SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
Amendment No. 1
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 25, 2000
CALIFORNIA WATER SERVICE GROUP
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-13883 77-0448994
State of Incorporation Commission File No. IRS Employer ID Number
1720 North First Street, San Jose, CA 95112
Address, including Zip code, of registrant's principal executive office
(408) 367-8200
Registrant's telephone number, including area code
Not Applicable
(Former name or former address, if changed since last report)
Item 5. Other Events
The Merger (Merger) between California Water Service Group
("Registrant") and Dominguez Services Corporation ("Dominguez") was completed on
May 25, 2000. Each outstanding Dominguez common share was exchanged for 1.38
shares of Registrant common stock. To complete the merger, the Company issued
2,210,254 new common shares in exchange for the 1,601,679 outstanding Dominguez
shares. The acquisition was accounted for as a tax-free pooling of interests.
The Registrant hereby files as Exhibit 10.1 hereto, its audited
supplemental consolidated balance sheets as of December 31, 1999 and 1998, and
the related supplemental consolidated statements of income, common stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1999, along with the notes to the supplemental consolidated
financial statements and the independent auditors' report.
CALIFORNIA WATER SERVICE GROUP
Date: July 27, 2000 By: /s/ Peter C. Nelson
President and Chief Executive Officer
EXHIBIT INDEX
Exhibit Page
- -------
10.1 Registrant's audited supplemental consolidated balance 4
sheets as of December 31, 1999 and 1998, and the related
supplemental consolidated statements of income, common
stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1999, along
with the notes to the supplemental consolidated financial
statements and the independent auditors' report.
CALIFORNIA WATER SERVICE GROUP
Supplemental Consolidated Balance Sheet
December 31, 1999 and 1998
IN THOUSANDS
-------------------
1999 1998
- --------------------------------------------------------------------------------
ASSETS
Utility plant:
Land $ 10,440 $ 9,185
Depreciable plant and equipment 776,795 734,304
Construction work in progress 14,661 11,620
Intangible assets 10,790 9,351
- --------------------------------------------------------------------------------
Total utility plant 812,686 764,460
Less depreciation and amortization 248,296 230,691
- --------------------------------------------------------------------------------
Net utility plant 564,390 533,769
- --------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents including
restricted cash of $724 in 1999
and $542 in 1998 2,379 1,760
Receivables:
Customers 14,333 12,048
Other 4,777 3,992
Unbilled revenue 8,199 6,967
Materials and supplies at average cost 2,247 2,265
Taxes and other prepaid expenses 6,416 6,915
- --------------------------------------------------------------------------------
Total current assets 38,351 33,947
- --------------------------------------------------------------------------------
Other assets:
Regulatory assets 37,441 40,474
Unamortized debt premium and expense 3,503 3,556
Other 1,822 1,397
- --------------------------------------------------------------------------------
Total other assets 42,766 45,427
- --------------------------------------------------------------------------------
$ 645,507 $ 613,143
================================================================================
CAPITALIZATION AND LIABILITIES
Capitaliztion:
Common stock, $.01 par value; 25,000
shares authorized 15,094 shares
outstanding in 1999 and 15,015 in 1998 $ 151 $ 150
Additional paid-in capital 49,340 48,372
Retained earnings 145,610 139,054
Accumulated other comprehensive loss (517) -
- --------------------------------------------------------------------------------
Total common stockholders' equity 194,584 187,576
Preferred stock without mandatory
redemption provision, $25 par value.
380 shares authorized, 139 shares outstanding 3,475 3,475
Long term debt, less current maturities 168,866 149,975
- --------------------------------------------------------------------------------
Total capitalization 366,925 341,026
- --------------------------------------------------------------------------------
Current liabilities:
Current maturities of long term debt 2,747 2,699
Short-term borrowings 13,999 22,950
Accounts Payable 26,748 19,125
Accrued taxes 3,556 4,726
Accrued interest 2,092 1,944
Other accrued liabilities 13,569 12,138
- --------------------------------------------------------------------------------
Total current liabilities 62,711 63,582
- --------------------------------------------------------------------------------
Unamortized investment tax credits 3,096 3,202
Deferred income taxes 25,796 31,254
Regulatory and other liabilities 22,544 15,710
Advances for construction 105,556 101,573
Contributions in aid of construction 58,879 56,796
- --------------------------------------------------------------------------------
$ 645,507 $ 613,143
================================================================================
See accompanying notes to supplemental consolidated financial statements.
