1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended JUNE 30, 1997 Commission file number 0-1121
SOUTHERN CALIFORNIA WATER COMPANY
(Exact Name of Registrant as specified in its charter)
CALIFORNIA 95-1243678
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
630 EAST FOOTHILL BOULEVARD, SAN DIMAS, CALIFORNIA 91773
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (909) 394-3600
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 31, 1997, the number of shares outstanding
of the Registrant's Common Shares, Par Value $2.50,
was 8,957,671.
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SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-Q
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1: Financial Statements 1
Balance Sheets as of June 30, 1997 and December 31, 1996 2 - 3
Statements of Income for the Three Months Ended
June 30, 1997 and June 30, 1996 4
Statements of Income for the Six Months Ended
June 30, 1997 and June 30, 1996 5
Statements of Income for the Twelve Months Ended
June 30, 1997 and June 30, 1996 6
Statements of Cash Flows for the Six Months Ended
June 30, 1997 and June 30, 1996 7
Notes to Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operation 9 - 17
PART II OTHER INFORMATION
Item 1: Legal Proceedings 18
Item 2: Changes in Securities 18
Item 3: Defaults Upon Senior Securities 19
Item 4: Submission of Matters to a Vote of Security Holders 19
Item 5: Other Information 19
Item 6: Exhibits and Reports on Form 8-K 19
Signature 20
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PART I
ITEM 1. FINANCIAL STATEMENTS
The basic financial statements included herein have been
prepared by the Registrant, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission.
Certain information and footnote disclosures normally
included in financial statements, prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to such rules and
regulations, although the Registrant believes that the disclosures are adequate
to make the information presented not misleading. In the opinion of management,
all adjustments necessary for a fair statement of results for the interim period
have been made.
It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto in the Registrant's
latest Annual Report on Form 10-K.
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SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
ASSETS
JUNE 30, DECEMBER 31,
1997 1996
----------------- ------------------
(Unaudited)
(in thousands)
UTILITY PLANT, at cost
Water.......................................................................... $415,926 $411,852
Electric....................................................................... 33,766 33,300
----------------- ------------------
449,692 445,152
Less - Accumulated depreciation.............................................. (120,491) (114,086)
----------------- ------------------
329,201 331,066
Construction work in progress................................................ 37,482 26,710
----------------- ------------------
366,683 357,776
----------------- ------------------
OTHER PROPERTY AND INVESTMENTS................................................. 1,274 774
----------------- ------------------
CURRENT ASSETS
Cash and cash equivalents.................................................... 569 3,783
Accounts receivable -
Customers, less reserves of $269
in 1997 and $385 in 1996................................................. 10,282 7,870
Other...................................................................... 1,615 1,713
Unbilled revenue............................................................. 10,477 12,596
Materials and supplies, at average cost...................................... 1,379 1,292
Supply cost balancing accounts............................................... 4,182 6,273
Prepayments and other........................................................ 4,476 6,933
Accumulated deferred income taxes - net...................................... 4,372 3,302
----------------- ------------------
37,352 43,762
----------------- ------------------
DEFERRED CHARGES
Regulatory tax-related assets................................................ 22,795 23,201
Other deferred charges....................................................... 4,963 5,409
----------------- ------------------
27,758 28,610
----------------- ------------------
$433,067 $430,922
================= ==================
The accompanying notes are an integral part of these financial statements.
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SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
JUNE 30, DECEMBER 31,
1997 1996
--------------- ------------------
(Unaudited)
(in thousands)
CAPITALIZATION
Common shareholders' equity.................................................. $147,031 $146,766
Preferred shares............................................................. 1,600 1,600
Preferred shares subject to mandatory
redemption requirements.................................................... 480 480
Long-term debt............................................................... 111,321 107,190
--------------- ------------------
260,432 256,036
--------------- ------------------
CURRENT LIABILITIES
Notes payable to banks....................................................... 14,000 16,000
Long-term debt and preferred shares
due within one year........................................................ 191 482
Accounts payable............................................................. 11,857 12,865
Taxes payable................................................................ 6,490 5,777
Accrued interest............................................................. 1,809 1,772
Other accrued liabilities ................................................... 8,243 7,792
--------------- ------------------
42,590 44,688
--------------- ------------------
OTHER CREDITS
Advances for construction.................................................... 54,612 55,848
Contributions in aid of construction......................................... 28,074 28,158
Accumulated deferred income taxes - net...................................... 41,713 40,404
Unamortized investment tax credits........................................... 1,973 1,995
Regulatory tax-related liability............................................. 3,292 3,337
Other.......................................................................... 381 456
--------------- ------------------
130,045 130,198
--------------- ------------------
$433,067 $430,922
=============== ==================
The accompanying notes are an integral part of these financial statements.
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SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 1997 AND 1996
(Unaudited)
THREE MONTHS ENDED
JUNE 30,
----------------------------------------
1997 1996
-------------- -------------
(in thousands, except
per share amounts)
OPERATING REVENUES
Water........................................................................ $36,895 $37,444
Electric..................................................................... 2,448 2,450
-------------- -------------
39,343 39,894
-------------- -------------
OPERATING EXPENSES
Water purchased.............................................................. 9,758 10,420
Power purchased for pumping.................................................. 1,724 1,681
Power purchased for resale................................................... 902 1,104
Groundwater production assessment............................................ 2,457 1,489
Supply cost balancing accounts............................................... 2,123 1,802
Other operating expenses..................................................... 3,324 3,201
Administrative and general expenses.......................................... 5,463 5,151
Depreciation................................................................. 2,751 2,526
Maintenance.................................................................. 1,730 1,791
Taxes on income.............................................................. 2,198 2,924
Other taxes.................................................................. 1,540 1,319
-------------- -------------
33,970 33,408
-------------- -------------
Operating income............................................................. 5,373 6,486
OTHER INCOME................................................................... 216 200
-------------- -------------
Income before interest charges............................................... 5,589 6,686
INTEREST CHARGES............................................................... 2,508 2,584
-------------- -------------
NET INCOME...................................................................... 3,081 4,102
DIVIDENDS ON PREFERRED SHARES.................................................. (23) (24)
-------------- -------------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS..................................... $3,058 $4,078
============== =============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.................................. 8,958 7,848
============== =============
Earnings Per Common Share...................................................... $0.34 $0.52
============== =============
Dividends Declared Per Common Share............................................ $0.310 $0.305
============== =============
The accompanying notes are an integral part of these financial statements.
