In 2013 and 2012, net income was
$47.3 millionand $48.8 million, respectively. Diluted earnings per share decreased $0.15to $1.02or 13% from 2012 to 2013. The weighted average number of common shares outstanding used in the diluted earnings per share calculation increased to 46,417,000 shares in 2013 compared to 41,892,000 shares in 2012 mostly due to the sale of 5,750,000 shares of common stock on March 26, 2013. The $1.5 milliondecrease in net income was primarily attributable to cost increases for employee wages and benefits, water production costs, depreciation on plant placed into service during 2012, and property taxes. The decrease in net income was also due to the 2012 one-time benefit from the reversal of 2011 deferred WRAM revenues of $12.9 millionand associated costs of $10.5 millionthat we recognized in 2012, a $0.6 milliondecrease in the unrealized pre-tax gain on our benefit plan insurance investments in 2013, and higher net interest expenses mostly due to a reduction in capital project spending in 2013. The one-time tax benefit was $4.9 millionin 2013 for state enterprise zone credits and state repairs deductions, and was $6.2 millionin 2012 for state repairs deductions. The 2013 cost increases were partially offset by cost reductions to other operations, maintenance expenses, and income taxes. In 2012 and 2011, net income was $48.8 millionand $37.7 million, respectively. Diluted earnings per share increased $0.27to $1.17or 30% from 2011 to 2012. The $11.1 millionincrease in net income was primarily attributable to a one-time income tax benefit of $6.2 millionrelated to 2011 and prior years for state income tax repairs and maintenance deductions that we recognized in 2012, an unrealized pre-tax gain of $2.5 millionon our benefit plan insurance investments, a one-time benefit of 2011 deferred WRAM operating revenues of $12.9 millionand associated costs of $10.5 millionthat we recognized in 2012, a decrease in the current year income tax provision due to the repairs and maintenance deductions, and lower financing costs for short-term borrowings, which was partially offset by a $3.9 millionreduction to operating revenues due to the cost of capital adjustment mechanism and cost increases for employee wages and benefits, water production costs, and depreciation on plant placed into service during 2011.
We plan to continue to seek rate relief to recover our operating cost increases and receive reasonable returns on invested capital. We expect to fund our long-term capital needs through a combination of debt, common stock offerings, and cash flow from operations.
Critical Accounting Policies and Estimates
We maintain our accounting records in accordance with accounting principles generally accepted in
the United States of Americaand as directed by the Commissions to which our operations are subject. The process of preparing financial statements requires the use of estimates on the part of management. The estimates used by management are based on historic experience and an understanding of current facts and circumstances. A summary of our significant accounting policies is listed in Note 2 of the Notes to Consolidated Financial Statements. The following sections describe those policies where the level of subjectivity, judgment, and variability of estimates could have a material impact on the financial condition, operating performance, and cash flows of the business. Revenue Recognition Revenue generally includes monthly cycle customer billings for regulated water and wastewater services at rates authorized by regulatory Commissions (plus an estimate for water used between the customer's last meter reading and the end of the accounting period) and billings to certain non-regulated customers at rates authorized by contract with government agencies. The Company's regulated water and waste water revenue requirements are authorized by the Commissions in the states in which we operate. The revenue requirements are intended to provide the Company a reasonable opportunity to recover its cost of service and earn a return on investments. 41
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For metered customers, Cal Water recognizes revenue from rates which are designed and authorized by the CPUC. Under the Water Revenue Adjustment Mechanism (WRAM), Cal Water records the adopted level of volumetric revenues, which would include recovery of cost of service and a return on investments as established by the CPUC for metered accounts (adopted volumetric revenues). In addition to volumetric-based revenues, the revenue requirements approved by the CPUC include service charges, flat rate charges, and other items not subject to the WRAM. The adopted volumetric revenue considers the seasonality of consumption of water based upon historical averages. The variance between adopted volumetric revenues and actual billed volumetric revenues for metered accounts is recorded