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, 1999
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)
California 77-0448994
(State or other jurisdiction (I.R.S. Employer identification No.)
of incorporation or organization)
1720 North First Street, San Jose, CA. 95112
(Address of principal executive offices) (Zip Code)
1-408-367-8200
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
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, 1999 - 12,619,140.
This Form 10-Q contains a total of 15 pages.
PART I - FINANCIAL INFORMATION
CALIFORNIA WATER SERVICE GROUP
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
MAR 31, 1999 DEC 31, 1998
In Thousands
ASSETS
Utility plant $688,251 $680,690
Less depreciation and amortization 206,536 202,385
Net utility plant 481,715 478,305
Current assets:
Cash and cash equivalents 1,213 591
Receivables 12,064 13,510
Unbilled revenue 5,448 5,896
Materials and supplies 2,059 2,107
Taxes and other prepaid expenses 4,404 4,491
Total current assets 25,188 26,595
Regulatory assets 39,899 39,538
Other deferred assets 4,003 4,061
$550,805 $548,499
CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholders' equity:
Common stock $44,941 $44,941
Retained earnings 122,934 123,863
Total common shareholders' equity 167,875 168,804
Preferred stock 3,475 3,475
Long term debt 156,345 136,345
Total capitalization 327,695 308,624
Current liabilities:
Short-term borrowings 2,000 22,500
Accounts payable 16,313 15,881
Accrued expenses and other liabilities 19,957 17,147
Total current liabilities 38,270 55,528
Unamortized investment tax credits 2,924 2,924
Deferred income taxes 27,606 27,925
Advances for construction 96,322 95,701
Contributions in aid of construction 45,096 45,100
Regulatory liabilities 12,892 12,697
$550,805 $548,499
See accompanying notes on page 5 2
CALIFORNIA WATER SERVICE GROUP
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED: March 31
1999 1998
In Thousands
Operating revenue $39,125 $35,225
Operating expenses:
Operations 24,758 22,291
Maintenance 2,201 2,121
Depreciation and amortization 4,004 3,640
Income Taxes 1,377 714
Property and other taxes 1,989 1,973
Total operating expenses 34,329 30,739
Net operating income 4,796 4,486
Other income and expenses, net 994 187
5,790 4,673
Interest and amortization on long term debt 2,889 2,872
Other interest 369 211
3,258 3,083
Net income 2,532 1,590
Preferred dividends 38 38
Net income available for common stock $2,494 $1,552
Weighted average Common shares outstanding 12,619 12,619
Basic Earnings per share of common stock $0.20 $0.12
Dividends per share of common stock $0.2713 $0.2675
3
CALIFORNIA WATER SERVICE GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED
In Thousands
MARCH 31
1999 1998
Operating activities:
Net Income $2,532 $1,590
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,004 3,626
Regulatory assets and liabilities, net (166) (135)
Deferred income taxes and investment tax
credits, net 560 153
Change in operating assets and liabilities:
Receivables 1,445 2,975
Unbilled revenue 448 644
Materials and supplies 48 39
Taxes and other prepaid expenses 87 580
Accounts payable 433 (454)
Accrued expenses and other liabilities 1,930 1,057
Other changes, net 221 147
Net adjustments 9,010 8,632
Net cash provided by operating activities 11,542 10,222
Investing activities:
Utility plant expenditures (7,928) (6,248)
Financing activities:
Net short-term borrowings (20,500) (2,000)
Proceeds from issuance of Senior Notes 20,000 0
Advances for construction 934 1,319
Contributions in aid of construction 334 167
Refunds of advances for construction (299) (861)
Dividends paid (3,461) (3,439)
Net cash used in financing activities (2,992) (4,814)
Change in cash and cash equivalents 622 (840)
Cash and cash equivalents at beginning
of period 591 1,742
Cash and cash equivalents at end of period $1,213 $902
See accompanying notes on page 5 4
Notes:
1. 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.
2. The interim financial information is unaudited. In the opinion of
management, the accompanying financial statements reflect all adjustments
which are necessary to provide a fair statement of the results for the
periods covered. The adjustments consist only of normal recurring
adjustments.
