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, 2004
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
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(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
August 4, 2004 - 18,345,496.
TABLE OF CONTENTS
Page
PART I Financial Review - Management's Discussion and Analysis and
Condensed Consolidated Financial Statements.................... 3
Item 1 Condensed Consolidated Balance Sheets (unaudited)
June 30, 2004 and December 31, 2003............................ 4
Condensed Consolidated Statements of Income (unaudited)
For the Three and Six Months Ended June 30, 2004 and 2003...... 5
Condensed Consolidated Statements of Cash Flows (unaudited)
For the Six Months Ended June 30, 2004 and 2003................ 7
Notes to Condensed Consolidated Financial Statements............. 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 15
Item 3 Quantitative and Qualitative Disclosure about Market Risk........ 27
Item 4 Controls and Procedures.......................................... 28
PART II Other Information
Item 1 Legal Proceedings................................................ 28
Item 4 Submission of Matters to a Vote of Security Holders.............. 29
Item 6 Exhibits and Reports on Form 8-K................................. 29
Signatures....................................................... 30
Index to Exhibits................................................ 31
2
PART I FINANCIAL INFORMATION
Item 1.
Financial Statements
The condensed consolidated financial statements presented in this
filing on Form 10-Q have been prepared by management and are unaudited.
3
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands, except per share data) June 30, December 31,
2004 2003
----------- -----------
ASSETS
Utility plant:
Utility plant $ 1,106,534 $ 1,078,975
Less accumulated depreciation and amortization 331,150 319,477
----------- -----------
Net utility plant 775,384 759,498
----------- -----------
Current assets:
Cash and cash equivalents 24,109 2,856
Customer receivables 23,095 18,434
Other receivables 13,609 5,125
Unbilled revenue 13,107 8,522
Materials and supplies 3,225 2,957
Taxes and other prepaid expenses 6,934 5,609
----------- -----------
Total current assets 84,079 43,503
----------- -----------
Regulatory assets 54,747 53,326
Other assets 18,228 16,708
----------- -----------
$ 932,438 $ 873,035
=========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $.01 par value $ 183 $ 169
Additional paid-in capital 130,636 93,748
Retained earnings 152,764 150,908
Accumulated other comprehensive loss (301) (301)
----------- -----------
Total common stockholders' equity 283,282 244,524
Preferred stock 3,475 3,475
Long-term debt, less current maturities 271,968 272,226
----------- -----------
Total capitalization 558,725 520,225
----------- -----------
Current liabilities:
Current maturities of long-term debt 846 904
Short-term borrowings -- 6,454
Accounts payable 28,624 23,776
Accrued expenses and other liabilities 36,406 32,430
----------- -----------
Total current liabilities 65,876 63,564
Unamortized investment tax credits 2,925 2,925
Deferred income taxes 48,144 38,005
Regulatory and other liabilities 38,100 35,835
Advances for construction 126,642 121,952
Contributions in aid of construction 92,026 90,529
Commitments and contingencies -- --
----------- -----------
$ 932,438 $ 873,035
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements
4
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Unaudited
For the three months ended: June 30, June 30,
2004 2003
-------- --------
Operating revenue $88,845 $67,994
-------- --------
Operating expenses:
Operations 55,450 45,693
Maintenance 3,032 3,063
Depreciation and amortization 6,521 5,838
Income taxes 6,844 3,314
Property and other taxes 2,915 2,538
-------- --------
Total operating expenses 74,762 60,446
-------- --------
Net operating income 14,083 7,548
-------- --------
Other income and expenses:
Non-regulated income, net 573 559
Gain on sale of non-utility property -- 958
-------- --------
Total other income and expenses 573 1,517
Interest expense:
Interest expense 4,752 5,090
Less capitalized interest 150 610
-------- --------
Total interest expense 4,602 4,480
Net income $10,054 $ 4,585
======== ========
Earnings per share
Basic $ 0.59 $ 0.30
======== ========
Diluted $ 0.59 $ 0.30
======== ========
Weighted average shares outstanding
Basic 16,965 15,182
======== ========
Diluted 16,983 15,198
======== ========
Dividends per share of common stock $0.28250 $0.28125
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements
5
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Unaudited
For the six months ended: June 30, June 30,
2004 2003
-------- --------
Operating revenue $149,085 $119,305
-------- --------
Operating expenses:
Operations 96,948 83,453
Maintenance 6,213 6,316
Depreciation and amortization 13,039 11,598
Income taxes 7,802 2,761
Property and other taxes 5,609 5,003
-------- --------
Total operating expenses 129,611 109,131
-------- --------
Net operating income 19,474 10,174
-------- --------
Other income and expenses:
Non-regulated income, net 1,123 1,169
Gain on sale of non-utility property 1 1,511
-------- --------
Total other income and expenses 1,124 2,680
Interest expense:
Interest expense 9,398 9,947
Less capitalized interest 300 910
-------- --------
Total interest expense 9,098 9,037
Net income $ 11,500 $ 3,817
======== ========
Earnings per share
Basic $ 0.67 $ 0.25
======== ========
Diluted $ 0.67 $ 0.25
======== ========
Weighted average shares outstanding
Basic 16,949 15,182
======== ========
Diluted 16,967 15,191
======== ========
Dividends per share of common stock $0.56500 $0.56250
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
For the six months ended: June 30, June 30,
