UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________________ to ______________
Commission file number ____1-13883___________________________
CALIFORNIA WATER SERVICE GROUP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0448994
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer identification No.)
of incorporation or organization)
1720 North First Street, San Jose, CA. 95112
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
1-408-367-8200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by checkmark whether the Registrant is an accelerated filer (as defined
in rule 12b-2 of the Act) Yes X No __
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
May 3, 2004 - 16,932,046.
TABLE OF CONTENTS
Page
PART I Financial Review - Management's Discussion and Analysis and
Condensed Consolidated Financial Statements...................... 3
Item 1 Condensed Consolidated Balance Sheets (unaudited)
March 31, 2004 and December 31, 2003........................... 4
Condensed Consolidated Statements of Income (unaudited)
For the Three Months Ended March 31, 2004 and 2003............. 5
Condensed Consolidated Statements of Cash Flows (unaudited)
For the Three Months Ended March 31, 2004 and 2003............. 6
Notes to Condensed Consolidated Financial Statements............. 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 12
Item 3 Quantitative and Qualitative Disclosure about Market Risk........ 21
Item 4 Controls and Procedures.......................................... 21
PART II Other Information
Item 1 Legal Proceedings................................................ 22
Item 4 Submission of Matters to a Vote of Security Holders.............. 22
Item 6 Exhibits and Reports on Form 8-K................................. 23
Signatures....................................................... 24
Index to Exhibits................................................ 25
2
PART I FINANCIAL INFORMATION
Item 1.
Financial Statements
The condensed consolidated financial statements presented in this
filing on Form 10-Q have been prepared by management and are unaudited.
3
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands, except per share data) March 31, December 31,
2004 2003
----------- -----------
ASSETS
Utility plant:
Utility plant $ 1,089,894 $ 1,078,975
Less accumulated depreciation and amortization 326,361 319,477
----------- -----------
Net utility plant 763,533 759,498
----------- -----------
Current assets:
Cash and cash equivalents 2,086 2,856
Receivables 19,198 23,559
Unbilled revenue 8,115 8,522
Materials and supplies at average cost 2,875 2,957
Taxes and other prepaid expenses 6,258 5,609
----------- -----------
Total current assets 38,532 43,503
----------- -----------
Other assets:
Regulatory assets 53,710 53,326
Other assets 18,127 16,708
----------- -----------
Total other assets 71,837 70,034
----------- -----------
$ 873,902 $ 873,035
=========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $.01 par value $ 169 $ 169
Additional paid-in capital 93,748 93,748
Retained earnings 147,533 150,908
Accumulated other comprehensive loss (301) (301)
----------- -----------
Total common stockholders' equity 241,149 244,524
Preferred stock 3,475 3,475
Long-term debt, less current maturities 272,042 272,226
----------- -----------
Total capitalization 516,666 520,225
----------- -----------
Current liabilities:
Current maturities of long-term debt 904 904
Short-term borrowings 9,800 6,454
Accounts payable 18,264 23,776
Accrued expenses and other liabilities 36,606 32,430
----------- -----------
Total current liabilities 65,574 63,564
Unamortized investment tax credits 2,925 2,925
Deferred income taxes 38,161 38,005
Regulatory and other liabilities 35,888 35,835
Advances for construction 123,372 121,952
Contributions in aid of construction 91,316 90,529
Commitments and contingencies -- --
----------- -----------
$ 873,902 $ 873,035
=========== ===========
<FN>
See Notes to Condensed Consolidated Financial Statements
</FN>
4
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(In thousands, except per share data)
For the three months ended: March 31, March 31,
2004 2003
-------- --------
Operating revenue $ 60,240 $ 51,310
-------- --------
Operating expenses:
Operations 41,498 37,761
Maintenance 3,181 3,253
Depreciation and amortization 6,518 5,760
Income taxes 958 (553)
Property and other taxes 2,694 2,465
-------- --------
Total operating expenses 54,849 48,686
-------- --------
Net operating income 5,391 2,624
-------- --------
Other income and expenses:
Non-regulated income, net 550 612
Gain on sale of non-utility property 1 552
-------- --------
551 1,164
-------- --------
Income before interest expense 5,942 3,788
-------- --------
Interest expense:
Interest expense 4,646 4,856
Less: capitalized interest 150 300
