SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year Ended DECEMBER 31,1998 Commission file number 0-18677
DOMINGUEZ SERVICES CORPORATION
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(Exact name of registrant as specified in its charter)
California 33-0391161
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(State of other jurisdiction of (I.R.S. Employer identification no.)
incorporation or organization)
21718 South Alameda Street, Long Beach, California 90810
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(Address of principal executive offices) Zip Code)
Registrant's telephone number, including area code (310) 834-2625
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE The NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES, $1 PAR VALUE
---------------------------
(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K
Yes X No
---
State the aggregate market value of the voting stock held by non-affiliates
of the registrant:
Common Shares average bid price of $28.125 on March 19, 1999.
AGGREGATE MARKET VALUE $29,692,322
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
MARCH 19, 1999 - 1,560,979 SHARES
(There are 52 pages in this 10-K)
PART I
ITEM 1. BUSINESS.
FORWARD-LOOKING STATEMENTS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (Reform Act), the Company is hereby filing
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements (as defined in the Reform Act) made by or on
behalf of the Company in this Annual Report. Any statements that express such
statements are often, but not always, expressed with phrases such as
expectations, beliefs, plans, objectives, assumptions, or future events or
performance, through the use of words or phrases such as "anticipate,"
"believes," "estimates," "expects," "intends," "plans," "predicts,"
"projects," "will likely result," "will continue," are not statements of
historical facts and may be forward-looking.
Forward-looking statements involve estimates, assumptions, and uncertainties
and are qualified in their entirety by reference to the following important
factors, which are difficult to predict, contain uncertainties, are beyond
the control of the Company, and could cause actual results to differ
materially from those contained in forward-looking statements:
- prevailing governmental policies and regulatory actions, including
those of the Commission, with respect to allowed rates of return,
industry and rate structure, acquisition and disposal of assets and
facilities, operation and construction of plant facilities, recovery
of balancing account, and present or prospective competition;
- economic and geographic factors including political and economic
risks;
- changes in and compliance with environmental and safety laws and
policies;
- water supply and weather conditions;
- customer growth rate;
- Year 2000 issues:
- delays or change in costs of Year 2000 compliance;
- failure of major suppliers, customers or others with whom the
Company does business to resolve their own Year 2000 issues on
a timely basis;
- changes in tax rates or policies or in rates of inflation;
- unanticipated changes in operating expenses and capital
expenditures; - capital market conditions;
- competition for non-regulatory opportunities; and
- legal and administrative proceedings and settlements that influence
the business and profitability of the Company.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date
on which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the impact of
any such factor on the business, or the extent to which any factor, or
combination of factors, may cause results to differ materially from those
contained in any forward-looking statement.
2
GENERAL
Dominguez Services Corporation (the Company) is a holding company created in
1990 through an Agreement of Merger with Dominguez Water Company. The
Company's principal business is the ownership of all the common stock of
Dominguez Water Company. The holding company structure provides operational
and financial flexibility and allows the Company to engage in non-utility
activities. The Company has two wholly-owned subsidiaries: Dominguez Water
Company and its operating subsidiaries (Dominguez,) which is involved in
regulated water supply and distribution, and DSC Investments, which is
involved in non-regulated, water-related services and investments. A detail
description of the regulated and non-regulated businesses is contained in
Item 8, Financial Statements and Supplementary Data, Note 17.
Dominguez and its operating subsidiaries are regulated by the California
Public Utilities Commission (the Commission) and, as such, they must obtain
the Commission's approval to increase water rates to recover increases in
operating expenses and authorization to include reinvested capital in
ratebase. 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 Division,)
and its operating subsidiaries, the Kern River Valley Water Company, the
Antelope Valley Water Company and Redwood Valley Water Company (collectively
referred to as the "Subsidiaries"). The South Bay Division has been providing
water service for more than 87 years to its customers. Currently, the South
Bay Division serves approximately 32,524 customers in a 35 square mile area
including most of Carson, one-quarter of Torrance, and parts of Compton, Long
Beach, Los Angeles, Los Angeles County, and Harbor City. The Kern River
Valley Water Company and the Antelope Valley Water Company provide water
service to approximately 4,099 and 1,259 customers, respectively.
Dominguez organized the Redwood Valley Water Company in 1998 to acquire
certain water companies located in northern California. During 1998,
Dominguez received Commission approval to acquire the assets of the Lucerne
Water Company, with 1,242 customers located in Lake County in northern
California and the assets of the Rancho del Paradiso and Armstrong Valley
Water Companies, with 370 total customers, located in Sonoma County in
northern California. On January 1, 1999, Dominguez completed the acquisitions
of these companies and took over operations under the name of Redwood Valley
Water Company.
DSC Investments is primarily engaged in the transfer of water rights between
third parties. Income from the transfers of water rights may significantly
vary from year to year due to demands for groundwater by major pumpers in the
West and Central Groundwater Basins. DSC Investments also has a twenty
percent ownership interest in Chemical Services Company (CSC) with an option
to acquire an additional 40% through the year 2001. CSC manufactures and
distributes chlorine generators used in the water and wastewater industry to
produce safe on-site chlorine.
3
OPERATIONS
In 1998, Dominguez supplied 11,569 million gallons of water to 37,882
customers, compared to 12,362 million gallons of water to 37,636 customers in
1997. Although Dominguez has a diversified customer base, a substantial
portion, 50% in 1998 and 49% in 1997, of sales were derived from business and
industrial usage. Furthermore, a single customer, a refinery, accounted for
34% of these business and industrial sales in 1998, and for 33% in 1997.
THE MERGER
On November 13, 1998, the Company executed an Agreement and Plan of
Reorganization (the Merger Agreement) to merge with California Water Service
Group (CWSG), the parent of California Water Service Company (Cal Water) and
CWS Utility Services, pursuant to which the Company's operations would have
been merged into Cal Water. Under the terms of the Merger Agreement, each
share of the Company's common stock issued and outstanding on the closing
date would have been converted into the right to receive 1.18 shares of CWSG
common stock. The Company's Board of Directors (Board) received the opinion
of its financial advisor, PaineWebber Inc., that this exchange ratio was fair
to the shareholders of the Company's common stock from a financial point of
view.
On March 16, 1999, the Company announced that it had received an
unsolicited proposal from American States Water Company (ASWC) offering to
acquire all of the Company's outstanding common stock in a stock-for-stock
merger. Under the ASWC proposal, each share of the Company's common stock
would have been converted into the right to receive a number of ASWC shares
intended to provide $32.50 of value for each of the Company's shares. The
ASWC proposal also provided for a collar pursuant to which the minimum and
maximum conversion ratios would be 1.11 and 1.35 ASWC shares for each Company
share. The Company's financial advisor advised the Company's Board that this
proposal was more favorable to the Company's shareholders than the terms of
the Merger Agreement.
On March 22, 1999, the Company and CWSG executed an amendment to the
Merger Agreement which provides that each share of the Company's common stock
will be converted into the right to receive a number of CWSG shares intended
to provide $33.75 of value for each of the Company's shares. The amendment to
the Merger Agreement also provides that the minimum and maximum conversion
ratios will be 1.25 and 1.49 CWSG shares for each Company share.
The Company expects that the proposed merger will be treated as a
tax-free transaction under the applicable provisions of the Internal Revenue
Code. Shares of CWSG common stock trade under the symbol "CWT" on the New
York Stock Exchange. CWSG operations provide water utility services to over
1.5 million people in 58 California communities.
The completion of the proposed merger depends on a number of
conditions being met as stated in the Merger Agreement, including: 1) Company
shareholders must approve the Merger Agreement, 2) the Company and CWSG must
receive all required regulatory approvals and any waiting periods required by
law must have passed, which the Company expects to occur in the last quarter
of 1999, and 3) the independent accountants must opine that the merger will
qualify for "pooling of interest" accounting treatment.
If the conditions of the Merger Agreement are not satisfied or if
either the Company or CWSG decide not to complete the merger, certain
payments are required under the terms of the Merger Agreement. If the merger
is not consummated due to certain actions by the Company relating to
alternative transactions, the Company will pay CWSG liquidated damages in the
amount of $1.5 million. If the merger is not consummated, and, within 24
months of the effective date of the termination of the Merger Agreement, the
Company consummates another merger, consolidation or similar transaction that
is superior to the merger, the Company will pay to CWSG $1.2 million in
liquidated damages (in addition to the $1.5 million discussed above).
4
The Merger Agreement states that it may be terminated by the Company
if the Board determines based on the advice of its financial advisor that the
terms of the competing proposal are more favorable to the Company's
shareholders. The Merger Agreement further states, however, that it may not
be terminated under these circumstances by the Company until at least five
business days after the Company has provided written notice to CWSG that the
Company's Board has determined that a competing transaction is a "Superior
Proposal," as defined in the Merger Agreement.
The Company does not know at this time if it will receive any
additional proposals from ASWC or any other company that will be superior to
the terms of the amended Merger Agreement. If the Company were to terminate
the Merger Agreement to enter into a transaction with another company, it
could be obligated to pay CWSG liquidated damages as described above.
The Company will hold a special meeting of shareholders to consider
and vote upon the Merger Agreement.
5
WATER SUPPLY
Dominguez obtains its water supplies from its own groundwater wells plus two
water wholesalers of imported water.
All Dominguez service areas obtain either a portion or all of their supply
from groundwater wells. The quantity that the South Bay Division is allowed
to pump over a year's time is fixed by court adjudication. The adjudication
established distinct groundwater basins which are managed by a
court-appointed watermaster. The groundwater management fixes the safe yield
of the basins and ensures the replenishment of the basins by utilizing
impounded storm water, treated recycled water and purchased water when
necessary. Groundwater basins have not been adjudicated in the Subsidiaries.
In December 1997, Dominguez entered into a recycled water agreement with the
West Basin Municipal Water District (West Basin) and ARCO. Under the terms of
the agreement, Dominguez will sell ARCO recycled water purchased from West
Basin for the same cost margin that Dominguez would otherwise have received
providing ARCO with potable water. Dominguez expects to commit funds up to
$2,000,000 by December 1999 to construct recycled water facilities in its
South Bay Division service area.
In 1998, the Water Replenishment District of Southern California (WRD), a
water district responsible for the oversight and management of the West and
Central Groundwater Basins, awarded a grant to Dominguez of $1,820,000.
Dominguez received the first of its two payments for $910,000 in 1998 and
used approximately $670,000 to offset the cost of purchasing higher-priced
imported water in lieu of pumping its groundwater rights. The balance of the
funds, approximately $1,150,000, will be used to meet Dominguez' expected
$2,000,000 commitment in recycled water facilities, leaving a balance of
$850,000 funded by Dominguez.
The South Bay Division and Leona Valley service area of Antelope Valley Water
Company purchase water from wholesalers to supplement groundwater. The South
Bay Division purchases imported water from the Metropolitan Water District
(MWD) of southern California through West Basin. The Leona Valley service
area purchases its imported water from the Antelope Valley - East Kern Water
Agency (AVEK). Both of these wholesale suppliers obtain water from the
California State Water Project (SWP), and MWD also obtains water from the
Colorado River.
Long-term imported water supplies depend upon several factors. Dominguez'
future dependency on imported water will be subject to the availability and
usage of recycled water in the region as well as customer's long-term water
conservation efforts. Dominguez has and will continue to promote long-term
water conservation efforts and will advance the use of recycled water.
Dominguez anticipates that recycled water will be available for its largest
customer from West Basin by December 1999. The availability of recycled water
will reduce the South Bay Division's demand for imported water, the
availability of which may be uncertain in the future. Reduced imported water
supplies and annual population growth could create future drought conditions
in Southern California; however, Dominguez believes that the availability of
recycled water will significantly mitigate the impact of future droughts in
the South Bay Division service area.
Legislative actions continue to play a role in the long-term availability of
water for southern California. The amount of SWP water available from
northern California and water imported from the Colorado River may be
significantly reduced around the beginning of the next century. Even with the
use of recycled water and continuing conservation efforts, future drought
conditions may require water rationing by all water agencies and purveyors,
including Dominguez.
6
WATER QUALITY
Dominguez is subject to water quality regulations promulgated 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 and testing. With occasional minor exceptions,
Dominguez meets all current primary water standards.
Since mid-1997, Dominguez has been participating with many other large water
companies in an 18-month water sampling data acquisition program known as the
Information Collection Rule. Data collected will be used by the EPA to
establish future drinking water standards. Under the Federal Safe Drinking
Water Act, the EPA is required to continue to establish new maximum levels
for additional chemicals. The costs of future compliance are unknown, but
Dominguez could be required to perform more quality testing and treatment.
Management believes the Company's financial reserves will be sufficient to
meet these anticipated requirements. During 1998, Dominguez expended
$1,733,000 on water supply improvements. In 1999, Dominguez anticipates
spending $3,388,000 for water supply capital improvements.
