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 September 30, 2002
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
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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 |_|
APPLICABLE ONLY TO ISSUERS 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
October 31, 2002 - 15,182,046.
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)
September 30, December 31,
2002 2001
--------- ---------
ASSETS
Utility plant:
Utility plant $ 973,917 $ 909,658
Less accumulated depreciation and amortization 300,863 285,316
--------- ---------
Net utility plant 673,054 624,342
--------- ---------
Current assets:
Cash and cash equivalents 2,982 953
Receivables 29,855 22,800
Unbilled revenue 10,887 7,291
Materials and supplies at average cost 2,632 2,147
Taxes and other prepaid expenses 8,831 7,224
--------- ---------
Total current assets 55,187 40,415
--------- ---------
Other assets:
Regulatory assets 39,598 38,893
Other assets 8,171 6,564
--------- ---------
Total other assets 47,769 45,457
--------- ---------
$ 776,010 $ 710,214
========= =========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $.01 par value $ 152 $ 152
Additional paid-in capital 49,983 49,984
Retained earnings 150,653 147,299
Accumulated other comprehensive loss (816) (816)
--------- ---------
Total common stockholders' equity 199,972 196,619
Preferred stock 3,475 3,475
Long-term debt, less current maturities 241,789 202,600
--------- ---------
Total capitalization 445,236 402,694
--------- ---------
Current liabilities:
Current maturities of long-term debt 7,526 5,381
Short-term borrowings 11,000 22,000
Accounts payable 29,098 24,032
Accrued expenses and other liabilities 39,851 27,576
--------- ---------
Total current liabilities 87,475 78,989
Unamortized investment tax credits 2,882 2,882
Deferred income taxes 31,075 28,816
Regulatory and other liabilities 20,649 20,680
Advances for construction 113,475 106,657
Contributions in aid of construction 75,218 69,496
Commitments
--------- ---------
$ 776,010 $ 710,214
========= =========
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: Sept. 30, Sept. 30,
2002 2001
-------- --------
Operating revenue $81,440 $76,310
-------- --------
Operating expenses:
Operations 54,271 52,924
Maintenance 3,010 2,832
Depreciation and amortization 5,263 4,732
Income taxes 5,047 3,915
Property and other taxes 2,334 2,390
-------- --------
Total operating expenses 69,925 66,793
-------- --------
Net operating income 11,515 9,517
Other income and expenses, net 596 420
-------- --------
Income before interest expense 12,111 9,937
-------- --------
Interest expense:
Long-term debt interest 4,149 3,525
Other interest 287 492
-------- --------
Total interest expense 4,436 4,017
-------- --------
Net income $ 7,675 $ 5,920
======== ========
Earnings per share
Basic $ 0.50 $ 0.39
======== ========
Diluted $ 0.50 $ 0.39
======== ========
Weighted average shares outstanding
Basic 15,182 15,182
======== ========
Diluted 15,185 15,186
======== ========
Dividends per share of common stock $0.28000 $0.27875
======== ========
See Notes to Condensed Consolidated Financial Statements
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
For the nine months ended: Sept. 30, Sept. 30,
2002 2001
-------- --------
Operating revenue $202,234 $190,276
-------- --------
Operating expenses:
Operations 134,481 130,776
Maintenance 8,365 8,678
Depreciation and amortization 16,045 14,325
Income taxes 10,898 7,846
Property and other taxes 7,349 7,291
-------- --------
Total operating expenses 177,138 168,916
-------- --------
Net operating income 25,096 21,360
Other income and expenses
Other income, net 1,676 1,351
Gain on the sale of non-utility property 1,961 1,271
-------- --------
3,637 2,622
-------- --------
Income before interest expense 28,733 23,982
-------- --------
Interest expense:
Long-term debt interest 11,518 10,551
Other interest 994 1,526
-------- --------
Total interest expense 12,512 12,077
-------- --------
Net income $ 16,221 $ 11,905
======== ========
Earnings per share
Basic $ 1.06 $ 0.78
======== ========
Diluted $ 1.06 $ 0.77
======== ========
Weighted average shares outstanding
Basic 15,182 15,182
======== ========
Diluted 15,185 15,186
======== ========
Dividends per share of common stock $0.84000 $0.83625
======== ========
See Notes to Condensed Consolidated Financial Statements
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
For the nine months ended: Sept. 30, Sept. 30,
2002 2001
-------- --------
Operating activities
Net income $ 16,221 $ 11,905
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 16,045 14,325
Deferred income taxes, investment tax credits
regulatory assets and liabilities, net 1,523 3,168
Gain on sale of non-utility assets (1,961) (1,271)
Changes in operating assets and liabilities:
Receivables (6,866) (4,846)
Unbilled revenue (3,596) (3,169)
Taxes and other prepaid expenses (1,605) (1,678)
Accounts payable 4,945 5,001
Other current assets and liabilities 11,790 8,688
Other changes, net (3,386) (1,199)
-------- --------
Net adjustments 16,889 19,019
-------- --------
Net cash provided by operating activities 33,110 30,924
-------- --------
Investing activities:
Utility plant expenditures (58,915) (39,263)
Acquisition of Rio Grande Utility Corporation (2,300) --
Proceeds from sale of non-utility assets 2,122 1,055
-------- --------
Net cash used by investing activities (59,093) (38,208)
-------- --------
Financing activities:
Net short-term borrowings (11,000) (8,598)
Proceeds from long-term debt 40,000 20,000
Advances for construction 9,924 4,295
Refunds of advances for construction (3,386) (3,116)
Contributions in aid of construction 5,342 5,286
Dividends paid (12,868) (12,801)
-------- --------
Net cash provided by financing
activities 28,012 5,066
-------- --------
Change in cash and cash equivalents 2,029 (2,218)
Cash and cash equivalents at beginning of period 953 3,241
-------- --------
Cash and cash equivalents at end of period 2,982 1,023
======== ========
See Notes to Condensed Consolidated Financial Statements
CALIFORNIA WATER SERVICE GROUP
Notes to Condensed Consolidated Financial Statements
September 30, 2002
Note 1. Significant Accounting Policies
A summary of significant accounting policies and detailed information
regarding the Company's financial statements is included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
Note 2. Seasonal Business
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.