2004 2003
-------- --------
Operating activities
Net income $ 11,500 $ 3,817
-------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 13,039 11,598
Deferred income taxes, investment tax credits
regulatory assets and liabilities, net 10,925 (510)
Gain on sale of non-utility assets (1) (1,511)
Changes in operating assets and liabilities:
Receivables (13,103) (2,360)
Unbilled revenue (4,572) (2,070)
Taxes and other prepaid expenses (1,308) 1,670
Accounts payable 4,838 4,824
Other current assets (268) (40)
Other current liabilities 3,971 1,233
Other changes, net (915) (1,513)
-------- --------
Net adjustments 12,606 11,321
-------- --------
Net cash provided by operating activities 24,106 15,138
-------- --------
Investing activities:
Utility plant expenditures
Company funded (21,399) (32,191)
Developer funded (8,230) (10,092)
Acquisitions (900) (7,529)
Proceeds from sale of non-utility assets 6 1,609
-------- --------
Net cash used by investing activities (30,523) (48,203)
-------- --------
Financing activities:
Net changes in short-term borrowings (6,454) 13,679
Issuance (retirement) of long-term debt, net (316) 19,640
Advances for construction 7,096 6,580
Refunds of advances for construction (2,394) (2,371)
Contributions in aid of construction 2,479 4,082
Issuance of common stock 36,903 --
Dividends paid (9,644) (8,616)
-------- --------
Net cash provided by financing
activities 27,670 32,994
-------- --------
Change in cash and cash equivalents 21,253 (71)
Cash and cash equivalents at beginning of period 2,856 1,063
-------- --------
Cash and cash equivalents at end of period $ 24,109 $ 992
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements
7
CALIFORNIA WATER SERVICE GROUP
Notes to Condensed Consolidated Financial Statements
June 30, 2004
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, Inc. (Hawaii Water) provide
regulated utility services under the rules and regulations of their
respective state's regulatory commission. 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,
2003, included in its Form 10-K as filed with the Securities and Exchange
Commission on March 15, 2004.
Note 3. Stock-based Compensation
The Company has a stockholder-approved Long-Term Incentive Plan that allows
granting of non-qualified stock options. The Company has adopted the
disclosure requirements of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," as amended. As
permitted by SFAS No. 123, the Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," for its plan.
All outstanding options had an exercise price equal to the market price on
the date they were granted. No compensation expense was recorded for the
three- and six-month periods ended June 30, 2004 and 2003 related to stock
options. No options were granted during these periods.
8
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.
(In thousands, except per share data)
Three Months Ended
June 30
----------------------
2004 2003
---------- ---------
Net income, as reported $ 10,054 $ 4,585
Deduct: Total stock-based employee compensation
expense determined under fair value
method for all awards, net of related tax effects 16 21
---------- ---------
Pro forma net income $ 10,038 $ 4,564
========== =========
Earnings per share
Basic - as reported $ 0.59 $ 0.30
Basic - pro forma $ 0.59 $ 0.30
Diluted - as reported $ 0.59 $ 0.30
Diluted - pro forma $ 0.59 $ 0.30
(In thousands, except per share data)
Six Months Ended
June 30
----------------------
2004 2003
---------- ---------
Net income, as reported $ 11,500 $ 3,817
Deduct: Total stock-based employee compensation
expense determined under fair value
method for all awards, net of related tax effects 33 42
---------- ---------
Pro forma net income $ 11,467 $ 3,775
========== =========
Earnings per share
Basic - as reported $ 0.67 $ 0.25
Basic - pro forma $ 0.67 $ 0.25
Diluted - as reported $ 0.67 $ 0.25
Diluted - pro forma $ 0.67 $ 0.24
9
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 outstanding to purchase common shares were 145,500 and
149,250 at June 30, 2004 and June 30, 2003, respectively.
(In thousands, except per share data)
Three Months Ended
June 30
-------------------
2004 2003
------- -------
Net income $10,054 $ 4,585
Less preferred dividends 38 38
------- -------
Net income available to common stockholders $10,016 $ 4,547
======= =======
Weighted average common shares 16,965 15,182
Dilutive common stock options (treasury method) 18 16
------- -------
Shares used for dilutive computation 16,983 15,198
======= =======
Net income per share - basic $ 0.59 $ 0.30
------- -------
Net income per share - diluted $ 0.59 $ 0.30
------- -------
10
(In thousands, except per share data)
Six Months Ended
June 30
-------------------
2004 2003
------- -------
Net income $11,500 $ 3,817
Less preferred dividends 76 76
------- -------
Net income available to common stockholders $11,424 $ 3,741
======= =======
Weighted average common shares 16,949 15,182
Dilutive common stock options (treasury method) 18 9
------- -------
Shares used for dilutive computation 16,967 15,191
======= =======
Net income per share - basic $ 0.67 $ 0.25
------- -------
Net income per share - diluted $ 0.67 $ 0.25
------- -------
Note 6. Pension Plan and Other Postretirement Benefits
The Company provides a qualified defined benefit, non-contributory pension
plan for substantially all employees. The Company makes annual
contributions to fund the amounts accrued for the qualified pension plan.
The Company also maintains an unfunded, non-qualified, supplemental
executive retirement plan. The costs of the plans are charged to expense
and utility plant.
The Company offers medical, dental, vision and life insurance benefits for
retirees and their spouses and dependents. Participants are required to pay
a premium, which offsets a portion of the cost.