-------- --------
Total interest expense 4,496 4,556
-------- --------
Net income (loss) $ 1,446 $ (768)
======== ========
Earnings per share
Basic $ 0.08 $ (0.05)
======== ========
Diluted $ 0.08 $ (0.05)
======== ========
Weighted average shares outstanding
Basic 16,932 15,182
======== ========
Diluted 16,953 15,182
======== ========
Dividends per share of common stock $0.28250 $0.28125
======== ========
See Notes to Condensed Consolidated Financial Statements
5
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
For the three months ended: March 31, March 31,
2004 2003
-------- --------
Operating activities
Net income (loss) $ 1,446 $ (768)
-------- --------
Adjustments to reconcile net income (loss) to net cash
Provided by operating activities:
Depreciation and amortization 6,518 5,760
Deferred income taxes, investment tax credits
regulatory assets and liabilities, net (175) (342)
Gain on sale of non-utility property (1) (552)
Changes in operating assets and liabilities:
Receivables 4,353 3,288
Unbilled revenue 407 1,023
Taxes and other prepaid expenses (649) 828
Accounts payable (5,512) (680)
Other current assets 82 134
Other current liabilities 4,176 2,731
Other changes, net (1,107) (1,527)
-------- --------
Net adjustments 8,092 10,663
-------- --------
Net cash provided by operating activities
9,538 9,895
-------- --------
Investing activities:
Utility plant expenditures:
Company funded (8,168) (17,884)
Developer funded (3,444) (6,186)
Proceeds from sale of non-utility property 6 588
-------- --------
Net cash used by investing activities (11,606) (23,482)
-------- --------
Financing activities:
Net short-term borrowings 3,346 (4,802)
Issuance (retirement) of long-term debt, net (183) 19,710
Advances for construction 2,652 2,610
Refunds of advances for construction (1,223) (1,259)
Contributions in aid of construction 1,528 2,291
Dividends paid (4,822) (4,308)
-------- --------
Net cash provided by financing activities 1,298 14,242
-------- --------
Change in cash and cash equivalents (770) 655
Cash and cash equivalents at beginning of period 2,856 1,063
-------- --------
Cash and cash equivalents at end of period $ 2,086 $ 1,718
======== ========
<FN>
See Notes to Condensed Consolidated Financial Statements
</FN>
6
CALIFORNIA WATER SERVICE GROUP
Notes to Condensed Consolidated Financial Statements
March 31, 2004
Note 1. Organization and Operations
California Water Service Group (the Company) is a holding company that
provides water utility and other related services in California,
Washington, New Mexico and Hawaii through its wholly owned subsidiaries.
California Water Service Company (Cal Water), Washington Water Service
Company (Washington Water), New Mexico Water Service Company (New Mexico
Water) and Hawaii Water Service Company, Inc. (Hawaii Water) provide
regulated utility services under the rules and regulations of their
respective State's regulatory commissions. In addition, these entities and
CWS Utility Services provide non-regulated water utility and
utility-related services.
The Company operates primarily in one business segment providing water
utility services.
Note 2. Summary of Significant Accounting Policies
The interim financial information is unaudited. In the opinion of
management, the accompanying condensed consolidated financial statements
reflect all adjustments that are necessary to provide a fair presentation
of the results for the periods covered. The adjustments consist only of
normal recurring adjustments. The results for interim periods are not
necessarily indicative of the results of the entire year. The condensed
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements for the year ended December 31,
2003 included in its Form 10-K as filed with the Securities and Exchange
Commission on March 15, 2004.
Note 3. Stock-based Compensation
The Company has a stockholder approved Long-Term Incentive Plan that allows
granting of non-qualified stock options. The Company has adopted the
disclosure requirements of Statement of Financial Accounting Standards
(SFAS) No. 123 "Accounting for Stock-Based Compensation," as amended by
SFAS No. 148 "Accounting for Stock-Based Compensation - Transition
Disclosure - An Amendment of FASB Statement No. 123," and as permitted by
SFAS No. 123, applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," for its plan. All outstanding
options had an exercise price equal to the market price on the date they
were granted. No compensation expense was recorded for the three month
periods ended March 31, 2004 and 2003 related to stock options. No options
were granted during either period.
7
The table below illustrates the effect on net income and earnings per share
as if the company had applied the fair value recognition provision of SFAS
No. 123 to employee compensation.
