UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
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
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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)
408-367-8200
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(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
August 1, 2005 - 18,375,496.
TABLE OF CONTENTS
Page
PART I Financial Information - Financial Statements....................... 3
Item 1 Condensed Consolidated Balance Sheets (unaudited)
June 30, 2005 and December 31, 2004............................. 4
Condensed Consolidated Statements of Income (unaudited)
For the Three and Six Months Ended June 30, 2005 and 2004....... 5
Condensed Consolidated Statements of Cash Flows (unaudited)
For the Six Months Ended June 30, 2005 and 2004................. 6
Notes to Unaudited Condensed Consolidated Financial Statements.... 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 14
Item 3 Quantitative and Qualitative Disclosure about Market Risk......... 29
Item 4 Controls and Procedures........................................... 29
PART II Other Information
Item 1 Legal Proceedings................................................. 30
Item 4 Submission of Matters to a Vote of Security Holders............... 30
Item 6 Exhibits.......................................................... 30
Signatures........................................................ 31
Index to Exhibits................................................. 32
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
(In thousands, except per share data)
Unaudited
June 30, December 31,
2005 2004
----------- -----------
ASSETS
Utility plant:
Utility plant $ 1,177,272 $ 1,144,074
Less accumulated depreciation and amortization 358,184 343,769
----------- -----------
819,088 800,305
----------- -----------
Current assets:
Cash and cash equivalents 19,243 18,820
Receivables, net of allowances for uncollectible accounts
of $286 at June 30, 2005 and $ 287 at December 31, 2004
Customers 18,331 15,867
Income taxes 363 7,298
Other 4,629 3,147
Unbilled revenue 13,601 9,307
Materials and supplies, at average cost 3,834 3,161
Prepaid pension expense 281 3,671
Taxes and other prepaid expenses 5,501 9,122
----------- -----------
Total current assets 65,783 70,393
----------- -----------
Regulatory assets
55,174 53,477
Other assets 19,646 18,678
----------- -----------
$ 959,691 $ 942,853
=========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $.01 par value $ 184 $ 184
Additional paid-in capital 131,510 131,271
Retained earnings 154,574 156,851
Accumulated other comprehensive loss (701) (701)
----------- -----------
Total common stockholders' equity 285,567 287,605
Preferred stock 3,475 3,475
Long-term debt, less current maturities 274,538 274,821
----------- -----------
Total capitalization 563,580 565,901
----------- -----------
Current liabilities:
Current maturities of long-term debt 1,144 1,100
Short-term borrowings -- --
Accounts payable 30,096 19,745
Accrued expenses and other liabilities 37,868 36,367
----------- -----------
Total current liabilities 69,108 57,212
Unamortized investment tax credits 2,721 2,721
Deferred income taxes 56,710 54,826
Regulatory and other liabilities 36,170 35,986
Advances for construction 136,010 131,292
Contributions in aid of construction 95,392 94,915
Commitments and contingencies -- --
----------- -----------
$ 959,691 $ 942,853
=========== ===========
<FN>
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
</FN>
4
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Unaudited
For the three months ended: For the six months ended:
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
-------- -------- -------- --------
Operating revenue $ 81,457 $ 88,845 $141,760 $149,085
-------- -------- -------- --------
Operating expenses:
Water production costs 29,395 33,563 49,215 54,724
Other operations 21,804 21,887 43,747 42,224
Maintenance 3,759 3,032 7,418 6,213
Depreciation and amortization 7,006 6,521 14,002 13,039
Income taxes 5,148 6,844 5,603 7,802
Property and other taxes 3,092 2,915 6,057 5,609
-------- -------- -------- --------
Total operating expenses 70,204 74,762 126,042 129,611
-------- -------- -------- --------
Net operating income 11,253 14,083 15,718 19,474
-------- -------- -------- --------
Other income and expenses:
Non-regulated income, net 705 573 1,343 1,123
Gain on sale of non-utility property 61 -- 59 1
-------- -------- -------- --------
Total other income and expenses 766 573 1,402 1,124
-------- -------- -------- --------
Interest expense:
Interest expense 4,653 4,752 9,299 9,398
Less capitalized interest 225 150 450 300
-------- -------- -------- --------
Total interest expense 4,428 4,602 8,849 9,098
-------- -------- -------- --------
Net income $ 7,591 $ 10,054 $ 8,271 $ 11,500
======== ======== ======== ========
Earnings per share
Basic $ 0.41 $ 0.59 $ 0.45 $ 0.67
======== ======== ======== ========
Diluted $ 0.41 $ 0.59 $ 0.45 $ 0.67
======== ======== ======== ========
Weighted average shares outstanding
Basic 18,373 16,965 18,372 16,949
======== ======== ======== ========
Diluted 18,407 16,983 18,404 16,967
======== ======== ======== ========
