10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 14, 2002
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, 2002
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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
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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
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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
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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
April 30, 2002 - 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) March 31, December 31,
2002 2001
---- ----
ASSETS
Utility plant:
Utility plant $ 919,735 $ 909,658
Less accumulated depreciation and amortization 290,443 285,316
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Net utility plant 629,292 624,342
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Current assets:
Cash and cash equivalents 1,195 953
Receivables 22,703 22,800
Unbilled revenue 7,427 7,291
Materials and supplies at average cost 2,396 2,147
Taxes and other prepaid expenses 6,156 7,224
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Total current assets 39,877 40,415
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Other assets:
Regulatory assets 39,097 38,893
Other assets 7,593 6,564
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Total other assets 46,690 45,457
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$ 715,859 $ 710,214
========= =========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $.01 par value $ 152 $ 152
Additional paid-in capital 49,984 49,984
Retained earnings 144,938 147,299
Accumulated other comprehensive loss (816) (816)
--------- ---------
Total common stockholders' equity 194,258 196,619
Preferred stock 3,475 3,475
Long-term debt, less current maturities 202,135 202,600
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Total capitalization 399,868 402,694
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Current liabilities:
Current maturities of long-term debt 5,381 5,381
Short-term borrowings 29,500 22,000
Accounts payable 21,458 24,032
Accrued expenses and other liabilities 30,036 27,576
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Total current liabilities 86,375 78,989
Unamortized investment tax credits 2,882 2,882
Deferred income taxes 29,012 28,816
Regulatory and other liabilities 20,654 20,680
Advances for construction 107,199 106,657
Contributions in aid of construction 69,869 69,496
Commitments
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$ 715,859 $ 710,214
========= =========
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: March 31, March 31,
2002 2001
---- ----
Operating revenue $ 51,611 $ 47,008
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Operating expenses:
Operations 34,774 33,119
Maintenance 2,420 2,740
Depreciation and amortization 5,394 4,817
Income taxes 1,279 141
Property and other taxes 2,463 2,399
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Total operating expenses 46,330 43,216
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Net operating income 5,281 3,792
Other income and expenses, net 505 393
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Income before interest expense 5,786 4,185
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Interest expense:
Long-term debt interest 3,532 3,516
Other interest 326 448
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Total interest expense 3,858 3,964
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Net income $ 1,928 $ 221
======== ========
Earnings per share
Basic $ 0.12 $ 0.01
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Diluted $ 0.12 $ 0.01
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Weighted average shares outstanding
Basic 15,182 15,182
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Diluted 15,337 15,294
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Dividends per share of common stock $0.28000 $0.27875
======== ========
See Notes to Condensed Consolidated Financial Statements
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, except per share data)
See Notes to Condensed Consolidated Financial Statements
CALIFORNIA WATER SERVICE GROUP
Notes to Condensed Consolidated Financial Statements
March 31, 2002
Note 1. Seasonal Business
Due to the seasonal nature of the water business, the results for interim
periods are not indicative of the results for a twelve-month period.
Note 2. Interim Financial Statements
The interim financial information is unaudited. In the opinion of
management, the accompanying financial statements reflect all adjustments
that are necessary to provide a fair statement of the results for the
periods covered. The adjustments consist only of normal recurring
adjustments.
Note 3. Earnings Per Share
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
quarters ended March 31, 2002 and 2001. The difference between basic and
diluted weighted average number of common shares outstanding is the effect
of dilutive common stock options outstanding.
The following schedule reconciles shares used to calculate basic and
diluted earnings per share:
On January 2, 2002, 55,000 new options were granted at an exercise
price of $25.15 under the Company's Long Term Incentive Plan. No options
were exercised during the first quarter of 2002 or 2001.
Note 4. Significant Accounting Policies
A summary of significant accounting policies and detailed information
regarding the Company's financial statements are included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
Note 5. Lines of Business
The Company operates primarily in one business segment providing water
utility services.
Note 6. New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement No.
142, "Goodwill and Other Intangible Assets". Statement 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 the statement. Statement 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. The Company adopted Statement No. 142 on January 1, 2002.
Since the Company does not have goodwill or other intangible assets, its
adoption did not have a material impact on the financial position or
results of operation.
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 adopted Statement No. 144
on January 1, 2002. Its adoption did not have a material impact on the
financial position or results of operation.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning
established by the Private Securities Litigation Reform Act of 1995 ("Act"). The
forward-looking statements are intended to qualify under provisions of the
federal securities laws for "safe harbor" treatment established by the Act.
