UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-13883
CALIFORNIA WATER SERVICE GROUP
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(Exact name of registrant as specified in its charter)
Delaware 77-0448994
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(Sate or other jurisdiction (I.R.S. Employer identification No.)
of incorporation or organization)
1720 North First Street, San Jose, CA. 95112
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(Address of principal executive offices) (Zip Code)
1-408-367-8200
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSURES INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common shares outstanding as of
May 3, 2000 - 12, 935, 612. This form 10-Q contains a total of 12 pages.
PART I FINANCIAL INFORMATION
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-Q filing of California Water Service Group ("Company")
contains forward looking statements. The forward looking statements are intended
to qualify for the "safe harbor" established by the Private Securities
Litigation Reform Act of 1995. Forward looking statements generally contain
words or phrases such as anticipates, assumes, believes, expects, estimates,
projects and based on management's judgement. Statements that describe goals,
objectives, plans or expectations are also forward looking. Actual results may
vary materially from what is contained in a forward looking statement. Factors
which may cause a different than expected or anticipated result include
regulatory commission decisions, new legislation, litigation settlements,
increases in supplier prices, the adequacy of water supplies, changes in
environmental compliance requirements, acquisitions, changes in customer water
use patterns and the impact of weather on operating results.
RESULTS OF FIRST QUARTER OPERATIONS
First quarter net income was $1,203,000, equivalent to $0.09 per common
share compared to the $2,621,000 or $0.20 per share earned last year. Operating
revenue increased $642,000 to $40,495,000. Heavier rain this year caused usage
from existing customers to decline. However, that decline was offset by revenue
from rate increases and usage by 4,700 new customers that were added since last
year, resulting in the net revenue growth. Components of the operating revenue
increase are presented in the following table:
Decreased consumption $(301,000)
Rate increases 478,000
Usage by new customers 465,000
---------
Net revenue increase $ 642,000
=========
Total operating expenses were $36,139,000 in 2000 versus $34,991,000 in
1999, a 3% increase.
Water production costs, representing the largest components of total
operating expenses include purchased water, purchased power for pump operations
and pump taxes. Together, these costs accounted for 48% of total operating
expenses and increased 2% compared to last year. Well production provided 53% of
the water supply with 46% purchased from wholesale suppliers and 1% received
from a local watershed. The supply sources are unchanged from last year. The
components of water production costs and the changes from last year are shown in
the table below:
First Quarter
2000 Cost Change
----------- -----------
Purchased water $10,442,000 $ 401,000
Purchased power 1,667,000 (122,000)
Pump taxes 542,000 (72,000)
----------- -----------
Total $12,651,000 $ 207,000
=========== ===========
The purchased water increase was primarily attributable to wholesale
water suppliers' rate increases. Rates in the three San Francisco Peninsula
districts which obtain most of their supply from the San Francisco Water
Department increased 37%. Six other districts were impacted by wholesale water
rate increases ranging from 2% to 7% since last year's third quarter. Rates in
the Stockton district declined 10%. The purchased water cost increases are being
recovered through customer billings. Purchased power and pump taxes decreased in
response to pumping requirement adjustments to meet seasonal demand and
variations in source of supply. For example, the water supply in the East Los
Angeles district shifted from wells to purchased water, increasing purchased
water cost, but reducing power and pump taxes during the period.
Other operations expense increases resulted from:
o The impact of a general wage increase that was effective at the start of
the year, additional hours worked and increases in related employee
benefits contributed to the increase.
o A new computer system was installed last year. During development, the
costs of consultants who developed and installed the system were
capitalized. Now that the system is in production, the remaining
consultant's time is being expensed.
o Professional fees in connection with the Dominguez merger.
Maintenance expense increased $446,000. Projects involving wells,
pumping equipment and water main repairs increased overall maintenance expense.
Federal and state income taxes decreased $651,000 because of lower
taxable income.
Other income and expenses on a pretax basis were $299,000 compared to
$1,077,000 last year. In last year's first quarter, $680,000 of gains from the
sales of real estate were recorded. There were no corresponding sales this year,
although work is underway to complete real estate transactions during the
remainder of 2000.
Interest expense on long-term debt rose $219,000 because of the
issuance in March 1999 of the $20 million, Series B 6.77% senior notes that were
outstanding during the entire quarter this year. Short-term interest expense
declined $85,000 because of lower borrowings under the bank line of credit.