Payments by the Company related to pension plan and other postretirement
benefits were $1,649,000 for the three months ended June 30, 2004, and
$6,041,000 for the six months ended June 30, 2004. The Company is planning
to increase its funding for 2004 by $3,800,000 from $7,700,000 to
$11,500,000. The increase relates to payments previously scheduled for the
first quarter of 2005 and does not represent an increase in the total
estimated payments related to the 2004 plan year. Estimated payments will
be adjusted prior to December 2004 upon receipt of updated calculations
from the Company's actuary.
11
The following table lists components of the pension plans and other
postretirement benefits. The data listed under "pension plan" includes the
qualified pension plan and the non-qualified executive supplemental
retirement plan. The data listed under "other benefits" is for all other
postretirement benefits.
(In thousands)
Three Months Ended June 30
-------------------------------------------------------------
Pension Benefit Other Benefits
-------------------------- --------------------------
2004 2003 2004 2003
------- ------- ------- -------
Service cost $ 1,137 $ 970 $ 305 $ 258
Interest cost 1,364 1,344 342 306
Expected return on plan assets (1,219) (1,189) (86) (58)
Recognized net initial ABO -- -- N/A N/A
Recognized net initial APBO N/A N/A 69 69
Amortization of prior service cost 424 450 19 19
Recognized net actuarial (gain) loss 34 15 84 72
------- ------- ------- -------
Net periodic benefit cost $ 1,740 $ 1,590 $ 733 $ 666
======= ======= ======= =======
(In thousands)
Six Months Ended June 30
-------------------------------------------------------------
Pension Benefit Other Benefits
-------------------------- --------------------------
2004 2003 2004 2003
------- ------- ------- -------
Service cost $ 2,274 $ 1,947 $ 610 $ 479
Interest cost 2,728 2,697 684 568
Expected return on plan assets (2,438) (2,387) (172) (108)
Recognized net initial ABO -- -- N/A N/A
Recognized net initial APBO N/A N/A 138 128
Amortization of prior service cost 848 904 38 35
Recognized net actuarial (gain) loss 68 30 168 133
------- ------- ------- -------
Net periodic benefit cost $ 3,480 $ 3,191 $ 1,466 $ 1,235
======= ======= ======= =======
ABO - Accumulated benefit obligation
APBO - Accumulated postretirement benefit obligation
Postretirement benefit expense for "other benefits" recorded in the
three-month periods ended June 30, 2004 and 2003 was $385,000 and $352,000,
12
respectively. Postretirement benefit expense for "other benefits" recorded
in the six-month periods ended June 30, 2004 and 2003 was $771,000 and
705,000, respectively. As of June 30, 2004, the Company had a regulatory
asset of $7,536,000 related to postretirement benefits, which is expected
to be recovered through future customer rates.
Note 7. Financing
On June 24, 2004, the Company announced the sale of 1,250,000 shares of
common stock. A prospectus supplement and prospectus were filed with the
SEC under rule 424 (b) (2) on that date. The shares were sold at $27.25 per
share. The underwriters exercised part of their over allotment option,
after which the additional common shares issued totaled 1,409,700 shares.
The net proceeds are estimated at $36.8 million and the transaction was
closed on June 29, 2004. The funds were used to pay down short-term
borrowings and to invest in short-term money market instruments pending
their use for general corporate purposes. After issuance of these shares,
there remains $35,648,175 in securities under the shelf registration, which
are available for future issuance.
Note 8. New Accounting Standards
In December 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46R, "Consolidation of Variable Interest Entities,"
which amended Interpretation No. 46, "Consolidation of Variable Interest
Entities." The revision exempted certain entities and modified the
effective dates of Interpretation No. 46. The original guidance issued
under Interpretation No. 46 in January 2003 is still applicable.
Interpretation No. 46 and Interpretation No. 46R provide 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. 46R was effective
March 31, 2004. The adoption of Interpretation No. 46R did not impact the
Company's financial position, results of operations or cash flows.
In December 2003, the FASB issued Statements of Financial Accounting
Standards (SFAS) No. 132 (revised), "Employers' Disclosures about Pensions
and Other Postretirement Benefits - An Amendment of FASB Statements No. 87,
88, and 106," which changed certain disclosures. SFAS No. 132 (revised) was
effective for fiscal years ending after December 15, 2003, and is effective
for interim-period disclosures beginning after December 15, 2003. As the
revision relates to disclosure requirements, the adoption of SFAS No. 132
(revised) did not impact the Company's financial position, results of
operations or cash flows.
In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003." FSP No.
106-2 is effective for the first quarter after June 15, 2004 and replaces
FSP No. 106-1. FSP 106-1 was effective for the three-month and six-month
periods ended June 30, 2004, as the Company chose not to adopt FSP 106-2
early. Also, FSP 106-1 was effective for the Company's consolidated
financial statements for the year ended December 31, 2003. FSP 106-1
permits a sponsor of a postretirement health care plan that provides a
prescription drug benefit to make a one-time election to defer accounting
13
for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Medicare Act). In accordance with FSP No.
106-1, the Company made a one-time election to defer the recognition of the
impact of FSP No. 106-1 accounting through June 30, 2004. Any measures of
the accumulated postretirement benefit obligation and net periodic
postretirement benefit cost in the consolidated financial statements and
footnotes for the three- and six-month periods ended June 30, 2004, did not
reflect the effects of the Medicare Act. FSP 106-1 addressed elections to
defer or not defer the accounting implications of the Medicare Act and
provided disclosure guidance, but did not provide specific authoritative
accounting guidance. FSP 106-2 provides specific authoritative accounting
guidance and addresses methods of transition. At this time, the Company has
not determined if its plan is actuarially equivalent and, as a result, it
can not estimate the impact FSP 106-2 will have on future reporting
periods.