3. Basic earnings per share are calculated on the weighted average number of
common shares outstanding during the period and net income available for
common stock as shown on the Consolidated Statement of Income. The Group
has no dilutive securities, accordingly, dilutive earnings per share is
not shown.
4. Refer to 1998 Annual Report on Form 10-K for a summary of significant
accounting policies and detailed information regarding the financial
statements.
5. Group operates primarily in one business segment providing water utility
services.
6. Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" were adopted during
the first quarter. Neither pronouncement had a material impact on Group's
financial position or operating results.
5
PART I FINANCIAL INFORMATION
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-Q filing of California Water Service Group ("Group") contains
forward looking statements. Readers are directed to review the comments
regarding forward looking statements contained in the Management's Discussion
and Analysis of Financial Condition and Results of Operations section of the
1998 Annual Report to shareholders. The 1998 Annual Report to shareholders
was incorporated by reference in Group's 1998 Form 10-K filing.
RESULTS OF FIRST QUARTER OPERATIONS
First quarter net income was $2,532,000, equivalent to $0.20 per common share.
This represents an $0.08 or 67% increase from the $0.12 earned in last year's
first quarter.
Operating revenue increased $3,900,000 to $39,125,000. A return to relatively
normal weather during this year's first quarter resulted in an increase in
customer water usage throughout the service territories. By comparison,
weather during the first quarter last year was unfavorable and depressed sales
and earnings. In addition, 3,800 new customers were added in the last twelve
months. Average revenue per customer increased $9.33 or 10%. A breakdown of
the increase in operating revenue is accounted for in the following
table:
General rate increases $56,000
Step rate increases 344,000
Total rate increases 400,000
Increased consumption 3,169,000
Usage by new customers 331,000
Net revenue increase $3,900,000
Total operating expenses were $34,329,000 in 1999 versus $30,739,000 in 1998, a
12% increase.
Water production costs which include purchased water, purchased power and
pump taxes and accounted for 36% of total operating expenses, increased 18%.
Well production provided 46% of the supply with 53% purchased from wholesale
suppliers and the remaining 1% obtained from the San Francisco Peninsula
watershed. The components of water production costs and the changes from
last year are shown in the following table:
First Quarter
1999 Cost Change
Purchased water $10,041,000 $1,220,000
Purchased power 1,749,000 427,000
Pump taxes 614,000 269,000
Total $12,404,000 $1,916,000
The purchased water increase was primarily attributable to the increase in
water production and water credits recorded in 1998, but not available this
year. Increases in wholesale water rates affecting the Southern California
districts were offset by a wholesale rate decrease for the San Francisco
Peninsula districts. San Francisco Water Department has notified its
wholesale customers that a 37% rate increase will be effective for invoices
rendered after July 1, 1999. The Company expects to pass the purchased water
increase onto retail customers. Purchased power and pump taxes increased in
response to additional pumping to meet customers' demand and due to a shift
in sources of supply.
Other operations expense categories increased $550,000. The impact of a general
wage increase, which was effective at the start of the year, additional hours
worked and increases in related employee benefits increased expenses. Cost
associated with the Dominguez merger also increased this category.
Depreciation and amortization expense increased $364,000 mainly due to
increased depreciation expense authorized by the California Public Utilities
Commission ("Commission") in rate case decisions and a greater depreciable
plant investment. The additional expense is reflected in customer rates.
Federal and state income taxes increased $663,000 because of greater taxable
income.
Other income and expenses was $994,000. Other income included $600,000 in
gains from the sale of real estate parcels as part of the ongoing real estate
program. Netted against other income was $97,000 of other expenses, which
included contributions and costs of maintaining nonregulated properties.
REGULATORY MATTERS
1998 rate case applications were filed with the Commission on July 31, 1998 for
rate increases in four districts (Bear Gulch, East Los Angeles, Hermosa Redondo
and Visalia) representing 25% of total regulated customers. The applications
requested additional annual revenue of about $7,000,000 with a return on
equity of 11.85%. A stipulated agreement was reached with the Commission staff
and approval of the agreement by the Commission is expected in mid-May. The
proposed decision authorizes a 9.55% return on equity providing $1,916,000 in
additional revenue during the first twelve months following its effective date.
