ITEM 1. BUSINESS
Erie Family Life Insurance Company (hereinafter referred to as "The Company", the "Registrant" or "Erie Family Life") was incorporated in the Commonwealth of Pennsylvania on May 23, 1967 and commenced business on September 1, 1967. The Company is primarily engaged in the business of underwriting and selling non-participating individual and group life insurance policies, including universal life. Erie Family Life also sells individual and group annuities. Erie Family Life is owned 21.6 % by Erie Indemnity Company and 52.2% by Erie Insurance Exchange. The remaining stock is held by the public, predominantly agents and employees of the Erie Insurance Group.
Erie Indemnity Company is a Pennsylvania business corporation formed in 1925 to be the attorney-in-fact for Erie Insurance Exchange, a Pennsylvania-domiciled reciprocal insurance exchange. The Erie Indemnity Company's principal business activity consists of management of the Exchange. The Erie Indemnity Company also is engaged in the property/casualty insurance business through its wholly owned subsidiaries, Erie Insurance Company (Erie Insurance Co.), Erie Insurance Company of New York (Erie NY) and Erie Insurance Property & Casualty Company (Erie P&C) and through its management of Flagship City Insurance Company (Flagship), a subsidiary of the Erie Insurance Exchange. Together with the Erie Insurance Exchange, the Erie Indemnity Company and its subsidiaries and affiliates, including Erie Family Life, operate collectively under the name "Erie Insurance Group."
Products
The Company's portfolio of life insurance includes the usual forms of permanent life, endowment and term policies, including whole life, family income, mortgage and decreasing term, group, and universal life insurance. In terms of face value, new life business issued in 1996 had a ratio of 4:1 of term insurance to whole life insurance coverage.
Life insurance premiums and annuity deposits have been the primary sources of cash inflows for the Company.
Classes of Life Insurance Percentage of Total Sales
For the year ended December 31,
Certain elements of revenue and expense reflect the requirements of Financial Accounting Standard (FAS) 97. FAS 97 prescribes a uniform method by which life insurance companies record certain long-term
contracts, specifically annuities, universal life, and other interest sensitive products. This method involves separating the premium income into the "premium" portion (shown in the sales figures) which represents insurance protection purchased, and the "deposit" portion, which represents funds to be held at interest for future uses. Under this standard, the "deposit" portion of the premium income is accounted for using methods applicable to comparable "interest bearing obligations" of other types of financial institutions.
Structured settlement annuities sold to affiliate companies represented $13,504,953 in annuity deposits in 1996, $22,018,313 in 1995 and $11,431,965 in 1994. Also included in the annuity deposits are annuity contracts purchased by the Erie Insurance Group Retirement Plan for Employees. These annuity contracts purchased totaled $4,894,042 in 1996, $6,024,125 in 1995 and $8,880,714 in 1994.
Classes of Deposits Total Deposits
For the year ended December 31,
The Registrant reinsures with other insurance companies the portion of the insurance coverage above acceptable retentions. Beginning January 1, 1995, the retention limit on an acceptable risk was increased to $300,000 on each individual life written. Prior to January 1, 1995, the limit was $225,000.
The Company reinsures under a number of different reinsurance agreements. The primary purpose of this reinsurance is to enable the Company to write a policy in an amount larger than the risk it is willing to assume for itself. The secondary purposes are to receive commissions on the reinsurance ceded and in some instances to participate in the profits of the reinsured business by way of an "experience rating refund."
Marketing
The Company markets its products through independent agents throughout Pennsylvania, Maryland, Virginia, West Virginia, Ohio, Indiana, Tennessee, North Carolina and the District of Columbia. The policies sold are evaluated by the Company's Underwriting Department which selects or declines applicants for insurance. Premium on policies which are accepted may be standard or rated, depending on the nature of the risk.
Competition
The Company operates in a highly competitive industry which consists of numerous stock and mutual life insurance companies. A large number of established insurance companies compete in states in which the Company transacts business and many of these companies offer more diversified lines of insurance coverage and have substantially greater financial resources than does the Company. Competition is based primarily on price, product features, availability of insurance products and the financial strength of the Company.
Insurance Regulation
The Company is subject to supervision and regulation by the insurance departments of the states in which it does business. Although the extent of the regulation varies from state to state, generally the supervisory agencies are vested with broad administrative powers relating to the granting and revocation of licenses to transact business, regulation of trade practices, licensing of agents, approval of policy forms, deposits of security for the benefits of policy owners and investments and maintenance of specified reserves and capital, all designed primarily for the protection of policy owners. In accordance with the rules of the National Association of Insurance Commissioners, the Company is examined periodically by one or more of the state supervisory agencies. The latest such examination of the Company was conducted by the Pennsylvania and Ohio Insurance Departments and covered the four years ended December 31, 1995.
The Commonwealth of Pennsylvania has adopted the minimum risk-based capital requirements on domestic insurance companies that were developed by the National Association of Insurance Commissioners (NAIC). The formulas for determining the amount of risk-based capital specify various weighing factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. These formulas determine a ratio of the company's regulatory total adjusted capital to its authorized control level risk-based capital, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The NAIC levels and ratios are as follows:
Ratio of Total Adjusted Capital to NAIC Required Authorized Control Level Risk-Based Regulatory Event Capital (Less Than or Equal to)
Company action level 2 (or 2.5 with negative trends) Regulatory action level 1.5 Authorized control level 1 Mandatory control level .7
Erie Family Life has regulatory total adjusted capital of $84 million and $76 million at December 31, 1996, and 1995, respectively, and a ratio of total adjusted capital to authorized control level risk-based capital of 7.1 at both December 31, 1996 and 1995. The Company's ratios significantly exceed the minimum NAIC risk-based capital requirements.
Life Reserves
In accordance with generally accepted accounting principles (GAAP), the Company is required to establish and maintain as liabilities, actuarial reserves to meet its obligations on life insurance policies and annuities. These reserves are amounts which, with additions from premiums to be received on outstanding policies and with interest on such reserves compounded annually at certain assumed rates, are calculated to be sufficient to meet policy obligations at death or maturity in accordance with the mortality tables employed when the policies are issued.
The interest factors used in the computation of material reserves are:
Basis of Assumption
Investments
In accordance with standard insurance practice, the Registrant invests its funds principally in corporate bonds and preferred and common stocks. In 1996, the Company's real estate held for investment purposes constituted 0.2% of the Company's total assets while mortgage loans accounted for 1.2% and other invested assets accounted for 0.9%. The real estate owned by the Company is leased to an affiliate, Erie Indemnity Company (Indemnity), for rentals of $423,120 per year through December 31, 2000. In addition, the Company makes policy loans to its Policyholders, and at December 31, 1996, such policy loans constituted 0.6% of the Registrant's total assets. Annual increases in the number and dollar amount of policy loans, generally, will vary with changes in short-term rates of interest. When short-term rates are high, policy loans are also expected to increase.
Subject to certain laws that prescribe the nature, quality and percentage of the various types of investments which may be made by insurance companies, the Company manages its investments to meet diversification, yield and liquidity objectives.
Employees
Services of seventy-nine full-time Employees are provided through an affiliate, Erie Indemnity Company. All employees are salaried and ten are officers. These Employee expenses along with other operating expenses are paid by the Erie Indemnity Company and reimbursed on a monthly basis. None of the Employees are covered by collective bargaining agreements and the Company believes its Employee relations are good.
Other Data
The Company's Lapse Rate for 1996 was 8.2%.
Reinsurance Profitability - Not Applicable.
New Types of Insurance - Not Applicable.
Total Insurance In Force for the last five years Net of Reinsurance was:
1996 - $9,646,962,000 1995 - $8,370,940,000 1994 - $7,481,537,000 1993 - $6,428,223,000 1992 - $5,545,197,000
ITEM 2.