Note 9. Subsequent Event
CPUC Decision Related to Failure to Report Acquisitions
-------------------------------------------------------
On July 8, 2004, the California Public Utilities Commission (CPUC) issued a
final decision regarding the Company's failure to report three small
acquisitions. The Company was assessed a fine of $75,000 and a reduction of
50 basis points (0.5%) in the allowed return on equity for its Salinas
district, the district that includes two of the three acquisitions. The
time frame for the return on equity reduction is expected to be one year.
The Office of Ratepayer Advocates had recommended a fine of $9.6 million
and refund of $0.5 million, which the CPUC rejected. Prior to this
decision, the Company had filed for a general rate increase in its Salinas
district, which the CPUC was holding pending the resolution of this matter.
With the final decision on this matter, a rate increase for the Salinas
district was approved that will increase annual revenues by an estimated
$1.1 million, after adjustment for the reduction in allowed rate of return.
The $75,000 fine was recorded as an expense in the second quarter. The
increase in revenue will be recorded when billed to customers, consistent
with the Company's revenue recognition practices.
14
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,
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,
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; the ability to satisfy requirements related to the Sarbanes
Oxley Act section 404 and other regulations on internal controls; electric
power interruptions; increases in suppliers' prices and the availability of
supplies including water and power; fluctuations in interest rates; changes
in environmental compliance and water quality requirements; acquisitions
and the ability to successfully integrate acquired companies; the ability
to successfully implement business plans; 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 current or future debt that could increase financing costs or
affect the ability to borrow, make payments on debt or pay dividends; and,
other risks and unforeseen events. When considering forward-looking
statements, the reader should keep in mind the cautionary statements
included in this paragraph. 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 is 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
15
circumstances. Management believes that the following accounting policies
are critical because they involve a higher degree of complexity and
judgment, and can have a material impact on the 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 June 30, 2004, the unbilled
revenue amount was $13,108,000 and at December 31, 2003, the amount was
$8,522,000. 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 $2,149,000
at June 30, 2004 and $2,127,000 at December 31, 2003. 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 (offsetable expenses)
represent recoverable costs incurred, but not billed to customers. The
amounts included in these accounts relate to rate increases charged by
suppliers of purchased water and purchased power, and increases in pump
taxes, and only apply for the Company's California regulated operations.
The Company does not record expense balancing or memorandum accounts in its
financial statements as revenue, nor as a receivable, until the CPUC has
authorized recovery of the higher costs and customers have been billed.
Therefore, a timing difference may occur between when costs are recognized
and the recognition of associated revenues. The balancing and memorandum
accounts are only used to track the higher costs outside of the financial
statements. The cost increases, which are beyond the Company's control, are
referred to as "offsetable expenses" because under certain circumstances
they are recoverable from customers in future offset rate increases. The
amounts requested may not be ultimately collected through rates, as amounts
may be disallowed during the review process or subject to an earnings test.
While the adjustments would not impact previously recorded amounts, the
adjustments may change future earnings and cash flows. See Regulatory
Matters for net balances of expense balancing and memorandum accounts.
16
Regulated Utility Accounting
- ----------------------------
Because the Company operates extensively in a regulated business, it is
subject to the provisions of 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, it 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 determine if it had
suffered an asset impairment that would require a write-down in the assets'
valuation. There have been no such asset impairments as of June 30, 2004.
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. Management 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, 2004.
Pension Benefits
- ----------------
The Company incurs costs associated with its 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. The Company uses an investment advisor
to provide advice in managing the plan's investments. Management
anticipates that any increase in funding for the pension and postretirement
health care benefits plans will be recovered in future customer rates.
17
RESULTS OF SECOND QUARTER 2004 OPERATIONS COMPARED TO
SECOND QUARTER 2003 OPERATIONS
Summary
- -------
Second quarter net income was $10,054,000, equivalent to $0.59 per common
share on a diluted basis, compared to net income of $4,585,000 or $0.30 per
share on a diluted basis in the second quarter of 2003. The primary drivers
were increases in rates and favorable weather conditions. Partially
offsetting revenue increases were cost increases for purchased water,
income taxes, depreciation and other expenses.
Operating Revenue
- -----------------
Operating revenue increased $20,851,000, or 31%, to $88,845,000. As
disclosed in the following table, the increase was due primarily to
increases in rates and increases in usage. Weather impact was favorable as
rainfall was much lower compared to the prior year. Temperatures were
slightly warmer, which also increased usage. Water usage increased 18%
above the prior year, with the largest increase in April, increasing 30%.
The factors that affected the operating revenue increase for the second
quarter of 2004 are presented in the following table:
Rate increases $ 9,713,000
Increase in usage by existing customers 9,460,000
Usage by new customers 1,678,000
---------------
Net operating revenue increase $ 20,851,000
===============
The components of the rate increases are listed in the following table:
2001 General Rate Case (GRC) $ 3,440,000
Purchased water offset 1,480,000
2001 GRC catch up 1,263,000
Step rates 1,192,000
Bakersfield Treatment Plant 1,158,000
2002 GRC 967,000
Hawthorne 174,000
Balancing accounts 39,000
---------------
Total increase in rates $ 9,713,000
===============
Usage by new customers includes $247,000 related to Hawaii Water, whose
operations were acquired in May 2003, and includes $458,000 for the City of
Commerce, for which the lease arrangement began in August 2003.