(In thousands, except per share data)
Three Months Ended
March 31
2004 2003
--------- --------
Net income (loss), as reported $ 1,446 ($768)
Deduct: Total stock-based employee compensation
expense determined under fair value
method for all awards, net of related tax effects 17 21
--------- --------
Pro forma net income (loss) $ 1,429 ($789)
========= ========
Earnings (Loss) per share
Basic - as reported $ 0.08 ($0.05)
Basic - pro forma $ 0.08 ($0.05)
Diluted - as reported $ 0.08 ($0.05)
Diluted - pro forma $ 0.08 ($0.05)
Note 4. 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 5. Earnings Per Share Calculations
The computations of basic and diluted earnings per share are noted below.
Common stock options to purchase 149,250 and 154,500 shares for the three
months ended March 31, 2004 and 2003, respectively, were outstanding. Stock
options for 2003 were excluded from the diluted per share calculation due
to their anti-dilutive effect.
8
(In thousands, except per share data)
Three Months Ended
March 31
2004 2003
-------- --------
Net income (loss) $ 1,446 ($768)
Less preferred dividends 38 38
-------- --------
Net income (loss) available to common stockholders $ 1,408 ($806)
======== ========
Weighted average common shares 16,932 15,182
Dilutive common stock options (treasury method) 21 --
-------- --------
Shares used for dilutive computation 16,953 15,182
======== ========
Net income (loss) per share - basic $ 0.08 ($0.05)
-------- --------
Net income (loss) per share - diluted $ 0.08 ($0.05)
-------- --------
Note 6. Pension Plan and Other Postretirement Benefits
The Company provides a qualified defined benefit, non-contributory pension
plan for substantially all employees. The Company makes annual
contributions to fund the amounts accrued for the qualified pension plan.
The Company also maintains an unfunded, non-qualified, supplemental
executive retirement plan. The costs of the plans are charged to expense
and utility plant.
The Company offers medical, dental, vision and life insurance benefits for
retirees and their spouses and dependents. Participants are required to pay
a premium, which offsets a portion of the cost.
Payments by the Company related to pension plan and other postretirement
benefits were $3,812,000 for the three months ended March 31, 2004. Due to
a federal regulation change, the estimated funding for 2004 has been
revised from $8,235,000 to $7,700,000 for 2004. The change in funding is
not expected to impact the expense recorded for 2004.
The following table lists components of the pension plans and other
postretirement benefits. The data listed under "pension plan" includes the
qualified pension plan and the non-qualified executive supplemental
retirement plan. The data listed under "other benefits" is for all other
post retirement benefits.
9
(In thousands)
Three Months Ended March 31
Pension Plan Other Benefits
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Service cost $ 1,137 $ 977 $ 305 $ 221
Interest cost 1,364 1,353 342 262
Expected return on plan assets (1,219) (1,198) (86) (50)
Recognized net initial ABO -- -- N/A N/A
Recognized net initial APBO N/A N/A 69 59
Amortization of prior service cost 424 454 19 16
Recognized net actuarial (gain) loss 34 15 84 61
------- ------- ------- -------
Net periodic benefit cost $ 1,740 $ 1,601 $ 733 $ 569
======= ======= ======= =======
ABO - Accumulated benefit obligation
APBO - Accumulated postretirement benefit obligation
Postretirement benefit expense for "other benefits" recorded in the first
quarter of 2004 and 2003 was $388,000 and $345,000, respectively. As of
March 31, 2004, the Company had a regulatory asset of $7,191,000 related to
postretirement benefits, which is expected to be recovered through future
customer rates.
Note 7. New Accounting Standards
In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of
Variable Interest Entities" which amended Interpretation No. 46,
"Consolidation of Variable Interest Entities". The revision exempted
certain entities and modified the effective dates. The original guidance
issued under Interpretation No. 46 in January 2003 is still applicable.
Interpretation No. 46 and Interpretation No. 46R provide guidance for
determining when a primary beneficiary should consolidate a variable
interest entity or equivalent structure that functions to support the
activities of the primary beneficiary. Interpretation No. 46R was effective
for the period ended March 31, 2004. The adoption of Interpretation No. 46R
did not impact the Company's financial position, results of operations or
cash flows.
In January 2004, the FASB issued FASB Staff Position (FSP) No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003." FSP No.