In addition, the decision is expected to provide another $2,179,000 in revenue
during its first twelve months for environmental compliance, specific capital
budget expenditures and recovery of General Office expenses.
As proposed, the decision would generate total new revenue of $4,095,000 in the
first twelve months.
On January 1, 1999, step rate increases became effective that are estimated to
provide revenue of $1,815,000 .
An application to increase rates in the Hawthorne district which the Company
has operated under a long-term lease since 1996 is also being processed. In
accordance with the lease agreement, this application will be processed by the
Hawthorne city council. A decision is expected in the third quarter of 1999.
LIQUIDITY
Interest expense on long-term debt increased by $17,000. In March, Series B
6.77% $20 million unsecured senior notes due in 2028 were issued, increasing
interest costs. The note proceeds were used to repay short-term bank
borrowings. Short-term interest expense increased $158,000 due to additional
borrowings under the bank line of credit. At March 31, 1999, $2 million was
borrowed under the credit line at an effective interest rate of 6.33%. At
March 31, 1998, $12.5 million was outstanding under the credit line. The bank
credit line which expires on April 30, 1999, is in the process of being
renewed.
The first quarter common dividend was paid on January 15, 1999 at $0.27125 per
share. The $0.27125 represents a $0.00375 or 1.4% increase in the quarterly
dividend rate from last year as approved by the Board of Directors at their
January meeting.
Annualized, the 1999 dividend rate is $1.085 per common share compared to $1.07
in 1998. Based on the 12-month earnings per share at March 31, 1999, the
dividend payout ratio is 71%. At their April 21, 1999 meeting, Directors
declared the second quarter dividend payable May 15, 1999.
About 11% of the outstanding shares participate in the reinvestment program
under Group's Dividend Reinvestment and Stock Purchase Plan ("Plan"). No new
common shares were issued under the Plan during the quarter. Shares required
for the dividend reinvestment and stock purchase options were purchased on
the open market and distributed to Plan participants. Shares are also
purchased on the open market to fulfill the requirements of the Company
sponsored Employee Savings Plan (401K). Purchases are made on a biweekly
basis.
Book value per common share was $13.30 at March 31, 1999, compared to
$12.86 a year earlier.
During the quarter, utility plant expenditures totaled $7,928,000 for additions
to and replacements of utility plant. Of that amount, $6,485,000 was funded
through Group's construction budget with the remainder funded by developers'
contributions in aid of construction and refundable advances for construction.
The 1999 Group construction budget is $30,700,000.
WATER SUPPLY
Group believes that its various sources of water supply are sufficient to meet
customer demand for the remainder of the year. Historically, about half of the
water source is purchased from wholesale suppliers with the other half pumped
from wells.
Storage in state reservoirs was 125% of historic average as of February 28,
1999, and groundwater levels remain adequate. An abundant mountain snowpack
provides runoff to streams and reservoirs as it melts during the summer months.
YEAR 2000
Readiness: Group's Year 2000 preparedness team has developed and is
implementing a Year 2000 readiness plan. The Group retained an outside
independent consultant who reviewed and evaluated the Year 2000 readiness
plan. The consultant's report was positive, but identified certain areas
that require additional attention that is being given to
implement the consultant's recommendations.
Generally, computer operations are centralized at a single location. The
information technology (IT) group has inventoried its various software
programs and identified modifications required to make the programs Year
2000 ready. Most computer applications are currently processed on a
mainframe based system, however, as part of a technology upgrade, a local
area network (LAN) computer system that includes Year
2000 ready servers and personal computers, was installed during 1998. A new
Year 2000 compatible accounting, purchasing and human resources software
program package is being installed on the LAN system. Certain accounting
applications have already been migrated to the LAN system and others are in
the process of being converted. During the first quarter, good progress was
made on installing the new accounting, purchasing and human resources computer
software. As scheduled, customer billing applications are predominately Y2K
compatible and the remaining work for full readiness is scheduled for
completion by mid-year.
