in 1995 (Note 1) 165 206
Income tax related deferred charges (Note 1 & 9) 838 1,146
--------- ---------
Total Assets $ 46,875 $ 45,295
--------- ---------
--------- ---------
CAPITALIZATION AND LIABILITIES:
Common shareholders' equity:
Common shares:
Par value $1
Authorized: 2,000,000 shares
Issued: 1,004,370 shares $ 1,004 $ 1,004
Paid-in capital 2,508 2,512
Retained earnings (Note 3) 12,114 11,380
--------- ---------
Total common shareholders' equity 15,626 14,896
Preferred shares (Note 2)
Class A, $25 par value per share - 98
Long-term debt (Note 4) 7,036 7,273
--------- ---------
Total capitalization 22,662 22,267
Current maturities of long-term debt (Note 4) 849 81
Accounts payable 2,260 3,027
Interim debt (Note 5) 800 -
Current portion of advances for construction (Note 6) 169 200
Accrued interest 60 240
Other accrued expenses 1,208 1,179
Income taxes (Note 1 & 9) 236 134
--------- ---------
Total current liabilities 5,582 4,861
Advances for construction (Note 6) 5,236 5,240
Contributions in aid of construction (Note 7) 6,076 6,056
Deferred income taxes (Note 1 & 9) 3,617 3,399
Unamortized investment tax credit (Note 1) 287 298
Accrued pension cost (Note 8) 959 1,114
Deferred credits 2,456 2,060
--------- ---------
Total Capitalization and Liabilities $ 46,875 $ 45,295
--------- ---------
--------- ---------
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENT OF INCOME & RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, ($ IN THOUSANDS) 1996 1995 1994
CONSOLIDATED STATEMENT OF INCOME
Operating revenue $ 24,705 $ 25,486 $ 23,569
----------- ----------- -----------
Operating expenses:
Purchased water 7,797 11,204 11,437
Other production costs 4,119 1,913 (351)
Operations 6,469 6,006 6,095
Maintenance 1,053 978 992
Depreciation 1,307 1,275 1,246
Taxes:
Property 289 277 274
Other 159 179 158
Income taxes (Notes 1 & 9) 1,314 1,177 1,340
----------- ----------- -----------
Total operating expenses 22,507 23,009 21,191
----------- ----------- -----------
----------- ----------- -----------
Operating income 2,198 2,477 2,378
Other income (expenses):
Interest and amortization of debt (659) (683) (714)
Water rights 338 95 198
Other 104 64 70
----------- ----------- -----------
Net income $ 1,981 $ 1,953 $ 1,932
----------- ----------- -----------
----------- ----------- -----------
Earnings per common share (in Dollars) $ 1.97 $ 1.94 $ 1.92
----------- ----------- -----------
FOR THE YEARS ENDED DECEMBER 31, ($ IN THOUSANDS) 1996 1995 1994
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Balance at beginning of year $ 11,380 $ 10,597 $ 9,775
Net income 1,981 1,953 1,932
Cash dividends:
Preferred stock, Class A $1.25 per share 1 5 5
Common stock:
1996 - $1.24 per share 1,246 - -
1995 - $1.16 per share - 1,165 -
1994 - $1.10 per share - - 1,105
----------- ----------- ----------
Balance at end of year $ 12,114 $ 11,380 $ 10,597
----------- ----------- ----------
----------- ----------- ----------
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, ($ IN THOUSANDS) 1996 1995 1994
INCREASE(DECREASE) IN CASH:
Cash flows from operating activities:
Net income $ 1,981 $ 1,953 $ 1,932
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,321 1,291 1,262
Deferred income taxes and investment tax credits 207 134 36
Change in assets and liabilities:
Customer receivables - net (106) 102 (65)
Notes receivable 7 6 6
Other receivables 367 341 (85)
Materials and supplies 48 7 (1)
Accounts payable (767) 244 762
Income taxes (receivable) payable 102 (114) (23)
Accrued pension cost (155) (209) 162
Income tax related deferred charges 308 (51) 6
Other, net 199 (627) (527)
---------- ---------- ----------
Net cash provided by operating activities 3,512 3,077 3,465
---------- ---------- ----------
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (3,490) (2,622) (3,318)
Purchase of Chemical Service Corporation (399) - -
---------- ---------- ----------
Net cash used for investing activities (3,889) (2,622) (3,318)
---------- ---------- ----------