106-1, which was effective for the Company's consolidated financial
statements for the year ended December 31, 2003, permits a sponsor of a
postretirement health care plan that provides a prescription drug benefit
to make a one-time election to defer accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Medicare Act). In accordance with FSP No. 106-1, the Company made a
one-time election to defer the recognition of the impact of FSP No. 106-1
10
accounting. Any measures of the accumulated postretirement benefit
obligation and net periodic postretirement benefit cost in the consolidated
financial statements and footnotes for March 31, 2004 did not reflect the
effects of the Medicare Act. Currently, specific authoritative accounting
guidance for the federal subsidy is pending and that guidance, when issued,
may require the Company to change previously reported information. The
Company believes the accounting change will reduce postretirement cost, but
cannot estimate the impact at this time.
Note 8. Subsequent Event
Acquisitions
On April 30, 2004, the Company acquired the stock of National Utility
Company (NUC) and land from owners of NUC for approximately $1,030,000 in
cash. The Company plans to retire NUC's stock and merge it into New Mexico
Water Service Company. Revenue and net loss for NUC for 2003 were $541,000
and ($19,000), respectively. The purchase price is approximately equal to
rate base, and therefore the Company expects to record minimal or no
goodwill in the transaction.
11
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This quarterly report, including all documents incorporated by reference,
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,
assumes, anticipates, projects, predicts, forecasts 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. They are subject to uncertainty and changes in circumstances.
Actual results may vary materially from what is contained in a
forward-looking statement. Factors that may cause a result different than
expected or anticipated include: governmental and regulatory commissions'
decisions; changes in regulatory commissions' policies and 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 and water quality
requirements; acquisitions and our ability to successfully integrate
acquired companies; the ability to successfully implement business plans;
changes in customer water use patterns; the impact of weather on water
sales and operating results; access to sufficient capital on satisfactory
terms; civil disturbances or terrorist threats or acts, or apprehension
about the possible future occurrences of acts of this type; the involvement
of the United States in war or other hostilities; restrictive covenants in
or changes to the credit ratings on our current or future debt that could
increase our financing costs or affect our ability to borrow, make payments
on debt or pay dividends; and, other risks and unforeseen events. When
considering forward-looking statements, you should keep in mind the
cautionary statements included in this paragraph. We assume no obligation
to provide public updates of forward-looking statements.
CRITICAL ACCOUNTING POLICIES
We maintain our accounting records in accordance with accounting principles
generally accepted in the United States of America and as directed by the
regulatory commissions to which we are subject. The process of preparing
financial statements requires the use of estimates on the part of
management. The estimates used by management are based on historical
experience and an understanding of current facts and circumstances.
12
Management believes that the following accounting policies are critical
because they involve a higher degree of complexity and judgment, and can
have a material impact on our 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 March 31, 2004, the unbilled
revenue amount was $8,115,000 and at December 31, 2003, the amount was
$8,522,000. 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 $2,182,000
at March 31, 2004 and $2,127,000 at December 31, 2003. This liability is
included in "accrued expenses and other liabilities" on the balance sheet.
Expense Balancing and Memorandum Accounts
Expense balancing accounts and memorandum accounts (offsetable expenses)
represent recoverable costs incurred, but not billed to our customers. The
amounts included in these accounts relate to rate increases charged to us
by suppliers of purchased water and purchased power, and increases in pump
taxes and only apply for our California regulated operations. We do not
record expense balancing or memorandum accounts in our financial statements
as revenue, nor as a receivable, until the California Public Utilities
Commission (CPUC) and has authorized recovery of the higher costs and
customers have been billed. Therefore, a timing difference may occur
between when costs are recognized and the recognition of associated
revenues. The balancing and memorandum accounts are only used to track the
higher costs outside of the financial statements. The cost increases, which
are beyond our control, are referred to as "offsetable expenses" because
under certain circumstances they are recoverable from customers in future
offset rate increases. The amounts requested may not be ultimately
collected through rates, as amounts may be disallowed during the review
process or subject to an earnings test. While the adjustments would not
impact previously recorded amounts, the adjustments may change future
earnings and cash flows. The cumulative net amount in the expense balancing
accounts and memorandum accounts as of March 31, 2004 was approximately
$9,100,000. This amount includes certain amounts that have been filed for
recovery but not yet been authorized, or amounts that have not yet been
filed for recovery. See Regulatory Matters for cumulative net balances of
expense balancing and memorandum accounts which have been authorized for
recovery.