Revenue and income are generally higher in the warm, dry summer months
when water usage and sales are greater. Revenue and income are lower in
the winter months when cooler temperatures and rainfall curtail water
usage and sales.
Note 3. Interim Financial Statements
The interim financial information is unaudited. In the opinion of
management, the accompanying financial statements reflect all adjustments
that are necessary to provide a fair statement of the results for the
periods covered. The adjustments consist only of normal recurring
adjustments.
Note 4. Earnings Per Share
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 including potentially dilutive shares
as determined by application of the treasury stock method. Income
available for common stockholders is determined by subtracting dividends
paid on preferred stock, which were $38,000 for the quarters ended
September 30, 2002 and 2001, from net income. For the nine months ended
September 30, 2002 and 2001, preferred dividends were $115,000. The
difference between basic and diluted weighted average number of common
shares outstanding is the effect of dilutive common stock options
outstanding.
On January 2, 2002, 55,000 new options were granted at an exercise
price of $25.15 under the Company's Long Term Incentive Plan. A total of
154,500 options were outstanding at September 30, 2002. No options were
exercised during the first nine months of 2002 or during the year 2001.
Common stock options to purchase 107,000 shares and 52,000 shares
for the quarters ended September 30, 2002 and 2001, respectively, were
excluded from the diluted per share calculation due to their anti-dilutive
effect. For the nine months ended September 30, 2002 and 2001, common
stock options to purchase 107,000
shares and 52,000 shares in the respective periods were excluded from the
dilutive per share calculation due to their anti-dilutive effect.
Shares used in the basic and dilutive earnings per share calculations for
the three and nine months ending September 30, 2002 and 2001 were:
In Thousands
-----------------
2002 2001
------ ------
Shares used to calculate basic earnings per share 15,182 15,182
Dilutive common stock options outstanding 3 4
------ ------
Shares used to calculate dilutive earnings per share 15,185 15,186
------ ------
Note 5. Lines of Business
The Company operates primarily in one business segment providing water
utility services.
Note 6. New Accounting Standards
During 2002, the Company adopted two new accounting policies, each of
which was based on new requirements issued by the Financial Accounting
Standards Board ("FASB").
In July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets". Statement 142 specifies that goodwill and intangible
assets with indefinite useful lives will no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of the statement. 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. The
Company adopted Statement No. 142 on January 1, 2002. The adoption of
Statement No. 142 did not have a material impact on the financial position
or results of operation.
In August 2001, Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," was issued by the FASB. The statement sets
forth requirements for measuring impairment of a long-lived asset that is
defined as the condition that exists when the carrying amount of a
long-lived asset exceeds its fair value. The statement also establishes
criteria in which an impairment loss must be recognized. The Company
adopted Statement No. 144 on January 1, 2002. Its adoption did not have a
material impact on the financial position or results of operation.
Note 7. Issuance of Long-term Debt
In August 2002, the Company completed the issue of $20 million, 5.90%,
15-year Series F Senior Notes. This was the second $20 million senior note
issue completed by the Company in 2002. In May 2002, Series E senior notes
were issued at 7.11% with a 30-year term. The notes were issued to
institutional investors under an exemption from registration in Section
4(2) of the Securities Act of 1933.
Note 8. Acquisitions
Rio Grande Utility Corporation.
On July 1, 2002, after receiving state regulatory approval, the
Company acquired certain assets of Rio Grande Utility Corporation ("Rio
Grande") through its wholly-owned subsidiary, New Mexico Water Service
Company ("NMWSC"). The purchase includes the water and wastewater assets
of Rio Grande, which serves 2,265 water and 1,600 sewer customers in
unincorporated areas of Valencia County, New Mexico, located 30 miles
south of Albuquerque. The purchase price was $2,300,000 in cash, plus
assumption of $3,100,000 in outstanding debt. Rate base for the system is
approximately $5,400,000. Its total assets were $8,400,000 at June 30,
2002 of which $7,312,000 was for utility plant and $732,000 was for water
rights. A condensed balance sheet of Rio Grande has not been presented
since the acquisition is not material to the Company.
The Rio Grande purchase price was allocated to the fair value of net
assets acquired, including utility plant, water rights and assumed
liabilities. The results of operations for the three and nine month
periods ending September 30, 2002 include the operating results of Rio
Grande from the date of acquisition.
Pro forma results of operations have not been presented for the Rio
Grande acquisition because the effect of this purchase is not material.
The preliminary allocation of fair value is based on management's estimate
of the fair value for purchase accounting purposes at the date of
acquisition. The purchase price allocations are subject to revision as
management obtains additional information.
For 2001, Rio Grande had gross revenue of $1,485,000. Its gross
utility plant in service at December 31, 2001 was $12,458,000 and net
utility plant in service was $9,153,000. The regulatory decision
authorizing the purchase of Rio Grande's assets by NMWSC included an
authorization to increase annual water rates by $115,000.