ITEM 2. PROPERTIES
The Registrant owns no real property and no tangible personal property used in the operation of its business except office supplies and forms. The Registrant does, however, own real property for investment purposes as outlined under ITEM 1 - INVESTMENTS. The executive and administrative offices of the Registrant are located in the headquarters office of Erie Insurance Group in Erie, Pennsylvania. The Registrant pays other members of the group an amount determined by an arm's length agreement for office space and for the use of facilities, equipment and services.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Registrant is not involved in any material pending legal proceedings other than ordinary routine litigation incidental to its business.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote to shareholders during the fourth quarter of 1996.
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Currently there is no market on which the Registrant's stock is traded. The Company had 1,146 recordholders of Common Stock at December 31, 1996.
Date Dividends Declared Date Dividends Paid Dividends per Share*
March 2, 1995 April 1, 1995 .113 April 25, 1995 July 3, 1995 .113 June 22, 1995 October 2, 1995 .113 September 21, 1995 January 2, 1996 .113 February 29, 1996 April 1, 1996 .125 May 1, 1996 July 1, 1996 .125 June 17, 1996 October 1, 1996 .125 September 17, 1996 January 2, 1997 .125
*Adjusted to reflect a three-for-one stock split which was effective May 2, 1996.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The information contained in "Selected Financial Data" on Page 10 of the Company's 1996 Annual Report is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION
The information set forth on pages 11 through 18 of the Company's 1996 Annual Report is incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The 1996 Financial Statements and the Registrant's independent auditor's report on pages 20 through 28 of the Company's 1996 Annual Report are incorporated herein by reference, as is the unaudited information set forth in the Notes to the Financial Statements under the caption "Unaudited Quarterly Summary of Operations" on page 28.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The Company is a member of an insurance holding company system pursuant to Pennsylvania law under which insurance companies are required to have nominating, audit and executive compensation committees composed solely of directors who are not officers, employees or controlling shareholders of the Company or any entity controlling the Company. Insurance companies can satisfy this requirement if the insurance company is controlled by an insurer or a publicly held corporation that has committees that comply with this requirement. Erie Indemnity Company, holder of 21.6% of the Company's stock directly and 52.2% of the Company's stock as attorney-in-fact for Erie Insurance Exchange, has committees which meet these requirements.
The following table sets forth the compensation paid by the Company during each of the three fiscal years ended December 31, 1994, 1995, and 1996, to the chief executive officer of the Company and the four other most highly compensated executive officers of the Company during 1996 for services rendered in all capacities to the Company, EFL, Erie Insurance Exchange (the "Exchange") and their subsidiaries and affiliates.
Annual Compensation
Name and Other Annual All Other Principal Position Year Salary Bonus Compensation Compensation (1) - - --------------------------------------------------------------------------------
F. William Hirt 1996 $ 0 $ 11,220 $ 0 $ 0 Chief Executive Officer(2) 01/01/96-02/11/96
Stephen A. Milne 1996 $467,305 $ 39,351 $ 1,014 $ 26,020 Chief Executive 1995 245,611 26,623 927 39,993 Officer (3) 1994 189,512 34,943 965 4,433 02/12/96-12/31/96
Jan R. Van Gorder 1996 $312,555 $ 25,433 $ 1,014 $ 26,431 Executive Vice 1995 296,095 26,725 1,029 29,625 President, Secretary 1994 278,442 25,590 1,029 14,834 & General Counsel
Thomas M. Sider 1996 $267,295 $ 26,844 $ 1,014 $ 24,231 Executive Vice 1995 231,901 26,696 941 22,410 President & Chief 1994 190,049 22,571 941 21,109 Financial Officer
John J. Brinling, 1996 $202,126 $ 34,652 $ 946 $ 24,098 Jr., Executive 1995 184,104 20,853 877 28,837 Vice President of 1994 176,365 19,527 877 22,682 EFL
Alvin L. Irwin 1996 $175,868 $ 19,436 $ 6,060 $ 633,680 Senior Vice 1995 171,273 17,978 6,325 3,192 President (4) 1994 167,072 16,360 3,665 3,010
(1) Amounts shown include matching contributions made by the Company pursuant to the Company's Employee Savings Plan and premiums paid by the Company on behalf oft the named individuals on the Split Dollar Plan insurance policies. For the year 1996, contributions made to the Employee Savings Plans amounted to $-0-, $11,729, $8,869, $8,024, $6,026 and $4,278 on behalf of Messrs. Hirt, Milne, VanGorder, Sider, Brinling, and Irwin, respectively. For the year 1995, contributions to the Employee Savings Plan amounted to $-0-, $5,424, $6, 849, $6,143, $4,910, and $3,192 on behalf of Messrs. Hirt, Milne, VanGorder, Sider, Brinling, and Irwin. For the year 1994, contributions made to the Employee Savings Plan amounted to $-0-. $4,433, $6,190, $4,788. $4,478 and $3,010 on behalf of Messrs. Hirt, Milne, VanGorder, Sider, Brinling, and Irwin, respectively. Premiums paid during 1996 for Split Dollar Life insurance policies for Messrs. Hirt, Milne, VanGorder, Sider, Brinling, and Irwin, respectively, are as follows: $-0-, $14,291, $17,742, $16,207, $18,072, and $-0-. Premiums paid during 1995 for Split Dollar Life insurance policies for Messrs. Hirt, Milne, VanGorder, Sider, Brinling, and Irwin, respectively, are as follows: $-0-, $28,786, $17,420, $16,267, $18,144, and $-0-. Premiums paid during 1994 for Split Dollar Life insurance policies for Messrs. Hirt, Milne, VanGorder, Sider, Brinling, and Irwin are as follows: $-0-, $-0-, $8,644, $16,321, $18,204, and $-0-. The Company is entitled to recover the premiums from any proceeds paid on such Split Dollar Life insurance policies and has retained a collateral interest in each policy to the extent of the premiums paid with respect to such policies. The total benefit accruing to Mr. Irwin under the Supplemental Employee Retirement Plan of the Company amounted to $629,402 and is reported on the table in 1996.
(2) Mr. Hirt served as Chief Executive Officer of the Company for the period January 1, 1996 thru February 11, 1996.
(3) Mr. Milne became President and Chief Executive Officer of the Company and a Company Director on February 12, 1996.
(4) Mr. Irwin retired effective December 31, 1996 after 30 years of service.
Stock Options and Stock Appreciation Rights
The Company does not have a stock option plan, nor has it ever granted any stock option or stock appreciation right to any of the persons named in the Summary Compensation Table.
Pension Plan
The following table sets forth the estimated annual benefits payable upon retirement at age 65 under the Erie Insurance Group Retirement Plan for Employees.
PENSION PLAN TABLE
Years of Service Remuneration 15 20 25 30 35 - - ------------------------------------------------------------------- $ 200,000 60,000 80,000 100,000 120,000 120,000 225,000 67,500 90,000 112,500 135,000 135,000 250,000 75,000 100,000 125,000 150,000 150,000 300,000 90,000 120,000 150,000 180,000 180,000 350,000 105,000 140,000 175,000 210,000 210,000 400,000 120,000 160,000 200,000 240,000 240,000 450,000 135,000 180,000 225,000 270,000 270,000 500,000 150,000 200,000 250,000 300,000 300,000 550,000 165,000 220,000 275,000 330,000 330,000 600,000 180,000 240,000 300,000 360,000 360,000 650,000 195,000 260,000 325,000 390,000 390,000 700,000 210,000 280,000 350,000 420,000 420,000 750,000 225,000 300,000 375,000 450,000 450,000
The compensation covered by such plan is the base salary reported in the Summary Compensation Table.
Under the pension plan, credited years of service is capped at 30 years. Credited years of service for each of the individuals named in the Summary Compensation Table is as follows: F. William Hirt - 30 years, Stephen A. Milne - 19 years, Jan R. Van Gorder - 16 years, Thomas M. Sider - 26 years, John J. Brinling, Jr. - 29 years and Alvin Irwin - 30 years.