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SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1996
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
----------------------------------------
1997 1996
-------------- -------------
(in thousands, except
per share amounts)
OPERATING REVENUES
Water........................................................................ $65,482 $64,504
Electric..................................................................... 6,067 5,786
-------------- -------------
71,549 70,290
-------------- -------------
OPERATING EXPENSES
Water purchased.......................................................... 17,597 17,117
Power purchased for pumping.............................................. 3,006 3,246
Power purchased for resale............................................... 2,294 2,655
Groundwater production assessment........................................ 3,582 2,886
Supply cost balancing assessment......................................... 2,681 1,626
Other operating expenses................................................. 6,802 6,315
Administrative and general expenses...................................... 10,780 9,777
Depreciation............................................................. 5,478 5,051
Maintenance.............................................................. 3,797 3,143
Taxes on income.......................................................... 3,303 4,542
Other taxes.............................................................. 3,118 2,736
-------------- -------------
62,438 59,094
-------------- -------------
Operating income......................................................... 9,111 11,196
OTHER INCOME................................................................... 260 248
-------------- -------------
Income before interest charges........................................... 9,371 11,444
INTEREST CHARGES............................................................... 4,978 5,174
-------------- -------------
NET INCOME..................................................................... 4,393 6,270
DIVIDENDS ON PREFERRED SHARES.................................................. (46) (48)
-------------- -------------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS..................................... $4,347 $6,222
============== =============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.................................. 8,956 7,847
============== =============
Earnings Per Common Share...................................................... $0.49 $0.79
============== =============
Dividends Declared Per Common Share............................................ $0.62 $0.61
============== =============
The accompanying notes are an integral part of these financial statements.
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SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED JUNE 30, 1997 AND 1996
(Unaudited)
TWELVE MONTHS ENDED
JUNE 30,
-------------------------------------
1997 1996
------------- --------------
(in thousands, except
per share amounts)
OPERATING REVENUES
Water........................................................................ $140,975 $131,631
Electric..................................................................... 11,813 11,123
------------- --------------
152,788 142,754
------------- --------------
OPERATING EXPENSES
Water purchased............................................................ 38,835 36,783
Power purchased for pumping................................................ 7,471 8,154
Power purchased for resale................................................. 5,464 5,320
Groundwater production assessment.......................................... 6,642 6,157
Supply cost balancing accounts............................................. 3,119 90
Other operating expenses................................................... 13,907 13,536
Administrative and general expenses........................................ 21,553 18,115
Depreciation............................................................... 10,529 9,238
Maintenance................................................................ 8,398 5,684
Taxes on income............................................................ 9,045 10,281
Other taxes................................................................ 6,480 5,477
------------- --------------
131,443 118,835
------------- --------------
Operating income........................................................... 21,345 23,919
------------- --------------
OTHER INCOME................................................................... 541 510
------------- --------------
Income before interest charges............................................. 21,886 24,429
INTEREST CHARGES............................................................... 10,305 10,139
------------- --------------
NET INCOME..................................................................... 11,581 14,290
DIVIDENDS ON PREFERRED SHARES.................................................. (93) (95)
------------- --------------
EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS..................................... $11,488 $14,195
============= ==============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.................................. 8,445 7,846
============= ==============
Earnings Per Common Share...................................................... $1.36 $1.81
============= ==============
Dividends Declared Per Common Share............................................ $1.235 $1.215
============= ==============
The accompanying notes are an integral part of these financial statements.
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SOUTHERN CALIFORNIA WATER COMPANY
CASH FLOW STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
-------------------------------------
1997 1996
------------------ -------------
(in thousands)
CASH FLOWS FROM
Operating Activities:
Net income................................................................. $4,393 $6,270
Adjustments for non-cash items:
Depreciation and amortization.............................................. 5,671 5,199
Deferred income taxes and
investment tax credits................................................. 577 851
Other - net.............................................................. (798) (546)
Changes in assets and liabilities:
Accounts receivable...................................................... (2,412) (1,638)
Prepayments.............................................................. 2,457 1,978
Supply cost balancing accounts........................................... 2,091 1,391
Accounts payable......................................................... (1,008) 4,629
Taxes payable............................................................ 713 (546)
Unbilled revenue......................................................... 2,119 (3,438)
Other.................................................................... 499 (6)
---------------- ----------------
Net Cash Provided...................................................... 14,302 14,144
---------------- ----------------
Financing Activities:
Issuance of securities..................................................... 5,370 206
Receipt of advances and contributions...................................... 619 1,646
Repayments of long-term debt and
redemption of preferred shares........................................... (59) (15,327)
Refunds on advances........................................................ (2,393) (2,162)
Net change in notes payable to banks....................................... (2,000) 23,500
Common and preferred dividends paid........................................ (5,605) (4,861)
---------------- ----------------
Net Cash Provided/(Used).............................................. (4,068) 3,002
---------------- ----------------
Investing Activities:
Construction expenditures................................................... (13,448) (14,549)
---------------- ---------------
Net Cash Used......................................................... (13,448) (14,549)
---------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents......................... (3,214) 2,597
Cash and Cash Equivalents, Beginning of period............................... 3,783 343
---------------- ----------------
Cash and Cash Equivalents, End of period..................................... $569 $2,940
================ ================
The accompanying notes are an integral part of these financial statements.
