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 June 30, 2001
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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
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CALIFORNIA WATER SERVICE GROUP
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(Exact name of registrant as specified in its charter)
Delaware 77-0448994
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(Sate or other jurisdiction (I.R.S. Employer identification No.)
of incorporation or organization)
1720 North First Street, San Jose, CA. 95112
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(Address of principal executive offices) (Zip Code)
1-408-367-8200
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(Registrant's telephone number, including area code)
Not Applicable
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(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
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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
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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
July 31, 2001 - 15,182,046. This form 10-Q contains a total of 15 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) June 30, December 31,
2001 2000
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ASSETS
Utility plant:
Utility plant $ 878,091 $ 851,281
Less depreciation and amortization 277,780 268,500
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Net utility plant 600,311 582,781
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Current assets:
Cash and cash equivalents 1,047 3,241
Receivables 26,675 20,613
Unbilled revenue 9,754 7,964
Materials and supplies at average cost 3,150 2,718
Taxes and other prepaid expenses 4,748 5,484
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Total current assets 45,374 40,020
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Other assets:
Regulatory assets 38,493 38,133
Other assets 6,909 5,671
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Total other assets 45,402 43,804
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$ 691,087 $ 666,605
========= =========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $.01 par value $ 151 $ 151
Additional paid-in capital 49,984 49,984
Retained earnings 147,403 149,185
Accumulated other comprehensive loss (486) (486)
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Total common stockholders' equity 197,052 198,834
Preferred stock 3,475 3,475
Long-term debt, less current maturities 187,112 187,098
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Total capitalization 387,639 389,407
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Current liabilities:
Current maturities of long-term debt 2,881 2,881
Short-term borrowings 32,000 14,598
Accounts payable 29,727 26,493
Accrued expenses and other liabilities 19,854 19,764
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Total current liabilities 84,462 63,736
Unamortized investment tax credits 2,983 2,989
Deferred income taxes 26,214 25,620
Regulatory and other liabilities 20,359 20,316
Advances for construction 108,357 105,562
Contributions in aid of construction 61,073 58,975
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$ 691,087 $ 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: June 30, June 30,
2001 2000
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Operating revenue $66,958 $65,948
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Operating expenses:
Operations 44,733 43,790
Maintenance 3,106 2,606
Depreciation and amortization 4,777 4,742
Income taxes 3,790 3,387
Property and other taxes 2,502 2,446
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Total operating expenses 58,908 56,971
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Net operating income 8,050 8,977
Other income and expenses, net 1,809 623
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Income before interest expense 9,859 9,600
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Interest expense:
Long-term debt interest 3,509 3,249
Other interest 586 598
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Total interest expense 4,095 3,847
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Net income $ 5,764 $ 5,753
======= ========
Earnings per share
Basic $ 0.38 $ 0.38
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Diluted $ 0.37 $ 0.38
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Weighted average shares outstanding
Basic 15,182 15,118
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Diluted 15,294 15,146
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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 INCOME
(In thousands, except per share data)
For the six months ended: June 30, June 30,
2001 2000
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Operating revenue $113,966 $112,659
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Operating expenses:
Operations 77,853 74,924
Maintenance 5,845 5,601
Depreciation and amortization 9,593 9,213
Income taxes 3,932 4,338
Property and other taxes 4,901 4,705
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Total operating expenses 102,124 98,781
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Net operating income 11,842 13,878
Other income and expenses, net 2,202 952
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Income before interest expense 14,044 14,830
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Interest expense:
Long-term debt interest 7,026 6,496
Other interest 1,033 1,048
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Total interest expense 8,059 7,544
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Net income $ 5,985 $ 7,286
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Earnings per share
Basic $ 0.39 $ 0.48
======== ========
Diluted $ 0.39 $ 0.48
