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, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-13883
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CALIFORNIA WATER SERVICE GROUP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0448994
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(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
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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 ___
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
November 4, 2004 - 18,345,496.
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)
September 30, 2004 and December 31, 2003................................ 4
Condensed Consolidated Statements of Income (unaudited)
For the Three and Nine Months Ended September 30, 2004 and 2003......... 5
Condensed Consolidated Statements of Cash Flows (unaudited)
For the Nine Months Ended September 30, 2004 and 2003................... 7
Notes to Condensed Consolidated Financial Statements...................... 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 15
Item 3 Quantitative and Qualitative Disclosure about Market Risk................. 28
Item 4 Controls and Procedures................................................... 28
PART II Other Information
Item 1 Legal Proceedings......................................................... 29
Item 6 Exhibits ................................................................. 29
Signatures................................................................ 30
Index to Exhibits......................................................... 31
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 SHEET
Unaudited
(In thousands, except per share data) September 30, December 31,
2004 2003
----------- -----------
ASSETS
Utility plant:
Utility plant $ 1,124,938 $ 1,078,975
Less accumulated depreciation and amortization 337,766 319,477
----------- -----------
Net utility plant 787,172 759,498
----------- -----------
Current assets:
Cash and cash equivalents 31,322 2,856
Customer receivables 23,950 18,434
Other receivables 4,881 5,125
Unbilled revenue 12,906 8,522
Materials and supplies 3,276 2,957
Taxes and other prepaid expenses 5,458 5,609
----------- -----------
Total current assets 81,793 43,503
----------- -----------
Regulatory assets 55,398 53,326
Other assets 18,571 16,708
----------- -----------
$ 942,934 $ 873,035
=========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $.01 par value $ 183 $ 169
Additional paid-in capital 130,647 93,748
Retained earnings 158,333 150,908
Accumulated other comprehensive loss (301) (301)
----------- -----------
Total common stockholders' equity 288,862 244,524
Preferred stock 3,475 3,475
Long-term debt, less current maturities 271,895 272,226
----------- -----------
Total capitalization 564,232 520,225
----------- -----------
Current liabilities:
Current maturities of long-term debt 857 904
Short-term borrowings -- 6,454
Accounts payable 26,779 23,776
Accrued expenses and other liabilities 37,373 32,430
----------- -----------
Total current liabilities 65,009 63,564
Unamortized investment tax credits 2,925 2,925
Deferred income taxes 50,182 38,005
Regulatory and other liabilities 37,967 35,835
Advances for construction 129,008 121,952
Contributions in aid of construction 93,611 90,529
Commitments and contingencies -- --
----------- -----------
$ 942,934 $ 873,035
=========== ===========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
</FN>
4
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Unaudited
(In thousands, except per share data)
For the three months ended: September 30, September 30,
2004 2003
-------- --------
Operating revenue $ 97,104 $ 88,197
-------- --------
Operating expenses:
Operations 62,456 58,398
Maintenance 3,640 3,172
Depreciation and amortization 6,518 5,830
Income taxes 7,050 5,587
Property and other taxes 2,942 2,691
-------- --------
Total operating expenses 82,606 75,678
-------- --------
Net operating income 14,498 12,519
-------- --------
Other income and expenses:
Non-regulated income, net 650 623
Gain on sale of non-utility property 6 24
-------- --------
Total other income and expenses 656 647
-------- --------
Interest expense:
Interest expense 4,615 4,879
Less capitalized interest 250 300
-------- --------
Total interest expense 4,365 4,579
-------- --------
Net income $ 10,789 $ 8,587
======== ========
Earnings per share
Basic $ 0.59 $ 0.53
======== ========
Diluted $ 0.59 $ 0.53
======== ========
Weighted average shares outstanding
Basic 18,345 16,209
======== ========
Diluted 18,360 16,222
======== ========
Dividends per share of common stock $0.28250 $0.28125
======== ========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
</FN>
5
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Unaudited
(In thousands, except per share data)
For the nine months ended: September 30, September 30,
2004 2003
-------- --------
Operating revenue $246,189 $207,502
-------- --------
Operating expenses:
Operations 159,404 141,851
Maintenance 9,853 9,488
Depreciation and amortization 19,557 17,428
Income taxes 14,852 8,348
Property and other taxes 8,551 7,694
-------- --------
Total operating expenses 212,217 184,809
-------- --------
Net operating income 33,972 22,693
-------- --------
Other income and expenses:
Non-regulated income, net 1,773 1,792
Gain on sale of non-utility property 7 1,535
-------- --------
Total other income and expenses 1,780 3,327
-------- --------
Interest expense:
Interest expense 14,013 14,826
Less capitalized interest 550 1,210
-------- --------