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SOUTHERN CALIFORNIA WATER COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. For a summary of significant accounting policies and other
information relating to these interim financial statements,
reference is made to pages 28 through 32 of the 1996 Annual
Report to Shareholders under the caption "Notes to Financial
Statements."
2. Earnings per Common Share are based on the weighted average
number of Common Shares outstanding during each period and net
income after deducting preferred dividend requirements.
3. In November, 1996, Registrant filed an application with the
California Public Utilities Commission (CPUC) seeking approval of
its recovery through rates of costs associated with its
participation in the Coastal Aqueduct Extension of the State
Water Project (SWP). Registrant's current investment in SWP is
approximately $1.8 million and is included in utility plant.
Registrant is investigating alternative methods to recover its
investment in the SWP including, but not limited to, an
assessment per lot or other measurable unit for each new hookup
to Registrant's water systems. This recovery method also requires
CPUC approval and no assurance can be given that the CPUC will
deny or approve recovery through rates of all or any costs
associated with such participation.
4. Registrant implemented increased water rates in six of its
rate-making districts on January 1, 1996 and additional step
increases were effective in January, 1997. Water rates in two
additional customer service areas were increased on January 1,
1997 to recover costs associated with capital projects in those
areas. Registrant filed Notices of Intent to increase water rates
in three rate-making districts in January, 1997. Registrant has
received CPUC staff reports and is currently reviewing the
staff's position. New rates were effective in May, 1997 in
Registrant's Bear Valley Electric customer service area. An
additional step increase was effective in January, 1997. See the
section entitled "Rates and Regulation" for more information.
5. As permitted by the CPUC, Registrant maintains water and electric
supply cost balancing accounts to account for undercollections
and overcollections of revenues designed to recover such costs.
Recoverability of such costs are recorded in income and charged
to balancing accounts when such costs are incurred. The balancing
accounts are credited when such costs are recovered through rate
adjustments.
6. In February, 1997, the Financial Accounting standards Board
issued SFAS No. 128, "Earnings per Share". This statement, which
is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods, establishes
simplified standards for computing and presenting earnings per
share ("EPS"). SFAS No. 128 requires dual presentation of basic
and diluted EPS on the face on the income statement for entities
with complex capital structures and disclosure of the calculation
of each EPS amount. Registrant does not anticipate that adoption
of SFAS No. 128 will have a significant impact on reported
earnings.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
GENERAL
Southern California Water Company ("Registrant") is a public
utility company engaged principally in the purchase, production, distribution
and sale of water (SIC No. 4941). Registrant also distributes electricity in one
community (SIC No. 4911). Registrant, regulated by the California Public
Utilities Commission ("CPUC"), was incorporated on December 31, 1929 under the
laws of the State of California as American States Water Services Company of
California as the result of the consolidation of 20 water utility companies.
From time to time, additional water companies and municipal water districts have
been acquired and properties in limited service areas have been sold.
Registrant's present name was adopted in 1936.
Registrant is organized into three regions operating within
75 communities in 10 counties in the State of California and provides water
service in 21 customer service areas. As of June 30, 1997, about 73% of
Registrant's water customers were located in the greater metropolitan areas of
Los Angeles and Orange Counties. Registrant also provides electric service to
the City of Big Bear Lake and surrounding areas in San Bernardino County.
Beginning in June, 1996, all electric energy sold by Registrant to customers in
its Bear Valley Electric customer service area was purchased under an energy
brokerage contract with ENOVA Energy Management, Inc. Prior to June, 1996, all
energy sold was purchased from the Southern California Edison Company subsidiary
of Edison International. Registrant served 240,893 water customers and 20,495
electric customers at June 30, 1997, or a total of 261,378 customers compared
with 259,612 total customers at June 30, 1996.
RESULTS OF OPERATION
Earnings per common share for the three months ended June
30, 1997 decreased by 34.6% to $0.34 per share as compared to $0.52 per share
for the comparable period last year. For the six months ended June 30, 1997,
earnings per share decreased to $0.49 as compared to $0.79 for the six months
ended June 30, 1996. Earnings for the twelve months ended June 30, 1997
decreased by 24.9% to $1.36 per share as compared to $1.81 per share for the
twelve months ended June 30, 1996. The decline in the recorded results is
primarily attributable to increased supply costs during the first and second
quarters of 1997, as is more fully discussed below. Registrant anticipates
utilizing an increasing amount of pumped water in its resource mix for the
remainder of 1997 although earnings levels are expected to remain below those
reported for last year.
As compared to the same periods last year, water sales
volumes for the three, six and twelve months ended June 30, 1997 increased by
4.9%, 7.9% and 5.5%, respectively. Water operating revenues increased by 1.5%
and 7.1% for the six and twelve months ended June 30, 1997, respectively, over
the same periods of last year as a result of the impact of both increased sales
and general, step and attrition rate increases.
In April 1997, Registrant revised its meter reading
procedure, reducing the number of meter reading cycles from 21 to 19 to ensure
that all consumption registered through the meter in any month is billed in that
same month. This revised procedure caused a reduction in the not-billed portion
of the unbilled revenue calculation. As a result, for the three months ended
June 30, 1997, water operating revenues remained relatively unchanged. This
revised procedure also affected the six month results and, to a lesser degree,
the twelve month results.