Kaanapali Water Corporation
In August 2002, the Company agreed to acquire the Kaanapali Water
Corporation ("KWC") for $7.7 million in cash. KWC provides water utility
services to 500 customers in Maui, Hawaii. It had 2001 revenues of $3.3
million, and has net plant of approximately $7.3 million and current
assets of $0.4 million. The acquisition is subject to approval of the
Hawaii Public Utilities Commission ("HPUC") which is expected in the first
quarter of 2003. An application requesting approval of the purchase has
been submitted to the HPUC.
National Utilities Corporation
In June 2002, NMWSC signed an agreement to purchase National Utilities
Corporation for approximately $700,000. National Utilities serves 1,600
water customers and had 2001 revenue of $575,000 and total assets of
$1,425,000. Its net utility plant in service at December 31, 2001 was
$1,143,000. The purchase is subject to the approval of the New Mexico
Public Regulation Commission which is expected in the first quarter of
2003.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning
established by the Private Securities Litigation Reform Act of 1995 ("Act"). The
forward-looking statements are intended to qualify under provisions of the
federal securities laws for "safe harbor" treatment established by the Act.
Forward-looking statements are based on currently available information,
expectations, estimates, assumptions and projections, and management's judgment
about the Company, the water utility industry and general economic conditions.
Such words as expects, intends, plans, believes, estimates, anticipates,
projects 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, changes in regulatory commissions' policies or
procedures, the timeliness of regulatory commissions' actions concerning rate
relief, new legislation, electric power interruptions, increases in suppliers'
prices and the availability of supplies including water and power, fluctuations
in interest rates, 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.
CRITICAL ACCOUNTING POLICIES
The Company maintains its accounting records in accordance with accounting
principles generally accepted in the United States of America and as directed by
the regulatory commissions to which the Company's operations are subject.
Management believes that the following accounting policies may involve a higher
degree of complexity and judgement and the use of different judgements or
different assumptions on which judgements are based can cause a material change
in the Company's results of operations and financial condition.
Revenue Recognition. Revenue from metered customers includes billings to
customers based on monthly meter readings plus an estimate for water used
between the customer's last meter reading and the end of the accounting period.
The unbilled revenue amount is recorded as a current asset on the balance sheet
under the caption "Unbilled Revenue." At September 30, 2002, the unbilled
revenue amount was $10.9 million and at December 31, 2001 the amount was $7.3
million. The unbilled revenue amount is generally higher
during the summer months when water sales are higher. The amount recorded as
unbilled revenue varies depending on water usage in the preceding period, the
number of days between meter reads for each billing cycle, and the number of
days between each cycle's meter reading and the end of the accounting cycle.
Flat rate customers are billed in advance at the beginning of the service
period. The revenue is prorated so that the portion of revenue applicable to the
current accounting period is included in that period's revenue. The portion
related to a subsequent accounting period is recorded as unearned revenue on the
balance sheet and recognized as revenue when earned in the subsequent accounting
period. The unearned revenue liability was $1.7 million at September 30, 2002
and December 31, 2001. It is included in "accrued expenses and other
liabilities" on the balance sheet.
Expense Balancing and Memorandum Accounts. Expense balancing and memorandum
accounts reflect rate increases charged to the Company by suppliers of purchased
water and purchased power, and pump tax increases that are not included in
customer water rates. The Company does not record expense balancing or
memorandum accounts on its books as revenue, nor record a receivable until the
California Public Utilities Commission ("CPUC") has authorized a change in
customer rates to collect the cost increases and customers have been billed. The
cost increases tracked in expense balancing and memorandum accounts are referred
to as "Offsetable Expenses" because under certain circumstances they are
recoverable from customers in future rate increases designed to offset the
higher costs.
In October 2001, the CPUC adopted a resolution implementing its staff's
interim recommendation concerning practices and policies that enable water
utilities to recover cost increases in purchased water, purchased power and pump
taxes costs. These are costs that are passed on to water utilities by suppliers
and are beyond the control of the utility. The interim recommendation requires
that future Company requests to recover offsetable expenses will be processed
only if an operating district has filed a General Rate Case ("GRC") application
within a three-year period and the district is not earning more than its
authorized rate of return on a forward-looking, pro-forma basis. Neither of
these requirements applied to offset rate increases prior to adoption of the
resolution. The CPUC also directed its staff to open a proceeding to evaluate
offsetable expense recovery practices and policies, and recommend permanent
revisions.
Historically, offset rate increases enabled water utilities to recover as
a pass-through, cost increases for offsetable expenses that were not known or
anticipated when customer rates were established and were beyond the utility's
control. Offsetable expenses incurred prior to the CPUC's adoption of the
staff's interim recommendation were frozen as of November 29, 2001 in the
balancing accounts. The Company is authorized to track offsetable expenses
incurred after the CPUC changed its policy in regulatory memorandum accounts for
potential recovery subject to the CPUC's future determination of appropriate
practices and policies. Although the Company is hopeful that it will be
authorized to recover the offsetable expenses in both the balancing and
memorandum accounts, it is unable to predict the timing or amount of such
recoveries. Therefore, because of the uncertainty of collection, the Company's
accounting policy is to
not record the expense balancing and memorandum account amounts in its financial
statements until such amounts are included in customer billings.
In September 2002, the assigned administrative law judge recommended that
the CPUC adopt as permanent the interim recommendation regarding recovery of
expense balancing and memorandum accounts as described above, but modify the
limit on the amount subject to recovery. Under the interim rules, a utility
would not be allowed to recover any of the balancing or memorandum account
balance if it were earning over its authorized return on equity. The proposed
modification would allow recovery of a portion of the balancing or memorandum
account up to the amount by which the Company's over earning of its authorized
rate of return did not exceed the amount in the balancing account. While the
staff's recommendation is an improvement over the interim rules currently in
place, the Company believes there should be no limit on allowed recovery of the
balancing and memorandum accounts. The Company is continuing to present its
arguments to the CPUC staff. The CPUC is expected to adopt permanent rules
regarding recovery of balancing and memorandum accounts during the first half of
2003. The Company is unable to predict what the final rules will comprise or
their financial impact.