The benefits under such plan are computed on the basis of straight-life annuity amounts and a life annuity with a ten-year certain benefit. The benefits listed in the Pension Plan Table are not subject to deduction for Social Security or other offset amounts. The information in the foregoing table does not reflect certain limitations imposed by the Internal Revenue Code of 1986, as amended (the "Code"). Beginning in 1994, the Code prohibits the inclusion of earnings in excess of $150,000 per year (adjusted periodically for cost-of-living increases) in the average earnings used to calculate benefits. The Code also limits the maximum annual pension (currently $120,000, but adjusted annually for cost-of-living increases) that can be paid to each eligible employee. A Supplemental Employee Retirement Plan for senior management is in effect which provides benefits in excess of the earnings limitations imposed by the Internal Revenue Code of 1986 as amended.
Director Compensation
Effective January 1, 1995, the annual retainer for directors of all members of the Group, including the registrant, increased to $15,000, plus $1,200 for each meeting attended and $800 for each committee meeting attended (unless the committee meeting is held the same day as a Board of Directors meeting, for which committee meeting $500 will be paid) plus an additional $2,000 per year for each committee chairperson. In addition, all directors are reimbursed for their expenses incurred in attending meetings. Officers of the Company who serve as directors are not compensated separately for attendance at meetings of the Board of Directors and its committees. Director Petersen also is compensated pursuant to a consulting arrangement as disclosed in Item 13.
Agreements with Executive Officers
Upon the recommendation of the Executive Compensation Committee of the Company's Board of Directors the Company has entered into employment agreements with the following four of the Company's senior executive officers: John J. Brinling, Jr., Executive Vice President of the Company in November, 1995; Stephen A. Milne, President and CEO of the Company; Thomas M. Sider, Executive Vice President and Chief Financial Officer of the Company, and Jan R. Van Gorder, Executive Vice President, General Counsel and Secretary of the Company. The employment agreements have the following principal terms:
(a) A three year term expiring in November , 1998 unless the agreement is theretofore terminated in accordance with its terms with or without cause or due to disability or death of the officer or notice of non-renewal is given by the Company or the executive 30 days before any anniversary date;
(b) A minimum annual base salary at least equal to the executive's annual base salary at the time the agreement was executed, subject to periodic review to reflect the executive's performance and responsibilities, competitive compensation levels and the impact of inflation;
(c) The eligibility of the executive under the Company's incentive compensation programs and employee benefit plans;
(d) The establishment of the terms and conditions upon which the executive's employment may be terminated by the Company and the compensation of the executive in such circumstances. The agreements provide generally, among other things, that if the employment of an executive is terminated without Cause (as defined in the agreement) by the Company or by the executive for Good Reason (as defined in the agreement) then the executive shall be entitled to receive an amount equal to the sum of: (i) three times his highest annual base salary during the preceding three years plus an amount equal to the total of the executive's highest awards during the preceding three years under the Company's bonus and other short-term incentive compensation plans and (ii) any award or other compensation to which the executive is entitled under any of the Company's incentive compensation programs and employee benefit plans as well as for the continuing participation, for a period of three years following termination, in all life, medical and dental insurance programs and other benefit plans to
the extent the executive and his dependents were eligible to participate in such programs immediately prior to his termination;
(e) Provisions relating to confidentiality and non-disclosure following an executive's termination; and
(f) An agreement by the executive not to compete with the Company for a period of one year following his termination, unless his termination was without Cause.
Compensation Committee Interlocks and Insider Participation
The Executive Compensation Committee (the "Committee") of the Company presently consists of Peter B. Bartlett, Chairman, J. Ralph Borneman, Jr., Seth E. Schofield and Harry H. Weil. No member of the Committee is a former or current officer or employee of the Company or any of its affiliates. Furthermore, no executive officer of the Company serves as a member of a compensation committee of another entity one of whose executive officers serves on the Committee of the Company or as a director of the Company, nor does any executive officer of the Company serve as a director of another entity, one of whose executive officers serves on the Committee of the Company. Mr. Borneman is the President and a principal shareholder of Body- Borneman Associates, Inc., Body-Borneman, Inc. and Body-Borneman, Ltd., all of which are independent insurance agencies representing a number of insurers, including the Company and its insurance affiliates.
Report of the Executive Compensation Committee of the Company
The Committee is charged with the duty of recommending to the Board of Directors the compensation of the three highest paid officers of the Company and such other officers as are determined by the Board of Directors, recommending to the Board of Directors all forms of bonus compensation including incentive programs that would be appropriate for the Company and to undertake such other responsibilities as may be delegated to it by the Board of Directors. The Board has authorized the Compensation Committee to consider the compensation of the four highest paid officers, including the CEO. The Committee is composed of four directors who are not officers or employees of the Company, the Exchange or EFL or any of their affiliates or subsidiaries. The purpose of the Committee is to determine the level and composition of compensation that is sufficient to attract and retain top quality executives for the Company.
Compensation Philosophy: The objectives of the executive compensation practices are to (1) attract, reward and retain key executive talent and (2) to motivate executive officers to perform to the best of their abilities and to achieve short-term and long-term corporate objectives that will contribute to the overall goal of enhancing stockholder and policyholder value. To that end, compensation comparisons will be made to benchmark positions at other insurers in terms of compensation levels and composition of the total compensation mix.
Under federal tax laws, the Company is not allowed a federal income tax deduction for compensation paid to certain executive officers to the extent that compensation exceeds $1 million per officer in any fiscal year. No officer of the Company has received compensation in excess of $1 million in any fiscal year to date. The Compensation Committee may consider adopting policies with respect to this limitation on deductibility when appropriate.
The Committee reviewed the salary ranges and base salaries of the four highest paid executives including the chief executive officer in 1996. The Committee has position descriptions for the four highest paid executives of the Company, including the chief executive officer, which define the responsibilities and duties of each position. The position descriptions also delineate the functional areas of accountability and the qualifications and skills required to perform such responsibilities and duties. The Committee then reviews the salary ranges for the chief executive officer and the other three highest paid senior executives, comparing the ranges to third party data compiled for similar positions with other property and casualty insurers. In reviewing the salary ranges for the four highest paid executives, including the chief executive officer, the Committee references Sibson's Management Compensation Survey published annually by Sibson & Company, Inc., which
summarizes compensation data for more than 100 insurance companies. The data is reported by position and by company asset size and by premium volume. The unique aspects of each position, its duties and responsibilities, the effect on the performance of the Company, the number of employees supervised directly and other criteria are also considered in setting the base salaries. The Committee also secured the services of Towers Perrin, a nationally recognized consulting firm with specific expertise in the insurance industry, to do a detailed analysis of competitive compensation levels and make recommendations. In addition, Towers Perrin made specific recommendations to the Committee regarding the compensation for Mr. Milne as he assumed the responsibilities of chief executive officer.
The level of compensation for each executive reflects his or her skills, experience and job performance. Normally, base salary will not be less than the minimum for the salary range established for each position. Executives with a broader range of skills, experience and consistently high performance with the Company may receive compensation above the midpoint for the established salary range.
A promotional salary increase may also be added to the executive's compensation when the executive assumes new responsibilities or has increased accountability for results. Significant changes in duties and responsibilities may also result in a higher salary range.
Compensation for the chief executive officer consists primarily of salary and bonus and minor perquisites which amount to less than 10% of the chief executive officer's salary and bonus. No long-term incentive plans (which provide incentives for performance occurring over longer periods of time) are currently utilized in determining the compensation of the chief executive officer, although external data indicates its prevalence among competitor companies. Stock options, stock appreciation rights and restricted stock are not currently part of the executive compensation package for any executives of the Company.
Performance factors applicable to the Company, such as property and casualty insurance loss ratios, investment portfolio returns, overall company profitability, as well as other factors are considered indirectly in evaluating the chief executive officer's performance.
Compensation of the next three most highly compensated individuals is determined by the Committee and is based upon the factors and processes enumerated, i.e., a determination of a salary range based upon market data and evaluation of the executive with respect to the executive's job description and his or her position within the salary range.
Compensation of the next highest paid executives (other than the four highest paid executives) is based upon the Company's established standard compensation policies and is not determined by the Committee. As with the chief executive officer and the next three most highly compensated executive officers, no long-term incentive plans are maintained for this executive.