REGULATORY AFFAIRS
In March 1998, the Commission instituted its own proceeding
(Investigation 98-03-013) to investigate whether existing standards and
policies of the Commission regarding drinking water quality adequately
protect the public health and safety with respect to contaminants such as
Volatile Organic Compounds, Perchlorate, and MTBE, and whether those
standards and policies are being uniformly complied with by
Commission-regulated utilities. The Commission investigation appears to be in
response to class action civil lawsuits naming as defendants other
Commission-regulated water utilities. Dominguez filed its responses in a
timely manner and believes that such responses clearly show that Dominguez
has and continues to comply with state and federal water quality standards.
Dominguez cannot predict the outcome of this proceeding or any impact to the
Company.
In October 1997, the Commission instituted its own proceeding to set
rules and provide guidelines for the acquisition and merger of water
companies. This proceeding was initiated to develop guidelines necessary to
implement a new law, referred to as Senate Bill 1268, requiring the
Commission to use the standard of fair-market value when establishing the
ratebase value for the acquired distribution system assets of a public water
system. Dominguez participated with the Commission staff in workshops.
Commission staff and all Class A utilities had reached an agreement on
guidelines. Dominguez believes that the new law and the Commission's
guidelines will benefit Dominguez in its acquisition of small water systems.
In October 1997, the Commission also instituted its own rulemaking
proceeding to develop rules for public-private partnerships. Dominguez
participated with the Commission staff in workshops; however, all
participants failed to reach a settlement and develop necessary guidelines.
The Commission is scheduled to hold hearings in 1999.
During 1998, Dominguez received the Commission's approval to acquire
the assets of the Lucerne Water Company, an investor-owned water system
serving 1,242 customers, in exchange for 42,092 shares of the Company's
common stock. This acquisition, effective January 1, 1999, will be accounted
for using the purchase method. Ratebase for the acquired assets was set at
$713,000, resulting in an additional credit of $262,000 to be recorded in
paid in capital.
Also in 1998, Dominguez received Commission approval to acquire the
assets of the Rancho del Paradiso and Armstrong Valley Water Companies,
investor-owned water systems serving 60 and 310 customers respectively, in
exchange for 12,375 shares of the Company's common stock. This acquisition,
effective January 1, 1999, will be accounted for using the purchase method.
Rate base for the acquired assets was set at $188,000, resulting in an
additional credit of $55,000 to be recorded in paid in capital.
7
In the first quarter of 1999, the Company filed a joint application
with CWSG to approve the merger of their regulated utility companies (see
"THE MERGER" above).
In February 1999, Dominguez filed general rate increase applications
for the South Bay Division and its subsidiaries, Antelope Valley Water
Company and Kern River Valley Water Company. The applications request a
cumulative rate increase of $5,872,000, based on a requested return on equity
of 10.66% for test year 2000, 10.73% for year 2001, and an attrition
allowance for the year 2002. Dominguez and its subsidiaries anticipate that
the new rates will be effective January 1, 2000. There can be no assurance,
however, as to the amount of any rate increases that the Commission will
approve.
NON-UTILITY SUBSIDIARY OPERATIONS
DSC Investments invested $350,000 in CSC on December 20, 1996 and acquired a
twenty percent equity ownership with the option to acquire an additional
forty percent through the year 2001. Under the investment agreements, the
Company is obligated to provide working cash and long-term financing to CSC
for the leasing of chlorine generators, subject to the financial condition of
CSC. During 1998, the Company terminated its loan agreement with CSC. CSC
executed a one-year promissory note for $100,000 with the Company. The
Company agreed to subordinate the note to CSC's commercial lender and CSC
agreed to release the Company of any future obligation to lend additional
funds to CSC. The Company accounts for the CSC investment under the equity
method.
On April 26, 1996, the Company sold the remaining assets of Hydro-Metric
Service Corporation to a former employee in exchange for a two-year note. The
loan was paid in full as of April 1998. The sale resulted in a net gain of
$39,000.
During 1998, DSC Investments facilitated transfers of water right leases
between third parties, adding $549,000 to the Company's revenue. The future
income from the transfer of water right leases will depend upon the need to
pump groundwater by major industrial users and water purveyors.
EMPLOYEE RELATIONS
As of December 31, 1998, the Company had a total of 70 employees in utility
and non-utility operations. None of the employees is represented by a labor
organization, and there has never been a work stoppage or interruption due to
a labor dispute. In general, wages, hours, and conditions of employment are
equivalent to those found in the industry. Dominguez considers its relations
with its employees to be excellent. All employees receive paid time off.
Dominguez provides and pays the cost of group life, disability, medical and
dental insurance, as well as pensions, for its employees.
ENVIRONMENTAL MATTERS
Dominguez' operations are subject to pollution control and water quality
control as discussed in the "Water Quality" section.
Other state and local environmental regulations apply to Dominguez operations
and facilities. These regulations are primarily related to the handling,
storage and disposal of hazardous materials. Dominguez is currently in
compliance with all other state and local regulations.
8
ITEM 2. PROPERTIES.
The Company's general administrative and executive offices are located at
21718 South Alameda Street in Carson, California. The South Bay division has
prior rights to lay distribution mains and for other uses on much of the
public and private lands in its service area. Dominguez' claim of prior
rights is derived from the original Spanish land grant covering the Dominguez
service area. For this reason, Dominguez, unlike most other public utilities,
generally receives compensation from the appropriate public authority when
the relocation of its facilities is necessitated by the construction of roads
or other projects. It is common for public utilities to bear the entire cost
of such relocation.
Primarily the Company is comprised of facilities to pump and distribute both
groundwater and purchased water to residential, commercial, and industrial
customers. As of December 31, 1998, the Company has invested $8,852,000 in
water supply, $23,483,000 in distribution, and $2,820,000 in other operating
facilities. Company believes that its current facilities are adequate to meet
customer demand, subject to the addition of capital facilities as the system
requires.
Substantially all of the property of Dominguez is subject to the lien of the
Trust Indenture dated August 1, 1954, as supplemented and amended, to Chase
Manhattan Bank and Trust Company, N.A., as Trustee, securing the two
outstanding series of Dominguez' First Mortgage Bonds.
9
ITEM 3. LEGAL PROCEEDINGS.
The Company is routinely involved in legal actions. The Company does not believe
these matters will have a material adverse effect, if any, on its financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) MARKET PRICE FOR COMMON SHARES
1998 HIGH LOW
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First Quarter $23.125 $18.500
Second Quarter 19.500 17.000
Third Quarter 23.500 17.500
Fourth Quarter 31.250 21.250
1997 HIGH LOW
---- ---
First Quarter $16.333 $15.000
Second Quarter 17.333 15.667
Third Quarter 17.667 15.333
Fourth Quarter 21.500 17.000
Adjusted to reflect 3-for-2 stock split effected January 1998.
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON SHARES
The Nasdaq Stock Market maintenance standards require
that Nasdaq National Market companies have at least
400 shareholders of round lots. As of December 31,
1998, the Company complied with the standard with 313
common shareholders of record and more than 659
beneficial shareholders, who have elected to hold
their shares in street name.
(c) DIVIDENDS DECLARED
Dividend Declared 1998 1997
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First Quarter $0.2300 $0.2175
Second Quarter 0.2300 0.2175
Third Quarter 0.2300 0.2175
Fourth Quarter 0.2300 0.2175
Adjusted to reflect 3-for-2 stock split effected January 1998.
(d) DIVIDEND RESTRICTION
The Company's available dividends to its shareholders
are substantially dependent on the availability of
dividends from Dominguez to the Company. 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
$6,500,000 as of December 31, 1998.
11
(e) NEW SHARES ISSUED DURING 1999
In January 1999, the Company issued 54,467 shares of
its common stock in connection of its acquisition of
certain water companies. The Company stock issued was
exempted from registration under the Security Act of
1933 pursuant to Sec. 5(2) of the Act and or
regulation D promulgated under the Act.
12
ITEM 6. SELECTED FINANCIAL DATA.
ELEVEN YEAR STATISTICAL REVIEW
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS: (Dollars in Thousands)
Operating revenue $ 25,267 $ 26,818 $ 24,705 $ 25,486 $ 23,569 $ 22,193
Operating expenses (before taxes) 22,128 22,652 20,745 21,376 19,419 18,139
Other taxes 566 552 448 455 432 406
Other expenses 66 40 33 7 29 20
Other income (718) (590) (475) (165) (297) (353)
Interest cost 870 758 659 683 714 732
Income taxes 932 1,385 1,314 1,177 1,340 1,243
Income before extraordinary item 1,423 2,021 1,981 1,953 1,932 2,006
Extraordinary item, net of tax 499 -- -- -- -- --
Net income 924 2,021 1,981 1,953 1,932 2,006
Dividends paid 1,386 1,306 1,247 1,170 1,110 1,070
Reinvested in the business (462) 715 734 783 822 936
PER COMMON SHARE DATA: *
Earnings-Before extraordinary item $ 0.94 $ 1.34 $ 1.31 $ 1.29 $ 1.28 $ 1.33
Earnings-Basic and diluted $ 0.61 $ 1.34 $ 1.31 $ 1.29 $ 1.28 $ 1.33
Dividends $ 0.92 $ 0.87 $ 0.83 $ 0.77 $ 0.73 $ 0.71
Payout percentage 150.82% 64.68% 63.00% 60.00% 57.50% 53.50%
Book value $ 10.54 $ 10.85 $ 10.37 $ 9.89 $ 9.35 $ 8.82
Return on common equity (average) 5.70% 12.60% 13.00% 13.40% 14.10% 15.60%
Year end market price $ 28.00 $ 21.50 $ 15.00 $ 12.33 $ 11.17 $ 14.00
Market to book ratio at year-end 265.60% 198.20% 144.60% 124.70% 119.40% 158.70%
Number shares outstanding 1,506,512 1,506,512 1,506,512 1,506,512 1,506,512 1,506,512
BALANCE SHEET DATA: (Dollars in Thousands)
Gross utility plant $ 68,701 $ 63,510 $ 60,069 $ 57,271 $ 55,406 $ 52,260
Net utility plant 49,724 46,020 43,544 41,358 40,022 37,977
Non-utility plant 101 110 49 67 67 51
Total assets 52,635 51,661 46,875 45,295 44,652 42,662
CAPITALIZATION: (Dollars in Thousands)
Long-term debt $ 11,217 $ 11,194 $ 7,036 $ 7,273 $ 7,326 $ 7,493
Preferred stock -- -- -- 98 98 98
Common equity 15,879 16,341 15,626 14,896 14,092 13,284
Total capitalization 27,096 27,535 22,662 22,267 21,516 20,875
Interim debt 450 -- 800 -- -- --
CAPITALIZATION RATIOS:
Long-term debt 41.40% 40.65% 31.00% 32.70% 34.00% 35.90%
Preferred stock -- -- -- 0.40% 0.50% 0.50%
Common equity 58.60% 59.35% 69.00% 66.90% 65.50% 63.60%
Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
OTHER UTILITY STATISTICS:
Customers at year-end 37,882 37,636 36,882 36,739 36,371 36,107
For the years ended December 31, 1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- -----------
SUMMARY OF OPERATIONS: (Dollars in Thousands)
Operating revenue $ 21,813 $ 18,706 $ 19,139 $ 20,359 $ 19,409
Operating expenses (before taxes) 18,327 15,677 15,869 16,885 16,054
Other taxes 397 323 321 330 320
Other expenses 17 32 41 18 51
Other income (85) (73) (186) (38) (64)
Interest cost 586 606 633 577 569
Income taxes 1,031 807 1,087 1,110 1,050
Income before extraordinary item 1,540 1,334 1,374 1,507 1,429
Extraordinary item, net of tax -- -- -- -- --
Net income 1,540 1,334 1,374 1,507 1,429
Dividends paid 1,009 989 965 940 884
Reinvested in the business 531 345 409 567 545
PER COMMON SHARE DATA: *
Earnings-Before extraordinary item $ 1.02 $ 0.88 $ 0.91 $ 0.98 $ 0.95
Earnings-Basic and diluted $ 1.02 $ 0.88 $ 0.91 $ 0.98 $ 0.95
Dividends $ 0.67 $ 0.65 $ 0.64 $ 0.61 $ 0.57
Payout percentage 65.40% 74.20% 70.10% 62.60% 60.60%
Book value $ 8.19 $ 7.85 $ 7.60 $ 7.32 $ 6.72
Return on common equity (average) 12.80% 11.40% 12.20% 14.00% 14.50%
Year end market price $ 10.83 $ 10.00 $ 9.50 $ 9.83 $ 10.00
Market to book ratio at year-end 132.20% 127.40% 125.00% 134.30% 148.80%
Number shares outstanding 1,506,512 1,506,512 1,497,555 1,497,555 1,469,430
BALANCE SHEET DATA: (Dollars in Thousands)
Gross utility plant $ 51,037 $ 50,161 $ 46,710 $ 45,205 $ 41,536
Net utility plant 37,511 33,793 31,713 31,233 28,714
Non-utility plant 105 105 104 101 93
Total assets 40,275 39,596 37,477 36,513 33,516
CAPITALIZATION: (Dollars in Thousands)
Long-term debt $ 7,657 $ 3,829 $ 3,766 $ 4,059 $ 4,583
Preferred stock 98 98 126 142 784
Common equity 12,348 11,817 11,383 10,968 9,877
Total capitalization 20,103 15,744 15,275 15,169 15,244
Interim debt -- 3,375 2,725 950 --
CAPITALIZATION RATIOS:
Long-term debt 38.10% 24.30% 24.70% 26.80% 30.10%
Preferred stock 0.50% 0.60% 0.80% 0.90% 5.10%
Common equity 61.40% 75.10% 74.50% 72.30% 64.80%
Total 100.00% 100.00% 100.00% 100.00% 100.00%
OTHER UTILITY STATISTICS:
Customers at year-end 36,043 35,949 34,444 34,189 32,765
13
For the years ended December 31, 1998 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
Water sales (millions of gallons) 11,569 12,362 11,481 12,371 12,071 11,359
Average revenue per customer $ 650.22 $ 688.10 $ 650.92 $ 665.70 $ 619.90 $ 561.27
Utility employees 70 73 77 78 76 75
For the years ended December 31, 1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- -----------
Water sales (millions of gallons) 11,731 10,906 12,957 13,339 13,237
Average revenue per customer $ 481.35 $ 423.35 $ 490.32 $ 501.95 $ 520.58
Utility employees 69 71 64 56 51
* Adjusted to reflect 3-for-2 stock split effected January, 1998.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENT
In connection with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (Reform Act), the Company is hereby
filing cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements (as defined in the Reform Act) made by or on
behalf of the Company in this Annual Report. Any statements that express such
statements are often, but not always, expressed with phrases such as
expectations, beliefs, plans, objectives, assumptions, or future events or
performance, through the use of words or phrases such as "anticipate,"
"believes," "estimates," "expects," "intends," "plans," "predicts,"
"projects," "will likely result," "will continue," are not statements of
historical facts and may be forward-looking.