At December 31, 2001, the amount included in the balancing and memorandum
accounts was $6.5 million. At September 30, 2002, the amount had increased to
$10.5 million. The amount relates primarily to higher electric costs incurred by
the Company since 2001 when power rates charged to the Company by electric
suppliers, as authorized by the CPUC, increased an average of 48%. Increases in
the memorandum accounts are expected to be smaller once current power rates are
reflected in customer rates through future GRC decisions.
Utility Accounting. Because the Company operates extensively in a regulated
business, it is subject to the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of
Regulation." Regulators establish rates that are expected to permit the recovery
of the cost of service and a return on investment. In the event a portion of the
Company's operations were no longer subject to the provisions of SFAS No. 71,
the Company would be required to write off related regulatory assets and
liabilities that are not specifically recoverable and determine if other assets
might be impaired. If a regulatory commission determined that a portion of the
Company's assets were not recoverable in customer rates, the Company would be
required to determine if it had suffered an asset impairment that would require
a write down in the assets' valuation. There had been no asset impairment at
September 30, 2002.
Income Taxes. Significant judgment by management is required in determining the
provision for income taxes. The preparation of consolidated financial statements
requires the estimation of income tax expense. The process involves the
estimating of current tax exposure together with assessing temporary differences
resulting from different treatment of certain items, such as depreciation, for
tax and financial statement reporting. These differences result in deferred tax
assets and liabilities, which are reported in the consolidated balance sheet.
The Company must also assess the likelihood that deferred
tax assets will be recovered in future taxable income, and to the extent
recovery is unlikely, a valuation allowance would be recorded. If a valuation
allowance were required, it could significantly increase income tax expense. In
management's view, a valuation allowance is not required at September 30, 2002.
RESULTS OF THIRD QUARTER 2002 OPERATIONS
Third quarter net income was $7,675,000, equivalent to $0.50 per common
share on a diluted basis compared to the $5,920,000 or $0.39 per share earned in
2001's third quarter.
Revenue
Operating revenue increased $5,130,000 or 7% to $81,440,000. Weather,
which can have a significant influence on customer water usage was dry and warm
in both years. A 4% increase in water production was reflected in increased
water used by existing customers and sales to new customers. The factors that
impacted the operating revenue increase for the third quarter 2002 are presented
in the following table:
Increased usage by existing customers $1,763,000
Rate increases 2,244,000
Usage by new customers 1,123,000
----------
Net revenue increase $5,130,000
==========
Revenue from rate increases includes $623,000 for recovery of higher
purchased power costs in four of the Company's 24 California districts. Recovery
of power cost increases in the other districts has not been authorized by the
CPUC, but will be processed in accordance with the CPUC's procedures as
described in the Critical Accounting Policies section of this report. Because
the CPUC has not issued decisions for the GRC applications that were filed in
July 2001, customer water rates continue to reflect electric power costs that do
not include the 48% electric rate increases that went into effect during 2001.
Additional revenue from rate cases also includes $1,040,000 authorized in prior
year GRC decisions and $581,000 from step rate increases effective at the start
of 2002.
Total Operating Expenses
Total operating expenses were $69,925,000 for the three months ended
September 30, 2002 versus $66,793,000 for the same period in 2001, a 5%
increase.
Water production expense consists of purchased water, purchased power and
pump taxes. It represents the largest component of total operating expenses.
During the quarter, these costs accounted for 51% of total operating expenses
and increased 2% compared to total operating expenses for the third quarter last
year. Well production provided 54% of the water supply, 46% was purchased from
wholesale suppliers and a small quantity 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:
Third Quarter
2002 Cost Change
----------- ----------
Purchased water $25,163,000 $1,571,000
Purchased power 8,454,000 (647,000)
Pump taxes 2,257,000 (87,000)
----------- ----------
Total $35,874,000 $837,000
=========== ==========
A 1% increase in the volume of water purchased for resale along with
purchased water rate increases from wholesale suppliers' in three California
districts caused purchased water cost to increase. This was partially offset by
a wholesale water supplier in one district reducing rates and the cancellation
of a planned 9% mid-year increase in the wholesale supplier's rates for the
three San Francisco Peninsula districts.
Purchased power, which is used mainly to operate pumping equipment,
decreased 7% due to lower well production. Where available, the Company shifted
to lower cost electric tariffs offered by the power companies which resulted in
lower purchased power costs.
Labor rate increases that averaged 3% on January 1, 2002 along with
payroll for employees added in the acquisition of the Company's New Mexico
subsidiary caused payroll costs to increase $358,000. At September 30, 2002
there were 799 employees and at September 30, 2001 there were 796 employees.
Consultants were used to enhance computer technology systems during the third
quarter of 2001. That cost has since been eliminated, helping to reduce
operations expenses.
Maintenance expense was $177,000 higher in the quarter ended September 30,
2002 due to additional maintenance required at wells and for service line
repairs. The increase in well and service line repairs was offset by a decline
in water main repairs. Scheduled maintenance for the full year 2002 is expected
to be in a range similar to the prior year.
Depreciation expense increased $531,000 because of a larger investment in
depreciable utility plant and an increase in the recovery of plant investments
recognized in prior GRC proceedings.
Federal and state income taxes increased $1,133,000 because of higher
income. The effective tax rate was 40% in both years.