ERIE INDEMNITY COMPANY EXECUTIVE COMPENSATION COMMITTEE
Peter B. Bartlett, Chairman J. Ralph Borneman, Jr. Seth E. Schofield Harry H. Weil
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of 2/28/97
(a) Name & Address Shares of Beneficial Beneficially Percent of Owner Owned Class
Erie Indemnity Company 2,043,900(1) 21.6%(1) 100 Erie Insurance Place Direct Erie, PA 16530
Erie Insurance Exchange 4,932,900(1) 52.2%(1) 100 Erie Insurance Place Direct Erie, PA
(b) Shares beneficially owned directly or indirectly by all Directors and Officers:
Name & Address Shares of Beneficial Beneficially Percent of Owner Owned Class
Peter B. Bartlett 0 NA 65 Egbert Street Bay Head, NJ 08742
Samuel P. Black, Jr. 68,118 .72% 400 French St., Suite 100 Erie, PA 16507
J. Ralph Borneman 1,536 .02% Box 552 17 East Philadelphia Ave. Boyertown, PA 19512
Patricia A. Goldman 0 NA 3026 1/2 Q Street, NW Washington, DC 20007
Susan Hirt Hagen 300 -- 5727 Grubb Rd. Erie, PA 16506
Thomas B. Hagen 154,482 1.63% 5727 Grubb Rd. Erie, PA 16506
F. William Hirt 167,034 1.77% 3270 Kingston Court S. Erie, PA 16506
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (Cont.)
(b) Shares beneficially owned directly or indirectly by all Directors and Officers:
Name & Address Shares of Beneficial Beneficially Percent of Owner Owned Class
Dr. Irvin H. Kochel 6,249 .07% 4737 Reese Road Erie, PA 16510
Edmund J. Mehl 12,150 .13% 504 Frontier Dr. Erie, PA 16505
Stephen A. Milne 0 NA 100 Culbertson Drive Lake City, PA 16423
John M. Petersen 89,141 .94% 124 Voyageur Dr. Erie, PA 16505
Seth E. Schofield 0 NA 9500 South Ocean Drive #1601 Jensen Beach, FL 34957
Jan R. Van Gorder 75 -- 6796 Manchester Beach Road Fairview, PA 16415
Harry H. Weil 0 NA 7 Foxwood Drive Pittsburgh, PA 15238
John J. Brinling, Jr. 1,260 .01% 1522 Sumner Drive Erie, PA 16505
Robert H. Dreyer 600 .01% 465 Hawthorne Trace Fairview, PA 16415
Philip Alan Garcia 1,275 .01% 786 Stockbridge Drive Erie, PA 16505
Thomas M. Sider 285 -- 11810 Old Lake Road North East, PA 16428
Douglas F. Ziegler 270 -- 378 Ridgeview Drive Erie, PA 16505
Officers and directors as a group (19 persons) 502,775(2) 5.32%(2)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (Cont.)
(1) Erie Insurance Exchange (the "Exchange") is a reciprocal insurance exchange controlled by its subscribers, each of whom has designated Erie Indemnity Company as such subscriber's attorney-in-fact for certain purposes, including Indemnity's holding of Common Stock of the Company. 76.2% of the outstanding voting stock of Erie Indemnity Company is owned beneficially by a trust established by H. O. Hirt, the father of F. William Hirt and Susan H. Hagen and the father-in-law of Thomas B. Hagen. Mr. Hirt and Mrs. Hagen are beneficiaries of the trust and are co-trustees with Mellon Bank, N.A. An additional 12.7% of the Erie Indemnity Company voting stock is beneficially owned by Samuel P. Black, Jr.
(2) Includes direct and indirect beneficial ownership and shares owned by and with spouses.
(c) There are no contractual arrangements known to the Registrant which may result in a change in control of the Company.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors Black and Borneman are officers and principal shareholders of insurance agencies which receive insurance commissions in the ordinary course of business from Erie Family Life and its affiliates in accordance with such companies standard commission schedules and agents' contracts.
The retired President and CEO and previous Chief Investment Officer of the Erie Insurance Group of Companies, and current director, John M. Petersen, entered into a consulting arrangement with Erie Indemnity Company effective January 2, 1996. Under the terms of the arrangement, Erie Indemnity Company engaged Mr. Petersen as a consultant to furnish Erie Indemnity Company and its pension trust, Erie Insurance Exchange, and Erie Family Life Insurance Company, with investment services with respect to their investments in common stocks. The amount paid Mr. Petersen pursuant to this arrangement in 1996 was $2,078,758.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following financial statements of the Registrant and the report of independent certified public accountants are incorporated herein by reference to pages 20 through 28 in the Registrant's annual report to shareholders for the year ended December 31, 1996.
Independent Auditor Report Statements of Financial Position - December 31, 1996 and 1995 Statements of Operations for the years ended December 31, 1996, 1995 and 1994 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 Notes to Financial Statements
(2) The following financial statement schedules are included in this report on FORM 10-K:
Page
Independent Auditors' Report on Schedules 25
Schedule I - Summary of Investments other than investments in related parties 26
Schedule V - Supplementary Insurance Information 27
Schedule VI - Reinsurance 28
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted.
(3) Exhibits:
Exhibit 13 - Annual Report to Shareholders
Exhibit 27 - Financial Data Schedule
All exhibits for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted.
(b) No reports on Form 8-K have been filed or were required to be filed during the last quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 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.
Date: March 11, 1997 ERIE FAMILY LIFE INSURANCE COMPANY (Registrant)
Principal Officers
/s/ F. William Hirt F. William Hirt, Chairman of the Board
/s/ Stephan A. Milne Stephen A. Milne, President and C.E.O.
/s/ Thomas M. Sider Thomas M. Sider, Executive Vice President & CFO
/s/ Philip A. Garcia Philip A. Garcia, Senior Vice President & Controller
Board of Directors
/s/ Peter B. Bartlett /s/ Irvin H. Kochel Peter B. Bartlett Dr. Irvin H. Kochel
/s/ Samuel P. Black, Jr. /s/ Edmund J. Mehl Samuel P. Black, Jr. Edmund J. Mehl
/s/ J. Ralph Borneman /s/ Stephen A. Milne J. Ralph Borneman Stephen A. Milne
/s/ Patricia A. Goldman /s/ John M. Petersen Patricia A. Goldman John M. Petersen
/s/ Susan Hirt Hagen /s/ Seth E. Schofield Susan Hirt Hagen Seth E. Schofield
/s/ Thomas B. Hagen /s/ Jan R. Van Gorder Thomas B. Hagen Jan R. Van Gorder
/s/ Harry H. Weil F. William Hirt Harry H. Weil
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders Erie Family Life Insurance Company
We have audited the statements of financial position of Erie Family Life Insurance Company (Company) as of December 31, 1996 and 1995 and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996, as contained in the 1996 annual report, incorporated by reference in the annual report on Form 10-K for the year ended December 31, 1996. In connection with our audits of the financial statements, we also have audited the financial statement schedules, as listed in the accompanying index. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules 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 Erie Family Life Insurance Company as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ Brown Schwab Bergquist & Co.
Erie, Pennsylvania February 18, 1997
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
SCHEDULE V - SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE V - SUPPLEMENTARY INSURANCE INFORMATION (CONTINUED)
SCHEDULE VI - REINSURANCE


ITEM 1. BUSINESS
GENERAL
Southern California Water Company, hereinafter referred to as Registrant, is a utility company engaged principally in the purchase, production, distribution and sale of water (SIC No. 4941). Registrant also distributes electricity in one community (SIC No. 4911). Registrant, regulated by the California Public Utilities Commission, hereinafter referred to as the CPUC, was incorporated in 1929 under the laws of the State of California as American States Water Services Company of California as the result of the consolidation of 20 water utility companies. From time to time, additional water companies and municipal water districts have been acquired and properties in limited service areas have been sold or been the subject of condemnation proceedings. Registrant's present name was adopted in 1936.