Forward-looking statements involve estimates, assumptions, and
uncertainties and are qualified in their entirety by reference to the following
important factors, which are difficult to predict, contain uncertainties, are
beyond the control of the Company, and could cause actual results to differ
materially from those contained in forward-looking statements:
- prevailing governmental policies and regulatory actions,
including those of the Commission, with respect to allowed
rates of return, industry and rate structure, acquisition and
disposal of assets and facilities, operation and construction
of plant facilities, recovery of balancing account, and
present or prospective competition;
- economic and geographic factors including political and
economic risks;
- changes in and compliance with environmental and safety laws
and policies;
- water supply and weather conditions; - customer growth rate;
- Year 2000 issues:
- delays or change in costs of Year 2000 compliance;
- failure of major suppliers, customers or others with whom the
Company does business to resolve their own Year 2000 issues on
a timely basis;
- changes in tax rates or policies or in rates of inflation;
- unanticipated changes in operating expenses and capital
expenditures;
- capital market conditions;
- competition for non-regulatory opportunities; and
- legal and administrative proceedings and settlements that
influence the business and profitability of the Company.
Any forward-looking statement speaks only as of the date on which
such statement is made, and the Company undertakes no obligation to update
any forward-looking statement to reflect events or circumstances after the
date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time and it is not
possible for management to predict all of such factors, nor can it assess the
impact of any such factor on the business, or the extent to which any factor,
or combination of factors, may cause results to differ materially from those
contained in any forward-looking statement.
GENERAL
The following discussion should be read in conjunction with the
accompanying Consolidated Financial Statements and with the Eleven Year
Statistical Review in this report. A description of the regulated and
non-regulated businesses is contained in Note 17 of Notes to Consolidated
Financial Statements.
Dominguez Services Corporation (the Company) has two wholly-owned
subsidiaries: Dominguez Water Company and its operating subsidiaries
(Dominguez,) which is involved in regulated water supply
15
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 Commission) and, as such, they
must obtain the Commission's approval to increase water rates to recover
increases in operating expenses and authorization to include reinvested
capital in ratebase. 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
Division), and its operating subsidiaries, the Kern River Valley Water
Company, the Antelope Valley Water Company and Redwood Valley Water Company
(collectively referred to as the "Subsidiaries"). The South Bay Division has
been providing water service for more than 87 years to its customers.
Currently, the South Bay Division serves approximately 32,524 customers in a
35 square mile area including most of Carson, one-quarter of Torrance, and
parts of Compton, Long Beach, Los Angeles, Los Angeles County, and Harbor
City. The Kern River Valley Water Company and the Antelope Valley Water
Company provide water service to approximately 4,099 and 1,259 customers,
respectively.
Dominguez organized the Redwood Valley Water Company in 1998 to
acquire certain water companies located in northern California. During 1998,
Dominguez received Commission approval to acquire the assets of the Lucerne
Water Company, with 1,242 customers located in Lake County in northern
California and the assets of the Rancho del Paradiso and Armstrong Valley
Water Companies, with 370 total customers, located in Sonoma County in
northern California. On January 1, 1999, Dominguez completed the acquisitions
of these companies and took over operations under the name of Redwood Valley
Water Company.
DSC Investments is primarily engaged in the transfer of water rights
between third parties. Income from the transfers of water rights may
significantly vary from year to year due to demands for groundwater by major
pumpers in the West and Central Groundwater Basins. DSC Investments also has
a twenty percent ownership interest in Chemical Services Company (CSC) with
an option to acquire an additional 40% through the year 2001. CSC
manufactures and distributes chlorine generators used in the water and
wastewater industry to produce safe on-site chlorine.
THE MERGER
On November 13, 1998, the Company executed an Agreement and Plan of
Reorganization (the Merger Agreement) to merge with California Water Service
Group (CWSG), the parent of California Water Service Company (Cal Water) and CWS
Utility Services, pursuant to which the Company's operations would be merged
into Cal Water. Under the terms of the Merger Agreement, each share of the
Company's common stock issued and outstanding on the closing date would have
been converted into the right to receive 1.18 shares of CWSG common stock. The
Company's Board of Directors (Board) received the opinion of its financial
advisor, PaineWebber Inc., that this exchange ratio was fair to the shareholders
of the Company's common stock from a financial point of view.
On March 16, 1999, the Company announced that it received an
unsolicited proposal from American States Water Company (ASWC) offering to
acquire all of the Company's outstanding common stock in a stock-for-stock
merger. Under the ASWC proposal, each share of the Company common stock would
be converted into the right to receive a number of ASWC shares that would be
intended to provide $32.50 of value for each of the Company shares. The ASWC
proposal also provided for a collar pursuant to which the minimum and maximum
conversion ratio would be 1.11 and 1.35. The Company's financial advisor
advised the Company's that this proposal was more favorable to the Company's
shareholders than the terms of the Merger Agreement.
On March 22, 1999, the Company and CWSG executed an amendment to the
Merger Agreement which provides that each share of the Company's common stock
will be converted into the right to receive a number of CWSG shares which is
intended to provide $33.75 of value for each of the Company's shares. The
amendment to the Merger Agreement also provides that the minimum and maximum
conversion ratios will be 1.25 and 1.49 CWSG shares for each Company share.
16
The Company expects that the merger will be treated as a tax-free
transaction under the applicable provisions of the Internal Revenue Code.
Shares of CWSG common stock trade under the symbol "CWT" on the New York
Stock Exchange. CWSG operations provide water utility services to over 1.5
million people in 58 California communities.
The completion of the merger depends on a number of conditions being
met as stated in the Merger Agreement, including: 1) Company shareholders
must approve the Merger Agreement, 2) the Company and CWSG must receive all
required regulatory approvals and any waiting periods required by law must
have passed, which the Company expects to occur in the last quarter of 1999,
and 3) the independent accountants must opine that the merger will qualify
for "pooling of interest" accounting treatment.
If the conditions of the Merger Agreement are not satisfied or if
either the Company or CWSG decide not to complete the merger, certain
payments are required under the terms of the Merger Agreement. If the merger
is not consummated due to certain actions by the Company relating to
alternative transactions, the Company will pay CWSG liquidated damages in the
amount of $1.5 million. If the merger is not consummated, and, within 24
months of the effective date of the termination of the Merger Agreement, the
Company consummates another merger, consolidation or similar transaction that
is superior to the merger, the Company will pay to CWSG $1.2 million in
liquidated damages (in addition to the $1.5 million discussed above).
The Merger Agreement states that it may be terminated by the Company
if the Board determines based on the advice of its financial advisor that the
terms of the competing proposal are more favorable to the Company's
shareholders. The Merger Agreement further states, however, that it may not
be terminated under these circumstances by the Company until at least five
business days after the Company has provided written notice to CWSG that the
Company's Board has determined that a competing transaction is a "Superior
Proposal," as defined in the Merger Agreement.
The Company does not know at this time if it will receive any
additional proposals from ASWC or any other company that will be superior to
the terms of the amended Merger Agreement. If the Company were to terminate
the Merger Agreement to enter into a transaction with another company, it
could be obligated to pay CWSG liquidated damages as described above.
The Company will hold a special meeting of shareholders to consider
and vote upon the Merger Agreement.
RESULTS OF OPERATIONS 1998 COMPARED TO 1997
Operating revenue totaled $25,267,000 for 1998, a decrease of
$1,551,000, or 5.8%, from the $26,818,000 recorded for 1997. The decrease in
revenue is due to a reduction in water sales. Consumption by residential and
multi-family customers was reduced by 6.2% and by business-industrial customers
by 5.0%.
Operating expenses before taxes decreased by $524,000, or 2.3%,
compared to 1997. Operating expenses are comprised of several different
components, including purchased and pumped water costs, operations and
maintenance expenses and depreciation expense. Operations and maintenance
expenses, and depreciation expense increased in 1998 by $293,000, or 4.2%,
and $98,000, or 7.3%, respectively. However, the cost to pump and purchase
water decreased by a combined total of $915,000, or 6.4%. This is primarily
attributed to lower sales and a resulting decrease in production costs.
During 1998, the Company received a grant from the Water Replenishment
District of Southern California (WRD), a water district responsible for the
oversight and management of the West and Central Groundwater Basins, of which
approximately $390,000 decreased production costs. The reduction in cost
would have been greater if several wells were not out of service for
rehabilitation. While the wells were not in service, higher priced purchased
water was supplied to our customers.
Other income increased by $102,000, or 19%, due to increased
activity in the transfer of water right leases and operating contracts.
Interest costs increased by $112,000, or 15%, due to a new bond
issuance in December 1997.
17
The extraordinary item related to merger expenses totaled $814,000.
The tax effect of the extraordinary item is $315,000.
Net income before the extraordinary item decreased by $598,000, or
29.6%, due to the reasons mentioned above. Earnings per share before the
extraordinary item on common equity decreased from $1.34 to $.94. The Company
raised its annual dividend to common shareholders to $.92 in 1998 from $.87
in 1997, an increase of 5.8%.
RESULTS OF OPERATIONS 1997 COMPARED TO 1996
Operating revenue totaled $26,818,000 for 1997, an increase of
$2,113,000, or 8.6%, over the $24,705,000 recorded for 1996. The increased
revenue is due to higher sales to industrial customers and higher rates in the
South Bay Division to cover the higher cost of imported water. Industrial sales
increased by $1,419,000, or 13.8%.
Operating expenses before taxes increased by $1,907,000, or 9.2%,
primarily due to an increase in the cost of water. Additional water was
purchased from West Basin to cover the increased water sales. The overall
margin on water sales decreased from 52% to 47% due to additional water
purchased. Operations and maintenance costs decreased by $476,000, or 6.3%.
Other income increased by $108,000, or 24%, due to increased
activity in the transfer of water right leases.
Interest costs increased by $99,000, or 15%, due to additional
borrowings for capital improvements during 1997.
Net income increased $40,000, or 2%, due to the reasons mentioned
above. Earnings per share on common equity increased from $1.31 to $1.34. The
Company raised its annual dividend to common shareholders to $.87 in 1997
from $.83 in 1996, an increase of 4.8%.
Effective January 2, 1998, the Company split its common stock
three-for-two for shareholders of record on December 15, 1997. The Company
paid cash in lieu of issuing fractional shares based on the closing price as
of December 15, 1997. The par value of the common stock remained unchanged.
Financial data in this report is adjusted to reflect the change.
RESULTS OF OPERATIONS 1996 COMPARED TO 1995
Operating revenue totaled $24,705,000 for 1996, a decrease of $781,000,
or 3%, from the $25,486,000 recorded for 1995. The decreased revenues are due to
lower sales to industrial customers, which were partially offset by higher
residential sales. 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 operations and maintenance costs. In 1996,
water costs decreased as the South Bay Division was able to purchase less
imported water from West Basin due to increased pumping of its wells. The
overall margin on water sales improved from 49% to 52% due to lower 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. The sale of
Hydro-Metric resulted in a gain of $39,000.