Other Income
Other income and expenses was $596,000 compared to $420,000 in 2001. The
increase in other income resulted from improved results from job orders (work
done for others) and an increase in antenna site leases. There were no surplus
real property sales recorded in the third quarter of 2002 or 2001.
Interest Expense
Total interest expense increased $418,000. Long-term debt interest expense
increased $624,000 because of two additional $20 million senior note issues that
were outstanding in 2002. Because of the increase in construction expenditures
especially on
several large, lengthy projects such as the Bakersfield treatment plant, the
amount of interest capitalized during the quarter increased by $150,000.
Borrowings under the Company's short-term bank credit agreement were lower
during the third quarter this year than in 2001. Average interest rates on
short-term debt was approximately 3% in 2002 compared to a 4% rate during the
third quarter in 2001. These two factors caused short-term interest expense to
decline $206,000.
RESULTS OF NINE MONTHS ENDED SEPTEMBER 30, 2002
Net income for the nine months ending September 30, 2002 increased
$4,316,000 to $16,221,000, equivalent to $1.06 per common share on a diluted
basis compared to $0.77 on a diluted basis for the same period last year.
Revenue
Operating revenue increased $11,958,000 to $202,234,000. The higher
revenue was due to increased usage by existing customers, rate increases and
revenue from 7,900 new customers added during the period. The average revenue
per customer increased 5% for the nine-month period. A breakdown of the increase
in operating revenue is presented in the following table:
Increased usage by existing customers $4,031,000
Rate increases 5,936,000
Usage by new customers 1,991,000
-----------
Net revenue increase $11,958,000
===========
The rate increases came from California GRC decisions that were effective
in September 2001 totaling $2,103,000 and a GRC decision in Washington that was
effective in May 2002 totaling $520,000, step rate increases effective at the
start of the year totaling $1,448,000 and power cost offset rate increases of
$1,865,000 that are effective for four districts beginning in November 2001.
Total Operating Expenses
Total operating expenses increased 5% over 2001.
Water production volume and the cost of water production increased 5% each
from last year. The water production costs accounted for 46% of total operating
expenses. Well production provided 52% of the supply with 47% purchased from
wholesale suppliers and 1% produced through the Company's treatment plants, the
same ratios as last year.
Wholesale water rate increases from three wholesale suppliers were modest.
One supplier reduced its cost of wholesale water. As a result, average 2002
purchased water rates are about the same as last year. The increase in purchased
water cost was mainly due to the increase in the volume of water purchased
because of higher customer usage and to serve new customers. Because of power
rate increases that became effective in 2001, purchased power expense increased
over 8%. For January, electric rates were 48%
more than last year, from February through mid-May the rates were 38% higher,
and for the remainder of the period to September 30, 2002, the rates were at the
same level as in 2001. The Company is not aware of any future power rate
increases. The Company has taken advantage of lower electric rate tariffs that
are available from its two electric suppliers and by doing so lowered the
overall cost of electric power. The components of water production expense and
the changes from last year are shown in the table below:
2002 Cost Change
----------- ----------
Purchased water $59,115,000 $2,374,000
Purchased power 17,395,000 1,275,000
Pump taxes 5,054,000 59,000
----------- ----------
Total $81,564,000 $3,708,000
=========== ==========
In addition to water production costs, other operations expense categories
increased $4,495,000. Payroll and benefits charged to operations were 1% less in
2002 because there were fewer employees on the payroll. As part of the Company's
expense control and budget process, consultants who worked on technology
projects were curtailed, reducing these expenses.
Maintenance expenses were lower by $313,000 due to fewer repairs of
pumping equipment, wells, water mains and service lines.
Depreciation and amortization expense increased $1,721,000 due to a larger
depreciable plant investment on which depreciation expense is calculated and an
increase in recovery of plant investments authorized in prior GRC proceedings.
Federal and state income taxes increased $3,052,000 because of higher
taxable income. The effective tax rate in both years was 40%.
Other Income
The increase in other income from $2,622,000 to $3,637,000 was primarily a
result of additional surplus property sales in 2002. During 2002, property sales
totaled $1,961,000 while in 2001 property sales were $1,271,000. Net other
income excluding property sales was $1,676,000 in 2002 and $1,351,000 in the
prior year. This increase was mainly due to improved operating results for
operation and maintenance agreements and lease income at antenna sites.
Interest Expense
Overall interest expense reflects a $435,000 increase over 2001. Gross
long-term interest expense increased $1,567,000 because two additional $20
million senior note issues were outstanding in 2002. Series E notes were issued
in May and Series F notes were issued in August 2002. Because of the increase in
construction expenditures especially on several large, lengthy projects such as
the Bakersfield treatment plant, the amount of interest capitalized during 2002
increased by $600,000, reducing interest expense.
Interest expense for short-term borrowings under the Company's bank credit
agreement is $532,000 less than in 2001 due to reduced borrowings and lower
interest rates.
REGULATORY MATTERS
Rate Case Proceedings
The CPUC is processing the Company's 15 GRC applications that were filed
in July 2001. In May 2002, evidentiary hearings were completed for issues that
had not been resolved between the Company and the CPUC's staff. A decision for
the applications that had been expected late in the third quarter is now
anticipated for late in the fourth quarter due to a variety of regulatory
processing delays. Because the Company and other utilities have experienced
delays in receiving decisions, it is possible that a decision could be rendered
later than anticipated. Based on the outcome of evidentiary hearings and
meetings with the CPUC staff, the Company estimates that the decisions could add
between $13 million and $14 million in annual revenue commencing with 2003.