Dividends per share of common stock $ 0.2850 $ 0.2825 $ 0.5700 $ 0.5650
======== ======== ======== ========
<FN>
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
</FN>
5
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
For the six months ended: June 30, June 30,
2005 2004
-------- --------
Operating activities
Net income $ 8,271 $ 11,500
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,002 13,039
Deferred income taxes, investment tax credits
regulatory assets and liabilities, net 316 10,925
Gain on sale of non-utility assets (59) (1)
Changes in operating assets and liabilities:
Receivables 2,972 (13,103)
Unbilled revenue (4,294) (4,572)
Taxes and other prepaid expenses 7,012 (1,308)
Accounts payable 10,350 4,838
Other current assets (673) (268)
Other current liabilities 1,501 3,971
Other changes, net (608) (915)
-------- --------
Net adjustments 30,519 12,606
-------- --------
Net cash provided by operating activities 38,790 24,106
-------- --------
Investing activities:
Utility plant expenditures:
Company-funded (28,463) (21,399)
Developer-funded (5,572) (8,230)
Acquisitions (155) (900)
Proceeds from sale of non-utility assets 62 6
-------- --------
Net cash used in investing activities (34,128) (30,523)
-------- --------
Financing activities:
Net changes in short-term borrowings -- (6,454)
Retirement of long-term debt, net (557) (316)
Advances for construction 7,039 7,096
Refunds of advances for construction (2,321) (2,394)
Contributions in aid of construction 1,910 2,479
Issuance of common stock 239 36,903
Dividends paid (10,549) (9,644)
-------- --------
Net cash (used in) provided by financing
activities (4,239) 27,670
-------- --------
Change in cash and cash equivalents 423 21,253
Cash and cash equivalents at beginning of period 18,820 2,856
-------- --------
Cash and cash equivalents at end of period $ 19,243 $ 24,109
======== ========
<FN>
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
</FN>
6
CALIFORNIA WATER SERVICE GROUP
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2005
Note 1. Organization and Operations
California Water Service Group (the Company) is a holding company with five
wholly owned subsidiaries that provide water utility and other related
services in California, Washington, New Mexico and Hawaii. 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 and related 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,
2004, included in its Form 10-K as filed with the Securities and Exchange
Commission on March 15, 2005.
Note 3. Stock-Based Compensation
The Company has an Equity Incentive Plan (the "Plan") approved by
stockholders on April 27, 2005, that allows granting of non-qualified stock
options and other equity instruments. No grants have been made under the
Plan, which replaces the former Long-Term Incentive Plan under which
options were granted, some of which are still outstanding. No further
grants will be made under the Long-Term Incentive Plan.
7
The Company has adopted the 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," to 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 either
of the three-month or six-month periods ended June 30, 2005 or 2004 related
to stock options. No options were granted during either period.
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 Six Months Ended
June 30, June 30,
2005 2004 2005 2004
------- ------- ------- -------
Net income, as reported $ 7,591 $10,054 $ 8,271 $11,500
Less preferred dividends 38 38 76 76
------- ------- ------- -------
Net income available to common stockholders 7,553 10,016 8,195 11,424
Deduct: Total stock-based employee compensation
expense determined under fair value
method for all awards, net of related tax effects 12 16 23 33
------- ------- ------- -------
Pro forma net income $ 7,541 $10,000 $ 8,172 $11,391
======= ======= ======= =======
Earnings per share
Basic - as reported $ 0.41 $ 0.59 $ 0.45 $ 0.67
Basic - pro forma $ 0.41 $ 0.59 $ 0.44 $ 0.67
Diluted - as reported $ 0.41 $ 0.59 $ 0.45 $ 0.67
Diluted - pro forma $ 0.41 $ 0.59 $ 0.44 $ 0.67
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 12-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.
8
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 113,250 and
145,500 at June 30, 2005 and June 30, 2004, respectively.
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
------- ------- ------- -------
Net income, as reported $ 7,591 $10,054 $ 8,271 $11,500
Less preferred dividends 38 38 76 76
------- ------- ------- -------
Net income available to common shareholders $ 7,553 $10,016 $ 8,195 $11,424
======= ======= ======= =======
Weighted average common shares, basic 18,373 16,965 18,372 16,949
Dilutive common stock options (treasury method) 34 18 32 18
------- ------- ------- -------
Shares used for dilutive calculation 18,407 16,983 18,404 16,967
======= ======= ======= =======
Earnings per share - basic $ 0.41 $ 0.59 $ 0.45 $ 0.67
------- ------- ------- -------
Earnings per share - dilutive $ 0.41 $ 0.59 $ 0.45 $ 0.67
------- ------- ------- -------
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 $74,000 for the three months ended June 30, 2005, and
$147,000 for the six months ended June 30, 2005. The estimated funding for
2005 is $6,600,000.