Interest costs decreased by $24,000, or 3.6%, due to the retirement
of the Series G bonds in 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 $1.29 to $1.31 for the reasons stated above. The Company raised its
annual dividend to common shareholders from $0.77 in 1995 to $0.83 in 1996,
an increase of 7.8%.
18
LIQUIDITY AND CAPITAL RESOURCES
The Company's continuing operations provided sufficient cash in 1998 to
cover operating expenses, interest and dividends. In 1998, Dominguez and its
Subsidiaries invested $5,183,000 in utility plant improvements. Approximately
$561,000 was contributed or advanced by developers.
In December 1997, Dominguez issued $5,000,000 in Series K Bonds
under its trust indenture dated August 1, 1954, with a coupon interest rate
of 6.94%, due in 2012. Most of the proceeds from the sale were used to repay
the outstanding balance of short-term borrowings. The short-term borrowings
were incurred due to the retirement of the Series F and H Bonds in 1997, as
well as for funding capital expenditures. The balance of these proceeds was
used to fund 1998 capital expenditures.
The Company has available $4,500,000 under a revolving credit
facility with Bank of America. As of December 31, 1998 and 1997, short-term
borrowing under the facility totaled $450,000 and zero respectively. The
Company intends to renew the credit facility when it expires in June 1999.
During 1998, the Company terminated its loan agreement with CSC. CSC
executed a one-year promissory note for $100,000 with the Company. The
Company agreed to subordinate the note to CSC's commercial lender and CSC
agreed to release the Company of any future obligation to lend further funds
to CSC.
The Company's 1999 capital budget is $6,043,000. Budgeted
improvements include $3,608,000 for water production facilities and storage,
an $800,000 investment to accommodate a regional recycled water treatment
plant, and $697,000 for pipeline replacements. The Company will fund budgeted
improvements from earnings available for reinvestment and short-term
borrowings, if necessary.
In December 1997, Dominguez entered into a recycled water agreement
with the West Basin Municipal Water District (West Basin) and ARCO. Under the
terms of the agreement, Dominguez will sell ARCO recycled water purchased
from West Basin for the same cost margin that Dominguez would otherwise have
received providing ARCO with potable water. Dominguez expects to commit funds
up to $2,000,000 by December 1999 to construct recycled water facilities in
its South Bay Division service area.
In 1998, WRD awarded a grant to Dominguez of $1,820,000. Dominguez
received the first of its two payments for $910,000 in 1998 and used
approximately $670,000 to offset the cost of purchasing higher-priced
imported water in lieu of pumping its groundwater rights. The balance of the
funds, approximately $1,150,000, will be used to meet Dominguez' expected
$2,000,000 commitment in recycled water facilities, leaving a balance of
$850,000 to be funded by Dominguez.
REGULATORY AFFAIRS
In March 1998, the Commission instituted its own proceeding
(Investigation 98-03-013) to investigate whether existing standards and policies
of the Commission regarding drinking water quality adequately protect the public
health and safety with respect to contaminants such as Volatile Organic
Compounds, Perchlorate, and MTBE, and whether those standards and policies are
being uniformly complied with by Commission-regulated utilities. The Commission
investigation appears to be in response to class action civil lawsuits naming as
defendants other Commission-regulated water utilities. Dominguez filed its
responses in a timely manner and believes that such responses clearly show that
Dominguez has and continues to comply with state and federal water quality
standards. Dominguez cannot predict the outcome of this proceeding or any impact
to the Company.
In October 1997, the Commission instituted its own proceeding to set
rules and provide guidelines for the acquisition and merger of water
companies. This proceeding was initiated to develop guidelines necessary to
implement a new law, referred to as Senate Bill 1268, requiring the
Commission to use the standard of fair-market value when establishing the
ratebase value for the acquired distribution system assets of a public water
system. Dominguez participated with the Commission staff in workshops.
Commission staff and all Class A utilities had reached an agreement on
guidelines. Dominguez believes that
19
the new law and the Commission's guidelines will benefit Dominguez in its
acquisition of small water systems.
In October 1997, the Commission also instituted its own rulemaking
proceeding to develop rules for public-private partnerships. Dominguez
participated with the Commission staff in workshops; however, all
participants failed to reach a settlement and develop necessary guidelines.
The Commission is scheduled to hold hearings in 1999.
During 1998, Dominguez received the Commission's approval to acquire
the assets of the Lucerne Water Company, an investor-owned water system
serving 1,242 customers, in exchange for 42,092 shares of the Company's
common stock. This acquisition, effective January 1, 1999, will be accounted
for using the purchase method. Ratebase for the acquired assets was set at
$713,000, resulting in an additional credit of $262,000 to be recorded in
paid in capital.
Also in 1998, Dominguez received Commission approval to acquire the
assets of the Rancho del Paradiso and Armstrong Valley Water Companies,
investor-owned water systems serving 60 and 310 customers respectively, in
exchange for 12,375 shares of the Company's common stock. This acquisition,
effective January 1, 1999, will be accounted for using the purchase method.
Ratebase for the acquired assets was set at $188,000, resulting in an
additional credit of $55,000 to be recorded in paid in capital.
In the first quarter of 1999, the Company filed a joint application
with CWSG to approve the merger of their regulated utility companies (see
"THE MERGER" above).
In February 1999, Dominguez filed general rate increase applications
for the South Bay Division and its subsidiaries, Antelope Valley Water
Company and Kern River Valley Water Company. The applications request a
cumulative rate increase of $5,872,000, based on a requested return on equity
of 10.66% for test year 2000, 10.73% for year 2001, and an attrition
allowance for the year 2002. Dominguez and its subsidiaries anticipate that
the new rates will be effective January 1, 2000. There can be no assurance,
however, as to the amount of any rate increases that the Commission will
approve.
ENVIRONMENTAL MATTERS
Dominguez is subject to water quality regulations promulgated 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 and testing. With occasional minor exceptions,
Dominguez meets all current primary water standards.
Since mid-1997, Dominguez has been participating with many other
large water companies in an 18-month water sampling data acquisition program
known as the Information Collection Rule. Data collected will be used by the
EPA to establish future drinking water standards. Under the Federal Safe
Drinking Water Act, the EPA is required to continue to establish new maximum
levels for additional chemicals. The costs of future compliance are unknown,
but Dominguez could be required to perform more quality testing and
treatment. Management believes the Company's financial reserves will be
sufficient to meet these anticipated requirements. During 1998, Dominguez
expended $1,733,000 for water supply improvements. In 1999, Dominguez
anticipates spending $3,388,000 for water supply capital improvements.
WATER SUPPLY
Dominguez obtains its water supplies from its own groundwater wells and
from two wholesalers of imported water.
All Dominguez service areas obtain either a portion or all of their
supply from groundwater wells. The quantity that the South Bay Division is
allowed to pump over a year's time is fixed by court adjudication. The
adjudication established distinct groundwater basins which are managed by a
court-appointed watermaster. The groundwater management fixes the safe yield
of the basins and ensures the replenishment of the basins by utilizing
impounded storm water, treated recycled water and purchased water when
necessary. Groundwater basins have not been adjudicated in the Subsidiaries.
20
The South Bay Division and Leona Valley service area of Antelope
Valley Water Company purchase water from wholesalers to supplement
groundwater. The South Bay Division purchases imported water from the
Metropolitan Water District (MWD) of southern California through West Basin.
The Leona Valley service area purchases its imported water from the Antelope
Valley - East Kern Water Agency (AVEK). Both of these wholesale suppliers
obtain water from the California State Water Project (SWP), and MWD also
obtains water from the Colorado River.
Long-term imported water supplies are dependent upon several
factors. Dominguez' future dependency on imported water will be subject to
the availability and usage of recycled water in the region as well as
customer's long-term water conservation efforts. Dominguez has and will
continue to promote long-term water conservation efforts and will advance the
use of recycled water.
Dominguez anticipates that recycled water will be available for its
largest customer from West Basin by December 1999. The availability of
recycled water will reduce the South Bay Divisions demand for imported water,
the availability of which may be uncertain in the future. Reduced imported
water supplies and annual population growth could create future drought
conditions in Southern California; however, Dominguez believes that the
availability of recycled water will significantly mitigate the impact of
future droughts in the South Bay Division service area.
Legislative actions continue to play a role in the long-term
availability of water for southern California. The amount of SWP water
available from northern California and water imported from the Colorado River
may be significantly reduced around the beginning of the next century. Even
with the use of recycled water and continuing conservation efforts, future
drought conditions may require water rationing by all water agencies and
purveyors, including Dominguez.
ACCOUNTING STANDARDS
The Company currently applies accounting standards that recognize the
economic effects of rate regulation and records regulatory assets and
liabilities related to water distribution operations. If rate recovery of
water-related costs becomes unlikely or uncertain, whether due to competition or
regulatory action, these accounting standards may no longer apply. This change
could result in the write-off of costs in an amount that could be material.
However, based on a current evaluation of the various factors and conditions
that are expected to affect future cost recovery, management believes that its
regulatory assets will likely be recovered in the future.
In 1998, the Company implemented Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which requires public companies to report financial and
descriptive information about its reportable segments.
The Company also adopted SFAS No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the
disclosure requirements for pensions and other additional information on
changes in the benefit obligations and fair values of plan assets.
The adoption of these two standards did not change the measurement
or recognition of income or expense and did not result in a restatement of
previously reported earnings per share.
YEAR 2000
Various software applications and embedded systems are used throughout
our business that may be affected by so-called "Year 2000 issues." These issues
may prevent an application or system from correctly processing the date 2000 and
beyond. A failure to correct any critical Year 2000 processing problems prior to
January 1, 2000, could have adverse operational and financial consequences if
the affected systems either cease to function or produce erroneous data. At this
time, the major risks associated with the inability of systems and software to
process Year 2000 data correctly are a system failure or a disruption of our
billing process. Such failures could affect financial results and cash flows.
Management has established a project team to address Year 2000
issues. The team is focused on three key elements: business continuity,
project management, and risk management. Business continuity involves the
continuation of reliable water supply and service in a safe and
cost-effective manner. Project
21
management involves defining and meeting the project scope, schedule, and
budget. Risk management involves customer management, contingency planning,
and legal issues. In addition to these internal activities, the Company is
working with various industry groups to coordinate water utility industry
efforts to prepare for the Year 2000.
Identifying and addressing noncompliant software applications and
embedded systems consists of the following stages: inventory, analysis,
renovation, testing, and deployment. The first stage is to inventory all
applications and systems. The analysis stage involves assessing whether
software applications and embedded systems are Year 2000 compliant. The
renovation stage involves remediating or upgrading applications and systems
to make them Year 2000 ready. Testing determines whether renovations are
successful. In the deployment stage, the tested applications and systems are
implemented. Management has also begun to develop contingency plans to
address the possibility that the applications and systems may not be Year
2000 ready at the end of this process. Management has completed the inventory
and analysis phases of the project, and estimates that it is 90% completed
with the renovation, testing, and deployment phases.
The Year 2000 project focuses on systems and applications required
to deliver reliable water service, and secondarily, on computer systems that
support core business functions, such as customer information and billing,
finance, and personnel. SCADA software and payroll systems are to be replaced
with new software that is Year 2000 compliant. The Company's payroll vendor
will upgrade the payroll program at no cost to the Company. The SCADA system
will be upgraded by October 1999.
The Company current schedule is subject to change, depending on
developments that may arise through unforeseen business circumstances, and
through remediation and testing phases of the compliance effort. The Company
also depends upon third parties, including customers, suppliers, government
agencies and financial institutions, to reliably deliver their products and
services. The Company has begun implementing additional initiatives to assess
the degree to which third parties with whom it has business relationships are
addressing Year 2000 issues. These initiatives include analysis of the Year
2000 compliance programs of critical vendors and obtaining Year 2000
warranties in certain new contracts and licenses. Protocols have been
established for assuring that software and embedded systems remain Year 2000
compliant on a continuing basis. Contingency planning is addressing
mechanisms for preventing or mitigating interruption caused by the Company's
suppliers. The Company also has an outreach program in place for
communicating Year 2000 project information to residential and business
customers.
The only Year 2000 program costs expended as of December 31, 1998,
are employee payroll. The total cost of remediating or upgrading software,
which would not otherwise be replaced in accordance with the Company's
business plans, is approximately $10,000. All such costs are expensed as
incurred. The amounts do not include the cost of new software applications
installed as a result of strategic replacement projects described earlier.
Such replacement projects have not been accelerated because of Year 2000
issues.
The cost of the project and the dates on which the Company plans to
complete Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third parties' Year 2000
readiness, and other factors. Further, the Company expects to incur
additional costs after 1999 to remediate and replace less critical software
applications and embedded systems.
The Company has existing contingency plans in place for events such
as extreme heat, storms, equipment failures, and accidents. Year 2000
contingency plans are being based on the framework of existing emergency
management system preparation and scenario development, and address the most
reasonably likely worst case scenarios that could occur in the event that
various Year 2000 issues are not resolved in a timely manner. Contingency
planning is an ongoing process and will continue through the fourth quarter
of 1999.