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Weighted average shares outstanding
Basic 15,182 15,106
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Diluted 15,294 15,146
======== ========
Dividends per share of common stock $0.55750 $0.55000
======== ========
See Notes to Condensed Consolidated Financial Statements
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended
(In thousands)
June 30, June 30,
2001 2000
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Operating activities
Net income $ 5,985 $ 7,286
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Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,593 9,213
Deferred income taxes, investment tax credits
regulatory assets and liabilities, net 271 812
Changes in operating assets and liabilities:
Receivables (6,060) (2,029)
Unbilled revenue (1,790) (1,188)
Accounts payable 3,234 789
Other current assets and liabilities 393 493
Other changes, net (1,239) (545)
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Net adjustments 4,402 7,545
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Net cash provided by operating activities 10,387 14,831
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Investing activities:
Utility plant expenditures (27,245) (18,216)
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Financing activities:
Net short-term borrowings 17,402 9,196
Net long-term debt (24) 510
Issuance of common stock -- 644
Advances for construction 4,542 2,827
Refunds of advances for construction (1,749) (2,016)
Contributions in aid of construction 3,023 765
Dividends paid (8,530) (7,982)
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Net cash provided by financing activities 14,664 3,944
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Change in cash and cash equivalents (2,194) 559
Cash and cash equivalents at beginning of period 3,241 1,655
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Cash and cash equivalents at end of period $ 1,047 $ 2,214
======== ========
<FN>
See Notes to Condensed Consolidated Financial Statements
</FN>
California Water Service Group
Notes to Condensed Consolidated Financial Statements
1. Due to the seasonal nature of the water business, the results for interim
periods may not be 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 of normal recurring adjustments.
Certain prior years' amounts have been reclassified, where necessary, to
conform to the current presentation.
3. Basic earnings per share is calculated by dividing income available for
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated by
dividing income available for common stockholders by the weighted average
number of common shares outstanding plus potentially dilutive shares.
Income available for common stockholders is determined by subtracting from
net income dividends paid on preferred stock which were $38,000 for the
quarter ended June 30, 2001 and $76,000 for the six months ended June 30,
2001. The difference between basic and diluted weighted average number of
common shares outstanding is the effect of dilutive common stock options
outstanding.
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 statement presentation.
5. The Company operates primarily in one business segment providing water
utility services.
6. In July 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations", and Statement No. 142, "Goodwill and Other
Intangible Assets". Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001 as well as all purchase method business combinations completed after
June 30, 2001. Statement 141 also specifies conditions that intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. Statement 142 specifies that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 also
requires that intangible assets with determinable useful lives be amortized
over their useful lives to their estimated residual values, and reviewed
for impairment in accordance with Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of".
The Company is required to adopt the provisions of Statement 141
immediately, except with regard to business combinations initiated prior to
July 1, 2001 that it expects to be accounted for using the
pooling-of-interests method. Statement 142 is effective for the Company on
January 1, 2002.
The Company has not yet determined the impact the adoption of Statements
141 and 142 will have on its financial position or results of operations.
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, the timeliness of regulatory commissions'
actions concerning rate relief, new legislation, electric power interruption,
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, especially as it impacts water sales. The
Company assumes no obligation to provide public updates of forward-looking
statements.
RESULTS FOR THE SECOND QUARTER
Second quarter net income was $5,764,000, equivalent to $0.37 per
common share on a diluted basis compared to the $5,753,000 or $0.38 per share on
a diluted basis last year. Operating revenue increased 2% from $65,948,000 in
2000 to $66,958,000. Cooler weather, especially in the Southern California
service areas, had a negative impact on second quarter revenue. Revenue from
existing customers declined $818,000 as usage per customer was lower this year.
Offsetting the decline in usage was $1,171,000 of additional revenue from rate
increases and $657,000 of additional revenue from 7,200 new customers.
Decreased consumption by existing customers ($ 818,000)
Rate increases 1,171,000
Usage by new customers 657,000
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Net revenue increase $ 1,010,000
===========
Total operating expenses increased 3%. The second quarter last year
included $1,775,000 of non-recurring expenses related to the Dominguez Services
Corporation merger that was completed in May 2000.
Water production was 4% lower; however, water production costs,
consisting of purchased water, purchased power and pump taxes, increased 1%.