as a component of revenue with an offsetting entry to a regulatory asset or liability balancing account (tracked individually for each Cal Water district) subject to certain criteria under the accounting for regulated operations being met. The variance amount may be positive or negative and represents amounts that will be billed or refunded to customers in the future. Cost-recovery rates are designed to permit full recovery of certain costs allowed to be recovered by the commissions. Cost-recovery rates such as the Modified Cost Balancing Account (MCBA) provides for recovery of adopted expense levels for purchased water, purchased power and pump taxes, as established by the CPUC. In addition, cost-recovery rates include recovery of cost related to water conservation programs and certain other operation expenses adopted by the CPUC. Variances (which include the effects of changes in both rate and volume for the MCBA) between adopted and actual costs are recorded as a component of revenue, as the amount of such variances will be recovered from or refunded to our customers at a later date. Cost-recovery expenses are generally recognized when the expenses are incurred with no markup for return or profit. The balances in the WRAM and MCBA assets and liabilities accounts will fluctuate on a monthly basis depending upon the variance between adopted and actual results. The recovery or refund of the WRAM is netted against the MCBA over- or under-recovery for the corresponding district and the deferred net balances are interest bearing at the current 90 day commercial paper rate. At the end of the calendar year, Cal Water files with the CPUC to refund or collect the balance in the accounts. Most undercollected net WRAM and MCBA receivable balances are collected over 12 and 18 months. Cal Water defers any net WRAM and MCBA revenues and associated costs whenever the net receivable balances are estimated to be collected more than 24 months after the respective reporting period in which it was recorded. The deferred net WRAM and MCBA revenue and associated costs were determined using forecasts of rate payer consumption trends in future reporting periods and the timing of when the CPUC will authorize Cal Water's filings to recover unbilled balances. Deferred revenues and associated costs are recorded in future periods as the collection becomes within 24 months of the respective reporting period.
The net WRAM and MCBA balances included in regulatory assets and liabilities as of
2013 2012 Dollars in millions Net short-term receivable
$ 30.9 $ 34.0Net long-term receivable 15.4 12.1 Total receivable $ 46.3 $ 46.1Net short-term payable $ 1.0 $ 0.4Net long-term payable 0.9 0.1 Total payable $ 1.9 $ 0.5Flat rate customers are billed in advance at the beginning of the service period. The revenue is prorated so that the portion of revenue applicable to the current period is included in that period's revenue, with the balance recorded as unearned revenue on the balance sheet and recognized as revenue 42
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when earned in the subsequent accounting period. Our unearned revenue liability was
$1.5 millionand $1.7 millionas of December 31, 2013and 2012, respectively. This liability is included in "other accrued liabilities" on our consolidated balance sheets. Regulated Utility Accounting Because we operate extensively in a regulated business, we are subject to the accounting standards for regulated utilities. The Commissions in the states in which we operate establish rates that are designed to permit the recovery of the cost of service and a return on investment. We capitalize and record regulatory assets for costs that would otherwise be charged to expense if it is probable that the incurred costs will be recovered in future rates. Regulatory assets are amortized over the future periods that the costs are expected to be recovered. If costs expected to be incurred in the future are currently being recovered through rates, we record those expected future costs as regulatory liabilities. In addition, we record regulatory liabilities when the Commissions require a refund to be made to our customers over future periods. Determining probability requires significant judgment by management and includes, but is not limited to, consideration of testimony presented in regulatory hearings, proposed regulatory decisions, final regulatory orders, and the strength or status of applications for rehearing or state court appeals. We also record a regulatory asset when a mechanism is in place to recover current expenditures and historical experience indicates that recovery of incurred costs is probable, such as the regulatory assets for pension benefits; and deferred income tax. If we determine that a portion of our assets used in utility operations is not recoverable in customer rates, we would be required to recognize the loss of the assets disallowed.