13
Regulated Utility Accounting
Because we operate extensively in a regulated business, we are subject to
the provisions of 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 our operations were no longer subject to the provisions of SFAS
No. 71, we 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 our assets were not recoverable in customer rates, we would be
required to determine if we had suffered an asset impairment that would
require a write-down in the assets' valuation. There have been no such
asset impairments as of March 31, 2004.
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. We 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
March 31, 2004.
Pension Benefits
We incur costs associated with our pension and postretirement health care
benefits plans. To measure the expense of these benefits, management must
estimate compensation increases, mortality rates, future health cost
increases and discount rates used to value related liabilities and to
determine appropriate funding. Different estimates used by management could
result in significant variances in the cost recognized for pension benefit
plans. The estimates used are based on historical experience, current
facts, future expectations and recommendations from independent advisors
and actuaries. We use an investment advisor to provide advice in managing
the plan's investments. We anticipate any increase in funding for the
pension and postretirement health care benefits plans will be recovered in
future customer rates.
14
RESULTS OF FIRST QUARTER 2004 OPERATIONS COMPARED TO FIRST QUARTER 2003
OPERATIONS
Summary
First quarter net income was $1,446,000, equivalent to $0.08 per common
share on a diluted basis compared to a loss of ($768,000) or ($0.05) per
share on a diluted basis in the first quarter of 2003. The primary drivers
were increases in rates and new customers; partially offset by cost
increases for purchased water, income taxes, depreciation and other
expenses.
Operating Revenue
Operating revenue increased $8,930,000 or 17% to $60,240,000. As disclosed
in the following table, most of the increase was due to increases in rates.
Weather impact was mixed during the quarter, as January and February had
lower temperatures and higher rainfall contrasted by higher temperatures
and lower rainfall in March. We experienced an increase in water usage, as
water usage increased 10% above the prior year, with the largest increase
in March, increasing 19%.
The factors that impacted the operating revenue for the first quarter of
2004 are presented in the following table:
Rate increases $6,977,000
Usage by new customers 1,626,000
Increase in usage by existing customers 327,000
----------
Net operating revenue increase $8,930,000
==========
The components of the rate increases are listed in the following table:
2001 General Rate Case (GRC) $2,423,000
Bakersfield Treatment Plant 1,158,000
Purchased water offset 953,000
2001 GRC catch up 890,000
Step rates 738,000
Balancing accounts 530,000
2002 GRC 163,000
Hawthorne 122,000
----------
Total increase in rates $6,977,000
==========
Usage by new customers includes $703,000 for Hawaii Water as these
operations were acquired in May 2003 and includes $380,000 for the City of
Commerce as a lease arrangement was entered into in July 2003.
15
Total Operating Expenses
Total operating expenses were $54,849,000 for the three months ended March
31, 2004 versus $48,686,000 for the same period in 2003, a 13% increase.
Water production expense consists of purchased water, purchased power and
pump taxes. It represents the largest component of total operating
expenses, accounting for approximately 40% of total operating expenses.
Water production expenses increased 12% compared to last year.
Sources of water production for California operations as a percent of total
water production are listed on the following table:
Three Months Ended
March 31
-----------------
2004 2003
---- ----
Well production 40% 48%
Purchased 56% 51%
Surface 4% 1%
--- ---
Total 100% 100%
=== ===
Washington Water, New Mexico Water and Hawaii Water obtain all of their
water supply from wells. The components of water production costs are shown
in the table below:
Three Months Ended March 31
---------------------------
2004 2003 Change
----------- ----------- -----------
Purchased water $16,361,000 $14,402,000 $ 1,959,000
Purchased power 3,595,000 3,623,000 (37,000)
Pump taxes 1,205,000 928,000 277,000
----------- ----------- -----------
Total $21,161,000 $18,962,000 $ 2,199,000
=========== =========== ===========
Purchased water cost increased due to higher wholesale water rates in
several districts and higher usage of purchased water. Included in
purchased water was an additional expense of $840,000 to revise the
estimated settlement cost to $1,571,000 related to the previously reported
meter malfunction at the wholesale supplier in the Stockton district. The
estimate was revised after completion of a study by a third party
contracted by us. At this time, settlement negotiations have not yet begun
with the wholesale supplier (Stockton East Water District) and the other
primary buyer (City of Stockton), therefore final resolution may be
different from our estimates. Also, included in purchased water is a credit
of $1,381,000 received from certain wholesale suppliers for our southern
California districts. The credits were due to adjustments by certain
wholesale suppliers to all participants for the difference between actual
costs and billed costs for 2003. For the three months ended March 31, 2003,
we did not accrue any additional amounts related to the meter malfunction
and recorded $123,000 of credits from wholesale suppliers. Pump taxes
increases primarily due to higher well production in one district, where
pump tax rates are the highest of all of our districts.