While that is good news, it does not recognize that due to the regulatory lag in
receiving the decision, approximately $3 million in revenue was lost. The
decision if approved as proposed is expected to authorize a return on equity of
9.7% with an equity percentage of capitalization at 51.5%.
Washington Water Service Company filed a General Rate Case (GRC)
application in February 2002. The Washington Utilities and Transportation
Commission issued its decision early in April 2002 granting a $1 million
increase in annual revenue.
In June 2002, the CPUC authorized the Company to increase rates in its
Bakersfield district by $796,000 on an annual basis. This decision was based on
an advice letter filing to cover approximately $6 million of construction cost
incurred to date for a new water treatment plant.
The Company filed a Notice of Intent to file GRC applications for three
California districts plus General Office in July 2002. The Commission's staff
has not yet accepted the applications, but are expected to in early November.
Four additional district GRC applications will be submitted in January 2003.
Combined, these districts represent 17% of the California customers. The
Commission's staff has indicated that a decision on these filings should be
expected in mid to late 2003.
Legislative Initiative.
Regulatory delays in obtaining GRC decisions have been costly to
California regulated water utilities. In recent years, the Company has
experienced significant revenue losses due to regulatory delays. The Company
normally files its general rate case applications in July. The CPUC's stated
rate processing plan provides for a decision within ten months. When decisions
are not issued in a timely manner, the Company loses revenue and does not
recover costs during the period the decisions are delayed.
On September 30, 2002, Assembly Bill 2838, that will be effective January
1, 2003, was enacted. It is designed to preserve the cash flow of regulated
water utilities by providing interim rate relief if the CPUC has not issued a
decision for a requested GRC
rate increase within its established ten month processing period. The interim
rate relief is subject to adjustment based on the CPUC's final decision in the
GRC proceeding.
LIQUIDITY
Short-term and Long-term Debt
Short-term bank borrowings were $11,000,000 at September 30, 2002 and
$22,000,000 at December 31, 2001. On September 23, 2002, the bank credit
agreement was amended to extend the 30-day out-of-debt compliance period from a
30-day period in calendar year 2002 to a 30-day period between January 1, 2002
and April 30, 2003. The extension provides the Company additional flexibility in
complying with the out-of-debt provision.
In August 2002, the Company completed the issue of the $20 million, 5.90%,
15-year Series F Senior Notes. This was the second series of $20 million senior
notes issued in 2002. The Series F notes were issued to an institutional
investor under an exemption from registration in Section 4(2) of the Securities
Act of 1933.
Proceeds from the issue were used to repay outstanding short-term bank
borrowings.
The Company has initiated a program to refinance a portion of its
outstanding first mortgage bonds. The refinancing is intended to take advantage
of the current low interest rates. The Company estimates that the total program,
which will be completed in two phases, will save approximately $1.4 million in
annual interest costs.
In the first phase, the Company expects to refinance Series S, BB and DD
first mortgage bonds, and Series P which matures on November 1, 2002. Including
Series P, the total first mortgage bond principal balance refinanced for the
four series, which will be after application of the November 1, 2002 sinking
fund payments, will be $33,940,000. The refinancing will be accomplished with
funds from the issue of two new series of lower interest cost, unsecured senior
notes. This first phase of the refinancing is expected to be completed during
November and December, and is expected to reduce annual interest costs about $1
million.
The second phase of the refinancing is expected to be completed in
May 2003. In this phase, the Company expects to refinance Series EE first
mortgage bonds with lower interest cost senior notes.
There is currently outstanding $19,200,000 under this bond series.
This phase of the refinancing is expected to save approximately
$450,000 in annual interest costs if interest rates remain at or near their
current levels.
At September 30, 2002, the Company has $120,865,000 of first mortgage
bonds outstanding. If it successfully completes both phases of the bond
refinancing program the Company will have $65,600,000 million in first mortgage
bonds outstanding. Two other series of outstanding first mortgage bonds will be
considered for refinancing late in 2003. Additional refinancing will be
dependent upon market conditions at the time.
Debt Credit Ratings
California Water Service Company is rated by Moody's Investors Service
("Moodys") and Standard & Poor's ("S&P"). The Company has enjoyed an Aa3 rating
by Moody's and AA- by S&P. At the end of the third quarter 2002, the Company met
separately with both credit rating agencies at annual rating reviews.
On October 3, 2002, Moody's issued a news release stating that it was
placing the Company's Aa3 senior secured debt rating on review for possible
downgrade. Moody's indicated that the primary reason for the action was delayed
rate relief from the California Public Utilities Commission and the Company's
capital spending requirements for water infrastructure and environmental
compliance needs.
On November 6, 2002, S&P lowered the Company's corporate credit rating
from AA- to A+. In its news release, S&P stated that the change "has been caused
principally by deterioration in regulatory support from the California Public
Utilities Commission (CPUC)," noting that decisions for recovery of reasonable
expenses have been delayed as much as 18 months. In the news release, S&P
classified the Company's outlook as "stable," saying, "Standard & Poor's does
not expect that Cal Water will experience any funding anxiety beyond that
associated with regulatory tardiness."
Dividends
The third quarter common dividend was paid on August 19, 2002 at $0.28 per
share compared to a quarterly dividend in 2001 of $0.27875. This was the
Company's 231st consecutive quarterly dividend. Annualized, the 2002 dividend
rate is $1.12 per common share compared to $1.115 in 2001. Based on the 12-month
earnings per share at September 30, 2002, the dividend payout ratio is 89%. For
the full year 2001, the payout ratio was 115%. On a long-term basis, the
Company's goal is to achieve a dividend payout ratio of about 60%.
At their October 23, 2002 meeting, the Board declared the fourth quarter
dividend payable November 18, 2002 to stockholders of record on November 4,
2002. This will be the 232nd 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 (401K). Purchases for this plan are made on a biweekly basis.