9
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 June 30, Six Months Ended June 30,
------------------------------------------ -------------------------------------------
Pension Benefit Other Benefits Pension Benefit Other Benefits
------------------- ------------------- ------------------- -------------------
2005 2004 2005 2004 2005 2004 2005 2004
------- ------- ------- ------- ------- ------- ------- -------
Service cost $ 1,194 $ 1,137 $ 443 $ 305 $ 2,388 $ 2,274 $ 886 $ 610
Interest cost 1,499 1,364 448 342 2,998 2,728 896 684
Expected return on plan assets (1,378) (1,219) (97) (86) (2,756) (2,438) (194) (172)
Recognized net initial APBO N/A N/A 69 69 N/A N/A 138 138
Amortization of prior service cost 487 424 19 19 974 848 38 38
Recognized net actuarial loss 54 34 195 84 108 68 390 168
------- ------- ------- ------- ------- ------- ------- -------
Net periodic benefit cost $ 1,856 $ 1,740 $ 1,077 $ 733 $ 3,712 $ 3,480 $ 2,154 $ 1,466
======= ======= ======= ======= ======= ======= ======= =======
APBO - Accumulated postretirement benefit obligation
The "other benefits" amount of $1,077,000 and $ 2,154,000 for the quarter
and year-to-date ended June 30, 2005 include a reduction of $182,000 and
$364,000, respectively, representing the estimated reduction for Medicare
subsidies to comply with FASB Staff Position (FSP) No. 106-2, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003," which was implemented by the
Company in the third quarter of 2004. Therefore, no such reduction was
estimated for the amounts as shown for the quarter and year-to-date ended
June 30, 2004.
Postretirement benefit expenses for "other benefits" recorded in the
three-month periods ended June 30, 2005 and 2004 were $331,000 and
$385,000, respectively. Postretirement benefit expense for "other benefits"
recorded in the six-month periods ended June 30, 2005 and 2004 was $588,000
and 771,000, respectively. As of June 30, 2005, the Company had a
regulatory asset of $10,609,000 related to postretirement benefits, which
is expected to be recovered through future customer rates.
10
Note 7. Gains on Sale of Property
In 1995, the California Legislature enacted the Water Utility
Infrastructure Improvement Act of 1995 (Infrastructure Act) to encourage
water utilities to sell surplus properties and reinvest in needed water
utility facilities. In September 2003, the California Public Utilities
Commission (CPUC) issued decision D.03-09-021 in Cal Water's 2001 GRC
filing. In this decision, the CPUC ordered Cal Water to file an application
setting up an Infrastructure Act memorandum account with an up-to-date
accounting of all real property that was at any time in rate base and that
Cal Water had sold since the effective date of the Infrastructure Act.
Additionally, the decision directed the CPUC staff to file a detailed
report on its review of Cal Water's application. On January 11, 2005, the
Office of Ratepayer Advocates (ORA) issued a report expressing its opinion
that Cal Water had not proven that surplus properties sold since 1996 were
no longer used and useful. The ORA recommended that Cal Water be fined
$160,000 and that gains from property sales should generally benefit
ratepayers.
During the period under review, Cal Water's cumulative gains from surplus
property sales were $19.2 million, which included an inter-company gain
related to a transaction with Utility Services and a like-kind exchange
with a third party. If the CPUC finds any surplus property sale or transfer
was recorded inappropriately, Cal Water's rate base could be reduced, which
would lower future revenues, net income, and cash flows. In early April,
the parties submitted testimony and briefs and the Administrative Law Judge
held an evidentiary hearing. The Company expects to receive a proposed
decision by the fourth quarter of 2005. Management believes it has fully
complied with the Infrastructure Act and that ORA's conclusions and
recommendations are without merit. Cal Water intends to vigorously oppose
ORA's findings. Accordingly, Cal Water has not accrued a liability in the
financial statements for ORA's recommendations. At this time, Cal Water
does not know how the CPUC will rule in this matter.
Note 8. Recent Accounting Standards
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 151, "Inventory
Costs - an Amendment to ARB no. 43, Chapter 4." The statement clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material. The statement is effective for fiscal years
beginning after June 15, 2005. The adoption of this statement is not
expected to impact the Company's financial position, results of operations
or cash flows.
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary
Assets." The statement amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with the
general exception for exchanges of nonmonetary assets that do not have
commercial substance. The statement is effective for fiscal years beginning
after June 15, 2005. The adoption of this statement is not expected to
impact the Company's financial position, results of operations, or cash
flows.
11
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," which revised SFAS 123, "Accounting for Stock-Based
Compensation." The statement requires a public entity to measure the cost
of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited
exceptions). On April 14, 2005, the SEC revised the effective date to
fiscal years beginning after June 15, 2005. The adoption of this statement
is not expected to materially impact the Company's financial position,
results of operations, or cash flows for the equity instruments previously
granted.
In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-1,
"Application of FASB Statement No. 109, Accounting for Income Tax, to the
Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004." FSP No. 109-1 provides guidance on the
application of SFAS No. 109 to the provision within the American Jobs
Creation Act of 2004 (the Act) that allows a tax deduction on qualified
production activities. The guidance states that the deduction should be
accounted for as a special deduction in accordance with SFAS No. 109. The
adoption of this guidance is not expected to materially impact the
Company's financial position, results of operations or cash flows.
In March 2005, the FASB issued Interpretation No. 46R-5, "Implicit Variable
Interests under FASB Interpretation No. 46 (revised December 2003), which
amends Interpretation No.46, "Consolidation of Variable Interest Entities."
