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 September 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 1-13883
--------------------------------------------------
CALIFORNIA WATER SERVICE GROUP
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0448994
--------------------------------------------------------------------------------
(Sate or other jurisdiction (I.R.S. Employer identification No.)
of incorporation or organization)
1720 North First Street, San Jose, CA. 95112
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
1-408-367-8200
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
APPLICABLE ONLY TO ISSURERS 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
October 31, 2000 - 15,145,866. This form 10-Q contains a total of 15 pages.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements presented in this 10Q filing have been
prepared by management and have not been audited.
<PAGE>
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
Sept. 30, Dec. 31,
2000 1999
--------- ---------
ASSETS
Utility plant:
Utility plant $ 839,966 $ 812,686
Less depreciation and amortization 264,757 248,296
--------- ---------
Net utility plant 575,209 564,390
--------- ---------
Current assets:
Cash and cash equivalents 1,144 2,379
Receivables 21,895 19,110
Unbilled revenue 10,976 8,199
Materials and supplies at average cost 2,390 2,247
Taxes and other prepaid expenses 5,910 6,416
--------- ---------
Total current assets 42,315 38,351
--------- ---------
Other assets:
Regulatory assets 38,057 37,441
Deferred assets 5,333 5,325
--------- ---------
Total other assets 43,390 42,766
--------- ---------
$ 660,914 $ 645,507
========= =========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $.01 par value $ 151 $ 151
Additional paid-in capital 49,984 49,340
Retained earnings 149,915 145,610
Accumulated other comprehensive loss (517) (517)
--------- ---------
Total common stockholders' equity 199,533 194,584
Preferred stock 3,475 3,475
Long-term debt, less current maturities 169,470 168,866
--------- ---------
Total capitalization 372,478 366,925
--------- ---------
Current liabilities:
Current maturities of long-term debt 2,651 2,747
Short-term borrowings 14,399 13,999
Accounts payable 29,938 26,748
Accrued expenses and other liabilities 28,628 19,217
--------- ---------
Total current liabilities 75,616 62,711
Unamortized investment tax credits 3,087 3,096
Deferred income taxes 25,279 25,796
Regulatory and other liabilities 20,430 22,544
Advances for construction 104,996 105,556
Contributions in aid of construction 59,028 58,879
--------- ---------
$ 660,914 $ 645,507
========= =========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
For the three months ended: Sept. 30, Sept. 30,
2000 1999
------- -------
Operating revenue $76,580 $72,280
------- -------
Operating expenses:
Operations 48,197 45,813
Maintenance 2,863 2,486
Depreciation and amortization 4,567 4,267
Income taxes 5,861 5,426
Property and other taxes 2,310 2,366
------- -------
Total operating expenses 63,798 60,358
------- -------
Net operating income 12,782 11,922
Other income and expenses, net 358 319
------- -------
Income before interest expense 13,140 12,241
------- -------
Interest expense:
Long-term debt interest 3,276 3,338
Other interest 659 197
------- -------
Total interest expense 3,935 3,535
------- -------
Net income $ 9,205 $ 8,706
======= =======
Basic and diluted earnings per share
of common stock $ 0.60 $ 0.57
======= =======
Average number of common shares
outstanding - basic 15,146 15,090
======= =======
- diluted 15,199 15,092
======= =======
Dividends per share of common stock $0.2750 $0.2713
======= =======
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
For the nine months ended: Sept. 30, Sept. 30,
2000 1999
-------- --------
Operating revenue $189,239 $177,140
-------- --------
Operating expenses:
Operations 123,122 113,596
Maintenance 8,463 7,655
Depreciation and amortization 13,781 12,993
Income taxes 10,199 10,619
Property and other taxes 7,014 6,714
-------- --------
Total operating expenses 162,579 151,577
-------- --------
Net operating income 26,660 25,563
Other income and expenses, net 1,310 2,818
-------- --------
Income before interest expense 27,970 28,381
-------- --------
Interest expense:
Long-term debt interest 9,772 9,708
Other interest 1,707 1,011
-------- --------
Total interest expense 11,479 10,719
-------- --------
Net income $ 16,491 $ 17,662
======== ========
Basic and diluted earnings per share