At December 31, 1996, Registrant was organized into three regions operating within 75 communities in 10 counties located throughout the State of California and provided water service in 21 separate customer service areas and one electric customer service area. The total population of these service areas on that date was approximately 1 million persons. For each of the years ended December 31, 1996, 1995 and 1994, about 73% of Registrant's water customers were located in the greater metropolitan areas of Los Angeles and Orange Counties. Registrant provides electric service to the City of Big Bear Lake and surrounding areas in San Bernardino County. Beginning in June, 1996, all electric energy sold by Registrant to customers in its Bear Valley Electric customer service area was purchased under an energy brokerage contract with ENOVA Energy Management, Inc. Prior to June, 1996, all energy sold was purchased from the Southern California Edison Company subsidiary of Edison International.
Registrant served 240,498 water customers and 20,546 electric customers at December 31, 1996, or a total of 261,044 customers, compared with 259,437 total customers at December 31, 1995 and 258,236 total customers at December 31, 1994. For the years ended December 31, 1996, 1995 and 1994, approximately 92% of Registrant's operating revenues were derived from water sales and approximately 8% were derived from the sale of electricity. Operating income before taxes on income of the electric district was approximately 9%, 8% and 7% of Registrant's total operating income before taxes for the years ended December 31, 1996, 1995 and 1994, respectively. The material contained in Note 11 Business Segments - of the Notes to Financial Statements in the 1996 Annual Report to Shareholders provides additional information on business segments while Note 12 - Selected Quarterly Financial Data (Unaudited) - of the Notes to Financial Statements in the 1996 Annual Report to Shareholders provides information regarding the seasonal nature of Registrant's business. The Notes to Financial Statements contained in the 1996 Annual Report to Shareholders are included herein by reference.
During 1996, Registrant supplied, from all sources, a total of 194,397 acre-feet of water compared to 183,108 acre-feet supplied in 1995 and 185,490 acre-feet in 1994. Of the total water supplied in 1996, approximately 43% was purchased from others, principally from member agencies of the Metropolitan Water District of Southern California ("MWD"). The remaining amount was furnished by the Bureau of Reclamation under contract, at no cost, to Registrant's Arden-Cordova customer service area and to Registrant's Clearlake
customer service area by prescriptive rights to water extracted from Clear Lake. The remainder of water supplied was produced from Registrant's owned wells.
MWD is organized to deliver imported water to areas within its jurisdiction. Registrant has 52 connections to the water distribution facilities of MWD and other municipal water agencies. MWD imports water from two principal sources: the Colorado River and the State Water Project ("SWP"). Available water supplies from the Colorado River and the SWP have historically been sufficient to meet most of MWD's requirements and MWD's supplies from these sources are anticipated to remain adequate through 1997. MWD's import of water from the Colorado River is expected to decrease in future years due to the requirements of the Central Arizona Project in the State of Arizona. In response, MWD has taken steps to secure additional storage capacity and increase available water supplies, including effecting transfers of water rights from other sources.
The recent storms during the 1996-1997 winter period provided precipitation adequate to fill most of the state's reservoirs to near capacity and the outlook for water supply in 1997 is favorable. In those districts of Registrant which pump groundwater, overall groundwater conditions remain at adequate levels, allowing Registrant to use groundwater in its resource mix and decrease its dependence on increasingly expensive purchased water. Registrant believes that its water supplies from all sources are adequate to meet current year projected demands.
COMPETITION
The business of Registrant is substantially free from direct and indirect competition with other public utilities, municipalities and other public agencies.
WATER-RELATED OPPORTUNITIES
Registrant continues to pursue strategic opportunities related to the operation of municipally-owned water systems. Registrant has pursued and continues to pursue opportunities to bid on long-term leases and operation contracts on a stand-alone basis or as part of a joint venture.
In December, 1996, Registrant and U.S. Water, L.L.C., a limited liability company owned by United Infrastructure Company, a general partnership formed by the Bechtel and Peter Kiewet organizations, and by Northwest Water Holdings, Inc., a subsidiary of United Utilities PLC, a water and electric utility based in the United Kingdom, formed Golden State Water Company LLC ("GSWC") for the purpose of pursuing potential opportunities to lease, or operate and maintain, municipally owned retail water supply and distribution systems and water treatment, wastewater collection and wastewater treatment facilities in California. GSWC has submitted a bid to the City of Garden Grove ("Garden Grove") to operate and maintain its water system. The bid remains subject to approval by Garden Grove. No assurance can be given that Garden Grove will approve GSWC's bid or that GSWC will ultimately be retained to operate and maintain the city's water system or perform any other services for Garden Grove. There can be no assurance that any such other opportunities will materialize or that, if they do, Registrant (either jointly with GSWC or alone) would be successful in consummating any such lease and/or maintenance and operation arrangements.
RATES AND REGULATION
Registrant is subject to regulation by the CPUC as to its water and electric business and properties. The CPUC has broad powers to regulate public utilities with respect to service and facilities, rates, classifications of accounts, valuation of properties and the purchase, disposition and mortgaging of properties necessary or useful in rendering public utility service. The CPUC also has authority over the issuance of securities, the granting of certificates of convenience and necessity as to the extension of services and facilities and various other matters.
The 22 customer service areas of Registrant are grouped into 16 water districts and one electric district for ratemaking purposes. Registrant's water rates vary among the 16 ratemaking districts due to differences in operating conditions and costs. Registrant continuously monitors operations in each of these districts so that it may file applications for rate changes, when warranted, on a district-by-district basis, in accordance with the CPUC's procedure. Under the CPUC's practices, rates may be increased by three methods: general rate increases, offsets for certain expense increases and advice letter filings related to certain plant additions.
General rate increases typically are for three-year periods and include "step" and "attrition" increases in rates for the second and third years, respectively. General rate increases are established by formal proceedings in which overall rate structure, expenses and rate base of the district are examined. Rates are based on estimated expenses and capital costs for a prospective two-year period. The attrition mechanism is to set rates applicable to the third of the three-year test cycle, which assumes that the costs and expenses for the third year of the cycle will change in the same proportion over the second year as the change projected for the second year over the first year. Step and attrition rate increases for the second and third years, respectively, are allowed to compensate for projected cost changes, but are subject to the satisfaction of certain tests, including a demonstration that earnings levels in the district did not exceed the latest rate of return authorized for Registrant. General rate proceedings typically take about 12 months from the filing of an application to the authorization of new rates.
Rate increases to offset increases in certain expenses, such as costs of purchased water, energy costs to pump water, costs of power purchased for resale and groundwater production assessments, are accomplished through an abbreviated "offset" procedure that typically takes about two months. The CPUC's regulations require utilities to maintain balancing accounts that reflect differences between specific offset cost increases and the rate increases authorized to offset those costs. The balancing accounts are subject to amortization through the offset procedure or through general rate decisions.
An advice letter, or rate base offset, proceeding is generally undertaken on an order of the CPUC in a general rate proceeding and provides for the delayed inclusion of certain projected plant facilities in future rates, pending notification that such facilities have actually been placed in service. The advice letter provides the required notification and, after CPUC approval, permits Registrant to include the costs associated with the facilities in rates.
During each of 1996, 1995 and 1994, Registrant's rates for most of its water ratemaking districts were changed, among other reasons, to directly offset changes in certain expenses (principally purchased water) and for increased levels of capital improvements. Rates in Registrant's Bear Valley Electric customer service area were adjusted in 1996. The following table lists information on estimated rate changes, by major type, for the last three years:
In January, 1996, new rates were effective in six of Registrant's rate-making districts which, among other things, authorized a rate of return on common equity of 10.40%, increased depreciation rates, authorized recovery of postretirement medical benefit costs, increased current recovery of labor and labor-related expenses and resulted in an increase in annual water operating revenues of approximately $15 million. Water rates in two additional ratemaking districts were increased on January 1, 1997 to recover costs associated with 1996 and 1997 capital projects in those areas.
Registrant filed notices of intent to increase water rates in four ratemaking districts in January, 1997. Registrant is unable to predict if the CPUC will authorize all or any of the proposed increases. However, it is not anticipated that new rates, if approved, would be effective before January, 1998.
