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, 1997
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 0-464
CALIFORNIA WATER SERVICE COMPANY
(Exact name of registrant as specified in its charter)
California 94-0362795
(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 October 31, 1997 - 6,309,570. This Form 10-Q contains a total of 12 pages.
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CALIFORNIA WATER SERVICE COMPANY
BALANCE SHEET
Sept 30, 1997 Dec 31, 1996
(In Thousands)
ASSETS
Utility plant $638,238 $618,432
Less depreciation 185,001 174,844
Net utility plant 453,237 443,588
Current assets:
Cash and cash equivalents 934 1,368
Accounts receivable 16,436 12,965
Unbilled revenue 7,982 5,577
Materials and supplies 2,091 2,324
Taxes and other prepaid expenses 6,435 4,537
Total current assets 33,878 26,771
Regulatory assets 37,574 37,556
Other deferred assets 4,332 4,475
$529,021 $512,390
CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholders' equity:
Common stock 44,941 44,941
Retained earnings 118,845 109,285
Total common shareholders' equity 163,786 154,226
Preferred stock 3,475 3,475
Long term debt 142,153 142,153
Total capitalization 309,414 299,854
Current liabilities:
Short-term borrowings 2,000 7,500
Accounts payable 19,001 14,692
Accrued expenses and other liabilities 19,517 12,602
Total current liabilities 40,518 34,794
Unamortized investment tax credit 3,086 3,086
Deferred income taxes 24,444 23,736
Advances for construction 95,658 95,226
Contributions in aid of construction 43,409 43,067
Regulatory liabilities 12,492 12,627
$529,021 $512,390
See accompanying notes on page 5 2
CALIFORNIA WATER SERVICE COMPANY
STATEMENT OF INCOME
September 30
1997 1996
FOR THE THREE MONTHS ENDED: In Thousands
Operating revenue $59,551 $59,230
Operating expenses:
Operation 35,971 34,319
Maintenance 2,560 2,186
Depreciation 3,435 3,263
Federal income taxes 4,017 4,634
State income taxes 1,008 1,365
Property and other taxes 2,020 1,975
Total operating expenses 49,011 47,742
Net operating income 10,540 11,488
Other income and expenses:
Interest and amortization on long term debt 2,889 2,953
Other income and expenses, net (209) (138)
2,680 2,815
Net income 7,860 8,673
Preferred dividends 38 38
Net income available for common stock $7,822 $8,635
Weighted average shares outstanding 6,310 6,295
Earnings per share of common stock $1.24 $1.37
Dividends per share of common stock $0.5275 $0.52
FOR THE NINE MONTHS ENDED:
Operating revenue $152,192 $140,577
Operating expenses:
Operation 89,005 84,604
Maintenance 6,782 5,999
Depreciation 10,211 9,407
Federal income taxes 9,936 8,339
State income taxes 2,436 2,464
Property and other taxes 5,783 5,550
Total operating expenses 124,153 116,363
Net operating income 28,039 24,214
Other income and expenses:
Interest and amortization on long term debt 8,668 8,859
Other income and expenses, net (289) (331)
8,379 8,528
Net income 19,660 15,686
Preferred dividends 114 114
Net income available for common stock $19,546 $15,572
Weighted average shares outstanding 6,310 6,285
Earnings per share of common stock $3.10 $2.48
Dividends per share of common stock $1.5825 $1.56
See accompanying notes on page 5 3
CALIFORNIA WATER SERVICE COMPANY
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED
In Thousands
SEPTEMBER 30
1997 1996
Operating activities:
Net Income $19,660 $15,686
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 10,211 9,407
Regulatory assets and liabilities, net (153) (181)
Deferred income taxes and investment tax
credits, net 708 582
Change in assets and liabilities:
Accounts receivable (3,471) (3,037)
Unbilled revenue (2,405) (2,097)
Materials and supplies 233 165
Taxes and other prepaid expenses (1,898) (2,262)
Accounts payable 4,309 4,036
Accrued expenses and other liabilities 6,915 9,158
Other changes, net 714 644
Net adjustments 15,163 16,415
Net cash provided by operating activities 34,823 32,101
Investing activities:
Utility plant expenditures (21,795) (27,298)
Financing activities:
Net short-term borrowings (5,500) 0
Proceeds from issuance of common stock 0 1,076
Advances for construction 3,562 4,059
Contributions in aid of construction 1,343 2,440
Refunds of advances for construction (2,767) (2,724)
Dividends (10,100) (9,911)
Net cash used for financing activities (13,462) (5,060)
Change in cash and cash equivalents (434) (257)
Cash and cash equivalents at start of period 1,368 6,273
Cash and cash equivalents at end of period $934 $6,016
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. 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 Statement of Income.
4. Refer to 1996 Annual Report on Form 10-K for a summary of significant
accounting policies and detailed information regarding the financial
statements.
5
PART I FINANCIAL INFORMATION
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF THIRD QUARTER OPERATIONS
Third quarter net income was $7,860,000 equivalent to $1.24 per common
share, a 13 cents decrease from the $1.37 earned in 1996's third quarter.
