10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 6, 2010
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
o | 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 | |
(State or other jurisdiction | (I.R.S. Employer identification No.) | |
of incorporation or organization) | ||
1720 North First Street, San Jose, CA. | 95112 | |
(Address of principal executive offices) | (Zip Code) |
408-367-8200
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the
Exchange Act) Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. Common shares outstanding as of July 31, 2010 20,802,361
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EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
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PART I FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
The condensed consolidated financial statements presented in this filing on Form 10-Q have been prepared by management and are unaudited. |
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands, except per share data)
(In thousands, except per share data)
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Utility plant: |
||||||||
Utility plant |
$ | 1,786,888 | $ | 1,709,062 | ||||
Less accumulated depreciation and amortization |
(533,424 | ) | (510,985 | ) | ||||
Net utility plant |
1,253,464 | 1,198,077 | ||||||
Current assets: |
||||||||
Cash and cash equivalents |
5,646 | 9,866 | ||||||
Receivables: |
||||||||
Customers |
27,031 | 25,567 | ||||||
Regulatory balancing accounts |
8,219 | 10,513 | ||||||
Other |
6,036 | 9,043 | ||||||
Unbilled revenue |
19,350 | 13,417 | ||||||
Materials and supplies at average cost |
5,702 | 5,530 | ||||||
Taxes, prepaid expenses and other assets |
19,654 | 18,305 | ||||||
Total current assets |
91,638 | 92,241 | ||||||
Other assets: |
||||||||
Regulatory assets |
220,621 | 204,104 | ||||||
Goodwill |
2,615 | 2,615 | ||||||
Other assets |
32,094 | 28,544 | ||||||
Total other assets |
255,330 | 235,263 | ||||||
$ | 1,600,432 | $ | 1,525,581 | |||||
CAPITALIZATION AND LIABILITIES |
||||||||
Capitalization: |
||||||||
Common stock, $.01 par value |
$ | 208 | $ | 208 | ||||
Additional paid-in capital |
216,063 | 215,528 | ||||||
Retained earnings |
204,930 | 204,898 | ||||||
Total common stockholders equity |
421,201 | 420,634 | ||||||
Long-term debt, less current maturities |
380,017 | 374,269 | ||||||
Total capitalization |
801,218 | 794,903 | ||||||
Current liabilities: |
||||||||
Current maturities of long-term debt |
2,923 | 12,953 | ||||||
Short-term borrowings |
55,150 | 12,000 | ||||||
Accounts payable |
48,830 | 43,689 | ||||||
Regulatory balancing accounts |
903 | 2,430 | ||||||
Accrued interest |
4,033 | 4,258 | ||||||
Accrued expenses and other liabilities |
33,905 | 35,028 | ||||||
Total current liabilities |
145,744 | 110,358 | ||||||
Unamortized investment tax credits |
2,318 | 2,318 | ||||||
Deferred income taxes, net |
94,463 | 91,851 | ||||||
Pension and postretirement benefits other than pensions |
143,543 | 137,127 | ||||||
Regulatory and other liabilities |
92,243 | 85,780 | ||||||
Advances for construction |
188,015 | 185,027 | ||||||
Contributions in aid of construction |
132,888 | 118,217 | ||||||
$ | 1,600,432 | $ | 1,525,581 | |||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(In thousands, except per share data)
(In thousands, except per share data)
June 30, | June 30, | |||||||
For the three months ended | 2010 | 2009 | ||||||
Operating revenue |
$ | 118,321 | $ | 116,667 | ||||
Operating expenses: |
||||||||
Operations: |
||||||||
Water production costs |
41,834 | 41,702 | ||||||
Administrative and general |
18,480 | 19,386 | ||||||
Other operations |
14,749 | 14,330 | ||||||
Maintenance |
5,158 | 4,312 | ||||||
Depreciation and amortization |
10,638 | 10,282 | ||||||
Income taxes |
7,091 | 6,789 | ||||||
Property and other taxes |
4,087 | 3,911 | ||||||
Total operating expenses |
102,037 | 100,712 | ||||||
Net operating income |
16,284 | 15,955 | ||||||
Other income and expenses: |
||||||||
Non-regulated revenue |
3,692 | 3,098 | ||||||
Non-regulated expenses, net |
(3,691 | ) | (721 | ) | ||||
Gain on sale of non-utility property |
| 72 | ||||||
Income taxes expense on other income and expenses |
| (992 | ) | |||||
Net other income and expenses |
1 | 1,457 | ||||||
Interest expense: |
||||||||
Interest expense |
6,939 | 5,962 | ||||||
Less: capitalized interest |
(1,035 | ) | (640 | ) | ||||
Net interest expense |
5,904 | 5,322 | ||||||
Net income |
$ | 10,381 | $ | 12,090 | ||||
Earnings per share |
||||||||
Basic |
$ | 0.50 | $ | 0.58 | ||||
Diluted |
$ | 0.50 | $ | 0.58 | ||||
Weighted average shares outstanding |
||||||||
Basic |
20,803 | 20,745 | ||||||
Diluted |
20,818 | 20,767 | ||||||
Dividends declared per share of common stock |
$ | 0.2975 | $ | 0.2950 | ||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(In thousands, except per share data)
(In thousands, except per share data)
June 30, | June 30, | |||||||
For the six months ended | 2010 | 2009 | ||||||
Operating revenue |
$ | 208,593 | $ | 203,280 | ||||
Operating expenses: |
||||||||
Operations: |
||||||||
Water production costs |
72,289 | 70,570 | ||||||
Administrative and general |
35,924 | 38,247 | ||||||
Other operations |
28,315 | 26,786 | ||||||
Maintenance |
10,109 | 8,947 | ||||||
Depreciation and amortization |
21,430 | 20,480 | ||||||
Income taxes |
8,499 | 8,021 | ||||||
Property and other taxes |
7,990 | 7,999 | ||||||
Total operating expenses |
184,556 | 181,050 | ||||||
Net operating income |
24,037 | 22,230 | ||||||
Other income and expenses: |
||||||||
Non-regulated revenue |
7,113 | 5,979 | ||||||
Non-regulated expenses, net |
(7,237 | ) | (3,362 | ) | ||||
Gain on sale of non-utility property |
| 675 | ||||||
Income taxes benefit (expense) on other income and expenses |
60 | (1,330 | ) | |||||
Net other (expense) income |
(64 | ) | 1,962 | |||||
Interest expense: |
||||||||
Interest expense |
13,428 | 11,000 | ||||||
Less: capitalized interest |
(1,854 | ) | (1,319 | ) | ||||
Net interest expense |
11,574 | 9,681 | ||||||
Net income |
$ | 12,399 | $ | 14,511 | ||||
Earnings per share |
||||||||
Basic |
$ | 0.60 | $ | 0.70 | ||||
Diluted |
$ | 0.60 | $ | 0.70 | ||||
Weighted average shares outstanding |
||||||||
Basic |
20,791 | 20,738 | ||||||
Diluted |
20,806 | 20,763 | ||||||
Dividends declared per share of common stock |
$ | 0.5950 | $ | 0.5900 | ||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
(In thousands)
June 30, | June 30, | |||||||
For the six months ended: | 2010 | 2009 | ||||||
Operating activities |
||||||||
Net income |
$ | 12,399 | $ | 14,511 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
22,857 | 21,614 | ||||||
Gain on sale of non-utility property |
| (675 | ) | |||||
Change in value of life insurance contracts |
83 | (1,827 | ) | |||||
Other changes in noncurrent assets and liabilities |
(1,008 | ) | 3,729 | |||||
Changes in operating assets and liabilities: |
||||||||
Receivables |
(2,095 | ) | (12,065 | ) | ||||
Accounts payable |
5,327 | 9,916 | ||||||
Other current assets |
(1,509 | ) | (5,018 | ) | ||||
Other current liabilities |
(1,347 | ) | (143 | ) | ||||
Other changes, net |
(1,851 | ) | 518 | |||||
Net adjustments |
20,457 | 16,049 | ||||||
Net cash provided by operating activities |
32,856 | 30,560 | ||||||
Investing activities: |
||||||||
Utility plant expenditures |
(60,458 | ) | (52,930 | ) | ||||
Purchase of life insurance |
(1,706 | ) | (1,613 | ) | ||||
Proceeds on sale of non-utility property |
| 750 | ||||||
Restricted cash (increase) |
(13 | ) | | |||||
Net cash used in investing activities |
(62,177 | ) | (53,793 | ) | ||||
Financing activities: |
||||||||
Short-term borrowings |
43,150 | 20,000 | ||||||
Repayment of short-term borrowing |
| (48,000 | ) | |||||
Advances and contributions in aid of construction |
1,620 | 2,414 | ||||||
Refunds of advances for construction |
(3,018 | ) | (2,520 | ) | ||||
Dividends paid |
(12,367 | ) | (12,233 | ) | ||||
Proceeds from long-term debt, net of issuance cost |
7,903 | 96,610 | ||||||
Repayment of long-term debt |
(12,187 | ) | (5,439 | ) | ||||
Issuance of common stock |
| 30 | ||||||
Net cash provided by financing activities |
25,101 | 50,862 | ||||||
Change in cash and cash equivalents |
(4,220 | ) | 27,629 | |||||
Cash and cash equivalents at beginning of period |
9,866 | 13,869 | ||||||
Cash and cash equivalents at end of period |
$ | 5,646 | $ | 41,498 | ||||
Supplemental information |
||||||||
Cash paid for interest (net of amounts capitalized) |
$ | 11,316 | $ | 8,553 | ||||
Cash paid for income taxes |
$ | 45 | $ | 358 | ||||
Supplemental disclosure of non-cash activities: |
||||||||
Accrued payables for investments in utility plant |
$ | 8,755 | $ | 7,623 | ||||
Utility plant contribution by developers |
$ | 23,239 | $ | 7,584 |
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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CALIFORNIA WATER SERVICE GROUP
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2010
(Amounts in thousands, except share and per share amounts)
June 30, 2010
(Amounts in thousands, except share and per share amounts)
Note 1. Organization and Operations and Basis of Presentation
California Water Service Group (the Company) is a holding company that provides water utility and
other related services in California, Washington, New Mexico and Hawaii through its wholly-owned
subsidiaries. California Water Service Company (Cal Water), Washington Water Service Company
(Washington Water), New Mexico Water Service Company (New Mexico Water), and Hawaii Water Service
Company, Inc. (Hawaii Water) provide regulated utility services under the rules and regulations
of their respective states regulatory commissions (jointly referred to herein as the
Commissions). CWS Utility Services and HWS Utility Services LLC provide non-regulated water
utility and utility-related services.
Basis of Presentation
The unaudited interim financial information has been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) for interim financial
information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission (SEC) and therefore do not contain all of
the information and footnotes required by GAAP and the SEC for annual financial statements. The
condensed consolidated financial statements should be read in conjunction with the Companys
consolidated financial statements for the year ended December 31, 2009, included in its annual
report on Form 10-K as filed with the SEC on March 1, 2010.
The preparation of the Companys condensed consolidated financial statements in accordance with
GAAP 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 balance sheet
dates and the reported amounts of revenues and expenses for the periods presented. Actual results
could differ from these estimates.
