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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 March 31, 2003
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
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(Sate or other jurisdiction (I.R.S. Employer identification No.)
of incorporation or organization)
1720 North First Street, San Jose, CA. 95112
- --------------------------------------------------------------------------------
(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
--- ---
Indicate by checkmark whether the Registrant is an accelerated filer (as defined
in rule 12b-2 of the Act) Yes X No
--- ---
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
May 5, 2003 - 15,182,046.
TABLE OF CONTENTS
Page
PART I Financial Review - Management's Discussion and Analysis and
Condensed Consolidated Financial Statements.................. 3
Item 1 Condensed Consolidated Balance Sheet
March 31, 2003 and December 31, 2002......................... 4
Condensed Consolidated Statement of Income (loss)
For the Three Months Ended March 31, 2003 and 2002........... 5
Condensed Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 2003 and 2002........... 6
Notes to Condensed Consolidated Financial Statements........... 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 11
Item 3 Quantitative and Qualitative Disclosure about Market Risk...... 21
Item 4 Controls and Procedures........................................ 21
PART II Other Information
Item 1 Legal Proceedings............................................... 22
Item 4 Submission of Matters to a Vote of Security Holders............. 22
Item 6 Exhibits and Reports on Form 8-K................................ 23
Signatures...................................................... 24
Certifications.................................................. 25
Index to Exhibits............................................... 27
2
PART I FINANCIAL INFORMATION
Item 1.
Financial Statements
The financial information presented in this 10-Q filing has been
prepared by management and has not been audited.
3
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED BALANCE SHEET
Unaudited
(In thousands, except per share data) March 31, December 31,
2003 2002
----------- -----------
ASSETS
Utility plant:
Utility plant $ 1,024,914 $ 1,001,310
Less accumulated depreciation and amortization 310,257 304,322
----------- -----------
Net utility plant 714,657 696,988
----------- -----------
Current assets:
Cash and cash equivalents 1,718 1,063
Receivables 20,648 23,961
Unbilled revenue 6,946 7,969
Materials and supplies at average cost 2,626 2,760
Taxes and other prepaid expenses 6,406 7,234
----------- -----------
Total current assets 38,344 42,987
----------- -----------
Other assets:
Regulatory assets 46,314 46,089
Other assets 16,009 14,518
----------- -----------
Total other assets 62,323 60,607
----------- -----------
$ 815,324 $ 800,582
=========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $0.01 par value $ 152 $ 152
Additional paid-in capital 49,984 49,984
Retained earnings 144,139 149,215
Accumulated other comprehensive loss (134) (134)
----------- -----------
Total common stockholders' equity 194,141 199,217
Preferred stock 3,475 3,475
Long-term debt, less current maturities 270,075 250,365
----------- -----------
Total capitalization 467,691 453,057
----------- -----------
Current liabilities:
Current maturities of long-term debt 1,000 1,000
Short-term borrowings 31,577 36,379
Accounts payable 23,026 23,706
Accrued expenses and other liabilities 33,188 30,456
----------- -----------
Total current liabilities 88,791 91,541
Unamortized investment tax credits 2,774 2,774
Deferred income taxes 31,252 31,371
Regulatory and other liabilities 28,804 28,804
Advances for construction 116,739 115,459
Contributions in aid of construction 79,273 77,576
Commitments and contingencies -- --
----------- -----------
$ 815,324 $ 800,582
=========== ===========
See Notes to Unaudited Condensed Consolidated Financial Statements
4
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
Unaudited
(In thousands, except per share data)
For the three months ended: March 31, March 31,
2003 2002
-------- --------
Operating revenue $ 51,310 $51,611
-------- --------
Operating expenses:
Operations 37,855 34,774
Maintenance 3,253 2,420
Depreciation and amortization 5,760 5,394
Income taxes (553) 1,279
Property and other taxes 2,465 2,463
-------- --------
Total operating expenses 48,780 46,330
-------- --------
Net operating income 2,530 5,281
-------- --------
Other income and expenses:
Non-regulated income, net 706 455
Gain on sale of non-utility property 552 50
-------- --------
Total other income and expense 1,258 505
-------- --------
Interest expense:
Long-term debt interest 4,178 3,532
Other interest 378 326
-------- --------
Total interest expense 4,556 3,858
-------- --------
Net income (loss) $ (768) $ 1,928
======== ========
Earnings (loss) per share
Basic $ (0.05) $ 0.12
======== ========
Diluted $ (0.05) $ 0.12
======== ========
Weighted average shares outstanding
Basic 15,182 15,182
======== ========
Diluted 15,182 15,185
======== ========
Dividends per share of common stock $0.28125 $0.28000
======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements
5
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
(In thousands)
For the Three Months Ended:
March 31, March 31,
2003 2002
-------- --------
Operating activities
Net income (loss) $ (768) $ 1,928
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,760 5,394
Deferred income taxes, investment tax credits
regulatory assets and liabilities, net (342) (34)
Gain on sale of non-utility property (552) (50)
Changes in operating assets and liabilities:
Receivables 3,288 97