Total interest expense 13,463 13,616
-------- --------
Net income $ 22,289 $ 12,404
======== ========
Earnings per share
Basic $ 1.27 $ 0.79
======== ========
Diluted
$ 1.27 $ 0.79
======== ========
Weighted average shares outstanding
Basic 17,418 15,528
======== ========
Diluted 17,433 15,539
======== ========
Dividends per share of common stock $0.84750 $0.84375
======== ========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
</FN>
6
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands) Unaudited Unaudited
For the nine months ended: September 30, September 30,
2004 2003
-------- --------
Operating activities
Net income $ 22,289 $ 12,404
-------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 19,557 17,428
Deferred income taxes, investment tax credits
regulatory assets and liabilities, net 12,153 3,900
Gain on sale of non-utility assets (7) (1,535)
Changes in operating assets and liabilities:
Receivables (5,233) (2,286)
Unbilled revenue (4,370) (4,715)
Taxes and other prepaid expenses 168 (764)
Accounts payable 2,993 5,293
Other current assets (319) (174)
Other current liabilities 4,938 13,612
Other changes, net (836) (1,425)
-------- --------
Net adjustments 29,044 29,334
-------- --------
Net cash provided by operating activities 51,333 41,738
-------- --------
Investing activities:
Utility plant expenditures
Company funded (35,969) (39,845)
Developer funded (13,107) (13,527)
Acquisitions (900) (6,094)
Proceeds from sale of non-utility assets 13 1,643
-------- --------
Net cash used by investing activities (49,963) (57,823)
-------- --------
Financing activities:
Net changes in short-term borrowings (6,454) (33,900)
Issuance (retirement) of long-term debt, net (378) 19,530
Advances for construction 10,660 9,197
Refunds of advances for construction (3,589) (3,603)
Contributions in aid of construction 4,809 5,310
Issuance of common stock 36,913 43,808
Dividends paid (14,865) (12,924)
-------- --------
Net cash provided by financing
activities 27,096 27,418
-------- --------
Change in cash and cash equivalents 28,466 11,333
Cash and cash equivalents at beginning of period 2,856 1,063
-------- --------
Cash and cash equivalents at end of period $ 31,322 $ 12,396
======== ========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
</FN>
7
CALIFORNIA WATER SERVICE GROUP
Notes to Condensed Consolidated Financial Statements
September 30, 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 commission. 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. As permitted by SFAS No. 123, the Company 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- and nine-month periods
ended September 30, 2004 and 2003 related to stock options. No options
were granted during these periods.
8
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 Sept. 30
---------------------------
2004 2003
---------- ----------
Net income, as reported $ 10,789 $ 8,587
Deduct: Total stock-based employee compensation
expense determined under fair value
method for all awards, net of related tax effects 16 21
---------- ----------
Pro forma net income $ 10,773 $ 8,566
========== ==========
Earnings per share
Basic - as reported $ 0.59 $ 0.53
Basic - pro forma $ 0.59 $ 0.53
Diluted - as reported $ 0.59 $ 0.53
Diluted - pro forma $ 0.59 $ 0.53
(In thousands, except per share data)
Nine Months Ended Sept. 30
--------------------------
2004 2003
---------- ----------
Net income, as reported $ 22,289 $ 12,404
Deduct: Total stock-based employee compensation
expense determined under fair value
method for all awards, net of related tax effects 49 63
---------- ----------
Pro forma net income $ 22,240 $ 12,341
========== ==========
Earnings per share
Basic - as reported $ 1.27 $ 0.79
Basic - pro forma $ 1.27 $ 0.79
Diluted - as reported $ 1.27 $ 0.79
Diluted - pro forma $ 1.27 $ 0.79
9
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 outstanding to purchase common shares were 143,250
and 149,250 at September 30, 2004 and September 30, 2003, respectively.
(In thousands, except per share data)
Three Months Ended Sept. 30
---------------------------
2004 2003
------- -------
Net income $10,789 $ 8,587
Less preferred dividends 38 38
------- -------
Net income available to common stockholders $10,751 $ 8,549
======= =======
Weighted average common shares 18,345 16,209
Dilutive common stock options (treasury method) 15 13
------- -------
Shares used for dilutive computation 18,360 16,222
======= =======
Net income per share - basic $ 0.59 $ 0.53
------- -------
Net income per share - diluted $ 0.59 $ 0.53
------- -------
10
(In thousands, except per share data)
Nine Months Ended September 30
------------------------------
2004 2003
------- -------
Net income $22,289 $12,404
Less preferred dividends 115 115
------- -------
Net income available to common stockholders $22,174 $12,289
======= =======
Weighted average common shares 17,418 15,528
Dilutive common stock options (treasury method) 15 11
------- -------
Shares used for dilutive computation 17,433 15,539
======= =======
Net income per share - basic $ 1.27 $ 0.79
------- -------
Net income per share - diluted $ 1.27 $ 0.79
------- -------
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 plans and other
postretirement benefits were $3,767,000 for the three months ended
September 30, 2004, and $9,808,000 for the nine months ended September
30, 2004. The Company plans to fund $12,600,000 in 2004, an increase of
$1,100,000 from the amount reported in the previous quarter. Payments
may be further adjusted prior to December 2004 upon receipt of revised
calculations from the Company's actuary.