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Kilowatt-hour sales of electricity increased by 4.29% and
5.19% for the six and twelve months ended June 30, 1997, respectively, as
compared to the same periods last year and, as a result of the increased sales
and new rates effective January 1, 1997, electric operating revenues for the
same periods increased by 4.9% and 6.2%, respectively, from last year. For the
three months ended June 30, 1997, electric operating revenues remained
essentially unchanged although kilowatt-hour sales decreased by 5.3% from last
year. The decrease in sales was significantly affected by reduced billings to
industrial customers which have a lower unit rate that do residential and
commercial customers.
Purchased water costs are 2.8%, and 5.6% greater,
respectively, for the six and twelve months ended June 30, 1997 as compared to
the same periods last year reflecting increased amounts of purchased water in
Registrant's resource mix. For the three months ended June 30, 1997, purchased
water costs declined by 6.4% from last year. Each of the three periods is
affected by refunds received by Registrant from the Metropolitan Water District
of Southern California ("MWD") which totaled approximately $1.984 million in the
aggregate.
Costs of power purchased for pumping decreased by 7.4% and
8.4%, respectively, for the six and twelve months ended June 30, 1997 as
compared to the same periods ended June 30, 1996 due to decreased pumped water
volumes in Registrant's resource mix. Costs for pumping increased by 2.6% during
the three months ended June 30, 1997 due to increased pumping volumes in
Registrant's supply mix.
Costs of power purchased for resale decreased by 18.3% and
13.6% for the three and six months ended June 30, 1997, respectively, as
compared to the same periods ended June 30, 1996. The decreased costs are the
result generally of reduced rates due to the effects of deregulation as well as
the sale of energy back to the provider in April 1997 which reduced energy costs
by approximately $110,000. As compared to last year, costs of power purchased
for resale increased by 2.7% for the twelve months ended June 30, 1997 due to
increased energy sales.
Groundwater production assessments are 65.0%, 24.1% and 7.9%
higher for the three, six and twelve months ended June 30, 1997 as compared to
the comparable periods last year due to increased supply during the recent
quarter from pumped sources. The comparisons are also affected by a charge of
approximately $750,000 in June, 1997 for additional assessments associated with
increased pumping in Registrant's San Gabriel Valley and San Dimas customer
service areas, which are recoverable through the balancing account.
A positive entry for the provision for supply cost balancing
accounts reflects recovery of previously under-collected supply costs.
Conversely, a negative entry for the provision for supply cost balancing
accounts reflects an undercollection of previously incurred supply costs. The
positive entries for the three, six and twelve months ended June 30, 1997 result
from approval by the CPUC of rate increases sufficient to recover previously
under-collected purchased water supply costs, supply costs for power purchased
for pumping and groundwater production assessments. The balancing account
mechanism insulates earnings from changes in costs of purchased water, power
purchased for pumping or resale and groundwater production assessments, all of
which are outside the immediate control of Registrant. However, the balancing
account mechanism is not designed to insulate earnings against changes in supply
mix, as occurred during the first and second quarters of 1997. See the section
entitled "Water Supply."
Other operating expenses increased by 3.8%, 7.7% and 2.7%,
respectively, for the three, six and twelve months ended June 30, 1997 as
compared to the same periods ended June 30, 1996 due chiefly to an increase in
the percentage of labor being charged to this category. In addition, there has
been, relative to the periods last year, an increase in the number of persons
charging all or a portion of their time to various customer service functions.
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Administrative and general expenses increased by 6.1%, 10.3%
and 19.0% for the three, six and twelve months ended June 30, 1997,
respectively, as compared to the same periods ended June 30, 1996. These periods
are each affected by an increase in the amount of labor being charged to this
category due to additions to staff as well as increased costs associated with
health insurance, recovery of postretirement medical benefits and pension and
401-k plan costs.
Depreciation expense, increased by 8.9%, 8.5% and 14.0%,
respectively, for the three, six and twelve months ended June 30, 1997
reflecting, among other things, the effects of recording approximately $31
million in net plant last year, depreciation on which began in January, 1997.
Taxes on income decreased by approximately 24.8%, 27.3% and
12.0%, respectively, for the three, six and twelve months ended June 30, 1997 as
compared to the three, six and twelve months ended June 30, 1996 primarily as a
result of lower pre-tax income and a slightly lower marginal state income tax
rate.
For the three, six and twelve month periods ending June 30,
1997, other taxes increased by 16.8%, 14.0% and 18.3%, respectively, as compared
to the same time periods ending June 30, 1996 primarily due to increased
property taxes resulting from higher valuation assessments.
Maintenance expense increased by 20.8% and 47.7%,
respectively, for the six and twelve months ended June 30, 1997 as compared to
last year reflecting increased maintenance on wells, hydrants and valves. For
the three months ended June 30, 1997, maintenance expense decreased by 3.4% as
maintenance on wells is completed.
Interest expense for the three and six months ended June 30,
1997 decreased by 2.9% and 3.8%, respectively, over the comparable 1996 time
periods due primarily to reduce bank borrowings during these periods. Interest
expense increased by 1.6% for the twelve months ended June 30, 1997 as compared
to the same period last year due to slightly higher rates on bank borrowing.
LIQUIDITY AND CAPITAL RESOURCES
Registrant's construction program is designed to ensure its
customers high quality service. Registrant maintains an ongoing distribution
main replacement program throughout its customer service areas, based on the
priority of leaks detected, fire protection enhancement and a reflection of the
underlying replacement schedule. In addition, Registrant upgrades its electric
and water supply facilities and is aggressively scheduling meter replacements
that conform with CPUC requirements. Registrant's Board of Directors has
approved anticipated net capital expenditures of approximately $27.5 million in
1997.
Registrant funds the majority of its operating expenses,
interest payments on its debt, dividends on its outstanding common and preferred
shares and makes its mandatory sinking fund payments through internal sources.