Unbilled revenue 1,023 (136)
Accounts payable (680) (2,574)
Other current assets and liabilities 3,693 3,279
Other changes, net (1,527) (1,159)
-------- --------
Net adjustments 10,663 4,817
-------- --------
Net cash provided by operating activities 9,895 6,745
-------- --------
Investing activities:
Utility plant expenditures (24,070) (10,733)
Proceeds from sale of non-utility property 588 50
-------- --------
Net cash used by investing activities (23,482) (10,683)
-------- --------
Financing activities:
Net short-term borrowings (4,802) 7,500
Net long-term debt 19,710 (465)
Advances for construction 2,610 1,597
Refunds of advances for construction (1,259) (1,055)
Contributions in aid of construction 2,291 892
Dividends paid (4,308) (4,289)
-------- --------
Net cash provided by financing activities 14,242 4,180
-------- --------
Change in cash and cash equivalents 655 242
Cash and cash equivalents at beginning of period 1,063 953
-------- --------
Cash and cash equivalents at end of period $ 1,718 $ 1,195
======== ========
Supplemental Disclosures of cash flow Information:
Cash paid during the period for:
Interest expense (net of amounts capitalized) 216 (160)
Income taxes 1 --
See Notes to Unaudited Condensed Consolidated Financial Statements
6
CALIFORNIA WATER SERVICE GROUP
Notes to Condensed Consolidated Financial Statements
March 31, 2003
Note 1. Organization and Operations
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 (Hawaii Water) provide regulated
utility services under the rules and regulations of their respective
State's regulatory commissions. In addition, these entities and CWS Utility
Services provide non-regulated water utility and utility-related services.
The Company operates primarily in one business segment providing water
utility services.
Note 2. Summary of Significant Accounting Policies
The interim financial information is unaudited. 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 adjustments consist only of
normal recurring adjustments. The results for interim periods are not
necessarily indicative of the results of the entire year. The condensed
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements for the year ended December 31,
2002 included in its Form 10-K as filed with the Securities and Exchange
Commission on March 25, 2003.
Note 3. Stock-based Compensation
The Company has a stockholder approved Long-Term Incentive Plan that allows
granting of nonqualified stock options. The Company has adopted the
disclosure requirements of Statement of Financial Accounting Standards
(SFAS) No. 123 "Accounting of Stock-Based Compensation," and as permitted
by the statement, applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," for its plan. All outstanding
options have an exercise price equal to the market price on the date they
were granted. No compensation expense was recorded for the three months
ended March 31, 2003 and 2002 related to stock options. No options were
granted during the three months ended March 31, 2003. The table below
illustrates the effect on net income and earnings per share as if the
company had applied the fair value recognition provision of SFAS No. 123 to
employee compensation.
7
In thousands except per share data Quarters Ended March 31
-----------------------
2003 2002
---- ----
Net income/(loss), as reported ($ 768) $ 1,928
Deduct: Total stock-based employee compensation
expense determined under fair value
method for all awards, net of related tax effects 21 21
------- ---------
Pro forma net income /(loss) ($ 789) $ 1,907
======= =========
Earnings/(Loss) per share
Basic - as reported ($ 0.05) $ 0.12
Basic - pro forma ($ 0.05) $ 0.12
Diluted - as reported ($ 0.05) $ 0.12
Diluted - pro forma ($ 0.05) $ 0.12
Note 4. 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 5. Earnings Per Share Calculations
The computations of basic and diluted earnings per share are noted below.
Common stock options to purchase 154,500 shares and 107,000 shares for the
three months ended March 31, 2003 and 2002, respectively, were excluded
from the diluted per share calculation due to their anti-dilutive effect.
In thousands, except per share data
Quarters Ended
March 31
2003 2002
-------- -------
Net income/(loss) ($ 768) $ 1,928
Less preferred dividends 38 38
-------- -------
Net income/(loss) available for common ($ 806) $ 1,890
======== =======
Weighted average common shares 15,182 15,182
Dilutive common stock options (treasury method) -- 3
-------- -------
Shares used for dilutive computation 15,182 15,185
======== =======
Net income/(loss) per share - basic ($ 0.05) $ 0.12
-------- -------
Net income/(loss) per share - diluted ($ 0.05) $ 0.12
-------- -------
8
Note 6. New Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations," which applies to
legal obligations associated with the retirement of long-lived assets and
the associated asset retirement costs. The statement is effective for the
Company in the first quarter of 2003. The adoption of the accounting
requirements of this statement did not have a material impact to the
Company's financial position, results of operations or cash flows.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This Statement requires that a liability for costs
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. The provisions
of this statement are effective for exit or disposal activities that are
initiated after December 31, 2002. The adoption of the accounting
requirements of this statement did not impact the Company's financial
position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 requires a
liability to be recognized at the time a company issues a guarantee for the
fair value of the obligations assumed under certain guarantee agreements.