11
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 postretirement benefits.
(In thousands)
Three Months Ended September 30
----------------------------------------
Pension Benefit Other Benefits
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Service cost $ 1,182 $ 970 $ 380 $ 258
Interest cost 1,482 1,344 382 306
Expected return on plan assets (1,208) (1,189) (83) (58)
Recognized net initial ABO -- -- -- --
Recognized net initial APBO -- -- 69 69
Amortization of prior service cost 420 450 18 19
Recognized net actuarial loss 174 15 130 72
------- ------- ------- -------
Net periodic benefit cost $ 2,050 $ 1,590 $ 896 $ 666
======= ======= ======= =======
(In thousands)
Nine Months Ended September 30
----------------------------------------
Pension Benefit Other Benefits
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Service cost $ 3,456 $ 2,910 $ 990 $ 774
Interest cost 4,210 4,032 1,066 918
Expected return on plan assets (3,646) (3,567) (255) (174)
Recognized net initial ABO -- -- -- --
Recognized net initial APBO -- -- 207 207
Amortization of prior service cost 1,268 1,350 56 57
Recognized net actuarial loss 242 45 298 216
------- ------- ------- -------
Net periodic benefit cost $ 5,530 $ 4,770 $ 2,362 $ 1,998
======= ======= ======= =======
ABO - Accumulated benefit obligation
APBO - Accumulated postretirement benefit obligation
Postretirement benefit expense for "other benefits" recorded in the
three-month periods ended September 30, 2004 and 2003 was $251,000 and
$357,000, respectively. Postretirement benefit expense for "other
12
benefits" recorded in the nine-month periods ended September 30, 2004
and 2003 was $1,034,000 and $1,053,000, respectively. As of September
30, 2004, the Company had a regulatory asset of $8,175,000 related to
postretirement benefits, which is expected to be recovered through
future customer rates. The regulatory asset incorporates a reduction of
$604,000 due to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. See Note 9, New Accounting Standards.
Note 7. Financing
On June 24, 2004, the Company announced the sale of 1,250,000 shares of
common stock. A prospectus supplement and prospectus were filed with
the SEC under rule 424 (b) (2) on that date. The shares were sold at
$27.25 per share. The underwriters exercised part of their
over-allotment option, after which the additional common shares issued
totaled 1,409,700 shares. The net proceeds were $36,800,000 and the
transaction was closed on June 29, 2004. The funds were used to pay
down short-term borrowings and to invest in short-term money market
instruments pending their use for general corporate purposes. After
issuance of these shares, there remains $35,648,175 in securities under
the shelf registration, which are available for future issuance.
Note 8. CPUC Decision Related to Failure to Report Acquisitions
On July 8, 2004, the California Public Utilities Commission (CPUC)
issued a final decision regarding the Company's failure to report three
small acquisitions. The Company was assessed a fine of $75,000 and a
reduction of 50 basis points (0.5%) in the allowed return on equity for
its Salinas district, the district that includes two of the three
acquisitions. The time frame for the return on equity reduction is
expected to be one year. The Office of Ratepayer Advocates had
recommended a fine of $9.6 million and refund of $0.5 million, which
the CPUC rejected. Prior to this decision, the Company had filed for a
general rate increase in its Salinas district, which the CPUC was
holding pending the resolution of this matter. With the final decision
on this matter, a rate increase for the Salinas district was approved
in July 2004 that will increase annual revenues by an estimated $1.1
million, after adjustment for the reduction in allowed rate of return.
The $75,000 fine was recorded as an expense in the second quarter. The
increase in revenue is recorded when billed to customers, consistent
with the Company's revenue recognition practices.
Note 9. New Accounting Standards
In December 2003, the Financial Accounting Standards Board (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 of Interpretation No. 46. The original
guidance issued under Interpretation No. 46 in January 2003 is still
13
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 March 31, 2004. The adoption of Interpretation No.
46R did not impact the Company's financial position, results of
operations or cash flows.
In December 2003, the FASB issued Statements of Financial Accounting
Standards (SFAS) No. 132 (revised), "Employers' Disclosures about
Pensions and Other Postretirement Benefits - An Amendment of FASB
Statements No. 87, 88, and 106," which changed certain disclosures.
SFAS No. 132 (revised) was effective for fiscal years ending after
December 15, 2003, and is effective for interim-period disclosures
beginning after December 15, 2003. As the revision relates to
disclosure requirements, the adoption of SFAS No. 132 (revised) did not
impact the Company's financial position, results of operations or cash
flows.
In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003." FSP No.
106-2 is effective for the first quarter after June 15, 2004, and
replaces FSP No. 106-1. FSP 106-1 was effective for the Company's
consolidated financial statements for the year ended December 31, 2003.
