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, 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 August 5, 1999 - 12,619,140.
This Form 10-Q contains a total of 14 pages.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CALIFORNIA WATER SERVICE GROUP
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999 DEC 31, 1998
(In thousands)
ASSETS
Utility plant $697,186 $680,690
Less depreciation and amortization 210,175 202,385
Net utility plant 487,011 478,305
Current assets:
Cash and cash equivalents 2,372 591
Receivables 16,078 13,510
Unbilled revenue 8,047 5,896
Materials and supplies 2,073 2,107
Taxes and other prepaid expenses 3,428 4,491
Total current assets 31,998 26,595
Regulatory assets 40,033 39,538
Other deferred assets 4,089 4,061
$563,131 $548,499
CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholders' equity:
Common stock $44,941 $44,941
Retained earnings 125,033 123,863
Total common shareholders' equity 169,974 168,804
Preferred stock 3,475 3,475
Long-term debt, excluding current portion
of $2,240 156,345 136,345
Total capitalization 329,794 308,624
Current liabilities:
Short-term borrowings 8,000 22,500
Accounts payable 22,074 15,881
Accrued expenses and other liabilities 16,686 17,147
Total current liabilities 46,760 55,528
Unamortized investment tax credits 2,924 2,924
Deferred income taxes 28,407 27,925
Advances for construction 96,814 95,701
Contributions in aid of construction 45,540 45,100
Regulatory liabilities 12,892 12,697
$563,131 $548,499
See accompanying notes on page 5 2
CALIFORNIA WATER SERVICE GROUP
CONSOLIDATED STATEMENT OF INCOME
In thousands, except per share data
FOR THE THREE MONTHS ENDED: June 30
1999 1998
Operating revenue $51,235 $44,455
Operating expenses:
Operation 32,058 28,063
Maintenance 2,148 2,282
Depreciation and amortization 3,834 3,641
Income taxes 3,337 2,072
Property and other taxes 1,880 1,823
Total operating expenses 43,257 37,881
Net operating income 7,978 6,574
Other income and expenses, net 897 166
8,875 6,740
Interest and amortization on long term debt 3,166 2,836
Other interest 149 343
3,315 3,179
Net income 5,560 3,561
Preferred dividends 38 38
Net income available for common stock $5,522 $3,523
Weighted average common shares outstanding 12,619 12,619
Basic earnings per share of common stock $0.44 $0.28
Dividends per share of common stock $0.2713 $0.2675
FOR THE SIX MONTHS ENDED:
Operating revenue $90,360 $79,680
Operating expenses:
Operation 56,816 50,354
Maintenance 4,349 4,403
Depreciation and amortization 7,838 7,281
Income taxes 4,714 2,786
Property and other taxes 3,869 3,796
Total operating expenses 77,586 68,620
Net operating income 12,774 11,060
Other income and expenses, net 1,891 354
14,665 11,414
Interest and amortization on long term debt 6,019 5,672
Other interest 554 591
6,573 6,263
Net income 8,092 5,151
Preferred dividends 76 76
Net income available for common stock $8,016 $5,075
Weighted average common shares outstanding 12,619 12,619
Basic earnings per share of common stock $0.64 $0.40
Dividends per share of common stock $0.5425 $0.5350
See accompanying notes on page 5 3
CALIFORNIA WATER SERVICE GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
In Thousands
1999 1998
Operating activities:
Net Income $8,092 $5,151
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,838 7,281
Regulatory assets and liabilities, net (300) (269)
Deferred income taxes and investment tax
credits, net 482 384
Change in operating assets and liabilities:
Receivables (2,568) (58)
Unbilled revenue (2,151) (1,553)
Materials and supplies 34 (28)
Taxes and other prepaid expenses 1,063 1,165
Accounts payable 6,193 3,014
Accrued expenses and other liabilities (461) 349
Other changes, net (87) 386
Net adjustments 10,043 10,671
Net cash provided by operating activities 18,135 15,822
Investing activities:
Utility plant expenditures (17,381) (16,251)
Financing activities:
Net short-term borrowings (14,500) 5,000
Proceeds from issuance of senior notes 20,000 0
Advances for construction 3,163 2,371
Contributions in aid of construction 1,122 510
Refunds of advances for construction (1,836) (1,839)
Dividends paid (6,922) (6,828)
Net cash (used) and provided by financing
activities 1,027 (786)
Change in cash and cash equivalents 1,781 (1,215)
Cash and cash equivalents at beginning of
period 591 1,742
Cash and cash equivalents at end of period $2,372 $527
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.