Group has also identified non-computer equipment and operating systems that
potentially contain embedded date sensitive chips. Steps have been taken to
make the equipment and systems Year 2000 ready.
Suppliers and vendors with whom the Group has a material business
relationship were contacted during 1998 to assess their Year 2000 preparedness.
The vendors and suppliers were contacted again during the first quarter to
determine that they will not encounter Year 2000 problems that might disrupt
the
Group's business processes. Those contacted include water wholesalers, power
supply companies, chemical vendors, fuel suppliers, banks and stock registrar.
This process is being repeated in 1999 as operating units continue to work with
suppliers and vendors to assure availability of necessary products and supplies.
A survey of each of Group's district water operations has also been completed
to assess specific needs within each district.
Costs: The estimated remediation cost for Year 2000 preparedness is about
$300,000. Included in the estimate is the cost of the outside consultant and
computer programming time. The costs of the new LAN system and software
package were not included in the estimate since their implementation and
installation date were not Year 2000 driven. No IT projects have been
deferred as a result of the Year 2000 efforts.
Risks: In a worst case scenario, Group may be unable to deliver water to its
some or all of its customers because wholesale suppliers cannot provide water
to the Group or power supplies are not available to operate pumping equipment.
Additionally, it may be impossible to produce customer bills or maintain
accounting functions if power sources are not available or computer billing
programs due not function due to Year 2000 failures.
Group is not able to estimate the potential financial impact of these
scenarios. Because there is an increased threat of litigation due to
potential Year 2000 problems, Group is evaluating its insurance policies to
determine if they provide coverage of Year 2000 issues.
Contingency Plans: Each district maintains an emergency response plan that is
reviewed and updated on a regular basis. These plans are designed to provide
for alternative operating plans and procedures in the event normal procedures
are interrupted.
The emergency plans are the basis for developing Year 2000 service interruption
plans.
Fixed site and portable auxiliary power generators are located throughout the
service territories. These generators are designed to produce electric power
for wells and pumps to supply water to customers in the event power suppliers
experience an outages.
If a power supplier is unable to deliver electricity, the auxiliary generators
would be used as a substitute source.
Emergency water connections are maintained between Group's water systems and
those of adjacent purveyors. In the event of loss of a wholesale water supply
or a power outage, the emergency connections could be operated to provide a
water supply.
Each district has identified high profile water users, such as hospitals, and
developed contingency plans for continued service in the event of a Year 2000
disruption.
During the first quarter, each department and operating district completed
another detailed review of its plan to address Y2K issues. The plans include:
- - Establishing a timeline to ascertain vendors' ability to provide crucial
products and services, informing employees of Y2K efforts and responsibilities,
scheduling maintenance so that water delivery facilities are on line at
year-end, arranging for alternate water and power supplies
- - Conducting "what if" exercises to develop responses to loss of water or power
outages from normal sources
- - Identifying plans to provide water service to critical vendors, such as
hospitals
- - Assuring that measures are in place to maintain water quality and testing
- - Arranging for equipment needs and supplies should Y2K problems develop
- - Scheduling employees to be on duty or available for duty
DOMINGUEZ MERGER
On March 22, 1999, Group and Dominguez Services Corporation agreed to an
amendment of the November 13, 1998 merger agreement between the two companies.
The amendment was in response to an unsolicited, competing proposal from
American States Water Company. The Dominguez board determined that American
States' proposal provided more favorable terms to its shareholders than the
original agreement with Group. Subsequent to the announcement of the March
22 amendment, American States issued a press release stating that it would
not submit any further proposals to acquire Dominguez.
The amendment changed the terms of the conversion ratio so that each share of
Dominguez common stock will be converted into the right to receive between 1.25
and 1.49 shares of Cal Water common stock. The precise conversion ratio will
depend upon the average price of Cal Water stock for a twenty-day period
preceding the transaction's closing date. The conversion ratio is designed
to give Dominguez shareholders the equivalent of $33.75 for each Dominguez
share. Dominguez shareholders are scheduled to vote on the merger on
May 12, 1999. The merger remains subject to various
regulatory approvals and is anticipated to close in the fourth quarter of 1999,
however, the Commission has given indications that their process will not be
complete until the first quarter of 2000.