of common stock $ 1.08 $ 1.16
======== ========
Average number of common shares
outstanding - basic 15,119 15,089
======== ========
- diluted 15,166 15,094
======== ========
Dividends per share of common stock $ 0.8250 $ 0.8138
======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
CALIFORNIA WATER SERVICE GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended
<CAPTION>
(In thousands)
Sept. 30, Sept. 30,
2000 1999
-------- --------
<S> <C> <C>
Operating activities
Net income $ 16,491 $ 17,662
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,781 12,993
Deferred income taxes, investment tax credits
regulatory assets and liabilities, net (3,256) (984)
Changes in operating assets and liabilities:
Receivables (2,785) (5,883)
Unbilled revenue (2,777) (2,189)
Accounts payable 3,190 9,009
Other current liabilities 9,411 11,266
Other changes, net 1,299 704
-------- --------
Net adjustments 18,863 24,916
-------- --------
Net cash provided by operating activities 35,354 42,578
-------- --------
Investing activities:
Utility plant expenditures (27,329) (29,983)
-------- --------
Financing activities:
Net short-term borrowings 400 (22,908)
Net long-term debt 508 19,953
Issuance of common stock 644 --
Advances for construction 3,144 5,896
Refunds of advances for construction (2,886) (3,151)
Contributions in aid of construction 1,116 2,230
Dividends paid (12,186) (11,507)
-------- --------
Net cash used in financing activities (9,260) (9,487)
-------- --------
Change in cash and cash equivalents (1,235) 3,108
Cash and cash equivalents at beginning of period 2,379 1,760
-------- --------
Cash and cash equivalents at end of period $ 1,144 $ 4,868
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Notes to Condensed Consolidated Financial Statements
1. The Merger between California Water Service Group (Company) and
Dominguez Services Corporation (Dominguez) was completed on May 25,
2000. Dominguez' primary operations are as a regulated water utility.
The merger was accounted for as a pooling of interests. Accordingly,
the Company's previously issued interim financial statements and
footnotes presented in this report have been restated to include the
accounts and results of Dominguez as if the merger had been completed
as of the beginning of the earliest period presented. Certain
reclassifications were made to the historic financial statements of the
companies to conform presentation.
2. To complete the Merger with Dominguez, the Company issued 2,210,254
shares of its common stock to Dominguez shareholders. There were no
intercompany transactions as a result of the Merger. For the periods
indicated below, the Company and Dominguez reported the following
items:
Unaudited - In Thousands
-----------------------------------------------------
3 months 3 months 9 months 9 months
Ended Ended Ended Ended
9-30-00 9-30-99 9-30-00 9-30-99
-------- -------- -------- --------
Revenue:
Company $ 76,580 $ 64,021 $175,007 $155,986
Dominguez -- 8,259 14,232 21,154
-------- -------- -------- --------
$ 76,580 $ 72,280 $189,239 $177,140
Net income:
Company $ 9,205 $ 8,020 $ 15,344 $ 16,290
Dominguez -- 686 1,147 1,372
-------- -------- -------- --------
$ 9,205 $ 8,706 $ 16,491 $ 17,662
The results for the three months ended September 30, 2000 are
reported by the Company on a consolidated basis including Dominguez
results from operations.
Dominguez previously reported merger transaction expenses related
to the merger as net of tax extraordinary items in its income
statements. For reporting purposes, the Company reclassified the
expense portion of the extraordinary items into "Operating expenses"
under "Operations" and the income tax portion into "Income taxes" in
the financial statements filed as part of this 10Q. The reclassified
amounts as previously reported by Dominguez, net of tax, were for the:
three months ended September 30, 1999, $21,000; nine months ended
September 30, 2000, $167,000; nine months ended September 30, 1999,
$134,000.
No adjustments were made to the Dominguez net assets to adopt the
same accounting practices of the Company. Dominguez previously reported
$1,542,000 of common stock that was reclassified by the Company to
paid-in capital in accordance with the Company's financial statement
presentation. The Company and Dominguez each had December 31 year-ends,
therefore no adjustment was required to retained earnings due to a
change in fiscal year-ends.
3. 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.