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. The forward looking
statements are intended to qualify for the "safe harbor" established
by the Private Securities Litigation Reform Act of 1995. Forward
looking statements generally contain words or phrases such as
anticipates, assumes, believes, expects estimates, projects and based on
management's judgement. Statements that describe goals, objectives,
plans or expectations are also forward looking. Actual results may
vary materially from what is contained in a forward looking statement.
Factors which may cause a different than expected or anticipated result
include regulatory commission decisions, new legislation, litigation
settlements, increases in supplier prices, the adequacy of water
supplies, changes in environmental compliance requirements,
acquisitions, changes in customer water use patterns and the impact of
weather on operating results.
RESULTS OF SECOND QUARTER OPERATIONS
Second quarter net income was $5,560,000, equivalent to $0.44 per
common share. This represents a $0.16 or 57% increase from the $0.28
earned in last year's second quarter. Operating revenue increased
$6,780,000 to $51,235,000. Relatively normal weather during this year's
second quarter resulted in an increase in customer water usage
throughout the service territories. By comparison, weather during the
second quarter last year was unfavorable and depressed sales and
earnings. Average revenue per customer increased $16.56 or 14%. 3,500
new customers were added in the last twelve months. A breakdown of the
increase in operating revenue is presented in the following table:
General rate increases $86,000
Offset rate increases 70,000
Step rate increases 461,000
Total rate increases 617,000
Increased consumption 5,729,000
Usage by new customers 434,000
Net revenue increase $6,780,000
Total operating expenses were $43,257,000 in 1999 versus
$37,881,000 in 1998, a 14% increase.
Water production costs, which are the largest components of total
operating expenses, include purchased water, purchased power and pump
taxes. They accounted for 44% of total operating expenses and increased
18% compared to last year. Well production provided 55% of the supply
with 44% 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
table below:
Second Quarter
1999 Cost Change
Purchased water $14,444,000 $2,025,000
Purchased power 3,183,000 542,000
Pump taxes 1,323,000 296,000
Total $18,950,000 $2,863,000
The purchased water increase was primarily attributable to the
increase in water production to supply customer usage and wholesale
water suppliers' rates increases. The three San Francisco Peninsula
districts which obtain most of their supply from the San Francisco Water
Department experienced a 37% rate increase effective for water used in
June 1999. Six other districts were impacted by wholesaler water rate
increases ranging from 2% to 4% since last year's second quarter. The
Company expects to pass the purchased water increases on to retail
customers. Purchased power and pump taxes increased in response to
additional pumping to meet customers' water demand and due to a shift in
sources of supply to more well water. The cost of well water is
generally less expensive than purchased water as a source of supply.
Other operations expense categories increased $1,132,000. 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 was the biggest factor in the increase.
Depreciation and amortization expense increased $193,000 mainly
due to increased depreciation expense authorized by the California
Public Utilities 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 $1,265,000
because of greater taxable income.
Other income and expenses on a pretax basis was $897,000. Other
income included $600,000 in gains from the sale of two real estate
parcels as part of the ongoing real estate program. These are expected
to be the last real estate transactions completed this year. Netted
against other income was $77,000 of other expenses, which included the
costs of maintaining nonregulated properties.
RESULTS FOR THE SIX MONTHS
Net income for the six months ending June 30, 1999 was $8,092,000,
equivalent to $0.64 per common share. This represents a $0.24 or 60%
increase from the $0.40 earned for the same period last year.
