10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 9, 2001
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
---------
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
- --------------------------------------------------------------------------------
(Sate or other jurisdiction (I.R.S. Employer identification No.)
of incorporation or organization)
1720 North First Street, San Jose, CA. 95112
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
1-408-367-8200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable (Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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
October 31, 2001 - 15,182,046. This form 10-Q contains a total of 15 pages.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The financial information presented in this 10Q filing has been
prepared by management and has not been audited.
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per share data) September 30, December 31,
2001 2000
--------- ---------
ASSETS
Utility plant:
Utility plant $ 889,124 $ 851,281
Less depreciation and amortization 281,843 268,500
--------- ---------
Net utility plant 607,281 582,781
--------- ---------
Current assets:
Cash and cash equivalents 1,023 3,241
Receivables 25,459 20,613
Unbilled revenue 11,133 7,964
Materials and supplies at average cost 2,437 2,718
Taxes and other prepaid expenses 7,161 5,484
--------- ---------
Total current assets 47,213 40,020
--------- ---------
Other assets:
Regulatory assets 38,673 38,133
Other assets 6,916 5,671
--------- ---------
Total other assets 45,589 43,804
--------- ---------
$ 700,083 $ 666,605
========= =========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $.01 par value $ 151 $ 151
Additional paid-in capital 49,984 49,984
Retained earnings 149,052 149,185
Accumulated other comprehensive loss (486) (486)
--------- ---------
Total common stockholders' equity 198,701 198,834
Preferred stock 3,475 3,475
Long-term debt, less current maturities 206,964 187,098
--------- ---------
Total capitalization 409,140 389,407
--------- ---------
Current liabilities:
Current maturities of long-term debt 2,881 2,881
Short-term borrowings 6,000 14,598
Accounts payable 31,494 26,493
Accrued expenses and other liabilities 28,171 19,764
--------- ---------
Total current liabilities 68,546 63,736
Unamortized investment tax credits 2,980 2,989
Deferred income taxes 29,236 25,620
Regulatory and other liabilities 20,417 20,316
Advances for construction 106,745 105,562
Contributions in aid of construction 63,019 58,975
--------- ---------
$ 700,083 $ 666,605
========= =========
See Notes to Condensed Consolidated Financial Statements
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
For the three months ended: September 30, September 30,
2001 2000
-------- --------
Operating revenue $ 76,310 $ 76,580
-------- --------
Operating expenses:
Operations 52,924 48,197
Maintenance 2,832 2,863
Depreciation and amortization 4,732 4,567
Income taxes 3,915 5,861
Property and other taxes 2,390 2,310
-------- --------
Total operating expenses 66,793 63,798
-------- --------
Net operating income 9,517 12,782
Other income and expenses, net 420 358
-------- --------
Income before interest expense 9,937 13,140
-------- --------
Interest expense:
Long-term debt interest 3,525 3,276
Other interest 492 659
-------- --------
Total interest expense 4,017 3,935
-------- --------
Net income $ 5,920 $ 9,205
======== ========
Earnings per share
Basic $ 0.39 $ 0.61
======== ========
Diluted $ 0.39 $ 0.60
======== ========
Weighted average shares outstanding
Basic 15,182 15,146
======== ========
Diluted 15,294 15,199
======== ========
Dividends per share of common stock $0.27875 $0.27500
======== ========
See Notes to Condensed Consolidated Financial Statements
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
For the nine months ended: September 30, September 30,
2001 2000
-------- --------
Operating revenue $190,276 $189,239
-------- --------
Operating expenses:
Operations 130,776 123,122
Maintenance 8,678 8,463
Depreciation and amortization 14,325 13,781
Income taxes 7,846 10,199
Property and other taxes 7,291 7,014
-------- --------
Total operating expenses 168,916 162,579
-------- --------
Net operating income 21,360 26,660
Other income and expenses, net 2,622 1,310
-------- --------
Income before interest expense 23,982 27,970
-------- --------
Interest expense:
Long-term debt interest 10,551 9,772
Other interest 1,526 1,707
-------- --------
Total interest expense 12,077 11,479
-------- --------
Net income $ 11,905 $ 16,491
======== ========
Earnings per share
Basic $ 0.78 $ 1.08
======== ========
Diluted $ 0.77 $ 1.08
======== ========
Weighted average shares outstanding
Basic 15,182 15,119
======== ========
Diluted 15,294 15,166
======== ========
Dividends per share of common stock $0.83625 $0.82500
======== ========
See Notes to Condensed Consolidated Financial Statements
CALIFORNIA WATER SERVICE GROUP
Notes to Consolidated Condensed Financial Statements
1. Due to the seasonal nature of the water business, the results for interim
periods may not be 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 of normal recurring adjustments.