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from advances for construction 219 287 164
Proceeds from contributions in aid of construction 301 178 111
Repayment of advances for construction (182) (197) (204)
Repayment of long-term debt (283) (291) (19)
Department of Water Resources Loan 814 - -
Preferred stock redemption (98) - -
Proceeds from interim debt 800 - -
Dividends paid (1,247) (1,170) (1,110)
---------- ---------- ----------
Net cash provided (used) for financing activities 324 (1,193) (1,058)
---------- ---------- ----------
---------- ---------- ----------
Net decrease in cash (53) (738) (911)
Cash at beginning of year 764 1,502 2,413
---------- ---------- ----------
Cash at end of year $ 711 $ 764 $ 1,502
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL 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 Subsidiaries
maintain their 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 abandonment. 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 abandonment and salvages are
charged or credited to accumulated depreciation. The effective composite
depreciation rate was 2.9% and 3.0% in 1996 and 1995, respectively. Costs of
maintenance and repairs are charged to operations; renewals and betterment
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:
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 based on the regulatory treatment afforded these
costs. As of December 31, 1996 and 1995, the balancing account reflected an
under-collection of $320,000 and $620,000 respectively.
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.
REGULATORY ASSETS:
Effective January 1, 1996, the Company adopted SFAS 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of. This
statement imposes a stricter criterion for regulatory assets by requiring
that such assets be probable of future recovery at each balance sheet date.
Based on the current regulatory structure in which the Company operates,
adoption of this standard did not have a material impact on the Company's
financial position or results of operations. However, the Company's ability
to meet the criterion may change in the future as competitive factors
influence the water industry.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
NEW BUSINESS:
On December 20, 1996, DSC Investments invested $350,000 in Chemical Services
Corporation and acquired a 20% equity ownership with the option to acquire an
additional 40% equity ownership over the next 5 years. The investment is
accounted for under the equity method. Under the investment agreements, the
Company is obligated to provide working cash and long term financing for the
leasing of chlorine generators to CSC subject to the financial conditions of
CSC. The maximum loan balance for the following calendar years are $2,000,000
(1997), $2,500,000 (1998), $3,000,000 (1999) and $3,500,000 (2000). As of
December 31, 1996, the Company had no outstanding loans to CSC. In accordance
with the agreements, the Company did not recognize any income from the CSC
investment in 1996.
SALE OF BUSINESS:
On April 26, 1996, the Company sold the remaining assets of Hydro-Metric
Services to an officer of the Company in exchange for a two year note
receivable with outstanding balance of $48,000 as of December 31, 1996. The
sale resulted in a gain of $39,000.
RECLASSIFICATIONS:
The 1996 and 1995 consolidated financial statements include certain
reclassifications necessary to conform to current year presentation.
NOTE 2 - SHAREHOLDERS EQUITY
As of March 15, 1996, the Company redeemed all the remaining outstanding
Class A Preferred Shares for $98,000. The Class A Preferred Shares were 5%
cumulative, with 30,000 shares authorized, with zero and 3,901 shares in 1996
and 1995 issued and outstanding.
NOTE 3 - RESTRICTIONS ON DIVIDENDS
Under the terms of its long-term debt agreements, Dominguez 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 $6,275,000 as of December 31, 1996. The Company's
available dividends to its shareholders are substantially dependent on the
availability of dividends from Dominguez to the Company.