Operating revenue increased $10,680,000 to $90,360,000. The
higher revenue was primarily due to favorable weather during the first
half of 1999 compared to 1998. As a result of this year's more normal
weather, customer water usage increased. Last year's damp, cool weather
negatively impacted revenue and constrained earnings. Since January 1,
1999, 1,583 new customers have been added. Average consumption per
metered customer increased 16% from last year and average revenue per
customer increased $22.39 or 11%, both indications of this year's better
weather. A breakdown of the increase in operating revenue is accounted
for in the following table:
General rate increases $87,000
Step rate increases 806,000
Offset rate increases 125,000
Total rate increases 1,018,000
Increased consumption 8,896,000
Usage by new customers 766,000
Net revenue increase $10,680,000
Total operating expenses increased 13%.
Water production was 18% more than last year. Well production
provided 52% of the supply with 47% purchased from wholesale suppliers
and 1% produced through a local watershed. Because of the increase in
production, water production costs which include purchased water,
purchased power and pump taxes were up $4,777,000. The components of
water production expense and the changes from last year are shown in the
table below:
Year to Date
1999 Cost Change
Purchased water $24,485,000 $3,245,000
Purchased power 4,932,000 967,000
Pump taxes 1,937,000 565,000
Total $31,354,000 $4,777,000
In addition to water production costs, other operation expense
categories increased $1,685,000. The impact of the 3.0% general wage
increase, which was effective at the start of the year, additional hours
worked and increases in related employee benefits increased operating
expenses. Legal fees increased due to expenses incurred for the
Dominguez merger and reincorporation in Delaware. The CPUC
reimbursement fee increased because of higher customer billings.
Maintenance expense was slightly lower this year due to fewer main
repairs.
Depreciation and amortization expense increased $557,000 due to
increased depreciation expense authorized by the 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 due to higher taxable
income.
Other income and expense, reported on a pretax basis, included
approximately $1,200,000 of gains from the sale of real estate. Other
income also included $751,000 from nonregulated operations. Netted
against other income was $174,000 of other expenses, which included
contributions and costs of operating and maintaining nonregulated
properties.
REGULATORY MATTERS
1998 rate case applications were filed with the California Public
Utilities 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. A stipulated agreement
was reached with the Commission staff. The full Commission approved the
settlement which became effective in mid-June. The decision is expected
to generate $4,095,000 in total additional revenue during the first
twelve months following its effective date. The decision authorizes a
9.55% return on equity providing $1,916,000 in additional revenue. In
addition, the decision provides another $2,179,000 in revenue for
environmental compliance, specific capital budget expenditures and
recovery of General Office expenses. This additional revenue is not
reflected in the 9.55% return on equity calculation.
An application to increase rates in the Hawthorne district which
the Company has operated under a long-term lease since 1996 is on file
with the City of Hawthorne city council. The Company is requesting a
rate increase totaling between $700,000 to $750,000. A decision by the
council is expected in the third quarter of 1999.
The Company's regulatory staff has completed a review of the 14
districts for which general rate applications could be filed this year.
Based on current earnings levels, projected expense increases and
expected capital expenditures, it was determined that no general rate
increase applications will be filed this year.
LIQUIDITY
Interest expense on long-term debt increased by $329,000. The
increase resulted from the March issuance of series B 6.77% $20 million
unsecured senior notes due in 2028. The new note issue increased long-
term interest costs.
Short-term interest expense decreased $195,000 due to repayment of
a portion of the outstanding bank borrowings with the senior note
proceeds. At June 30, 1999, $8 million was borrowed under the credit
line at an effective interest rate of 6.4%. At June 30, 1998, $19.5
million was outstanding under the credit line. The bank credit line
which expired on April 30, 1999 was renewed for an additional two year
period.
The second quarter common dividend was paid on April 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 June 30, 1999, the dividend payout ratio
is 65%. At their July 21, 1999 meeting, Directors declared the third
quarter dividend payable August 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 (401(k)). Purchases are made on a biweekly basis.
Preferred dividends were paid in the second quarter on May 15,
1999. The third quarter dividend was declared by the Board, payable
August 15, 1999.