The phases of the contingency planning process include business
impact analysis, contingency planning, and testing. Business impact analysis
requires business unit personnel to evaluate the impact of mission-critical
systems failures on the Company's core business operations, focusing on
specific failure scenarios and how they can be mitigated. The necessary
conditions for enacting the plans will be documented along with the
appropriate personnel responsible in each of the business units should a Year
2000 failure occur.
Based on the current schedule for completion of Year 2000 tasks, the
Company believes that its planning is adequate to secure Year 2000 readiness
of its critical systems. Nevertheless, achieving Year 2000
22
readiness is subject to various risks and uncertainties, many of which are
described above. The Company is not able to predict all the factors that
could cause actual results to differ materially from current expectations as
to Year 2000 readiness. However, if the Company, or third parties with whom
it has significant business relationships, fail to achieve Year 2000
readiness with respect to critical systems, there could be a material adverse
effect on the Company results of operations, financial position, and cash
flow, and the Company could be exposed to legal liabilities..
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR) DECEMBER 31, 1998 1997
---- ----
ASSETS:
PROPERTY, PLANT AND EQUIPMENT
UTILITY PLANT $66,402 $61,571
NON-UTILITY PLANT 101 110
---------------------------
66,503 61,681
LESS: ACCUMULATED DEPRECIATION 23,949 22,257
---------------------------
42,554 39,424
LAND AND LAND RIGHTS 964 544
WATER RIGHTS AND OTHER INTANGIBLE ASSETS 544 140
CONSTRUCTION WORK IN PROGRESS 791 1,255
---------------------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 44,853 41,363
CASH AND CASH EQUIVALENTS INCLUDING RESTRICTED CASH OF $542 IN 1998 AND 709 2,154
$503 IN 1997
ACCOUNTS RECEIVABLE
CUSTOMERS, LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $301 IN 1998 AND 1,348 2,098
1997
UNBILLED REVENUES 1,009 973
OTHER 162 324
MATERIALS AND SUPPLIES, AT AVERAGE COST 30 39
PREPAYMENTS AND OTHER 1,322 772
PRODUCTION COST BALANCING ACCOUNT 5 272
INCOME TAX RECEIVABLE 281 --
DEFERRED TAX ASSETS 127 530
---------------------------
TOTAL CURRENT ASSETS 4,993 7,162
---------------------------
NOTES RECEIVABLE 113 122
INVESTMENT IN AND LOAN TO CHEMICAL SERVICES COMPANY 450 750
PREPAID TAXES AND OTHERS 1,076 1,190
DEFERRED CHARGES, LESS ACCUMULATED AMORTIZATION OF $58 IN 1998 AND 1997 341 235
INCOME TAX RELATED DEFERRED CHARGES 809 839
---------------------------
TOTAL ASSETS $52,635 $51,661
===========================
CAPITALIZATION AND LIABILITIES:
COMMON SHAREHOLDERS' EQUITY
COMMON SHARES:
PAR VALUE $1
AUTHORIZED: 4,000,000 SHARES
ISSUED: 1,506,512 SHARES $1,506 $1,506
PAID-IN CAPITAL 2,006 2,006
RETAINED EARNINGS 12,367 12,829
---------------------------
TOTAL COMMON SHAREHOLDERS' EQUITY 15,879 16,341
LONG-TERM DEBT 11,217 11,194
---------------------------
TOTAL CAPITALIZATION 27,096 27,535
24
CURRENT MATURITIES OF LONG-TERM DEBT 56 64
CURRENT PORTION OF ADVANCES FOR CONSTRUCTION 169 187
ACCOUNTS PAYABLE 3,115 3,156
INTERIM DEBT 450 -
OTHER ACCRUED EXPENSES 1,367 1,405
INCOME TAXES - 134
---------------------------
TOTAL CURRENT LIABILITIES 5,157 4,946
---------------------------
ADVANCES FOR CONSTRUCTION 5,487 5,329
CONTRIBUTIONS IN AID OF CONSTRUCTION 6,220 6,118
DEFERRED INCOME TAXES 4,054 3,813
UNAMORTIZED INVESTMENT TAX CREDIT 265 277
ACCRUED PENSION COST 1,343 999
DEFERRED CREDITS 3,013 2,644
---------------------------
TOTAL CAPITALIZATION AND LIABILITIES $52,635 $51,661
===========================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
25
CONSOLIDATED STATEMENTS OF INCOME AND COMMON
SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEARS ENDED 1998 1997 1996
DECEMBER 31, ---- ---- ----
CONSOLIDATED STATEMENTS OF INCOME
OPERATING REVENUE $25,267 $26,818 $24,705
---------------------------------------
OPERATING EXPENSES:
PURCHASED WATER 10,580 10,235 7,797
OTHER PRODUCTION COSTS 2,770 4,030 4,119
OPERATIONS 6,312 6,060 6,469
MAINTENANCE 1,027 986 1,053
DEPRECIATION 1,439 1,341 1,307
PROPERTY TAXES 321 298 289
OTHER TAXES 245 254 159
INCOME TAXES 932 1,385 1,314
---------------------------------------
TOTAL OPERATING EXPENSES 23,626 24,589 22,507
---------------------------------------
OPERATING INCOME 1,641 2,229 2,198
OTHER INCOME (EXPENSES):
INTEREST AND AMORTIZATION OF DEBT EXPENSE (870) (758) (659)
WATER RIGHTS 549 438 338
OTHER 103 112 104
---------------------------------------
NET INCOME BEFORE EXTRAORDINARY ITEM 1,423 2,021 1,981
---------------------------------------
EXTRAORDINARY ITEM, NET OF TAXES IN THE AMOUNT OF $315 (499) - -
---------------------------------------
NET INCOME $924 $2,021 $1,981
=======================================
EARNINGS PER COMMON SHARE, BEFORE EXTRAORDINARY ITEM $0.94 $1.34 $1.31
---------------------------------------
EARNINGS PER COMMON SHARE, BASIC AND DILUTED $0.61 $1.34 $1.31
---------------------------------------
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
COMMON SHARES $1,506 $1,506 $1,506
PAID-IN-CAPITAL:
BEGINNING BALANCE 2,006 2,006 2,010
REDEMPTION OF PREFERRED STOCK - - (4)
---------------------------------------
ENDING BALANCE 2,006 2,006 2,006
---------------------------------------
RETAINED EARNINGS:
BEGINNING BALANCE 12,829 12,114 11,380
NET INCOME 924 2,021 1,981
CASH DIVIDENDS
PREFERRED STOCK, CLASS A $1.25 PER SHARE - - (1)
COMMON STOCK:
1998 - $0.92 PER SHARE (1,386) - -
1997 - $0.87 PER SHARE - (1,306) -
1996 - $0.83 PER SHARE - - (1,246)
---------------------------------------
ENDING BALANCE 12,367 12,829 12,114
---------------------------------------
TOTAL COMMON SHAREHOLDERS' EQUITY $15,879 $16,341 $15,626
=======================================
26
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $924 $2,021 $1,981
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 1,439 1,355 1,321
DEFERRED INCOME TAXES AND INVESTMENT TAX CREDITS 230 186 207
CHANGES IN ASSETS AND LIABILITIES:
CUSTOMER RECEIVABLE, NET 749 (469) (106)
OTHER RECEIVABLE 162 (145) 367
MATERIALS AND SUPPLIES 9 7 48
NOTES RECEIVABLE 9 8 7
INCOME TAX RELATED DEFERRED CHARGES 30 (1) 308
ACCOUNTS PAYABLE (42) 896 (767)
INCOME TAXES (415) (102) 102
ACCRUED PENSION COST 343 40 (155)
OTHER, NET 606 344 150
----------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,044 4,140 3,463
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (5,183) (3,580) (3,490)
PURCHASE OF CHEMICAL SERVICES COMPANY - - (350)
PURCHASE OF SUBSIDIARIES - (312) -
----------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (5,183) (3,892) (3,840)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM ADVANCES FOR CONSTRUCTION 235 347 219
PROCEEDS FROM CONTRIBUTIONS IN AID OF CONSTRUCTION 326 170 301
REPAYMENT OF ADVANCES FOR CONSTRUCTION (179) (189) (182)
ISSUANCE OF FIRST MORTGAGE BOND - 5,000 -
REPAYMENT OF LONG-TERM DEBT (52) (2,090) (283)
WORKING CASH (LOAN TO) REPAYMENT FROM CHEMICAL SERVICES COMPANY 300 (400) -
PROCEEDS FROM THE DEPARTMENT OF WATER RESOURCES LOAN - 463 814
PREFERRED STOCK REDEMPTION - - (98)
PROCEEDS FROM (REPAYMENT OF) INTERIM DEBT 450 (800) 800
DIVIDENDS PAID (1,386) (1,306) (1,247)
----------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (306) 1,195 324
----------------------------------------
NET INCREASE (DECREASE) IN CASH (1,445) 1,443 (53)
CASH AT BEGINNING OF YEAR 2,154 711 764
----------------------------------------
CASH AT END OF YEAR $709 $2,154 $711
========================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
27
Notes to Consolidated Financial Statements as of December 31, 1998
NOTE 1
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Dominguez
Services Corporation (the "Company"), Dominguez Water Company ("Dominguez") and
its subsidiaries. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities.
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 operates in the water services industry. All significant
intercompany transactions have been eliminated. Dominguez maintains its
accounts in accordance with the uniform system of accounts prescribed by the
California Public Utilities Commission (the Commission).
REVENUES:
Water service revenues are recognized on an accrual basis. 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 historical cost with subsequent additions
at cost or donor's basis, which approximates cost, less cost of retirements,
sales, and abandonments. Water rights are stated at the nominal amount of $1
plus purchased water rights at cost and past expenditures in connection with
litigation in defense thereof. Depreciation of utility plant for financial
statement purposes is computed using the Commission's 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% in 1998 and
1997. Costs of maintenance and repairs are charged to operations; renewals and
betterments are generally capitalized in the property accounts.
PREPAID TAXES AND OTHERS:
From 1987 through 1997, contributions in aid of construction and
advances for construction were taxable for federal and state income tax
purposes. The Company has paid these taxes and recorded deferred taxes in these
consolidated financial statements. 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 records 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, 1998 and 1997, the
balancing account reflected an under-collection of $5,000 and $272,000,
respectively.
INVESTMENTS:
The Company assumes all investments with maturities of three months or
less to be cash equivalents. Investments in entities that are 50% or less owned
are accounted for by the equity method.
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.
28
Investment Tax Credits (ITC) have been deferred and are being
amortized as reductions to income tax expense proportionately over the lives
of the properties giving rise to the credits.
REGULATORY ASSETS:
The Company currently applies accounting standards that recognize the
economic effects of rate regulation and records regulatory assets and
liabilities related to water distribution operations. If rate recovery of
water-related costs becomes unlikely or uncertain, whether due to competition or
regulatory action, these accounting standards may no longer apply. This change
could result in the write-off of costs in an amount that could be material.
However, based on a current evaluation of the various factors and conditions
that are expected to affect future cost recovery, management believes that its
regulatory assets will likely be recovered in the future.
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 Bonds.
RECLASSIFICATIONS:
The 1998 and 1997 consolidated financial statements include certain
reclassifications necessary to conform to current year presentation.
NOTE 2
CAPITAL STRUCTURE
The Company has authorized issuance of up to 4,000,000 shares of common
stock with par value of $1.00. As of December 31, 1998, 1,506,512 shares of
stock were issued and outstanding and 40,740 options were granted with a
weighted average exercise price of $16.94. At December 31, 1998, 6,450 options
were exercisable.
Effective January 2, 1998, the Company split its common stock
three-for two for shareholders of record on December 15, 1997. The Company
paid cash in lieu of issuing fractional shares based on the closing price as
of December 15, 1997. The par value of the common stock remained unchanged.
Share information and the capital accounts in the consolidated financial
statements have been retroactively restated to reflect the change. This
restatement resulted in the transfer of $502,000 from paid-in-capital to
common shares equity.
NOTE 3
RESTRICTIONS ON DIVIDENDS
The Company's available dividends to its shareholders are substantially
dependent on the availability of dividends from Dominguez to the Company. 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
$6,500,000 as of December 31, 1998.
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, 1998 and 1997, long-term debt outstanding was:
Carrying Amount (Dollars in Thousands) 1998 1997
First Mortgage Bonds
Series J, 8.86%, due 2022 $4,000 $4,000
29
Series K, 6.94%, due 2012 5,000 5,000
-------------------------
Total First Mortgage Bonds 9,000 9,000
-------------------------
Small Business Administration Loan
4% - due 2000 $15 $26
-------------------------
Department of Water Resources Loan:
Under the California Safe Drinking Water
Bond Act
7.4% - due 2020 $463 $471
7.4% - due 2011 272 286
7.4% - due 2013 190 198
3.0% - due 2032 831 790
3.4% - due 2027 502 487
-------------------------
Total Bonds & Notes $11,273 $11,258
-------------------------
Less : Current Maturities 56 64
-------------------------
Total Long Term Debt $11,217 $11,194
=========================
Aggregate maturities for the five years commencing with 1999 are
approximately $56,000 (1999), $60,000 (2000), $63,000 (2001), $66,000 (2002),
and $70,000 (2003).