4. The interim financial statements are 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.
5. Basic earnings per share is calculated by dividing income available to
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share
<PAGE>
is calculated by dividing income available to common stockholders by
the weighted average number of common shares outstanding and
potentially dilutive shares.
6. Refer to 1999 Annual Report on Form 10-K for a summary of significant
accounting policies and detailed information regarding the financial
statements.
7. The Company operates primarily in one business segment providing water
utility services.
<PAGE>
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 (Company)
contains forward looking statements as described in our Form 10-K filing. 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 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.
PRESENTATION
Prior period financial and operating amounts have been restated to give
retroactive effect to the Company's merger with Dominguez Services Corporation
(Dominguez) which was completed in the prior quarter and the merger with two
Washington state companies that were completed in the quarter ended December 31,
1999. Each of the mergers was completed under pooling-of-interest accounting
rules.
RESULTS OF THIRD QUARTER OPERATIONS
Third quarter net income was $9,205,000, equivalent to $0.60 per common
share. This represents a $0.03 increase from the $0.57 earned in last year's
third quarter.
Operating revenue increased $4,300,000 to $76,580,000. There was little
rainfall in either quarter, however, temperatures were slightly warmer this year
causing an increase in customer usage throughout the service territories.
Average revenue per customer increased $8.96 or 5%. 6,500 new customers were
added in the last twelve months. A breakdown of the increase in operating
revenue is presented in the following table:
Increased consumption $2,857,000
Rate increases 721,000
Usage by new customers 722,000
----------
Net revenue increase $4,300,000
==========
Total operating expenses were $63,798,000 in 2000 versus $60,358,000 in
1999, a 6% increase.
Water production costs, which are the largest components of total
operating expenses, include purchased water, purchased power and pump taxes.
They accounted for 50% of total operating expenses and increased 4% compared to
last year. Well production provided 53% of the supply with 46% purchased from
wholesale suppliers and the remaining 1% obtained from surface supplies. The
components of water production costs for the third quarter and the changes from
last year are shown in the table below:
2000 Costs Change
----------- -----------
Purchased water $23,877,000 $ 1,357,000
Purchased power 5,895,000 281,000
Pump taxes 1,955,000 (466,000)
----------- -----------
Total $31,727,000 $ 1,172,000
=========== ===========
The purchased water increase was primarily attributable to wholesale
water suppliers' rates increases and a 1% increase in water purchases. The three
San Francisco Peninsula districts which obtain most of their supply from the San
Francisco Water Department experienced a 5% wholesale rate increase
<PAGE>
in June. Five other districts were impacted by wholesaler water rate increases
ranging from 2% to 7% since last year's third quarter. Purchased water cost
increases are generally passed on to retail customers through the balancing
account procedures allowed by the California Public Utilities Commission
("CPUC"). Pump taxes decreased because of a source of supply shift from well
water to purchased water in certain districts that have pump taxes in effect.
Other operations expense categories increased $1,212,000. 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 expenses were
significant factors in the increase. During the quarter, $167,000 in Dominguez
merger expenses were paid compared to $25,000 last year. This year's expenses
were mainly for legal fees.
Depreciation and amortization expense increased $300,000 mainly due to
a greater depreciable plant investment and increased depreciation expense
authorized by the CPUC in rate case decisions. The additional expense is
reflected in customer rates. Federal and state income taxes increased $435,000
because of higher pretax income.
Other income and expenses was $358,000 compared to $319,000 last year.
No property sales were completed during the third quarter in either year,
however, work continues on completing sales of non-operating property. The next
property sales, as part of the Company's ongoing program, are expected to close
in the first half of 2001 and could generate pretax income of about $5,000,000.
RESULTS FOR THE NINE MONTHS
Net income for the nine months ending September 30, 2000 was
$16,491,000, equivalent to $1.08 per common share compared to the $1.16 earned
for the same period last year. As discussed below, the earnings comparison was
impacted by Dominguez merger costs and last year's gains from the real estate
program.
