UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-13883
CALIFORNIA WATER SERVICE GROUP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0448994
- --------------------------------------------------------------------------------
(Sate or other jurisdiction (I.R.S. Employer identification No.)
of incorporation or organization)
1720 North First Street, San Jose, CA. 95112
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
1-408-367-8200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSURES INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common shares outstanding as of
April 30, 2001 - 15,182,046. This form 10-Q contains a total of 13 pages.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The financial information presented in this 10Q filing has been prepared by
management and has not been audited.
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per share data) March 31, December 31,
2001 2000
--------- ---------
ASSETS
Utility plant:
Utility plant $ 865,643 $ 851,281
Less depreciation and amortization 274,642 269,273
--------- ---------
Net utility plant 591,001 582,008
--------- ---------
Current assets:
Cash and cash equivalents 1,779 3,241
Receivables 17,390 20,613
Unbilled revenue 6,036 7,964
Materials and supplies at average cost 2,830 2,718
Taxes and other prepaid expenses 6,796 6,257
--------- ---------
Total current assets 34,831 40,793
--------- ---------
Other assets:
Regulatory assets 38,313 38,133
Other assets 5,565 5,671
--------- ---------
Total other assets 43,878 43,804
--------- ---------
$ 669,710 $ 666,605
========= =========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $.01 par value $ 151 $ 151
Additional paid-in capital 49,984 49,984
Retained earnings 145,908 149,185
Accumulated other comprehensive loss (486) (486)
--------- ---------
Total common stockholders' equity 195,557 198,834
Preferred stock 3,475 3,475
Long-term debt, less current maturities 187,393 187,098
--------- ---------
Total capitalization 386,425 389,407
--------- ---------
Current liabilities:
Current maturities of long-term debt 2,651 2,881
Short-term borrowings 18,500 14,598
Accounts payable 24,151 26,493
Accrued expenses and other liabilities 21,893 19,764
--------- ---------
Total current liabilities 67,195 63,736
Unamortized investment tax credits 2,986 2,989
Deferred income taxes 26,007 25,620
Regulatory and other liabilities 20,350 20,316
Advances for construction 106,916 105,562
Contributions in aid of construction 59,831 58,975
--------- ---------
$ 669,710 $ 666,605
========= =========
See Notes to Condensed Consolidated Financial Statements
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
For the three months ended: March 31, March 31,
2001 2000
-------- --------
Operating revenue $ 47,008 $ 46,694
-------- --------
Operating expenses:
Operations 33,119 31,116
Maintenance 2,740 2,995
Depreciation and amortization 4,817 4,471
Income taxes 141 951
Property and other taxes 2,399 2,259
-------- --------
Total operating expenses 43,216 41,792
-------- --------
Net operating income 3,792 4,902
Other income and expenses, net 393 329
-------- --------
Income before interest expense 4,185 5,231
-------- --------
Interest expense:
Long-term debt interest 3,516 3,248
Other interest 448 450
-------- --------
Total interest expense 3,964 3,698
-------- --------
Net income $ 221 $ 1,533
======== ========
Earnings per share
Basic $ 0.01 $ 0.10
======== ========
Diluted $ 0.01 $ 0.10
======== ========
Weighted average shares outstanding
Basic 15,182 15,094
======== ========
Diluted 15,294 15,146
======== ========
Dividends per share of common stock $0.27875 $0.27500
======== ========
See Notes to Condensed Consolidated Financial Statements
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended
(In thousands)
March 31, March 31,
2001 2000
-------- --------
Operating activities
Net income $ 221 $ 1,533
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,817 4,471
Deferred income taxes, investment tax credits
regulatory assets and liabilities, net 240 (3,057)
Changes in operating assets and liabilities:
Receivables 3,223 4,513
Unbilled revenue 1,928 1,880
Accounts payable (2,342) (6,251)
Other current assets and liabilities 2,129 1,821
Other changes, net (546) 606
-------- --------
Net adjustments 9,449 3,983
-------- --------
Net cash provided by operating activities 9,670 5,516
-------- --------
Investing activities:
Utility plant expenditures (13,405) (3,980)
-------- --------
Financing activities:
Net short-term borrowings 3,902 2,300
Net long-term debt 28 (126)
Advances for construction 2,590 1,018
Refunds of advances for construction (1,239) (1,190)
Contributions in aid of construction 1,252 373
Dividends paid (4,260) (3,986)
-------- --------
Net cash provided by (used in)
financing activities 2,273 (1,611)
-------- --------
Change in cash and cash equivalents (1,462) (75)
Cash and cash equivalents at beginning of period 3,241 1,655
-------- --------
Cash and cash equivalents at end of period $ 1,779 $ 1,580
======== ========
<FN>
See Notes to Condensed Consolidated Financial Statements
</FN>
Notes to Financial Statements
1. Due to the seasonal nature of the water business, the results for interim
periods are not indicative of the results for a twelve month period.