CALIFORNIA WATER SERVICE GROUP
Supplemental Consolidated Statement of Income
For the years ended December 31, 1999, 1998, 1997
IN THOUSANDS, EXCEPT PER SHARE DATA
-----------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Operating revenue $ 234,937 $ 214,926 $ 225,165
- ---------------------------------------------------------------------------------------------------------------------
Operating expenses:
Operations:
Purchased water 69,776 60,958 62,390
Purchased power 14,355 12,541 13,893
Pump taxes 6,856 5,162 6,926
Administrative and general 32,266 29,784 28,650
Other 28,963 28,131 26,673
Maintenance 10,200 10,191 10,431
Depreciation and amortization 17,246 16,309 15,300
Income taxes 13,515 11,425 15,442
Property and other taxes 9,138 8,744 8,315
- ---------------------------------------------------------------------------------------------------------------------
Total operating expenses 202,315 183,245 188,020
- ---------------------------------------------------------------------------------------------------------------------
Net operating income 32,622 31,681 37,145
Other income and expenses, net 3,514 1,746 1,499
- ---------------------------------------------------------------------------------------------------------------------
Income before interest expense 36,136 33,427 38,644
Interest expense:
Long-term debt interest 13,084 12,125 12,018
Other interest 1,081 1,442 869
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 14,165 13,567 12,887
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 21,971 $ 19,860 $ 25,757
=====================================================================================================================
Basic and diluted earnings per share of common stock $ 1.44 $ 1.31 $ 1.71
=====================================================================================================================
Average number of common shares outstanding 15,090 15,014 15,014
Dilutive options outstanding 14 7
----------------------------------------------------
Total dilutive common shares outstanding 15,104 15,021 15,014
====================================================
See accompanying notes to supplemental consolidated financial statements.
CALIFORNIA WATER SERVICE GROUP
Supplemental Consolidated Statement of Common Stockholders' Equity
For the years ended December 31, 1999, 1998, 1997
IN THOUSANDS
--------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Retained Comprehinsive
Stock Capital Earnings Loss Total
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 150 $ 48,372 $123,251 $ - $ 171,773
Net income - - 25,757 - 25,757
Dividends paid:
Preferred stock - - 153 - 153
Common stock - - 14,619 - 14,619
- ---------------------------------------------------------------------------------------------------------------------
Total dividends paid - - 14,772 - 14,772
- ---------------------------------------------------------------------------------------------------------------------
Income reinvested in business 10,985 10,985
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 150 48,372 134,236 - 182,758
- ---------------------------------------------------------------------------------------------------------------------
Net income - - 19,860 - 19,860
- ---------------------------------------------------------------------------------------------------------------------
Dividends paid:
Preferred stock - - 153 - 153
Common stock - - 14,889 - 14,889
- ---------------------------------------------------------------------------------------------------------------------
Total dividends paid - - 15,042 - 15,042
- ---------------------------------------------------------------------------------------------------------------------
Income reinvested in business 4,818 4,818
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 150 48,372 139,054 - 187,576
- ---------------------------------------------------------------------------------------------------------------------
Issuance of new common stock 1 968 - - 969
- ---------------------------------------------------------------------------------------------------------------------
Net income - - 21,971 - 21,971
- ---------------------------------------------------------------------------------------------------------------------
Dividends paid:
Preferred stock - - 153 - 153
Common stock - - 15,262 - 15,262
- ---------------------------------------------------------------------------------------------------------------------
Total dividends paid - - 15,415 - 15,415
- ---------------------------------------------------------------------------------------------------------------------
Income reinvested in business - - 6,556 - 6,556
Comprehensive loss - - - (517) (517)
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 151 $ 49,340 $145,610 $ (517) $ 194,584
=====================================================================================================================
See accompanying notes to supplemental consolidated financial statements.
CALIFORNIA WATER SERVICE GROUP
Supplemental Consolidated Statement of Cash Flows
For the years ended December 31. 1999, 1998, 1997
IN THOUSANDS
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 21,971 $19,860 $25,757
- ---------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 17,246 16,309 15,300
Deferred income taxes, investment tax credits, and
regulatory assets and liabitlities, net 1,360 503 1,258
Changes in operating assets and liabilities
Receivables (2,324) 2,224 (2,869)
Unbilled revenue (1,187) (780) 399
Accounts payable 7,623 332 1,635
Other curent liabilities (467) 2,311 263
Other changes, net 3,334 892 1,919
- --------------------------------------------------------------------------------------------------------------------
Net adjustments 25,585 21,791 17,905
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 47,556 41,651 43,662
- --------------------------------------------------------------------------------------------------------------------
Investing activities:
Utility plant expenditures
Company funded (35,535) (35,963) (29,733)
Developer advances and contributions in aid of construction (12,984) (5,098) (7,778)
Other investments (80) - (312)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (48,599) (41,061) (37,823)
- --------------------------------------------------------------------------------------------------------------------
Financing activities:
Net short-term borrowings (8,951) 8,450 6,563
Issuance of common stock 46 - -
Issuance of long-term debt 20,062 - 5,000
Advances for construction 7,480 3,972 4,906
Refunds of advances for construction (4,056) (3,939) (3,890)
Contributions in aid of construction 4,814 3,982 2,940
Retirement of long-term debt (2,318) (785) (4,414)
Dividends paid (15,415) (15,042) (14,772)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided (used) in financing activities 1,662 (3,362) (3,667)
- --------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 619 (2,772) 2,172
Cash and cash equivalents at beginning of year 1,760 4,532 2,360
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,379 $ 1,760 $ 4,532
====================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 13,796 $11,922 $12,750
Income taxes 11,499 9,501 15,666
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to supplemental consolidated financial statements.