The revision relates to issues commonly arising in leasing arrangements
among related parties and other types of arrangements involving related and
unrelated parties. The original guidance under Interpretation No. 46 in
January 2003 is still applicable. Interpretation Nos. 46 and 46R-5 provide
guidance for determining when a primary beneficiary should consolidate a
variable interest entity or equivalent structure that functions to support
the activities of a primary beneficiary. Interpretation No. 46R-5 is
effective for the first reporting period beginning after March 3, 2005. The
adoption of Interpretation No. 46R-5 did not impact the Company's financial
position, results of operations, or cash flows.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations - an interpretation of FASB
Statement No. 143." Interpretation No. 47 provides guidelines as to when a
company is required to record a conditional asset retirement obligation. In
general, an entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. The fair value of a liability for
the conditional asset retirement obligation should be recognized when
incurred - generally upon acquisition, construction, or development and
(or) through the normal operation of the asset. The Interpretation is
effective no later than the end of fiscal years ending after December 15,
2005 (December 31, 2005, for calendar-year enterprises). The implementation
of this Interpretation is not expected to have a material impact on the
Company's financial position, results of operations, or cash flows.
12
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and
Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement
No. 3." Statement No. 154 replaces APB Opinion No. 20, "Accounting
Changes," and FASB Statement No. 3, "Reporting Accounting Changes in
Interim Financial Statements," and changes the requirements for and the
reporting of a change of an accounting principle. This Statement requires
retrospective application to prior periods' financial statements of changes
in accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. The
Statement is effective for all fiscal years beginning after December 15,
2005. The implementation of this Statement is not expected to have a
material impact on the Company's financial position, results of operations,
or cash flows.
13
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, including
decisions on proper disposition of property; 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 the Sarbanes-Oxley Act and other
regulations on internal controls; 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. For additional information relating to the risks of the
Company's business, see "Risk Factors" in the Company's Annual Report on
Form 10-K. The Company assumes no obligation to provide public updates on
forward-looking statements.
14
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 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 consists of monthly cycle customer billings for regulated water and
wastewater services at rates authorized by the governmental and regulatory
commissions (Commissions) and billings to certain non-regulated customers.
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 June 30, 2005, the unbilled
revenue amount was $13,601,000 and at December 31, 2004, the amount was
$9,307,000. 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 $2,216,000
at June 30, 2005 and $2,193,000 at December 31, 2004. This liability is
included in "accrued expenses and other liabilities" on the balance sheet.
15
Expense Balancing and Memorandum Accounts
- -----------------------------------------
Expense-balancing accounts and memorandum accounts are used to track
suppliers' rate changes for purchased water, purchased power, and pump
taxes that are not included in customer water rates. The cost changes are
referred to as "offsetable expenses," because under certain circumstances,
they are refundable from customers (or refunded to customers) in future
rates designed to offset cost changes from suppliers. The Company does not
record the balancing and memorandum accounts until the commission has
authorized a change in customer rates and the customer has been billed. The
cumulative net amount in the expense balancing accounts and memorandum
accounts as of June 30, 2005, was approximately $5,057,000. This amount
includes certain amounts that have been filed for recovery but have not yet
been authorized, or amounts that have not yet been filed for recovery. See
Regulatory Matters--Other Regulatory Matters below for cumulative net
balances of expense balancing and memorandum accounts that have been
authorized for recovery.
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 June 30, 2005.
Income Taxes
- ------------
The Company accounts for income taxes using the asset and liability method.
Deferred taxes assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Measurement of the deferred tax assets and liabilities is at
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on the deferred tax assets and liabilities of a change in tax rate
is recognized in the period that includes the enactment date. The Company
must also assess the likelihood that deferred tax assets will be recovered
in future taxable income and, to the extent recovery is unlikely, a
valuation allowance would be recorded. If a valuation allowance were
required, it could significantly increase income tax expense. In
management's view, a valuation allowance is not required at June 30, 2005.
16
The Company anticipates that future rate action by the Commissions will
reflect revenue requirements for the tax effects of temporary differences
recognized, which have previously been passed through to customers. The
Commissions have granted the Company rate increases to reflect the
normalization of the tax benefits of the federal accelerated methods and
available Investment Tax Credits (ITC) for all assets placed in service
after 1980. ITC are deferred and amortized over the lives of the related
properties for book purposes.
Advances for Construction and Contributions in Aid of Construction received
from developers subsequent to 1986 were taxable for federal income tax
purposes, and those received subsequent to 1991 were subject to California
income tax. In 1996, the federal law, and in 1997, the California law,
changed and only deposits for new services were taxable. In late 2000,
federal regulations were further modified to exclude fire services from
tax.
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 SECOND QUARTER 2005 OPERATIONS COMPARED TO SECOND QUARTER 2004
OPERATIONS
Summary
- -------
Second quarter net income was $7,591,000, equivalent to $0.41 per common
share on a diluted basis, compared to net income of $10,054,000 or $0.59
per share on a diluted basis in the second quarter of 2004. The primary
driver for the decrease in net income was the unfavorable weather
conditions during the current year compared to favorable weather conditions
in the prior year's second quarter.
Operating Revenue
- -----------------
Operating revenue decreased $7,388,000, or 8%, to $81,457,000. As disclosed
in the following table, the decrease was due primarily to decreases in
usage, partially offset by increases in rates and new customer usage
Weather impact was unfavorable, as rainfall was much higher compared to the
prior year. Temperatures were slightly cooler, which also reduced usage.
