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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
-------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________________ to ______________
Commission file number ____1-13883___________________________
CALIFORNIA WATER SERVICE GROUP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0448994
- --------------------------------------------------------------------------------
(Sate or other jurisdiction (I.R.S. Employer identification No.)
of incorporation or organization)
1720 North First Street, San Jose, CA. 95112
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
1-408-367-8200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSURES INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE LAST FIVE YEARS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common shares outstanding as of
July 31, 2002 - 15,182,046.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The financial information presented in this 10Q filing has been
prepared by management and has not been audited.
2
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per share data) June 30, December 31,
2002 2001
--------- ---------
ASSETS
Utility plant:
Utility plant $ 939,619 $ 909,658
Less accumulated depreciation and amortization 295,824 285,316
--------- ---------
Net utility plant 643,795 624,342
--------- ---------
Current assets:
Cash and cash equivalents 1,185 953
Receivables 28,507 22,800
Unbilled revenue 10,076 7,291
Materials and supplies at average cost 2,606 2,147
Taxes and other prepaid expenses 4,649 7,224
--------- ---------
Total current assets 47,023 40,415
--------- ---------
Other assets:
Regulatory assets 39,324 38,893
Other assets 10,230 6,564
--------- ---------
Total other assets 49,554 45,457
--------- ---------
$ 740,372 $ 710,214
========= =========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $.01 par value $ 152 $ 152
Additional paid-in capital 49,984 49,984
Retained earnings 147,267 147,299
Accumulated other comprehensive loss (816) (816)
--------- ---------
Total common stockholders' equity 196,587 196,619
Preferred stock 3,475 3,475
Long-term debt, less current maturities 222,290 202,600
--------- ---------
Total capitalization 422,352 402,694
--------- ---------
Current liabilities:
Current maturities of long-term debt 5,381 5,381
Short-term borrowings 24,000 22,000
Accounts payable 27,242 24,032
Accrued expenses and other liabilities 25,729 27,576
--------- ---------
Total current liabilities 82,352 78,989
Unamortized investment tax credits 2,882 2,882
Deferred income taxes 31,252 28,816
Regulatory and other liabilities 20,656 20,680
Advances for construction 108,956 106,657
Contributions in aid of construction 71,922 69,496
Commitments
--------- ---------
$ 740,372 $ 710,214
========= =========
See Notes to Condensed Consolidated Financial Statements
3
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
For the three months ended: June 30, June 30,
2002 2001
-------- --------
Operating revenue $ 69,183 $ 66,958
-------- --------
Operating expenses:
Operations 45,436 44,733
Maintenance 2,935 3,106
Depreciation and amortization 5,389 4,777
Income taxes 4,573 3,790
Property and other taxes 2,551 2,502
-------- --------
Total operating expenses 60,884 58,908
-------- --------
Net operating income 8,299 8,050
Other income and expenses
Other income, net 614 632
Gain on the sale of non-utility assets+B60 1,922 1,177
-------- --------
2,536 1,809
-------- --------
Income before interest expense 10,835 9,859
-------- --------
Interest expense:
Long-term debt interest 3,837 3,509
Other interest 380 586
-------- --------
Total interest expense 4,217 4,095
-------- --------
Net income $ 6,618 $ 5,764
======== ========
Earnings per share
Basic $ 0.43 $ 0.38
======== ========
Diluted $ 0.43 $ 0.37
======== ========
Weighted average shares outstanding
Basic 15,182 15,182
======== ========
Diluted 15,185 15,193
======== ========
Dividends per share of common stock $0.28000 $0.27875
======== ========
See Notes to Condensed Consolidated Financial Statements
4
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
For the six months ended: June 30, June 30,
2002 2001
-------- --------
Operating revenue $120,794 $113,966
-------- --------
Operating expenses:
Operations 80,210 77,853
Maintenance 5,355 5,845
Depreciation and amortization 10,783 9,593
Income taxes 5,852 3,932
Property and other taxes 5,014 4,901
-------- --------
Total operating expenses 107,214 102,124
-------- --------
Net operating income 13,580 11,842
Other income and expenses
Other income, net 1,067 926