Notes to Supplemental Consolidated Financial Statements
December 31, 1999, 1998, and 1997
Basis of Presentation
The Merger between California Water Service Group (Company) and Dominguez
Services Corporation (Dominguez) was completed on May 25, 2000. On the merger
date, each outstanding Dominguez common share was exchanged for 1.38 shares of
Company common stock. To complete the merger, the Company issued 2,210,254 new
common shares in exchange for the 1,601,679 outstanding Dominguez shares.
The merger was accounted for as a pooling of interests. Accordingly,
the Company's supplemental consolidated financial statements and footnotes
presented in this report have been restated to include the accounts and results
of Dominguez as if the merger had been completed as of the beginning of the
earliest period presented. Certain reclassifications were made to the historic
financial statements of the companies to conform presentation.
Note 1. Organization and Operations
The Company is a holding company that through its wholly owned
subsidiaries provides water utility and other related services in California,
Washington and New Mexico. During 1999, the Company reincorporated as a Delaware
corporation. California Water Service Company (Cal Water) and Washington Water
Service Company provide regulated utility services under the rules and
regulations of their respective regulatory commissions (jointly referred to as
"Commissions"). CWS Utility Services provides non-regulated water utility and
related utility services.
Dominguez is a utility holding company whose subsidiaries provided
water service to about 40,000 customers in 21 California communities. Its
primary subsidiary, Dominguez Water Company, is a regulated water utility with
its largest operation serving over 32,000 accounts located in the South Bay area
of Los Angeles County adjacent to Cal Water's Hermosa Redondo and Palos Verdes
districts. It also had operations in Kern County east of Cal Water's Bakersfield
district serving over 4,000 accounts, in the Antelope Valley area serving about
1,200 accounts and in an area north of San Francisco referred to as Redwood
Valley serving about 2,000 customers. Approximately half of Dominguez' 1999 and
1998 water revenue was derived from business and industrial customers. A single
refinery customer provided 38% of the business-industrial revenue in 1999, 34%
in 1998 and 33% in 1997. The Dominguez operations will become part of Cal
Water's regulated operations.
The Company operates primarily in one business segment, providing water
and related utility services.
Note 2. Summary of Significant Accounting Policies
The supplemental consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. The financial statements give
retroactive effect to acquisitions, which were accounted for as pooling of
interests. Intercompany transactions and balances have been eliminated.
The accounting records of the Company are maintained in accordance with
the uniform system of accounts prescribed by the Commissions. Certain prior
years' amounts have been reclassified, where necessary, to conform to the
current presentation.
The preparation of supplemental consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Revenue consists of monthly cycle customer billings for regulated water
service at rates authorized by the Commissions and billings to certain
non-regulated customers. Revenue from metered accounts includes unbilled amounts
based on the estimated usage from the latest meter reading to the end of the
accounting period. Flat-rate accounts, which are billed at the beginning of the
service period, are included in revenue on a pro rata basis for the portion
applicable to the current accounting period.
Utility Plant Utility plant is carried at original cost when first constructed
or purchased, except for certain minor units of property recorded at estimated
fair values at dates of acquisition. Cost of depreciable plant retired is
eliminated from utility plant accounts and such costs are charged against
accumulated depreciation. Maintenance of utility plant is charged primarily to
operation expenses. Interest is capitalized on plant expenditures during the
construction period and amounted to $324,000 in 1999, $224,000 in 1998, and
$267,000 in 1997.
Intangible assets acquired as part of water systems purchased are
stated at amounts as prescribed by the Commissions. All other intangibles have
been recorded at cost. Included in intangible assets is $6,500,000 paid to the
City of Hawthorne to lease the city's water system and associated water rights.