However, because of the seasonal nature of its water and electric businesses,
Registrant utilizes its short-term borrowing capacity on occasion to finance
current operating expenses.
Registrant continues to rely on external sources, including
short-term bank borrowing, the receipt of contributions-in-aid-of-construction
and advances for construction and install-and-convey advances, to fund the
majority of its construction expenditures. The aggregate short-term borrowing
capacity available to Registrant under its three bank lines of credit was $37
million as of June 30, 1997. As of June 30, 1997, Registrant had a total of $14
million in borrowing outstanding under those bank lines of credit. Registrant
routinely employs short-term bank borrowing as an interim financing source prior
to executing either a long-term debt or equity issue. Registrant anticipates
issuing additional long-term debt in
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1997, with the net proceeds initially being used to repay short-term bank
borrowings and, after that, fund construction expenditures.
Registrant has no derivative financial instruments,
financial instruments with significant off-balance sheet risks or financial
instruments with concentrations of credit risk.
WATER SUPPLY
For the three months ended June 30, 1997, Registrant
produced a total of 55,591 acre-feet of water.. Of this amount, approximately
55% came from pumped sources and 44.3% was purchased from others, principally
the Metropolitan Water District of Southern California ("MWD"). The remaining
amount was supplied by the Bureau of Reclamation (the "Bureau") under a no-cost
contract. During the three months ended June 30, 1996, Registrant produced
53,481 acre-feet of water, 56.7% of which came from pumped sources, 42.6% was
purchased and the remainder was supplied by the Bureau.
For the six months ended June 30, 1997, Registrant produced
92,317 acre-feet of water, 54.7% of which came from pumped sources, 44.9% was
purchased and the remaining amount was supplied by the Bureau. During the six
months ended June 30, 1996, Registrant produced 88,125 acre-feet of water. Of
this amount, 58.3% came from pumped sources, 41.2% was purchased and the
remainder was provided by the Bureau.
During the twelve months ended June 30, 1997, Registrant
produced 197,693 acre-feet of water whereas Registrant produced 193,501
acre-feet produced during the twelve months ended June 30, 1996. During the
twelve month period ended June 30, 1997, 54.1% of total supply came from pumped
sources, 44.6% was purchased and the remaining was supplied by the Bureau.
During 1996, 57.4% of total supply came from pumped sources, 41.1% was purchased
and the remainder came from the Bureau.
The MWD is a water district organized under the laws of the
State of California for the purpose of delivering imported water to areas within
its jurisdiction. The Registrant has 52 connections to the water distribution
facilities of MWD and other municipal water agencies. MWD imports water from two
principal sources: the Colorado River and the State Water Project ("SWP").
Available water supplies from the Colorado River and the SWP have historically
been sufficient to meet most of MWD's requirements and MWD's supplies from these
sources are anticipated to continue to remain adequate through 1996. MWD's
import of water from the Colorado River is expected to decrease in future years
due to the requirements of the Central Arizona Project in the State of Arizona.
In response, MWD has taken a number of steps to secure additional storage
capacity and increase available water supplies, including effecting transfers of
water rights from other sources.
Precipitation during the 1996-1997 winter period provided
adequate supply to fill most of the state's storage reservoirs to near capacity
and the outlook for water supply in 1997 remains favorable. In those customer
service areas of Registrant which pump groundwater, overall groundwater
conditions remain at adequate levels. However, certain of Registrant's
groundwater supply have been affected to varying degrees by various forms of
contamination which, in some cases, has caused Registrant to utilize
increasingly more purchased water in its resource mix. Registrant believes that
its available water supplies from all sources are adequate to meet current year
projected demand.
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ENVIRONMENTAL MATTERS
1996 Amendments to Federal Safe Drinking Water Act
On August 6, 1996, amendments (the "1996 SDWA amendments") to
the Safe Drinking Water Act (the "SDWA") were signed into law. The 1996 SDWA
amendments amount to a rewrite of the law that the United States Environmental
Protection Agency ("EPA") has been trying to implement for almost ten years. The
amendments were developed with significant contributions from water purveyors
and regulators. The California Department of Health Services, acting on behalf
of the EPA, administers the EPA's program in California.
The 1996 SDWA revise the 1986 amendments to the SDWA, which
required that the EPA set 25 new contaminant standards every three years, with a
new process for selecting and regulating contaminants. The EPA can only regulate
contaminants that may have adverse health effects, are known or likely to occur
at levels of public health concern, and the regulation of which will provide "a
meaningful opportunity for health risk reduction." The EPA must, within 18
months of the time that the 1996 SDWA amendments were signed into law, publish a
list of contaminants for possible regulation and must update that list every
five years. In addition, every five years, the EPA must select at least five
contaminants on that list and determine whether to regulate them. The new law
allows the EPA to bypass the selection process and adopt interim regulations for
contaminants in order to address urgent health threats. Current regulations,
however, remain in place and are not subject to the new standard-setting
provisions.
The 1996 SDWA amendments allow the EPA for the first time to
base primary drinking water regulations on risk assessment and cost/benefit
considerations and on minimizing overall risk. The EPA must base regulations on
best available, peer-reviewed science and data from best available methods. For
proposed regulations that involve the setting of maximum contaminant levels
("MCL's"), the EPA must use, and seek public comment on, an analysis of
quantifiable and non-quantifiable risk-reduction benefits and cost for each such
MCL.
Registrant currently tests its wells and water systems for
more than 90 contaminants, covering all contaminants listed in the SDWA. Water
from wells found to contain levels of contaminants above the established MCL's
is either treated or blended before it is delivered to customers.
Since the SDWA became effective, Registrant has experienced
increased operating costs for testing to determine the levels, if any, of the
contaminants in Registrant's sources of supply and additional expense to lower
the level of any contaminants in order to meet the MCL standards. Such costs and
the costs of controlling any other contaminants may cause Registrant to
experience additional capital costs as well as increased operating costs.