NOTE 5
INTERIM DEBT
The Company maintained an available line of credit of $4,500,000 in
1998 and $4,470,000 in 1997 with Bank of America. At the end of 1998, $450,000
was outstanding. There were no borrowings outstanding at the end of December 31,
1997. The Company intends to renew the line of credit, which expires in June
1999. Borrowing bears interest at the preference lending rate.
NOTE 6
ADVANCES FOR CONSTRUCTION
Advances for construction of main extensions are primarily refundable
to depositors over a 20- 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 annual installments. Beginning
in June 1982, contracts provided for full refund at a 2-1/2% rate per year for
40 years. Estimated refunds for 1999 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.
(DOLLARS IN THOUSANDS) 1998 1997
Beginning balance $ 6,118 $6,076
Add net contributions during the year 308 232
30
Deduct depreciation for the year charged on plant (206) (190)
acquired through donations
-------------------------
Ending balance $ 6,220 $6,118
=========================
31
NOTE 8
EMPLOYEE BENEFITS
PENSION PLAN:
The Company provides a qualified defined benefit pension 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 are determined in accordance with Statement of
Financial Accounting Standards (SFAS) No. 87, including the use of the
projected unit credit actuarial cost method. For ratemaking purposes, the
Company recovers pension expense based on the method in place prior to SFAS
No. 87. In 1998, the Company implemented SFAS No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits," which
standardizes disclosure requirements but does not affect the measurement of
plan obligations. Prior periods have been restated to conform to the current
year presentation.
The components of the 1998 and 1997 provisions are summarized below:
(DOLLARS IN THOUSANDS) 1998 1997
---- ----
CHANGE IN BENEFIT OBLIGATION:
BENEFIT OBLIGATION AT BEGINNING OF YEAR $10,155 $9,016
SERVICE COST 500 433
INTEREST COST 736 676
ACTUARIAL LOSS 613 405
BENEFITS PAID (542) (375)
BENEFIT OBLIGATION AT END OF YEAR $11,462 $10,155
--------------------------------------------------
CHANGE IN PLAN ASSETS:
FAIR VALUE OF PLAN ASSETS AT BEGINNING OF YEAR $11,726 $10,503
ACTUAL RETURN ON PLAN ASSETS 1,046 1,472
EMPLOYER CONTRIBUTION (126) 126
BENEFITS PAID (542) (375)
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $12,104 $11,726
--------------------------------------------------
FUNDED STATUS: $642 $1,571
UNRECOGNIZED NET ACTUARIAL GAIN (1,968) (2,508)
UNRECOGNIZED PRIOR SERVICE COST 158 172
UNRECOGNIZED NET INITIAL ASSETS (175) (234)
ACCRUED BENEFIT COST $(1,343) $(999)
--------------------------------------------------
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
DISCOUNT RATE 6.50% 7.25%
EXPECTED RETURN ON PLAN ASSETS 7.50% 7.50%
RATE OF COMPENSATION INCREASE 4.00% 4.50%
COMPONENTS OF NET PERIODIC BENEFIT COST:
SERVICE COST $500 $433
INTEREST COST 736 676
EXPECTED RETURN ON PLAN ASSETS (879) (788)
AMORTIZATION OF PRIOR SERVICE COST 14 14
32
RECOGNIZED ACTUARIAL GAIN (96) (90)
RECOGNIZED NET INITIAL ASSETS (58) (58)
NET PERIODIC BENEFIT COST $217 $187
--------------------------------------------------
POSTRETIREMENT BENEFITS
OTHER THAN PENSIONS:
The Company charges the costs associated with its postretirement
benefits other than pensions to expense during the employee's years of service.
The Company is amortizing its $588,000 transition 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 with ratemaking practices. 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 postretirement benefits other than pensions are
summarized below:
(DOLLARS IN THOUSANDS) 1998 1997
---- ----
CHANGE IN BENEFIT OBLIGATION:
BENEFIT OBLIGATION AT BEGINNING OF YEAR $654 $543
SERVICE COST 35 35
INTEREST COST 46 40
ACTUARIAL (GAIN) LOSS (32) 63
BENEFITS PAID (24) (27)
BENEFIT OBLIGATION AT END OF YEAR $679 $654
--------------------------------------------------
CHANGE IN PLAN ASSETS:
FAIR VALUE OF PLAN ASSETS AT BEGINNING OF YEAR $471 $451
ACTUAL RETURN ON PLAN ASSETS 38 47
EMPLOYER CONTRIBUTION 24 -
BENEFITS PAID (24) (27)
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $509 $471
--------------------------------------------------
FUNDED STATUS: $(170) $(183)
UNRECOGNIZED NET ACTUARIAL GAIN (317) (295)
UNRECOGNIZED NET INITIAL OBLIGATION 397 425
ACCRUED BENEFIT COST $(90) $(53)
--------------------------------------------------
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
DISCOUNT RATE 6.50% 7.25%
EXPECTED RETURN ON PLAN ASSETS 7.50% 7.50%
RATE OF MEDICAL TREND 6.00% 6.50%
COMPONENTS OF NET PERIODIC BENEFIT COST:
SERVICE COST $35 $35
INTEREST COST 46 40
EXPECTED RETURN ON PLAN ASSETS (34) (32)
RECOGNIZED ACTUARIAL GAIN (14) (18)
RECOGNIZED NET INITIAL OBLIGATION 28 28
33
NET PERIODIC BENEFIT COST $61 $53
--------------------------------------------------
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in the
assumed health care cost trend rates would have the following effects:
(DOLLARS IN THOUSANDS) 1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
1998 INCREASE DECREASE
-------- --------
EFFECT ON SERVICE AND INTEREST COST COMPONENTS $73 $(62)
EFFECT ON POSTRETIREMENT BENEFIT OBLIGATION 14 (10)
1997
EFFECT ON SERVICE AND INTEREST COST COMPONENTS 71 (64)
EFFECT ON POSTRETIREMENT BENEFIT OBLIGATION 14 (12)
The Company also offers its employees a 401(k) plan. Employees make all
contributions under the plan.
STOCK-BASED COMPENSATION PLANS:
The Company's 1997 Stock Incentive Plan (the Plan) was adopted by the
Board on February 25, 1997, and contains provisions for four types of awards:
(i) stock options to purchase shares of the Company's common stock, (ii) payment
of awards earned under the Company's Annual Incentive Plan (AIP) in shares of
stock, (iii) issuance of restricted stock, and (iv) payment of dividend
equivalents which, at the discretion of the compensation committee, may be
granted in conjunction with stock options or restricted stock awards to provide
cash payments prior to the time the option is exercised or the shares are
vested.
SFAS No. 123, "Accounting for Stock-Based Compensation," if fully
adopted, changes the methods for recognition of cost on plans similar to
those of the Company. Adoption of the accounting requirements under SFAS No.
123 is optional; however, pro forma disclosures as if the Company had adopted
the cost recognition method are required. Had compensation cost for stock
options awarded under this plan been determined consistent with SFAS No. 123,
the Company's net income and earnings per share would have reflected the
following pro forma amounts:
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, except per share data) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Net income:
- ------------------------------------------------------------------------------------------------------------------------
As reported $ 924 $ 2,021
- ------------------------------------------------------------------------------------------------------------------------
Pro forma 914 2,018
- ------------------------------------------------------------------------------------------------------------------------
Earnings per share, basic and diluted:
- ------------------------------------------------------------------------------------------------------------------------
As reported $ 0.61 $ 1.34
- ------------------------------------------------------------------------------------------------------------------------
Pro forma 0.61 1.34
- ------------------------------------------------------------------------------------------------------------------------
The Company may grant up to 75,000 options under the Plan. The
Company has granted 40,740 through December 31, 1998. The options are issued
at fair market value with exercise prices equal to the Company's stock price
at the date of grant. Options vest over a four-year period, are exercisable
in whole or in installments, and expire ten years from date of grant. In
accordance with the Plan and the granted option agreements as of December 31,
1998, vesting of options granted will be accelerated so such options will be
exercisable prior to a change in control of the Company.
A summary of the status of the Company's stock option plan at
December 31, 1998 and 1997, and changes during the years then ended, are
presented in the table and narrative below:
34
- ------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------
Shares Wtd Avg Shares Wtd Avg
Ex Price Ex Price
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 25,800 $16.33 - N/A
- ------------------------------------------------------------------------------------------------------------
Granted 14,940 18.00 25,800 $16.33
- ------------------------------------------------------------------------------------------------------------
Exercised - N/A - N/A
- ------------------------------------------------------------------------------------------------------------
Forfeited/Expired - N/A - N/A
- ------------------------------------------------------------------------------------------------------------
Outstanding at the end of year 40,740 16.94 25,800 16.33
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Exercisable at end of year 6,450 16.33 - N/A
- ------------------------------------------------------------------------------------------------------------
Weighted average fair value of options granted 1.94 1.48
- ------------------------------------------------------------------------------------------------------------
Amounts shown reflect the 3-for-2 stock split effected January 1998.
14,940 options outstanding at December 31, 1998, have an exercise price of
$18.00 and a weighted average remaining contractual life of 9.54 years. The
remaining 25,800 options have an exercise price of $16.33 and a weighted
average remaining contractual life of 8.48 years.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes pricing model with the following assumptions
used for the grants in fiscal 1998: weighted average risk-free interest rate
of 5.67%; weighted average volatility of 18.46%; expected life of 10 years;
and a weighted average dividend yield of 6.36%.
NOTE 9
INCOME TAXES
The Company utilizes SFAS No. 109, "Accounting for Income Taxes,"
which requires the recognition of deferred taxes for all temporary
differences between book and tax income.
CURRENT AND DEFERRED TAXES:
Income tax expense includes 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
are:
(Dollars in Thousands) 1998 1997
Deferred tax assets:
Pension plan $626 $447
Other 148 724
-------------------------
Total deferred tax assets $774 $1,171
-------------------------
Deferred tax liabilities:
Depreciation $3,814 $3,284
Property-related 1,110 1,200
Other (223) (30)
-------------------------
Total deferred tax liabilities $4,701 $4,454
-------------------------
Net accumulated deferred income taxes $3,927 $3,283
Classification of accumulated deferred income taxes:
Included in current assets 127 530
-------------------------
Included in deferred taxes $4,054 $3,813
-------------------------
35
The current and deferred components of income tax expense are:
(Dollar in Thousands) 1998 1997 1996
---- ---- ----
Current income tax expenses:
Current federal $555 $814 $887
Current state 177 266 276
Investment tax credit (11) (10) (12)
721 1,070 1,151
Tax benefit of extraordinary item (315) - -
Total current taxes expenses $406 $1,070 $1,151
----------------------------------------
Deferred income tax expenses:
Depreciation $316 $296 $282
Contributions and advances - - (156)
Pensions (136) - -
Other 31 19 37
Total deferred tax expenses $211 $315 $163
----------------------------------------
A reconciliation of the federal statutory income tax rate to the
effective rate is presented below:
- ---------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------
Expected income tax expense 34% 34% 34%
- ---------------------------------------------------------------------------------
State income taxes 5% 5% 6%
- ---------------------------------------------------------------------------------
Abandonments -- -- (1%)
- ---------------------------------------------------------------------------------
Other 2% 2% 1%
- ---------------------------------------------------------------------------------
Total 41% 41% 40%
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
The Company has no net operating loss carryforward at December 31,
1998.
NOTE 10
NEW BUSINESS AND DISPOSITIONS
BUSINESS INVESTMENTS:
On December 20, 1996, DSC Investments, the non-regulated subsidiary
of the Company, invested $350,000 in Chemical Services Company (CSC) and
acquired a 20% equity ownership interest with the option to acquire an
additional 40% over the next 5 years. The Company accounts for the CSC
investment under the equity method.
Under its investment agreements, the Company is not obligated to
exercise all or any part of its option to acquire additional equity ownership
in CSC. However, if the Company fails to exercise its option for two
consecutive years, CSC has the option to repurchase all of the Company's
equity ownership in CSC. In 1998, the Company did not exercise its first
option to purchase additional equity ownership in CSC. The Company was also
obligated to provide working cash and long-term financing, for the leasing of
chlorine generators, to CSC, subject to the financial condition of CSC, which
amounted to $400,000 as of December 31, 1997. During 1998, the Company
terminated its loan agreement with CSC. CSC executed a one-year promissory
note for $100,000 with the Company. The Company agreed to subordinate the
note to CSC's
36
commercial lender and CSC agreed to release the Company of any future
obligation to lend further funds to CSC.