2. The interim financial information is unaudited. In the opinion of
management, the accompanying financial statements reflect all adjustments
which are necessary to provide a fair statement of the results for the
periods covered. The adjustments consist only of normal recurring
adjustments.
3. Basic earnings per share is calculated by dividing income available to
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated by
dividing income available to common stockholders by the weighted average
number of common shares outstanding plus potentially dilutive shares.
4. Refer to the Annual Report on Form 10-K for the year ended December 31,
2000 for a summary of significant accounting policies and detailed
information regarding the financial statements.
5. The Company operates primarily in one business segment providing water
utility services.
6. The Company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" on January
1, 2001. Its adoption did not have a material impact on the Company's
financial position or results of operations.
7. Acquisitions of two water systems, accounted for as asset purchases and
adding 375 customers to Washington Water Service Company, a wholly-owned
subsidiary, were completed in the first quarter. The purchase price for the
two systems was $428,000.
The acquisition of the 1,100 customer NISH water systems in Visalia,
California was completed as a pooling of interests. The effect of pooling
was deemed not to be material, therefore, prior year financial statements
have not been restated and pro-forma disclosures were not considered
significant. The net equity of NISH was recorded as an adjustment to
retained earnings as of January 1, 2001. 36,180 common shares were issued
for NISH which were valued at $899,000.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10Q, contains forward-looking statements intended to qualify for
"safe harbor" within the meaning of the Federal securities laws as established
by the Private Securities Litigation Reform Act of 1995. Such statements are
based on currently available information, expectations, estimates, assumptions
and projections, and management's judgment about California Water Service Group
(Company), the water utility industry and general economic conditions. Words
such as expects, intends, plans, believes, estimates, anticipates or variations
of such words or similar expressions are intended to identify forward-looking
statements. The forward-looking statements are not guarantees of future
performance. Actual results may vary materially from what is contained in a
forward-looking statement. Factors which may cause a result different than
expected or anticipated include: governmental and regulatory commissions'
decisions, new legislation, increases in suppliers' prices and the availability
of supplies, changes in environmental compliance requirements, acquisitions, the
ability to successfully implement business plans, changes in customer water use
patterns and the impact of weather on operating results. The Company assumes no
obligation to provide public updates of forward-looking statements.
RESULTS OF FIRST QUARTER OPERATIONS
First quarter net income was $221,000, equivalent to $0.01 per common share
on a diluted basis compared to the $1,533,000 or $0.10 per share earned last
year. Operating revenue increased $314,000 to $47,008,000. Heavier rain this
year, especially in our Southern California service areas, caused usage from
existing customers to decline 2%. However, that decline was offset by additional
revenue from rate increases and usage by 6,400 new customers that were added
since last year, resulting in the net revenue growth. Components of the
operating revenue increase are presented in the following table:
Decreased consumption $(1,065,000)
Rate increases 889,000
Usage by new customers 490,000
-----------
Net revenue increase $ 314,000
===========
Total operating expenses were $43,216,000 in 2001 versus $41,792,000 in
2000, a 3% increase.
Water production costs, representing the largest components of total
operating expenses include purchased water, purchased power for pump operations
and pump taxes. Together, these costs accounted for 38% of total operating
expenses and increased
3% compared to last year. Well production provided 47% of the water supply, 53%
was purchased from wholesale suppliers and a small portion was developed through
the Company's surface water treatment plants. The components of water production
costs and the changes from last year are shown in the table below:
First Quarter
2001 Cost Change
----------- -----------
Purchased water $13,014,000 $ 330,000
Purchased power 2,432,000 375,000
Pump taxes 848,000 (257,000)
----------- -----------
Total $16,294,000 $ 448,000
=========== ===========
The purchased water increase was primarily attributable to wholesale water
suppliers' rate increases in six California districts. Purchased power increased
due to higher energy costs. Pump taxes decreased because of less pumping in
districts where pump taxes are incurred.