18
Total Operating Expenses
- ------------------------
Total operating expenses were $74,762,000 for the three months ended June
30, 2004, versus $60,446,000 for the same period in 2003, a 24% increase.
Water production expense consists of purchased water, purchased power and
pump taxes. It represents the largest component of total operating
expenses, accounting for approximately 45% of total operating expenses.
Water production expenses increased 28% compared to last year.
For California operations, sources of water production as a percent of
total water production are listed on the following table:
Three Months Ended June 30
--------------------------
2004 2003
------ -----
Well production 48% 51%
Purchased 48% 48%
Surface 4% 1%
----- ----
Total 100% 100%
===== =====
Washington Water, New Mexico Water and Hawaii Water obtain all of their
water supply from wells.
The components of water production costs are shown in the table below:
Three Months Ended June 30
--------------------------
2004 2003 Change
----------- ----------- -----------
Purchased water $25,380,000 $19,298,000 $ 6,082,000
Purchased power 5,957,000 5,360,000 597,000
Pump taxes 2,226,000 1,576,000 650,000
----------- ----------- -----------
Total $33,563,000 $26,234,000 $ 7,329,000
=========== =========== ===========
Purchased water cost increased due to higher wholesale water rates in
several districts and higher usage of purchased water. Included in
purchased water are credits received from certain wholesale suppliers. The
amounts of the credits were $1,004,000 and $1,434,000 for 2004 and 2003,
respectively. Purchased power increased due to higher usage. Pump taxes
increased primarily due to higher well production in the Los Altos
district, where pump tax rates are the highest of all of the Company's
districts.
Payroll charged to operations expense increased $612,000 or 8%. Wages for
union employees increased 1.5% effective January 1, 2004. Overall payroll
costs (expensed and capitalized) increased 5% due to increases in the
number of employees and higher wage rates. Employee and retiree medical
costs increased $350,000 or 19%. At June 30, 2004, there were 826 employees
and at June 30, 2003, there were 810 employees.
19
Other areas of major expense increases were: water treatment and water
quality expenses increased $259,000 or 32%; workers compensation expenses
increased $373,000, more than doubling; regulatory expense, which is
primarily CPUC fees, increased $283,000 or 30% due to the higher revenue.
Maintenance expense was essentially flat for the quarter ended June 30,
2004, decreasing $31,000, or 1%. Depreciation and amortization expense
increased $683,000 or 12% because of 2003 capital expenditures. A major
component of the depreciation expense increase relates to the Bakersfield
Treatment Plant, which began operations in the second quarter of 2003 and
added $438,000 to depreciation expense in the second quarter of 2004.
Federal and state income taxes increased $3,530,000 due to the change in
taxable income. The effective tax rate was 41% in the second quarter of
2004 and 42% for the prior year's quarter.
Other Income and Expense
- ------------------------
Other income was $573,000 for the quarter ended June 30, 2004, compared to
$1,517,000, a decrease of $944,000. There were no gains or losses from
property sales for the second quarter of 2004 compared to gains of $958,000
for the second quarter of 2003.
Interest Expense
- ----------------
Total interest expense increased $122,000 or 3%. This was due to a
reduction in capitalized interest, which is a credit to total interest
expense. Construction work-in-progress amounts were lower in the second
quarter of 2004 compared to 2003. Partially offsetting was lower interest
expense on long-term debt as a result of refinancing a portion of the
long-term debt in 2003 at lower rates and lower short-term borrowings.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 2004 COMPARED TO THE
SIX MONTHS ENDED JUNE 2003
Summary
- -------
Net income for the six-month period ended June 30, 2004, was $11,500,000,
equivalent to $0.67 per common share on a diluted basis, compared to net
income of $3,817,000 or $0.25 per share on a diluted basis, for the six
months ended June 30, 2003. The primary drivers were increases in rates and
favorable weather conditions. Partially offsetting the increase in revenues
were cost increases for purchased water, income taxes, depreciation and
other expenses.
Operating Revenue
- -----------------
Operating revenue increased $29,780,000 or 25% to $149,085,000. As
disclosed in the following table, the increase was due to increases in
rates and increases in usage. Weather impact was favorable as rainfall was
much lower compared to prior year. Temperatures were slightly warmer, which
increased water usage by 15% above the prior year, with the largest monthly
increase (30%) in April.
20
The factors that affected the operating revenue increase are presented in
the following table:
Rate increases $ 16,690,000
Increase in usage by existing customers 9,786,000
Usage by new customers 3,304,000
---------------
Net operating revenue increase $ 29,780,000
===============
The components of the rate increases are listed in the following table:
2001 GRC $ 5,863,000
Purchased water offset 2,434,000
Bakersfield Treatment Plant 2,316,000
2001 GRC catch up 2,152,000
Step rates 1,928,000
2002 GRC 1,131,000
Balancing accounts 569,000
Hawthorne 297,000
--------------
Total increase in rates $ 16,690,000
==============
Usage by new customers includes $949,000 related to Hawaii Water, whose
operations were acquired in May 2003, and includes $837,000 for the City of
Commerce, for which the lease arrangement began in July 2003.
Total Operating Expenses
- ------------------------
Total operating expenses were $129,611,000 for the six months ended June
30, 2004, versus $109,131,000 for the same period in 2003, a 19% increase.
Water production expense consists of purchased water, purchased power and
pump taxes. It represents the largest component of total operating
expenses, accounting for approximately 42% of total operating expenses.