Certain prior years' amounts have been reclassified, where necessary, to
conform to the current presentation.
3. Basic earnings per share is calculated by dividing income available for
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated by
dividing income available for common stockholders by the weighted average
number of common shares outstanding plus potentially dilutive shares.
Income available for common stockholders is determined by subtracting from
net income dividends paid on preferred stock which were $38,000 for the
quarter ended September 30, 2001 and $115,000 for the nine months ended
September 30, 2001. The difference between basic and diluted weighted
average number of common shares outstanding is the effect of dilutive
common stock options outstanding.
4. Refer to the Annual Report on Form 10-K for the year ended December 31,
2000 for a summary of significant accounting policies and detailed
information regarding the financial statement presentation.
5. The Company operates primarily in one business segment providing water
utility services.
6. On September 28, 2001, the Company issued unsecured $20 million Series D
7.13% 30-year Senior Notes. The issue was completed through a private
placement with two insurance companies.
7. The Company entered into new short-term bank credit agreements dated July
31, 2001. The new agreements, which expire on April 30, 2003, replace the
prior bank short-term borrowing agreements. The new agreement allows for
unsecured short-term borrowings of up to $60 million at the prime or lower
rates quoted by the banks.
8. In July 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations", and Statement No. 142, "Goodwill and Other
Intangible Assets". Statement No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001 as well as all purchase method business combinations completed after
June 30, 2001. Statement No. 141
also specifies conditions that intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart
from goodwill. Statement No. 142 specifies that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions
of Statement No. 142. Statement No. 142 also requires that intangible
assets with determinable useful lives be amortized over their useful lives
to their estimated residual values, and reviewed for impairment in
accordance with Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets" and for "Long-Lived Assets to be Disposed of".
The Company is required to adopt the provisions of Statement No. 141
immediately. The Company is not involved in a business combination
initiated prior to July 1, 2001 that it expected to be accounted for using
the pooling-of-interests method. Statement No. 142 is effective for the
Company on January 1, 2002.
The Company has not yet completed a full review of the impact that
adopting Statements No. 141 and No. 142 will have on its financial position
or results of operations. However, on a preliminary basis the Company does
not expect either statement to have a material impact on its financial
position or results of operations.
In June 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" of long-lived assets was
issued. The statement is effective for fiscal years beginning after June
15, 2003. The Company has not yet completed a full review of the impact
that adopting the statement will have on its financial position or results
of operations, and therefore is unable to state the impact that adopting
the statement will have on its financial position or results of operations.
In August 2001, Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" was issued. The statement sets forth
requirements for measuring impairment of a long-lived asset that is defined
as the condition that exists when the carrying amount of a long-lived asset
exceeds its fair value. The statement also establishes criteria in which an
impairment loss must be recognized. The Company has not yet completed a
full assessment of the impact of adopting this statement, and therefore is
uncertain as to the impact that adopting the statement will have on its
financial position or results of operations. The statement is effective for
the Company in 2002.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10Q contains forward-looking statements intended to qualify
for "safe harbor" within the meaning of the Federal securities laws as
established by the Private Securities Litigation Reform Act of 1995. Such
statements are based on currently available information, expectations,
estimates, assumptions and projections, and management's judgment about
California Water Service Group (Company), the water utility industry and general
economic conditions. Words such as "expects, intends, plans, believes,
estimates, anticipates" 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. Actual results may vary materially
from what is contained in a forward-looking statement. Factors which may cause a
result different than expected or anticipated include: governmental and
regulatory commissions' decisions, changes in regulatory commissions' policies
or procedures, the timeliness of regulatory commissions' actions concerning rate
relief, new legislation, electric power interruption, increases in suppliers'
prices and the availability of supplies, changes in environmental compliance
requirements, acquisitions, the ability to successfully implement business
plans, changes in customer water use patterns and the impact of weather on
operating results, especially as it impacts water sales. The Company assumes no
obligation to provide public updates of forward-looking statements.