Water usage decreased 13% from the prior year, with the largest decrease of
14% occurring in April.
The factors that affected the operating revenue decrease for the second
quarter of 2005 are presented in the following table:
Rate increases (net) $ 2,490,000
Decrease in usage by existing customers (10,811,000)
Usage by new customers 933,000
------------
Net operating revenue decrease $(7,388,000)
============
The components of the net rate increase are listed in the following table:
2002 General Rate Case (GRC) $ 575,000
Purchased water offset 219,000
2001 GRC catch up (1,255,000)
Step rates 1,403,000
Recovery of balancing accounts 1,319,000
2003 GRC 109,000
City of Hawthorne 120,000
------------
Total increase in rates $ 2,490,000
============
The number of customers from regulated and non-regulated, full system
operations increased 1.1% compared to June 2004.
Total Operating Expenses
- ------------------------
Total operating expenses were $70,204,000 for the three months ended June
30, 2005, versus $74,762,000 for the same period in 2004, a 6% decrease.
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 42% of total operating expenses.
Water production expenses decreased 12% compared to last year.
For California operations, sources of water production as a percent of
total water production are listed on the following table:
Three Months Ended June 30
--------------------------------
2005 2004
------------- -------------
Well production 46% 48%
Purchased 50% 48%
Surface 4% 4%
------------- -------------
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 June 30
---------------------------
2005 2004 Change
------------ ------------ ------------
Purchased water $22,385,000 $25,380,000 $(2,995,000)
Purchased power 5,184,000 5,957,000 (773,000)
Pump taxes 1,826,000 2,226,000 (400,000)
------------ ------------ ------------
Total $29,395,000 $33,563,000 $(4,168,000)
============ ============ ============
Purchased water cost decreased due to lower usage of purchased water,
partially offset by higher prices from wholesaler and lower purchased water
credits. Included in the purchased water amounts are credits received from
certain wholesale suppliers and the sale of unused water rights. The
amounts of the credits were $490,000 and $1,004,000 for the quarter ended
June 20, 2005 and 2004, respectively. Purchased power and pump taxes
decreased primarily due to lower usage.
Other operations expenses were $21,804,000, decreasing $83,000 or 0.4%.
Payroll and benefits charged to operations expense increased $781,000 or
6%. Wages for union employees increased 2.5%, effective January 1, 2005.
Overall payroll costs (expensed and capitalized) increased 4% due to
increases in the number of employees and higher wage rates. Employee and
retiree medical costs increased $91,000 or 4%. Pension costs increased
$149,000, or 9%. Chemical and filter expenses decreased $199,000, or 36%.
Workers' compensation expense decreased $455,000, or 84%. Travel expenses
decreased $100,000, or 40%. PUC fees decreased $104,000, or 10%, due to the
lower level of revenues. At June 30, 2005, there were 845 employees and at
June 30, 2004, there were 826 employees.
19
Maintenance expense was up for the quarter ended June 30, 2005, increasing
$727,000, or 24% due to increases in well expense of $138,000, pumping
equipment of $160,000, water treatment equipment of $106,000 and mains of
$142,000. Depreciation and amortization expense increased $485,000, or 7%
because of additional depreciation expense due to 2004 capital
expenditures.
Federal and state income taxes decreased $1,696,000 due to the decrease in
taxable income. The effective tax rate was 40% in the second quarter of
2005 and 41% for the prior year's quarter. On June 13, 2005, the Company
received notice from the Internal Revenue Service that it had completed its
audit of the Company's tax returns for the 2002 and 2003 tax years, which
closes these years to further review. The results of the audit did not have
a material impact on the Company's balance sheet, results of operations or
cash flows and will result in a net refund to the Company of $363,000 due
to certain adjustments. The refund affected deferred income taxes and did
not affect income tax expense.
Other Income and Expense
- ------------------------
Other income was $766,000 for the quarter ended June 30, 2005, compared to
$573,000, an increase of $193,000 primarily due to interest income on
short-term investments. Included in other income and expense for the
quarter ended June 30, 2005, was $61,000 representing the gain on the sale
of non-utility property. There were no gains reported in the quarter ended
June 30, 2004.
Interest Expense
- ----------------
Total interest expense decreased $174,000, or 4%. This was due to an
increase in capitalized interest, which is a credit to total interest
expense. Construction work-in-progress amounts were higher in the second
quarter of 2005 compared to 2004.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 2005 COMPARED TO THE SIX
MONTHS ENDED JUNE 2004
Summary
- -------
Net income for the six-month period ended June 30, 2004, was $8,271,000,
equivalent to $0.45 per common share on a diluted basis, compared to net
income of $11,500,000 or $0.67 per share on a diluted basis, for the
six-months ended June 30, 2004. The primary driver for the decrease in net
income was the unfavorable weather conditions experienced in the second
quarter of 2005 compared to the second quarter of 2004.
Operating Revenue
- -----------------
Operating revenue decreased $7,325,000, or 5%, to $141,760,000. As
disclosed in the following table, the decrease was due to decreases in
usage, partially offset by increases in rates. Weather impact was
unfavorable as rainfall was much higher compared to prior year.