In the opinion of management, the accompanying condensed consolidated financial statements
reflect all adjustments that are necessary to provide a fair presentation of the results for the
periods covered. The results for interim periods are not necessarily indicative of the results
for any future period.
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. Revenue and income are generally higher in
the warm, summer months and lower in the cooler winter months.
The Company operates in one reportable segment providing water and related utility services.
The Company evaluated its operations through the time these financial statements were issued and
determined there were no subsequent events requiring additional adjustments or disclosures as of
the time these financial statements were issued.
Note 2. Summary of Significant Accounting Policies
Revenue
Revenue includes monthly cycle customer billings for regulated water and wastewater services at
rates authorized by regulatory commissions and billings to certain non-regulated customers.
Revenue from metered customers includes billings to customers based on monthly meter readings
plus an estimate for water used between the customers last meter reading and the end of the
accounting period. 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 periods revenue, with the balance recorded as unearned
revenue on the balance sheet and recognized as revenue when earned in the subsequent accounting
period. In addition, effective July 1, 2008 with the adoption of the Water Revenue Adjustment
Mechanism (WRAM) and the Modified Cost Balancing Account (MCBA), Cal Water records the
difference between what is billed to its regulated customers and that which is authorized by the
California Public Utilities Commission (CPUC).
Under the WRAM, Cal Water records the adopted level of volumetric revenues as authorized by the
CPUC for metered accounts (adopted volumetric revenues). In addition to volumetric-based
revenues, the revenue requirements approved by the CPUC include
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service charges, flat rate charges, and other items that are not subject to the WRAM. The adopted
volumetric revenue considers the seasonality of consumption of water based upon historical
averages. The variance between adopted volumetric revenues and actual billed volumetric revenues
for metered accounts is recorded as a component of revenue with an offsetting entry to a current
or long-term asset or liability balancing account (tracked individually for each Cal Water
district). The variance amount may be positive or negative and represents amounts that will be
billed or refunded to customers in the future.
Under the MCBA, Cal Water tracks adopted expense levels for water production costs (purchased
water, purchased power, and pump taxes), as established by the CPUC. Variances (which include the
effects of changes in both rate and volume) between adopted and actual purchased water, purchased
power, and pump tax expenses are recorded as a component of revenue, as the amount of such
variances will be recovered from or refunded to the Companys customers at a later date. This is
reflected with an offsetting entry to a current or long-term asset or liability regulatory
balancing account (tracked individually for each Cal Water district).
The balances in the WRAM and MCBA assets and liabilities accounts fluctuate on a monthly basis
depending upon the variance between adopted and actual results. The recovery or refund of the
WRAM is netted against the MCBA over- or under-recovery for the corresponding district and is
interest bearing at the current ninety day commercial paper rate. When the net amount for any
district achieves a pre-determined level at the end of any calendar year (i.e., at least 2.5
percent over- or under-recovery of the approved revenue requirement), Cal Water will file with
the CPUC to refund or collect the balance in the accounts. Account balances less than those
levels may be refunded or collected in Cal Waters general rate case proceedings or aggregated
with future calendar year balances for comparison with the recovery level. As of June 30, 2010
included in the net regulatory balancing accounts, current and long-term assets were $8.2 million
and $20.6 million, respectively, and the net regulatory balancing accounts current and long-term
liabilities were $0.9 million and $1.5 million, respectively. As of December 31, 2009, included
in the net regulatory balancing accounts, current and long-term assets were $10.5 million and
$5.1 million, respectively, and the net regulatory balancing accounts current and long-term
liabilities were $2.4 million and $0.9 million, respectively.
Note 3. Stock-based Compensation
Long-Term Incentive Plan
The long-term incentive plan was replaced on April 27, 2005, by a stockholder-approved equity
incentive plan. The Long-Term Incentive Plan allowed granting of nonqualified stock options, some
of which are currently outstanding. There will be no future grants made. The Company had
accounted for options using the intrinsic value method. Options were granted at an exercise price
that was not less than the per share common stock market price on the date of grant. The options
vested at a 25% rate on their anniversary date over their first four years and are exercisable
over a ten-year period. At June 30, 2010, options are fully vested and exercisable at a weighted
average price of $25.50. No options were granted for the six-month periods ended June 30, 2010
and 2009.
Equity Incentive Plan
The Companys Equity Incentive Plan, which was approved by shareholders on April 27, 2005, is
authorized to issue up to 1,000,000 shares of common stock. As of June 30, 2010 and 2009, the
Company granted Restricted Stock Awards (RSAs) of 36,909 and 21,000 shares, respectively, of
common stock both to officers and to directors of the Company. Employee options vest over
forty-eight months, while director options vest at the end of twelve months. In the second
quarters of 2010 and 2009, the shares were valued at $35.48 and $38.38 per share, respectively,
based upon the fair market value of the Companys common stock on the date of grant.
During the first six months of 2009, the Company granted Stock Appreciation Rights (SARs) to
officers of 71,500 shares, which vest ratably over forty-eight months and expire at the end of
ten years. The Company did not grant any SARs in 2010.
The Company has recorded compensation costs for the RSAs and SARs in Operating Expense in the
amount of $0.5 million for both the six months ended June 30, 2010 and June 30, 2009.
Note 4. Earnings Per Share Calculations
The computations of basic and diluted earnings per share are noted below. Basic earnings per
share are computed by dividing net income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted earnings per share reflect
the potential dilution that could occur if securities or other contracts were exercised or
converted
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into common stock. RSAs are included in the common shares outstanding because the shares have all
the same voting and dividend rights as issued and unrestricted common stock.
The SARs outstanding of 180,210 shares are anti-dilutive for the three and six months ended June
30, 2010 and 2009. All options are dilutive and the dilutive effect is shown in the table below.
(In thousands, except per share data)
Three Months Ended June 30 | ||||||||
2010 | 2009 | |||||||
Net income available to common stockholders |
$ | 10,381 | $ | 12,090 | ||||
Weighted average common shares, basic |
20,803 | 20,745 | ||||||
Dilutive common stock options (treasury method) |
15 | 22 | ||||||
Shares used for dilutive computation |
20,818 | 20,767 | ||||||
Net income per share basic |
$ | 0.50 | $ | 0.58 | ||||
Net income per share diluted |
$ | 0.50 | $ | 0.58 | ||||
Six Months Ended June 30 | ||||||||
2010 | 2009 | |||||||
Net income available to common stockholders |
$ | 12,399 | $ | 14,511 | ||||
Weighted average common shares, basic |
20,791 | 20,738 | ||||||
Dilutive common stock options (treasury method) |
15 | 25 | ||||||
Shares used for dilutive computation |
20,806 | 20,763 | ||||||
Net income per share basic |
$ | 0.60 | $ | 0.70 | ||||
Net income per share diluted |
$ | 0.60 | $ | 0.70 | ||||
Note 5. Pension Plan and Other Postretirement Benefits
The Company provides a qualified, defined-benefit, non-contributory pension plan for
substantially all employees. The Company makes annual contributions to fund the amounts accrued
for the qualified pension plan. The Company also maintains an unfunded, non-qualified,
supplemental executive retirement plan. The costs of the plans are charged to expense or are
capitalized in utility plant as appropriate.
The Company offers medical, dental, vision, and life insurance benefits for retirees and their
spouses and dependents. Participants are required to pay a premium, which offsets a portion of
the cost.
Cash payments by the Company related to pension plans and other postretirement benefits were $6.6
million for the six months ended June 30, 2010. The estimated cash contribution to the pension
plans for 2010 is $23.5 million. The estimated contribution to the other benefits plan for 2010
is $5.6 million.
The following table lists components of the pension plans and other postretirement benefits. The
data listed under pension plan includes the qualified pension plan and the non-qualified
supplemental executive retirement plan. The data listed under other benefits is for all other
postretirement benefits.
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||||||
Pension Plan | Other Benefits | Pension Plan | Other Benefits | |||||||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||
Service cost |
$ | 2,451 | $ | 2,354 | $ | 793 | $ | 954 | $ | 4,902 | $ | 4,560 | $ | 1,586 | $ | 1,458 | ||||||||||||||||
Interest cost |
3,332 | 3,158 | 783 | 890 | 6,664 | 6,176 | 1,566 | 1,408 | ||||||||||||||||||||||||
Expected return on plan assets |
(2,051 | ) | (1,871 | ) | (279 | ) | (208 | ) | (4,102 | ) | (3,578 | ) | (558 | ) | (393 | ) | ||||||||||||||||
Recognized net initial APBO (1) |
N/A | N/A | 69 | 69 | N/A | N/A | 138 | 138 | ||||||||||||||||||||||||
Amortization of prior service
cost |
1,649 | 1,533 | 29 | 29 | 3,298 | 3,066 | 58 | 58 | ||||||||||||||||||||||||
Recognized net actuarial loss |
524 | 505 | 392 | 612 | 1,048 | 966 | 784 | 811 | ||||||||||||||||||||||||
Net periodic benefit cost |
$ | 5,905 | $ | 5,679 | $ | 1,787 | $ | 2,346 | $ | 11,810 | $ | 11,190 | $ | 3,574 | $ | 3,480 | ||||||||||||||||
(1) | APBO Accumulated postretirement benefit obligation |
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Note 6. Short-term and Long-term Borrowings
California Water Service Group and subsidiaries which it designates may borrow up to $50 million
under the Companys short-term credit facility. Cal Water may borrow up to $250 million under its
credit facility; however, all borrowings need to be repaid within twelve months unless otherwise
authorized by the CPUC.
Both short-term unsecured credit agreements contain affirmative and negative covenants and events
of default customary for credit facilities of this type including, among other things,
limitations and prohibitions relating to additional indebtedness, liens, mergers, and asset
sales. Also, these unsecured credit agreements contain financial covenants governing the Company
and its subsidiaries consolidated total capitalization ratio and interest coverage ratio. As of
June 30, 2010, the Company has met all borrowing covenants for both credit agreements.
As of June 30, 2010 and 2009, the outstanding borrowings on the Company lines of credit were
$20.2 million and $12 million, respectively, and borrowings on the Cal Water lines of credit were
$35 million and none, respectively.
During the six months ended June 30, 2010, we added new long-term debt of $7.9 million to fund
Cal Water and Washington Water capital projects and repaid debt of $12.2 million.
Note 7. Commitment and Contingencies
Commitments
The Company has significant commitments to lease certain office spaces and water systems, and for
the purchase of water from water wholesalers. These commitments are described in footnote 15 of
the current report on Form 10-K.
Contingencies
Groundwater Contamination
The Company has been and is involved in litigation against third parties to recover past and
future costs related to ground water contamination in our service areas. The cost of litigation
is expensed as incurred and any settlement is first offset against such costs. Any settlement in
excess of the cost to litigate is accounted for on a case by case basis, dependent upon the
nature of the settlement.