New rates were effective in May, 1996 in Registrant's Bear Valley Electric customer service area. An additional step increase was effective in January, 1997.
In November, 1996, Registrant filed an application with the CPUC seeking recovery through rates of costs associated with its participation in the coastal aqueduct extension of the State Water Project. Registrant is currently unable to predict if the CPUC will authorize recovery of all or any of the costs associated with its participation in the Project.
EMPLOYEE RELATIONS
Registrant had 463 employees as of December 31, 1996. Seventeen employees in Registrant's Bear Valley Electric customer service area were members of the International Brotherhood of Electrical Workers, hereinafter referred to as the IBEW. Registrant's bargaining unit agreement with the IBEW expired on December 1, 1996 but was extended until March 31, 1997. Registrant and the IBEW are negotiating a new contract, but Registrant is unable at this time to predict the final result of those negotiations. Fifty-three of Registrant's water utility employees in its Metropolitan ratemaking district are members of the Utility Workers of America, hereinafter referred to as the UWA. The collective bargaining agreement with the UWA expires in March, 2001. Registrant has no other unionized employees.
ENVIRONMENTAL MATTERS
1996 Amendments to Federal Safe Drinking Water Act
On August 6, 1996, amendments (the "1996 SDWA amendments") to the federal Safe Drinking Water Act (the "SDWA") were signed into law. The 1996 SDWA amendments amount to a rewrite of the law that the United States Environmental Protection Agency (the "EPA") has been trying to implement for almost 10 years. The amendments were developed with significant contributions from water purveyors and regulators. The California Department of Health Services, acting on behalf of the EPA, administers the EPA's program in California.
The 1996 SDWA amendments revise the 1986 amendments to the SDWA, which required that the EPA set 25 new contaminant standards every three years, with a new process for selecting and regulating contaminants. The EPA can only regulate contaminants that may have adverse health effects, are known or likely to occur at levels of public health concern, and the regulation of which will provide "a meaningful opportunity for health risk reduction." The EPA must, within 18 months of the time that the 1996 SDWA amendments were signed into law, publish a list of contaminants for possible regulation and must update that list every five years. In addition, every five years, the EPA must select at least five contaminants on that list and determine whether to regulate them. The new law allows the EPA to bypass the selection process and adopt interim regulations for contaminants in order to address urgent health threats. Current standards for contaminants, however, remain in place and are not subject to the new standard-setting provisions.
The 1996 SDWA amendments allow the EPA for the first time to base primary drinking water regulations on risk assessment and cost/benefit considerations and on minimizing overall risk. The EPA must base regulations on best available, peer-reviewed science and data from best available methods. For proposed regulations that involve the setting of maximum contaminant levels ("MCLs"), the EPA must use, and seek public comment on, an analysis of quantifiable and non-quantifiable risk-reduction benefits and cost for each such MCL.
Registrant currently tests its wells and water systems for more than 90 contaminants, covering all contaminants listed in the SDWA. Water from wells found to contain levels of contaminants above the established MCL's is either treated or blended before it is delivered to customers.
Since the SDWA became effective, Registrant has experienced increased operating costs for testing to determine the levels, if any, of the contaminants in Registrant's sources of supply and additional expense to lower the level of any contaminants in order to meet the MCL standards. Such costs and the costs of controlling any other contaminants may cause Registrant to experience additional capital costs as well as increased operating costs.
Registrant is currently unable to predict the ultimate impact that the 1996 SDWA amendments might have on its financial position or its results of operation. The ratemaking process provides Registrant with the opportunity to recover prudently incurred capital and operating costs associated with water quality. Management believes that such incurred costs will be authorized for recovery by the CPUC.
Proposed Enhanced Surface Water Treatment Rule
On July 29, 1994, the EPA proposed an Enhanced Surface Water Treatment Rule ("ESWTR"), which would require increased surface-water treatment to decrease the risk of microbial contamination. The EPA has proposed several different versions of the ESWTR for promulgation. The version selected for promulgation will be determined based on data collected by certain water suppliers and forwarded to the EPA pursuant to the EPA's Information Collection Rule, which requires such water suppliers to monitor certain microbial and other contaminants in their water supplies and to conduct certain tests in respect of such contaminants. The EPA must adopt interim and final rules pertaining to enhanced surface water treatment according to a negotiated schedule or as soon as practicable. The ESWTR, in any of the forms currently proposed, would apply to each of Registrant's five surface water treatment plants. However, because it is impossible to predict the version of the ESWTR that will be promulgated, the Company is unable to predict what additional costs, if any, will be incurred to comply with the ESWTR.
Regulation of Disinfection/Disinfection By-Products
Registrant will also be subject to new regulations concerning disinfection/disinfection by-products ("DBPs"), Stage I of which regulations are expected to become effective in June, 1998. These regulations will require reduction of tri-halomethane contaminants from 100 micrograms per liter to 80 micrograms per liter and are expected to affect two of Registrant's systems.
The EPA must adopt Stage II rules pertaining to DBPs according to a negotiated schedule or as soon as practicable. The EPA is not allowed to utilize the new cost/benefit analysis provided for in the 1996 SDWA amendments for establishing the Stage II rules applicable to DBPs but may utilize the regulatory negotiating process provided for in the 1996 SDWA amendments to develop the Stage II rule.
Ground Water Disinfection Rule
By December, 1998, the EPA is scheduled to propose regulations requiring disinfection of certain groundwater systems and provide guidance on determining which systems must provide disinfection facilities. The EPA may utilize the cost/benefit analysis provided in the 1996 SDWA amendments to establish such regulations. It is anticipated that the regulations will apply to several of Registrant's systems using groundwater supplies. While no assurance can be given as to the nature and cost of any additional compliance measures, if any, that will ultimately be necessitated by implementation of the proposed regulations, Registrant does not believe that such regulations will impose significant additional compliance costs, since Registrant already currently engages in disinfection of its groundwater systems.
Regulation of Radon and Arsenic
Registrant will be subject to new regulations regarding radon and arsenic. EPA must propose an arsenic rule by January 1, 2001 and adopt a rule one year later. EPA has 180 days after enactment of the 1996 SDWA amendments to develop a plan to study ways to reduce arsenic health risk uncertainties and is authorized to enter into cooperative agreements to carry out the study. Depending on the MCL eventually established for arsenic, compliance could require Registrant to implement costly well-head remedies such as ion exchange or, alternatively, to purchase additional and more expensive water supplies already in compliance for blending with well sources.
The EPA must withdraw its proposed radon rule and arrange for the National Academy of Sciences to conduct a risk assessment and a study of risk-reduction benefits associated with various mitigation measures. EPA has 30 months from enactment of the 1996 SDWA amendments in which to seek comment on a risk-reduction and cost analysis for potential radon standards, six more months to propose a standard, and another year to adopt a standard. Although Registrant is unable to predict what the standard for radon might eventually be, Registrant itself is currently conducting studies to determine the best treatment for affected wells, which treatment could range from simple aeration to filtration through granular activated carbon.
Voluntary Efforts to Exceed Surface Water Treatment Standards
Registrant is a voluntary member of the "Partnership for Safe Water", a national program to further protection of the public from diseases caused by cryptosporidium and other microscopic organisms. As a volunteer in the program, Registrant has committed to exceed current regulations governing surface water treatment to ensure that its surface treatment facilities are performing as efficiently as possible.
Fluoridation of Water Supplies
Registrant is subject to State of California Assembly Bill 733 which requires fluoridation of water supplies for public water systems serving more than 10,000 service connections. Although the bill requires affected systems to install treatment facilities only when public funds have been made available to cover capital and operating costs, the bill requires the CPUC to authorize cost recovery through rates should public funds for operation of the facilities, once installed, become unavailable in future years.
Matters Relating to Arden-Cordova System
Three of the 27 wells in Registrant's Arden-Codova system have, for several years, been subject to contamination by trichloroethylene. GenCorp Aerojet has, by court decree, been responsible for all costs related to the provision of well-head treatment. Although a 10-year agreement with Aerojet Corporation expired in 1996, Aerojet Corporation has agreed to reimburse Registrant for the costs of backwash system modification at all three wells.