The lease payment is being amortized on a straight-line basis over the 15-year
life of the lease. The Company continually evaluates the recoverability of
utility plant by assessing whether the amortization of the balance over the
remaining life can be recovered through the expected and undiscounted future
cash flows.
Depreciation Depreciation of utility plant for financial statement purposes is
computed on the straight-line remaining life method at rates based on the
estimated useful lives of the assets, ranging from 5 to 65 years. The provision
for depreciation expressed as a percentage of the aggregate depreciable asset
balances was 2.5% in 1999, 1998, and 1997. For income tax purposes, as
applicable, the Company computes depreciation using the accelerated methods
allowed by the respective taxing authorities. Plant additions since June 1996
are depreciated on a straight-line basis for tax purposes.
Cash Equivalents Cash equivalents include highly liquid investments, primarily
U.S. Treasury and U.S. Government agency interest bearing securities, stated at
cost with original maturities of three months or less.
Restricted Cash Restricted cash represents proceeds collected through a
surcharge on certain customers' bills plus interest earned on the proceeds. The
restricted cash is to service debt obligations on California Safe Drinking Water
Bonds.
Long-Term Debt Premium, Discount and Expense The discount and expense on
long-term debt is being amortized over the original lives of the related debt
issues. Premiums paid on the early redemption of certain debt issues and
unamortized original issue discount and expense of such issues are amortized
over the life of new debt issued in conjunction with the early redemption.
Accumulated Other Comprehensive Loss The Company has an unfunded Supplemental
Executive Retirement Plan. The unfunded accumulated benefit obligation of the
plan exceeds the accrued benefit cost. This amount exceeds the unrecognized
prior service cost, therefore accumulated other comprehensive loss has been
recorded as a separate component of Stockholders' Equity.
Advances for Construction Advances for Construction consist of payments received
from developers for installation of water production and distribution facilities
to serve new developments. Advances are excluded from rate base for rate setting
purposes. Annual refunds are made to developers without interest over a 20-year
or 40-year period. Refund amounts under the 20-year contracts are based on
annual revenues from the extensions. Unrefunded balances at the end of the
contract period are credited to Contributions in Aid of Construction and are no
longer refundable. Refunds on contracts entered into since 1982 are made in
equal annual amounts over 40 years. At December 31, 1999, the amounts refundable
under the 20-year contracts were $8,687,000 and under 40-year contracts
$96,869,000. Estimated refunds for 2000 for all water main extension contracts
are $4,264,000.
Contributions in Aid of Construction Contributions in Aid of Construction
represent payments received from developers, primarily for fire protection
purposes, which are not subject to refunds. Facilities funded by contributions
are included in utility plant, but excluded from rate base. Depreciation related
to contributions is charged to Contributions in Aid of Construction.
Income Taxes The Company accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the 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 deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
It is anticipated that future rate action by the Commissions will
reflect revenue requirements for the tax effects of temporary differences
recognized, which have previously been flowed through to customers.
The Commissions have granted the Company customer 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
subsequent to 1991 were subject to California income tax. In 1996 the federal
tax law, and in 1997 the California tax law, changed and the major portion of
future advances and contributions are nontaxable.
Earnings per Share Basic earnings per share (EPS) is calculated by dividing
income available to common stockholders by the weighted average shares
outstanding during the year. Diluted EPS is calculated by dividing income
available to common stockholders by the weighted average shares outstanding and
potentially dilutive shares.
Stock-Based Compensation The Company adopted Statement on Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation". The Company elected
to adopt the provision of the statement that allows the continuing practice of
not recognizing compensation expense related to the granting of employee stock
options to the extent that the option price of the underlying stock was equal to
or greater than the market price on the date of the option grant.
Note 3. Other Acquisitions
In 1999, the Company acquired all of the outstanding stock of Harbor Water
Company and South Sound Utility Company, which form the operations of Washington
Water Service Company, serving 14,800 regulated and non-regulated customers. The
acquisitions were accounted for as pooling of interests in exchange for 316,472
shares of Company stock and assumption of long-term debt of $2,959,000. The
results of operations previously reported by the separate entities and included
in the accompanying supplemental consolidated financial statements are not
significant.
During 1998, Dominguez purchased the assets of Lucerne Water Company,
Rancho del Paradiso Water Company and Armstrong Valley Water Company. These
investor owned system served 1,624 accounts. The acquisitions were completed
effective January 1, 1999 in exchange the equivalent of 75,164 shares of Company
common stock. Because ratebase was set by the Commission above historic cost,
$768,000 was recorded in additional paid in capital. The acquisitions were
accounted for under purchase accounting. The purchases were completed on a non
cash basis in which Dominguez issued its common stock valued at $923,000 and
assumed debt obligations of $1,108,000.