Goodwill Accounting and Evaluation for Impairment
In November of 2013 and 2012, we performed annual impairment tests of the remaining goodwill balance of
$2.6 millionby comparing the fair value of HawaiiWater, the reporting unit, with its carrying amount, including goodwill and no impairment was recorded. Our analysis considered the approval of future rate case proceedings for the various operations of Hawaii Water based on historical rate of return filings allowed by the Hawaii Public Utilities Commission. To the extent the approved rate of return filings allowed by the Hawaii Public Utilities Commissionare less than expected, an impairment of the recorded goodwill may occur. Income Taxes We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities at enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect on the deferred tax assets and liabilities of a change in tax rate in the period that includes the enactment date. We must also assess the likelihood that deferred tax assets will be recovered in future taxable income and, to the extent recovery is not probable, a valuation allowance would be recorded. In management's view, a valuation allowance was not required at December 31, 2013or December 31, 2012. We anticipate that future rate actions by the regulatory commissions will reflect revenue requirements for the tax effects of temporary differences recognized, which have previously been passed through to customers. The regulatory commissions have granted us rate increases to reflect the normalization of the tax benefits of the federal accelerated methods and available Investment Tax Credits (ITCs) for all assets placed in service after 1980. ITCs are deferred and amortized over the lives of the related properties for book purposes. The commission granted flowthrough for state taxes. 43
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In 2013, the Company recorded
$4.4 millionof State of Californiaenterprise zone (EZ) credits for sales and use taxes and hiring incentives for the period from 2008 to 2013 based on an analysis of all district operations. The Company filed amended state income tax returns for tax years 2008, 2009, 2010 and 2011. The State of Californiahiring EZ credits were included on the Company's 2012 state income tax returns filed during the fourth quarter of 2013. The Company will amend the 2012 state income tax return for sales and use tax EZ credits in 2014. Unused State of California EZ credits can be carried-forward ten years. The Company estimates the carried-forward portion of its State of California EZ credits at $2.3 million. The Company's analysis of State of California EZ credits as of December 31, 2013resulted in the recognition of a $0.6 millionliability for unrecognized tax benefits. On September 19, 2013, the U. S. Department of the Treasuryand Internal Revenue Service (IRS) issued the final and re-proposed tangible property regulations for repairs and maintenance deductions with an effective date of January 1, 2014. These tax regulations allowed the Company to deduct a significant amount of linear asset costs previously capitalized for book and tax purposes. The Company intends to reevaluate its unit of property for linear assets on its 2013 tax return. The Company's federal fourth quarter of 2013 qualified repairs and maintenance deductions was $25.0 millionfor 2012 and prior years and created a deferred income tax liability of $8.8 millionas of December 31, 2013. The Company's state fourth quarter of 2013 qualified repairs and maintenance deductions was $41.0 millionfor 2012 and prior years and was recorded as a $2.4 millionreduction to state income tax expense. The total federal NOL was $14.8 millionand state NOL was $42.0 millionas of December 31, 2013mostly due to repairs and maintenance deductions. The NOL carry-forward amounts are more likely than not to be recovered and therefore require no valuation allowance. The NOL carry-forward does not begin to expire until 2033. During 2012, the Company filed an application for a change in tax accounting method with the IRSto implement the repairs and maintenance deduction. The Company's federal linear assets qualified repairs and maintenance deduction was $86.7 millionfor 2011 and prior years and created a deferred income tax liability $30.4 millionas of December 31, 2012. The Company's state linear assets qualified repairs and maintenance deduction was $122.2 millionfor 2011 and prior years and was recorded as a $7.0 millionreduction to state income tax expense. The Company planned to carry-back the NOL as of December 31, 2012and recorded a $0.8 millionfederal income tax expense. This adjustment was reversed in 2013 when the federal NOL was carried-forward to reduce 2013 income tax payments. The American Taxpayer Relief Act of 2012 provided the Company with additional 50% first-year bonus depreciation for assets placed in service from December 31, 2012to December 31, 2013. The Tax Relief, Unemployment InsuranceReauthorization and Job Creation Act of 2010 provided the Company with additional federal income tax deductions for assets placed in service after September 8, 2010and before December 31, 2012. The federal income tax deduction was estimated at $2.1 millionin 2013, was $5.1 millionin 2012 and was $12.6 millionin 2011. The 2013 estimate will be finalized when we file the 2013 tax returns in the third quarter of 2014. On October 24, 2013, the IRScompleted its audit of the Company's 2010 and 2011 federal income tax returns with no audit adjustment. In December 2012, the California Franchise Tax Board completed an audit of the Company's 2008 and 2009 state income tax returns with no audit adjustment. The State of Hawaii Department of Taxationis presently auditing the Company's 2011 and 2012 Hawaii state income tax returns. The State of California Board of EqualizationFranchise is presently auditing the Company's 2010, 2011, and 2012 sales and use tax filings. It is uncertain when the State audits will be completed. The Company believes that the final resolution of the state audits will not have a material impact on its financial condition or results of operations.