The Company has determined its retiree health plan is actuarially
equivalent and would qualify for the subsidy. Because the Company is
regulated, FSP 106-2 did not have an impact to the income statement or
cash flows. The adjustment for FSP 106-2 impacts the balance sheet
only, decreasing liabilities and assets by $604,000. The Company
believes it will be eligible for the subsidy starting in 2006. The
Company has not yet decided on whether any or a portion of the subsidy
will impact premiums charged to retirees, therefore this adjustment may
change once a decision has been made.
14
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This quarterly report 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; the ability to satisfy
requirements related to Sarbanes Oxley Act section 404 and other
regulations on internal controls; condemnation actions taken by
governmental entities; 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 the 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 current or future debt that could increase financing
costs or affect the ability to borrow, make payments on debt or pay
dividends; and, other risks and unforeseen events. When considering
forward-looking statements, the reader should keep in mind the
cautionary statements included in this paragraph. 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 is 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. Management believes
15
that the following accounting policies are critical because they
involve a higher degree of complexity and judgment, and can have a
material impact on the 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, 2004, the
unbilled revenue amount was $12,906,000 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 $2,102,000 at September 30, 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
customers. The amounts included in these accounts relate to rate
increases charged by suppliers of purchased water and purchased power
and increases in pump taxes, and only apply to the Company's California
regulated operations. The Company does not record expense balancing or
memorandum accounts in its financial statements as revenue, or as a
receivable, until the CPUC has authorized recovery of the higher costs
and customers have been billed. Therefore, a timing difference may
occur between when costs are incurred and the associated revenues are
recognized. The balancing and memorandum accounts are only used to
track the cost variances outside of the financial statements. The cost
variances, which are beyond the Company's control, are referred to as
"offsetable expenses" because under certain circumstances they are
recoverable from customers in future offset rate increases (or, in the
case of expense reductions, are credited to customers). 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. See Regulatory
Matters for net balances of expense balancing and memorandum accounts.
16
Regulated Utility Accounting
- ----------------------------
Because the Company operates extensively in a regulated business, it is
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 the Company's operations were no
longer subject to the provisions of SFAS No. 71, it 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 have
been no such asset impairments as of September 30, 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 differing 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. Management 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, 2004.
Pension Benefits
- ----------------
The Company incurs costs associated with its 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. The Company
uses an investment advisor to provide advice in managing the plan's
investments. Management anticipates that any increase in funding for
the pension and postretirement health care benefits plans will be
recovered in future customer rates.
17
RESULTS OF THIRD QUARTER 2004 OPERATIONS COMPARED TO THIRD QUARTER
2003 OPERATIONS
Summary
- -------
Third quarter net income was $10,789,000, equivalent to $0.59 per
common share on a diluted basis, compared to net income of $8,587,000
or $0.53 per share on a diluted basis in the third quarter of 2003. The
primary driver was an increase in rates. Partially offsetting revenue
increases were cost increases for purchased water, income taxes,
depreciation and other expenses. In addition, more common shares were
outstanding in 2004 than in 2003.
Operating Revenue
- -----------------
Operating revenue increased $8,907,000, or 10%, to $97,104,000. As
disclosed in the following table, the increase was due primarily to
increases in rates. Weather impact was unfavorable, as temperatures
were slightly lower and decreased usage compared to the prior year.
Rainfall was minor in both periods.
The factors that affected the operating revenue increase for the third
quarter of 2004 are presented in the following table:
Rate increases $ 9,922,000
Usage by new customers 1,318,000
Decrease in usage by existing customers (2,333,000)
-----------
Net operating revenue increase $ 8,907,000
===========
The components of the rate increases are listed in the following table:
2001 General Rate Case (GRC) $ 3,240,000
2002 GRC 1,715,000
Purchased water offset 1,608,000
Step rates 1,370,000
Bakersfield Treatment Plant 1,310,000
2001 GRC catch up 1,129,000
Hawthorne 240,000
Balancing accounts (690,000)
-----------
Total increase in rates $ 9,922,000
===========
Total Operating Expenses
- ------------------------
Total operating expenses were $82,606,000 for the three months ended
September 30, 2004, up 9% over the $75,678,000 recorded for the same
period in 2003.
18
Water production expense consists of purchased water, purchased power
and pump taxes. It represents the largest component of total operating
expenses, accounting for approximately 49% of total operating expenses.
Water production expenses increased 3% compared to last year.