Forward-looking statements are based on currently available information,
expectations, estimates, assumptions and projections, and management's judgment
about the Company, the water utility industry and general economic conditions.
Such words as expects, intends, plans, believes, estimates, anticipates,
projects 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 interruptions, increases in suppliers'
prices and the availability of supplies including water and power, 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.
CRITICAL ACCOUNTING POLICIES
The Company maintains its accounting records in accordance with
accounting principles generally accepted in the United States and as directed by
the regulatory commissions to which the Company's operations are subject.
Management believes that the following accounting policies may involve a higher
degree of complexity and judgement.
Revenue Recognition. Revenue from metered customers includes billings to
customers based on monthly meter readings plus an estimate of water used between
the customer's last meter reading and the end of the accounting period. The
unbilled revenue amount is recorded as a current asset on the balance sheet
under the caption "Unbilled Revenue." At March 31, 2002, the unbilled amount was
$7.4 million and at December 31, 2001 the amount was $7.3 million. The amount
recorded as unbilled revenue varies depending on water usage, the number of days
between meter reads for each billing cycle, and the number of days between each
cycle's meter reading and the end of the accounting cycle.
Flat rate customers are billed in advance at the beginning of the
service period. The revenue is prorated so that the portion of revenue
applicable to the current accounting
period is included in that period's revenue. The portion related to a subsequent
accounting period is recorded as unearned revenue on the balance sheet and
recognized as revenue in the subsequent accounting period. The unearned revenue
liability was $1.7 million at March 31, 2002 and December 31, 2001. It is
included in "accrued expenses and other liabilities" on the balance sheet.
Expense Balancing Accounts. The Company does not record expense balancing
accounts in revenue until the California Public Utilities Commission ("CPUC")
has authorized a change in customer rates and the customer has been billed.
Expense balancing accounts include the amount of suppliers' rate increases
charged to the Company for purchased water, purchased power and pump tax
expenses that are not included in customer water rates. The cost increases are
referred to as "Offsetable Expenses" because under certain circumstances they
are recoverable from customers in future rate increases designed to offset the
higher costs.
The Company tracks the cost increases in expense balancing accounts as
allowed by the CPUC. During the first quarter of 2002, the uncollected amount in
the balancing accounts increased $750,000 to $7,250,000. The increase relates
primarily to higher electric costs that have not been billed to customers. To
the extent the Company meets the criteria set forth by the CPUC in its interim
balancing account recovery procedures, the Company expects to collect the
balancing account amounts in future customer billings. The Company is uncertain
if it will meet the CPUC's criteria or what portion of the balancing accounts
will be recoverable in offset rate increases. Therefore, the Company's
accounting policy is not to record the balancing account amounts until they are
included in customer billings.
Utility Accounting. Because the Company operates extensively in a regulated
business, it is subject to the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 71, Accounting for the Effects of Certain Types of
Regulation. Regulators establish rates that are expected to permit the recovery
of the cost of service and a return on investment. In the event a portion of the
Company's operations were no longer subject to the provisions of SFAS No. 71,
the Company would be required to write off related regulatory assets and
liabilities that are not specifically recoverable and determine if other assets
might be impaired. If a regulatory commission determined that a portion of the
Company's assets were not recoverable in customer rates, the Company would need
to assess if it had suffered an asset impairment that would require a write down
in asset valuation.
Income Taxes. Significant judgement by management is required in determining tax
provisions. The preparation of consolidated financial statements requires the
estimation of income tax expense. The process involves the estimating of actual
current tax exposure together with assessing temporary differences resulting
from different treatment of certain items, such as depreciation, for tax and
financial statement reporting. These differences result in deferred tax assets
and liabilities, which are reported in the consolidated balance sheet. The
Company must also assess the likelihood that deferred tax assets will be
recovered in future taxable income, and to the extent recovery is
unlikely, a valuation allowance would be recorded. If a valuation account were
required, it could significantly increase income tax expense.
RESULTS OF FIRST QUARTER OPERATIONS
First quarter net income was $1,928,000, equivalent to $0.12 per common
share on a diluted basis compared to the $221,000 or $0.01 per share earned in
2001's first quarter.