The Company is involved in a lawsuit against major oil refineries regarding the contamination of
the ground water as a result of the gas additive Methyl tert-butyl ether (MTBE). The Company
entered into a partial settlement with the defendants in April of 2008 that represent
approximately 70% of the responsible parties (as determined by the Superior Court). On
October 22, 2008, the Company received $34.2 million after deducting attorneys fees and
litigation expenses. The Company is aggressively pursuing legal action against the remaining
responsible parties. The Company has filed with the Commission to determine the appropriate
regulatory treatment of the proceeds. It anticipates that the proceeds will be used on MTBE
qualified capital investments. When an agreement is reached with the Commission regarding the
regulatory treatment, the Company will adjust the accounting of the settlement, accordingly.
The Company has recorded the proceeds to replace the infrastructure damaged or lost due to the
MTBE contamination in accordance with the Internal Revenue Code Section 1033. This treatment
will reduce the tax basis of the replacement property and therefore deferring any taxable gain.
As previously reported, the Company has filed with the City of Bakersfield, in the Superior Court
of California, a lawsuit that names potentially responsible parties, who manufactured and
distributed products containing 1,2,3 trichloropropane (TCP) in California. TCP has been detected
in the ground water. The lawsuit seeks to recover treatment costs necessary to remove TCP. The
Court has now coordinated our action with other water purveyor cases (TCP Cases JCCP 4435) in
San Bernardino County. No trial date has yet been set. The Company has entered into a settlement
with one of the distributor defendants, FMC Corporation. The Company will record the proceeds in
a memorandum account until the Commission approves an allocation between ratepayers and
shareholders.
10
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The Company has filed in San Mateo County Superior Court a complaint (California Water Service
Company v. The Dow Chemical Company, et al. CIV 473093) against potentially responsible parties
that manufactured and distributed products in California, which contained perchloroethylene, also
known as tetrachloroethylene (PCE) for recovery of past, present, and future treatment costs. The
case has not been consolidated with other PCE cases. Discovery is underway and no trial date has
yet been set.
Other Legal Matters
From time to time, the Company has been named as a co-defendant in several asbestos related
lawsuits. The Company has been dismissed without prejudice in several of these cases. In other
cases the Companys contractors and insurance policy carriers have settled the cases with no
effect on the Companys financial statements. As such the Company does not currently believe
there is any potential loss probable of occurring related to these matters and therefore no
accrual or contingency has been recorded.
From time to time, the Company is involved in various disputes and litigation matters that arise
in the ordinary course of business. The status of each significant matter is reviewed and
assessed for potential financial exposure. If the potential loss from any claim or legal
proceeding is considered probable and the amount of the range of loss can be estimated, a
liability is accrued for the estimated loss in accordance with the accounting standards for
contingencies. Legal proceedings are subject to uncertainties, and the outcomes are difficult to
predict. Because of such uncertainties, accruals are based on the best information available at
the time. While the outcome of these disputes and litigation matters cannot be predicted with any
certainty, management does not believe when taking into account existing reserves the ultimate
resolution of these matters will materially affect the Companys financial position, results of
operations, or cash flows.
Note 8. 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, accounts receivable and
accounts payable, the carrying amounts approximated the fair value because of the short-term
maturity of the instruments. The fair value of the Companys long-term debt was estimated at $391
million and $367 million as of June 30, 2010 and December 31, 2009, respectively, using the
published quoted market price, if available, or the discounted cash flow analysis, based on the
current rates available to the Company for debt of similar maturities and credit risk. The book
value of the long-term debt was $380 million and $374 million as of June 30, 2010 and December
31, 2009, respectively. The fair value of advances for construction contracts was estimated at
$76 million as of June 30, 2010 and $74 million as of December 31, 2009.
Note 9. Condensed Consolidating Financial Statements
The following tables present the condensed consolidating statements of income of California Water
Service Group (Guarantor and Parent), Cal Water (issuer and wholly-owned consolidated subsidiary
of California Water Service Group) and other wholly-owned subsidiaries of the Company for the
six-month periods ended June 30, 2010 and 2009, the condensed consolidating statements of cash
flows for the six-months ended June 30, 2010 and 2009 and the condensed consolidating balance
sheets as of June 30, 2010 and December 31, 2009. The information is presented utilizing the
equity method of accounting for investments in consolidating subsidiaries.
11
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CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 2010
As of June 30, 2010
(In thousands)
Parent | All Other | Consolidating | ||||||||||||||||||
Company | Cal Water | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Utility plant: |
||||||||||||||||||||
Utility plant |
$ | | $ | 1,661,713 | $ | 132,374 | $ | (7,199 | ) | $ | 1,786,888 | |||||||||
Less accumulated depreciation and amortization |
| (509,185 | ) | (25,434 | ) | 1,195 | (533,424 | ) | ||||||||||||
Net utility plant |
| 1,152,528 | 106,940 | (6,004 | ) | 1,253,464 | ||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
| 2,669 | 2,977 | | 5,646 | |||||||||||||||
Receivables and unbilled revenue |
| 56,510 | 4,126 | | 60,636 | |||||||||||||||
Receivables from affiliates |
22,165 | 11,369 | 2,976 | (36,510 | ) | | ||||||||||||||
Other current assets |
110 | 24,065 | 1,181 | | 25,356 | |||||||||||||||
Total current assets |
22,275 | 94,613 | 11,260 | (36,510 | ) | 91,638 | ||||||||||||||
Other assets: |
||||||||||||||||||||
Regulatory assets |
| 218,674 | 1,947 | | 220,621 | |||||||||||||||
Investments in affiliates |
422,143 | | | (422,143 | ) | | ||||||||||||||
Long-term affiliate notes receivable |
9,529 | | | (9,529 | ) | | ||||||||||||||
Other assets |
476 | 27,187 | 7,251 | (205 | ) | 34,709 | ||||||||||||||
Total other assets |
432,148 | 245,861 | 9,198 | (431,877 | ) | 255,330 | ||||||||||||||
$ | 454,423 | $ | 1,493,002 | $ | 127,398 | $ | (474,391 | ) | $ | 1,600,432 | ||||||||||
CAPITALIZATION AND LIABILITIES |
||||||||||||||||||||
Capitalization: |
||||||||||||||||||||
Common stockholders equity |
$ | 421,202 | $ | 390,332 | $ | 38,204 | $ | (428,537 | ) | $ | 421,201 | |||||||||
Affiliate long-term debt |
| | 9,529 | (9,529 | ) | | ||||||||||||||
Long-term debt, less current maturities |
| 375,622 | 4,395 | | 380,017 | |||||||||||||||
Total capitalization |
421,202 | 765,954 | 52,128 | (438,066 | ) | 801,218 | ||||||||||||||
Current liabilities: |
||||||||||||||||||||
Current maturities of long-term debt |
| 2,246 | 677 | | 2,923 | |||||||||||||||
Short-term borrowings |
20,150 | 35,000 | | | 55,150 | |||||||||||||||
Payables to affiliates |
12,868 | 315 | 23,327 | (36,510 | ) | | ||||||||||||||
Accounts payable |
| 45,232 | 4,501 | | 49,733 | |||||||||||||||
Accrued expenses and other liabilities |
203 | 32,086 | 5,611 | 38 | 37,938 | |||||||||||||||
Total current liabilities |
33,221 | 114,879 | 34,116 | (36,472 | ) | 145,744 | ||||||||||||||
Unamortized investment tax credits |
| 2,318 | | | 2,318 | |||||||||||||||
Deferred income taxes, net |
| 92,941 | 1,375 | 147 | 94,463 | |||||||||||||||
Pension and postretirement benefits other than pensions |
| 143,543 | | | 143,543 | |||||||||||||||
Regulatory and other liabilities |
| 81,371 | 10,872 | | 92,243 | |||||||||||||||
Advances for construction |
| 186,475 | 1,540 | | 188,015 | |||||||||||||||
Contributions in aid of construction |
| 105,521 | 27,367 | | 132,888 | |||||||||||||||
$ | 454,423 | $ | 1,493,002 | $ | 127,398 | $ | (474,391 | ) | $ | 1,600,432 | ||||||||||
12
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CALIFORNIA
WATER SERVICE GROUP
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2009
As of December 31, 2009
(In thousands)
Parent | All Other | Consolidating | ||||||||||||||||||
Company | Cal Water | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Utility plant: |
||||||||||||||||||||
Utility plant |
$ | | $ | 1,604,680 | $ | 111,581 | $ | (7,199 | ) | $ | 1,709,062 | |||||||||
Less accumulated depreciation and amortization |
| (488,577 | ) | (23,538 | ) | 1,130 | (510,985 | ) | ||||||||||||
Net utility plant |
| 1,116,103 | 88,043 | (6,069 | ) | 1,198,077 | ||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
532 | 6,000 | 3,334 | | 9,866 | |||||||||||||||
Receivables |
28 | 54,117 | 4,395 | | 58,540 | |||||||||||||||
Receivables from affiliates |
11,026 | 12,827 | 2,140 | (25,993 | ) | | ||||||||||||||
Other current assets |
| 23,025 | 810 | | 23,835 | |||||||||||||||
Total current assets |
11,586 | 95,969 | 10,679 | (25,993 | ) | 92,241 | ||||||||||||||
Other assets: |
||||||||||||||||||||
Regulatory assets |
| 202,268 | 1,836 | | 204,104 | |||||||||||||||
Investments in affiliates |
422,287 | | | (422,287 | ) | | ||||||||||||||
Long-term affiliate notes receivable |
11,155 | | | (11,155 | ) | | ||||||||||||||
Other assets |
| 24,026 | 7,337 | (204 | ) | 31,159 | ||||||||||||||
Total other assets |
433,442 | 226,294 | 9,173 | (433,646 | ) | 235,263 | ||||||||||||||
$ | 445,028 | $ | 1,438,366 | $ | 107,895 | $ | (465,708 | ) | $ | 1,525,581 | ||||||||||
CAPITALIZATION AND LIABILITIES |
||||||||||||||||||||
Capitalization: |
||||||||||||||||||||
Common stockholders equity |
$ | 420,634 | $ | 389,127 | $ | 39,592 | $ | (428,719 | ) | $ | 420,634 | |||||||||
Affiliate long-term debt |
| | 11,155 | (11,155 | ) | | ||||||||||||||
Long-term debt, less current maturities |
| 370,900 | 3,369 | | 374,269 | |||||||||||||||
Total capitalization |
420,634 | 760,027 | 54,116 | (439,874 | ) | 794,903 | ||||||||||||||
Current liabilities: |
||||||||||||||||||||
Current maturities of long-term debt |
| 12,246 | 707 | | 12,953 | |||||||||||||||
Short-term borrowings |
12,000 | | | | 12,000 | |||||||||||||||
Payables to affiliates |