Gain on the sale of non-utility assets 1,974 1,276
-------- --------
3,041 2,202
-------- --------
Income before interest expense 16,621 14,044
-------- --------
Interest expense:
Long-term debt interest 7,368 7,026
Other interest 706 1,033
-------- --------
Total interest expense 8,074 8,059
-------- --------
Net income $ 8,547 $ 5,985
======== ========
Earnings per share
Basic $ 0.56 $ 0.39
======== ========
Diluted $ 0.56 $ 0.39
======== ========
Weighted average shares outstanding
Basic 15,182 15,182
======== ========
Diluted 15,185 15,187
======== ========
Dividends per share of common stock $0.56000 $0.55750
======== ========
See Notes to Condensed Consolidated Financial Statements
5
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
For the six months ended: June 30, June 30,
2002 2001
-------- --------
Operating activities
Net income $ 8,547 $ 5,985
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,783 9,593
Deferred income taxes, investment tax credits
regulatory assets and liabilities, net 1,981 271
Gain on sale of non-utility assets (1,974) (1,276)
Changes in operating assets and liabilities:
Receivables (5,707) (6,060)
Unbilled revenue (2,785) (1,790)
Taxes and other prepaid expenses 2,575 734
Accounts payable 3,210 3,234
Other current assets and liabilities (2,306) (341)
Other changes, net (1,797) (1,332)
-------- --------
Net adjustments 3,980 3,033
-------- --------
Net cash provided by operating activities 12,527 9,018
-------- --------
Investing activities:
Utility plant expenditures (31,275) (27,245)
Deposit for acquisition of Rio Grande Utilities Corp. (2,300) --
Proceeds from sale of non-utility assets 2,095 1,345
-------- --------
Net cash used by investing activities (31,480) (25,900)
-------- --------
Financing activities:
Net short-term borrowings 2,000 17,402
Proceeds from long-term debt 20,000 --
Advances for construction 4,352 4,542
Refunds of advances for construction (2,053) (1,749)
Contributions in aid of construction 3,465 3,023
Dividends paid (8,579) (8,530)
-------- --------
Net cash provided by financing
activities 19,185 14,688
-------- --------
Change in cash and cash equivalents 232 (2,194)
Cash and cash equivalents at beginning of period 953 3,241
-------- --------
Cash and cash equivalents at end of period $ 1,185 $ 1,047
======== ========
See Notes to Condensed Consolidated Financial Statements
6
CALIFORNIA WATER SERVICE GROUP
Notes to Condensed Consolidated Financial Statements
June 30, 2002
Note 1. Seasonal Business
Due to the seasonal nature of the water business, the results for interim
periods are not indicative of the results for a twelve-month period.
Revenue and income are generally higher in the warm, dry summer months when
water usage and sales are greater. Revenue and income are lower in the
winter months when cooler temperatures and rainfall curtail water usage and
sales.
Note 2. Interim Financial Statements
The interim financial information is unaudited. In the opinion of
management, the accompanying financial statements reflect all adjustments
that are necessary to provide a fair statement of the results for the
periods covered. The adjustments consist only of normal recurring
adjustments.
Note 3. Earnings Per Share
Basic earnings per share is calculated by dividing income available for
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated by
dividing income available for common stockholders by the weighted average
number of common shares outstanding including potentially dilutive shares
as determined by application of the Treasury Stock method. Income available
for common stockholders is determined by subtracting from net income
dividends paid on preferred stock which were $38,000 for the quarters ended
June 30, 2002 and 2001. For the six months ended June 30, 2002 and 2001,
preferred dividends were $76,000. The difference between basic and diluted
weighted average number of common shares outstanding is the effect of
dilutive common stock options outstanding.
On January 2, 2002, 55,000 new options were granted at an exercise
price of $25.15 under the Company's Long Term Incentive Plan. No options
were exercised during the first six months of 2002 or 2001.
Common stock options to purchase 107,000 and 56,000 shares for the
quarters ended June 30, 2002 and 2001, respectively, were excluded from the
diluted per share calculation due to their anti-dilutive effect. For the
six months ended June 30, 2002 and 2001, common stock options to purchase
107,000 shares in each period were excluded from the dilutive per share
calculation due to their anti-dilutive effect.