Book value per common share was $13.47 at June 30, 1999 compared
to $12.87 a year earlier.
During the quarter, utility plant expenditures totaled $9,453,000
for additions to and replacements of utility plant. Of that amount,
$7,711,000 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, roughly half of the water source is purchased from
wholesale suppliers with the other half pumped from wells. A small
portion is developed through local runoff on the San Francisco
Peninsula.
Storage in state reservoirs was 122% of historic average as of May
18, 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 UPDATE
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. The consultant's
recommendations have been addressed by the preparedness team.
Computer operations are centralized at a single location.
Computer applications are currently processed on a mainframe based
system and a local area network (LAN) computer system.
Most billing applications are processed on the mainframe computer.
As scheduled, the information technology (IT) group has inventoried the
various mainframe software programs and identified modifications
required to make the programs Year 2000 ready. The necessary
modifications have made and tested. The modified programs are currently
used in daily production work.
A new Year 2000 compatible accounting, purchasing and human
resources software program package is being installed on the LAN system.
Certain accounting applications including general ledger, accounts
payable and payroll have already been migrated to the LAN system and
others are in the process of being converted. Progress has made on
installing the new accounting, purchasing and human resources computer
software.
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 of 1999 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.
Group operates 21 separate water systems. Each system is unique
as to its operating requirements. Each operating district has prepared
a Year 2000 readiness and response plan. The plans continue to be
reviewed and updated as additional testing is completed and new
information received that might affect the Year 2000 transition.
Costs: The estimated remediation cost for Year 2000 preparedness
is about $300,000 of which $200,000 has been spent to date. Included in
the estimate is the cost of the outside consultants 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: Group's water systems use some chip based equipment in
their operations. However, Group believes that in the case of a
technology failure in computer based operating equipment, the water
systems can be operated on a manual basis.
In a worst case scenario, Group may be unable to deliver water to
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.
Group has evaluated its insurance coverage and believes that its
policies do 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 separate Year 2000 service interruption
preparedness and response 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 a 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.
Each department and operating district completed another detailed
review of its plan to address Y2K issues. The plans continue to be
discussed and reviewed through the remainder of this year. 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 and preparing for manual
water system operations if necessary
- - Identifying plans to provide water service to critical vendors, such
as hospitals
- - Assuring that measures are in place to maintain water quality and
testing alternatives are available
- - Arranging for equipment needs and supplies should Y2K problems
develop
- - Scheduling employees to be on duty or available for duty
DOMINGUEZ MERGER
Dominguez Services Corporation shareholders voted on May 12, 1999
to approve the merger of Dominguez with Group. The merger remains
subject to regulatory approval. Approval from the California Public
Utilities Commission is expected late in the fourth quarter this year or
in the first quarter of 2000.
The merger agreement was signed on November 13, 1998 and amended
March 22, 1999. At the time of merger, each Dominguez share will be
exchanged for between 1.25 and 1.49 shares of Group common stock. The
precise conversion ratio will depend upon the average price of Group
common stock for a twenty-day period preceding the transaction's closing
date. The conversion ratio is designed to yield Dominguez shareholders
a $33.75 value for each Dominguez share.
REINCORPORATION IN DELAWARE
Group expects to complete the reincorporation of California Water
Service Group as a Delaware corporation in the third quarter of this
year. The reincorporation was approved by shareholders at their annual
meeting in April 1999. The reincorporated company will be named
California Water Service Group, Inc.
ACCOUNTING PRONOUNCEMENTS
No accounting pronouncements were issued or effective 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 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 on to consumers. Group manages
other commodity price exposure through the duration and terms of its
vendor contracts.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to the shareholders which have not been
previously reported. Results of shareholder voting at the April 15,
1999 annual meeting were reported in the first quarter 10Q.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits required to be filed by Item 601 of Regulation S-K.
None
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the authorized undersigned.
CALIFORNIA WATER SERVICE GROUP
Registrant
August 2, 1999
/s/ Gerald F. Feeney
Gerald F. Feeney
Vice President, Chief Financial Officer and Treasurer
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