REINCORPORATION IN DELAWARE
As noted in Part II of this report, common and preferred shareholders approved
the proxy proposal to reincorporate California Water Service Group as a
Delaware corporation. Group will now proceed with its plans for
reincorporation. California Water Service Company and CWS Utility Services
will remain California corporations.
ACCOUNTING PRONOUNCEMENTS
There were no accounting pronouncements issued during the period that would
have a significant impact on Group.
MARKET RISK
Group does not hold, trade in or issue derivative financial instruments and
therefore is not exposed to the risks these instruments present.
Group's market risk to interest rate exposure is limited because the cost of
long-term financing, including interest costs, are covered in consumer water
rates as approved by the Commission. Group does not have foreign operations,
therefore, it does not have a foreign currency exchange risk.
Group's sensitivity to commodity prices is most affected by changes in
purchased water and purchased power costs. Through the Commission's
balancing account procedures, increases in purchased water and purchased
power costs can be passed onto consumers. Group manages other commodity
price exposure primarily through the duration and terms of its vendor
contracts.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareholders of California Water Service Group was
held April 21, 1999 at Group's executive office in San Jose, California.
The election of directors and ratification of KPMG LLP to serve as
independent auditors for 1999 were approved at the meeting. To allow the
receipt of additional common shareholder votes, the meeting was adjourned to
April 27, 1999 relative to the proposal to reincorporate Group as a Delaware
corporation. At the April 27th meeting, the proposal was approved.
(b)At the annual shareholders' meeting, a Board of Directors was elected for
the ensuing year. The following directors were elected as nominated:
Robert W. Foy Edward D. Harris, Jr., M.D.
Robert K. Jaedicke Richard P. Magnuson
Linda R. Meier Peter C. Nelson
C. H. Stump George A. Vera
J. W. Weinhardt
(c) Three proposals were voted on at the meeting: (1) election of directors for
the ensuing year, (2) reincorporation of Group in Delaware and (3) ratification
of the Board's selection of KPMG LLP to serve as independent auditors for 1999.
(1) Tabulation of votes for the election of directors was:
For Against
Robert W. Foy 13,183,583 82,645
Edward D. Harris, Jr.,M.D. 13,190,009 76,218
Robert K. Jaedicke 13,169,881 96,347
Richard P. Magnuson 13,195,728 70,500
Linda R. Meier 13,188,224 78,003
Peter C. Nelson 13,185,894 80,333
C. H. Stump 13,180,777 85,450
George A. Vera 13,189,972 76,256
J. W. Weinhardt 13,140,704 125,525
(2) Shareholders cast 8,034,062 votes in favor of reincorporating Group as a
Delaware corporation and 1,226,907 votes against the proposal. There were
380,965 abstentions and 3,624,293 non votes. As required, a majority of
both common and
preferred shareholders voted in favor of the Delaware incorporation proposal.
(3)The Directors' selection of KPMG LLP to serve as independent auditors for
1999 was ratified by the shareholders. There were 13,062,929 votes in favor,
71,350 against, 128,748 abstentions and 3,200 non votes on this matter.
PART II OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8-K
(a)Exhibits required to be filed by Item 601 of Regulation S-K.
10.26 Agreement and Plan of Reorganization dated November 13, 1998
and amended on March 22, 1999 among California Water Service
Group, California Water Service Company and Dominguez Services
Corporation (filed on Form S-4, registration number 333-71367,
effective April 5, 1999)
(b)The following Form 8-K was filed during the quarter ended March 31, 1999:
March 29, 1999 to report an amendment to the November 13, 1998 merger agreement
between California Water Service Group and Dominguez Services Corporation. The
amendment incorporated a share exchange collar whereby Dominguez shareholders
would receive between 1.25 and 1.49 shares of Group common stock for each share
of Dominguez common stock. The exchange ratio is dependent upon an average
market price of Group common stock at closing.
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
authorized undersigned.
CALIFORNIA WATER SERVICE GROUP
Registrant
April 28, 1999
/s/ Gerald F. Feeney
Gerald F. Feeney
Vice President, Chief Financial Officer
and Treasurer
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