In January, 1997, Registrant was notified that ammonium perchlorate had been detected in three of its wells in its Arden-Cordova system. GenCorp Aerojet has, in the past, used ammonium perchlorate in their processing as an oxidizer of rocket fuels. Although neither the EPA nor the DOHS has established a drinking water standard for ammonium perchlorate, Registrant has notified customers in its Arden-Cordova customer service area of detection of ammonium perchlorate. Registrant and GenCorp Aerojet are in negotiations on matters related to procedures to address cleanup of the contaminated wells as well as costs associated with the cleanup. Registrant is unable to predict when the negotiations will be completed or the likely outcome of such negotiations.
Matters Relating to Culver City System
The compound methyl tertiary butyl ether (MTBE) has been detected in the Charnock Basin located in the City of Santa Monica and Culver City, which lie within Registrant's service area. MTBE is an oxygenate used in reformulated fuels. At the request of the Regional Water Quality Control Board, the City of Santa Monica and the California Environmental Protection Agency, Registrant removed two of its wells in the Culver City system from service in November 1996 to help in efforts to avoid further spread of the MTBE contamination plume. Neither these wells nor any of Registrant's other wells have been found to be contaminated with MTBE. Registrant is purchasing water from the Metropolitan Water District at an increased cost to replace the water supply formerly pumped from the two wells removed from service.
Several studies are under way to determine the possible sources and causes of the MTBE contamination. The federal EPA is pursuing an enforcement effort to reach a settlement with the potentially responsible parties on matters relating to the cleanup of the contamination as well as to obtain reimbursement from such parties for increased costs incurred by the Company in purchasing replacement water. Registrant is unable to predict the outcome of the EPA's enforcement effort, and no assurance can be given as to whether the Company will obtain reimbursement for the increased costs of purchasing water to replace the water formerly pumped from the affected wells in the Culver City system.
Bear Valley Electric
There have been no environmental matters that have materially affected or are currently materially affecting Registrant's Bear Valley Electric Service area.
ITEM 2

ITEM 2 - PROPERTIES
FRANCHISES, COMPETITION, ACQUISITIONS AND CONDEMNATION OF PROPERTIES
Registrant holds all necessary franchises from the incorporated communities and the counties which it serves. Registrant holds certificates of public convenience and necessity granted by the CPUC in each of the ratemaking districts it serves. Registrant's certificates, franchises and similar rights are subject to alteration, suspension or repeal by the respective governmental authorities having jurisdiction.
The laws of the State of California provide for the acquisition of public utility property by governmental agencies through their power of eminent domain, also known as condemnation. Within the last three years, Registrant has been involved in activities related to the condemnation of its Bay Point water district by the Contra Costa Water District. Registrant and the Contra Costa Water District have settled all matters related to this action.
WATER PROPERTIES
As of December 31, 1996, Registrant's physical properties consisted of water transmission and distribution systems which included 2,603 miles of pipeline together with services, meters and fire hydrants and 437 parcels of land, generally less than one acre each, on which are located wells, pumping plants, reservoirs and other water utility facilities including five surface water treatment plants. Registrant's 41 water systems and operating properties have been maintained and improved in the ordinary course of business.
As of December 31, 1996, Registrant owned and operated 292 active wells equipped with pumps with an aggregate capacity of approximately 180 million gallons per day. Registrant has 52 connections to the water distribution facilities of the MWD and other municipal water agencies. Registrant's storage reservoirs and tanks have an aggregate capacity of approximately 94 million gallons. Registrant owns no dams in its customer service areas. The table on the following page sets forth, in greater detail, a listing of selected water utility plant by ratemaking district.
ELECTRIC PROPERTIES
Registrant's electric properties are all located in the Big Bear area of San Bernardino County. As of December 31, 1996, Registrant operated 28.7 miles of overhead 34.5 KV transmission lines, 0.6 miles of underground 34.5 KV transmission lines, 172.4 miles of 4.16 KV or 2.4 KV distribution lines, 39.5 miles of underground cable and 14 sub-stations. There are no generating plants in Registrant's system.
OFFICE BUILDINGS
Registrant's general offices are housed in a single-story office building located in San Dimas, California. The land and the building, which was completed and occupied in early 1990, are owned by Registrant. The Registrant also owns and occupies certain facilities housing regional, district and customer service offices while other such facilities are housed in leased premises.
MORTGAGE AND OTHER LIENS
As of December 31, 1996, Registrant had no mortgage debt outstanding, and its properties were free of any encumbrances or liens securing indebtedness.
FINANCING OF CAPITAL EXPENDITURES
Registrant's construction program is designed to ensure its customers high quality service. Registrant maintains an ongoing distribution main replacement program throughout its customer service areas, based on the priority of leaks detected, fire protection enhancement and a reflection of the underlying replacement schedule. In addition, Registrant upgrades its electric and water supply facilities and is aggressively scheduling meter replacements that conform with CPUC requirements.
Registrant's Board of Directors has approved anticipated net capital expenditures of approximately $27,500,000 in 1997. Registrant anticipates capital expenditures of approximately $32,000,000 and $33,000,000 in 1998 and 1999, respectively, although such expenditures are subject to final approval by Registrant's Board of Directors. Registrant anticipates that net capital expenditures in excess of its internally generated cash will continue to be financed through a combination of long-term debt and sales of additional Common Shares.
Registrant issued 1,000,000 Common Shares in December, 1996 and an additional 71,500 Common Shares in January, 1997 for aggregate net proceeds of $22,062,000. Also during 1996, Registrant issued approximately 41,000 Common Shares through its Dividend Reinvestment and Common Share Purchase and 401(k) Plans for additional aggregate proceeds of approximately $904,000.
In December, 1996, Registrant sold $8 million in tax-exempt debt that was issued through the California Pollution Control Financing Authority. The funds were deposited with a trustee and will be used to finance water main replacements in several of Registrant's customer service areas.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this Report (including the documents incorporated herein by reference) are forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as the Company "believes," "anticipates," "expects" or words of similar import. Similarly, statements that describe the Company's future plans, objectives, estimates or goals are also forward-looking statements. Such statements address future events and conditions concerning capital expenditures, earnings, litigation, rate and other regulatory matters, adequacy of water supplies, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those currently anticipated in such statements, by reason of factors such as utility restructuring, including ongoing state and federal activities; future economic conditions, including changes in customer demand; future climatic conditions; legislative, regulatory and competitive developments in markets in which the Company operates; and other circumstances affecting anticipated revenues and costs.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
Registrant is subject to ordinary course litigation incidental to its business. No legal proceedings are pending (except such incidental litigation) to which Registrant is a party or to which any of its properties is subject which are believed by Registrant to be material.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION RELATING TO COMMON SHARES -
Information responding to Item 201(a) of Regulation S-K is included in the 1996 Annual Report to Shareholders under the caption "Stock Listing" located on page 36 thereof, filed by Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2).
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON SHARES -
As of March 17, 1997, there were 4,078 holders of record of Common Shares.
(c) FREQUENCY AND AMOUNT OF ANY DIVIDENDS DECLARED AND DIVIDEND RESTRICTIONS
Information responding to Item 201(c) of Regulation S-K is included in the 1996 Annual Report to Shareholders, under the caption "Stock Listing" and located on page 36, filed by
Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2). For each of the last three years, Registrant has paid dividends on its Common Shares on March 1, June 1, September 1 and December 1.
Additional information responding to Item 201(c) of Regulation S-K with respect to dividend restrictions is included in the 1996 Annual Report to Shareholders, under Note 2 captioned "Capital Stock" located on pages 28 and 29 of the Notes to Financial Statements, filed by Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2).
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
Information responding to Item 6 is included in the 1996 Annual Report to Shareholders, under the caption entitled "Selected Financial Data" located on page 1, filed by Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2).
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Information responding to Item 7 is included in the 1996 Annual Report to Shareholders, under the caption entitled "Management's Discussion and Analysis" located on pages 19 through 22, filed by Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2).