Operating revenue increased $4,603,000 to $51,611,000. A primary factor
in the improvement in revenue was warmer and drier weather in the Company's
California service areas compared to the first quarter last year. Also
contributing to the higher revenue was additional revenue from rate increases
and usage by 5,100 new customers that were added since last year. Components of
the operating revenue increase are presented in the following table:
Increased consumption by existing customers $2,801,000
Rate increases 1,442,000
Usage by new customers 360,000
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Net revenue increase $4,603,000
==========
OPERATING EXPENSES
Total operating expenses were $46,330,000 in 2002 versus $43,216,000 in
2001, a 7% increase.
Most of the operating expense increase was in water production expenses
which consists of purchased water, purchased power and pump taxes. Water
production costs represent the largest components of total operating expenses.
During the quarter, these costs accounted for 40% of total operating expenses
and increased 13% compared to the first quarter last year. During the quarter,
well production provided 46% of the water supply, 53% was purchased from
wholesale suppliers and 1% was developed through the Company's surface water
treatment plants. The components of water production costs and the changes from
last year are shown in the table below:
First Quarter
2002 Cost Change
----------- ----------
Purchased water $13,890,000 $ 876,000
Purchased power 3,608,000 1,176,000
Pump taxes 952,000 104,000
----------- ----------
Total $18,450,000 $2,156,000
=========== ==========
Purchased water costs increased due to wholesale suppliers' rate
increases in six California districts, plus a 9% increase in water purchases
that were necessary to supply customer usage. Refunds of $965,000 were received
during 2002's first quarter from the
Water Replenishment District of Southern California and credited to reduce
purchased water expense. In 2001, $312,000 in credits were received and credited
to reduce purchased water expense. Purchased power, which is used to operate
pumping equipment, increased due to higher electric rates in effect during the
first quarter of 2002. The increase averaged 41%, a 48% increase was in effect
for January and 38% during February and March. Purchased power also increased
due to a 7% increase in well production to meet customer demand. Pump taxes
increased because of the 7% increase in well production.
Labor rate increases that averaged about 3% were effective on January
1, 2002. However, total payroll charged to operations is equivalent to the
amount charged in the first quarter of 2001 because of a reduction in the number
of employees and some payroll cost shifting to capital projects in support of
the Company's expanded construction budget. During the first quarter of 2001,
consultants were used to enhance computer technology systems. That cost has
since been substantially reduced. The reduction has assisted in keeping
operations expense lower.
Maintenance expense decreased $320,000 due to a reduction in
unscheduled maintenance required at wells, and fewer water main and service line
repairs. Scheduled maintenance during 2002 is expected to be in a range similar
to the prior year.
Depreciation expense increased because of a larger investment in
depreciable utility plant and an increase in recovery of plant investments
recognized in rate proceedings.
Federal and state income taxes increased $1,138,000 because of higher
income.
Other income, net of expenses, was $505,000 this year and $393,000 in
2001. Non-regulated income from system operating agreements, antenna site
leases, contract work performed for others, and several small real estate
transactions accounted for the improved results in this area. In April 2002, the
Company entered a contract to sell a surplus real estate parcel for $1,750,000.
The transaction is expected to close during 2002's second quarter. The pretax
gain expected to be realized from the sale is $1.6 million.
Interest expense declined $106,000. Net long-term interest expense
decreased because a larger amount of interest expense was capitalized due to the
increase in the Company's capital expenditures on new plant additions.
Borrowings under the short-term bank credit agreement during the first quarter
this year were higher than in 2001; however, the interest rate on short-term
debt is approximately 3.5% compared to a 5.9% rate at the end of the first
quarter in 2001. The lower rate has offset the cost of higher borrowings.
REGULATORY MATTERS
Washington Water Service Company filed a General Rate Case (GRC)
application in February 2002. The Washington Utilities and Transportation
Commission issued its decision early in April 2002 granting a $1 million
increase in annual revenue.
The California Public Utilities Commission (Commission) is processing
the Company's 15 GRC applications that were filed in July 2001. In April 2002,
evidentiary hearings were held for issues that had not been resolved between the
Company and the
Commission's staff. Decisions on these applications are anticipated near the end
of the summer.
In May 2001, immediately after the Commission authorized substantial
electric rate increases for the state's two largest power companies, the Company
requested authorization to recover $5.9 million in higher power costs in its
California districts. In October 2001, the Commission adopted a resolution
implementing its staff's interim recommendation concerning practices and
policies that enable water utilities to recover increases in purchased water,
purchased power and pump taxes. In 2001, the Company was authorized rate
increases in four districts totaling $2.7 million in additional annual revenue.