16
Payroll expense increased $590,000. Wages for union employees increased
1.5% effective January 1, 2004. Overall, payroll costs increased 5% due to
increases in the number of employees, higher wage rates and the Hawaii
Water acquisition. Pension costs increased $123,000 or 7% and
employee/retiree medical costs increased $282,000 or 16%. At March 31,
2004, there were 816 employees and at March 31, 2003, there were 797
employees.
Insurance/property claims for the quarter increased $302,000. This was due
primarily to flood damage caused by a pipe breakage in one district and
higher insurance premiums.
Maintenance expense was essentially flat for the quarter ended March 31,
2004, decreasing $72,000, or 2%. Depreciation and amortization expense
increased $758,000 or 13% because of 2003 capital expenditures. A major
component of the depreciation expense increase relates to the Bakersfield
Treatment Plant, which began operations in the second quarter of 2003 and
added $438,000 to depreciation expense in the first quarter of 2004.
Federal and state income taxes increased $1,511,000 due to the change in
taxable income. The effective tax rate was 40% in the current quarter and
42% for the prior year's quarter.
Other Income and Expense
Other income was $551,000 for the quarter ended March 31, 2004 compared to
$1,164,000, a decrease of $613,000. Gains from property sales for the
quarter were minimal compared to gains of $552,000 in 2003.
Interest Expense
Total interest expense decreased $60,000 or 1%. This decrease was due to
lower interest expense on long term debt as a result of refinancing a
portion of the debt in 2003 at lower rates. In addition, average short term
borrowings on our credit facilities were lower than last year. Partially
offsetting this decrease was a decline in capitalized interest, as
construction work in progress amounts were lower in the first quarter of
2004 as compared to the first quarter of 2003.
REGULATORY MATTERS
Rate Case Proceedings
Filings that were approved in 2003 were disclosed in the Management's
Discussion and Analysis section of our annual report on Form 10-K for 2003.
These approved filings impact 2004 revenues because revenue is recorded
based on billings to customers (See Results of First Quarter 2004
Operations Compared to First Quarter 2003 Operations - Operating Revenue).
In 2004, Cal Water received approval from the CPUC for step rate increases
of $4,433,000 on an annual basis, of which $3,902,000 was effective in
January 2004 and $531,000 was effective in April 2004.
17
In February 2004, the CPUC authorized an advice letter for $718,000 for one
district related to increase purchased water rates. The rate change was
effective in February 2004 and will be collected over the next 12 months.
In April 2004, Cal Water received authorization from the CPUC on its 2002
GRC. The GRC included four districts and will increase rates $3,573,000 on
an annual basis, effective April 2004.
Cal Water recovered certain amounts being tracked in off balance sheet
expense balancing and memorandum account. Approvals to recover these
amounts were received in 2003. (See "Expense Balancing and Memorandum
Accounts" section in Critical Accounting Policies.) The amounts remaining
to be recovered from these approved filings as of December 31, 2003 and
March 31, 2004 were $2,760,000 and $2,230,000, respectively.
Cal Water has pending its 2003 GRC filing covering two districts and a
filing for recovery of balancing accounts. We are unable to predict the
timing and final amount of these filings at this time.
Cal Water is planning to submit its 2004 GRC filings in the 3rd quarter of
2004. We are unable to predict the timing and final amount of these filings
at this time.
New Mexico Water is planning to file for rate increases for its waste water
operations in 2004 and Hawaii Water has submitted a rate filing for its
water operations in 2004. We are unable to predict the timing and final
amount of these filings at this time. Washington Water is not planning to
submit a rate filing during 2004.