Water production costs are the largest components of total operating expenses.
Together these costs accounted for 45% of total operating expenses. Well
production provided 52% of the water supply, 47% was purchased from wholesale
suppliers and the balance was developed from surface supplies processed through
the Company's two surface water treatment plants. The components of water
production costs and the changes from last year are shown in the table below:
2001 Cost Change
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Purchased water $20,135,000 ($196,000)
Purchased power 4,587,000 647,000
Pump taxes 1,803,000 (260,000)
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Total $26,525,000 $191,000
=========== ===========
Purchased water rates charged by wholesalers increased in six
California districts. Despite the increases, purchased water cost decreased due
to credits received from two wholesale suppliers and a decline in purchases as a
result of reduced customer demand. Pump taxes decreased because of less pumping
in districts where pump taxes are incurred.
June was the first month fully impacted by California's higher electric
rates. Compared to last year, the Company's California electric suppliers' rate
rose an average of 48%. For the quarter, the additional electric cost was
$647,000. The Company expects that increases in electric rates will be recovered
from customers through established California Public Utilities Commission
("Commission" or "CPUC") procedures, although on short-term basis there will be
a regulatory lag in recovering the higher costs. Authorization for the Company
to increase rates to recover the higher electric costs is expected at the
Commission's August 23, 2001 meeting.
Also increasing other operations expense was the impact of the general
wage increase that was effective at the start of the year, additional hours
worked and increases in related employee benefits.
Maintenance expense increased $500,000 due to additional work
necessitated by water main and service line repairs, along with work at
wellsites.
Federal and state income taxes increased $403,000 due to increased
income.
Net other income increased $1,186,000 primarily due to the sale of a
surplus real estate property in the South San Francisco district. The sale
increased other income by $990,000. Another real estate transaction is expected
to be completed during 2001 that will provide pretax income of approximately $3
million.
Interest expense on long-term debt rose $260,000 over the second
quarter of 2000 because of the issuance in October 2000 of the $20 million,
Series C 8.15% senior notes. Other interest expense declined slightly. Even
though borrowings under the bank short-term line of credit were higher this
year, interest rates were lower resulting in the reduced expense.
RESULTS FOR THE SIX MONTHS
Net income for the six months ending June 30, 2001 was $5,985,000,
equivalent to $0.39 per common share on a diluted basis compared to the $0.48
per common share on a diluted basis earned for the same period last year. As
discussed below, the earnings comparison was impacted by this year's gains from
the program to sell surplus real estate and last year's Dominguez merger costs.
Operating revenue increased $1,307,000 to $113,966,000. The higher
revenue was primarily due to rate increases and revenue from new customers.
Since January 1, 2001, 3,800 new customers have been added. Average consumption
per metered customer decreased 2% from last year and average revenue per
customer decreased $1.18. A breakdown of the net increase in operating revenue
is accounted for in the following table:
Decreased consumption by existing customers ($1,833,000)
Rate increases 2,028,000
Usage by new customers 1,112,000
-----------
Net revenue increase $ 1,307,000
===========
Total operating expenses increased 3%.
Water production was 4% less than last year. Well production provided
50% of the supply with 49% purchased from wholesale suppliers and 1% produced
through the treatment plants. Despite the decrease in production, water
production costs increased $640,000 mainly due to wholesale water suppliers and
electricity price increases. Refer to the section titled "California Energy
Situation" for further discussion of electric costs. The components of water
production expense and the changes from last year are shown in the table below:
2001 Cost Change
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Purchased water $33,148,000 $134,000
Purchased power 7,019,000 1,023,000
Pump taxes 2,651,000 (517,000)
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Total $42,818,000 $640,000
============= ===============
In addition to water production costs, other operations expense
categories increased $2,289,000. During 2000, $1,980,000 in non-recurring
expenses related to the Dominguez merger were incurred. Operation expenses
increased due to the 3% wage increase that was effective at the start of the
year and the resulting increase in employee benefits costs.