RESULTS FOR THE THIRD QUARTER
Third quarter 2001 net income was $5,920,000, equivalent to $0.39 per
common share on a diluted basis compared to the $9,205,000 or $0.60 per share on
a diluted basis last year. Operating revenue decreased 0.4% to $76,310,000 from
$76,580,000 in 2000. Cooler weather, especially in the southern California
service areas, caused a decline in customers' water usage and resulted in lower
revenue for the quarter. Revenue from existing customers declined $2,450,000
because of the lower usage. Offsetting the decline in usage was $1,519,000 of
additional revenue from rate increases and $661,000 from usage by new customers.
The following table shows the change in revenue:
Decreased consumption by existing customers ($2,450,000)
Rate increases 1,519,000
Usage by 5,700 new customers 661,000
----------
Net revenue decrease ($270,000)
==========
Total operating expenses increased 5% compared to last year's third
quarter. Water production was 3% higher, however, water production costs,
consisting of purchased water, purchased electric power and pump taxes,
increased 10%. Water production costs are the largest components of total
operating expenses. Together these costs accounted for 52% of total operating
expenses, 2% more than last year. Well production provided 55% of the water
supply, 45% was purchased from wholesale suppliers and less than one percent was
developed from surface supplies processed through the Company's two surface
water treatment plants. The components of water production costs and the changes
from last year are shown in the table below:
3rd Quarter
2001 Cost Change
----------- ----------
Purchased water $23,592,000 ($285,000)
Purchased power 9,101,000 3,205,000
Pump taxes 2,344,000 389,000
----------- ----------
Total $35,037,000 $3,309,000
=========== ==========
Purchased water rates charged by wholesalers increased in seven
districts. Despite the increases, purchased water cost decreased due to reduced
customer usage that resulted in a decline in water purchases, and a shift to
using more well water. The 3rd quarter was the first quarter fully impacted by
higher electric rates. Compared to last year, the Company's California electric
suppliers' rates rose 48% and electric rates in Washington were 27% higher. The
higher rates combined with a 3% increase in water pumping increased electric
costs by $3,205,000. Pump taxes increased because of higher tax rates and more
pumping in districts subject to a pump tax.
Also increasing other operations expense was the impact of the general
wage increase that was effective at the start of the year, additional hours
worked and increases in related employee benefits.
Maintenance expense decreased $30,000 due to a slight decrease in
maintenance expenditures for water main and service line repairs.
Federal and state income taxes decreased $1,946,000 due to the decline
in income.
Other income for the quarter was $420,000, an increase of 17% over last
year. There were no real estate sales this quarter, however, a real estate sale
was completed in October 2001 and will be reported in the fourth quarter 2001.
It will contribute $2,700,000 to pretax income.
Interest expense on long-term debt rose $249,000 over 2000's third
quarter because of the issuance in late September 2001 of the $20 million,
Series D 7.13% senior notes, and the Series C senior notes issued in October
2000 that were not outstanding in 2000's third quarter. Other interest expense
decreased $167,000 due to lower interest rates. The increase in borrowings was
necessary because of higher operating expenses, particularly for purchased power
costs, and delays in receiving timely California Public Utilities Commission
(CPUC) rate decisions.
RESULTS FOR THE NINE MONTHS
Net income for the nine months ending September 30, 2001 was
$11,905,000, equivalent to $0.77 per common share on a diluted basis compared to
the $1.08 per common share on a diluted basis earned for the same period last
year. As discussed below, the earnings comparison was impacted by this year's
lower water sales, increases in electric rates and delays in receiving rate
increases from the CPUC.