For California operations, sources of water as a percent of total water
production are listed on the following table:
Three Months Ended September 30
--------------------------------
2004 2003
------ ------
Well production 49.9% 51.6%
Purchased 46.5% 46.1%
Surface 3.6% 2.3%
------ ------
Total 100.0% 100.0%
====== ======
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 September 30
---------------------------------------
2004 2003 Change
----------- ----------- -----------
Purchased water $28,839,000 $27,411,000 $ 1,428,000
Purchased power 8,460,000 9,065,000 (605,000)
Pump taxes 2,754,000 2,327,000 427,000
----------- ----------- -----------
Total $40,053,000 $38,803,000 $ 1,250,000
=========== =========== ===========
Purchased water cost increased principally due to higher wholesale
water rates in several districts. Included in purchased water are
credits received from certain wholesale suppliers and sale of water
rights. The amounts of the credits were $366,000 and $739,000 for 2004
and 2003, respectively. Purchased power decreased due principally to
lower rates. Pump taxes increased primarily due to higher well
production in the Los Altos district, where pump tax rates are the
highest of all of the Company's districts.
Payroll charged to operations expense increased $571,000 or 7%. Wages
for union employees increased 1.5% effective January 1, 2004. Overall
payroll costs (expensed and capitalized) increased 6% due to increases
in the number of employees and higher wage rates. Employee and retiree
medical costs increased $528,000 or 32%. Workers' compensation costs
increased $425,000 or 128%. At September 30, 2004, there were 830
employees and at September 30, 2003, there were 814 employees.
Other areas of major expense increases were: outside services,
principally related to compliance with the internal control provisions
of Sarbanes Oxley ($467,000); increases for fees payable to the CPUC
($160,000), which are calculated on a percentage of revenue; increases
19
for bad debts ($161,000); increases related to the Bakersfield
Treatment Plant operations ($124,000) and increases for training
($103,000).
Maintenance expense increased $468,000, or 15%, for the quarter ended
September 30, 2004, primarily for mains and service lines. Depreciation
and amortization expense increased $688,000 or 12% 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. Depreciation of the plant
began January 2004, consistent with the Company's accounting policies,
and added $484,000 to depreciation expense in the third quarter of
2004.
Federal and state income taxes increased $1,463,000 or 26% due to the
increase in taxable income. The effective tax rate was 40% and 39% for
the third quarters of 2004 and 2003, respectively.
Other Income and Expense
- ------------------------
Other income was $656,000 for the quarter ended September 30, 2004,
compared to $647,000 in the prior year, an increase of $9,000. Gains
from property sales were minor in both periods.
Interest Expense
- ----------------
Total interest expense decreased $214,000 or 5%. The decrease was
principally due to lower short-term borrowings.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 2004 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 2003
Summary
- -------
Net income for the nine-month period ended September 30, 2004, was
$22,289,000, equivalent to $1.27 per common share on a diluted basis,
compared to net income of $12,404,000 or $0.79 per share on a diluted
basis, for the nine months ended September 30, 2003. The primary
drivers were increases in rates and favorable weather conditions
occurring in the second quarter. Partially offsetting the increase in
revenues were cost increases for purchased water, income taxes,
depreciation and other expenses. In addition, more shares were
outstanding in 2004 than in 2003.
Operating Revenue
- -----------------
Operating revenue increased $38,687,000 or 19% to $246,189,000. As
disclosed in the following table, the increase was due to increases in
rates and increases in water usage. Weather impact was favorable as
rainfall was much lower than in the prior year, primarily in the second
quarter. Temperatures were approximately the same. The lower rainfall
increased water usage by 8% above the prior year, with the largest
monthly increase (30%) in April. The factors that affected the
operating revenue increase are presented in the following table:
20
Rate increases $ 26,448,000
Increase in usage by existing customers 7,617,000
Usage by new customers 4,622,000
------------
Net operating revenue increase $ 38,687,000
============
The components of the rate increases are listed in the following table:
2001 GRC $ 9,103,000
Purchased water offset 4,042,000
Bakersfield Treatment Plant 3,625,000
Step rates 3,244,000
2001 GRC catch up 3,173,000
2002 GRC 2,846,000
Hawthorne 536,000
Balancing accounts (121,000)
------------
Total increase in rates $ 26,448,000
============
Usage by new customers includes $970,000 related to Hawaii Water, whose
operations were acquired in May 2003, and includes $1,016,000 for the
City of Commerce, for which the lease arrangement began in July 2003.
Total Operating Expenses
- ------------------------
Total operating expenses were $212,217,000 for the nine months ended
September 30, 2004, an increase of 15% over the $184,809,000 recorded
for the same period in 2003.
Water production expense consists of purchased water, purchased power
and pump taxes. It represents the largest component of total operating
expenses, accounting for approximately 45% of total operating expenses.
Water production expenses increased 13% compared to last year.
For California operations, sources of water as a percent of total water
production are listed on the following table:
Nine Months Ended September 30
------------------------------
2004 2003
------ ------
Well production 47.4% 48.0%
Purchased 48.5% 50.9%
Surface 4.1% 1.1%
------ ------
Total 100.0% 100.0%
====== ======
Washington Water, New Mexico Water and Hawaii Water obtain all of their
water supply from wells.