In December 1997, Dominguez entered into a recycled water agreement
with the West Basin Municipal Water District (West Basin) and ARCO. Under the
terms of the agreement, Dominguez will sell ARCO recycled water purchased
from West Basin for the same cost margin that Dominguez would otherwise have
received providing ARCO with potable water. Dominguez expects to commit funds
up to $2,000,000 by December 1999 to construct recycled water facilities in
its South Bay Division service area.
In 1998, the Water Replenishment District of Southern California
(WRD), a water district responsible for the oversight and management of the
West and Central Groundwater Basins, awarded a grant to Dominguez of
$1,820,000. Dominguez received the first of its two payments for $910,000 in
1998 and used approximately $670,000 to offset the cost of purchasing
higher-priced imported water in lieu of pumping its groundwater rights. The
balance of the funds, approximately $1,150,000, will be used to meet
Dominguez' expected $2,000,000, commitment in recycled water facilities,
leaving a balance of $850,000 to be funded by Dominguez.
ACQUISITIONS:
During 1998, Dominguez received the Commission's approval to acquire
the assets of the Lucerne Water Company, an investor-owned water system serving
1,242 customers, in exchange for 42,092 shares of the Company's common stock.
This acquisition, effective January 1, 1999, will be accounted for using the
purchase method. Ratebase for the acquired assets was set at $713,000, resulting
in an additional credit of $262,000 to be recorded in paid in capital.
Also in 1998, Dominguez received Commission approval to acquire the
assets of the Rancho del Paradiso and Armstrong Valley Water Companies,
investor-owned water systems serving 60 and 310 customers respectively, in
exchange for 12,375 shares of the Company's common stock. This acquisition,
effective January 1, 1999, will be accounted for using the purchase method.
Ratebase for the acquired assets was set at $188,000, resulting in an additional
credit of $55,000 to be recorded in paid in capital.
SALE OF BUSINESS:
On April 26, 1996, the Company sold to a former employee the remaining
assets of Hydro-Metric Services Corporation in exchange for a two-year note
receivable. The loan was paid in full as of April 1998. The sale resulted in a
gain of $39,000.
NOTE 11
BUSINESS RISKS AND CONCENTRATION
OF SALES
Forty-five percent of the Company's water supply comes from its own
groundwater wells, and fifty-five percent comes from wholesalers of imported
water. The long-term availability of imported water supplies is dependent upon
several factors. Drought conditions throughout the state, increases in
population, tightening of water quality standards, and legislation may reduce
water supplies. At this time, the Company does not anticipate any constraints on
its imported water supplies due primarily to above-average precipitation in
recent years. The Company is taking steps to reduce its dependence on imported
water supplies, including working with the West Basin to bring recycled water
into its South Bay Division service area. The Company continues to drill new
wells in order to enable it to utilize its total adjudicated groundwater rights.
Dominguez is subject to water quality regulations promulgated 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 and testing. With occasional minor exceptions,
Dominguez meets all current primary water standards.
37
Since mid-1997, Dominguez has been participating with many other
large water companies in an 18-month water sampling data acquisition program
known as the Information Collection Rule. Data collected will be used by the
EPA to establish future drinking water standards. Under the Federal Safe
Drinking Water Act, the EPA is required to continue to establish new maximum
levels for additional chemicals. The costs of future compliance are unknown,
but Dominguez could be required to perform more quality testing and
treatment. Management believes the Company's financial reserves will be
sufficient to meet these anticipated requirements. During 1998, Dominguez
expended $1,733,000 for water supply improvements. In 1999, Dominguez
anticipates spending $3,388,000 for water supply capital improvements.
The Company is required to provide service 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 of water consumption, 50% in 1998 and 49% in 1997, is attributable to
business-industrial customers. One single refinery was responsible for 34% of
this business-industrial consumption in 1998, and for 33% in 1997.
Revenue details for 1998 and 1997 are as follows:
(DOLLARS IN THOUSANDS) 1998 1997
Residential-Multi-Family $11,473 $11,964
Business-Industrial 11,174 11,698
Public Authority 1,286 1,537
All Other 1,334 1,619
------------------------
Total $25,267 $26,818
========================
NOTE 12
SUPPLEMENTAL CASH FLOW INFORMATION
(DOLLARS IN THOUSANDS) 1998 1997 1996
CASH PAID FOR:
Interest, net $603 $774 $824
Income taxes $650 $1,000 $1,095
NOTE 13
RELATED PARTY TRANSACTIONS
Dominguez annually refunds a portion of revenue received from several
water mains for which Watson Land Company, Carson Estate Company, and Dominguez
Properties advanced the construction funds to Dominguez. The refunds to Watson
Land Company were $17,250 in 1998 and $16,175 in 1997. The refunds to Carson
Estate Company were $1,339 in 1998 and $1,110 in 1997. The refunds to Dominguez
Properties were $6,176 in 1998 and $6,176 in 1997.
Dominguez also leases sites used for wells from Watson Land Company,
Carson Estate Company, and Dominguez Properties. The rental costs for Watson
Land Company were $40,732 in 1998 and $39,517 in 1997. The rental costs to
Carson Estate Company were $19,674 in 1998 and $18,580 in 1997. The rental
costs for Dominguez Properties were $3,846 in 1998 and $4,174 in 1997.
Dominguez provides water service to these entities to the extent
that they have property within the division.
Dominguez purchases chlorine generation equipment and supplies from
CSC. Company owns a 20% equity interest in CSC. Purchases from CSC totaled
approximately $393,000 in 1998 and $733,000 in 1997.
38
NOTE 14
SUBSEQUENT EVENTS
On January 1, 1999, Dominguez consummated the purchase agreements to
acquire the assets of Lucerne Water Company, Rancho del Paradiso Water Company
and Armstrong Valley Water Company. These acquisitions will be accounted for
using the purchase method.
In February 1999, Dominguez filed general rate increase applications
for the South Bay Division and its subsidiaries, Antelope Valley Water
Company and Kern River Valley Water Company. The applications request a
cumulative rate increase of $5,872,000, based on a requested return on equity
of 10.66% for test year 2000, 10.73% for year 2001, and an attrition
allowance for the year 2002. Dominguez and its subsidiaries anticipate that
the new rates will be effective January 1, 2000. There can be no assurance,
however, as to the amount of any rate increases that the Commission will
approve.
39
NOTE 15
THE MERGER
On November 13, 1998, the Company executed an Agreement and Plan of
Reorganization (the Merger Agreement) to merge with California Water Service
Group (CWSG), the parent of California Water Service Company (Cal Water) and CWS
Utility Services, pursuant to which the Company's operations would have been
merged into Cal Water. Under the terms of the Merger Agreement, each share of
the Company's common stock issued and outstanding on the closing date would have
been converted into the right to receive 1.18 shares of CWSG common stock. The
Company's Board received the opinion of its financial advisor, Paine Webber
Inc., that this exchange ratio was fair to the shareholders of the Company's
common stock from a financial point of view.
On March 16, 1999, the Company announced that it had received an
unsolicited proposal from American States Water Company (ASWC) offering to
acquire all of the Company's outstanding common stock in a stock-for-stock
merger. Under the ASWC proposal, each share of the Company's common stock
would have been converted into the right to receive a number of ASWC shares
intended to provide $32.50 of value for each of the Company's shares. The
ASWC proposal also provided for a collar pursuant to which the minimum and
maximum conversion ratios would be 1.11 and 1.35 ASWC shares for each Company
share. The Company's financial advisor advised the Company's Board that this
proposal was more favorable to the Company's shareholders than the terms of
the Merger Agreement.
On March 22, 1999, the Company and CWSG executed an amendment to the
Merger Agreement which provides that each share of the Company's common stock
will be converted into the right to receive a number of CWSG shares intended
to provide $33.75 of value for each of the Company's shares. The amendment to
the Merger Agreement also provides that the minimum and maximum conversion
ratios will be 1.25 and 1.49 CWSG shares for each Company share.
The Company expects that the proposed merger will be treated as a
tax-free transaction under the applicable provisions of the Internal Revenue
Code. Shares of CWSG common stock trade under the symbol "CWT" on the New
York Stock Exchange. CWSG operations provide water utility services to over
1.5 million people in 58 California communities.
The completion of the proposed merger depends on a number of
conditions being met as stated in the Merger Agreement, including: 1) Company
shareholders must approve the Merger Agreement, 2) the Company and CWSG must
receive all required regulatory approvals and any waiting periods required by
law must have passed, which the Company expects to occur in the last quarter
of 1999, and 3) the independent accountants must opine that the merger will
qualify for "pooling of interest" accounting treatment.
If the conditions of the Merger Agreement are not satisfied or if
either the Company or CWSG decide not to complete the merger, certain
payments are required under the terms of the Merger Agreement. If the merger
is not consummated due to certain actions by the Company relating to
alternative transactions, the Company will pay CWSG liquidated damages in the
amount of $1.5 million. If the merger is not consummated, and, within 24
months of the effective date of the termination of the Merger Agreement, the
Company consummates another merger, consolidation or similar transaction that
is superior to the merger, the Company will pay to CWSG $1.2 million in
liquidated damages (in addition to the $1.5 million discussed above).
The Merger Agreement states that it may be terminated by the Company
if the Board determines based on the advice of its financial advisor that the
terms of the competing proposal are more favorable to the Company's
shareholders. The Merger Agreement further states, however, that it may not
be terminated under these circumstances by the Company until at least five
business days after the Company has provided written notice to CWSG that the
Company's Board has determined that a competing transaction is a "Superior
Proposal," as defined in the Merger Agreement.
The Company does not know at this time if it will receive any
additional proposals from ASWC or any other company that will be superior to
the terms of the amended Merger Agreement. If the Company
40
were to terminate the Merger Agreement to enter into a transaction with
another company, it could be obligated to pay CWSG liquidated damages as
described above.
The Company will hold a special meeting of shareholders to consider and
vote upon the Merger Agreement.
NOTE 16
EARNINGS PER SHARE
The following table reconciles basic and diluted earnings per share
calculations. Shares in the table below have been restated to reflect the
Company's stock split in January 1998 (See Note 2).
INCOME SHARES PER-SHARE
(DOLLARS IN AMOUNT
THOUSANDS)
FOR YEAR ENDED DECEMBER 31, 1998
Basic Earnings Per Share:
Net income available to common shareholders $924 1,506,512 $0.61
-----------------
Options issued to executives 4,838
-------------------------------
Diluted Earnings Per Share:
Net income available to common shareholders $924 1,511,350 $0.61
------------------------------------------------
FOR YEAR ENDED DECEMBER 31, 1997
Basic Earnings Per Share:
Net income available to common shareholders $2,021 1,506,512 $1.34
-----------------
Options issued to executives 361
-------------------------------
Diluted Earnings Per Share:
Net income available to common shareholders $2,021 1,506,873 $1.34
------------------------------------------------
41
NOTE 17
BUSINESS SEGMENTS
In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." The Company is a diversified water
resource management company specializing in the delivery of high quality water
supplies and has operations in two business segments, "Regulated" and
"Non-Regulated," as well as general corporate charges.
The Regulated business segment is comprised of water utilities, the
largest of which is Dominguez Water Company, serving 100,000 people in the
South Bay area of Los Angeles County. The Company's other water utilities,
all located in California, are: Kern River Valley Water Company in Kern
County, Antelope Valley Water Company in northern Los Angeles and Kern
Counties, and Redwood Valley Water Company in Lake and Sonoma Counties. These
subsidiaries in aggregate serve an additional 20,000 people.
In the area of Non-Regulated water-related business segments, the
Company holds a twenty percent equity stake in Chemical Services Company, the
developer, manufacturer, and marketer of proprietary chlorine generation and
treatment products. The Company is also active in water rights brokerage and
water supply and system operation contracts. The Company accounts for the CSC
investment under the equity method. See note 10 for additional information.
Income from water right brokerage is derived from the selling and purchasing
of leased water rights to pump groundwater.
Profits and assets for each segment are presented below:
1998 (Dollars in Thousands) REGULATED NON-REGULATED OTHER TOTAL
--------- ------------- ----- -----
Operating revenue $25,267 $- $- $25,267
Inter-segment revenues (expenses) 275 (275) - -
Other income 49 669 - 718
Interest revenue 17 29 - 46
Interest and amortization expense 804 66 - 870
Depreciation 1,439 - - 1,439
Extraordinary item, net of tax - - 499 499
Segment net income 1,119 304 (499) 924
Segment assets 51,575 1,060 - 52,635
1997 (Dollars in Thousands)
Operating revenue $26,818 $- $- $26,818
Other income 151 438 - 589
Interest revenue 8 49 - 57
Interest and amortization expense 673 85 - 758
Depreciation 1,341 - - 1,341
Segment net income 1,779 242 - 2,021
Segment assets 50,782 879 - 51,661
1996 (Dollars in Thousands)
Operating revenue $24,705 $- $- $24,705
Other income 136 339 - 475
Interest revenue 12 - - 12
Interest and amortization expense 659 - - 659
Depreciation 1,307 - - 1,307
Segment net income 1,747 234 - 1,981
Segment assets 46,875 - - 46,875
42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Dominguez Services Corporation:
We have audited the accompanying consolidated balance sheets of Dominguez
Services Corporation and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, common shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN
Los Angeles, California
March 24, 1999
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names and ages of all directors and
executive officers, indicating the positions and offices presently held by
each.