11,983 | 12 | 13,998 | (25,993 | ) | | ||||||||||||||
Accounts payable |
86 | 41,405 | 4,628 | | 46,119 | |||||||||||||||
Accrued expenses and other liabilities |
325 | 34,580 | 4,369 | 12 | 39,286 | |||||||||||||||
Total current liabilities |
24,394 | 88,243 | 23,702 | (25,981 | ) | 110,358 | ||||||||||||||
Unamortized investment tax credits |
| 2,318 | | | 2,318 | |||||||||||||||
Deferred income taxes, net |
| 90,330 | 1,374 | 147 | 91,851 | |||||||||||||||
Pension and postretirement benefits other than pensions |
| 137,127 | | | 137,127 | |||||||||||||||
Regulatory and other liabilities |
| 74,956 | 10,824 | | 85,780 | |||||||||||||||
Advances for construction |
| 183,555 | 1,472 | | 185,027 | |||||||||||||||
Contributions in aid of construction |
| 101,810 | 16,407 | | 118,217 | |||||||||||||||
$ | 445,028 | $ | 1,438,366 | $ | 107,895 | $ | (465,708 | ) | $ | 1,525,581 | ||||||||||
13
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CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended June 30, 2010
For the three months ended June 30, 2010
(In thousands)
Parent | All Other | Consolidating | ||||||||||||||||||
Company | Cal Water | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
Operating revenue |
$ | | $ | 111,376 | $ | 6,945 | $ | | $ | 118,321 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Operations: |
||||||||||||||||||||
Water production costs |
| 39,556 | 2,278 | | 41,834 | |||||||||||||||
Administrative and general |
| 16,581 | 1,899 | | 18,480 | |||||||||||||||
Other operations |
| 12,954 | 2,049 | (254 | ) | 14,749 | ||||||||||||||
Maintenance |
| 4,951 | 207 | | 5,158 | |||||||||||||||
Depreciation and amortization |
| 10,113 | 590 | (65 | ) | 10,638 | ||||||||||||||
Income taxes (benefit) |
(71 | ) | 7,134 | (381 | ) | 409 | 7,091 | |||||||||||||
Property and other taxes |
| 3,567 | 520 | | 4,087 | |||||||||||||||
Total operating expenses |
(71 | ) | 94,856 | 7,162 | 90 | 102,037 | ||||||||||||||
Net operating income (loss) |
71 | 16,520 | (217 | ) | (90 | ) | 16,284 | |||||||||||||
Other Income and Expenses: |
||||||||||||||||||||
Non-regulated revenue |
290 | 2,313 | 1,560 | (471 | ) | 3,692 | ||||||||||||||
Non-regulated expense, net |
| (2,593 | ) | (1,098 | ) | | (3,691 | ) | ||||||||||||
Income tax (expense) benefit on other income and expense |
(118 | ) | 109 | (191 | ) | 200 | | |||||||||||||
Net other income (expense) |
172 | (171 | ) | 271 | (271 | ) | 1 | |||||||||||||
Interest: |
||||||||||||||||||||
Interest expense |
174 | 6,730 | 379 | (344 | ) | 6,939 | ||||||||||||||
Less: capitalized interest |
| (706 | ) | (329 | ) | | (1,035 | ) | ||||||||||||
Net interest expense |
174 | 6,024 | 50 | (344 | ) | 5,904 | ||||||||||||||
Gross income (loss) |
69 | 10,325 | 4 | (17 | ) | 10,381 | ||||||||||||||
Equity earnings of subsidiaries |
10,312 | | | (10,312 | ) | | ||||||||||||||
Net income |
$ | 10,381 | $ | 10,325 | $ | 4 | $ | (10,329 | ) | $ | 10,381 | |||||||||
14
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CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the six months ended June 30, 2010
For the six months ended June 30, 2010
(In thousands)
Parent | All Other | Consolidating | ||||||||||||||||||
Company | Cal Water | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
Operating revenue |
$ | | $ | 194,989 | $ | 13,604 | $ | | $ | 208,593 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Operations: |
||||||||||||||||||||
Water production costs |
| 68,023 | 4,266 | | 72,289 | |||||||||||||||
Administrative and general |
| 32,021 | 3,903 | | 35,924 | |||||||||||||||
Other operations |
| 24,727 | 3,842 | (254 | ) | 28,315 | ||||||||||||||
Maintenance |
| 9,756 | 353 | | 10,109 | |||||||||||||||
Depreciation and amortization |
| 20,280 | 1,215 | (65 | ) | 21,430 | ||||||||||||||
Income taxes (benefit) |
(95 | ) | 8,622 | (437 | ) | 409 | 8,499 | |||||||||||||
Property and other taxes |
| 6,948 | 1,042 | | 7,990 | |||||||||||||||
Total operating expenses |
(95 | ) | 170,377 | 14,184 | 90 | 184,556 | ||||||||||||||
Net operating income (loss) |
95 | 24,612 | (580 | ) | (90 | ) | 24,037 | |||||||||||||
Other Income and Expenses: |
||||||||||||||||||||
Non-regulated revenue |
530 | 4,772 | 2,714 | (903 | ) | 7,113 | ||||||||||||||
Non-regulated expense, net |
| (5,175 | ) | (2,062 | ) | | (7,237 | ) | ||||||||||||
Gain on sale on non-utility property |
| | | | | |||||||||||||||
Income tax (expense) benefit on other income and expense |
(216 | ) | 164 | (270 | ) | 382 | 60 | |||||||||||||
Net other income (expense) |
314 | (239 | ) | 382 | (521 | ) | (64 | ) | ||||||||||||
Interest: |
||||||||||||||||||||
Interest expense |
234 | 13,099 | 745 | (650 | ) | 13,428 | ||||||||||||||
Less: capitalized interest |
| (1,260 | ) | (594 | ) | | (1,854 | ) | ||||||||||||
Net interest expense |
234 | 11,839 | 151 | (650 | ) | 11,574 | ||||||||||||||
Gross income (loss) |
175 | 12,534 | (349 | ) | 39 | 12,399 | ||||||||||||||
Equity earnings of subsidiaries |
12,224 | | | (12,224 | ) | | ||||||||||||||
Net income (loss) |
$ | 12,399 | $ | 12,534 | $ | (349 | ) | $ | (12,185 | ) | $ | 12,399 | ||||||||
15
Table of Contents
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended June 30, 2009
For the three months ended June 30, 2009
(In thousands)
Parent | All Other | Consolidating | ||||||||||||||||||
Company | Cal Water | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
Operating revenue |
$ | | $ | 109,797 | $ | 6,870 | $ | | $ | 116,667 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Operations: |
||||||||||||||||||||
Water production costs |
| 39,979 | 1,723 | | 41,702 | |||||||||||||||
Administrative and general |
| 17,303 | 2,083 | | 19,386 | |||||||||||||||
Other operations |
| 12,386 | 2,058 | (114 | ) | 14,330 | ||||||||||||||
Maintenance |
| 4,054 | 258 | | 4,312 | |||||||||||||||
Depreciation and amortization |
| 9,448 | 869 | (35 | ) | 10,282 | ||||||||||||||
Income taxes (benefit) |
(40 | ) | 6,953 | (242 | ) | 118 | 6,789 | |||||||||||||
Property and other taxes |
| 3,444 | 467 | | 3,911 | |||||||||||||||
Total operating expenses |
(40 | ) | 93,567 | 7,216 | (31 | ) | 100,712 | |||||||||||||
Net operating income (loss) |
40 | 16,230 | (346 | ) | 31 | 15,955 | ||||||||||||||
Other Income and Expenses: |
||||||||||||||||||||
Non-regulated revenue |
181 | 1,987 | 1,249 | (319 | ) | 3,098 | ||||||||||||||
Non-regulated expense, net |
| 87 | (808 | ) | | (721 | ) | |||||||||||||
Gain on sale of properties |
| 77 | (5 | ) | | 72 | ||||||||||||||
Income tax (expense) on other income and expense |
(74 | ) | (876 | ) | (146 | ) | 104 | (992 | ) | |||||||||||
Net other income |
107 | 1,275 | 290 | (215 | ) | 1,457 | ||||||||||||||
Interest: |
||||||||||||||||||||
Interest expense |
98 | 5,812 | 257 | (205 | ) | 5,962 | ||||||||||||||
Less: capitalized interest |
| (505 | ) | (135 | ) | | (640 | ) | ||||||||||||
Net interest expense |
98 | 5,307 | 122 | (205 | ) | 5,322 | ||||||||||||||
Equity earnings of subsidiaries |
12,041 | | | (12,041 | ) | | ||||||||||||||
Net income (loss) |
$ | 12,090 | $ | 12,198 | $ | (178 | ) | $ | (12,020 | ) | $ | 12,090 | ||||||||
16
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CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the six months ended June 30, 2009
For the six months ended June 30, 2009
(In thousands)
Parent | All Other | Consolidating | ||||||||||||||||||
Company | Cal Water | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
Operating revenue |
$ | | $ | 190,073 | $ | 13,207 | $ | | $ | 203,280 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Operations: |
||||||||||||||||||||
Water production costs |
| 67,059 | 3,511 | | 70,570 | |||||||||||||||
Administrative and general |
| 34,542 | 3,705 | | 38,247 | |||||||||||||||
Other operations |
| 23,417 | 3,597 | (228 | ) | 26,786 | ||||||||||||||
Maintenance |
| 8,574 | 373 | | 8,947 | |||||||||||||||
Depreciation and amortization |
| 18,883 | 1,666 | (69 | ) | 20,480 | ||||||||||||||
Income taxes (benefit) |
(65 | ) | 8,132 | (359 | ) | 313 | 8,021 | |||||||||||||
Property and other taxes |
| 6,953 | 1,046 | | 7,999 | |||||||||||||||
Total operating expenses |
(65 | ) | 167,560 | 13,539 | 16 | 181,050 | ||||||||||||||
Net operating income (loss) |
65 | 22,513 | (332 | ) | (16 | ) | 22,230 | |||||||||||||
Other Income and Expenses: |
||||||||||||||||||||
Non-regulated revenue |
352 | 3,944 | 2,296 | (613 | ) | 5,979 | ||||||||||||||
Non-regulated expense, net |
| (1,655 | ) | (1,707 | ) | | (3,362 | ) | ||||||||||||
Gain on sale of properties |
| 675 | | | 675 | |||||||||||||||
Income tax (expense) on other income and expense |
(144 | ) | (1,207 | ) | (264 | ) | 285 | (1,330 | ) | |||||||||||
Net other income and expense |
208 | 1,757 | 325 | (328 | ) | 1,962 | ||||||||||||||
Interest: |
||||||||||||||||||||
Interest expense |
159 | 10,728 | 498 | (385 | ) | 11,000 | ||||||||||||||
Less: capitalized interest |
| (1,050 | ) | (269 | ) | | (1,319 | ) | ||||||||||||
Net interest expense |
159 | 9,678 | 229 | (385 | ) | 9,681 | ||||||||||||||
Equity earnings of subsidiaries |
14,397 | | | (14,397 | ) | | ||||||||||||||
Net income (loss) |
$ | 14,511 | $ | 14,592 | $ | (236 | ) | $ | (14,356 | ) | $ | 14,511 | ||||||||
17
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CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2010
For the six months ended June 30, 2010
(In thousands)
Parent | All Other | Consolidating | ||||||||||||||||||
Company | Cal Water | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
Operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | 12,399 | $ | 12,534 | $ | (349 | ) | $ | (12,185 | ) | $ | 12,399 | ||||||||
Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |
||||||||||||||||||||
Equity earnings of subsidiaries |
(12,224 | ) | | | 12,224 | | ||||||||||||||
Dividends received from affiliates |
12,367 | | | (12,367 | ) | | ||||||||||||||
Depreciation and amortization |
| 21,619 | 1,303 | (65 | ) | 22,857 | ||||||||||||||
Change in value of life insurance contracts |
| 83 | | | 83 | |||||||||||||||
Other changes in noncurrent assets and liabilities |
| (753 | ) | (255 | ) | | (1,008 | ) | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||||||
Net increase (decrease) in advances to affiliates |
(10,159 | ) | 1,761 | 8,398 | | | ||||||||||||||
Other changes, net |
(229 | ) | (3,127 | ) | 1,855 | 26 | (1,475 | ) | ||||||||||||
Net adjustments |
(10,245 | ) | 19,583 | 11,301 | (182 | ) | 20,457 | |||||||||||||
Net cash provided by (used in) operating activities |
2,154 | 32,117 | 10,952 | (12,367 | ) | 32,856 | ||||||||||||||
Investing activities: |
||||||||||||||||||||
Utility plant expenditures |
| (50,686 | ) | (9,772 | ) | | (60,458 | ) | ||||||||||||
Purchase of life insurance |
| (1,706 | ) | | | (1,706 | ) | |||||||||||||
Restricted cash decrease |