7
Shares used in the basic and dilutive earnings per share calculations for
the three months ending June 30, 2002 were:
In Thousands
2002 2001
---- ----
Shares used to calculate basic earnings per share 15,182 15,182
Dilutive common stock options outstanding 3 11
------- -------
Shares used to calculate dilutive earnings per share 15,185 15,193
------- -------
Shares used in the basic and dilutive earnings per share calculations for
the six months ending June 30, 2002 were:
In Thousands
2002 2001
---- ----
Shares used to calculate basic earnings per share 15,182 15,182
Dilutive common stock options outstanding 3 5
------- -------
Shares used to calculate dilutive earnings per share 15,185 15,187
------- -------
Note 4. Significant Accounting Policies
A summary of significant accounting policies and detailed information
regarding the Company's financial statements are included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
Note 5. Lines of Business
The Company operates primarily in one business segment providing water
utility services.
Note 6. New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement No.
142, "Goodwill and Other Intangible Assets". Statement 142 specifies that
goodwill and intangible assets with indefinite useful lives will no longer
be amortized, but instead be tested for impairment at least annually in
accordance with the provisions of the statement. Statement 142 also
requires that intangible assets with determinable useful lives be amortized
over their useful lives to their estimated residual values, and reviewed
for impairment. The Company adopted Statement No. 142 on January 1, 2002.
Since the Company does not have goodwill or other intangible assets subject
to Statement No. 142, its adoption did not have a material impact on the
financial position or results of operation.
In August 2001, Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," was issued. The statement sets forth
requirements for measuring impairment of a long-lived asset that is defined
as the condition that exists when the carrying amount of a long-lived asset
exceeds its fair value. The statement also establishes criteria in which an
impairment loss must be recognized. The Company adopted Statement No. 144
on January 1, 2002. Its adoption did not have a material impact on the
financial position or results of operation.
8
Note 7. Issuance of Long-term Debt
In May 2002, the Company completed the issue of the $20 million, 7.11%,
30-year Series E Senior Notes. The notes were issued to two institutional
investors under an exemption from registration in Section 4(2) of the
Securities Act of 1933 ("Securities Act").
Note 8. Acquisition - Subsequent Events
On July 1, 2002, after receiving state regulatory approval, the Company
acquired the assets of Rio Grande Utility Corporation (Rio Grande) through
its wholly-owned subsidiary, New Mexico Water Service Company ("NMWSC").
The purchase includes the water and wastewater assets of Rio Grande, which
serves 2,265 water and 1,600 sewer customers in unincorporated areas of
Valencia County, New Mexico, located 30 miles south of Albuquerque. The
purchase price was $2,300,000 in cash, plus assumption of $3,100,000 in
outstanding debt. Rate base for the system is approximately $5,400,000.
In June 2002, NMWSC signed an agreement to purchase National Utilities
Corporation for approximately $700,000. National Utilities serves 1,600
water customers and had 2001 revenue of $575,000 and total assets of
$1,425,000. Its net utility plant in service at December 31, 2001 was
$1,143,000. The purchase is subject to the approval of the New Mexico
Public Regulation Commission which is expected in the first quarter of
2003.
In August 2002, the Company agreed to acquire the Kaanapali Water
Corporation ("KWC") for $7.7 million in cash. KWC provides water utility
services to 500 customers in Maui, Hawaii. It had 2001 revenues of $3.3
million, and has net plant of approximately $7.3 million and current assets
of $0.4 million. The acquisition is subject to approval of the Hawaii
Public Utilities Commission which is expected in mid-2003.
9
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning
established by the Private Securities Litigation Reform Act of 1995 ("Act"). The
forward-looking statements are intended to qualify under provisions of the
federal securities laws for "safe harbor" treatment established by the Act.
Forward-looking statements are based on currently available information,
expectations, estimates, assumptions and projections, and management's judgment
about the Company, the water utility industry and general economic conditions.
Such words as expects, intends, plans, believes, estimates, anticipates,
projects or variations of such words or similar expressions are intended to
identify forward-looking statements. The forward-looking statements are not
guarantees of future performance. Actual results may vary materially from what
is contained in a forward-looking statement. Factors which may cause a result
different than expected or anticipated include: governmental and regulatory
commissions' decisions, changes in regulatory commissions' policies or
procedures, the timeliness of regulatory commissions' actions concerning rate
relief, new legislation, electric power interruptions, increases in suppliers'
prices and the availability of supplies including water and power, changes in
environmental compliance requirements, acquisitions, the ability to successfully
implement business plans, changes in customer water use patterns and the impact
of weather on operating results, especially as it impacts water sales. The
Company assumes no obligation to provide public updates of forward-looking
statements.