We incur costs associated with our pension and postretirement health care benefits plans. To measure the expense of these benefits, our management must estimate compensation increases, mortality rates, 44
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future health cost increases and discount rates used to value related liabilities and to determine appropriate funding. Different estimates used by our management could result in significant variances in the cost recognized for pension benefit plans. The estimates used are based on historical experience, current facts, future expectations, and recommendations from independent advisors and actuaries. We use an investment advisor to provide advice in managing the plan's investments. Beginning with the 2009 California GRC decision effective
January 1, 2011, we anticipate any increases in funding for the pension benefits plans will be recovered in future rate filings, thereby mitigating the financial impact. We believe it is probable that future costs will be recovered in future rates and therefore have recorded a regulatory asset in accordance with generally accepted accounting principles.
Workers' Compensation and Other Claims
We are self-insured for a portion of workers' compensation and other claims. Excess amounts are covered by insurance policies. For workers' compensation, we work with an independent actuary firm to estimate the discounted liability associated with claims submitted and claims not yet submitted based on historical data. These estimates could vary significantly from actual claims paid, which could impact earnings and cash flows. For other claims, management estimates the cost incurred but not yet paid using historical information. Actual costs could vary from these estimates. Management believes actual costs incurred would be allowed in future rates, mitigating the financial impact. Results of Operations Earnings In 2013 and 2012, net income was
$47.3 millionand $48.8 million, respectively. Diluted earnings per share decreased $0.15to $1.02or 13% from 2012 to 2013. The weighted average number of common shares outstanding used in the diluted earnings per share calculation increased to 46,417,000 shares in 2013 compared to 41,892,000 shares in 2012 mostly due to the sale of 5,750,000 shares of common stock on March 26, 2013. The $1.5 milliondecrease in net income was primarily attributable to the cost increases for employee wages and benefits, water production costs, depreciation on plant placed into service during 2012, and property taxes. The decrease in net income was also due to the 2012 one-time benefit from the reversal of 2011 deferred WRAM revenues of $12.9 millionand associated costs of $10.5 millionthat we recognized in 2012, a $0.6 milliondecrease in the unrealized pre-tax gain on our benefit plan insurance investments in 2013, and higher net interest expenses mostly due to a reduction in capital project spending in 2013. The one-time tax benefit was $4.9 millionin 2013 for state enterprise zone credits and repairs deductions, and was $6.2 millionin 2012 for state repairs deductions. The 2013 cost increases were partially offset by cost reductions to other operations, maintenance expenses, and income taxes. In 2012 and 2011, net income was $48.8 millionand $37.7 million, respectively. Diluted earnings per share increased $0.27to $1.17or 30% from 2011 to 2012. The $11.1 millionincrease in net income was primarily attributable to a one-time income tax benefit of $6.2 millionrelated to 2011 and prior years for state income tax repairs and maintenance deductions that we recognized in 2012, an unrealized pre-tax gain of $2.5 millionon our benefit plan insurance investments, a one-time benefit of 2011 deferred WRAM operating revenues of $12.9 millionand associated costs of $10.5 millionthat we recognized in 2012, a decrease in the current year income tax provision due to the repairs and maintenance deductions, and lower financing costs for short-term borrowings, which was partially offset by a $3.9 millionreduction to operating revenues due to the cost of capital adjustment mechanism and cost increases for employee wages and benefits, water production costs, and depreciation on plant placed into service during 2011.
January 2014meeting, the Board of Directors declared the quarterly dividend, increasing it for the 47th consecutive year. The quarterly dividend was raised from $0.1600to $0.1625per common share, 45
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or an annual rate of
$0.65per common share. Dividends have been paid for 69 consecutive years. The annual dividends paid per common share in 2013, 2012, and 2011 were $0.640, $0.630, and $0.615, respectively. Earnings not paid as dividends are reinvested in the business for the benefit of stockholders. The dividend payout ratio was 63% in 2013, 54% in 2012, and 68% in 2011, for an average of 61% over the three-year period. Our long-term targeted dividend payout ratio is 60%
Operating revenue in 2013 was
$584.1 million, an increase of $24.1 million, or 4.3%, over 2012. Operating revenue in 2012 was $560.0 million, an increase of $58.2 million, or 11.6%, over 2011. The estimated sources of changes in operating revenue were: 2013 2012 2011 Dollars in millions Rate increases $ 13.6$
8.4 14.0 4.4 Conservation balancing account(2) 0.3 (2.2 ) (4.3 ) Pension balancing account(2) 0.6 4.3 (1.9 ) Deferral of net WRAM and MCBA revenue(3) (0.3 ) 12.0 (12.9 ) New customers 1.5 1.2 2.9 Net change
$ 24.1 $ 58.2 $ 41.4
º The net change due to actual versus adopted results, usage, and other in the above table was the increase in customer usage and the net effect of WRAM. The usage by existing customers can materially change based upon current weather patterns and is influenced both by temperature and
rainfall; however, the impact of weather on gross margin has been minimized
with the adoption of WRAM and MCBA for
Californiacustomers on July 1, 2008. º (2)
º The pension and conservation balancing accounts in the above table was the
difference between actual expenses and adopted rate recovery.