21
The components of water production costs are shown in the table below:
Nine Months Ended September 30
-------------------------------------------
2004 2003 Change
------------ ------------ ------------
Purchased water $ 70,580,000 $ 61,110,000 $ 9,470,000
Purchased power 18,012,000 18,056,000 (44,000)
Pump taxes 6,185,000 4,831,000 1,354,000
------------ ------------ ------------
Total $ 94,777,000 $ 83,997,000 $ 10,780,000
============ ============ ============
Purchased water cost increased due to higher wholesale water rates in
several districts and increased purchases of purchased water. Included
in purchased water costs was an additional expense of $868,000 to
revise the settlement cost to $1,599,000 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 and negotiation of a settlement with all parties. For the
nine months ended September 30, 2003, expenses related to the meter
malfunction were approximately $487,000. Also included in purchased
water are credits received from certain wholesale suppliers and sale of
water rights. The amounts of the credits were $2,942,000 and $2,717,000
for 2004 and 2003, respectively. Purchased power decreased due to a
decrease in electricity rates. Pump taxes increased primarily due to
higher well production in the Los Altos district, where pump tax rates
are the highest of all of the Company's districts.
Payroll charged to operations expense increased $2,000,000 or 8%. Wages
for union employees increased 1.5% effective January 1, 2004. Overall
payroll costs (expensed and capitalized) increased 5% due to increases
in the number of employees and higher wage rates. Employee and retiree
medical costs increased $1,162,000 or 22%. Workers' compensation costs
increased $815,000 or 88%. At September 30, 2004, there were 830
employees and at September 30, 2003, there were 814 employees.
Other areas of major expense increases were: increases for outside
services, principally related to compliance with the internal control
provisions of Sarbanes Oxley ($585,000); increases for fees payable to
the CPUC ($516,000), which are calculated on a percentage of revenue;
increases related to the Bakersfield Treatment Plant operations
($539,000), increases for bad debts ($169,000); increases for insurance
($287,000); and increases for training ($251,000).
Maintenance expense increased $365,000 or 4% for the nine months
primarily due to repairs to service lines. Depreciation and
amortization expense increased $2,129,000 or 12% 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. Depreciation of the plant
began January 2004, consistent with the Company's accounting policies,
and added $1,451,000 to depreciation expense in 2004.
22
Federal and state income taxes increased $6,504,000, or 78% due to the
increase in taxable income. The effective tax rate was 40% in 2004 and
40% in 2003.
Other Income and Expense
- ------------------------
Other income was $1,780,000 for the nine months ended September 30,
2004, compared to $3,327,000 for the first nine months of 2003, a
decrease of $1,547,000. Gains from property sales for 2004 were minimal
compared to gains of $1,535,000 in 2003.
Interest Expense
- ----------------
Total interest expense decreased $153,000 or 1%. This was due to lower
short-term borrowings and lower interest expense on long-term debt as a
result of refinancing a portion of the debt. Partially offsetting the
decrease was a reduction in capitalized interest, which is a credit to
total interest expense. Construction work-in-progress amounts were
lower in the first nine months of 2004 compared to the first nine
months of 2003.
REGULATORY MATTERS
Rate Case Proceedings
- ---------------------
Filings that were approved in 2003 were disclosed in the Management's
Discussion and Analysis section of the annual report on Form 10-K for
2003. Filings approved in 2003 may impact 2004 revenues incrementally
as revenue is recorded based on billings to customers.
Following are major filings approved in 2004 (through October 2004):
--------------------------------------------------------------------
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.
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 General Rate Case (GRC). The GRC included four districts and
increased rates $3,573,000 on an annual basis, effective April 2004.
In July 2004, Cal Water received authorization from the CPUC on its
Salinas district filing. This will increase rates $1,121,000 on an
annual basis, effective July 2004.
In September 2004, Cal Water received authorization from the CPUC on
its 2003 GRC filing, which increased rates $388,000 on an annual basis,
effective October 2004.
23
In September 2004, Cal Water received authorization from the CPUC on
its Los Altos advice letter filing related to purchased water and pump
taxes, which increased rates $487,000 on an annual basis, effective
October 2004.
Expense Balancing and Memorandum Accounts
- -----------------------------------------
The following discussion relates to changes in the Company's expense
balancing memorandum accounts (See "Expense Balancing and Memorandum
Accounts" section in Critical Accounting Policies).
In May 2003, Cal Water received approval from the CPUC to recover in
rates a net $4,649,000, which relate primarily to expenses incurred in
2001. The net amounts remaining to be collected in rates as of December
2003 was $2,760,000. At September, 2004, the net amounts remaining were
$1,051,000, which is expected to be fully recovered/refunded by May
2005.
In May 2004, Cal Water received approval from the CPUC to refund in
rates $1,515,000 which relates primarily to over collection of specific
expenses incurred over multiple years in the King City and Dominguez
districts. At September 2004, the credit amounts remaining for the King
City and Dominguez districts were $874,000 which is expected to be
refunded by May 2005, except for a minor credit that will be refunded
by May 2007.