Interpretation No. 45 is effective for guarantees issued or modified after
December 31, 2002. The disclosure requirements effective for the year
ending December 31, 2002 expand the disclosures required by a guarantor
about its obligations under a guarantee. The adoption of the accounting
requirements of this statement did not impact the Company's financial
position, results of operations or cash flows.
In January, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." The interpretation provides guidance for
determining when a primary beneficiary should consolidate a variable
interest entity or equivalent structure that functions to support the
activities of the primary beneficiary. Interpretation No. 46 is effective
for all new variable interest entities created or acquired after January
31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of Interpretation No. 46 must be applied
for the first interim or annual period beginning after June 15, 2003. The
adoption of the accounting requirements of this statement did not impact
the Company's financial position, results of operations or cash flows.
9
Note 7. Subsequent Events
Financing
On May 1, 2003, the Company issued $10 million, 5.54%, 20 year Series I
Senior Notes and $10 million, 5.44%, 15 year Series J Senior Notes. The
proceeds from these borrowings were used to early terminate EE First
Mortgage bonds that have an interest rate of 7.9%. The principal, call
premium and transaction costs associated with the early termination of the
EE First Mortgage bonds was approximately $20 million.
Acquisitions
On April 30, 2003, the Company acquired the Kaanapali Water Corporation for
an initial payment of $7.5 million in cash. After completing the
acquisition, the entity's name was changed to Hawaii Water Service Company
("HWSC"). The acquisition was approved by the Hawaii Public Utilities
Commission ("HPUC") in March 2003. The final purchase price will be
determined after certain events have occurred, principally the
determination of rate base after filing for a general rate case with the
HPUC. At that time, the purchase price could be adjusted. Preliminary
estimates of the amount of adjustment are between 0 and 30% of the purchase
price.
10
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This quarterly report, including all documents incorporated by reference,
contain 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,
assumes, anticipates, projects, predicts, forecasts 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. They are subject to uncertainty and changes in circumstances.
Actual results may vary materially from what is contained in a
forward-looking statement. Factors that may cause a result different than
expected or anticipated include: governmental and regulatory commissions'
decisions; changes in regulatory commissions' policies and 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; fluctuations in
interest rates; changes in environmental compliance and water quality
requirements; acquisitions and our ability to successfully integrate
acquired companies; the ability to successfully implement business plans;
changes in customer water use patterns; the impact of weather on water
sales and operating results; access to sufficient capital on satisfactory
terms; 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; restrictive covenants in
or changes to the credit ratings on our current or future debt that could
increase our financing costs or affect our ability to borrow, make payments
on debt or pay dividends; and, other risks and unforeseen events. When
considering forward-looking statements, you should keep in mind the
cautionary statements included in this paragraph. We assume no obligation
to provide public updates of forward-looking statements.
CRITICAL ACCOUNTING POLICIES
We maintain our accounting records in accordance with accounting principles
generally accepted in the United States of America and as directed by the
regulatory commissions to which we are subject. The process of preparing
financial statements requires the use of estimates on the part of
management. The estimates used by management are based on historical
experience and an understanding of current facts and circumstances.
Management believes that the following accounting policies are
11
critical because they involve a higher degree of complexity and judgement
and can have a material impact on our results of operations and financial
condition.
Revenue Recognition
Revenue from metered customers includes billings to customers based on
monthly meter readings plus an estimate for water used between the
customer's last meter reading and the end of the accounting period. The
unbilled revenue amount is recorded as a current asset on the balance sheet
under the caption "Unbilled Revenue." At March 31, 2003, the unbilled
revenue amount was $6.9 million and at December 31, 2002 the amount was
$8.0 million. The unbilled revenue amount is generally higher during the
summer months when water sales are higher. The amount recorded as unbilled
revenue varies depending on water usage in the preceding period, the number
of days between meter reads for each billing cycle, and the number of days
between each cycle's meter reading and the end of the accounting cycle.
Flat rate customers are billed in advance at the beginning of the service
period. The revenue is prorated so that the portion of revenue applicable
to the current accounting period is included in that period's revenue. The
portion related to a subsequent accounting period is recorded as unearned
revenue on the balance sheet and recognized as revenue when earned in the
subsequent accounting period. The unearned revenue liability was $1.8
million at March 31, 2003 and $1.7 million at December 31, 2002. This
liability is included in "accrued expenses and other liabilities" on the
balance sheet.