LIQUIDITY
Short-term and Long-term Debt
Short-term bank borrowings were $9,800,000 at March 31, 2004 and $6,454,000
at December 31, 2003. California Water Service Group has a $10,000,000
credit facility, which includes Washington Water, New Mexico Water, Hawaii
Water and CWS Utility Services and had borrowed $4,700,000 against the
facility at March 31, 2004. Cal Water has a $45,000,000 credit facility and
had borrowed $5,100,000 against the facility at March 31, 2004. In
addition, a $500,000 letter of credit is outstanding under the facility,
which reduces amounts available for borrowing. Both agreements have a
requirement for balances to be below certain thresholds for 30 consecutive
days each calendar year. We met this requirement in the first quarter of
2004 for both agreements. At March 31, 2004, we were in compliance with the
covenants of both facilities.
There were no additions to long term debt and we made principal payments of
$183,000 during the three months period ended March 31, 2004.
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Debt Credit Ratings
Cal Water's debt is rated A2 by Moody's Investors Service (Moody's) and A+
by Standard & Poor's (S&P). The rating from Moody's was downgraded in
February 2004 from A1 to A2. The rating from S&P was unchanged during the
quarter and the last rating change from S&P was in the fourth quarter of
2002.
Common Stock Issuance and Treasury Stock
The Company has $74,062,500 in securities under the shelf registration
filed with the SEC in 2003, which are available for future issuance.
Dividends, Book Value and Shareholders
The first quarter common stock dividend was paid on February 20, 2004, at
$0.2825 per share compared to a quarterly dividend in 2003 of $0.28125.
This was our 237th consecutive quarterly dividend. Annualized, the 2003
dividend rate is $1.13 per common share compared to $1.125 in 2003. Based
on the 12-month earnings per share at March 31, 2004, the dividend payout
ratio is 85% of net income. For the full year 2003, the payout ratio was
93% of net income. On a long-term basis, our goal is to achieve a dividend
payout ratio of 60% of net income accomplished through future earnings
growth.
At its April 28, 2004 meeting, the Board declared the second quarter
dividend of $0.2825 per share payable on May 21, 2004, to stockholders of
record on May 10, 2004. This will be the 238th consecutive quarterly
dividend.
Dividend Reinvestment and Stock Purchase Plan
We have a Dividend Reinvestment and Stock Purchase Plan (Plan). Under the
Plan, stockholders may reinvest dividends to purchase additional Company
common stock without commission fees. The Plan also allows existing
stockholders and other interested investors to purchase Company common
stock through the transfer agent up to certain limits. Our transfer agent
operates the Plan and purchases shares on the open market to provide shares
for the Plan.
2004 Financing Plan
Our 2004 financing plan includes raising approximately $40,000,000 -
$50,000,000 of new capital. For the current year, issuance of senior notes
to institutional investors, issuance of additional common stock or a
combination thereof will be used to raise new capital. Specific amounts are
not yet determined. If common stock is utilized, the common stock issue
will be accomplished with one issuance in 2004 pursuant to the shelf
registration. The timing of the issuance has not been established. Beyond
2004, we intend to fund capital needs through a relatively balanced
approach between long-term debt and equity.
Book Value and Stockholders of Record
Book value per common share was $14.24 at March 31, 2004 compared to $14.44
at December 31, 2003.
19
There are approximately 4,500 stockholders of record for our common stock.
Utility Plant Expenditures
During the three months ended March 31, 2004, capital expenditures totaled
$11,612,000; $8,168,000 was from company-funded projects and $3,444,000 was
from third party funded projects. The 2004 company-funded capital
expenditure budget is $65,800,000, but the actual amount may vary from the
budget number due to timing of actual payments related to current year
projects and prior year projects. We do not control third-party funded
capital expenditures, and therefore we are unable to estimate the amount of
such projects for 2004.
At March 31, 2004, construction work in progress was $20,107,000 compared
to $13,770,000 at December 31, 2003. Work in progress includes projects
that are under construction, but not yet complete and in service.
WATER SUPPLY
Based on information from water management agencies and internally
developed data, we believe that our 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 our water supply and facilities, we have heightened security
at our facilities and have taken added safety precautions for our employees
and the water we deliver to our customers. While we do not make public
comments on our security programs, we have been in contact with federal,
state and local law enforcement agencies to coordinate and improve water
delivery systems security. We have assigned a high priority to completing
work necessary to comply with new Environmental Protection Agency (EPA)
requirements concerning security of water facilities. In 2002, federal
legislation was enacted which resulted in new regulations concerning
security of water facilities, including submitting vulnerability assessment
studies to the federal government. The timing of submission of these
studies was based on size of operations. We have submitted the studies that
are required and plan to complete this program in 2004.