| (13 | ) | | | (13 | ) | |||||||||||||
Proceeds from affiliate long-term debt |
1,531 | | | (1,531 | ) | | ||||||||||||||
Net cash provided by (used in) investing activities |
1,531 | (52,405 | ) | (9,772 | ) | (1,531 | ) | (62,177 | ) | |||||||||||
Financing Activities: |
||||||||||||||||||||
Short-term borrowings |
8,150 | 35,000 | | | 43,150 | |||||||||||||||
Repayment of short-term borrowings |
| | | | | |||||||||||||||
Repayment of affiliate long-term borrowings |
| | (1,531 | ) | 1,531 | | ||||||||||||||
Proceeds from long-term debt |
| 5,805 | 2,098 | | 7,903 | |||||||||||||||
Repayment of long-term borrowings |
| (11,083 | ) | (1,104 | ) | | (12,187 | ) | ||||||||||||
Advances and contributions in aid for construction |
| 1,563 | 57 | | 1,620 | |||||||||||||||
Refunds of advances for construction |
| (2,999 | ) | (19 | ) | | (3,018 | ) | ||||||||||||
Dividends paid to non-affiliates |
(12,367 | ) | | | | (12,367 | ) | |||||||||||||
Dividends paid to affiliates |
| (11,329 | ) | (1,038 | ) | 12,367 | | |||||||||||||
Issuance of common stock |
| | | | | |||||||||||||||
Net cash provided by (used in) financing activities |
(4,217 | ) | 16,957 | (1,537 | ) | 13,898 | 25,101 | |||||||||||||
Change in cash and cash equivalents |
(532 | ) | (3,331 | ) | (357 | ) | | (4,220 | ) | |||||||||||
Cash and cash equivalents at beginning of period |
532 | 6,000 | 3,334 | | 9,866 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | | $ | 2,669 | $ | 2,977 | $ | | $ | 5,646 | ||||||||||
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CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2009
For the six months ended June 30, 2009
(In thousands)
Parent | All Other | Consolidating | ||||||||||||||||||
Company | Cal Water | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
Operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | 14,511 | $ | 14,592 | $ | (236 | ) | $ | (14,356 | ) | $ | 14,511 | ||||||||
Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |
||||||||||||||||||||
Equity earnings of subsidiaries |
(14,397 | ) | | | 14,397 | | ||||||||||||||
Dividends received from affiliates |
12,233 | | | (12,233 | ) | | ||||||||||||||
Depreciation and amortization |
| 19,838 | 1,845 | (69 | ) | 21,614 | ||||||||||||||
Gain on sale of non-utility property |
| (675 | ) | | | (675 | ) | |||||||||||||
Change in value of life insurance contracts |
| (1,827 | ) | | | (1,827 | ) | |||||||||||||
Other changes in noncurrent assets and liabilities |
890 | 4,124 | (1,288 | ) | 3 | 3,729 | ||||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||||||
Net increase (decrease) in advances to affiliates |
(1,147 | ) | 2,780 | (1,633 | ) | | | |||||||||||||
Other changes, net |
768 | (8,196 | ) | 611 | 25 | (6,792 | ) | |||||||||||||
Net adjustments |
(1,653 | ) | 16,044 | (465 | ) | 2,123 | 16,049 | |||||||||||||
Net cash provided by (used in) operating activities |
12,858 | 30,636 | (701 | ) | (12,233 | ) | 30,560 | |||||||||||||
Investing activities: |
||||||||||||||||||||
Utility plant expenditures |
| (48,917 | ) | (4,013 | ) | | (52,930 | ) | ||||||||||||
Sale of non-utility property |
| 750 | | | 750 | |||||||||||||||
Purchase of life insurance |
| (1,613 | ) | | | (1,613 | ) | |||||||||||||
Proceeds from affiliates long-term debt |
289 | | | (289 | ) | | ||||||||||||||
Net cash provided by (used in) investing activities |
289 | (49,780 | ) | (4,013 | ) | (289 | ) | (53,793 | ) | |||||||||||
Financing Activities: |
||||||||||||||||||||
Short-term borrowings |
| 20,000 | | | 20,000 | |||||||||||||||
Repayment of short-term borrowings |
| (48,000 | ) | | | (48,000 | ) | |||||||||||||
Repayment of affiliate long-term borrowings |
| | (289 | ) | 289 | | ||||||||||||||
Proceeds from long-term debt, net of issuance cost of $3,390 |
| 96,610 | | | 96,610 | |||||||||||||||
Repayment of long-term borrowings |
| (5,034 | ) | (405 | ) | | (5,439 | ) | ||||||||||||
Advances and contributions in aid for construction |
| 2,257 | 157 | | 2,414 | |||||||||||||||
Refunds of advances for construction |
| (2,495 | ) | (25 | ) | | (2,520 | ) | ||||||||||||
Dividends paid to non-affiliates |
(12,233 | ) | | | | (12,233 | ) | |||||||||||||
Dividends paid to affiliates |
| (11,249 | ) | (984 | ) | 12,233 | | |||||||||||||
Issuance of common stock |
30 | | | | 30 | |||||||||||||||
Net cash provided by (used in) financing activities |
(12,203 | ) | 52,089 | (1,546 | ) | 12,522 | 50,862 | |||||||||||||
Change in cash and cash equivalents |
944 | 32,945 | (6,260 | ) | | 27,629 | ||||||||||||||
Cash and cash equivalents at beginning of period |
427 | 3,025 | 10,417 | | 13,869 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 1,371 | $ | 35,970 | $ | 4,157 | $ | | $ | 41,498 | ||||||||||
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Item 2
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands, except where otherwise noted and per share amounts)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands, except where otherwise noted and per share amounts)
FORWARD LOOKING STATEMENTS
This quarterly report, including all documents incorporated by reference, contains
forward-looking statements within the meaning established by the Private Securities Litigation
Reform Act of 1995 (Act). Forward-looking statements in this quarterly report are based on
currently available information, expectations, estimates, assumptions and projections, and our
managements beliefs, assumptions, judgments and expectations about us, the water utility
industry and general economic conditions. These statements are not statements of historical fact.
When used in our documents, statements that are not historical in nature, including words like
expects, intends, plans, believes, may, estimates, assumes, anticipates,
projects, predicts, forecasts, should, seeks, or variations of these words or similar
expressions are intended to identify forward-looking statements. The forward-looking statements
are not guarantees of future performance. They are based on numerous assumptions that we believe
are reasonable, but they are open to a wide range of uncertainties and business risks.
Consequently, actual results may vary materially from what is contained in a forward-looking
statement.
Factors which may cause actual results to be different than those expected or anticipated
include, but are not limited to:
| governmental and regulatory commissions decisions, including decisions on proper disposition of property; | ||
| changes in regulatory commissions policies and procedures; | ||
| the timeliness of regulatory commissions actions concerning rate relief; | ||
| changes in the capital markets and access to sufficient capital on satisfactory terms; | ||
| new legislation; | ||
| changes in accounting valuations and estimates; | ||
| changes in accounting treatment for regulated companies, including adoption of International Financial Reporting Standards, if required; | ||
| electric power interruptions; | ||
| increases in suppliers prices and the availability of supplies including water and power; | ||
| fluctuations in interest rates; | ||
| changes in environmental compliance and water quality requirements; | ||
| acquisitions and the ability to successfully integrate acquired companies; | ||
| the ability to successfully implement business plans; | ||
| civil disturbances or terrorist threats or acts, or apprehension about the possible future occurrences of acts of this type; | ||
| the involvement of the United States in war or other hostilities; | ||
| our ability to attract and retain qualified employees; | ||
| labor relations matters as we negotiate with the unions; |
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| federal health care law changes could result in increases to Company health care costs and additional income tax expenses in future years; | ||
| implementation of new information technology systems; | ||
| changes in operations that result in an impairment to acquisition goodwill; | ||
| restrictive covenants in or changes to the credit ratings on current or future debt that could increase financing costs or affect the ability to borrow, make payments on debt, or pay dividends; | ||
| general economic conditions, including changes in customer growth patterns and our ability to collect billed revenue from customers; | ||
| changes in customer water use patterns and the effects of conservation; | ||
| the impact of weather on water sales and operating results; | ||
| the ability to satisfy requirements related to the Sarbanes-Oxley Act and other regulations on internal controls; and | ||
| the risks set forth in Risk Factors included elsewhere in this quarterly report. |
In light of these risks, uncertainties and assumptions, investors are cautioned not to place
undue reliance on forward-looking statements, which speak only as of the date of this quarterly
report or as of the date of any document incorporated by reference in this report, as applicable.
When considering forward-looking statements, investors should keep in mind the cautionary
statements in this quarterly report and the documents incorporated by reference. We are not under
any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking
statements, whether as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES
We maintain our accounting records in accordance with accounting principles generally accepted in
the United States of America (GAAP) and as directed by the regulatory commissions to which we are
subject. The process of preparing financial statements in accordance with GAAP requires the use
of estimates and assumptions on the part of management. The estimates and assumptions used by
management are based on historical experience and our understanding of current facts and
circumstances. Management believes that the following accounting policies are critical because
they involve a higher degree of complexity and judgment, and can have a material impact on our
results of operations and financial condition. These policies and their key characteristics are
discussed in detail in the 2009 Form 10-K. They include:
| revenue recognition and the water revenue adjustment mechanism; | ||
| expense balancing and memorandum accounts; | ||
| modified cost balancing accounts; | ||
| regulatory utility accounting; | ||
| income taxes; | ||
| pension benefits; | ||
| workers compensation and other claims; | ||
| goodwill accounting and evaluation for impairment; and | ||
| contingencies |
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For the three and six month periods ended June 30, 2010, there were no changes in the methodology
for computing critical accounting estimates, no additional accounting estimates met the standards
for critical accounting policies, and there were no material changes to the important assumptions
underlying the critical accounting estimates.