Expense Balancing and Memorandum Accounts
Expense-balancing accounts and memorandum accounts represent costs
incurred, but not billed to our customers. The amounts included in these
accounts relate to rate increases charged to us by suppliers of purchased
water and purchased power, and increases in pump taxes. We do not record
expense-balancing or memorandum accounts in our financial statements as
revenue, nor record a receivable until the California Public Utilities
Commission ("CPUC") has authorized recovery of the higher costs and
customers have been billed. The accounts are only used to track the higher
costs. The cost increases, which are beyond our control, are referred to as
"offsetable expenses" because under certain circumstances they are
recoverable from customers in future offset rate increases.
Historically, offset rate increases enabled water utilities to recover as a
pass-through, cost increases for offsetable expenses that were not known or
anticipated when customer rates were established and were beyond the
utility's control. In December 2002, the CPUC issued a decision that will
allow us to recover offsetable expenses that were labeled as frozen. These
were offsetable expenses incurred prior to November 29, 2001. The CPUC is
expected to adopt permanent rules regarding the recovery of offsetable
expenses incurred after November 29, 2001, which are included in our
memorandum accounts. We are unable to predict when the permanent rules will
be issued, their composition or their financial impact. Therefore, because
of the uncertainty of collection, our accounting policy is to not record
offsetable expenses in our financial statements until such amounts are
included in customer
12
billings. We filed for recovery in rates the offsetable expenses labeled as
frozen and will file for the additional offsetable expenses immediately
after the permanent rules have been issued.
At March 31, 2003, the amount included in the offsetable expense accounts
was $12.7 million, of which $6.1 million was labeled frozen. At December
31, 2002, the amount was $12.9 million, of which $6.1 million was labeled
frozen. No monies were collected during the quarter ended March 31, 2003.
The changes were due to refinements in determining amounts deemed
recoverable. The amounts in offsetable expenses are primarily driven by
higher electrical costs incurred from 2001 through March 31, 2003.
On May 8, 2003, the CPUC approved resolutions allowing offsetable expense
recovery in eight districts totally $5.4 million, which will be recovered
over the next 12-24 months. The CPUC decision deferred recovery for four
districts to the General Rate Case process. Also, other offsetable expenses
filings currently in process are expected to result in a net ratepayer
refund in the range of $200,000 to $300,000. The actual net effect will be
determined by future CPUC action.
Regulated Utility Accounting
Because we operate extensively in a regulated business, we are 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 our
operations were no longer subject to the provisions of SFAS No. 71, we
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 our
assets were not recoverable in customer rates, we would be required to
determine if we had suffered an asset impairment that would require a
write-down in the assets' valuation. There have been no such asset
impairments as of March 31, 2003.
Income Taxes
Significant judgment 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. We 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
March 31, 2003.
13
Pension Benefits
We incur costs associated with our pension and postretirement health care
benefits plans. To measure the expense of these benefits, management must
estimate compensation increases, mortality rates, future health cost
increases and discount rates used to value related liabilities and to
determine appropriate funding. Different estimates used by management could
result in significant variances in the cost recognized for pension benefit
plans. The estimates used are based on historical experience, current
facts, future expectations and recommendations from independent advisors
and actuaries. We use an investment advisor to provide expert advice in
managing the plan's investments. We anticipate any increase in funding for
the pension and postretirement health care benefits plans will be recovered
in future customer rates.
RESULTS OF FIRST QUARTER 2003 OPERATIONS
First quarter net loss was ($768,000), equivalent to ($0.05) per common
share on a diluted basis compared to the $1,928,000 or $0.12 per share on a
diluted basis earned in the first quarter of 2002.
Operating Revenue
Operating revenue decreased $301,000 or 1% to $51,310,000. Weather can have
a significant influence on customer water usage. Temperatures were slightly
warmer than the prior year. Precipitation was much higher compared to the
prior year, which had a negative influence on usage. A 3% decrease in water
production was reflected in decreased water usage by existing customers and
was partially offset by sales to new customers and increases in rates. The
factors that impacted the operating revenue decrease for the first quarter
of 2003 are presented in the following table:
Decreased usage by existing customers ($1,887,000)
Rate increases 846,000
Usage by new customers 740,000
----------
Net operating revenue decrease ($301,000)
==========
Operating revenue from rate increases includes step rate increases
effective January 2003, increases from advice letters for the Bakersfield
plant and increases for Washington Water that were effective for January
2003. Usage by new customers includes $333,000 for New Mexico Water as
these operations were acquired in July 2002.