Registrant is currently unable to predict the ultimate impact
that the 1996 SDWA amendments might have on its financial position or its
results of operation. The ratemaking process provides Registrant with the
opportunity to recover prudently incurred capital and operating costs associated
with water quality. Management believes that such incurred costs will be
authorized for recovery by the CPUC.
Proposed Enhanced Surface Water Treatment Rule
On July 29, 1994, the EPA proposed an Enhanced Surface Water
Treatment Rule ("ESWTR") which would require increased surface-water treatment
to decrease the risk of microbial contamination. The EPA has proposed several
versions of the ESWTR for promulgation. The version
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selected for promulgation will be determined based on data collected by certain
water suppliers and forwarded to the EPA pursuant to EPA's Information
Collection Rule, which requires such water suppliers to monitor microbial and
other contaminants in their water supplies and to conduct certain tests in
respect of such contaminants. The EPA must adopt interim and final rules
pertaining to enhanced surface water treatment according to a negotiated
schedule or as soon as practicable. The ESWTR, in any of the forms currently
proposed, would apply to each of Registrant's five surface water treatment
plants. However, because it is impossible to predict the version of the ESWTR
that will be promulgated, Registrant is unable to predict what additional costs,
if any, will be incurred to comply with the ESWTR.
Regulation of Disinfection/Disinfection By-Products
Registrant will also be subject to the new regulations
concerning disinfection/disinfection by-products ("DBPs"), Stage I of which
regulations are expected to become effective in June, 1998. These regulations
will require reduction of tri-halomethane contaminants from 100 micrograms per
liter to 80 micrograms per liter and are expected to affect two of Registrant's
systems.
The EPA must adopt Stage II rules pertaining to DBPs according
to a negotiated schedule or as soon as practicable. The EPA is not allowed to
use the new cost/benefit analysis provided for in the 1996 SDWA amendments for
establishing the Stage II rules applicable to DBPs but may utilize the
regulatory negotiating process provided for in the 1996 SDWA amendments to
develop the Stage II rule.
Ground Water Disinfection Rule
By December, 1998, the EPA is scheduled to propose regulations
requiring disinfection of certain groundwater systems and provide guidance on
determining which systems must provide disinfection facilities. The EPA may
utilize the cost/benefit analysis provided in the 1996 SDWA amendments to
establish such regulations. It is anticipated that the regulations will apply to
several of Registrant's systems using groundwater supplies. While no assurance
can be given as to the nature and cost of any additional compliance measures, if
any, Registrant does not believe that such regulations will impose significant
compliance costs, since Registrant already currently engages in disinfection of
its groundwater systems.
Regulation of Radon and Arsenic
Registrant will be subject to new regulations regarding radon
and arsenic. EPA must propose an arsenic rule by January 1, 2001 and adopt a
rule one year later. EPA has 180 days after enactment of the 1996 SDWA
amendments to develop a plan to study ways to reduce arsenic health risk
uncertainties and is authorized to enter into cooperative agreements to carry
out the study. Depending on the MCL eventually established for arsenic,
compliance could cause Registrant to implement costly well-head remedies such as
ion exchange or, alternatively, to purchase additional and more expensive water
supplies already in compliance for blending with well sources.
The EPA must withdraw its proposed radon rule and arrange for
the National Academy of Sciences to conduct a risk assessment and a study of
risk-reduction benefits associated with various mitigation measures. EPA has 30
months from enactment of the 1996 SDWA amendments to seek comment on a
risk-reduction and cost analysis for potential radon standards, six more months
to propose a standard, and another year to adopt a standard. Although Registrant
is unable to predict what the standard for radon might eventually be, Registrant
itself is currently conducting studies to determine the best treatment for
affected wells, which treatment could range from simple aeration to filtration
through granular activated carbon.
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Voluntary Efforts to Exceed Surface Water treatment Standards
Registrant is a voluntary member of the "Partnership for Safe
Water", a national program, to further protection of the public from diseases
caused by cryptosporidium and other microscopic organisms. As a volunteer in the
program, Registrant has committed to exceed current regulations governing
surface water treatment to ensure that its surface treatment facilities are
performing as efficiently as possible.
Fluoridation of Water Supplies
Registrant is subject to State of California Assembly Bill 733
which requires fluoridation of water supplies for public water systems serving
more than 10,000 service connections. Although the bill requires affected
systems to install treatment facilities only when public funds have been made
available to cover capital and operating costs, the bill requires the CPUC to
authorize cost recovery through rates should public funds for operation of the
facilities, once installed, become unavailable in future years.
Matters Relating to Arden-Cordova System
Three of the 27 wells in Registrant's Arden-Codova system
have, for several years, been subject to contamination by tricholoroethylene.
GenCorp Aerojet has, by court decree, been responsible for all costs related to
the provision of well-head treatment. Although a ten-year agreement with Aerojet
Corporation expired in 1996, Aerojet Corporation has agreed to reimburse
Registrant for the costs of backwash system modification at all three wells.
In January, 1997, Registrant was notified that ammonium
perchlorate had been detected in three of its wells in its Arden-Cordova system.
GenCorp Aerojet has, in the past, used ammonium perchlorate in their processing
as an oxidizer of rocket fuels. Registrant has taken the three wells detected
with ammonium perchlorate out of service. Although neither the EPA nor the DOHS
has established a drinking water standard for ammonium perchlorate, DOHS has
established an action level of 18 ppb which requires Registrant to notify
customers in its Arden-Cordova customer service area of detection of ammonium
perchlorate in amounts in excess of this action level. In April, 1997,
Registrant found ammonium perchlorate in three additional wells and had removed
those wells from service until it was determined that the levels were safe.