CRITICAL ACCOUNTING POLICIES
The Company maintains its accounting records in accordance with
accounting principles generally accepted in the United States of America and as
directed by the regulatory commissions to which the Company's operations are
subject. Management believes that the following accounting policies may involve
a higher degree of complexity and judgement and the use of different judgements
or different assumptions on which judgements are based can cause a material
change in the Company's results of operations and financial condition.
Revenue Recognition. Revenue from metered customers includes billings to
customers based on monthly meter readings plus an estimate of water used between
the customer's last meter reading and the end of the accounting period. The
unbilled revenue amount is recorded as a current asset on the balance sheet
under the caption "Unbilled Revenue." At June 30, 2002, the unbilled amount was
$10.1 million and at December 31, 2001 the amount was $7.3 million. The amount
recorded as unbilled revenue varies depending on water usage, the number of days
between meter reads for each billing cycle, and the
10
number of days between each cycle's meter reading and the end of the accounting
cycle. The amount is generally higher during the summer months when water sales
are higher.
Flat rate customers are billed in advance at the beginning of the
service period. The revenue is prorated so that the portion of revenue
applicable to the current accounting period is included in that period's
revenue. The portion related to a subsequent accounting period is recorded as
unearned revenue on the balance sheet and recognized as revenue when earned in
the subsequent accounting period. The unearned revenue liability was $1.7
million at June 30, 2002 and December 31, 2001. It is included in "accrued
expenses and other liabilities" on the balance sheet.
Expense Balancing and Memorandum Accounts. Expense balancing and memorandum
accounts reflect rate increases charged to the Company by suppliers for
purchased water and purchased power, and pump tax increases that are not
included in customer water rates. The Company does not record expense balancing
or memorandum accounts in revenue, nor record a receivable until the California
Public Utilities Commission ("CPUC") has authorized a change in customer rates
and the customer has been billed. The cost increases tracked in expense
balancing and memorandum accounts are referred to as "Offsetable Expenses"
because under certain circumstances they are recoverable from customers in
future rate increases designed to offset the higher costs.
In October 2001, the CPUC adopted a resolution implementing its staff's
interim recommendation concerning practices and policies that enable water
utilities to recover cost increases in purchased water, purchased power and pump
taxes costs. The interim recommendation requires that future Company requests to
recover offsetable expenses will be processed only if an operating district has
filed a General Rate Case ("GRC") application within a three-year period and the
district is not earning more than its authorized rate of return on a
forward-looking, pro-forma basis. Neither of these requirements applied to
offset rate increases prior to adoption of the resolution. The CPUC also
directed its staff to open a proceeding to evaluate offsetable expense recovery
practices and policies, and recommend permanent revisions. At this time,
hearings to evaluate the interim recommendation have not been scheduled.
Historically, offset rate increases enabled water utilities to recover
as a pass-through cost increases for offsetable expenses that were not
anticipated when customer rates were established and were beyond the utility's
control. Offsetable expenses incurred prior to the CPUC's adoption of the
staff's interim recommendation were frozen in the balancing accounts. The
Company is authorized to track offsetable expenses incurred after the CPUC's
change in policy in regulatory memorandum accounts for potential recovery
subject to the CPUC's future determination of appropriate practices and
policies. Although the Company is hopeful that it will be authorized to recover
the offsetable expenses in both the balancing and memorandum accounts, it is
unable to predict the timing or amount of such recoveries. Therefore, because of
the uncertainty of collection, the Company's accounting policy is not to record
the expense balancing and memorandum account amounts until they are included in
customer billings.
At December 31, 2001, the amount included in these accounts was $6.5
million. At March 31, 2002 the amount was $7.2 million and at June 30, 2002, the
amount had increased to $9.2 million. The amounts related primarily to higher
electric costs incurred
11
by the Company since 2001 when power rates charged to the Company by electric
suppliers, as authorized by the CPUC, increased 48%. Increases in the memorandum
accounts are expected to be smaller once current power rates are reflected in
customer rates through future GRC decisions.