Total Operating Expenses
Total operating expenses were $48,780,000 for the three months ended March
31, 2003 versus $46,330,000 for the same period in 2002, a 5% increase.
Water production expense consists of purchased water, purchased power and
pump taxes. It represents the largest component of total operating
expenses. During the current quarter, these costs accounted for 40% of
total operating expenses. Water costs increased 3% compared to last year.
Well production provided 46% of the
14
water supply, 53% was purchased from wholesale suppliers and 1% was
developed through our surface water treatment plants. The components of
water production costs and the changes from the first quarter of last year
are shown in the table below:
First Quarter
2003 Cost Change
----------- --------
Purchased water $14,402,000 $512,000
Purchased power 3,632,000 24,000
Pump taxes 928,000 (24,000)
----------- --------
Total $18,962,000 $512,000
=========== ========
Purchased water cost increased due to a refund of approximately $750,000
received in the first quarter of 2002. Excluding the refund, purchased
water costs were down from the prior year due to lower usage. Price
increases had an immaterial effect for the quarter.
Purchased power, which is used mainly to operate pumping equipment, was
essentially unchanged with lower volumes being offset by higher electric
costs. Where available, we shift to lower cost electric tariffs offered by
the power companies, which can result in lower purchased power costs.
Wages for union employees increased 1% effective January 1, 2003. Overall
labor costs increased 6% due to replacing personnel at higher salaries and
adding labor related to the acquisition of New Mexico Water. Payroll costs
charged to operating expense increased by $700,000. This was driven by
higher labor rates and changes to labor assigned to capital projects.
Pension and benefit costs increased $1,000,000 for pension plan changes and
higher medical claim costs. Part of the agreement with union employees
included a change in the pension plan. Factors applied against employees'
earnings were increased, which will result in increased amounts paid upon
retirement. This change increased cost substantially. At March 31, 2003
there were 793 employees and at March 2002 there were 784 employees.
Other items driving the increase were insurance ($150,000), supply/water
quality expenses ($300,000), customer service expenses ($100,000),
legal/accounting ($100,000), recruiting ($100,000) and the New Mexico
acquisition ($150,000).
Maintenance expense was $833,000 higher in the quarter ended March 31, 2003
due to additional maintenance required at mains and for service line
repairs. Depreciation expense increased $366,000 because of a larger
investment in depreciable utility plant and an increase in the recovery of
plant investments recognized in prior General Rate Case (GRC) proceedings.
Federal and state income taxes decreased $1,832,000 due to the decrease in
taxable income. The effective tax rate was 42% in the current quarter and
40% for the prior year's quarter.
15
Other Income and Expense
Other income and expense was $1,258,000 net income compared to $505,000 net
income in 2002, an increase in net income of $753,000. The increase in
other income resulted from improved results in third party operations and
maintenance arrangements (work done for third parties) and an increase in
rental income from additional antenna site leases. Gains from surplus real
property sales recorded in the first quarter of 2003 were $502,000 greater
than amounts in the first quarter of 2002.
Interest Expense
Total interest expense increased $698,000. Long-term debt interest expense
increased $496,000 because of the additional $60 million in senior notes
issued plus amortization of debt premium incurred for the refinancing
program. Interest capitalized for the quarter decreased $150,000 as the
amount of construction in progress is expected to be lower for the year
2003 with completion of several large projects such as the Bakersfield
treatment plant.
Borrowings under our short-term bank credit agreement were higher during
the first quarter of this year compared to the same quarter in 2002.
Average interest rates on short-term debt was approximately 3.4% in 2003
compared to a 3.5% rate during the first quarter in 2002. The higher
borrowings caused short-term interest expense to increase by $52,000.
REGULATORY MATTERS
Rate Case Proceedings
California Water 2001 General Rate Case (GRC) Applications - The CPUC
issued a decision to establish April 3, 2003 as the effective date for the
2001 applications. This is favorable to us as revenues will not continue to
be permanently lost due to the delays in GRC decisions by the CPUC. A Draft
of Proposed Decision (DPD) was issued in January 2003 authorizing a $12.8
million annual revenue increase, which is less than the initial filing. In
addition, the DPD decision authorized a return on equity of 9.7% on 51.5%
equity capitalization. The 2001 GRC was filed in July 2001 and past GRC
applications took approximately 10 months to receive a decision. The 2001
GRC filing is currently 23 months old. We are unable to predict when the
final decisions and rulings will be issued, their composition or their
financial impact.
Washington Water 2002 GRC Applications - Washington Water received approval
on its application effective April 2002 for $1 million of increased rates
annually to cover higher operating costs and capital expenditures.