Water production expenses increased 21% compared to last year.
For California operations, sources of water production as a percent of
total water production are listed on the following table:
Six Months Ended June 30
--------------------------
2004 2003
---- ----
Well production 46% 48%
Purchased 50% 51%
Surface 4% 1%
----- -----
Total 100% 100%
===== =====
21
Washington Water, New Mexico Water and Hawaii Water obtain all of their
water supply from wells.
The components of water production costs are shown in the table below:
Six Months Ended June 30
--------------------------
2004 2003 Change
----------- ----------- -----------
Purchased water $41,741,000 $33,700,000 $ 8,041,000
Purchased power 9,552,000 8,991,000 561,000
Pump taxes 3,431,000 2,504,000 927,000
----------- ----------- -----------
Total $54,724,000 $45,195,000 $ 9,529,000
=========== =========== ===========
Purchased water cost increased due to higher wholesale water rates in
several districts and higher usage of purchased water. Included in
purchased water was an additional expense of $840,000 to revise the
estimated settlement cost to $1,571,000 related to the previously reported
meter malfunction at the wholesale supplier in the Stockton district. The
estimate was revised after completion of a study by a third party
contracted by the Company. At this time, settlement negotiations have not
yet been completed with the wholesale supplier (Stockton East Water
District) and the other primary buyer (City of Stockton); therefore, final
resolution may be differ from estimates. For the six months ended June 30,
2003, expenses related to the meter malfunction were approximately
$244,000. Also included in purchased water are credits received from
certain wholesale suppliers. The amounts of the credits were $2,576,000 and
$1,978,000 for 2004 and 2003, respectively. Purchased power increased due
to higher usage. Pump taxes increased primarily due to higher well
production in the Los Altos district, where pump tax rates are the highest
of all of the Company's districts.
Payroll charged to operations expense increased $1,431,000 or 9%. Wages for
union employees increased 1.5% effective January 1, 2004. Overall payroll
costs (expensed and capitalized) increased 5% due to increases in the
number of employees and higher wage rates. Employee and retiree medical
costs increased $633,000 or 18%. At June 30, 2004, there were 826 employees
and at June 30, 2003, there were 810 employees.
Other areas of major expense increases were: water treatment and water
quality expenses increased $216,000 or 14%; insurance and workers
compensation expenses increased $614,000 or 38%; regulatory expense, which
is primarily CPUC fees, increased $419,000 or 26% due to the higher
revenue.
Maintenance expense was essentially flat for the six months, decreasing
$103,000, or 2%. Depreciation and amortization expense increased $1,441,000
or 12% because of 2003 capital expenditures. A major component of the
depreciation expense increase relates to the Bakersfield Treatment Plant,
which began operations in the second quarter of 2003 and added $876,000 to
depreciation expense in 2004.
22
Federal and state income taxes increased $5,041,000 due to the change in
taxable income. The effective tax rate was 40% in 2004 and 42% for 2003.
Other Income and Expense
- ------------------------
Other income was $1,124,000 for the six months ended June 30, 2004,
compared to $2,680,000 for the first six months of 2003, a decrease of
$1,556,000. Gains from property sales for 2004 were minimal compared to
gains of $1,511,000 in 2003.
Interest Expense
- ----------------
Total interest expense increased $61,000 or 1%. This was due to a reduction
in capitalized interest, which is a credit to total interest expense.
Construction work-in-progress amounts were lower in the first six months of
2004 compared to the first six months of 2003. Partially offsetting was
lower interest expense on long-term debt as a result of refinancing a
portion of the long-term debt in 2003 at lower rates and lower short-term
borrowings.
REGULATORY MATTERS
Rate Case Proceedings
- ---------------------
Filings that were approved in 2003 were disclosed in the Management's
Discussion and Analysis section of the Company's annual report on Form 10-K
for 2003. These approved filings impact 2004 revenues because revenue is
recorded based on billings to customers.
In 2004, Cal Water received approval from the CPUC for step rate increases
of $4,433,000 on an annual basis, of which $3,902,000 was effective in
January 2004 and $531,000 was effective in April 2004.
In February 2004, the CPUC authorized an advice letter for $718,000 for one
district related to increase purchased water rates. The rate change was
effective in February 2004 and will be collected over the next 12 months.
In April 2004, Cal Water received authorization from the CPUC on its 2002
General Rate Case (GRC). The GRC included four districts and increased
rates $3,573,000 on an annual basis, effective April 2004.
In July 2004, Cal Water received authorization from the CPUC on its Salinas
district filing. This will increase rates $1,121,000 on an annual basis,
effective July 2004.
In May 2003, after receiving approval from the CPUC, Cal Water began
recovering certain amounts that were tracked in balancing and memorandum
accounts. (See "Expense Balancing and Memorandum Accounts" section in
Critical Accounting Policies). The amounts remaining to be recovered from
these approved filings as of December 31, 2003 and June 30, 2004 were
$2,760,000 and $1,603,000, respectively.
Cal Water has the following pending filings: a 2003 GRC filing covering two
districts, an advice letter for increased purchased water rates for the Los
Altos district and a separate filing for recovery of balancing accounts.
23
The estimate of the net annual revenue from the 2003 GRC filing, when
approved, is approximately $300,000. The estimated annual revenue from the
Los Altos advice letter is $500,000. The estimated amount related to the
balancing account filing is approximately $7,900,000. Once approved, rate
changes for the 2003 GRC and the Los Altos advice letter will be ongoing.