Utility Accounting. Because the Company operates extensively in a regulated
business, it is subject to the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of
Regulation." Regulators establish rates that are expected to permit the recovery
of the cost of service and a return on investment. In the event a portion of the
Company's operations were no longer subject to the provisions of SFAS No. 71,
the Company would be required to write off related regulatory assets and
liabilities that are not specifically recoverable and determine if other assets
might be impaired. If a regulatory commission determined that a portion of the
Company's assets were not recoverable in customer rates, the Company would be
required to assess if it had suffered an asset impairment that would require a
write down in the assets' valuation. There had been no asset impairment at June
30, 2002.
Income Taxes. Significant judgement by management is required in determining the
provision for income taxes. The preparation of consolidated financial statements
requires the estimation of income tax expense. The process involves the
estimating of current tax exposure together with assessing temporary differences
resulting from different treatment of certain items, such as depreciation, for
tax and financial statement reporting. These differences result in deferred tax
assets and liabilities, which are reported in the consolidated balance sheet.
The Company must also assess the likelihood that deferred tax assets will be
recovered in future taxable income, and to the extent recovery is unlikely, a
valuation allowance would be recorded. If a valuation allowance were required,
it could significantly increase income tax expense. In management's view, a
valuation allowance is not required at June 30, 2002.
RESULTS OF SECOND QUARTER 2002 OPERATIONS
Second quarter net income was $6,618,000, equivalent to $0.43 per
common share on a diluted basis compared to the $5,764,000 or $0.37 per share
earned in 2001's second quarter.
Revenue
Operating revenue increased $2,225,000 or 3% to $69,183,000. Because of
cooler weather in this year's second quarter, sales to existing customers were
lower. However, revenue from rate increases and usage by 4,400 new customers
offset the decline due to usage. Factors that impacted the operating revenue
increase are presented in the following table:
12
Lower consumption by existing customers ($544,000)
Rate increases 2,259,000
Usage by new customers 510,000
----------
Net revenue increase $2,225,000
==========
Revenue from rate increases includes $730,000 for recovery of higher
purchased power costs in four of the Company's 20 California districts. Recovery
of power costs in the other districts was not allowed by the CPUC, but will be
processed in accordance with the CPUC's procedures as described in Critical
Accounting Policies section of this report.
Total Operating Expenses
Total operating expenses were $60,884,000 in 2002 versus $58,908,000 in
2001, a 3% increase.
Water production expenses, which consists of purchased water, purchased
power and pump taxes, represent the largest components of total operating
expenses. During the quarter, these costs accounted for 45% of total operating
expenses and increased 3% compared to the second quarter last year. During the
quarter, well production provided 53% of the water supply, 46% was purchased
from wholesale suppliers and 1% was developed through the Company's surface
water treatment plants. The components of water production costs and the changes
from last year are shown in the table below:
Second Quarter
2002 Cost Change
-------------- ------
Purchased water $20,062,000 ($73,000)
Purchased power 5,334,000 747,000
Pump taxes 1,845,000 42,000
----------- --------
Total $27,241,000 $716,000
=========== ========
Purchased water rates increased due to wholesale suppliers' increases
in six California districts. The wholesale water supplier in one district
lowered rates. The amount of water purchased declined 3%. Despite the wholesale
rate increases, the cost of purchased water declined slightly due to the
reduction in the amount of water purchased. Purchased water cost was reduced by
credits of $670,000 received in 2002 and $971,000 in 2001.
Purchased power, which is used to operate pumping equipment, increased
16% due to higher electric rates in effect during the second quarter of 2002.
Electric power rates charged to the Company by suppliers increased 38% in May
2001. Through the first half of this year's second quarter, the higher rates
resulted in increased purchased power costs. For the remainder of the quarter,
rates were equivalent from year-to-year. The Company is not aware of any pending
or proposed electric rate increases at this time. About 2% less water was pumped
from wells during the quarter.
Labor rate increases that averaged about 3% were effective on January
1, 2002. However, total payroll charged to operations was 1% less than in the
second quarter of 2001 because of a reduction in the number of employees and
some payroll cost shifting to
13
capital projects in support of the Company's expanded construction budget. At
June 30, 2002 there were 788 employees and at June 30, 2001 there were 808
employees. Consultants were used to enhance computer technology systems during
the second quarter of 2001. That cost has since been eliminated, helping to
control operations expenses.