Book value per common share was $13.17 at September 30, 2002 compared to
$12.95 at December 31, 2001.
Utility Plant
During the third quarter, utility plant expenditures totaled $27,640,000,
including $5,793,000 of Company funded projects. Year-to-date capital
expenditures through September 30, 2002 have been $58,915,000, including
$47,163,000 of Company funded projects. The 2002 Company-funded construction
budget is $76,800,000.
At September 30, 2002, construction work in progress was $52,144,000
compared to $39,022,000 at September 30, 2001. Work in progress includes
projects that are under construction, but not yet complete and in service. A
main reason for the increase in work
in progress is the $23,217,000 expended to date on the Northeast Bakersfield
Treatment Plant. This amount is included in work in progress at September 30,
2002. The $45 million project is the largest construction project ever
undertaken by the Company. It is proceeding on schedule and on budget, and is
expected to be in service before June 30, 2003.
On September 30, 2002, the Company completed the tax-free exchange of
seven surplus properties to a contractor for the new Customer and Operations
Center in Torrance. The Company occupied the new Customer and Operations Center
in January 2002 on a month-to-month lease basis, consolidating four of its
southern California operating districts at a single location. Because the
transaction was structured as a property exchange, acquiring the new facility
did not require a significant expenditure of cash. The combined districts'
operations will provide for more efficient service to customers in the South Bay
area of Los Angeles County. Under terms of the exchange agreement, the Company
guaranteed the contractor's bank loan during construction of the new facility.
The new facility, which is valued at in excess of $7 million, served as security
to the Company for the guarantee. When the property exchange was completed, the
contractor paid off the bank loan, and the Company was released from its
guarantee.
WATER SUPPLY
Based on information from water management agencies and Company developed
data, the Company believes that its various sources of water supply are
sufficient to meet customer demand for the remainder of the year. Historically,
about half of the water source is purchased from wholesale suppliers with the
other half pumped from underground wells. A small portion is developed through
three local surface treatment plants.
To safeguard its water supply and facilities, the Company has heightened
security at its facilities and taken added safety precautions for our employees
and the water we deliver to our customers. While the Company does not make
public comments on its security programs, it has been in contact with federal,
state and local law enforcement agencies to coordinate and improve water
delivery systems security. The Company has also assigned a high priority to
completing work necessary to comply with new Environmental Protection Agency
requirements concerning security of water facilities. This effort encompasses
all of the Company's district operations.
ACQUISITIONS
Rio Grande Utility Corporation.
On July 1, 2002, after receiving state regulatory approval, the Company
acquired certain assets of Rio Grande Utility Corporation ("Rio Grande") through
its wholly-owned subsidiary, New Mexico Water Service Company ("NMWSC"). The
purchase includes the water and wastewater assets of Rio Grande, which serves
2,265 water and 1,600 sewer customers in unincorporated areas of Valencia
County, New Mexico, located 30 miles south of Albuquerque. The purchase price
was $2,300,000 in cash, plus assumption of $3,100,000 in outstanding debt. Rate
base for the system is approximately
$5,400,000. Its total assets were $8,400,000 at June 30, 2002 of which
$7,312,000 was for utility plant and $732,000 was for water rights. A condensed
balance sheet of Rio Grande has not been presented since the acquisition is not
material to the Company.
The Rio Grande purchase price was allocated to the fair value of net
assets acquired, including utility plant, water rights and assumed liabilities.
The results of operations for the three and nine month periods ending September
30, 2002 include the operating results of Rio Grande from the date of
acquisition.
Pro forma results of operations have not been presented for the Rio Grande
acquisition because the effect of this purchase is not material. The preliminary
allocation of fair value is based on management's estimate of the fair value for
purchase accounting purposes at the date of acquisition. The purchase price
allocations are subject to revision as management obtains additional
information.
For 2001, Rio Grande had gross revenue of $1,485,000. Its gross utility
plant in service at December 31, 2001 was $12,458,000 and net utility plant in
service was $9,153,000. The regulatory decision authorizing the purchase of Rio
Grande's assets by NMWSC included an authorization to increase annual water
rates by $115,000.
Kaanapali Water Corporation
In August 2002, the Company agreed to acquire the Kaanapali Water
Corporation ("KWC") for $7.7 million in cash. KWC provides water utility
services to 500 customers in Maui, Hawaii, including 10 resorts and eight
condominium projects. It posted 2001 revenues of $3.3 million, and has net plant
of approximately $7.3 million and current assets of $0.4 million. The
transaction is subject to approval of the Hawaii Public Utilities Commission
("HPUC") which is expected in first quarter of 2003. An application requesting
approval of the acquisition was filed with the HPUC in October 2003.
National Utilities Corporation.
In June 2002, NMWSC signed an agreement to purchase National Utilities
Corporation for approximately $700,000. National Utilities serves 700 water
customers located adjacent to the Rio Grande water system and another 900 water
customers located 150 miles south of Albuquerque, New Mexico. The purchase will
entitle NMWSC to purchase up to 2,000 acre-feet of water annually as required
for its operations. The purchase is subject to the approval of the New Mexico
Public Regulation Commission. Regulatory approval is expected in the first
quarter of 2003.
National Utilities had 2001 revenue of $575,000 and total assets of
$1,425,000. Its net utility plant in service at December 31, 2001 was
$1,143,000.
ACCOUNTING PRONOUNCEMENTS
In June 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" of long-lived assets was issued.
The statement is effective for fiscal years beginning after June 15, 2002. The
Company has not yet completed a full review of the impact that adopting the
statement will have on its
financial position or results of operations, and therefore is unable to state
the impact that adopting the statement will have on its financial position or
results of operations.