In cash purchase transactions, Dominguez completed two other water
company asset acquisitions in 1999. The two companies served 288 customers. The
acquisition was accounted for under purchase accounting.
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.
Note 4. Preferred Stock
As of December 31, 1999 and 1998, 380,000 shares of preferred stock were
authorized. Dividends on outstanding shares are payable quarterly at a fixed
rate before any dividends can be paid on common stock. Preferred shares are
entitled to sixteen votes, each with the right to cumulative votes at any
election of directors.
The outstanding 139,000 shares of $25 par value cumulative, 4.4% Series
C preferred shares are not convertible to common stock. A premium of $243,250
would be due upon voluntary liquidation of Series C. There is no premium in the
event of an involuntary liquidation.
Note 5. Common Stockholders' Equity
The Company is authorized to issue 25,000,000 shares of $.01 par value common
stock. As of December 31, 1999 and 1998, 15,093,627 and 15,014,598 shares of
common stock were issued and outstanding, respectively. All shares of common
stock are eligible to participate in the Company's dividend reinvestment plan.
Approximately 10% of stockholders participate in the plan.
Stockholder Rights Plan In January 1998, the Board of Directors adopted a
Stockholder Rights Plan (the Plan) and authorized a dividend distribution of one
right (Right) to purchase 1/100th share of Series D Preferred Stock for each
outstanding share of Common Stock. The Rights became effective in February 1998
and expire in February 2008. The Plan is designed to provide stockholders
protection and to maximize stockholder value by encouraging a prospective
acquirer to negotiate with the Board.
Each Right represents a right to purchase 1/100th share of Series D
Preferred Stock at the price of $120, subject to adjustment (the Purchase
Price). Each share of Series D Preferred Stock is entitled to receive a dividend
equal to 100 times any dividend paid on common stock and 100 votes per share in
any stockholder election. The Rights become exercisable upon occurrence of a
Distribution Date. A Distribution Date event occurs if (a) any person
accumulates 15% of the then outstanding Common Stock, (b) any person presents a
tender offer which causes the person's ownership level to exceed 15% and the
Board determines the tender offer not to be fair to the Company's stockholders,
or (c) the Board determines that a stockholder maintaining a 10% interest in the
Common Stock could have an adverse impact on the Company or could attempt to
pressure the Company to repurchase the holder's shares at a premium.
Until the occurrence of a Distribution Date, each Right trades with the
Common Stock and is not separately transferable. When a Distribution Date
occurs: (a) the Company would distribute separate Rights Certificates to Common
Stockholders and the Rights would subsequently trade separate from the Common
Stock; and (b) each holder of a Right, other than the Acquiring Person (whose
Rights will thereafter be void), will have the right to receive upon exercise at
its then current Purchase Price that number of shares of Common Stock having a
market value of two times the Purchase Price of the Right. If the Company merges
into the acquiring person or enters into any transaction that unfairly favors
the acquiring person or disfavors the Company's other stockholders, the Right
becomes a right to purchase Common Stock of the acquiring person having a market
value of two times the Purchase Price.
The Board may determine that in certain circumstances a proposal that
would cause a Distribution Date is in the Company stockholders' best interest.
Therefore, the Board may, at its option, redeem the Rights at a redemption price
of $.001 per Right.
Note 6. Short-Term Borrowings
As of December 31, 1999, the Company maintained a bank line of credit providing
unsecured borrowings of up to $20,000,000 at the prime lending rate or lower
rates as quoted by the bank. Cal Water maintained a bank line of credit for an
additional $30,000,000 on the same terms as the Company. The line of credit
agreements, which expire April 2001, do not require minimum or specific
compensating balances.
Dominguez had a bank line of credit arrangement for $4,500,000. The
Dominguez line was terminated upon completion of the merger. Nothing was
outstanding under the Dominguez line at the time of the Merger.
The following table represents borrowings under the Company, Cal Water
and Dominguez bank lines of credit.