Maintenance expense decreased $171,000 due to a reduction in
unscheduled maintenance required at wells, and fewer water main and service line
repairs. Scheduled maintenance during 2002 is expected to be in a range similar
to the prior year.
Depreciation expense increased $612,000 because of a larger investment
in depreciable utility plant and an increase in recovery of plant investments
recognized in rate proceedings.
Federal and state income taxes increased $783,000 because of higher
income including increased gains on the sale of surplus real properties.
Other Income
Other income and expenses was $2,536,000 compared to $1,809,000 in
2001. During the second quarter 2002, two surplus real estate properties were
sold, adding $1,922,000 to other income. During the second quarter of 2001, a
real estate sale added $1,177,000 to other income. Other non-regulated income
from system operating agreements, antenna site leases and contract work
performed for others was $614,000 in this year's second quarter compared to
$632,000 in last year's second quarter. The decline resulted from less contract
work completed for others. However, the volume of work for the full year is
expected to be equivalent to last year. Income from the contract work is
recorded when a project is completed.
Interest Expense
Total interest expense increased $122,000. Long-term debt interest
expense increased because of two additional $20 million senior note issues that
were outstanding in 2002. Borrowings under the short-term bank credit agreement
were higher during the second quarter this year than in 2001. However, the
interest rate on short-term debt is approximately 3.1% compared to a 5.9% rate
at the end of the second quarter in 2001. The lower interest rate has offset the
cost of greater borrowings.
RESULTS OF SIX MONTHS ENDED JUNE 30, 2002
Net income for the six months ending June 30, 2002 increased $2,562,000
to $8,547,000, equivalent to $0.56 per common share on a diluted basis compared
to $0.39 on a diluted basis for the same period last year.
Revenue
Operating revenue increased $6,828,000 to $120,794,000. The higher
revenue was due to increased usage by existing customers, rate increases and
revenue from 2,100 new customers added during the period. Water sales in the
first quarter exceeded the prior year, but during the second quarter, 2002 sales
were lower than last year. The average revenue per customer increased 5% for the
six-month period. A breakdown of the net increase in operating revenue is
presented in the following table:
14
Increased consumption by existing customers $2,268,000
Rate increases 3,693,000
Usage by new customers 867,000
----------
Net revenue increase $6,828,000
==========
The rate increases came from GRCs totaling $1,565,000, step rate
increases effective at the start of the year totaling $886,000 and power cost
offset rate increases of $1,242,000 that are effective for four districts.
Total Operating Expenses
Total operating expenses increased 5% over 2001.
Total water production increased 3%. Water production costs were 7%
more than last year and made up 42% of total operating expenses. Well production
provided 51% of the supply with 48% purchased from wholesale suppliers and 1%
produced through the Company's treatment plants, the same ratios as last year.
Wholesale water rate increases from six suppliers and increased
deliveries of purchased water cause purchased water expense to increase. As a
result of power rate increases that became effective in 2001, purchased power
expense increased over 20%. For January, electric rates were 48% more than last
year, from February through mid-May the rates were 38% higher, and for the
remainder of the period to June 30, 2002, the rates were at the same level as in
2001. The Company is not aware of any future power rate increases. The
components of water production expense and the changes from last year are shown
in the table below:
2002 Cost Change
--------- ------
Purchased water $33,952,000 $803,000
Purchased power 8,941,000 1,922,000
Pump taxes 2,797,000 146,000
----------- ----------
Total $45,690,000 $2,871,000
=========== ==========
In addition to water production costs, other operations expense
categories increased $2,219,000. Payroll and benefits charged to operations were
1% less in 2002 because there were fewer employees on the payroll. As part of
the Company's expense control and budget process, consultants who worked on
technology projects were curtailed, reducing these expenses.
Maintenance expenses were lower by $490,000 due to fewer repairs of
pumping equipment, wells, water mains and service lines.
Depreciation and amortization expense increased due to a larger
depreciable plant investment on which depreciation expense is calculated and an
increase in recovery of plant investments authorized in rate proceedings.
Federal and state income taxes increased $1,920,000 because of higher
taxable income which reflects income tax due on gains of real property sales.