Operating revenue increased $321,000 to $59,551,000. Rate increases and
billings to new customers added to revenue, however, those increases were
offset by a decline in usage by existing customers. Consumption levels, as
measured by average sales per metered customer, decreased by 1% during the
quarter primarily due to unseasonable summer rains. A breakdown of the
increase in operating revenue is accounted for in the following table:
General rate increases $566,000
Step rate increases 546,000
Total rate increases 1,112,000
Decreased consumption (1,237,000)
Usage by 3,310 new customers 446,000
Net revenue increase $321,000
Total operating expenses increased 3% this year.
Water production was 0.4% above 1996's level. Well production provided 56%
of the supply with 44% purchased from wholesale suppliers. Water production
costs, which includes purchased water, purchased power and pump taxes,
increased $940,000.
Wholesale water suppliers' rate increases ranging from 1% to 7% became
effective in five districts since last year. The components of water
production expense and the changes from last year are shown in the table
below:
6
Third Quarter Dollar
1997 Cost Change
Purchased water $17,191,000 $991,000
Purchased power 4,830,000 (39,000)
Pump taxes 1,719,000 (12,000)
Total $23,740,000 $940,000
Other operations expense increased $712,000, primarily due to the impact of
the 3.0% general wage increase which was effective at the start of the year
and increases in related employee benefits.
Maintenance expense increased $374,000 due to various main repairs and
scheduled tank maintenance and painting.
Depreciation and amortization expense increased $172,000 due to increased
depreciation expense authorized by the Commission in the rate case decision
received in April 1997 affecting the Livermore and Palos Verdes districts,
and due to greater utility plant investments in all districts. The additional
expense is being reflected in customer rates.
Federal and state income taxes decreased $974,000 because of lower taxable
income. The California tax rate decreased from last year's 9.3% to 8.84%
this year.
REGULATORY MATTERS
In July 1997, the Company filed its 1997 rate case applications with the
California Public Utilities Commission (Commission) for rate increases in four
districts representing 7.4% of total customers. The applications request
additional first year annual revenue of about $650,000 and step rate increases
of about $240,000 in each year 1999 through 2001. The Company's proposal also
includes the continuation of the current return on equity (ROE) rate at 10.35%.
For the Oroville and Selma districts, the application proposes that rate
increases for the succeeding five years be based on the increase in the
Consumer Price Index for water/sewerage. These proposed increases are
designed to cover increases in operating expenses and plant investments, and
allows for Commission action if the Rate of Return ("ROR") varies more than 250
7
basis points from the requested 9.32% ROR.
LIQUIDITY
Interest expense, including amortization of debt premium, on long-term debt
decreased by $64,000 as a result the reduction in outstanding debt by the
retirement of Series K first mortgage bonds and sinking fund payments made
in November 1996. Short-term interest expense increased $20,000 due to
additional borrowings under the Company's bank line of credit during the
current quarter. At September 30, 1997, $2 million was borrowed under the
Company's $50 million bank line of credit at an effective interest rate of
7.025%. The short-term borrowings were repaid in early October, however, the
Company expects cash needs to require borrowing under the credit line again
in November.
The third quarter common dividend, the 211th consecutive quarterly
dividend, was paid on August 15, 1997 at $0.5275 per share. The $0.5275
represents a $0.0075 increase in the quarterly dividend rate from last year
as authorized by the Board of Directors at their January meeting. Annualized,
the dividend rate is $2.11 per common share. Based on the 12 month earnings
per share of $3.63 at September 30, 1997, the dividend payout ratio is 58%.
About 11% of the outstanding shares participate in the Company's current
Dividend Reinvestment Plan (DRP). No new common shares were issued under the
DRP during the third quarter. Shares required for the DRP were purchased on
the open market and redistributed to DRP participants.
Book value per common share was $25.96 at September 30, 1997 compared to
$24.41 a year earlier.
During the quarter, utility plant expenditures totaled $9,278,000 for additions
to and replacements of utility plant. Of that amount, $6,366,000 was funded
through the Company's construction budget with the balance provided by funds
received from developers as contributions in aid of construction and refundable
advances for construction. The 1997 Company construction budget is $23,200,000.
8
HOLDING COMPANY FORMATION
Regulatory approval necessary to complete formation of the holding company is
anticipated during the fourth quarter this year. The two-for-one common stock
split and a proportional increase in the Series C preferred stock's voting
rights will occur in conjunction with the holding company formation. An
effective date of January 1, 1998 is expected for both events.
NEW DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
On October 15, 1997, the Company announced plans to introduce a new
Dividend Reinvestment and Stock Purchase Plan ("Plan"). The Plan will allow
registered shareholders to reinvest dividends in Company shares and to purchase
additional shares directly from the Company without incurring a commission.
Investors purchasing Company shares for the first time can do so through the
Plan, also without paying a commission. There will be a provision for selling
Plan shares through the transfer agent, Boston EquiServe, who will be the Plan
Administrator. Shareholders who participate in the current dividend
reinvestment plan will automatically be enrolled in the new Plan. The Plan
is expected to be activated during the first quarter of 1998 at which time
Plan documents will be distributed.
9
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. Storage in state reservoirs remains at
or above historic levels and groundwater levels remain adequate.
10
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.
None.
(b) No reports on Form 8-K have been filed during the quarter ended
September 30, 1997.
11
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 COMPANY
Registrant
/s/ Gerald F. Feeney
Vice President, Chief Financial Officer and Treasurer
October 31, 1997
12
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