Dollars in Thousands
1999 1998 1997
Maximum short-term borrowings $25,500 $25,700 $17,900
Average amount outstanding 9,093 15,755 5,168
Weighted average interest rate 6.52% 7.09% 7.22%
Interest rate at December 31 7.11% 6.97% 7.29%
Note 7. Long-Term Debt
As of December 31, 1999 and 1998, long-term debt outstanding was:
In Thousands
Interest Maturity
Series Rate Date 1999 1998
First Mortgage Bonds: J 8.86% 2023 $4,000 $4,000
K 6.94% 2012 5,000 5,000
P 7.875% 2002 2,595 2,610
S 8.50% 2003 2,610 2,625
BB 9.48% 2008 14,940 16,650
CC 9.86% 2020 18,700 18,800
DD 8.63% 2022 19,300 19,400
EE 7.90% 2023 19,400 19,500
FF 6.95% 2023 19,400 19,500
GG 6.98% 2023 19,400 19,500
--------- ---------
125,345 127,585
Senior Notes: A 7.28% 2025 20,000 20,000
B 6.77% 2028 20,000 --
California Department of 3.0% to
Water Resources loans 7.4% 2011-32 3,236 2,258
Other long-term debt 3,032 2,831
--------- ----------
Total long-term debt 171,613 152,674
Less current maturities 2,747 2,699
---------- ----------
Long-term debt excluding current maturities $168,866 $149,975
The Series J and K first mortgage bonds that were obligations of
Dominguez became obligations of Cal Water at the time of the Merger. The other
first mortgage bonds are also obligations of Cal Water. All bonds are held by
institutional investors and secured by substantially all of Cal Water's utility
plant. The unsecured senior notes are also obligations of Cal Water. They are
held by institutional investors and require interest-only payments until
maturity. The Department of Water Resources ("DWR") loans were financed under
the California Safe Drinking Water Bond Act. Repayment of principal and interest
on the DWR loans is through a surcharge on customer bills. Other long-term debt
is primarily equipment financing arrangements with other financial institutions.
Aggregate maturities and sinking fund requirements for each of the succeeding
five years (2000 through 2004) are $2,747,000, $2,726,000, $5,203,000,
$5,405,000, and $2,722,000.
Note 8. Income Taxes
Income tax expense consists of the following:
In Thousands
Federal State Total
1999 Current $8,291 $2,560 $10,851
Deferred 2,769 (105) 2,664
Total $11,060 $2,455 $13,515
1998 Current $6,667 $2,388 $9,055
Deferred 2,679 (309) 2,370
Total $9,346 $2,079 $11,425
1997 Current $9,922 $3,160 $13,082
Deferred 2,484 (124) 2,360
Total $12,406 $3,036 $15,442
Income tax expense computed by applying the current federal tax rate of 35%
tax rate to pretax book income differs from the amount shown in the Consolidated
Statement of Income. The difference is reconciled in the table below:
In Thousands
1999 1998 1997
Computed "expected" tax expense $12,420 $10,950 $14,420
Increase (reduction) in taxes due to:
State income taxes net of federal tax benefit 1,624 1,442 1,973
Investment tax credits (184) (167) (162)
Other (345) (800) (789)
Total income tax $13,515 $11,425 $15,442
The components of deferred income tax expense were:
In Thousands
1999 1998 1997
Depreciation $2,974 $3,007 $2,753
Developer advances and contributions (749) (798) (334)
Bond redemption premiums (62) (62) (62)
Investment tax credits (94) (93) (93)
Other 595 316 96
Total deferred income tax expense $2,664 $2,370 $2,360
The tax effects of differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998
are presented in the following table:
In Thousands
1999 1998
Deferred tax assets:
Developer deposits for extension agreements
and contributions in aid of construction $40,595 $42,251
Federal benefit of state tax deductions 6,040 2,524
Book plant cost reduction for future deferred
ITC amortization 1,679 1,727
Insurance loss provisions 821 271
Pension plan 794 626
Other 2,886 1,609
Total deferred tax assets 52,815 49,008
Deferred tax liabilities:
Utility plant, principally due to depreciation differences 77,520 79,110
Premium on early retirement of bonds 1,091 1,152
Total deferred tax liabilities 78,611 80,262
Net deferred tax liabilities $25,796 $31,254
A valuation allowance was not required during 1999 and 1998. Based on
historic taxable income and future taxable income projections over the period in
which the deferred assets are deductible, management believes it is more likely
than not that the Company will realize the benefits of the deductible
differences.
Note 9. Employee Benefit Plans
Pension Plan The Company provides a qualified defined benefit, non-contributory
pension plan for substantially all employees. The cost of the plan was charged
to expense and utility plant. The Company makes annual contributions to fund the
amounts accrued for pension cost. Plan assets are invested in mutual funds,
pooled equity, bonds and short-term investment accounts. The data below includes
the unfunded, non-qualified, supplemental executive retirement plan.
Savings Plan The Company sponsors a 401(k) qualified, defined contribution
savings plan that allowed participants to contribute up to 15% of pre-tax
compensation in 1999, increasing to 18% in 2000. The Company matches fifty cents
for each dollar contributed by the employee up to a maximum Company match of
4.0%. Company contributions were $1,126,000, $1,078,000, and $1,045,000, for the
years 1999, 1998 and 1997.