Other operations expense increases resulted from:
o The impact of a general wage increase that was effective at the start of
the year, additional hours worked and increases in related employee
benefits.
o Increased consultants' costs in regards to the continuing enhancement of
the new computer system.
Maintenance expense decreased $255,000 due to decreased water treatment and
pump equipment maintenance, and fewer water main repairs.
Federal and state income taxes decreased $810,000 because of lower taxable
income.
Other income was $393,000 this year and $329,000 in 2000. Two real estate
transactions involving $140,000 in pretax income were recorded in the first
quarter. Other real estate transactions are expected to be completed during 2001
that will provide pretax income of over $4 million.
Interest expense on long-term debt rose $268,000 because of the issuance in
October 2000 of the $20 million, Series C 8.15% senior notes that were
outstanding during the entire quarter this year.
REGULATORY MATTERS
The Company will review 17 California Water Service Company districts for
consideration in filing 2001 general rate applications. Based on the results of
the review the company will file applications as appropriate. General rate
applications will be filed in July 2001 with CPUC decisions expected in the
second quarter of 2002. A rate increase application is anticipated for the
Washington operations for early 2002.
As noted elsewhere in this report, the Company plans to file for rate
recovery of the higher California power costs as soon as the final electric rate
tariffs have been established.
During 2001, rate increases are projected to provide about $6.4 million in
new revenue from the following sources:
> A rate increase filed by Dominguez Water Company prior to the merger with
the Company was approved by the California Public Utilities Commission
(CPUC) in October 2000. Total new revenue as a result of increases from
these proceeding is estimated at $1,300,000 for 2001.
> Increased rates in the Hawthorne district will provide $240,000 during
2001.
> Starting late in the second quarter, 2001 after CPUC approval, new revenue
from the general rate applications filed in 2000 for three California
districts is expected to be $1,600,000.
> The Company filed with the CPUC in May 2001 for recovery of certain general
office expenses. If approved, the 2001 revenue is estimated at $2,500,000
starting in August 2001.
> A total of $775,000 in additional revenue from 2001 step rate increases
that became effective January 1, 2001 is anticipated.
LIQUIDITY
Short-term bank borrowings were $18,500,000 at March 31, 2001 and
$14,598,000 at December 31, 2000. Additional short-term bank borrowings will be
necessary during the second quarter to fund semiannual long-term debt interest
payments due on May 1, 2001 and the second quarter dividend payable on May 15,
2001. Following those payments, the Company expects to generate cash flow from
operations to repay a portion of the short-term bank borrowings.
The first quarter common dividend was paid on February 15, 2001 at $0.27875
per share. This represents a $0.00375 or 1.4% increase in the quarterly dividend
rate from 2000 as approved by the Board of Directors at their January 2001
meeting. Annualized, the 2001 dividend rate is $1.115 per common share compared
to $1.10 in 2000. Based on the 12-month earnings per share at March 31, 2001,
the dividend payout ratio is 92%. At their April 18, 2001 meeting, Directors
declared the second quarter dividend payable May 15, 2001 to shareholders of
record on May 1, 2001. This is the 226th consecutive quarterly dividend paid by
the Company.
About 10% of the outstanding shares participate in the reinvestment program
under the Company's Dividend Reinvestment and Stock Purchase Plan ("Plan"). No
new common shares were issued under the Plan during the quarter. Shares required
for the dividend reinvestment and stock purchase option of the Plan were
purchased on the open market. Shares are also purchased on the open market to
fulfill the requirements of the Company sponsored Employee Savings Plan
(401(k)). Purchases for this plan are made on a biweekly basis.
Book value per common share was $12.88 at March 31, 2001 compared to $12.69
a year earlier.
During the quarter, utility plant expenditures totaled $13,405,000 for
additions to and replacements of utility plant. Of that amount, $3,457,000 was
funded through the Company's construction budget with the remainder funded by
developers' contributions
in aid of construction and refundable advances for construction. The 2001
Company construction budget is $53,900,000.
WATER SUPPLY
The Company believes that its various sources of water supply are
sufficient to meet customer demand for the remainder of the year. Historically,
roughly half of the water source is purchased from wholesale suppliers with the
other half pumped from wells. A small portion is developed through three local
surface treatment plants.