REGULATORY MATTERS
The Company has operated the City of Hawthorne water system under a
long-term lease since 1996. An application to increase water rates in the city
system was filed with the city council last year. The Company requested a rate
increase totaling between $700,000 to $750,000. Approval by the council is
expected during the second quarter.
LIQUIDITY
Under the $50 million bank line of credit, $16,250,000 was outstanding
at March 31, 2000 and $2,000,000 at March 31, 1999. The issuance of the $20
million Series B senior notes in March 1999 and strong cash flow allowed the
Company to repay most bank borrowings by the end of the first quarter last year.
No long-term financing took place in 2000. Short-term bank borrowings will be
necessary during the second quarter to fund semiannual long-term debt interest
payments on May 1, 2000 and the second quarter dividend payable on May 15, 2000.
Following those payments, the Company expects to generate sufficient cash flow
from operations to repay a portion of the short-term bank borrowings.
The first quarter common dividend was paid on February 15, 2000 at
$0.275 per share. The $0.275 represents a $0.00375 or 1.4% increase in the
quarterly dividend rate from last year as approved by the Board of Directors at
their January 2000 meeting. Annualized, the 2000 dividend rate is $1.10 per
common share compared to $1.085 in 1999. Based on the 12-month earnings per
share at March 31, 2000, the dividend payout ratio is 77%. At their April 19,
2000 meeting, Directors declared the second quarter dividend payable May 15,
2000 to shareholders of record on May 1, 2000. This is the 222nd consecutive
quarterly dividend paid by the Company.
About 11% of the outstanding shares participate in the reinvestment
program under the Company's Dividend Reinvestment and Stock Purchase Plan
("Plan"). No new common shares were issued under the Plan during the quarter.
Shares required for the dividend reinvestment and stock purchase option of the
Plan were purchased on the open market. Shares are also purchased on the open
market to fulfill the requirements of the Company sponsored Employee Savings
Plan (401(k)). Purchases for this plan are made on a biweekly basis.
Preferred dividends were paid for the first quarter on February 15,
2000. The second quarter dividend was declared by the Board, payable May 1,
2000.
Book value per common share was $13.51 at March 31, 2000 compared to
$13.21 a year earlier.
During the quarter, utility plant expenditures totaled $4,906,000 for
additions to and replacements of utility plant. Of that amount, $4,025,000 was
funded through the Company's construction budget with the remainder funded
by developers' contributions in aid of construction and refundable advances
for construction. The 2000 Company construction budget is $35,700,000.
WATER SUPPLY
The Company believes that its various sources of water supply are
sufficient to meet customer demand for the remainder of the year. Historically,
roughly half of the water source is purchased from wholesale suppliers with the
other half pumped from wells. A small portion is developed through local runoff
on the San Francisco Peninsula.
Storage in state reservoirs was 120% of historic average as of December
31, 1999, and groundwater levels remain adequate. A sufficient mountain snowpack
provides runoff to streams and reservoirs as it melts during the summer months.
DOMINGUEZ MERGER
As previously reported, the Company and Dominguez Services Corporation
have entered into a merger agreement. Under terms of the agreement, Dominguez
shareholders will receive Company common stock yielding an equivalent value of
approximately $33.75 per Dominguez share. The precise conversion ratio and
equivalent value will depend upon the average price of Company stock for a
twenty-day trading period preceding the merger's closing date. To achieve the
$33.75 exchange value, the exchange ratio can vary between 1.25 and 1.49 shares
of Company stock for each Dominguez share.
All approvals necessary to complete the merger have been granted,
except that of the California Public Utilities Commission ("CPUC"). A draft
decision recommending approval of the merger was issued by the assigned CPUC
Administrative Law Judge ("ALJ") and adopted by the assigned Commissioner. The
Commission's new President requested additional time to consider the merger and
subsequently circulated an alternate decision to that of the ALJ. The alternate
decision recommends against approval of the merger, on the basis that a
demonstration of ratepayer benefit has not been provided. However, the alternate
decision, if approved, would leave the proceeding open to provide the Company
and Dominguez an opportunity to provide additional evidence that ratepayers will
benefit from the merger.
The Company expects that at the Commission's May 18, 2000 meeting, the
ALJ's decision along with the alternative decision will be considered by the
full Commission. The Company is convinced that ratepayers will benefit from the
merger and remains committed to obtaining the Commission's approval. While the
Commission is expected to consider the merger at its May 18, 2000 meeting, it is
possible that the decision process could extend beyond that time frame.