º The deferral of net WRAM and MCBA revenue in the above table was the net
receivable balances that are expected to be collected from ratepayers
beyond 24 months following the end of the accounting period in which these
revenues were recorded. Early in 2012, Cal Water received CPUC decision
12-04-048, which decreased the amortization periods of Cal Water's
receivables and resulted in the recognition of the
revenue that was deferred in 2011. In 2013, the net WRAM revenue deferral
$0.3 million. Water Production Expenses Water production expenses, which consist of purchased water, purchased power, and pump taxes, comprise the largest segment of total operating expenses. Water production costs accounted for 44.3%, 41.6%, and 41.8% of total operating costs in 2013, 2012, and 2011, respectively. The rates charged for wholesale water supplies, electricity, and pump taxes are established by various public agencies. As such, these rates are beyond our control. 46
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The table below provides the amount of increases and percent changes in water production costs during the past two years:
2013 2012 2011 Amount Change % Change Amount Change % Change Amount Change % Change Dollars in millions Purchased water
$ 183.1 $ 21.813.5 % $ 161.3 $ 18.713.2 % $ 142.6 $ 16.713.3 % Purchased power 32.2 1.2 3.8 % 31.0 0.9
3.2 % 30.1 0.5 1.7 % Pump taxes 10.8 0.5 4.4 % 10.3 1.2 13.2 % 9.1 0.5 5.8 %
Total water production
The principal factors affecting water production expenses are the quantity, price and source of the water. Generally, water from wells costs less than water purchased from wholesale suppliers. The table below provides the amounts, percentage change, and source mix for the respective years: 2013 2012 2011 MG % of Total MG % of Total MG % of Total Millions of gallons (MG) Source: Wells 58,435 46.3 % 59,932 47.6 % 57,433 47.7 % % change
year (2.5 )% 4.4 %
Purchased 62,202 49.2 % 59,708 47.4 % 56,253 46.7 %
year 4.2 % 6.0 % (0.7 )% Surface 5,727 4.5 % 6,252 5.0 % 6,667 5.6 % % change from prior year (8.4 )% (6.2 )% (0.2 )% Total 126,364 100.0 % 125,892 100.0 % 120,353 100.0 % % change
year 0.4 % 4.6 %
Purchased water expenses are affected by changes in quantities purchased, supplier prices, and cost differences between wholesale suppliers. The MCBA mechanism is designed to recover all incurred purchase water expenses. For 2013, the
$21.8 millionincrease in purchased water is due to wholesaler water rate increases between 3% and 12% and a 4% increase in purchased quantities. On an overall blended basis, wholesale water rates increased 8% on a cost-per-million-gallon basis in 2013. Purchased water expense for 2013 was partially offset by lease water rights credits of $1.0 million. For 2012, the $18.7 millionincrease in purchased water is due to wholesaler water rate increases between 3% and 12% and a 6% increase in purchased quantities. On an overall blended basis, wholesale water rates increased 7% on a cost-per-million-gallon basis in 2012. Purchased water expense for 2012 was partially offset by lease water rights credits of $0.9 million. For 2011, the $16.7 millionincrease in purchased water is due to wholesaler water rate increases between 3% and 38% despite a 1% decrease in purchased quantities. On an overall blended basis, wholesale water rates increased 14% on a cost-per-million-gallon basis in 2011. Purchased water expense for 2011 was partially offset by lease water rights credits of $1.0 million.