Maintenance expenses were higher by $244,000 due to work at pump
stations, and more main and service line repairs. Fewer expenses related to
water treatment equipment were incurred.
Depreciation and amortization expense increased due to a greater
depreciable plant investment.
Federal and state income taxes were lower due to a decline in taxable
income.
Net other income was $2,202,000 compared to $952,000 last year. Other
income in 2001 includes $1,140,000 from two surplus property sales. There were
no property sales recorded in 2000.
REGULATORY MATTERS
The Company filed a Notice of Intent with the CPUC in July 2001 stating
that it is preparing to file General Rate Case (GRC) applications for 16
California Water Service Company districts. The applications are expected to be
file in September 2001. The districts represent about 70% of total customers.
Under the Commission's guidelines for processing GRC applications, Commission
decisions would be expected in the second quarter of 2002. However, the Company
and other water utilities have experienced delays in obtaining rate decisions as
the Commission has not adhered to its processing guidelines in recent
proceedings.
As noted elsewhere in this report, the Company filed for offset rate
recovery of the higher California electric costs in May and expected a decision
in June. That decision is now expected in late August. If approved, it would add
about $6.5 million in additional revenue.
A decision for the Company's GRC applications that were filed in July
2000 to increase rates in three California districts was expected in the second
quarter 2001. A decision is now expected in September 2001. If approval is
received, the expected increase in 2001 revenue is estimated at $1,000,000.
The Company filed with the Commission in May 2001 for recovery of
certain general office expenses. If approved, the estimated increase in annual
revenue will be approximately $5.9 million. A Commission decision had been
expected in 2001, but is not now expected until mid-2002.
LIQUIDITY
Short-term bank borrowings were $32,000,000 at June 30, 2001 compared
to $14,598,000 at the end of last year. Additional short-term bank borrowings
will be necessary during the third quarter to fund the quarterly dividend.
Following that payment, the Company expects to generate cash flow from
operations to repay a portion of the short-term bank borrowings. A long-term
debt financing is expected in the second half of 2001.
The Company is completing the syndication of its short-term bank line
of credit agreement among two banks. The total amount available under the new
arrangement is expected to be $60 million compared to the current agreement that
provides for a $50 million limit. The new agreement is expected to be in place
by mid-August.
On May 15, 2001, the second quarter common and preferred dividends were
paid.
The third quarter common dividend will be paid on August 15, 2001 at
$0.27875 per share as approved by the Board of Directors at their July 2001
meeting. This is the 227th consecutive quarterly dividend paid by the Company.
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 June 30, 2001, the dividend
payout ratio is 92%.
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 $12.98 at June 30, 2001.
During the quarter, utility plant expenditures totaled $22,339,000 for
additions to and replacements of utility plant. On a year-to-date basis, plant
expenditures have been $27,245,000. The plant expenditures were funded by
operations, short-term bank borrowings and developers.
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 98% of historic average as of June 30,
2001, and groundwater levels remain adequate. While below historic average, the
mountain snowpack will provide runoff to streams and reservoirs as it melts
during the summer months.
CALIFORNIA ENERGY SITUATION
In recent months, the California energy crisis has been well
publicized. The CPUC authorized electric suppliers to increase rates in January
followed by a larger increase effective in June. Compared to last year, the
increase in the Company's purchased power rates is approximately 48%.
During the second quarter, California was able to avoid rolling
electric blackouts. The Company continues its efforts to use power as
efficiently as possible and at the lowest cost to its customers. The Company
maintains backup power systems to continue water service to customers if the
power companies' supplies are interrupted. 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
Refer to Note 6 of the Notes to Condensed Consolidated Financial
Statements for information regarding issuance of Financial Accounting Standards
Board Statement No. 141, "Business Combinations", and Statement No. 142,
"Goodwill and Other Intangible Assets".
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
Matters voted on by stockholders at their annual meeting on April 18,
2001 were reported in the first quarter Form 10-Q.
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
August 3, 2001
/s/ Gerald F. Feeney
Gerald F. Feeney
Vice President, Chief Financial Officer
and Treasurer