15
Other Income
The increase in other income and expenses from $2,202,000 to $3,041,000
was a result of additional property sales in 2002. During 2002, property sales
totaled $1,974,000 while in 2001 property sales were $1,276,000. Other income
excluding property sales was $1,067,000 in 2002 and $926,000 in the prior year.
Interest Expense
Overall interest expense reflects a small increase over 2001. Gross
long-term interest expense increased $788,000 because two additional $20 million
senior note issues were outstanding in 2002. Series D notes were issued in 2001
and Series E was issued near the end of May 2002. Because of the increase in
construction expenditures especially on several large, lengthy projects such as
the Bakersfield treatment plant, the amount of interest capitalized during 2002
increased by $450,000, reducing interest expense.
REGULATORY MATTERS
The CPUC is processing the Company's 15 GRC applications that were
filed in July 2001. In April 2002, evidentiary hearings were held for issues
that had not been resolved between the Company and the CPUC's staff. Decisions
on these applications are anticipated near the end of September or early October
2002. Based the outcome of evidentiary hearings and meeting with CPUC staff, the
Company estimates that the decisions could add between $10 million and $11
million in annual revenue, however, the decisions must first be approved by the
Commissioners. The decisions are expected to authorize a return on equity of
9.7% with an equity capital structure of 51.5%.
In June 2002, the CPUC authorized the Company to increase rates in its
Bakersfield district by $796,000 on an annual basis. This decision was based on
an advice letter filing to cover approximately $6 million of construction cost
incurred to date for a new water treatment plant.
The Company filed GRC applications for seven California districts plus
General Office in July 2002. The Commission's staff has indicated that decisions
should be expected in mid-2003 for these filings.
Washington Water Service Company filed a General Rate Case (GRC)
application in February 2002. The Washington Utilities and Transportation
Commission issued its decision early in April 2002 granting a $1 million
increase in annual revenue.
LIQUIDITY
Short-term bank borrowings were $24,000,000 at June 30, 2002 and
$22,000,000 at December 31, 2001.
In May 2002, the Company completed the issue of the $20 million, 7.11%,
30-year Series E Senior Notes. The notes were issued to two institutional
investors under an exemption from registration in Section 4(2) of the Securities
Act of 1933 ("Securities
16
Act"). Proceeds from the issue were used to repay outstanding short-term bank
borrowings.
During the third quarter, the Company expects to issue $20 million of
Series F Senior Notes under Section 4(2) of the Securities Act of 1933. Terms of
the issue have not been finalized. With the proceeds from the Series F notes and
cash generated from operations, the Company expects to repay short-term bank
borrowings. The senior notes are sold to institutional investors and, therefore,
are not registered under the Securities Act.
The second quarter common dividend was paid on May 20, 2002 at $0.28
per share compared to a quarterly dividend in 2001 of $0.27875. This was the
Company's 230th consecutive quarterly dividend. Annualized, the 2002 dividend
rate is $1.12 per common share compared to $1.115 in 2001. Based on the 12-month
earnings per share at June 30, 2002, the dividend payout ratio is 99%. For the
full year 2001, the payout ratio was 115%. On a long-term basis, the Company's
goal is to achieve a dividend payout ratio of about 60%.
At their July 24, 2002 meeting, the Board declared the third quarter
dividend payable August 19, 2002 to stockholders of record on August 5, 2002.
This will be the 231st consecutive quarterly dividend paid by the Company.
About 10% of the outstanding shares participate in the reinvestment
program under the Company's Dividend Reinvestment and Stock Purchase Plan
("Plan"). No new common shares were issued under the Plan during the quarter.
Shares required for the dividend reinvestment and stock purchase option of the
Plan were purchased on the open market. Shares are also purchased on the open
market to fulfill the requirements of the Company sponsored Employee Savings
Plan (401K). Purchases for this plan are made on a biweekly basis.
Book value per common share was $12.95 at June 30, 2002 and December
31, 2001.
During the second quarter, utility plant expenditures totaled
$20,934,000, including $15,564,000 of Company funded projects. Expenditures
through June 30, 2002 have been $31,275,000, including $25,316,000 of Company
funded projects. The 2002 Company-funded construction budget is $76,800,000.
WATER SUPPLY
Based on information from water management agencies and Company
developed data, the Company believes that its various sources of water supply
are sufficient to meet customer demand for the remainder of the year.