The estimated recovery time frame for this balancing account filing is a
1-2 year period and is expected to vary by district. The Company estimates
it will receive regulatory approval for all of these filings in the 3rd
quarter of 2004, but timing and amounts could differ from estimates.
In July 2004, Cal Water submitted its preliminary 2004 GRC filings covering
8 districts and allocations of general office expenses. The Company is
unable to predict the timing and final amount of these filings at this
time.
New Mexico Water filed for rate increases for its waste water operations in
July 2004 and Hawaii Water submitted a rate filing for its water operations
the second quarter of 2004. The Company is unable to predict the timing and
final amount of these filings at this time. These operations represent a
small component of the overall business and therefore the impact of these
filings is expected to be immaterial. Washington Water is not planning to
submit a rate filing during 2004.
LIQUIDITY
Short-term and Long-term Debt
- -----------------------------
Short-term bank borrowings were $0 at June 30, 2004, and $6,454,000 at
December 31, 2003. California Water Service Group has a $10,000,000 credit
facility, which includes Washington Water, New Mexico Water, Hawaii Water
and CWS Utility Services and had no borrowings against the facility at June
30, 2004. Cal Water has a $45,000,000 credit facility and had no borrowings
against the facility at June 30, 2004. A $500,000 letter of credit is
outstanding under the Cal Water facility, which reduces amounts available
for borrowing. Both agreements have a requirement for balances to be below
certain thresholds for 30 consecutive days each calendar year (clean down
requirement) and both agreements require minimum ratings by defined credit
agencies on Cal Water's senior, long-term debt. The Company has met the
clean down requirements for 2004 for both agreements and has credit ratings
meeting the requirements. At June 30, 2004, the Company was in compliance
with the covenants of both facilities.
In May 2004, New Mexico Water entered into a credit agreement which allows
borrowings up to $3,400,000. The term is 16 months until approval has been
received from the New Mexico Public Regulation Commission, upon which the
term will be ten years. At June 30, 2004, no amounts were borrowed against
the agreement. The prior New Mexico Water credit agreement had borrowings
of approximately $2,500,000, which was paid and not renewed. Funds from
intercompany borrowings with California Water Service Group were used to
pay the debt.
24
There were no additions to long-term debt in the six-month period ended
June 30, 2004. Principal payments of $133,000 and $316,000 were made during
the three- and six-month periods ended June 30, 2004, respectively.
Debt Credit Ratings
- -------------------
Cal Water's debt is rated A2 by Moody's Investors Service (Moody's) and A+
by Standard & Poor's (S&P). The rating from Moody's was downgraded in
February 2004 from A1 to A2. There have not been further changes by Moody's
as of the filing date of this Form 10-Q. The rating from S&P was unchanged
during the quarter and the last rating change from S&P was in the fourth
quarter of 2002.
Common Stock Issuance and Treasury Stock
- ----------------------------------------
On June 24, 2004, the Company announced the sale of 1,250,000 shares of
common stock. A prospectus supplement and prospectus were filed with the
SEC under rule 424 (b) (2) on that date. The shares were sold at $27.25 per
share. The underwriters exercised part of their over allotment option,
after which the additional common shares issued totaled 1,409,700 shares.
The proceeds net of estimated expenses of the offering were $36.8 million
and the transaction was closed on June 29, 2004. Initially, the funds were
used to pay down short-term borrowings and to invest in short-term money
market instruments pending their use for general corporate purposes. After
issuance of these shares, there remains $35,648,175 in securities under the
shelf registration, which are available for future issuance.
Dividends, Book Value and Shareholders
- --------------------------------------
The second quarter common stock dividend was paid on May 21, 2004, at
$0.2825 per share, compared to a quarterly dividend in 2003 of $0.28125.
This was the Company's 238th consecutive quarterly dividend. Annualized,
the 2004 dividend rate is $1.13 per common share compared to $1.125 in
2003. Based on the 12-month earnings per share at June 30, 2004, the
dividend payout ratio is 70% of net income. For the full year 2003, the
payout ratio was 93% of net income. On a long-term basis, the goal is to
achieve a dividend payout ratio of 60% of net income accomplished through
future earnings growth.
At its July 28, 2004 meeting, the Board declared the third quarter dividend
of $0.2825 per share payable on August 20, 2004, to stockholders of record
on August 9, 2004. This will be the 239th consecutive quarterly dividend.
Dividend Reinvestment and Stock Purchase Plan
- ---------------------------------------------
The Company has a Dividend Reinvestment and Stock Purchase Plan (Plan).
Under the Plan, stockholders may reinvest dividends to purchase additional
Company common stock without commission fees. The Plan also allows existing
stockholders and other interested investors to purchase Company common
stock through the transfer agent up to certain limits. The transfer agent
operates the Plan and purchases shares on the open market to provide shares
for the Plan.
25
2004 Financing Plan
- -------------------
Proceeds from the issuance of additional common shares in June 2004 are
expected to provide adequate new capital for the balance of 2004 and may be
supplemented with short- term borrowings as needed. For 2005, the financing
plan includes raising $30,000,000 - $50,000,000 of new capital and is
expected to be accomplished through issuance of senior notes to
institutional investors. The timing of the debt issuance for 2005 has not
been established. Beyond 2005, the plan is to fund capital needs through a
relatively balanced approach between long-term debt and common stock
equity.