Operating revenue increased $1,037,000 to $190,276,000. The higher
revenue was primarily due to rate increases and revenue from new customers.
Since January 1, 2001, the Company added 5,200 new customers. Average
consumption per metered customer decreased 2 percent from last year and average
revenue per customer decreased $3.06. A breakdown of the net increase in
operating revenue is accounted for in the following table:
Decreased consumption by existing customers ($4,378,000)
Rate increases 3,642,000
Usage by new customers 1,773,000
----------
Net revenue increase $1,037,000
==========
Total operating expenses increased 4%. Water production declined 1%
from last year. Well production provided 52% of the supply with 47% purchased
from wholesale suppliers and 1% produced through the treatment plants. Despite
the decrease in production, water production costs increased $3,949,000 mainly
due to electrical rate increases. The components of water production expense and
the changes from last year are shown in the table below:
9-months
2001 Cost Change
----------- ----------
Purchased water $56,741,000 ($151,000)
Purchased power 16,120,000 4,228,000
Pump taxes 4,995,000 (128,000)
----------- ----------
Total $77,856,000 $3,949,000
=========== ==========
In addition to water production costs, other operations expense
categories increased $3,706,000. A 3% general wage increase that was effective
at the start of the year and additional hours worked added to expense. The
increase in wages also caused higher employee benefits expenses. During 2000,
$2,718,000 of expenses related to the Dominguez merger was recorded that did not
recur in 2001.
Maintenance expenses were higher by $215,000 or 3% over last year. The
higher costs related to pump stations, and main and service line repairs.
Depreciation and amortization expense increased due to a higher
depreciable plant investment.
Federal and state income taxes were lower due to a decline in income.
Net other income was $2,622,000 in 2001 compared to $1,310,000 last
year. Other income in 2001 includes $1,282,000 from surplus property sales.
There were no property sales recorded in 2000.
REGULATORY MATTERS
Electric power rates charged by suppliers increased 10% in the first
quarter and another 38% in May. Promptly after the May increase was known, the
Company filed applications with the CPUC to recover the increased power costs
for 24 districts under established offset cost recovery balancing account
procedures. In September 2001, the CPUC authorized offset rate increases for two
districts totaling $2,175,000 in annual revenue. For 2001, the offset rate
increases are expected to increase revenue by approximately $735,000. The CPUC
deferred decisions for the other 22 districts. Those decisions will likely be
processed as part of the 2001 General Rate Case (GRC) applications. Subsequent
to its September decisions, the CPUC proposed changes to the offset cost
recovery balancing account process. Adoption of the proposed revisions, which
the CPCU will consider in separate rulemaking proceedings, could deny the
Company recovery of some or all of the power cost increases that have already
been incurred or will be incurred in the future.
CPUC decisions were received in September 2001 for two of the three GRC
applications filed during the summer of 2000. The decisions authorized
additional annual revenue of $2,890,000. In 2001, the decisions are expected to
add approximately $980,000 to revenue. A decision for the third district was
denied and that GRC will likely be included in the 2001 GRC filings.
In September, the Company submitted GRC applications to the CPUC to
increase rates for 16 of California Water Service Company's 24 regulated
districts. These districts represent over 60 percent of total California
customers. The application requests a 10.75% return on equity and additional
annual revenue of $19 million. Under the Commission's guidelines for processing
GRC applications, the Company would expect decisions would be received in the
second quarter of 2002. However, the Company has noted that in recent water
industry proceedings, the Commission has not adhered to its processing
guidelines. The schedule for this series of applications indicates that the
Company may not receive decisions until the third quarter of 2002. Included in
the $19 million is an open application for $5.9 million covering increased
General Office expenses. The CPUC staff and the Company had agreed on a
stipulated settlement for the General Office cost recovery earlier this year.
However, the staff later reconsidered its position and deferred the matter. The
Company estimates that it might receive a decision concerning the General Office
costs in the second quarter of 2002.
LIQUIDITY
On September 28, 2001, the Company issued unsecured $20 million Series
D 7.13% 30-year Senior Notes. The issue was completed through a private
placement with two insurance companies.