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RESULTS OF SECOND QUARTER 2010 OPERATIONS COMPARED TO
SECOND QUARTER 2009 OPERATIONS
Amounts in thousands except share data
SECOND QUARTER 2009 OPERATIONS
Amounts in thousands except share data
Overview
Second quarter of 2010 net income was $10.4 million equivalent to $0.50 per diluted common share
compared to net income of $12.1 million or $0.58 per diluted common share in the second quarter
of 2009. The decrease in net income is primarily due to a significant reduction to other income
and expenses mostly from a decline in the cash surrender value of life insurance contracts
associated with our benefit plans. In addition, interest expenses increased $0.6 million as a
result of the issuance of $100 million of first mortgage bonds on April 17, 2009 and additional
short-term borrowings of $43.2 million during 2010 on the unsecured revolving lines of credit.
Operating Revenue
Operating revenue increased $1.7 million or 1% to $118.3 million in the second quarter of 2010.
As disclosed in the following table, the increase was due to rate increases, partially offset by
a reduction in customer usage and other changes.
The factors that impacted the operating revenue for the second quarter of 2010 compared to 2009
are presented in the following table:
Rate increases |
$ | 8,083 | ||
Net change due to actual versus adopted results, usage, and other |
(6,429 | ) | ||
Net operating revenue increase |
$ | 1,654 | ||
The net change due to actual versus adopted results, usage, and other in the above table refers
primarily to the revenue impact year over year of the change in revenue recognized by the WRAM
and MCBA. The WRAM is impacted by changes in consumption patterns from our historical trends as
well as an increase in conservation efforts. The MCBA, which records the differences in
production costs from the adopted costs, is recorded as an element of revenue as it represents
pass through costs which are billed to customers. The MCBA is impacted by changes in total
production quantities, the production mix of the source of water, the price paid for purchased
water and power, and the amount of pump taxes paid.
The components of the rate increases are listed in the following table:
Purchased water offset increases |
$ | 4,857 | ||
Step rate increases |
2,211 | |||
Balancing account adjustments |
540 | |||
General rate case (GRC) increases |
475 | |||
Total increase in rates |
$ | 8,083 | ||
Total Operating Expenses
Total operating expenses were $102.0 million for the second quarter of 2010, versus $100.7
million for the same period in 2009, a 1% increase.
Water production expense consists of purchased water, purchased power, and pump taxes. It
represents the largest component of total operating expenses, accounting for approximately 41% of
total operating expenses in the second quarter of 2010. Water production expenses increased due
to purchased water and power price increases, which were partially offset by reductions in
customer usage. Our wholly-owned operating subsidiaries, Washington Water, New Mexico Water, and
Hawaii Water obtain all of their water supply from wells.
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Sources of water as a percent of total water production are listed in the following table:
Three Months Ended June 30 | ||||||||
2010 | 2009 | |||||||
Well production |
49 | % | 49 | % | ||||
Purchased |
46 | % | 47 | % | ||||
Surface |
5 | % | 4 | % | ||||
Total |
100 | % | 100 | % | ||||
The components of water production costs are shown in the table below:
Three Months Ended June 30 | ||||||||||||
2010 | 2009 | Change | ||||||||||
Purchased water |
$ | 32,407 | $ | 31,654 | $ | 753 | ||||||
Purchased power |
7,414 | 7,584 | (170 | ) | ||||||||
Pump taxes |
2,013 | 2,464 | (451 | ) | ||||||||
Total |
$ | 41,834 | $ | 41,702 | $ | 132 | ||||||
Purchased water costs increased due to price increases from water wholesalers. Total water
production, measured in acre feet, decreased by 11% during the second quarter of 2010 as compared
with the second quarter of 2009 due to lower customer usage.
Administrative and general expense and other operations expense decreased 1% to $33.2 million.
The decrease was due to an increase in the proportion of labor and benefit costs included in
capital projects, lower outside service and legal fees, and a decrease in employee healthcare
expenses during the second quarter of 2010. These cost decreases were partially offset by higher
employee costs due to wage increases on January 1, 2010, and an increase in the number of
employees. At June 30, 2010, there were 1,028 employees and at June 30, 2009, there were 956
employees.
Maintenance expenses increased by 20% to $5.2 million in the second quarter of 2010 compared to
$4.3 million in the second quarter of 2009, due to an increase in main and service repairs.
Depreciation and amortization expense increased $0.4 million, or 3%, because of 2009 capital
additions.
Federal and state income taxes charged to operating expenses and other income and expenses
decreased $0.7 million, from a provision of $7.8 million in the second quarter of 2009 to $7.1
million in the second quarter of 2010, due to a decrease in pretax income. We expect the
effective tax rate to be between 38% and 40% for fiscal year 2010.
Other Income and Expense
Other income and expenses, net of income taxes, decreased $1.5 million to break-even during the
second quarter of 2010 mostly due to a decline in the cash surrender value of the life insurance
contracts associated with our benefit plans. There were no property sales during the second
quarter of 2010 compared to a $0.1 million property sale in the same period last year.
Interest Expense
Total interest expense, net of interest capitalized, increased $0.6 million to $5.9 million for
the second quarter of 2010 compared to the same period last year. This increase was attributable
to interest on Cal Waters first mortgage bonds and additional short-term borrowings of $43.2
million on the unsecured revolving lines of credit.
Company Health Care Benefits
During the month of March 2010, both the federal Patient Protection and Affordable Care Act
(P.L. 111-148) and Health Care and Education Reconciliation Act (H.R. 4872) were enacted. The
new federal health care laws eliminated future Company federal and state income tax deductions of
approximately $11.4 million. We do not expect the new federal health care laws to significantly
increase the Companys health care and other costs during the calendar year ending December 31,
2010.
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RESULTS OF THE SIX MONTHS ENDED JUNE 2010 COMPARED TO
THE SIX MONTHS ENDED JUNE 2009 OPERATIONS
Amounts in thousands except per share data
THE SIX MONTHS ENDED JUNE 2009 OPERATIONS
Amounts in thousands except per share data
Overview
Net income for the six-month period ended June 30, 2010, was $12.4 million, or $0.60 per diluted
common share compared to net income of $14.5 million or $0.70 per diluted common share for the
six months ended June 30, 2009. The decrease in net income is primarily attributable to a
significant reduction in other income and expenses from a decline in the cash surrender value of
life insurance contracts associated with our benefit plans from a loss of $0.1 million for six
months ended June 30, 2010 compared to a gain of $1.8 million in the same period last year, a
non-recurring property sale of $0.7 million during the six months ended June 30, 2009, and a $0.6
million increase in new business costs incurred during the first six months of 2010 to evaluate
potential acquisitions. In addition, interest expenses increased due to the issuance of $100
million first mortgage bonds on April 17, 2009, additional short-term borrowings of $43.2 million
during 2010 on the unsecured revolving lines of credit, and additional other long-term debt of
$7.9 million.
Operating Revenue
Operating revenue increased $5.3 million, or 3%, to $208.6 million in the six-month period ended
June 30, 2010. As disclosed in the following table, the increase was primarily due to increases
in rates, partially offset by reductions in usage by customers and other changes.
The factors that affected the operating revenue for the six-month period ended June 30, 2010
compared to 2009 are presented in the following table:
Rate increases |
$ | 12,379 | ||
Net change due to actual versus adopted results, usage, and other |
(7,066 | ) | ||
Net changes in operating revenue |
$ | 5,313 | ||
The net change due to actual versus adopted results, usage, and other in the above table refers
primarily to the revenue impact year over year of the change in revenue recognized by the WRAM
and MCBA. The WRAM is impacted by changes in consumption patterns from our historical trends as
well as an increase in conservation efforts. The MCBA, which records the differences in
production costs from the adopted costs, is recorded as an element of revenue as it represents
pass through costs which are billed to customers. The MCBA is impacted by changes in total
production quantities, the production mix of the source of water, the price paid for purchased
water and power, and the amount of pump taxes paid.
The components of the rate increases are listed in the following table:
Purchased water offset increase |
$ | 6,428 | ||
Step rate increase |
3,961 | |||
Balancing account adjustments |
1,122 | |||
General rate case (GRC) increase |
868 | |||
Total increase in rates |
$ | 12,379 | ||
Total Operating Expenses
Total operating expenses were $184.6 million for the six months ended June 30, 2010, versus
$181.1 million for the same period in 2009, a 2% increase.
Water production expense consists of purchased water, purchased power and pump taxes. Water
production expense represents the largest component of total operating expenses, accounting for
approximately 39% of total operating expenses. Water production expenses increased $1.7 million
in the six months ended June 30, 2010, or 2% compared to the same period last year due to
increased cost of purchased water and purchased power. Our wholly-owned operating subsidiaries,
Washington Water, New Mexico Water, and Hawaii Water obtain all of their water supply from wells.
25
Table of Contents
Sources of water production as a percent of total water production are listed on the following
table:
Six Months Ended June 30 | ||||||||
2010 | 2009 | |||||||
Well production |
47 | % | 47 | % | ||||
Purchased |
48 | % | 49 | % | ||||
Surface |
5 | % | 4 | % | ||||
Total |
100 | % | 100 | % | ||||
The components of water production costs are shown in the table below:
Six Months Ended June 30 | ||||||||||||
2010 | 2009 | Change | ||||||||||
Purchased water |
$ | 56,272 | $ | 54,594 | $ | 1,678 | ||||||
Purchased power |
12,583 | 12,127 | 456 | |||||||||
Pump taxes |
3,434 | 3,849 | (415 | ) | ||||||||
Total |
$ | 72,289 | $ | 70,570 | $ | 1,719 | ||||||
Purchased water cost increased due to higher prices from wholesalers. Total water production,
measured in acre feet, decreased 10% for the first six months of 2010 compared to the same period
last year due to lower customer usage. Purchased power costs increased due to higher prices from
electric utilities.
Administration and general and other operations expenses were $64.2 million, decreasing $0.8
million, or 1%, for the six months ended June 30, 2010. The decrease was primarily attributable
to an increase in the proportion of labor and benefit costs included in capital projects, lower
outside service and legal fees, and a decline in employee healthcare costs during the six months
ended June 30, 2010. These decreases were partially offset by higher employee costs due to wage
increases and an increase in the number of employees.
Maintenance expense increased $1.2 million, or 13%, for the six months ended June 30, 2010, to
$10.1 million due to an increase in repairs of mains, water treatment facilities, and wells.
Depreciation and amortization expense increased $1.0 million, or 5%, because of 2009 capital
additions.
Federal and state income taxes decreased $0.9 million, or 10%, for the six months ended June 30,
2010, due to the decline in pretax income. We expect the effective tax rate to be between 38% and
40% for 2010.
Other Income and Expense
Other income and expense, net of income taxes, was a loss of $0.1 million for the six months
ended June 30, 2010, compared to income of $2.0 million in the same period last year, which was a
decrease of $2.1 million. The decrease was primarily attributable to a $0.1 million decline in
the cash surrender value of life insurance contracts associated with our benefit plans during the
first six months of 2010 compared to a gain of $1.8 million during the first six months of 2009.
In addition, there was a non-recurring property sale of $0.7 million during the first six months
of 2009 and a $0.6 million increase in new business costs incurred during the first six months of
2010 to evaluate potential acquisitions.
Interest Expense
Net interest expense increased $1.9 million to $11.6 million for the period ended June 30, 2010
compared to the six-month period ended June 30, 2009. This increase was attributable to the
additional interest on Cal Waters first mortgage bonds, additional short-term borrowings of
$43.2 million on the unsecured revolving lines of credit, and additional other long-term debt of
$7.9 million during the six months ended June 30, 2010.