The Company's requests to recover power cost increases in the other California
districts will be processed in accordance with the interim policies adopted by
the Commission. This means that the amount of higher electric costs incurred up
to the date the Commission adopted its new rules will be recovered based on
findings of a separate Commission proceeding. No date has been set for the
separate proceeding. Higher costs incurred subsequent to the date of the
Commission's new rules will be recovered through GRC proceedings. Although the
Company is hopeful that it will be authorized to recover the additional
expenses, it is unable to predict the timing or amount of such recoveries.
The Company plans to file GRC applications for seven California
districts plus General Office in July 2002. The Commission's staff has indicated
that decisions should be expected in late 2003 for these filings.
LIQUIDITY
Short-term bank borrowings were $29,500,000 at March 31, 2002 and
$22,000,000 at December 31, 2001. Additional short-term bank borrowings will be
necessary during the second quarter to fund a portion of semiannual long-term
debt interest payments due on May 1, 2002 and the second quarter dividend
payable on May 20, 2002. Following those payments, the Company expects to
generate cash flow from operations to repay a portion of the short-term bank
borrowings.
In April 2002, the Company agreed to issue $20 million of 30-year
Series E senior notes at an interest rate of 7.11%. The notes will be funded to
the Company by two institutional investors in late May 2002. The funds from this
financing will be used to repay short-term bank borrowings.
The first quarter common dividend was paid on February 22, 2002 at
$0.28 per share compared to a quarterly dividend in 2001 of $0.27875. The
dividend increase was approved by the Board of Directors at their January 2002
meeting. It represents the 35th consecutive year that the dividend has been
increased. Annualized, the 2002 dividend rate is $1.12 per common share compared
to $1.115 in 2001. Based on the 12-month earnings per share at March 31, 2002,
the dividend payout ratio is 103%. For the full year 2001, the payout ratio was
115%. On a long-term basis, the Company's goal is to achieve a dividend payout
ratio of about 60%.
At their April 24, 2002 meeting, the Board declared the second quarter
dividend payable May 20, 2002 to stockholders of record on May 6, 2002. This
will be the 230th consecutive quarterly dividend paid by the Company.
About 10% 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 (401K). Purchases for this plan are made on a biweekly basis.
Book value per common share was $12.80 at March 31, 2002 and $12.95 at
December 31, 2001.
During the quarter, utility plant expenditures totaled $10,733,000 for
additions to and replacements of utility plant. The 2002 Company-funded
construction budget is $76,800,000.
WATER SUPPLY
Based on information from water management agencies and Company
developed data, the Company believes that its various sources of water supply
are sufficient to meet customer demand for the remainder of the year.
Historically, about half of the water source is purchased from wholesale
suppliers with the other half pumped from underground wells. A small portion is
developed through three local surface treatment plants.
Storage in state reservoirs was 96% of historic average as of February
28, 2002, and groundwater levels remain adequate. The mountain snowpack has a
good water content and is considered adequate to meet the current year's supply
needs.
ACCOUNTING PRONOUNCEMENTS
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, 2002. 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.
MARKET RISK
The Company does not hold, trade 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 and short-term bank borrowings, including
interest costs, is 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
generally 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 24, 2002 at the Company's executive office in San
Jose, California. As proposed in the 2002 Proxy, the election of
directors and confirmation of KPMG LLP to serve as independent auditors
for 2002 were approved by stockholders at the meeting.
(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:
Douglas M. Brown Robert W. Foy
Edward D. Harris, Jr. M.D. Richard P. Magnuson
Linda R. Meier Peter C. Nelson
Langdon W. Owen George A. Vera
(c) Two proposals were voted on at the meeting: (1) election of directors
for the ensuing year, and (2) ratification of the selection of KPMG LLP
as independent auditors for 2002.
(1) Tabulation of the votes for the election of directors was:
For Against
--- -------
Douglas M. Brown 13,248,806 231,230
Robert W. Foy 13,226,444 253,593
Edward D. Harris, Jr. M.D. 13,239,011 241,025
Richard P. Magnuson 13,261,742 218,295
Linda R. Meier 13,196,425 283,612
Peter C. Nelson 12,487,913 992,123
Langdon W. Owen 13,253,276 226,760
George A. Vera 13,255,534 224,502
(2) The Directors' selection of KPMG LLP to serve as independent auditors
for 2002 was ratified by the stockholders. There were 13,203,713 votes
in favor, 194,918 against and 81,404 abstentions.
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 2, 2002
/s/ Gerald F. Feeney
Gerald F. Feeney
Vice President, Chief Financial Officer
and Treasurer