The Company entered into new short-term bank credit agreements dated
July 31, 2001. The new agreements, which expire on April 30, 2003, replace the
prior bank short-term borrowing agreements. The new agreement allows for
unsecured short-term borrowings of up to $60 million at the prime or lower rates
quoted by the banks.
Short-term bank borrowings were reduced to $6,000,000 at September 30,
2001 with proceeds from the issuance of the Series D senior notes and cash from
operations. The bank borrowings were reduced to $3,000,000 during October 2001.
At September 30, 2000, short-term bank borrowings were $14,598,000. On November
1, 2001 additional short-term bank borrowings will be necessary to fund annual
sinking fund and semi-annual interest payments on first mortgage bonds, and
semi-annual interest payments on other debt obligations.
On August 15, 2001, the third quarter common and preferred dividends
were paid. The fourth quarter common dividend will be paid on November 15, 2001
at $0.27875 per share as approved by the Board of Directors at their October 24,
2001 meeting. This is the 228th consecutive quarterly dividend paid by the
Company. Annualized, the 2001 dividend rate is $1.115 per common share compared
to $1.10 in 2000. Because of lower earnings, the dividend payout ratio for the
12-month period ending September 30, 2001 is 111%.
No new common shares were issued during the quarter.
Book value per common share was $13.09 at September 30, 2001. During
the quarter, gross utility plant expenditures (Company and developer funded)
totaled $12,176,000 for additions to and replacements of utility plant. On a
year-to-date basis, gross plant expenditures have been $39,158,000. The plant
expenditures were funded by operations, issuance of Series D senior notes,
short-term bank borrowings and funds from developers. The 2001 Company
construction budget, which does not include developer funded projects, is
$53,900,000.
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 three local
surface treatment plants.
CALIFORNIA ENERGY SITUATION
The California energy crisis has been well publicized. In response to
supply shortages, electric power rates have increased significantly. During the
third quarter, California was able to sustain its energy sources and avoid
rolling electric blackouts. There is still uncertainty about the state's ability
to avoid future rolling electric blackouts. The Company continues its efforts to
use power as efficiently as possible and at the lowest cost to its customers.
The Company maintains backup power systems to continue water service to
customers if the power companies' supplies are interrupted. Many
wellsites are equipped with emergency electric generators. The generators are
designed to produce electricity to keep wells operating during power outages.
Storage tanks also provide customers with water during blackout periods.
ACCOUNTING PRONOUNCEMENTS
Refer to Note 8 to Condensed Consolidated Financial Statements for
information regarding issuance of Financial Accounting Standards Board Statement
No 141 "Business Combinations", Statement No. 142, "Goodwill and Other
Intangible Assets", Statement No. 143, "Accounting for Asset Retirement
Obligations", and Statement No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets".
SEPTEMBER 11 TERRORIST ATTACKS
The Company shares in the nation's shock and sadness caused by the
September 11th terrorist attacks in New York, Washington DC and Pennsylvania. As
a result of the attacks, the Company has heightened security at its facilities
and taken added precautions to safeguard our employees and the water we deliver
to our customers.
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, the Company has been able historically pass on
increases in purchased water and purchased power costs to consumers; recently
proposed revisions to the CPUC's procedures may impair the Company's ability to
recover some or all of the increases. 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
No matters were submitted to a vote of security holders during the
third quarter 2001.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Instruments Defining the Rights of Security Holders of California
Waters Service Company, including indentures:
4.1 Second Supplement to Note Agreement dated as of September 1, 2001
regarding the issuance of $20,000,000 7.13% Series D Senior Notes Due
November 1, 2031
(b) Material Contracts:
10.1 $60,000,000 Business Loan Agreements dated August 1, 2001 and expiring
July 31, 2003 between Bank of America as lead arranger/bank and
California Water Service Group and CWS Utility Services, California
Water Service Company, and JCC Homes
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
October 30, 2001
/s/ Gerald F. Feeney
Gerald F. Feeney
Vice President, Chief Financial Officer
and Treasurer