Company Health Care Benefits
During the month of March 2010, both the federal Patient Protection and Affordable Care Act
(P.L. 111-148) and Health Care and Education Reconciliation Act (H.R. 4872) were enacted. The
new federal health care laws eliminated future Company federal and state income tax deductions of
approximately $11.4 million. We do not expect the new federal health care laws to significantly
increase the Companys health care and other costs during the calendar year ending December 31,
2010.
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REGULATORY MATTERS
Rates and Regulations
The state regulatory commissions have plenary powers setting rates and operating standards. As
such, state commission decisions significantly impact our revenues, earnings, and cash flows. The
amounts discussed herein are generally annual amounts, unless specifically stated, and the
financial impact to recorded revenue is expected to occur over a twelve-month period from the
effective date of the decision. In California, water utilities are required to make several
different types of filings. Most filings result in rate changes that remain in place until the
next General Rate Case (GRC). As explained below, surcharges and surcredits to recover balancing
and memorandum accounts as well as interim rate true-ups are temporary rate changes, which have
specific time frames for recovery.
GRCs, escalation rate increase filings, and offset filings change rates to amounts that will
remain in effect until the next GRC. The CPUC follows a rate case plan, which requires Cal Water
to file a GRC for each of its twenty-four regulated operating districts every three years. In a
GRC proceeding, the CPUC not only considers the utilitys rate setting requests, but may also
consider other issues that affect the utilitys rates and operations. Effective in 2004, Cal
Waters GRC schedule was shifted from a calendar year to a fiscal year with test years commencing
on July 1st of each year. The CPUC is generally required to issue its GRC decision prior to the
first day of the test year or authorize interim rates. As such, Cal Waters GRC decisions, prior
to 2005, were generally issued in the fourth quarter. Effective with the 2009 GRC, the processing
time is scheduled for eighteen months with rates effective on January 1, 2011.
Between GRC filings utilities may file escalation rate increases, which allow the utility to
recover cost increases, primarily from inflation and incremental investment, during the second
and third years of the rate case cycle. However, escalation rate increases are subject to a
weather-normalized earnings test. Under the earnings test, the CPUC may reduce the escalation
rate increase to prevent the utility from earning in excess of the authorized rate of return for
that district.
In addition, utilities are entitled to file offset filings. Offset filings may be filed to adjust
revenues for construction projects authorized in GRCs when the plant is placed in service or for
rate changes charged to the Company for purchased water, purchased power, and pump taxes
(referred to as offsettable expenses). Such rate changes approved in offset filings remain in
effect until a GRC is approved. Additional information on the Companys regulatory process is
described in its annual report on Form 10-K for the year ended December 31, 2009.
Remaining Unrecorded Balances from Previously Authorized Balancing Accounts
Recoveries/Refunds
The total of unrecorded, under-collected memorandum and balancing accounts was approximately $1.5
million as of June 30, 2010. Included in this amount, Cal Water has amounts from districts that
are pending further action when balances become large enough to warrant action of either recovery
or refund.
2009 California General Rate Case Filing
On July 2, 2009, Cal Water filed its required application for a general review of rates for all
operating districts and general operations. The application, A.09-07-001, requests an annual
increase in rates of $70.6 million on January 1, 2011, $24.8 million on January 1, 2012, and
$24.8 million on January 1, 2013. The filing marks the beginning of an eighteen month review
process. On June 28, 2010, Cal Water filed a settlement of most issues in the proceeding with the
Commissions Division of Ratepayer Advocates and several other parties. Based on its past
practice, the Commission will consider the settlement but is not obligated to approve it. The
Commission may also approve only portions of the settlement. However, if the settlement were
adopted in whole, it would add $34.3 million to annual gross revenue beginning in January 2011.
Cal Water expects the Commission will issue its decision in the fourth quarter of 2011. The
Commission is generally required under state law to allow Cal Water interim rates and an
effective date of January 1, 2011 if a decision is not rendered in the proceeding by that date.
Request for MTBE regulatory treatment
On July 8, 2009, Cal Water filed an application requesting the CPUC adopt ratemaking treatment of
proceeds from its partial settlement of MTBE contamination litigation. Cal Water has requested
that all of the proceeds be reinvested in infrastructure to treat or replace MTBE-contaminated
facilities. In addition, Cal Water has requested that 50% of the reinvestment be included in rate
base upon which Cal Water could earn its authorized fair and reasonable rate of return. The
remaining 50% of the settlement
27
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proceeds would be included in rate base as contributions in aid of construction which does not
earn a return. Cal Water has also requested specific regulatory treatment of future settlement or
litigation proceeds that may occur in the consolidated MTBE cases. On
August 3, 2010, in a separate industry-wide proceeding, the CPUC
issued a draft decision in its review of general policies for accounting treatment of
contamination proceeds. The draft decision would make it the obligation of water utilities to
pursue polluters through litigation. As a result, the Commission under the draft would consider
litigation expenses and proceeds normal business operations and not allow litigation proceeds to
earn a rate of return except in extraordinary circumstances. Under its proposal the Commission
could allow other adjustments, again in limited circumstances, which could reward companies for
pursuit of litigation awards which exceed damage incurred. If this decision were adopted as
proposed, Cal Waters application would be unlikely to be granted, as Cal Waters damages from
MTBE contamination exceed the settlement proceeds. A draft decision may be approved as proposed,
amended, or rejected in favor of another recommendation. Cal Water and others have the
opportunity to comment on the draft decision. We believe the proposed
draft decision is not in the best interest of the Company or
ratepayers and therefore, Cal Water will work with other water
utilities to recommend changes to the draft decision to provide a
balanced approach that will minimize risks to the Company and
ratepayers.
The Commission may take those comments into account to
modify the proposal. Cal Water expects a final determination in the general policy proceeding to
be made before December 31, 2010.
2010 Regulatory Activity to Date
In February, March, and April 2010, Cal Water filed advice letters to offset increased purchased
water and pump tax rates in seven of its regulated districts totaling $17.1 million in annual
revenue. Under CPUC advice letter processing rules, Cal Water charges the rates in expense offset
advice letters to its customers upon filing. These rates were approved during the months of
March, April, and May 2010. However, expense offsets are dollar-for-dollar increases in revenue
to match increased expenses and interact with the WRAM and MCBA mechanisms so that net operating
income is not affected by an offset increase.
On January 7, 2010, Cal Water filed an application for additional financing authority with the
CPUC. If adopted as proposed, Cal Water would be allowed authority to issue $350 million of debt
and common stock to finance capital projects and operations. Cal Water cannot predict the timing
or outcome of the application at this time.
On January 12, 2010, Cal Water filed an advice letter to collect the balance of the Dominguez
Synergies memorandum account by surcharge for twelve months. This was approved in February 2010
and adds monthly fixed charges to bills for eight districts, totaling $0.8 million over the
recovery period.
In April and May, 2010, Cal Water filed advice letters for nineteen districts to recoup the net
balance of the WRAM and MCBA from 2008 and 2009. The total requested was $11.4 million. The
recovery period requested was between twelve and eighteen months, consistent from past practice,
from the date of advice letter approval. Advice letters for eleven of the districts were
approved as filed. The Commission required Cal Water to lengthen the recovery period for
balances in fifteen of the districts. While preliminarily implementing the longer recovery
periods, Cal Water has appealed the Commissions ruling and expects to propose other regulatory
remedies to ensure that balances are recovered within 24 months of the end of the accounting
period. Cal Water cannot determine the outcome of this appeal or other remedies at this time.
In May 2010, as allowed in the Commissions 2007 Rate Case Plan, Cal Water filed advice letters
to establish interim rates for eight districts. The effective date for these interim rates was
July 1, 2010. These advice letters do not immediately impact revenues. The interim rate changes
will be adjusted once the Commission has issued a determination in Cal Waters 2009 GRC, expected
in the fourth quarter of 2010.
In May 2010, Cal Water filed for escalation rate increases effective in July for seven districts
totaling $4.2 million in annual revenues. These rate changes were effective as filed.
Throughout the calendar year, Cal Water plans to file advice letters to offset expected increases
in purchased water and pump tax charges in some districts. Cal Water cannot predict the exact
timing or dollar amount of the changes. However, expense offsets are dollar-for-dollar increases
in revenue to match increased expenses and interact with the WRAM and MCBA mechanisms so that net
operating revenue is not affected by an offset increase.
During the calendar year, Hawaii Water plans to file general rate increase applications with the
Hawaii Public Utilities Commission for all service areas. Hawaii Water expects the HPUC to rule
in 2011 on its requests. However, these applications have not been filed at this time and
therefore Hawaii Water cannot determine the final amount of rate relief these filings will
generate.
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LIQUIDITY
Cash flows from Operations
Cash flows from operations were $32.9 million for the six months ended June 30, 2010. Cash flows
from operations is primarily generated by net income and changes in our operating assets and
liabilities. Cash generated by operations varies during the year due to the timing of customer
billings, contributions to our benefit plans, vendor payments, bond principal payments, and other
long-term debt payments.
During the six months ended June 30, 2010, we made contributions to our pension and retiree
health care plan of $6.6 million compared to $17.9 million paid during the six months ended June
30, 2009. As approved in the 2007 General Rate Case, we increased the funding level of our
pension and retiree health care plan from $27.5 million during 2009 to $29.1 million during 2010.
Bond principal and other long-term debt payments were $12.2 million during the six months ended
June 30, 2010, compared to $5.4 million during the same period last year.
The water business is seasonal. Revenue is lower in the cooler winter months and higher in the
warm summer months. This seasonality results in the possible need for short-term borrowings
under the bank lines of credit in the event cash is not available during the cooler winter
months. The increase in cash flows during the summer months allows short-term borrowings to be
paid down. Short-term borrowings are used to finance capital expenditures until long-term
financing is arranged.
Investing Activities
During the six months ended June 30, 2010, we had company and developer funded capital
expenditures of $60.5 million. For 2010, our capital budget is approximately $120 to $140
million.
Financing Activities
During the first six months ended June 30, 2010, there were no equity offerings; however, we
borrowed $43.2 million on our bank lines of credit and added new long-term debt of $7.9 million.
Advances and contributions in aid of construction increased $1.6 million during the six months
ended June 30, 2010, which was offset by refunds to developers of $3.0 million during the six
months ended June 30, 2010. Dividend payments were higher than the prior year due to an increased
dividend rate paid in the current year.
Short-Term and Long-Term Debt
Short-term liquidity is provided by bank lines of credit funds extended to us and certain of our
subsidiaries and by internally generated funds. Long-term financing is accomplished through the
use of both debt and equity. As of June 30, 2010, there were short-term borrowings of $55.2
million outstanding on the unsecured revolving line of credit compared to $12.0 million as of
June 30, 2009.
Given our ability to access our lines of credit on a daily basis, cash balances are managed to
levels required for daily cash needs and excess cash is invested in short-term or cash equivalent
instruments. Minimal operating levels of cash are maintained for Washington Water, New Mexico
Water, and Hawaii Water.