Other Postretirement Plans The Company provides substantially all active
employees with medical, dental and vision benefits through a self-insured plan.
Employees retiring at or after age 58 with 10 or more years of service are
offered, along with their spouses and dependents, continued participation in the
plan by payment of a premium. Retired employees are also provided with a $5,000
life insurance benefit. Plan assets are invested in a mutual fund, short-term
money market instruments and commercial paper.
The Company records the costs of postretirement benefits during the
employees' years of active service. The Commissions have issued decisions that
authorize rate recovery of tax deductible funding of postretirement benefits and
permit recording of a regulatory asset for the portion of costs that will be
recoverable in future rates.
The following table reconciles the funded status of the plans with the
accrued pension liability and the net postretirement benefit liability as of
December 31, 1999 and 1998:
In Thousands
Pension Benefits Other Benefits
1999 1998 1999 1998
Change in benefit obligation:
Beginning of year $61,396 $54,731 $9,900 $8,884
Service cost 2,899 2,399 498 405
Interest cost 3,894 3,747 689 623
Assumption change (6,669) 2,313 (929) 303
Plan amendment 744 -- -- 1,101
Experience (gain) or loss (3,900) 833 433 (904)
Benefits paid (2,672) (2,627) (396) (512)
End of year $55,692 $61,396 $10,195 $9,900
Change in plan assets:
Fair value of plan assets at beginning of year $57,050 $54,116 $1,723 $1,407
Actual return on plan assets 6,453 3,479 206 169
Employer contributions 177 2,082 28 659
Retiree contributions -- -- 343 357
Benefits paid (2,672) (2,627) (739) (869)
Fair value of plan assets at end of year $61,008 $57,050 $1,561 $1,723
Funded status $5,317 $(4,346) $(8,634) $(8,177)
Unrecognized actuarial (gain) or loss (16,204) (3,676) 556 1,168
Unrecognized prior service cost 4,971 4,916 959 1,030
Unrecognized transition obligation -- -- 3,228 3,476
Unrecognized net initial asset 455 683 369 397
Net amount recognized $(5,461) $(2,423) $(3,522) $(2,106)
Amounts recognized on the balance sheet consist of:
In Thousands
Pension Benefits Other Benefits
1999 1998 1999 1998
Accrued benefit costs $(5,461) $(2,423) $(3,522) $(2,106)
Additional minimum liability (1,460) -- -- --
Intangible asset 943 -- -- --
Accumulated other comprehensive loss 517 -- -- --
Net amount recognized $(5,461) $(2,423) $(3,522) $(2,106)
Pension Benefits Other Benefits
1999 1998 1999 1998
Weighted-average assumptions as of December 31:
Discount rate 7.50% 6.75% 7.50% 6.75%
Long-term rate of return on plan assets 8.00% 8.00% 8.00% 8.00%
Rate of compensation increases 4.50% 4.50% -- --
Net periodic benefit costs for the pension and other postretirement plans for
the years ending December 31, 1999, 1998 and 1997 included the following
components:
In Thousands
Pension Plan Other Benefits
1999 1998 1997 1999 1998 1997
Service cost $2,899 $2,399 $1,978 $498 $405 $315
Interest cost 3,894 3,747 3,481 689 623 589
Expected return on
plan assets (4,450) (4,199) (3,664) (144) (117) (84)
Net amortization and
deferral 871 683 634 401 360 348
Net periodic benefit cost $3,214 $2,630 $2,429 $1,444 $1,271 $1,168
Postretirement benefit expense recorded in 1999, 1998, and 1997 was
$1,064,000, $666,000, and $642,000. $4,194,000, which is recoverable through
future customer rates, is recorded as a regulatory asset. The Company intends to
make annual contributions to the plan up to the amount deductible for tax
purposes.
For 1999 measurement purposes, the Company assumed a 5.5% annual rate
of increase in the per capita cost of covered benefits was assumed; the rate was
assumed to decrease gradually to 5% in the year 2000 and remain at that level
thereafter. For
Dominguez, the corresponding rate of increase in the per capita cost of covered
benefits was 6.0%. The health care cost trend rate assumption has a significant
effect on the amounts reported. A one-percentage point change in assumed health
care cost trends is estimated to have the following effect:
In Thousands
1-percentage 1-percentage
Point Increase Point Decrease
Effect on total service and interest costs $264 $(176)
Effect on accumulated postretirement
benefit obligation $1,444 $(1,177)
Note 10. Stock-Based Compensation Plans
Certain key executives participated in Dominguez' 1997 Stock Incentive Plan
(Plan). The Plan was terminated at the time Dominguez merged with the Company.