In June 2004, Cal Water received approval from the CPUC to recover in
rates $394,000. This amount relates primarily of recoverable expenses
incurred in 2001 for the Salinas district. At September 2004, the
amount remaining for the Salinas district was $313,000 which is
expected to be fully recovered by June 2006.
In October 2004, Cal Water received approval from the CPUC to recover
in rates a net $5,639,000. These amounts relate primarily of
recoverable expenses incurred in 2002 and 2003. These amounts are
expected to be recovered/refunded by October 2006.
Pending Filings as of October 2004
- ----------------------------------
Cal Water has pending its 2004 GRC filing covering 8 districts. The
amount requested is $26,500,000. The amount may change due to a variety
of factors. Over the past few years, the amount approved by the CPUC
has been substantially less than the requested amount. The Company is
unable to predict the timing and final amount of these filings at this
time.
Cal Water is in the process of re-filing advice letters for balancing
and memorandum account recovery for three districts in the amount of
$3,560,000. It is expected the re-filing will be completed within one
month and CPUC approval will be received prior to April 2005.
New Mexico Water has filed for rate increases for its waste water
operations and Hawaii Water has submitted a rate filing for its water
operations. When approved, these filings are not expected to materially
affect the total Company results. We are unable to predict the timing
24
and final amount of these filings at this time. Washington Water is not
planning to submit a rate filing in 2004.
LIQUIDITY
Short-term and Long-term Debt
- -----------------------------
Short-term bank borrowings were $0 at September 30, 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 no borrowings against
the facility at September 30, 2004. Cal Water has a $45,000,000 credit
facility and had no borrowings against the facility at September 30,
2004. A $500,000 letter of credit is outstanding under the Cal Water
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 (a clean down
requirement) and both agreements require minimum ratings by defined
credit agencies on Cal Water's senior, long-term debt. The Company has
met the clean down requirements for 2004 for both agreements and has
credit ratings meeting the requirements. At September 30, 2004, the
Company was in compliance with the covenants of both facilities.
In May 2004, New Mexico Water entered into a credit agreement which
allows borrowings up to $3,400,000. The term is 16 months until
approval has been received from the New Mexico Public Regulation
Commission, upon which the term will be ten years. A request has been
filed and is expected to be received in the fourth quarter of 2004. At
September 30, 2004, no amounts were borrowed against the agreement. The
prior New Mexico Water credit agreement had borrowings of approximately
$2,500,000, which was paid and not renewed. Funds from intercompany
borrowings with California Water Service Group were used to pay the
debt.
There were no additions to long-term debt in the nine-month period
ended September 30, 2004. Principal payments of $62,000 and $378,000
were made during the three- and nine-month periods ended September 30,
2004, respectively.
In September 2004, Cal Water received authorization from the CPUC on
its Financing filing related to $250,000,000 of additional debt or
equity available for issuance through the year 2009. This amount will
be utilized on an as-needed basis. The balance remaining from the
previous authorization does not carry over.
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 last rating change from S&P was in
the fourth quarter of 2002. There have not been further changes by
Moody's or S&P as of the filing date of this Form 10-Q.
25
Common Stock Issuance and Treasury Stock
- ----------------------------------------
On June 24, 2004, the Company announced the sale of 1,250,000 shares of
common stock. A prospectus supplement and prospectus were filed with
the SEC under rule 424 (b) (2) on that date. The shares were sold at
$27.25 per share. The underwriters exercised part of their
over-allotment option, after which the additional common shares issued
totaled 1,409,700 shares. The proceeds net of expenses of the offering
were $36,800,000 and the transaction was closed on June 29, 2004.
Initially, the funds were used to pay down short-term borrowings and to
invest in short-term money market instruments pending their use for
general corporate purposes. After issuance of these shares, there
remains $35,648,175 in securities under the shelf registration, which
are available for future issuance.
No treasury stock was issued or redeemed during 2004 or 2003.
Dividends, Book Value and Shareholders
- --------------------------------------
The third quarter common stock dividend was paid on August 20, 2004, at
$0.2825 per share, compared to a quarterly dividend in 2003 of
$0.28125. This was the Company's 239th consecutive quarterly dividend.
Annualized, the 2004 dividend rate is $1.13 per common share, compared
to $1.125 in 2003. Based on the 12-month earnings per share at
September 30, 2004, the dividend payout ratio is 67% of net income. For
the full year 2003, the payout ratio was 93% of net income. On a
long-term basis, the goal is to achieve a dividend payout ratio of 60%
of net income accomplished through future earnings growth.
At its October 27, 2004 meeting, the Board declared the fourth quarter
dividend of $0.2825 per share, payable on November 19, 2004, to
stockholders of record on November 8, 2004. This will be the 240th
consecutive quarterly dividend.