California Water Service Group and subsidiaries which it designates may borrow up to $50 million
under the Companys short-term credit facility. California Water Service Company may borrow up to
$250 million under its credit facility; however, all borrowings need to be repaid within twelve
months unless otherwise authorized by the CPUC.
Both short-term credit agreements contain affirmative and negative covenants and events of
default customary for credit facilities of this type including, among other things, limitations
and prohibitions relating to additional indebtedness, liens, mergers, and asset sales. Also,
these unsecured credit agreements contain financial covenants governing the Company and its
subsidiaries consolidated total capitalization ratio and interest coverage ratio. As of June 30,
2010, we have met all of the covenant requirements and are eligible to use the full amounts of
these credit agreements.
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There was $7.9 million of new debt added to long-term debt during the six months ended June 30,
2010, and we made principal payments on Cal Waters first mortgage bonds and other long-term debt
of $12.2 million during the six months ended June 30, 2010.
Long-term financing, which includes senior notes, other debt securities, and common stock, has
typically been used to replace short-term borrowings and fund capital expenditures. Internally
generated funds, after making dividend payments, provide positive cash flow, but have not been at
a level to meet the needs of our capital expenditure requirements. Management expects this trend
to continue given our capital expenditures plan for the next five years. Some capital
expenditures are funded by payments received from developers for contributions in aid of
construction or advances for construction. Funds received for
contributions in aid of construction are non-refundable, whereas funds classified as advances in construction are
refundable. Management believes long-term financing is available to meet our cash flow needs
through issuances in both debt and equity instruments.
Dividends, Book Value and Shareholders
The second quarter common stock dividend of $0.2975 per share was paid on May 21, 2010, compared
to a quarterly dividend in the second quarter of 2009 of $0.2950. This was Cal Waters 261st
consecutive quarterly dividend. Annualized, the 2010 dividend rate is $1.19 per common share,
compared to $1.18 in 2009. For the full year 2009, the payout ratio was 61% of net income. On a
long-term basis, our goal is to achieve a dividend payout ratio of 60% of net income accomplished
through future earnings growth.
At its July 28, 2010 meeting, the Board declared the third quarter dividend of $0.2975 per share
payable on August 20, 2010, to stockholders of record on August 9, 2010. This will be our 262nd
consecutive quarterly dividend.
2010 Financing Plan
Cal Water is currently reviewing its financing needs for the balance of 2010 and 2011. We intend
to fund our capital needs in future periods through a relatively balanced approach between
long-term debt and equity. The Company and Cal Water have a three-year syndicated unsecured
revolving line of credit of $50 million and $250 million, respectively for short-term borrowings.
As of June 30, 2010, the Companys availability on these unsecured revolving lines of credit was
$244.9 million.
Book Value and Stockholders of Record
Book value per common share was $20.25 at June 30, 2010 compared to $20.26 at December 31, 2009.
There are approximately 2,569 (not in thousands) stockholders of record for our common stock, as
of our record date, July 29, 2010.
Utility Plant Expenditures
During the six months ended June 30, 2010, capital expenditures totaled $60.5 million for
company-funded and developer-funded projects. The planned 2010 company-funded capital expenditure
budget is approximately $120 to $140 million. The actual amount may vary from the budget number
due to timing of actual payments related to current year projects and prior year projects. We do
not control third-party-funded capital expenditures and therefore are unable to estimate the
amount of such projects for 2010.
At June 30, 2010, construction work in progress was $124.4 million compared to $116.9 million at
June 30, 2009. Work in progress includes projects that are under construction but not yet
complete and placed in service.
WATER SUPPLY
Our source of supply varies among our operating districts. Certain districts obtain all of their
supply from wells; some districts purchase all of their supply from wholesale suppliers; and
other districts obtain supply from a combination of wells and wholesale suppliers. A small
portion of supply comes from surface sources and is processed through Company-owned water
treatment plants. To the best of managements knowledge, we are meeting water quality,
environmental, and other regulatory standards for all company-owned systems.
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Californias normal weather pattern yields little precipitation between mid-spring and mid-fall.
The Washington Water service areas receive precipitation in all seasons, with the heaviest
amounts during the winter. New Mexico Waters rainfall is heaviest in the summer monsoon season.
Hawaii Water receives precipitation throughout the year, with the largest amounts in the winter
months. Water usage in all service areas is highest during the warm and dry summers and declines
in the cool winter months. Rain and snow during the winter months replenish underground water
aquifers and fill reservoirs, providing the water supply for subsequent delivery to customers. To
date, snowpack water content and rainfall accumulation during the 2009 2010 water year is 109%
of normal (as of July 1, 2010 per the California Department of Water Resources). Precipitation in
the prior year was below average. Management believes that supply pumped from underground
aquifers and purchased from wholesale suppliers will be adequate to meet customer demand during
2010 and beyond. However, water rationing may be required if declared by the state or local
jurisdictions. Long-term water supply plans are developed for each of our districts to help
assure an adequate water supply under various operating and supply conditions. Some districts
have unique challenges in meeting water quality standards, but management believes that supplies
will meet current standards using current treatment processes.
CONTRACTUAL OBLIGATIONS
During the six-months ended June 30, 2010, there were no material changes in contractual
obligations outside the normal course of business.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not hold, trade in or issue derivative financial instruments and therefore are not exposed
to risks these instruments present. Our 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 commissions. We do not have foreign
operations; therefore, we do not have a foreign currency exchange risk. Our business is sensitive
to commodity prices and is most affected by changes in purchased water and purchased power costs.
Historically, the CPUCs balancing account or offsetable expense procedures allowed for increases
in purchased water and purchased power costs to be passed on to consumers. Traditionally, a
significant percentage of our net income and cash flows comes from California regulated
operations; therefore the CPUCs actions have a significant impact on our business. See Item 2,
Managements Discussion and Analysis of Financial Condition and Results of Operations Critical
Accounting Policies -Expense Balancing and Memorandum Accounts and Regulatory Matters.
Item 4.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(c) under
the Exchange Act) that are designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange Commissions rules and
forms, and that such information is accumulated and communicated to our management, including our
CEO and CFO, as appropriate, to allow for timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management is required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Accordingly, our disclosure controls and procedures have been designed to provide
reasonable assurance of achieving their objectives.
Our management, with the participation of our CEO and our CFO, evaluated the effectiveness of our
disclosure controls and procedures on July 22, 2010, for the period ended June 30, 2010. Based on
that evaluation, we concluded that our disclosure controls and procedures were effective at the
reasonable assurance level.
(b) Changes to Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the
last fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1.
LEGAL PROCEEDINGS
Groundwater Contamination
The Company has been and is involved in litigation against third parties to recover past and
future costs related to ground water contamination in our service areas. The cost of litigation
is expensed as incurred and any settlement is first offset against such costs. Any settlement in
excess of the cost to litigate is accounted for on a case by case basis, dependent upon the
nature of the settlement.
The Company is involved in a lawsuit against major oil refineries regarding the contamination of
the ground water as a result of the gas additive Methyl tert-butyl ether (MTBE). The Company
entered into a partial settlement with the defendants in April of 2008 that represent
approximately 70% of the responsible parties (as determined by the Superior Court). On
October 22, 2008, the Company received $34.2 million after deducting attorneys fees and
litigation expenses. The Company is aggressively pursuing legal action against the remaining
responsible parties. The Company has filed with the Commission to determine the appropriate
regulatory treatment of the proceeds. It anticipates that the proceeds will be used on MTBE
qualified capital investments. When an agreement is reached with the Commission regarding the
regulatory treatment, the Company will adjust the accounting of the settlement, accordingly.
The Company has recorded the proceeds to replace the infrastructure damaged or lost due to the
MTBE contamination in accordance with the Internal Revenue Code Section 1033. This treatment
will reduce the tax basis of the replacement property and therefore deferring any taxable gain.
As previously reported, the Company has filed with the City of Bakersfield, in the Superior Court
of California, a lawsuit that names potentially responsible parties, who manufactured and
distributed products containing 1,2,3 trichloropropane (TCP) in California. TCP has been detected
in the ground water. The lawsuit seeks to recover treatment costs necessary to remove TCP. The
Court has now coordinated our action with other water purveyor cases (TCP Cases JCCP 4435) in
San Bernardino County. No trial date has yet been set. The Company has entered into a settlement
with one of the distributor defendants, FMC Corporation. The Company will record the proceeds in
a memorandum account until the Commission approves an allocation between ratepayers and
shareholders.
The Company has filed in San Mateo County Superior Court a complaint (California Water Service
Company v. The Dow Chemical Company, et al. CIV 473093) against potentially responsible parties
that manufactured and distributed products in California, which contained perchloroethylene, also
known as tetrachloroethylene (PCE) for recovery of past, present, and future treatment costs. The
case has not been consolidated with other PCE cases. Discovery is underway and no trial date has
yet been set.
Other Legal Matters
From time to time, the Company has been named as a co-defendant in several asbestos related
lawsuits. The Company has been dismissed without prejudice in several of these cases. In other
cases the Companys contractors and insurance policy carriers have settled the cases with no
effect on the Companys financial statements. As such the Company does not currently believe
there is any potential loss probable of occurring related to these matters and therefore no
accrual or contingency has been recorded.
From time to time, the Company is involved in various disputes and litigation matters that arise
in the ordinary course of business. The status of each significant matter is reviewed and
assessed for potential financial exposure. If the potential loss from any claim or legal
proceeding is considered probable and the amount of the range of loss can be estimated, a
liability is accrued for the estimated loss in accordance with the accounting standards for
contingencies. Legal proceedings are subject to uncertainties, and the outcomes are difficult to
predict. Because of such uncertainties, accruals are based on the best information available at
the time. While the outcome of these disputes and litigation matters cannot be predicted with any
certainty, management does not believe when taking into account existing reserves the ultimate
resolution of these matters will materially affect the Companys financial position, results of
operations, or cash flows.
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Item 4. (Removed and Reserved)
Item 6.
EXHIBITS
Exhibit | Description | |
31.1
|
Chief Executive Officer certification of financial statements pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 | |
31.2
|
Chief Financial Officer certification of financial statements pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 | |
32
|
Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 | |
101.INS
|
XBRL Instance Document | |
101.SCH
|
XBRL Taxonomy Extension Schema | |
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase | |
101.LAB
|
XBRL Taxonomy Extension Label Linkbase | |
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase |
| The financial information contained in these XBRL documents is unaudited and is furnished, not filed with the Commission. |
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
August 6, 2010 |
CALIFORNIA WATER SERVICE GROUP Registrant
|
|||
By: | /s/ Martin A. Kropelnicki | |||
Martin A. Kropelnicki | ||||
Vice President, Chief Financial Officer and Treasurer |
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Table of Contents
Exhibit Index
Exhibit | Description | |
31.1
|
Chief Executive Officer certification of financial statements pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 | |
31.2
|
Chief Financial Officer certification of financial statements pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 | |
32
|
Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 | |
101.INS
|
XBRL Instance Document | |
101.SCH
|
XBRL Taxonomy Extension Schema | |
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase | |
101.LAB
|
XBRL Taxonomy Extension Label Linkbase | |
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase |
| The financial information contained in these XBRL documents is unaudited and is furnished, not filed with the Commission. |
35