In April 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections," was issued. The statement rescinds Statement
No. 4, which required all gains and losses from extinguishments of debt to be
aggregated and, if material, classified as an extraordinary item, net of related
income tax effect. Upon adoption of Statement No. 145, companies will be
required to apply the criteria in APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" in
determining the classification of gains and losses resulting from the
extinguishments of debt. Statement No. 145 is effective for fiscal years
beginning after May 15, 2002. The Company believes this pronouncement has no
material effect on its financial statements.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Statement 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company believes this pronouncement has
no material effect on its financial statements.
Item 3.
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 and short-term bank borrowings, including interest
costs, is 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
generally be passed on to consumers. The Company manages other commodity price
exposure through the duration and terms of its vendor contracts.
Item 4.
CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Under the supervision and with the participation of the Company's management
including its Chief Executive Officer and Chief Financial Officer, the Company
conducted an evaluation of its disclosure controls and procedures, as such term
is defined under Rule 13a-14c promulgated under the Securities and Exchange Act
of 1934, as amended (the "Exchange Act"), within 90 days of the filing date of
this report. Based on their evaluation, the Company's Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective.
(b) Change in internal controls
There have been no significant changes, including corrective actions with
regards to significant deficiencies or material weaknesses, in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referenced in paragraph (a)
above.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Since 1995, the State of California's Department of Toxic Substances
Control (DTSC) named the Company as a potential responsible party for cleanup of
a toxic contamination plume in the Chico groundwater. The DTSC has prepared a
draft report titled "Preliminary Nonbinding Allocation of Financial
Responsibility" for the cleanup which asserts that the Company's share should be
10 percent, although DTSC views the potentially responsible parties as jointly
and severally liable. The DTSC estimates the total cleanup cost to be $8.69
million. The toxic spill occurred when cleaning solvents, which were discharged
into the city's sewer system by local dry cleaners, leaked into the underground
water supply due to breaks in the city's sewer pipes. The DTSC contends that the
Company's responsibility stems from its operation of wells in the surrounding
vicinity that caused the contamination plume to spread. While the Company
intends to cooperate with the cleanup effort, it denies any responsibility for
the contamination or the resulting cleanup and intends to vigorously resist any
action that may be brought against it. The Company has negotiated with DTSC
regarding dismissal of the Company from the claim in exchange for the Company's
cooperation in the cleanup effort. To date no agreement has been reached with
DTSC regarding dismissal of the Company from the DTSC action. The Company
believes that it has insurance coverage for this claim and that if it were
ultimately held responsible for a portion of the cleanup costs, there would not
be a material adverse effect on the Company's financial position or results of
operations.
Two additional toxic contamination plumes have been identified in the
Chico groundwater. While DTSC has not taken any assessment action regarding
these plumes, it has indicated that it may designate the Company as a potential
responsible party for cleanup of the additional plumes, as it did when the
original plume was identified in 1995. The Company does not have sufficient
information concerning the new plumes to estimate the cost of cleanup nor to
assess the basis of the Company's involvement or responsibility for any cleanup
efforts.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the third
quarter, 2002.
Item 5. Other Information
CORPORATE GOVERNANCE
On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law. This
legislation was enacted in response to concerns about corporate accountability
and oversight as it relates to publicly traded companies. Additionally, the
Securities and Exchange Commission and New York Stock Exchange have proposed or
adopted new rules dealing with corporate governance. Among the areas impacted by
the new requirements are:
o Board of Directors membership and independence of directors
o makeup and responsibilities of the Audit Committee, Compensation Committee
and Nominating Committee
o reporting of directors and officers trading in Company stock
o disclosure to investors of additional corporate governance compliance
issues
The Company is actively working with outside counsel and internal
resources to comply with all aspects of the new law, rules and regulations.
Internally, a Corporate Disclosure Committee made up primarily of officers was
formed to assist in gathering information that is important to corporate
governance and disclosure.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K.
The exhibit list required by this Item is incorporated by reference to the
Exhibit Index attached to this report.
(b) Reports on Form 8-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 undersigned thereunto duly authorized.
CALIFORNIA WATER SERVICE GROUP
------------------------------
Registrant
November 7, 2002
By: /s/ Gerald F. Feeney
Gerald F. Feeney
Vice President, Chief Financial Officer
and Treasurer
Form 10-Q Certification
I, Peter C. Nelson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of California
Water Service Group;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for
the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 7, 2002
/s/ Peter C. Nelson
- ------------------------------------
Peter C. Nelson
President and Chief Executive Officer
Form 10-Q Certification
I, Gerald F. Feeney, certify that:
1. I have reviewed this quarterly report on Form 10-Q of California
Water Service Group;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for
the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 7, 2002
/s/ Gerald F. Feeney
- ------------------------------------
Gerald F. Feeney
Vice President, Chief Financial Officer
and Treasurer
Exhibit Index
Exhibit Description
4.1 Fourth Supplement to Note Agreement dated as of May 1, 2002,
Pertaining to the issuance of $20,000,000, 5.90% Series F Senior
Notes due November 1, 2017
10.1 First Amendment dated September 23, 2002 to the Business Loan
Agreement dated August 1, 2001 between Bank of America and
California Water Service Company modifying the 30-day out-of-debt
period
10.2 Second Amendment dated September 23, 2002 to the Business Loan
Agreement dated August 1, 2001 between Bank of America and
California Water Service Group and CWS Utility Services modifying
the 30-day out-of-debt period
99.1 Chief Executive Officer certification of financial statements
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer certification of financial statements
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002