Operating revenue increased $12,099,000 to $189,239,000. The higher
revenue was primarily due to increased customer usage. Since January 1, 2000,
4,800 new customers have been added. Average consumption per metered customer
increased 5% from last year and average revenue per customer increased $24.61 or
6%. A breakdown of the increase in operating revenue is accounted for in the
following table:
Increased consumption $ 9,090,000
Rate increases 1,399,000
Usage by new customers 1,610,000
-----------
Net revenue increase $12,099,000
===========
Total operating expenses increased 7%.
Water production was 6% more than last year. Well production provided
51% of the supply with 48% purchased from wholesale suppliers and 1% produced
through a local watershed. Because of the increase in production, water
production costs that include purchased water, purchased power and pump taxes
were up $4,972,000. The components of water production expense and the changes
from last year are shown in the table below:
Year to Date
---------------------------------
2000 Costs Change
----------- -----------
Purchased water $56,891,000 $ 4,669,000
Purchased power 11,892,000 738,000
Pump taxes 5,123,000 (435,000)
----------- -----------
Total $73,907,000 $ 4,972,000
=========== ===========
In addition to water production costs, other operations expense
categories increased $4,554,000. The impact of the 3.0% general wage increase,
which was effective at the start of the year, additional hours
<PAGE>
worked and increases in related employee benefits increased operating expenses.
During 2000, $2,718,000 in expenses related to the Dominguez merger were
recorded compared to $254,000 in 1999. This year's expenses include success fees
paid to the investment bankers that represented the Company and Dominguez in the
transaction, severance payments to certain Dominguez employees who chose not to
continue employment with the Company, and legal and accounting fees. Last year,
the costs related to legal and accounting fees. Legal fees in 2000 also
increased due to expenses incurred for the Delaware reincorporation. The CPUC
reimbursement fee which is based on operating revenue increased because of
higher customer billings.
Maintenance expense was higher due to work at pump stations and more
main repairs this year.
Depreciation and amortization expense increased due to increased
depreciation expense authorized by the CPUC in rate case decisions and a greater
depreciable plant investment. The additional expense is reflected in customer
rates.
Federal and state income taxes were lower due to a decline in pretax
income.
Net other income was $1,310,000 compared to $2,818,000 last year. Other
income in 2000 included $1,576,000 from nonregulated operations. In 1999, other
income included approximately $1,300,000 in gains from the sales of
non-operating properties. There were no corresponding property sales completed
this year.
REGULATORY MATTERS
New water rates for the City of Hawthorne water system that the Company
operates under a long-term lease became effective in early August 2000. The
rates are expected to add $300,000 in annual revenue in their first full year.
Step rate increases of $185,000 each will be effective on July 1, 2001 and 2002.
Additionally, there will be a surcharge added to customer bills for a two-year
period starting in August 2001 designed to produce $448,000 in annual revenue.
Effective in August 2000, offset rate increases to recover increases in
water production expenses became effective in four California Water Service
Company ("Cal Water") districts. These rate increases will generate an estimated
$1,100,000 in additional 2000 revenue and $2,800,000 on an annualized basis.
Prior to its merger with the Company, Dominguez had filed a general
rate increase application with the CPUC. The application was unrelated to the
merger. A CPUC decision was issued in October 2000 authorizing an increase in
customer rates and granting a return on equity of 9.95%. For 2000, an estimated
$188,000 in new revenue is expected. For 2001, $1,694,000 in new revenue is
expected to be generated from the rate increase.
The Company's regulatory staff reviewed 15 Cal Water districts that
were eligible for general rate filings this year. Based on current earnings
levels, projected expense increases and expected capital expenditures,
applications will be filed for three districts representing about 25% of total
Cal Water customers. The requested increase would provide $3,400,000 in new
revenue in 2001 and $7,200,000 in 2002. The applications, which request a return
on common equity of 10.75%, were filed in July and decisions are expected during
the second quarter 2001.
Washington Water Service Company will be filing general rate
applications requesting $400,000 in additional revenue before year-end.
LIQUIDITY
On October 24, 2000, the Company completed the issuance of $20 million
Series C Senior Notes at an interest rate of 8.15%. The notes were issued to
institutional investors. Proceeds from the notes were used to eliminate current
short-term bank borrowings and to fund a portion of the 2000 construction
program.