These three wells have been returned to service and are being closely monitored
to ensure compliance with the DOHS action level. GenCorp Aerojet has agreed to
reimburse Registrant for all necessary and reasonable activities in the
construction of a pipeline to for interconnection of the Folsom City and
Arden-Cordova water systems to provide an alternative source(s) of water supply
in Registrant's Arden-Cordova customer service area.
Registrant has been able, pursuant to establishment by DOHS of
an interim MCL for perchlorate, to return three wells to service. Registrant
provides continual monitoring of these wells to ensure that levels of
perchlorate are below the MCL currently in effect.
Registrant and GenCorp Aerojet are in negotiations on other
matters related to procedures to address cleanup of the contaminated wells,
costs associated with the cleanup and costs associated with increased costs of
purchased water as compared to pumped sources. Registrant is unable to predict
when the negotiations will be completed or the likely outcome of such
negotiations.
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Matters Relating to Culver City System
The compound methyl tertiary butyl ether ("MTBE") has been
detected in the Charnock Basin located in the city of Santa Monica and Culver
City, which lies within Registrant's service area. MTBE is an oxygenate used in
reformulated fuels. At the request of the Regional Water Qualify Control Board,
the city of Santa Monica and the California Environmental Protection Agency,
Registrant removed two of its wells in the Culver City system from service in
November, 1996 to help in efforts to avoid further spread of the MTBE
contamination plume. Neither of these wells nor any of Registrant's other wells
have been found to be contaminated with MTBE. Registrant is purchasing water
from the Metropolitan Water District at an increased cost to replace the water
supply formerly pumped from the two wells removed from service.
Several studies are under way to determine the possible
sources and causes of the MTBE contamination. The federal EPA is pursuing an
enforcement effort to reach a settlement with the potentially responsible
parties on matters relating to the cleanup of the contamination as well as to
obtain reimbursement from such parties for increased costs incurred by
Registrant in purchasing replacement water. Registrant is unable to predict the
outcome of the EPA's enforcement effort, and no assurance can be given as to
whether Registrant will obtain reimbursement for the increased costs of
purchasing water to replace the water formerly pumped from the affected wells in
the Culver City system.
Bear Valley Electric
There have been no environmental matters that have
materially affected or are currently materially affecting Registrant's Bear
Valley Electric customer service area.
RATES AND REGULATION
Registrant is subject to regulation by the CPUC as to its
water and electric business and properties. The CPUC has broad powers to
regulate public utilities with respect to service and facilities, rates,
classifications of accounts, valuation of properties and the purchase,
disposition and mortgaging of properties necessary or useful in rendering public
utility service. The CPUC also has authority over the issuance of securities,
the granting of certificates of convenience and necessity as to the extension of
services and facilities and various other matters.
The 22 customer service areas of Registrant are grouped into
16 water districts and one electric district for ratemaking purposes.
Registrant's water rates vary among the 16 ratemaking districts due to
differences in operating conditions and costs. Registrant continuously monitors
operations in each of these districts so that it may file applications for rate
changes, when warranted, on a district-by-district basis, in accordance with the
CPUC's procedure. Under the CPUC's practices, rates may be increased by three
methods: general rate increases, offsets for certain expense increases and
advice letter filings related to certain plant additions.
In January, 1996, new rates were effective in six of
Registrant's rate-making districts which, among other things, authorized a rate
of return on common equity of 10.40%, increased depreciation rates, authorized
recovery of postretirement medical benefit costs, increased current recovery of
labor and labor-related expenses and resulted in an increase in annual water
operating revenues of approximately $15 million. Water rates in two additional
ratemaking districts were increased on January 1, 1997 to recover costs
associated with 1996 and 1997 capital projects in those areas.
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Registrant filed notices of intent to increase water rates in
four ratemaking districts in January, 1997 although only three applications were
actually filed. Registrant has received CPUC staff reports on the three pending
applications and has entered into settlement negotiations. Registrant is unable
to predict if a settlement of issues will be achieved or, if such a settlement
is achieved, whether the CPUC will authorize all or any of the proposed
increases, although it is not anticipated that new rates, if approved, would be
effective before January, 1998.
In November, 1996, Registrant filed an application with the
CPUC seeking recovery through rates of $1.8 million in costs associated with its
participation the coastal aqueduct extension of the State Water Project ("SWP").
Registrant is also pursuing alternative forms of recovery of its investment in
SWP including assessment of costs to new construction based on a charge per new
lot or other applicable unit of measurement, which assessment will require CPUC
approval. Registrant is currently unable to predict if the CPUC will authorize
recovery of all or any of the costs associated with its participation in the
Project. See Notes to Financial Statements for more information.
New rates were effective in May, 1996 in Registrant's Bear
Valley Electric customer service area. An additional step increase was effective
in January, 1997.
WATER-RELATED OPPORTUNITIES
Registrant continues to pursue strategic opportunities related
to the operation of municipally-owned water systems. Registrant has pursued and
continues to pursue opportunities to bid on long-term leases and operation
contracts on a stand-alone basis or as part of a joint venture. In December,
1996, Registrant and U.S. Water, L.L.C., a limited liability company owned by
United Infrastructure Company, a general partnership formed by the Bechtel and
Peter Kiewet organizations, and by Northwest Water Holdings, Inc., a subsidiary
of United Utilities PLC, a water and electric utility based in the United
Kingdom, formed Golden State Water Company LLC ("GSWC") for the purpose of
pursuing potential opportunities to lease, or operate and maintain, municipally
owned retail water supply and distribution systems and water treatment,
wastewater collection and wastewater treatment facilities in California. There
can be no assurance that such opportunities will materialize or that, if they
do, Registrant (either jointly with GSWC or alone) would be successful in
consummating any such lease and/or maintenance and operation arrangements.