Dividend Reinvestment and Stock Purchase Plan
- ---------------------------------------------
The Company has a dividend reinvestment and stock purchase plan called
the "Investor Choice Plan" and it is administered by its transfer
agent, American Stock Transfer and Trust Company. 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 without commission fees up to certain
limits. The transfer agent purchases shares on the open market to
provide shares for the Plan.
Transfer Agent
- --------------
Effective October 1, 2004, the Company changed transfer agents to
American Stock Transfer and Trust Company. The agent will manage
dividend payments, provide a dividend reinvestment and stock purchase
plan, and other matters for the Company. This change is expected to be
transparent to the Company's stockholders.
2004 Financing Plan
- -------------------
Proceeds from the issuance of additional common shares in June 2004 are
expected to provide adequate new capital for the balance of 2004 and
may be supplemented with short- term borrowings as needed. For 2005,
the financing plan includes raising $20,000,000 - $40,000,000 of new
26
capital and is expected to be accomplished through issuance of senior
notes to institutional investors. The timing of the debt issuance for
2005 has not been established. Beyond 2005, the plan is to fund capital
needs through a relatively balanced approach between long-term debt and
common stock equity.
Book Value and Stockholders of Record
- -------------------------------------
Book value per common share was $15.75 at September 30, 2004, compared
to $14.44 at December 31, 2003.
There are approximately 4,500 stockholders of record for the Company's
common stock.
Utility Plant Expenditures
- --------------------------
During the nine months ended September 30, 2004, capital expenditures
totaled $49,076,000; $35,969,000 was from company-funded projects and
$13,107,000 was from third party funded projects. The 2004
company-funded capital expenditure budget is $65,800,000. The actual
amount may vary due to timing of payments related to current year
projects and prior year projects. In addition, some projects planned to
be completed in 2004 are expected to be completed in 2005. The Company
does not control third-party funded capital expenditures, and therefore
it is unable to estimate the amount of such projects for the full year
of 2004.
At September 30, 2004, construction work-in-progress was $33,984,000
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, the Company believes that its various sources of water
supply are sufficient to meet customer demand. Historically, about half
of the water is purchased from wholesale suppliers with the other half
pumped from underground wells. A small portion is produced through
three local surface treatment plants.
To safeguard its water supply and facilities, the Company has
heightened security and has taken added safety precautions for its
employees and the water delivered to customers. While the Company does
not make public comments on its security programs, management has been
in contact with federal, state and local law enforcement agencies to
coordinate and improve water delivery systems security. Management
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
that resulted in new regulations concerning security of water
facilities, including submitting vulnerability assessment studies to
the federal government. The Company has completed and submitted all
studies for all operations as required by this legislation.
27
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 retired NUC's stock and merged 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 $30,000 of goodwill was recorded
in the transaction.
ACCOUNTING PRONOUNCEMENTS
See Note 9 of the Condensed Consolidated Financial Statements
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT 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 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. The Company does not have foreign
operations; therefore, does not have a foreign currency exchange risk.
The 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. A significant percentage of the
Company's net income and cash flows comes from California regulated
operations; therefore the CPUC's actions could impact the Company's
ability to pass cost increases to its customers which could have a
significant impact on the 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
The Company carried out an evaluation, under the supervision of and
with the participation of management, including the principal executive
officer and principal financial officer, of the effectiveness of the
design and operation of the Company's 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 the Company's disclosure controls and procedures, the
principal executive officer and principal financial officer have
concluded that the Company's disclosure controls and procedures are
28
functioning effectively to provide reasonable assurance that the
information required to be disclosed in periodic SEC filings is
reported within the time periods specified by the SEC rules and
regulations.
(b) Changes to Internal controls
There were no changes in the Company's internal control over financial
reporting that occurred during the last fiscal quarter that have
materially affected, or are reasonably likely to materially affect,
such control.
PART II OTHER INFORMATION
Item 1.
LEGAL PROCEEDINGS
(a) From time to time, the Company has been involved in a variety of
legal proceedings. For a description, see the annual report on
Form 10-K for the year ended December 31, 2003. During the nine
months ended September 30, 2004, there were no material
developments with respect to previously disclosed existing
proceedings and no new material proceedings not previously
disclosed except as noted below.
(b) In the Company's Selma district, the City Council voted
unanimously on October 18, 2004, not to adopt a resolution of
necessity and to abandon its efforts to purchase the Company's
water system in Selma through condemnation procedures. Therefore,
the Company will not take any further action on this matter. The
Company intends to improve working relations and communications
with the City.
Item 6.
EXHIBITS
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.
29
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
November 5, 2004
By: /s/ Richard D. Nye
-----------------------------------------------
Richard D. Nye
Vice President, Chief Financial Officer
and Treasurer
30
Exhibit Index
Exhibit Description
------- -----------
10.22 Amendment No.1 to the California Water Service Company
Supplemental Executive Retirement Plan effective January 1,
2001.
10.27 Amendment No.2 to the California Water Service Company
Supplemental Executive Retirement Plan effective January 1,
2003.
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.
31