NOTE 4 - LONG-TERM DEBT
Under a trust indenture dated August 1, 1954 and twelve supplemental
indentures, the Company pledged substantially all its property, water rights,
and materials and supplies as collateral under the bonds. At December 31,
1996 and 1995 long-term debt outstanding was:
- --------------------------------------------------------
CARRYING AMOUNT ($ IN THOUSANDS) 1996 1995
- --------------------------------------------------------
First Mortgage Bonds:
Series F, 8% due 1997 $ 756 $ 774
Series H, 9.375% due 1998 1,290 1,330
Series J, 8.86% due 2022 4,000 4,000
--------------------
Total First Mortgage Bonds $6,046 $6,104
--------------------
SMALL BUSINESS ADMINISTRATION LOAN:
- --------------------------------------------------------
4% - due 2000 $ 39 $ 53
--------------------
DEPARTMENT OF WATER RESOURCES LOAN:
- --------------------------------------------------------
Under the California Safe Drinking
Water Bond Act of 1976
7.4% - due 2020 $ 478 $ 503
7.4% - due 2011 304 447
7.4% - due 2013 204 247
3.0% - due 2032 547 -
3.4% - due 2027 267 -
--------------------
Total Bonds & Notes $7,885 $7,354
Less: Current Maturities 849 81
--------------------
Total Long Term Debt $7,036 $7,273
--------------------
- --------------------------------------------------------
Aggregate maturities for the five years commencing with 1996 are
approximately $849,000 (1997), $1,305,000 (1998), $57,000 (1999), $55,000
(2000) and $52,000 (2001).
NOTE 5 - INTERIM DEBT
The Company maintained an available line of credit of $3,000,000 in 1996 and
$2,000,000 in 1995 with Bank of America. At the end of December 31, 1996, the
outstanding borrowing was $800,000. At the end of 1995, it was zero. The
Company intends to renew the line of credit which expires in July 1997. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1997 for all main extension
contracts are $169,000.
NOTE 7 - CONTRIBUTIONS IN AID OF CONSTRUCTION
Contributions in aid of construction are donations or contributions in cash,
services or property from governmental agencies or individuals for the
purpose of constructing utility facilities. Depreciation applicable to such
plants is charged to the contributions in aid account rather than to
depreciation expense.
The charges continue until the cost applicable to such properties has been
fully depreciated or the asset has been retired.
- ----------------------------------------------------------
($ IN THOUSANDS) 1996 1995
- ----------------------------------------------------------
Beginning balance $6,056 $6,264
Add net contributions during the year 236 18
Deduct depreciation for the year charged
on plant acquired through donations (216) (226)
-----------------
Ending Balance $6,076 $6,056
- ----------------------------------------------------------
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 $363,000 in 1996,
$401,000 in 1995 and $505,000 in 1994.
Beginning January 1, 1987, costs for pensions were determined under the rules
prescribed by Statement of Financial Accounting Standards (SFAS) No. 87,
including the use of the projected unit credit actuarial cost method. For
rate making purposes, the Company recovers pension expense based on the
method in place prior to SFAS No. 87.
The components of the 1996, 1995 and 1994 provisions are summarized as follows:
- ------------------------------------------------------------
($ IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------
Service cost (including expense) $ 501 $ 498 $ 549
Interest cost 638 574 545
Actual return on assets (1164) (1,111) (55)
Amortization of unrecognized
net asset (58) (58) (58)
Unrecognized net gain (loss) 446 498 (476)
--------------------------
Net pension cost $ 363 $ 401 $ 505
- ------------------------------------------------------------
The obligations for pension benefits and the amount recognized in the
Consolidated Balance Sheets are reconciled as follows:
- ------------------------------------------------------------
($ IN THOUSANDS) 1996 1995
- ------------------------------------------------------------
Plan assets, at fair value,
invested in stocks and bonds $10,503 $ 9,127
Actuarial present value of projected
benefit obligation (9,015) (8,511)
------------------
Plan assets in excess of projected
benefit obligation $ 1,488 $ 616
Unrecognized prior service cost 186 201
Unrecognized net asset (292) (350)
Unrecognized net gain (2,341) (1,581)
------------------
Accrued pension cost $ (959) $(1,114)
------------------
Discount rate 7.50% 7.50%
Rate of compensation increase 4.50% 4.50%
Expected return on assets 7.50% 7.50%
- ------------------------------------------------------------
The accumulated benefit obligation of $7,770,000 at December 31, 1996,
including vested benefits of $7,066,000 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.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
In January 1993, the Company adopted a new accounting standard for
post-retirement 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 his/her 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
with rate-making practices. Total expense was $87,000 in 1996. Differences
between expense determined under the new standard and amounts authorized for
rate recovery are not expected to be material and are charged to earnings.