Book Value and Stockholders of Record
- -------------------------------------
Book value per common share was $16.63 at June 30, 2004, compared to $14.44
at December 31, 2003.
There are approximately 4,500 stockholders of record for the Company's
common stock.
Utility Plant Expenditures
- --------------------------
During the six months ended June 30, 2004, capital expenditures totaled
$29,629,000; $21,399,000 was from company-funded projects and $8,230,000
was from third party funded projects. The 2004 company-funded capital
expenditure budget is $65,800,000, but the actual amount may vary from the
budget number due to timing of actual payments related to current year
projects and prior year projects. The Company does not control third-party
funded capital expenditures, and therefore it is unable to estimate the
amount of such projects for 2004.
At June 30, 2004, construction work-in-progress was $27,236,000 compared to
$13,770,000 at December 31, 2003. Work-in-progress includes projects that
are under construction, but not yet complete and in service.
WATER SUPPLY
Based on information from water management agencies and internally
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 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 its water supply and facilities, the Company has heightened
security and has taken added safety precautions for its employees and the
water delivered to customers. While the Company does not make public
comments on its security programs, management has been in contact with
federal, state and local law enforcement agencies to coordinate and improve
water delivery systems security. Management assigned a high priority to
completing work necessary to comply with new Environmental Protection
Agency (EPA) requirements concerning security of water facilities. In 2002,
federal legislation was enacted that resulted in new regulations concerning
security of water facilities, including submitting vulnerability assessment
26
studies to the federal government. The Company has completed and submitted
all studies for all operations as required by this legislation.
ACQUISITIONS
On April 30, 2004, the Company acquired the stock of National Utility
Company (NUC) and land from owners of NUC for approximately $1,030,000 in
cash. The Company retired NUC's stock and merged it into New Mexico Water
Service Company. Revenue and net loss for NUC for 2003 were $541,000 and
($19,000), respectively. The purchase price is approximately equal to rate
base and $30,000 of goodwill was recorded in the transaction.
ACCOUNTING PRONOUNCEMENTS
See Note 8 of the Condensed Consolidated Financial Statements
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not hold, trade in or issue derivative financial
instruments and therefore are not exposed to risks these instruments
present. The 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. The Company does not have foreign operations; therefore, does
not have a foreign currency exchange risk. The business is sensitive to
commodity prices and is most affected by changes in purchased water and
purchased power costs.
Historically, the CPUC's balancing account or offsetable expense procedures
allowed for increases in purchased water and purchased power costs to be
passed on to consumers. Traditionally, a significant percentage of the
Company's net income and cash flows comes from California regulated
operations; therefore the CPUC's actions have a significant impact on the
business. See Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations--Expense Balancing and Memorandum
Accounts and Regulatory Matters.
27
Item 4.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision of and with
the participation of management, including the principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as of the end
of the period covered by this report, pursuant to Rule 13a-15(e) under the
Securities Exchange Act of 1934. Based on their review of the Company's
disclosure controls and procedures, the principal executive officer and
principal financial officer have concluded that the Company's disclosure
controls and procedures are functioning effectively to provide reasonable
assurance that the information required to be disclosed in periodic SEC
filings is reported within the time periods specified by the SEC rules and
regulations.
(b) Changes to Internal controls
There were no changes in the Company's internal control over financial
reporting that occurred during the last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, such controls.
PART II OTHER INFORMATION
Item 1.
Legal Proceedings
(a) From time to time, the Company has been involved in a variety of legal
proceedings. For a complete description, see the annual report on Form
10-K for the year ended December 31, 2003. During the six months ended
June 30, 2004, there were no material developments with respect to
previously disclosed existing proceedings and no new material
proceedings not previously disclosed except as discussed in Part I,
Item 1 "Financial Statements, Note 9 Subsequent Event" and as noted
below.
(b) In the Company's Selma district, the City Council has taken initial
steps to negotiate the purchase of that water operation under
condemnation procedures. The Company intends to vigorously use all
legal actions to stop this action. The Selma district comprised 1% of
total revenues and operating income for fiscal 2003.
28
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Disclosure of matters submitted to a vote of security holders was
provided in the Company's Form 10-Q for the first quarter of 2004. This
relates to matters voted on by security holders at the April 28, 2004
annual shareholders meeting.
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 29, 2004, the Company furnished a Current Report on Form 8-K
pursuant to Item 12, "Results of Operations and Financial Condition,"
attaching a press release dated April 28, 2004 announcing results for
the first quarter of 2004. On June 24, 2004, the Company filed a
Current Report on Form 8-K pursuant to Items 5 "Other Events" and 7,
"Financial Statements and Exhibits" announcing the terms of its common
stock issuance. On July 29, 2004, the Company furnished a Current
Report on Form 8-K pursuant to Item 12, "Results of Operations and
Financial Condition," attaching a press release dated July 28, 2004,
announcing results for the second quarter of 2004.
29
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
August 6, 2004
By: /s/ RICHARD D. NYE
---------------------------------------
Richard D. Nye
Vice President, Chief Financial Officer
and Treasurer
30
Exhibit Index
Exhibit Description
------- -----------
4 The registrant undertakes to furnish to the
Commission upon request a copy of any instrument
defining the rights of holders of long term debt that
does not exceed 10 percent of the registrant's total
consolidated equity and that is not otherwise on file
with the Commission.
31.1 Chief Executive Officer certification of financial
statements pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
31.2 Chief Financial Officer certification of financial
statements pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
32 Chief Executive Officer and Chief Financial Officer
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
31