ACQUISTIONS
On April 12, 2000, Washington Water Service Company ("WWSC"), a wholly
owned subsidiary of the Company, received approval from the Washington Utilities
and Transportation Commission ("WUTC") to purchase the assets of Mirrormount
Water Services and Lacamas Farmsteads Water Company. The acquisitions were
completed in April 2000. Together the companies serve almost 800 customers and
produce annual revenue of about $250,000.
WWSC also purchased the assets of Robischon Engineers, Inc. in April
2000. This acquisition will add in-house engineering capabilities to the
Washington operation. It will also enable WWSC to provide water system design
services to other water providers.
During 1999 the Company invested in a firm that provided meter-reading
services in Santa Fe, New Mexico. In April 2000, the Company assumed
responsibility for this contract. The Company's agreement is with Avistar, a
subsidiary of Public Service of New Mexico, which operates the 26,000-account
water system for the city.
ACCOUNTING PRONOUNCEMENTS
No accounting pronouncements were issued or effective during the period
that would have a significant impact on the Company.
MARKET RISK
The Company does not hold, trade in or issue derivative financial
instruments and therefore is not exposed to risks these instruments present.
The Company's market risk to interest rate exposure is limited because
the cost of long-term financing, including interest costs, are covered in
consumer water rates as approved by the Commission. The Company does not have
foreign operations, therefore, it does not have a foreign currency exchange
risk.
The Company's sensitivity to commodity prices is most affected by
changes in purchased water and purchased power costs. Through the Commission's
balancing account procedures, increases in purchased water and purchased power
costs can be passed on to consumers. The Company manages other commodity price
exposure through the duration and terms of its vendor contracts.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of California Water Service Group was
held on April 19, 2000 at the Company's executive office in San Jose,
California. As proposed in the 2000 Proxy, the election of directors,
confirmation of KPMG LLP to serve as independent auditors for 2000 and
adoption of a Long Term Incentive Plan were approved by stockholders at the
meeting. The stockholder proposal regarding preemptive rights was not
approved.
(b) At the annual stockholders meeting, a Board of Directors to serve for the
ensuing year was elected. The following directors were elected as
nominated:
Robert W. Foy Edward D. Harris, Jr. M.D.
Robert K. Jaedicke Richard P. Magnuson
Linda R. Meier Peter C. Nelson
Langdon W. Owen C. H. Stump
George A. Vera
(c) Four proposals were voted on at the meeting: (1) election of directors for
the ensuing year, (2) ratification of the selection of KPMG LLP as
independent
auditors for 2000, (3) a Long Term Incentive Plan and (4) a stockholder
proposal regarding preemptive rights.
(1) Tabulation of the votes for the election of directors was:
For Against
--- -------
Robert W. Foy 12,959,597 175,445
Edward D. Harris, Jr. M.D. 12,962,153 172,889
Robert K. Jaedicke 12,897,647 237,394
Richard P. Magnuson 12,970,557 164,484
Linda R. Meier 12,963,588 171,454
Peter C. Nelson 12,931,634 203,408
Langdon W. Owen 12,903,680 231,362
C. H. Stump 12,879,175 255,867
George A. Vera 12,955,615 179,427
(2) The Directors' selection of KPMG LLP to serve as independent auditors for
2000 was ratified by the stockholders. There were 12,911,229 votes in
favor, 59,495 against, 164,317 abstentions and one non-vote.
(3) The proposal for a Long Term Incentive Plan was approved with 7,655,905
votes in favor, 1,810,009 votes against, 279,642 abstentions and 3,389,486
non-votes.
(4) The stockholder proposal regarding preemptive rights was not approved.
There were 1,020,811 votes in favor, 7,977,755 votes against, 746,991
abstentions, and 3,389,485 non-votes.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits required to be filed by Item 601 of Regulation S-K.
None
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
authorized undersigned.