Temperatures were slightly cooler, which resulted in a 13% decrease in
water usage below the prior year, with the largest monthly decrease of 14%
occurring in April.
20
The factors that affected the operating revenue decrease are presented in
the following table:
Rate increases (net) $ 4,523,000
Decrease in usage by existing customers (13,625,000)
Usage by new customers 1,777,000
------------
Net operating revenue decrease $ (7,325,000)
============
The components of the net rate increases are listed in the following table:
2002 GRC $ 1,502,000
Purchased water offset 402,000
2001 GRC catch up (2,108,000)
Step rates 2,344,000
Recovery of balancing accounts 1,996,000
2003 GRC 183,000
City of Hawthorne 204,000
------------
Total increase in rates $ 4,523,000
============
Total Operating Expenses
- ------------------------
Total operating expenses were $126,042,000 for the six-months ended June
30, 2005, versus $129,611,000 for the same period in 2004, a 3% decrease.
Water production expense consists of purchased water, purchased power and
pump taxes. It represents the largest component of total operating
expenses, accounting for approximately 39% of total operating expenses.
Water production expenses decreased 10% compared to last year.
For California operations, sources of water production as a percent of
total water production are listed on the following table:
Six Months Ended June 30
------------------------
2005 2004
------- -------
Well production 45% 46%
Purchased 51% 50%
Surface 4% 4%
------- -------
Total 100% 100%
======= =======
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:
Six Months Ended June 30
--------------------------
2005 2004 Change
------------ ------------ ------------
Purchased water $ 38,129,000 $ 41,741,000 $ (3,612,000)
Purchased power 8,120,000 9,552,000 (1,432,000)
Pump taxes 2,966,000 3,431,000 (465,000)
------------ ------------ ------------
Total $ 49,215,000 $ 54,724,000 $ (5,509,000)
============ ============ ============
Purchased water cost decreased due to lower usage, partially offset by
higher prices from wholesaler and lower purchased water credits. Included
in purchased water are credits received from certain wholesale suppliers
and the sale of unused water rights. The amounts of the credits were
$768,000 and $2,576,000 for 2005 and 2004, respectively. Purchased power
and pump taxes also decreased due to lower production.
Other operations expenses were $43,747,000, increasing $1,523,000, or 4%.
Payroll and benefits charged to operations expense increased $1,766,000, or
6%. Wages for union employees increased 2.5%, effective January 1, 2005.
Overall payroll costs (expensed and capitalized) increased 4% due to
increases in the number of employees and higher wage rates. Employee and
retiree medical costs increased $513,000, or 12%. Outside services, which
includes legal, auditor and consultants fees, increased $713,000, or 80%.
Workers' compensation expenses decreased $514,000, or 52%. Liability
insurance decreased $229,000, or 23%. PUC fees decreased $98,000, or 5% due
to the lower level of revenues. At June 30, 2005, there were 845 employees
and at June 30, 2004, there were 826 employees.
Maintenance expense was up for the six-months ended June 30, 2005,
increasing $1,205,000, or 19%, due to increases in well expense of
$159,000, pumping equipment of $241,000, water treatment equipment of
$143,000 and mains and meters of $478,000. Depreciation and amortization
expense increased $963,000, or 7%, because of 2004 capital expenditures.
Federal and state income taxes decreased $2,199,000 due to the change in
taxable income. The effective tax rate was 40% in 2005 and 2004.
Other Income and Expense
- ------------------------
Other income was $1,402,000 for the six-months ended June 30, 2005,
compared to $1,124,000 for the first six months of 2004, an increase of
$278,000 that is partially due to interest income from short-term
investments.
Interest Expense
- ----------------
Total interest expense decreased $249,000, or 3%, due to an increase in
capitalized interest, which is a credit to total interest expense.
Construction work-in-progress amounts were higher in the first six months
of 2005 compared to the first six months of 2004.
22
REGULATORY MATTERS
Rate Case Proceedings
- ---------------------
In January 2005, Cal Water received approval from the California Public
Utilities Commission (CPUC) for step rate increases of $4.4 million on an
annual basis, which were effective in January 2005.
In February 2005, the Hawaii Public Utilities Commission issued a general
rate order that decreased rates for Hawaii Water Service Company's (HWSC)
Kaanapali water system by approximately $68,000 annually. Additionally,
HWSC was authorized to establish a tracking mechanism for recovering
certain water treatment plant costs, approximately $50,000 annually,
pending the outcome of litigation seeking recovery for treatment costs from
the potentially responsible parties. These claims are not expected to
materially affect the total Company financial results.
In April 2005, the New Mexico Public Regulation Commission approved New
Mexico Water Service Company's GRC for its wastewater operations. The
approval was for a rate increase of $329,000 on an annual basis. Sixty-five
percent of the amount was effective in April 2005, and the full amount will
be effective on January 1, 2006.
In May 2005, the Company received authorization from the CPUC to recover in
rates $822,000 on an annual basis to offset higher purchased water and pump
tax costs in its Stockton district.
In July 2005, the Company received authorization from the CPUC to recover
in rates $614,000 on an annual basis to offset higher purchased water in
its Westlake district.