ACQUISITIONS
See Note 8 of the Condensed Consolidated Financial Statements
ACCOUNTING PRONOUNCEMENTS
See Note 7 of the Condensed Consolidated Financial Statements
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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not hold, trade in or issue derivative financial instruments and
therefore are not exposed to risks these instruments present. Our 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 commissions. We do not
have foreign operations; therefore, we do not have a foreign currency
exchange risk. Our business is sensitive to commodity prices and is most
affected by changes in purchased water and purchased power costs.
Historically, the CPUC's balancing account or offsetable expense procedures
allowed for increases in purchased water and purchased power costs to be
passed on to consumers. Traditionally, a significant percentage of our net
income and cash flows comes from California regulated operations; therefore
the CPUC's actions have a significant impact on our business. See Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Expense Balancing and Memorandum Accounts and Regulatory
Matters.
Item 4.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision of and with the
participation of our management, including our principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the
period covered by this report, pursuant to Rule 13a-15(e) under the
Securities Exchange Act of 1934. Based on their review of our disclosure
controls and procedures, the principal executive officer and principal
financial officer have concluded that our disclosure controls and
procedures are effective in timely alerting us to material information that
is required to be included in periodic SEC filings.
(b) Changes to Internal controls
There were no changes in our internal control over financial reporting that
occurred during our last fiscal quarter that have materially affected, or
are reasonably likely to materially affect, such controls.
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PART II OTHER INFORMATION
Item 1.
Legal Proceedings
(a) From time to time, we have been involved in a variety of legal
proceedings. For a complete description, see our annual report on
Form 10-K for the year ended December 31, 2003. During the quarter
ended March 31, 2004, there were no material developments with
respect to previously disclosed existing proceedings and no new
material proceedings not previously disclosed.
Item 4.
Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of California Water Service
Group was held on April 28, 2004 at the headquarters office in San
Jose, California. As proposed in the 2004 Proxy Statement, the
election of directors and confirmation of KPMG LLP to serve as
independent auditors for 2004 were approved by stockholders at the
meeting.
(b) At the annual stockholders meeting, a Board of Directors to serve
for the ensuing year was elected. The following directors were
elected as nominated:
Douglas M. Brown Robert W. Foy
Edward D. Harris, Jr. M.D. Richard P. Magnuson
Linda R. Meier Peter C. Nelson
George A. Vera David N. Kennedy
Bonnie G. Hill
(c) Two proposals were voted on at the meeting: (1) election of
directors for the ensuing year, and (2) ratification of the
selection of KPMG LLP as independent auditors for 2004.
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(1) Tabulation of the votes for the election of directors was:
For Withheld
--- --------
Douglas M. Brown 15,901,992 110,031
Robert W. Foy 15,970,944 110,031
Edward D. Harris, Jr. M.D 15,964,758 110,031
Bonnie G. Hill 15,971,429 110,031
David N. Kennedy 15,962,426 110,031
Richard P. Magnuson 15,920,085 110,031
Linda R. Meier 15,917,719 110,031
Peter C. Nelson 15,962,495 110,031
George A. Vera 15,918,317 110,031
(2) The stockholders ratified the Audit Committee's selection of KPMG
LLP to serve as independent auditors for 2004. There were
15,877,038 votes in favor, 144,662 against and 90,624 abstentions.
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
On January 29, 2004, we furnished a Current Report on Form 8-K pursuant
to Item 12, "Results of Operations and Financial Condition," attaching
our press release dated January 28, 2004 announcing our results of
operations for the fourth quarter and year ended December 31, 2003. On
April 29, 2004, we furnished a Current Report on Form 8-K pursuant to
Item 12, "Results of Operations and Financial Condition," attaching our
press release dated April 28, 2004 announcing our results for the first
quarter of 2004.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CALIFORNIA WATER SERVICE GROUP
------------------------------
Registrant
May 7, 2004
By: /s/ RICHARD D. NYE
----------------------------------------
Richard D. Nye
Vice President, Chief Financial Officer
and Treasurer
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Exhibit Index
Exhibit Description
31.1 Chief Executive Officer certification of financial
statements pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
31.2 Chief Financial Officer certification of financial
statements pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
32 Chief Executive Officer and Chief Financial Officer
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
25