CALIFORNIA WATER SERVICE GROUP
Registrant
May 3, 2000
/s/ Gerald F. Feeney
Gerald F. Feeney
Vice President, Chief Financial Officer
and Treasurer
CALIFORNIA WATER SERVICE GROUP
CONSOLIDATED BALANCE SHEET
(In thousands) March 31, December 31,
2000 1999
--------- ---------
ASSETS
Utility plant:
Utility plant $ 742,257 $ 737,352
Less depreciation and amortization 226,763 221,998
--------- ---------
Net utility plant 515,494 515,354
--------- ---------
Current assets:
Cash and cash equivalents 1,952 1,437
Receivables 12,710 15,574
Unbilled revenue 5,539 7,145
Materials and supplies at average cost 2,608 2,229
Taxes and other prepaid expenses 4,909 4,437
--------- ---------
Total current assets 27,718 30,822
--------- ---------
Other assets:
Regulatory assets 36,593 36,458
Other deferred assets 4,936 4,984
--------- ---------
Total other assets 41,529 41,442
--------- ---------
$ 584,741 $ 587,618
========= =========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $.01 par value $ 129 $ 129
Additional paid-in capital 44,881 44,881
Retained earnings 130,297 132,689
Accumulated other comprehensive loss (517) (517)
--------- ---------
Total common stockholders' equity 174,790 177,182
Preferred stock 3,475 3,475
Long-term debt, less current maturities 156,490 156,572
--------- ---------
Total capitalization 334,755 337,229
--------- ---------
Current liabilities:
Current maturities of long-term debt 2,651 2,651
Short-term borrowings 16,299 13,599
Accounts payable 18,552 23,707
Accrued expenses and other liabilities 17,292 15,554
--------- ---------
Total current liabilities 54,794 55,511
Unamortized investment tax credits 2,842 2,842
Deferred income taxes 21,965 21,427
Regulatory and other liabilities 18,001 18,001
Advances for construction 99,968 99,991
Contributions in aid of construction 52,416 52,617
--------- ---------
$ 584,741 $ 587,618
========= =========
CALIFORNIA WATER SERVICE GROUP
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
For the three months ended: March 31, March 31,
2000 1999
------- -------
Operating revenue $40,495 $39,853
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Operating expenses:
Operations 26,534 25,226
Maintenance 2,687 2,241
Depreciation and amortization 4,097 4,074
Income taxes 736 1,387
Property and other taxes 2,085 2,063
------- -------
Total operating expenses 36,139 34,991
------- -------
Net operating income 4,356 4,862
Other income and expenses, net 299 1,077
------- -------
Income before interest expense 4,655 5,939
------- -------
Interest expense:
Long-term debt interest 3,072 2,853
Other interest 380 465
------- -------
Total interest expense 3,452 3,318
------- -------
Net income $ 1,203 $ 2,621
======= =======
Basic earnings per share of common
stock $ 0.09 $ 0.20
======= =======
Average number of common shares
outstanding 12,936 12,936
======= =======
Dividends per share of common stock $0.2750 $0.2713
======= =======
CALIFORNIA WATER SERVICE GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended
(In thousands)
March 31, March 31,
2000 1999
-------- --------
Operating activities
Net income $ 1,203 $ 2,621
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,097 4,074
Deferred income taxes, investment tax credits
regulatory assets and liabilities, net 403 303
Changes in operating assets and liabilities:
Receivables 2,864 1,553
Unbilled revenue 1,606 463
Accounts payable (5,155) 413
Other current liabilities 1,738 1,874
Other changes, net (625) (77)
-------- --------
Net adjustments 4,928 8,603
-------- --------
Net cash provided by operating activities 6,131 11,224
-------- --------
Investing activities:
Utility plant expenditures (4,906) (7,900)
-------- --------
Financing activities:
Net short-term borrowings 2,700 (20,458)
Net long-term debt (82) 20,073
Advances for construction 948 1,281
Refunds of advances for construction (853) (599)
Contributions in aid of construction 172 367
Dividends paid (3,595) (3,461)
-------- --------
Net cash used in financing activities (710) (2,797)
-------- --------
Change in cash and cash equivalents 515 527
Cash and cash equivalents at beginning of period 1,437 1,051
-------- --------
Cash and cash equivalents at end of period $ 1,952 $ 1,578
======== ========
See accompanying notes of page 5.
Notes to Financial Statements
1. 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.
2. The interim financial information is unaudited. In the opinion of
management, the accompanying financial statements reflect all adjustments
which are necessary to provide a fair statement of the results for the
periods covered. The adjustments consist only of normal recurring
adjustments.
3. Basic earnings per share is calculated on the weighted average number of
common shares outstanding during the period and net income available for
common stock as shown on the Consolidated Statement of Income. The Company
has no dilutive securities, accordingly, diluted earnings per share is not
shown.
4. Refer to 1999 Annual Report on Form 10-K for a summary of significant
accounting policies and detailed information regarding the financial
statements.
5. The Company operates primarily in one business segment providing water
utility services.