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information responding to Item 8 is included on pages 23 through 33 of the 1996 Annual Report to Shareholders under the captions listed below, which Report was filed by Registrant with the Commission pursuant to Regulation 14A, and is incorporated herein by reference pursuant to General Instruction G(2).
Report of Independent Public Accountants
Balance Sheets - December 31, 1996 and 1995
Statements of Capitalization - December 31, 1996 and 1995
Statements of Income - for the years ended December 31, 1996, 1995 and
Statements of Changes in Common Shareholders' Equity - for the years ended December 31, 1996, 1995 and 1994
Statements of Cash Flows - for the years ended December 31, 1996, 1995 and 1994
Notes to Financial Statements
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information responding to Item 10 is included in the definitive Proxy Statement, filed by Registrant with the Commission on or about March 20, 1997 pursuant to Regulation 14A, under the captions entitled "Election of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance," and "Executive Officers - Experience, Security Ownership and Compensation," and is incorporated herein by reference pursuant to General Instruction G(3).
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Information responding to Item 11 is included in the definitive Proxy Statement, filed by Registrant with the Commission on or about March 20, 1997 pursuant to Regulation 14A, under the captions entitled "Election of Directors," "Executive Officers - Experience, Security Ownership and Compensation," "Pension Plan," "Deferred Compensation Plan for Directors and Executives," "Compensation Committee Interlocks and Inside Participation," "Report on Executive Compensation," and "Performance Graph," and is incorporated herein by reference pursuant to General Instruction G(3).
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information responding to Item 12 is included in the definitive Proxy Statement, filed by Registrant with the Commission on or about March 20, 1997 pursuant to Regulation 14A, under the captions entitled "Election of Directors" and "Executive Officers - Experience, Security Ownership and Compensation" and is incorporated herein by reference pursuant to General Instruction G(3).
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responding to Item 13 is included in the definitive Proxy Statement, filed by Registrant with the Commission on or about March 20, 1997 pursuant to Regulation 14A, under the caption entitled "Certain Relationships and Related Transactions" and is incorporated herein by reference pursuant to General Instruction G(3).
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Reference is made to the Financial Statements incorporated herein by reference to Item 8 hereof.
2. Schedules I, III, IV, and V are omitted as they are not applicable. All other required schedules may be found in Exhibit 13 filed herewith.
3. See (c) below.
(b) The Company filed a Current Report on Form 8-K dated December 9, 1996 relating to the Company's formation, together with U.S. Water, L.L.C., of Golden State Water Company LLC. The Company also filed a Current Report on Form 8-K dated December 16, 1996 to report that the Company entered into an Underwriting Agreement, the form of which was attached as an exhibit to such report.
(c) Exhibits -
3.1 By-Laws as Amended to April 26, 1994*
3.2.1 Restated Articles of Incorporation as Amended to December 4, 1990 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121
3.2.2 Certificate of Amendment of Articles of Incorporation dated December 3, 1992 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1992. Commission File No. 0-1121.
3.2.3 Certificate of Amendment of Articles of Incorporation dated February 17, 1994 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1993. Commission File No. 0-1121.
3.3 Certificate of Ownership dated August 10, 1978 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121
4.1 Indenture, dated September 1, 1993 between Registrant and Chemical Trust Company of California, as trustee, relating to Registrant's Medium Term Notes, Series A, incorporated herein by reference to Registrant's Form 8-K. Commission File No. 33-62832.
10.1 Deferred Compensation Plan for Directors and Executives incorporated herein by reference to Registrant's Registration Statement on Form S-2 (Registration No. 33-5151).
10.2 Reimbursement Agreement dated November 1, 1984 between Registrant and Barclays Bank International Limited incorporated herein by reference to Registrant's Registration Statement on Form S-2 (Registration No. 33-5151).
10.3 First Amendment to Reimbursement Agreement dated January 1, 1986 between Registrant and Barclays Bank PLC (formerly Barclays Bank International Limited) incorporated herein by reference to Registrant's Registration Statement on Form S-2 (Registration No. 33-5151).
10.4 Second Amendment to Reimbursement Agreement dated April 9, 1987 between Registrant and Barclays Bank PLC incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121.
10.5 Third Amendment to Reimbursement Agreement dated September 14, 1987 between Registrant and Barclays Bank PLC incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121.
10.6 Fourth Amendment to Reimbursement Agreement dated September 22, 1988 between Registrant and Barclays Bank PLC incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121.
10.7 Fifth Amendment to Reimbursement Agreement dated March 9, 1990 between Registrant and Barclays Bank PLC incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121.
10.8 Sixth Amendment to Reimbursement Agreement dated November 29, 1990 between Registrant and Barclays Bank PLC incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121.
10.9 Second Sublease dated October 5, 1984 between Registrant and Three Valleys Municipal Water District incorporated herein by reference to Registrant's Registration Statement on Form S-2 (Registration No. 33-5151).
10.10 Note Agreement dated as of February 1, 1989 between Registrant and First Colony Life Insurance incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121.
10.11 Schedule of omitted Note Agreements incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1990. Commission File No. 0-1121.
10.12 Note Agreement dated as of May 15, 1991 between Registrant and Transamerica Occidental Life Insurance Company incorporated herein by reference to Registrant's Form 10-Q with respect to the quarter ended June 30, 1991. Commission File No. 0-1121.
10.13 Schedule of omitted Note Agreements incorporated herein by reference to Registrant's Form 10-Q with respect to the quarter ended June 30, 1991. Commission File No. 0-1121.
10.14 Agreement for Financing Capital Improvement dated as of June 2, 1992 between Registrant and Three Valleys Municipal Water District incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1992. Commission File No. 0-1121.
10.15 Water Supply Agreement dated as of June 1, 1994 between Registrant and Central Coast Water Authority incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1994. Commission File No. 0-1121.
10.16 Retirement Plan for Non-Employee Directors of Southern California Water Company, as amended, January 25, 1995 incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1994. Commission File No. 0-1121.
10.17 Dividend Reinvestment and Common Share Purchase Plan incorporated herein by reference to Registrant's Post-Effective Amendment No. 1 to Form S-3 (Registration No. 33-42218).
10.18 Key Executive Long-Term Incentive Plan incorporated herein by reference to Registrant's 1995 Proxy Statement, Commission File No. 0-1121.
10.19 Energy Management Services Agreement between Registrant and Enova Energy, Inc.
13. Portions of the Annual Report to Shareholders for the year ended December 31, 1996 which are expressly incorporated herein by reference.*
21. Subsidiaries of Registrant - Exhibit not included as subsidiaries in the aggregate are not significant.
23. Consent of Independent Public Accountants.*
27. Schedule UT.*
(d) None.
- --------------------- *Filed concurrently herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SOUTHERN CALIFORNIA WATER COMPANY
By: /s/ JAMES B. GALLAGHER. ---------------------------------- James B. Gallagher Vice President - Finance, Chief Financial Officer and Secretary
Date: March 14, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated.
/s/ W. V. CAVENEY . Date: March 14, 1997 - ------------------------------------------- W. V. Caveney Chairman of the Board and Director
/s/ FLOYD E. WICKS . March 14, 1997 - ------------------------------------------- Floyd E. Wicks Principal Executive Officer; President, CEO and Director
/s/ JAMES B. GALLAGHER . March 14, 1997 - ------------------------------------------- James B. Gallagher Principal Financial and Accounting Officer; Vice President - Finance, CFO and Secretary
/s/ JEAN E. AUER . March 14, 1997 - ------------------------------------------- Jean E. Auer, Director
/s/ R. BRADBURY CLARK . March 14, 1997 - ------------------------------------------- R. Bradbury Clark, Director
/s/ N. P. DODGE, JR. . March 14, 1997 - ------------------------------------------- N. P. Dodge, Jr., Director
/s/ ROBERT F. KATHOL . March 14, 1997 - ------------------------------------------- Robert F. Kathol, Director
/s/ LLOYD E. ROSS . March 14, 1997 - ------------------------------------------- Lloyd E. Ross, Director