Storage in state reservoirs was 106% of historic average as of March 23,
2001, and groundwater levels remain adequate. While somewhat below historic
average, the mountain snowpack will provide runoff to streams and reservoirs as
it melts during the summer months.
ACQUISITIONS
Acquisitions of two water systems, accounted for as asset purchases and
adding 375 customers to Washington Water, a wholly-owned subsidiary of the
Company, were completed in the first quarter. The purchase price for the two
systems was $428,000.
The acquisition of the 1,100 customer NISH water systems in Visalia,
California was completed as a pooling of interests. The effect of pooling was
deemed not to be material, therefore, prior year financial statements have not
been restated and pro-forma disclosures were not considered significant. The net
equity of NISH was recorded as an adjustment to retained earnings as of January
1, 2001. 36,180 common shares were issued for NISH which were valued at
$899,000.
Combined, the three acquisitions are expected to provide approximately
$350,000 in annual revenue.
CALIFORNIA ENERGY SITUATION
In recent months, the California energy crisis has been well publicized. In
January 2001, electric rates increased about 10 percent. Another increase of
about 35 percent was approved by the CPUC and is expected to be effective during
the second quarter. The Company intends to file an application with the CPUC to
recovery the higher electric rates from customers as soon as the final electric
rate structure is known.
During the quarter, California experienced several power outages when power
suppliers implemented rolling electric blackouts due to supply shortages. This
summer, additional periods of electric blackouts are expected. The Company has
taken action for such situations in order to continue water service to
customers. Many wellsites are equipped with emergency electric generators. The
generators are designed to produce electricity to keep wells operating during
power outages. Storage tanks also provide customers with water during blackout
periods.
ACCOUNTING PRONOUNCEMENTS
No accounting pronouncements were issued or effective during the period
that would have a significant impact on the Company, however, Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" was adopted on January 1, 2001.
MARKET RISK
The Company does not hold, trade in or issue derivative financial
instruments and therefore is not exposed to risks these instruments present.
The Company's market risk to interest rate exposure is limited because the
cost of long-term financing, including interest costs, are covered in consumer
water rates as approved by the Commission. The Company does not have foreign
operations, therefore, it does not have a foreign currency exchange risk.
The Company's sensitivity to commodity prices is most affected by changes
in purchased water and purchased power costs. Through the Commission's balancing
account procedures, increases in purchased water and purchased power costs can
be passed on to consumers. The Company manages other commodity price exposure
through the duration and terms of its vendor contracts.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of California Water Service Group was
held on April 18, 2001 at the Company's executive office in San Jose,
California. As proposed in the 2001 Proxy, the election of directors and
confirmation of KPMG LLP to serve as independent auditors for 2001 were
approved by stockholders at the meeting.
(b) At the annual stockholders meeting, a Board of Directors to serve for the
ensuing year was elected. The following directors were elected as
nominated:
Douglas M. Brown Robert W. Foy
Edward D. Harris, Jr. M.D. Robert K. Jaedicke
Richard P. Magnuson Linda R. Meier
Peter C. Nelson Langdon W. Owen
George A. Vera
(c) Two proposals were voted on at the meeting: (1) election of directors for
the ensuing year, and (2) ratification of the selection of KPMG LLP as
independent auditors for 2001.
(1) Tabulation of the votes for the election of directors was:
For Against
---------- -------
Douglas M. Brown 13,892,197 171,402
Robert W. Foy 12,955,436 171,402
Edward D. Harris, Jr. M.D 13,893,894 171,402
Robert K. Jaedicke 13,875,169 171,402
Richard P. Magnuson 13,903,012 172,202
Linda R. Meier 13,868,808 171,402
Peter C. Nelson 12,949,509 173,706
Langdon W. Owen 13,885,153 172,202
George A. Vera 13,894,987 171,402
(2) The Directors' selection of KPMG LLP to serve as independent auditors for
2001 was ratified by the stockholders. There were 13,642,844 votes in
favor, 100,979 against and 120,585 abstentions.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits required to be filed by Item 601 of Regulation S-K.
None
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
authorized undersigned.
CALIFORNIA WATER SERVICE GROUP
Registrant
April 30, 2001
/s/ Gerald F. Feeney
Gerald F. Feeney
Vice President, Chief Financial Officer
and Treasurer