California Water 2002 GRC Applications - In November 2002, applications
were filed for rate increases of $1.3 million on an annual basis relating
to three districts. Due to the delays by the CPUC decision-making process
in 2002 and 2003, we are unable to predict when the final decisions and
rulings will be issued, their composition or their financial impact.
16
California Water 2003 GRC Applications - In January 2003, applications were
filed for rate increases of $8.2 million on an annual basis relating to
four districts. We expect to make additional GRC applications in July 2003.
Due to the delays by the CPUC in the decision making process in 2002 and
2003, we are unable to predict when the final decisions and rulings will be
issued, their composition or their financial impact.
California Water Advice Letters - Advice letters are used to request rate
increases for specific capital expenditures. The process for receiving
decisions on advice letters is less involved than for GRC applications.
Decisions by the CPUC on advice letters have been timely and much faster
compared to GRC applications. In June, 2002, the CPUC authorized increased
rates for our Bakersfield district of $800,000 on an annual basis. In
April, 2003, the CPUC authorized increased rates of an additional $1.8
million for our Bakersfield district. We expect to make an additional
advice letter application in the second half of 2003 for Bakersfield. These
rate increases reflect additional expenditures related to the new treatment
plant with a total project cost of approximately $49 million.
Other rate increases - We will be requesting from the City of Hawthorne an
increase of $200,000 effective July, 2003. This increase is not governed by
the CPUC and is expected to be granted.
Legislative Initiative
Regulatory delays in obtaining GRC decisions have been costly to California
regulated water utilities. In recent years, we have experienced significant
revenue losses due to regulatory delays. We normally file our general rate
case applications in July. The CPUC's stated rate case processing plan
provides for a decision within ten months. In the past, when decisions were
not issued in a timely manner, we lost revenue and did not recover costs
during the period the decisions were delayed. We estimate that $3 million
of revenue was lost for the quarter due to decision delays by the CPUC.
Assembly Bill 2838 became effective on January 1, 2003. It is designed to
preserve the cash flow of regulated water utilities by providing interim
rate relief if the CPUC has not issued a decision for a requested GRC rate
increase within its established ten month processing period. The interim
rate relief is subject to adjustments based on the CPUC's final decision in
the GRC proceeding. For the three months ended March 31, 2003, Assembly
Bill 2838 did not have an impact on us in granting interim rate relief. The
CPUC interpreted the provisions of the bill to apply only to GRC
applications subsequent to January 1, 2003 and the CPUC is reviewing their
internal processing period.
LIQUIDITY
Short-term and Long-term Debt
Short-term bank borrowings were $31,577,000 at March 31, 2003 and
$36,379,000 at December 31, 2002. New credit agreements were obtained
during the quarter ended
17
March 31, 2003. A $55 million agreement was contracted for California Water
Service Company in February 2003 and expires in April 2005. The amount is
reduced to $45 million after June 30, 2003. The agreement has a 30-day
out-of-debt compliance period that must be met by December 31, 2003. A $10
million credit facility was contracted for California Water Service Group,
CWS Utility Services and New Mexico Water Service Company in February 2003.
The agreement has a 30-day out-of-debt compliance period that must be met
by December 31, 2003. New Mexico Water Service Company has a $2.9 million
facility that was renewed in January 2003 and expires May 2004 and does not
have an out-of-debt compliance period. Washington Water Service Company has
a $0.1 million loan commitment that is currently unused.
In February 2003, we completed the issuance of $10 million, 4.58%, 7 year
Series K Senior Notes and $10 million, 5.48%, 15 year Series L Senior
Notes. Both notes were unsecured. The funds were used to pay down debt on
the credit facility and to fund capital expenditures.
We initiated a program in 2002 to refinance a portion of our outstanding
first mortgage bonds. This program has been continued in 2003. On May 1,
2003, we issued $10 million, 5.54%, 20-year series I Senior Notes and $10
million, 5.44%, 15 year series J Senior Notes. Both notes were unsecured.
The proceeds from these borrowings were used to early terminate EE First
Mortgage bonds that have an interest rate of 7.9%. The principal, call
premiums and transaction costs were approximately $20 million. We will
continue to pursue refinancing opportunities when economic conditions are
favorable. The refinancing program is expected to save approximately $1.8
million on an annual basis.
Debt Credit Ratings
California Water Service Company is rated by Moody's Investors Service
("Moodys") and Standard & Poor's ("S&P"). The rating by Moodys is A1 and
S&P is A+. The ratings were unchanged from the revised ratings issued in
the fourth quarter of 2002.