In July 2005, the Company received a decision on its 2004 General Rate Case
(GRC) filings that authorizes rate increases of $7.6 million to annual
revenues. This GRC covers approximately 50% of the customers in the
Company's California operations. The rates became effective in July 2005.
Cal Water has pending memorandum account filings for 2004 offsettable
expense to refund to customers $532,000 over 12 months. Approval is
expected by the CPUC by end of the third quarter of 2005.
23
Below is a list of rate filings approved by the CPUC in 2004 that impacted
2005 revenues due to recording revenues based upon customer billings, which
typically reflect rate changes over a 12-month period from the effective
date. (See previous items on Operating Revenue). There were no rate filings
approved during 2004 for Washington Water Service Company, New Mexico Water
Service Company, and Hawaii Water Service Company.
February 2004 - increase of $700,000 annually for purchased water costs
April 2004 - step rate increases of $500,000 annually
April 2004 - increase of $3,600,000 annually for the 2002 GRCs in four
districts
May 2004 - refund of $1,500,000 for balancing account over-collections
related to offsettable expenses incurred over multiple years in the
King City and Dominguez districts. Except for a minor amount refunded
over 36-months, surcredits will be effective for 12-months.
June 2004 - surcharge to recover $400,000 in offsettable expenses for
2001 in the Salinas district.
July 2004 - increase of $1,100,000, annually, for the 2001 GRC in the
Salinas district effective over 12 - months.
August 2004 - step rate increases of $500,000, annually, for four
districts
September 2004 - increase of $400,000, annually, for the 2003 GRC in
the South San Francisco and Bakersfield districts
September 2004 - increase of $500,000, annually, for higher purchased
water and pump taxes in the Los Altos district
October to December 2004 - surcharges to recover $9,200,000 in
offsettable expenses for 2002 and 2003 in multiple districts.
Surcharges vary by district and are effective from 12 to 36 months.
Other Regulatory Matters
- ------------------------
Cal Water recovered certain amounts being tracked in off-balance sheet
expense balancing and memorandum accounts. Approvals to recover these
amounts were received in 2004. (See "Expense Balancing and Memorandum
Accounts" section in the Critical Accounting Policies.) The amounts
remaining to be recovered from these approved filings as of June 30, 2005,
and December 31, 2004, were $5,601,000 and $8,588,000, respectively. These
amounts exclude pending amounts and amounts not yet filed for recovery.
24
Surplus Property Sales
- ----------------------
In 1995, the California Legislature enacted the Water Utility
Infrastructure Improvement Act of 1995 (Infrastructure Act) to encourage
water utilities to sell surplus properties and reinvest in needed water
utility facilities. In September 2003, the California Public Utilities
Commission (CPUC) issued decision D.03-09-021 in Cal Water's 2001 GRC
filing. In this decision, the CPUC ordered Cal Water to file an application
setting up an Infrastructure Act memorandum account with an up-to-date
accounting of all real property that was at any time in rate base and that
Cal Water had sold since the effective date of the Infrastructure Act.
Additionally, the decision directed the CPUC staff to file a detailed
report on its review of Cal Water's application. On January 11, 2005, the
Office of Ratepayer Advocates (ORA) issued a report expressing its opinion
that Cal Water had not proven that surplus properties sold since 1996 were
no longer used and useful. The ORA recommended that Cal Water be fined
$160,000 and that gains from property sales should generally benefit
ratepayers.
During the period under review, Cal Water's cumulative gains from surplus
property sales were $19.2 million, which included an inter-company gain
related to a transaction with Utility Services and a like-kind exchange
with a third party. If the CPUC finds any surplus property sale or transfer
was recorded inappropriately, Cal Water's rate base could be reduced, which
would lower future revenues, net income, and cash flows. In early April,
the parties submitted testimony and briefs and the Administrative Law Judge
held an evidentiary hearing. The Company expects to receive a proposed
decision within the fourth quarter of 2005. Management believes it has
fully complied with the Infrastructure Act and that ORA's conclusions and
recommendations are without merit. Cal Water intends to vigorously oppose
ORA's findings. Accordingly, Cal Water has not accrued a liability in the
financial statements for ORA's recommendations. At this time, Cal Water
does not know how the CPUC will rule in this matter.
LIQUIDITY
Short-Term and Long-Term Debt
- -----------------------------
There were no outstanding short-term bank borrowings at June 30, 2005 or
December 31, 2004, on either the Company's or Cal Water's credit facility.
California Water Service Group has a $10,000,000 credit facility, which
includes Washington Water, New Mexico Water, Hawaii Water, and CWS Utility
Services. Cal Water has a $45,000,000 credit facility. Both agreements have
a requirement for balances to be below certain thresholds for 30
consecutive days each calendar year. The Company has met this requirement
in 2005 for both agreements. At June 30, 2005, the Company was in
compliance with the covenants of both facilities.
There was an additional $372,000 increase to long-term debt primarily due
to an assumption of debt related to a Washington Water acquisition in the
six-month period ended June 30, 2005. The Company made principal payments
of $611,000 to long-term debt during the six-month period ended June 30,
2005.