Under SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company elected to apply the provisions of APB Opinion 25 and provide the
proforma disclosure provisions required by the Statement. Accordingly, no
compensation cost has been recognized in the supplemental consolidated financial
statements for stock options that have been granted. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's 1999, 1998 and 1997 net income would
not have changed materially from the amount reported on the consolidated
statement of income. Basic and diluted earnings per share would also be
unchanged.
The Plan provided that in the event of a merger of Dominguez into
another entity, granted but unexercised stock options issued under the Plan
would become exercisable. At the time of the Merger, 37,900 shares of Dominguez
common stock were outstanding under the Plan. These options were exercised and
converted into Dominguez shares prior to the Merger and were equivalent to
52,300 shares of Company common stock when converted at the 1.38 exchange rate
at the time of the Merger.
At December 31, 1999, 1998 and 1997, the number of options outstanding
under the Dominguez Plan stated in terms of Company common shares as if the
options were converted to Company common stock at the 1.38 exchange rate at the
time of the Merger were 52,400, 56,200 and 35,600. The year-end weighted average
exercise prices were $23.44, $23.38 and $22.54 for 1999, 1998 and 1997,
respectively.
At the Company's 2000 annual meeting, stockholders approved a Long Term
Incentive Plan. In June 2000, 53,500 options were granted under the plan to the
Company's 13 officers. The options vest at a 25% rate over their first four
years and are exercisable over a ten-year period.
Note 11. Fair Value of Financial Instruments
For those financial instruments for which it is practicable to estimate a fair
value the following methods and assumptions were used. For cash equivalents, the
carrying amount approximates fair value because of the short-term maturity of
the instruments. The fair value of the Company's long-term debt is estimated at
$189,400,000 as of December 31, 1999, and $166,165,000 as of December 31, 1998,
using a discounted cash flow analysis, based on the current rates available to
the Company for debt of similar maturities. The fair value of advances for
construction contracts is estimated at $33,000,000 as of December 31, 1999, and
$32,000,000 as of December 31, 1998, based on data provided by brokers.
Note 12. Quarterly Financial Data (Unaudited)
The Company's common stock is traded on the New York Stock Exchange under the
symbol "CWT". Quarterly dividends have been paid on common stock for 220
consecutive quarters and the quarterly rate has been increased each year since
1968.
1999 - in thousands except per share amounts
first second third fourth
Operating revenue $45,657 $59,233 $72,295 $57,752
Net operating income 5,200 8,440 11,922 7,060
Net income 2,868 6,089 8,706 4,308
Basic and diluted earnings per share .19 .40 .57 .28
1998 - in thousands except per share amounts
first second third fourth
Operating revenue $41,357 $51,441 $71,062 $51,066
Net operating income 4,985 7,130 12,816 6,750
Net income 1,969 4,028 10,173 3,690
Basic and diluted earnings per share .13 .26 .68 .24
Independent Auditors' Report
The Stockholders and Board of Directors
California Water Service Group
We have audited the accompanying supplemental consolidated balance sheets of
California Water Service Group and subsidiaries as of December 31, 1999 and
1998, and the related supplemental consolidated statements of income, common
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. These supplemental consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits. We did not audit the consolidated
financial statements of Dominguez Services Corporation and subsidiaries, which
financial statements reflect total assets constituting 9.0 percent and 8.6
percent as of December 31, 1999 and 1998, respectively, and total revenues
constituting 12.1 percent, 11.8 percent, and 11.9 percent for each of the years
in the three-year period ended December 31, 1999, respectively, of the related
consolidated totals. Those financial statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for Dominguez Services Corporation and subsidiaries, is
based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of California Water Service Group and Dominguez Services Corporation
on May 25, 2000, which has been accounted for as a pooling-of-interests as
described in the footnote captioned "Basis of Presentation" to the supplemental
consolidated financial statements. Generally accepted accounting principles
proscribe giving effect to a consummated business combination accounted for by
the pooling-of-interests method in financial statements that do not include the
date of consummation. These financial statements do not extend through the date
of consummation. However, they will become the historical consolidated financial
statements of California Water Service Group and subsidiaries after financial
statements covering the date of consummation of the business combination are
issued.
In our opinion, based on our audits and the report of other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the financial position of California Water Service
Group and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America applicable after financial
statements are issued for a period which includes the date of consummation of
the business combination.
/s/ KPMG LLP
Mountain View, California
July 27, 2000