Historically, about half of the water source is purchased from wholesale
suppliers with the other half pumped from underground wells. A small portion is
developed through three local surface treatment plants.
17
ACQUISITIONS
Rio Grande Utility Corporation.
On July 1, 2002, after receiving state regulatory approval, the Company
acquired the assets of Rio Grande Utility Corporation (Rio Grande) through its
wholly-owned subsidiary, New Mexico Water Service Company ("NMWSC"). The
purchase includes the water and wastewater assets of Rio Grande, which serves
2,265 water and 1,600 sewer customers in unincorporated areas of Valencia
County, New Mexico, located 30 miles south of Albuquerque. The purchase price
was $2,300,000 in cash, plus assumption of $3,100,000 in outstanding debt. Rate
base for the system is approximately $5,400,000. Its total assets were
$9,500,000 at June 30, 2002.
For 2001, Rio Grande had gross revenue of $1,485,000. Its gross utility
plant in service at December 31, 2001 was $12,458,000 and net utility plant in
service was $9,153,000. The regulatory decision authorizing the purchase of Rio
Grande's assets by NMWSC included an authorization to increase annual water
rates by $115,000.
National Utilities Corporation.
In June 2002, NMWSC signed an agreement to purchase National Utilities
Corporation for approximately $700,000. National Utilities serves 700 water
customers located adjacent to the Rio Grande water system and another 900 water
customers located 150 miles south of Albuquerque, New Mexico. The purchase will
entitle NMWSC to purchase up to 2,000 acre-feet of water annually as required
for its operations. The purchase is subject to the approval of the New Mexico
Public Regulation Commission. Regulatory approval is expected in the first
quarter of 2003.
National Utilities had 2001 revenue of $575,000 and total assets of
$1,425,000. Its net utility plant in service at December 31, 2001 was
$1,143,000.
Kaanapali Water Corporation
In August 2002, the Company agreed to acquire the Kaanapali Water
Corporation ("KWC") for $7.7 million in cash. KWC provides water utility
services to 500 customers in Maui, Hawaii, including 10 resorts and eight
condominium projects. It posted 2001 revenues of $3.3 million, and has net plant
of approximately $7.3 million and current assets of $0.4 million. The
transaction is subject to approval of the Hawaii Public Utilities Commission
which is expected in mid-2003.
ACCOUNTING PRONOUNCEMENTS
In June 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" of long-lived assets was issued.
The statement is effective for fiscal years beginning after June 15, 2002. The
Company has not yet completed a full review of the impact that adopting the
statement will have on its financial position or results of operations, and
therefore is unable to state the impact that adopting the statement will have on
its financial position or results of operations.
18
MARKET RISK
The Company does not hold, trade in or issue derivative financial
instruments and therefore is not exposed to risks these instruments present.
The Company's market risk to interest rate exposure is limited because
the cost of long-term financing and short-term bank borrowings, including
interest costs, is covered in consumer water rates as approved by the
Commission. The Company does not have foreign operations; therefore, it does not
have a foreign currency exchange risk.
The Company's sensitivity to commodity prices is most affected by
changes in purchased water and purchased power costs. Through the Commission's
balancing account procedures, increases in purchased water and purchased power
costs can generally be passed on to consumers. The Company manages other
commodity price exposure through the duration and terms of its vendor contracts.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Matters voted on by stockholders at their annual meeting on April 24,
2002 were reported in the first quarter Form 10-Q.
19
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K.
None
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALIFORNIA WATER SERVICE GROUP
------------------------------
Registrant
August 2, 2002
By:
/s/ Gerald F. Feeney
Gerald F. Feeney
Vice President, Chief Financial Officer
and Treasurer
20
Exhibit Index
Exhibit Description
2 Asset and Real Estate Property Purchase and Sale Agreement dated
November 6, 2000 pertaining to the acquisition of Rio Grande
Utility Corporation's water and wastewater assets by New Mexico
Water Service Company on July 1, 2002
4.1 Third Supplement to Note Agreement dated as of May 1, 2002,
Pertaining to the issuance of $20,000,000, 7.11% Series E Senior
Notes due May 1, 2032
99.1 Chief Executive Officer certification of financial statements
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer certification of financial statements
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002