25
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. No amounts have been utilized
to date. This amount will be utilized on an as-needed basis. The balance
remaining from the previous authorization did 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), both unchanged from the previous quarter. The
rating from Moody's was last changed in February 2004, when the rating was
changed from A1 to A2. The rating from S&P was last changed in the fourth
quarter of 2002, when the rating was changed from AA- to A+.
Shelf Registration
- ------------------
The Company has $35,648,175 in securities under the shelf registration
filed with the SEC in 2003, which are available for future issuance.
Dividends
- ---------
The second quarter common stock dividend of $0.2850 per share was paid on
May 20, 2005, compared to a quarterly dividend in the second quarter of
2004 of $0.2825. This was the Company's 242nd consecutive quarterly
dividend. Annualized, the 2005 dividend rate is $1.14 per common share,
compared to $1.13 in 2004. Based on the 12-month earnings per share at June
30, 2005, the dividend payout ratio is 92% of net income. For the full year
2004, the payout ratio was 77% of net income. On a long-term basis, the
Company's goal is to achieve a dividend payout ratio of 60% of net income
accomplished through future earnings growth.
At its July 27, 2005 meeting, the Board declared the Company's 243rd
consecutive dividend in the amount of $0.2850 per share, payable on August
19, 2005, to stockholders of record on August 8, 2005.
Dividend Reinvestment and Stock Purchase Plan
- ---------------------------------------------
The Company's transfer agent has 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. The Company's transfer agent operates the Plan and purchases shares
on the open market to provide shares for the Plan.
26
2005 Financing Plan
- -------------------
The Company's 2005 financing plan includes raising approximately
$20,000,000 of new capital in 2005. The plan includes issuance of long-term
debt primarily to meet funding needs for capital expenditures. Depending
upon the level of capital expenditures, this planned issuance of long-term
debt may not occur in 2005 and would then be expected to occur in 2006.
Currently, the Company does not plan to issue additional equity in 2005,
although this may change depending on a variety of factors. Beyond 2005,
management intends 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 $15.54 at June 30, 2005, compared to $15.66
at December 31, 2004.
There are approximately 4,000 stockholders of record for the Company's
common stock as of June 30, 2005.
Utility Plant Expenditures
- --------------------------
During the six months ended June 30, 2005, capital expenditures totaled
$34,035,000; $28,463,000 was from Company-funded projects and $5,572,000
was from third party-funded projects. The 2005 Company-funded capital
expenditure budget is $85,000,000, 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. The estimated cash payments for the
full-year of 2005 for Company-funded capital expenditures is $70 million.
The Company does not control third party-funded capital expenditures;
therefore, it is unable to estimate the amount of such projects for 2005.
At June 30, 2005, construction work-in-progress was $31,769,000 compared to
$13,248,000 at December 31, 2004. Work-in-progress includes projects that
are under construction, but not yet complete and in service.
Sarbanes-Oxley Act, Section 404
- -------------------------------
To comply with the Sarbanes-Oxley Act, Section 404 on internal controls,
external costs of $0.9 million were incurred related to 2004. For 2005, the
Company estimates incurring $0.5 - $0.6 million in external costs.
27
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 for the remainder of the
year. Historically, about half of the water is purchased from wholesale
suppliers with the other half pumped from underground wells. A small
portion is developed through three local surface treatment plants.
On April 12, 2005, the Company announced that it had requested its
customers in the Salinas district to cut down on peak hour water usage for
a three-month period due to six wells that were shut off temporarily
because of contamination. The Company also asked large commercial users to
reduce water usage during peak hours and to store water during non-peak
hours for later use. As of July 31, 2005, one of the shut-off wells is back
on line with two more scheduled to be up by the middle or end of August.
The Company, however, will continue to ask its customers to cut back usage
during peak hours until the end of September. The Salinas district
accounted for 4.5% of the Company's revenues for the second quarter and
year-to-date ended June 30, 2005. The continued shut-down of five of these
wells is not expected to materially impact the financial results or cash
flows of the Company.
28
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. Its market risk-to-interest rate exposure is limited because the
cost of long-term financing and short-term bank borrowings, including
interest costs, are covered in consumer water rates as approved by the
commissions. The Company does not have foreign operations; therefore, it
does not have a foreign currency exchange risk. The Company's 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 the Company's business. See
Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Critical Accounting Policies --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 its management, including its 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 the Company's
disclosure controls and procedures, the principal executive officer and
principal financial officer have concluded that its disclosure controls and
procedures are 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 SEC rules and regulations.
(b) Changes to Internal Control Over Financial Reporting
There was no change in the Company's internal control over financial
reporting that occurred during the last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
29
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 complete description, see the Company's annual
report on Form 10-K for the year ended December 31, 2004. During the
quarter ended June 30, 2005, there were no material developments with
respect to previously disclosed existing procedures and no material
proceeding not previously disclosed.
(b) The discussion under Part I, Financial Information, Item 2,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Regulatory Matters: Surplus Property Sales" is
incorporated by reference.
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Previously reported in the Company's quarterly report on Form 10-Q for the
quarter ended March 31, 2005.
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.
30
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
August 5, 2005
By: /s/ Richard D. Nye
-------------------------
Richard D. Nye
Vice President, Chief Financial Officer
and Treasurer
31
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
32