Interest expense on long-term debt decreased by $62,000 for the third
quarter as compared to 1999's quarter. The decrease resulted from a reduction in
outstanding first mortgage bonds due to sinking fund payments made in November
1999.
Short-term interest expense increased $462,000 because of increased
borrowings this year. In March 1999, the Series B senior notes were issued. The
proceeds were used to reduce short-term bank borrowings and as a result also
reduced short-term interest expense. At September 30, 2000, $14.4 million was
outstanding under short-term borrowing arrangements at an effective interest
rate of 8%. At September 30, 1999, there were no short-term borrowings.
<PAGE>
The third quarter common dividend was paid on August 15, 2000 at $0.275
per share. The $0.275 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 2000 dividend rate is $1.10 per common share
compared to $1.085 in 1999. Based on the 12-month earnings per share at
September 30, 2000, the dividend payout ratio is 80%. At their October 18, 2000
meeting, Directors declared the fourth quarter dividend payable November 15,
2000.
Preferred dividends were paid in the third quarter on August 15, 2000.
The regular third quarter dividend was declared by the Board, payable November
15, 2000.
Book value per common share was $13.17 at September 30, 2000 compared
to $12.90 a year earlier.
During the quarter, utility plant expenditures totaled $10,024,000 for
additions to and replacements of utility plant. The 2000 Company construction
budget is $38,000,000.
DOMINGUEZ INTEGRATION
For operating and reporting purposes, Dominguez became a district of
Cal Water when the merger was completed.
A team consisting of representatives from the two companies worked to
accomplish a smooth transition. To maximize operating efficiencies, the Company
is moving forward to consolidate the Dominguez, Hermosa-Redondo and Palos Verdes
district operations at a single location. The combined customer and operation
center is being constructed by a third party contractor. Arrangements have been
made to finance the new facility through a tax free property exchange with the
contractor. Under the tax free exchange arrangement, the Company will exchange
vacated properties in the three districts noted above with the contractor for
the new facility. Occupancy is expected before the end of 2001
WATER SUPPLY
The Company believes that its various sources of water supply are
sufficient to meet customer demand for the remainder of the year. Historically,
approximately half of the water source is purchased from wholesale suppliers
with the other half pumped from wells. A small portion is developed through
surface supplies on the San Francisco Peninsula and in the Bakersfield district.
Storage in California reservoirs exceeded historic average. Groundwater
levels in all districts remain adequate. An abundant mountain snowpack provides
runoff to streams and reservoirs as it melts during the summer months.
ACCOUNTING PRONOUNCEMENTS
No accounting pronouncements were issued or effective during the period
that would have a significant impact on the Company.
MARKET RISK
The Company does not hold, trade in or issue derivative financial
instruments and therefore is not exposed to risks these instruments present.
The Company's market risk to interest rate exposure is limited because
the cost of long-term financing, including interest costs, are covered in
consumer water rates as approved by the Commission. The Company does not have
foreign operations, therefore, it does not have a foreign currency exchange
risk.
The Company's sensitivity to commodity prices is most affected by
changes in purchased water and purchased power costs. Through the Commission's
balancing account procedures, increases in purchased water and purchased power
costs can be passed on to consumers. The Company manages other commodity price
exposure through the duration and terms of its vendor contracts.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
<PAGE>
No matters were submitted to the stockholders that have not been
previously reported.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K.
Exhibit 27, Financial Data Schedule for the quarter ended September 30,
2000
(b) As a result of the merger of the Company and Dominguez Services
Corporation effective on May 25, 2000, an 8K-A, Amendment #1, was filed
on August 4, 2000 to present the Company's audited supplemental
consolidated balance sheet as of December 31, 1999 and 1998, and
related supplemental consolidated statements of income, common
stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1999.
As a result of the merger of the Company and Dominguez effective on May
25, 2000, an 8K-A, Amendment #2, was filed on August 7, 2000 presenting
unaudited pro forma condensed combined financial information for the
years ended December 31, 1999, 1998 and 1997 and for the quarter ended
March 31, 2000.
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
November 2, 2000
/s/ Gerald F. Feeney
Gerald F. Feeney
Vice President, Chief Financial Officer
and Treasurer