The components of post-retirement benefits other than pensions expense were:
- ------------------------------------------------------------
($ IN THOUSANDS) 1996 1995
- ------------------------------------------------------------
Service cost for benefits earned $ 39 $ 39
Interest cost 47 45
Actual return on assets (52) (1)
Amortization of losses from prior periods (5) (6)
Amortization of transition obligation 28 28
Assets gain (loss) deferred 30 (15)
------------------
Total $ 87 $ 90
------------------
- ------------------------------------------------------------
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,
1996, from $543,000 to $608,000, a $65,000 increase, and annual aggregate
service and interest costs from $86,000 to $100,000, a $14,000 increase. The
actuarial assumptions used were discount rates of 7.5% at December 31, 1996,
and 7.5% at January 1, 1996, and an expected long-term rate of return on plan
assets of 7.5% and 7.5% 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) 1996 1995
- ------------------------------------------------------------
Deferred tax assets:
Pension plan $ 450 $ 495
Other 616 531
-----------------
Total deferred tax assets $1,066 $1,026
-----------------
Deferred tax liabilities:
Depreciation $3,031 $2,749
Property-related 1,250 1,300
Other (25) 36
-----------------
Total deferred tax liabilities $4,256 $4,085
-----------------
Net accumulated deferred income taxes $3,190 $3,059
Classification of accumulated deferred
income taxes:
Included in current assets 427 340
Included in deferred taxes $3,617 $3,399
- ------------------------------------------------------------
The current and deferred components of income tax expenses were:
- ------------------------------------------------------------
($ IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------
Current income taxes:
Current federal $ 887 $ 842 $ 955
Current state 276 271 310
Investment tax credit (12) (12) (12)
----------------------------
Total current taxes $1,151 $1,101 $1,253
----------------------------
Deferred income taxes:
Depreciation $ 282 $ 267 $ 188
Contributions and advances (156) (158) (78)
Pension plan - - (47)
Other 37 (33) 24
----------------------------
Total deferred taxes $ 163 $ 76 $ 87
----------------------------
- -------------------------------------------------------------
A reconciliation of the federal statutory income tax rate to the effective
rate is presented below:
- --------------------------------------------------------------
PERCENT 1996 1995 1994
- --------------------------------------------------------------
Expected income tax expense 34% 34% 34%
Increase in expected income
tax resulting from effect
of state income tax 6% 6% 6%
Abandonment (1%) (2%) -
Other 1% - 1%
-------------------------
Total 40% 38% 41%
- --------------------------------------------------------------
NOTE 10 - BUSINESS RISKS AND CONCENTRATION OF SALES
Fifty-four percent of the Company's water supplies comes from its own
groundwater wells, and forty-six percent comes from wholesalers of imported
water. The long term availability of imported water supplies are dependent
upon several factors.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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's utility operations are subject to regulation by various
government agencies. The water quality is regulated 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. One of the Subsidiary water systems exceeded the
State and Federal standard for radioactivity. The Company has ceased using
this water source and is providing customers with an alternative source.
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, 46% in 1996 and 53% in 1995, of business
and industrial sales are dependent upon the refineries. One single refinery
was responsible for 32% of this business/industrial consumption in 1996, and
for 37% in 1995.