Dividends, Book Value and Share Holders
The first quarter common dividend was paid on February 21, 2003, at
$0.28125 per share compared to a quarterly dividend in 2002 of $0.28. This
was our 233rd consecutive quarterly dividend. Annualized, the 2003 dividend
rate is $1.125 per common share compared to $1.12 in 2002. Based on the
12-month earnings per share at March 31, 2003, the dividend payout ratio is
105% of net income. For the full year 2002, the payout ratio was 90% of net
income. On a long-term basis, our goal is to achieve a dividend payout
ratio of about 60% of net income.
At their April 23, 2003 meeting, the Board declared the second quarter
dividend of $0.28125 payable May 16, 2003 to stockholders of record on May
2, 2003. This will be the 234th consecutive quarterly dividend.
About 4% of the outstanding shares participate in the reinvestment program
under the Company's Dividend Reinvestment and Stock Purchase Plan ("Plan").
Shares
18
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 our sponsored Employee Savings
Plan (401K). Purchases for this plan are made on a biweekly basis.
Book value per common share was $12.79 at March 31, 2003 compared to $13.12
at December 31, 2002.
We estimate there are approximately 16,000 stockholders of our common
stock.
Utility Plant
During the first quarter, utility plant expenditures totaled $24.1 million,
including $6.2 million of third party funded projects. The 2003 Company
funded construction budget is $51.7 million.
At March 31, 2003, construction work in progress was $64.1 million compared
to $48.6 million at December 31, 2002. Work in progress includes projects
that are under construction, but not yet complete and in service. A main
reason for the increase in work in progress is the $43.7 million expended
to date on the Northeast Bakersfield Treatment Plant. This amount is
included in work in progress at March 31, 2003. The $49 million project is
the largest construction project ever undertaken by the Company. It is
proceeding on schedule and on budget, and is expected to be in service
before June 30, 2003.
WATER SUPPLY
Based on information from water management agencies and internally
developed data, we believe that our 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.
To safeguard our water supply and facilities, we have heightened security
at our facilities and taken added safety precautions for our employees and
the water we deliver to our customers. While we do not make public comments
on our security programs, we have been in contact with federal, state and
local law enforcement agencies to coordinate and improve water delivery
systems security. We have assigned a high priority to completing work
necessary to comply with new Environmental Protection Agency requirements
concerning security of water facilities. This effort encompasses all of our
district operations.
ACQUISITIONS
Rio Grande Utility Corporation
On July 1, 2002, after receiving state regulatory commission approval, we
acquired certain assets of Rio Grande Utility Corporation (Rio Grande)
through New Mexico
19
Water. The purchase included the water and wastewater assets of Rio Grande,
which serves 2,400 water and 1,700 wastewater customers about 30 miles
south of Albuquerque. The purchase price was $2.3 million in cash, plus
assumption of $3.1 million in outstanding debt. Rate base for the system is
approximately $5.4 million. Revenues for 2002 were $1.6 million.
The Rio Grande purchase price was allocated to the fair value of net assets
acquired, including utility plant, water rights and assumed liabilities.
The allocation of fair value is based on management's estimate of the fair
value for purchase accounting purposes at the date of acquisition. The
purchase price allocations are subject to revision if management obtains
additional information. Our results of operations for the three-month
period ending March 31, 2003 include the operating results of New Mexico
Water. These were not material to the company.
Kaanapali Water Corporation
On April 30, 2003, we acquired the Kaanapali Water Corporation for an
initial payment of $7.5 million in cash. After completing the acquisition,
the entity's name was changed to Hawaii Water Service Company. Hawaii Water
provides water utility services to 500 customers in Maui, Hawaii. It had
2002 revenues of $3.0 million, and has net plant excluding contributions in
aid of constructions of approximately $7.2 million and current assets of
$0.2 million. The acquisition was approved by the Hawaii Public Utilities
Commission ("HPUC") in March 2003. The final purchase price will be
determined after certain events have occurred, principally the resolution
of determining rate base after filing for a general rate case with the
HPUC. At that time, the purchase price could be adjusted. Preliminary
estimates of the amount of adjustment are between 0 and 30% of the purchase
price.
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 second 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.
ACCOUNTING PRONOUNCEMENTS
See Note 6 of the Condensed Consolidated Financial Statements
20
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 commission's balancing account or offsetable expense
procedures allowed for increases in purchased water and purchased power
costs to be passed on to consumers. Over 95% of our net income and cash
flows come from California operations, therefore the CPUC actions have a
significant impact on our business. The CPUC has yet to issue final rules
on offsetable expenses. We are unable to predict when the permanent rules
will be issued, their composition or their financial impact on us. See Item
2, Expense Balancing and Memorandum Accounts.