ACCOUNTING STANDARD
In February, 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings per Share". This statement, which is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods, establishes simplified standards for computing and
presenting earnings per share ("EPS"). SFAS No. 128 requires dual presentation
of basic and diluted EPS on the face on the income statement for entities with
complex capital structures and disclosure of the calculation of each EPS amount.
Registrant does not anticipate that adoption of SFAS No. 128 will have a
significant impact on reported earnings.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this Report (including the
documents incorporated herein by reference) are forward-looking statements
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as Registrant "believes," "anticipates,"
"expects" or words of similar import. Similarly, statements that describe
Registrant's future
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plans, objectives, estimates or goals are also forward-looking statements. Such
statements address future events and conditions concerning capital expenditures,
earnings, litigation, rate and other regulatory matters, adequacy of water
supplies, liquidity and capital resources, and accounting matters. Actual
results in each case could differ materially from those currently anticipated in
such statements, by reason of factors such as utility restructuring, including
ongoing state and federal activities; future economic conditions, including
changes in customer demand; future climatic conditions; legislative, regulatory
and other circumstance affecting anticipated revenues and costs.
PART II
ITEM 1. LEGAL PROCEEDINGS
On April 24, 1997, a complaint for negligence, wrongful death,
strict liability, trespass, public nuisance, private nuisance, negligence per
se, strict liability for ultrahazardous activities and fraudulent concealment
was filed in Los Angeles Superior Court on behalf of more than 140 plaintiffs.
The plaintiffs allege that (i) they are, and at all relevant times were,
customers of Registrant, (ii) for a period of more than twenty years, Registrant
has provided and continues to provide them with contaminated water from wells
located in an area of the San Gabriel Valley that has been designated a federal
environmental (EPA) superfund site, and (iii) the maintenance of this
contaminated well water has resulted in contamination of the ground water, soil,
subsurface soil and air with trichloroethylene, perchloroethene and carbon
tetrachloride and other solvents. The plaintiffs allege that Registrant's
actions were the direct and legal cause of injuries to the plaintiffs' person,
personal property and financial interests in undetermined amounts to be
determined at trial. Plaintiffs seek damages, including general, special, and
punitive damages, according to proof at trial, as well as reasonable attorney's
fees and costs of suit, and other appropriate relief. Registrant was served on
June 3, 1997 and Registrant has not yet responded to the allegations in court.
Registrant has provided water service in portions of the San
Gabriel Valley for over 60 years and portions of the San Gabriel Valley have
been designated federal environmental superfund sites. Registrant has not been
previously notified that it is a potentially responsible party with respect to
any of these sites. Registrant has commenced a review and evaluation of the
plaintiff's claims and its insurance coverage for environmental liabilities
during the past 25 years. In light of the breadth of the plaintiff's claims, the
lack of factual information regarding the plaintiff's claims and the fact that
the complaint was recently served, discovery has not yet commenced, Registrant
is unable to determine at this time what, if any, potential liability it may
have with respect to these claims. Nonetheless, Registrant will vigorously
defend itself against the allegations.
Registrant is also subject to ordinary routine litigation
incidental to its business. Other than as disclosed above, no legal proceedings
are pending, except such incidental litigation, to which Registrant is a party
or of which any of its properties is the subject which are believed to be
material.
ITEM 2. CHANGES IN SECURITIES
As of June 30, 1997, earned surplus amounted to $49,700,000.
Of this amount, $23,256,000 was restricted as to payment of cash dividends on
Registrant's Common Shares.
As of June 30, 1997, authorized but unissued Common Shares
includes 89,226 and 71,408 Common Shares reserved for issuance under
Registrant's Dividend Reinvestment and Common Share Purchase Program and
Investment Incentive Program ("401-k"), respectively. Common Shares reserved for
the 401-k Plan are in relation to the matching contributions by Registrant and
for investment purposes by participants.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On or about March 27, 1997, common and preferred shareholders
of Registrant were mailed a Notice of Annual Meeting and a Proxy Statement.
Shareholders were requested to vote their shares for the election of a slate of
seven directors to serve until the next annual meeting and until their
successors are chosen and qualified. The following table presents the results of
the election presented at the Annual Meeting of Shareholders on April 29, 1997:
[GRAPHIC OMITTED]
Name "For" "Against"
------------------- ----- ---------
James L. Anderson 94.38% 5.62%
Jean E Auer 94.47% 5.53%
William V. Caveney 94.36% 5.64%
N.P. Dodge, Jr. 94.40% 5.60%
Robert F. Kathol 94.50% 5.50%
Lloyd E. Ross 94.45% 5.55%
Floyd E. Wicks 94.49% 5.51%
In addition, at the Annual Meeting of Shareholders on April
29, 1997, shareholders approved by a 81.23% affirmative vote, an amendment to
Registrant's Articles Of Incorporation to increase the number of authorized
Common Shares from 10,000,000 to 30,000,000.
ITEM 5. OTHER INFORMATION
On July 28, 1997, the Board of Directors of Registrant
declared a regular quarterly dividend of $0.31 per common share. The dividend
will be paid September 1, 1997 to shareholders of record as of the close of
business on August 11, 1997. In other actions, the Board of Directors declared
regular quarterly dividends of $0.25 per share, $0.265625 per share and $0.3125
per share on its 4%, 4-1/4% and 5% Cumulative Preferred Shares, respectively.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned duly authorized officer and chief financial officer.
SOUTHERN CALIFORNIA WATER COMPANY
By : s/ McClellan Harris III
-------------------------------
McClellan Harris III
Vice President - Finance,
Chief Financial Officer,
Treasurer and Secretary
Date: July 31, 1997