Sales for 1996 and 1995 are as follows:
- ------------------------------------------------------------
($ IN THOUSANDS) 1996 1995
- ------------------------------------------------------------
Residential-Multi Family $ 11,566 $ 10,584
Business-Industrial 10,279 11,759
Public Authority 1,486 1,436
All Other 1,374 1,707
--------------------
Total $ 24,705 $ 25,486
--------------------
- ------------------------------------------------------------
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------------------------
($ IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------
Cash paid for:
Interest, net $ 824 $ 501 $ 523
Income taxes $1,095 $1,270 $1,075
- ------------------------------------------------------------
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
Energy L.P. advanced the construction funds to the Company. The refunds to
Watson Land Company were $15,442 in 1996 and $16,516 for 1995. The refunds to
Carson Estate Company were $1,110 for 1996 and $1,110 for 1995. The refunds
to Dominguez Energy L.P.were $6,176 for 1996 and $6,176 for 1995.
The Company also leases sites used for wells from Watson Land Company, Carson
Estate Company and Dominguez Energy L.P. The rental costs for Watson Land
Company were $38,778 in 1996 and $38,652 for 1995. The rental costs for
Carson Estate Company were $13,500 for 1996 and none for 1995. The rental
costs for Dominguez Energy L.P. were $2,901 for 1996 and $2,678 for 1995.
The Company provides water service to these entities to the extent that they
have property within the division.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
During 1996 the Company's insurance carrier settled the remaining lawsuit
filed in the California Superior Court that arose from the shooting death of
an employee by another employee in January 1994. All legal costs accrued in
anticipation of litigation have been reversed. The terms of the settlements
had no material adverse financial impact on the Company.
Under the terms of the proposed agreement between ARCO Los Angeles Refinery
and the West Basin Municipal Water District, the Company will commit to fund
$2,000,000 in recycled water system facilities. This agreement is expected to
be signed by all parties in 1997. The funds will be expended when recycled
water service is available to ARCO, which is tentatively scheduled for
mid-1998.
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, 1996 and 1995, and
the related consolidated statements of income, retained earnings, and cash
flows for each of the three years in the period ended December 31, 1996.
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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Los Angeles, California
March 5, 1997
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 judgments 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
/s/ John S. Tootle
John S. Tootle
Vice President-Finance
QUARTERLY FINANCIAL DATA (UNAUDITED)
OPERATING REVENUE NET INCOME EARNINGS
($ IN THOUSANDS) ($ IN THOUSANDS) PER SHARE
1996 1995 1996 1995 1996 1995
First Quarter $ 5,225 $ 5,094 $ 270 $ 233 $ .27 $ .23
Second Quarter 6,356 6,868 535 605 .53 .60
Third Quarter 7,404 7,552 787 749 .78 .75
Fourth Quarter 5,720 5,972 389 366 .39 .36
---------- ---------- -------- -------- -------- --------
Total $ 24,705 $ 25,486 $ 1,981 $ 1,953 $ 1.97 $ 1.94
---------- ---------- -------- -------- -------- --------
---------- ---------- -------- -------- -------- --------
MARKET INFORMATION (UNAUDITED)
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "DOMZ". There were 322 common
shareholders of record as of December 31, 1996, as well as 367 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 1996 and 1995 was obtained from the National
Association of Securities Dealers, Inc., 1735 K Street Northwest, Washington,
D.C. 20006:
1996 HIGH LOW DIVIDEND
First Quarter 19 17-3/4 .31
Second Quarter 23 18 .31
Third Quarter 23-1/2 20-1/2 .31
Fourth Quarter 23-1/2 22-1/4 .31
------ ------ ---
1995
First Quarter 17-3/4 16-3/4 .29
Second Quarter 17-3/4 16-1/2 .29
Third Quarter 17-1/2 16 .29
Fourth Quarter 19 16 .29
------ ------ ---