Item 4.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision of our Chief Executive Officer and Chief Financial
Officer, and with the participation of other senior management, we
conducted an evaluation of the effectiveness of the design and operation of
the disclosure controls and procedures as defined by Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934. The evaluation was
completed within 90 days of the filing of this quarterly report (Evaluation
Date). Based on the evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that as of the Evaluation Date the disclosure
controls and procedures were adequate and effective, and that the material
information required to be included in this report, including information
from our consolidated subsidiaries, was properly recorded, processed,
summarized and reported, and was made known to the Chief Executive Officer
and Chief Financial Officer by others within the Company in a timely
manner, particularly during the period when this quarterly report on Form
10-Q was being prepared.
(b) Change in Internal Controls
In addition, there were no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to
the Evaluation Date. We have not identified any significant or material
weaknesses in our internal controls, and therefore there were no corrective
actions taken.
21
PART II OTHER INFORMATION
Item 1.
Legal Proceedings
(a) In March 2003, we were served with a lawsuit in state court, as
one of several defendants, for damages and injuries related from
alleged contamination in our drinking water supply in the
Marysville district. The suit did not specify a dollar amount. We
do not believe that the complaint alleges any facts under which it
may be held liable. We have filed a responsive motion on various
grounds. The Court has not ruled on our motion. We intend to
vigorously defend the suit. In 2000 and 2002, the same plantiffs
in this action brought suits against us in federal court with
similar allegations concerning drinking water supply
contamination. All federal claims were dismissed with prejudice
however, the Federal Court refused to hear the state claims. Our
insurance carrier is paying for legal defense costs, and we
believe that our insurance policy will cover al costs related to
this matter.
Item 4.
Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of California Water Service
Group was held on April 23, 2003 at the Company's executive office
in San Jose, California. As proposed in the 2003 Proxy, the
election of directors and confirmation of KPMG LLP to serve as
independent auditors for 2003 were approved by stockholders at the
meeting.
(b) At the annual stockholders meeting, a Board of Directors to serve
for the ensuing year was elected. The following directors were
elected as nominated:
Douglas M. Brown Robert W. Foy
Edward D. Harris, Jr. M.D. Richard P. Magnuson
Linda R. Meier Peter C. Nelson
Langdon W. Owen George A. Vera
Bonnie G. Hill David N. Kennedy
(c) Two proposals were voted on at the meeting: (1) election of
directors for the ensuing year, and (2) ratification of the
selection of KPMG LLP as independent auditors for 2003.
22
(1) Tabulation of the votes for the election of directors was:
For Against
---------- -------
Douglas M. Brown 14,986,800 311,796
Robert W. Foy 14,975,989 322,607
Edward D. Harris, Jr. M.D. 14,990,811 307,784
Richard P. Magnuson 14.981.878 316.718
Linda R. Meier 14,941,675 356,921
Peter C. Nelson 14,984,302 314,293
Langdon W. Owen 14,974,481 324,114
George A. Vera 14,979,998 318,598
Bonnie G. Hill 14,926,417 372,179
David N. Kennedy 14,944,345 354,251
(2) The stockholders ratified the Directors' selection of KPMG LLP to
serve as independent auditors for 2003. There were 15,060,731
votes in favor, 99,039 against and 138,826 abstentions.
Item 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K.
The exhibit list required by this Item is incorporated by
reference to the Exhibit Index attached to this report.
(b) Reports on Form 8-K
On April 25, 2003, we filed a current report on Form 8-K pursuant
to Item 12, "Disclosure of Results of Operations and Financial
Condition," attaching our press release dated April 23, 2003
announcing earnings results for the first quarter of 2003.
23
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.
CALIFORNIA WATER SERVICE GROUP
------------------------------
Registrant
May 13, 2003
By: /s/ Richard D. Nye
Richard D. Nye
Vice President, Chief Financial Officer
and Treasurer
24
CERTIFICATIONS
I, Peter Nelson, President and Chief Executive Officer of California Water
Service Group, certify that:
1. I have reviewed this quarterly report on Form 10-Q of California Water
Service Group;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003 By: /s/ Peter C. Nelson
PETER C. NELSON
President and Chief Executive Officer
California Water Service Group
25
CERTIFICATIONS
I, Richard D. Nye, Chief Financial Officer of California Water Service Group,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of California Water
Service Group;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003
By: /s/ Richard D. Nye
RICHARD D. NYE
Chief Financial Officer
California Water Service Group
26
Exhibit Index
Exhibit Description
4.22 Seventh Supplement to Note Agreement dated as of 28
May 1, 2003 pertaining to the issuance of $10,000,000,
5.54% Series I Senior Notes due May 1, 2023.
4.23 Eight Supplement to Note Agreement dated as of 54
May 1, 2003 pertaining to the issuance of $10,000,000,
5.44% Series J Senior Notes due May 1, 2018.
99.1 Chief Executive Officer and Chief Financial Officer 84
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.
27