- -------------------------------------------------------------------------------------------------------------------
NAME, PRINCIPAL OCCUPATION OR EMPLOYMENT DIRECTOR
POSITION AND OFFICE AGE AND ALL OTHER POSITIONS WITH THE COMPANY SINCE
- -------------------------------------------------------------------------------------------------------------------
Dwight C. Baum 86 Senior Vice President of Paine Webber Incorporated 1962
Director (and Predecessors), a brokerage house
- -------------------------------------------------------------------------------------------------------------------
Brian J. Brady 50 President, Chief Executive Officer, and Chairman of 1995
Director, the Board of the Company since May 1996; President and
Chief Executive Officer and Chief Executive Officer of the Company since November
President 1995; Director, Irvine Ranch Water District,
since 1998; prior, Assistant
General Manager Public Utilities,
City of Anaheim, since 1992;
prior, Vice President and General
Manager, Energy Services, Inc., a
Subsidiary of Southern California
Edison, since 1988.
- -------------------------------------------------------------------------------------------------------------------
Richard M. Cannon 57 Chief Executive Officer and President of Watson Land 1991
Director Company, a privately held developer and owner of
industrial centers and buildings,
since 1994; prior, President of
Watson Land Company since 1989.
- -------------------------------------------------------------------------------------------------------------------
Terrill M. Gleoge 63 Senior Vice President, Chief Financial Officer of 1991
Director Carson Estate Company and affiliated entities, a
privately held investment company since 1989.
- -------------------------------------------------------------------------------------------------------------------
Thomas W. Huston 37 Director of Leasing and Asset Management for Watson 1995
Director Land Company since 1995; prior, Assistant Director of
Leasing and Asset Management, and prior Leasing Agent
for Watson Land Company.
- -------------------------------------------------------------------------------------------------------------------
C. Bradley Olson 58 President of Carson Estate Company since 1992; prior, 1993
Director Division President and Corporate Vice President of The
Irvine Company since 1984
- -------------------------------------------------------------------------------------------------------------------
Langdon W. Owen 68 President of Don Owen & Associates since 1973; 1994
Director Consulting Engineer and Financial Advisor.
- -------------------------------------------------------------------------------------------------------------------
Charles W. Porter 68 Business Consultant since January 1996; prior, 1977
Director President, Chief Executive Officer of the Company
since 1980.
- -------------------------------------------------------------------------------------------------------------------
Debra L. Reed 42 President, Energy Distribution Services and Chief 1995
Director Financial Officer, Southern California Gas Company,
since 1998, prior, Senior Vice
President of Southern California
Gas Company, since 1995; and
prior, Vice President, Southern
California Gas Company since
1988.
45
- -------------------------------------------------------------------------------------------------------------------
John S. Tootle 45 Vice President of Finance and Chief Financial Officer NA
Chief Financial Officer, of the Company since April 1987.
Vice President of Finance,
Treasurer and Secretary
- -------------------------------------------------------------------------------------------------------------------
There is no "family relationship" between any of the executive officers.
46
ITEM 11. EXECUTIVE COMPENSATION.
Set for below is certain information with respect to each of the Company'
executive officers. All officers have served at the discretion of the Board
of Directors.
- -----------------------------------------------------------------------------------------------------------------
NAME AGE POSITION WITH THE COMPANY YEARS AS OFFICER
- -----------------------------------------------------------------------------------------------------------------
Brian J. Brady 50 President, Chief Executive Officer, and 3
Chairman of the Board
- -----------------------------------------------------------------------------------------------------------------
John S. Tootle 45 Chief Financial Officer, Vice President of 12
Finance, Treasurer and Secretary
- -----------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
The following table sets for the compensation paid by the Company and options
and long-term incentive plans awarded in 1998 and its two prior fiscal years
to the Company's Chief Executive Officer and three other executive officers
of the Company whose total annual salary and bonus exceeded $100,000 in 1998.
- ------------------------------------------------------------------------------------------------------------------
NAME & PRINCIPAL POSITION YEAR SALARY BONUS AUTO & OTHER
COMPENSATION
- ------------------------------------------------------------------------------------------------------------------
Brian J. Brady 1998 $158,226.29 $26,402.00 $3,600.00
- ------------------------------------------------------------------------------------------------------------------
President & Chief Executive Officer 1997 150,009.60 16,200.00 3,920.54
- ------------------------------------------------------------------------------------------------------------------
1996 149,023.60 2,000.00 3766.80
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
John S. Tootle 1998 113,834.92 15,295.00 4,275.00
- ------------------------------------------------------------------------------------------------------------------
Chief Financial Officer, Treasurer, Vice 1997 113,297.61 8,800.00 4,140.23
- ------------------------------------------------------------------------------------------------------------------
President of Finance, Secretary 1996 110,557.60 6,200.00 5,116.60
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Susan L. Leone 1998 88,237.36 11,815.00 6,503.50
- ------------------------------------------------------------------------------------------------------------------
Director of Integrated Services 1997 87.721.66 - 6,672.71
- ------------------------------------------------------------------------------------------------------------------
1996 6,731.20 - -
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Terry H. Witthoft 1998 90,771.15 12,015.00 660.00
- ------------------------------------------------------------------------------------------------------------------
Director of Resource Development 1997 90,232.02 6,900.00 660.00
- ------------------------------------------------------------------------------------------------------------------
1996 87,592.00 4,200.00 720.00
- ------------------------------------------------------------------------------------------------------------------
47
OPTIONS AND LONG-TERM INCENTIVE PLANS
- ---------------------------------------------------------------------------------------------------------------
YEAR NAME NUMBER OF PERFORMANCES OR OTHER PERIOD UNTIL EXPIRATION DATE
SECURITIES MATURATION OR PAYOUT
UNDERLYING
OPTIONS
- ---------------------------------------------------------------------------------------------------------------
1998 Brian J. Brady 4,500 1,125 options every year for the July 14, 2008
next four years.
- ---------------------------------------------------------------------------------------------------------------
John S. Tootle 2,700 675 options every year for the next July 14, 2008
four years.
- ---------------------------------------------------------------------------------------------------------------
Susan L. Leone 2,100 525 options every year for the next July 14, 2008
four years.
- ---------------------------------------------------------------------------------------------------------------
Terry H. Witthoft 2,100 525 options every year for the next July 14, 2008
four years.
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
1997 Brian J. Brady 9,000 2,250 options exercisable and 2,250 June 23, 2007
options every year for the next
three years.
- ---------------------------------------------------------------------------------------------------------------
John S. Tootle 5,400 1,350 options exercisable and 1,350 June 23, 2007
options every year for the next
three years.
- ---------------------------------------------------------------------------------------------------------------
Susan L. Leone 3,000 750 options exercisable and June 23, 2007
750 options every year for the next
three years.
- ---------------------------------------------------------------------------------------------------------------
Terry H. Witthoft 4,200 1,050 options every year for the June 23, 2007
next three years.
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
In accordance with the Plan and the granted option agreements as of December
31, 1998, vesting of options granted will be accelerated so such options will
be exercisable prior to a change in control of the Company.
48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of January 28, 1999,
with respect to the beneficial ownership of the Company's common stock by (i)
each person known by the Company to own beneficially five percent or more of
any class of the Company's outstanding common stock, (ii) each director
nominee and named executive officer, and (iii) all directors and executive
officers as a group. Each shareholder has sole voting and investment power
with respect to such shares unless otherwise indicated.
NUMBER OF SHARES AND PERCENT OF COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER NATURE OF BENEFICIAL OWNERSHIP -----------------------
------------------------------------ ------------------------------
Carson Estate Company 307,657 20.4%
18710 South Wilmington, Suite 200
Rancho Dominguez, CA 90220
Watson Land Company 132,894 8.8%
515 South Figueroa Street, Suite 1910
Los Angeles, CA 90071
Dwight C. Baum 33,750(1) 2.2%
200 South Los Robles Avenue, Suite 645
Pasadena, CA 91101-2431
Richard M. Cannon 132,894(2) 8.8%
22010 South Wilmington Avenue, Suite 400
Carson, CA 90745
Terrill M. Gleoge 1,500 *
18710 South Wilmington Avenue, Suite 200
Rancho Dominguez, CA 90220
Thomas W. Huston 750 *
22010 South Wilmington Avenue, Suite 400
Carson, CA 90745
C. Bradley Olson 308,157(3) 20.4%
18710 South Wilmington Avenue, Suite 200
Rancho Dominguez, CA 90220
Langdon W. Owen 9,950 *
1300 Bristol North, Suite 290
Newport Beach, CA 92660
Charles W. Porter 8,491 *
400 Paseo Dorado
Long Beach, CA 90803
Debra L. Reed 239 *
555 West 5th Street
Los Angeles, CA 90013
Brian J. Brady 4,380(4) *
21718 South Alameda Street
Long Beach, CA 90810
John S. Tootle 5,141(5) *
21718 South Alameda Street
Long Beach, CA 90810
All Directors and Officers as a group, (10 persons) 505,252(6) 33.3%
*Less than one percent
1) All of such shares are owned by Mr. and Mrs. Baum as trustees of the
Dwight C. Baum and Hildagarde E. Baum Trust. Mr. and Mrs. Baum share
voting and investment powers with respect to such shares
2) All of such shares are owned by Watson Land Company, of which Mr. Cannon
is president, chief executive officer, and a director. Mr. Cannon shares
voting and investing powers with respect to such shares with the other
directors of Watson Land Company.
3) 307,657 of such shares are owned by the Carson Estate Company, of which
Mr. Olson is president and a director. Mr. Olson shares voting and
investing powers with respect to such shares with the other directors of
Carson Estate Company. The remaining 500 shares are owned by Mr. Olson
individually.
4) Includes 2,250 currently exercisable options held by Mr. Brady.
5) Includes 1,350 currently exercisable options held by Mr. Tootle.
6) Includes shares described in footnotes (2) and (3) above, and includes
2,250 currently exercisable options held by Mr. Brady and 1,350 currently
exercisable options held by Mr. Tootle.
49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Dominguez annually refunds a portion of revenue received from
several water mains for which Watson Land Company, Carson Estate Company, and
Dominguez Properties advanced the construction funds to Dominguez. The
refunds to Watson Land Company were $17,250 in 1998 and $16,175 for 1997. The
refunds to Carson Estate Company were $1,339 for 1998 and $1,110 for 1997.
The refunds to Dominguez Properties were $6,176 for 1998 and $6,176 for 1997.
Dominguez also leases sites used for wells from Watson Land Company,
Carson Estate Company, and Dominguez Properties. The rental costs for Watson
Land Company were $40,732 in 1998 and $39,517 for 1997. The rental costs for
Carson Estate Company were $19,674 for 1998 and $18,580 for 1997. The rental
costs for Dominguez Properties were $3,846 for 1998 and $4,174 for 1997.
Dominguez provides water service to these entities to the extent
that they have property within the division.
Dominguez purchases chlorine generation equipment and supplies from
CSC. Company owns a 20% equity interest in CSC. Purchases from CSC totaled
approximately $393,000 in 1998 and $733,000 in 1997.
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of the report
2.1 The Merger Agreement
2.2 Amendment to the Merger Agreement
23 Consent of Independent Public Accountants
(b) The Company filed a Form S-8 on February 8, 1999.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DOMINGUEZ SERVICES CORPORATION:
By /s/ BRIAN J. BRADY
----------------------------------
Brian J. Brady, Chief Executive Officer
By /s/ JOHN S. TOOTLE
----------------------------------
John S. Tootle, Chief Financial
Officer, Treasurer, Secretary
By /s/ CYNTHIA C. CHU
----------------------------------
Cynthia C. Chu, Corporate Controller
Assistant Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
DIRECTORS:
/s/ B. J. BRADY 3/22/99
---------------------------- -------------------
B. J. Brady, Chairman Date
/s/ D. C. BAUM 3/22/99
----------------------------- -------------------
D. C. Baum Date
/s/ R. M. Cannon 3/22/99
---------------------------- -------------------
R. M. Cannon Date
/s/ T. M. GLOEGE 3/26/99
---------------------------- -------------------
T. M. Gloege Date
/s/ T. W. HUSTON 3/22/99
---------------------------- -------------------
T. W. Huston Date
/s/ C. B. OLSON 3/22/99
---------------------------- -------------------
C. B. Olson Date
/s/ L. W. Owen 3/22/99
---------------------------- -------------------
L. W. Owen Date
/s/ C. W. Porter 3/22/99
---------------------------- -------------------
C. W. Porter Date
/s/ D. L. Reed 3/26/99
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D. L. Reed Date
52