See Item 1, "Rates and Regulation" of this annual report.
Purchased power expenses are affected by the quantity of water pumped from wells and moved through the distribution system, rates charged by electric utility companies, and rate structures applied to usage during peak and non-peak times of the day or season. In 2013, 2012, and 2011 purchased power expense increased
$1.2 million, or 4%, $0.9 million, or 3%, and $0.5 million, or 2%, respectively, primarily due to power supplier rate increases. 47
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Changes in climate change regulations could increase the cost of purchased power which in turn would result in an increase in the rates our power suppliers charge us. Any change in pricing of our purchased power in
Californiawould be recovered from our rate payers by the MCBA. Any change in power costs in other states would be requested to be recovered by the rate payers in those states. The impact of such legislation, is dependent upon the enacted date, the factors that impact our suppliers cost structure, and their ability to pass the costs to us in their approved tariffs. These items are not known at this time.
Administrative and General Expenses
Administrative and general expenses include payroll related to administrative and general functions, all employee benefits charged to expense accounts, insurance expenses, legal fees, expenses associated with being a public company, and general corporate expenses.
During 2013, administrative and general expenses increased
$4.1 million, or 4.4%, as compared to 2012. The increase was due primarily to increases in employee payroll costs, health care, pension and other employee benefit costs. These increases were partially offset by a reduction to outside service costs. During 2012, administrative and general expenses increased $8.2 million, or 9.5%, as compared to 2011. The increase was due primarily to increases in employee payroll costs, health care, pension, other employee benefit costs, and outside service costs.
Other Operations Expenses
The components of other operations expenses include payroll, material and supplies, and contract service costs of operating the regulated water systems, including the costs associated with water transmission and distribution, pumping, water quality, meter reading, billing, operations of district offices, and water conservation programs. During 2013, other operating expenses decreased
$7.4 million, or 9.6%, compared to 2012 mainly due to $10.5 millionof MCBA costs from the recording of the 2011 deferred WRAM revenues and associated costs recorded during 2012 and the decrease was partially offset by $2.6 millionof increased conservation program expenses in 2013 compared to 2012. Conservation program expenses are fully recovered in rates for 2011, 2012, and 2013, and are tracked in a balancing account, such that revenues are recovered on a dollar-for-dollar basis up to the amounts authorized in the 2009 GRC.
During 2012, other operating expenses increased
Maintenance expenses decreased
$1.8 million, or 9.3%, in 2013, compared to 2012 due to decreased costs for repairs of mains, services, meters, hydrants, and other structures. For 2012, maintenance expenses decreased $1.6 million, or 7.5%, compared to 2011 due to decreased costs for repairs of mains, services, meters, hydrants, and other structures
Depreciation and Amortization
Depreciation and amortization increased
$3.7 millionin 2013 due to capital additions from 2012, and increased $4.3 millionin 2012 due to capital additions from 2011.
Our capital expenditures in
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administrative cost of certain projects.
Californiaemission controls are expected to increase the cost of vehicle acquisitions. Certain existing vehicles will also have to be retrofitted to comply with the current legislation. The costs will be recovered via depreciation expense by our rate payers upon the filing of future general rate cases.
For 2013, income taxes decreased
$1.0 millionas compared to 2012. For 2012, income taxes decreased $1.7 millionas compared to 2011. The effective tax rate was 30.2% (with the tax accounting method change, which reduced 2013 state income taxes by $2.4 million), 31.7% (with the tax accounting method change, which reduced 2012 state income taxes by $7.0 million), and 38.4%, in 2013, 2012, and 2011, respectively. The tax rate is also affected by the flow through method of accounting for income taxes which resulted from differences between tax depreciation and book depreciation on both pre-1982 assets, as well as all Californiaassets. The flow through method of accounting is described in the Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements. We anticipate the reversal of federal tax depreciation on pre-1982 assets to continue in future years; however, its effect on our tax provision is uncertain due to the offsetting flow-through of state tax depreciation, which continues to increase with capital additions and the impact of cost to remove pre-1982 assets. In September of 2010, the 50% bonus depreciation for federal income tax filings was extended through 2013 and on January 2, 2013was extended through December 31, 2013, which reduced 2013, 2012 and 2011 income tax payments $2.1 million, $5.0 million, and $12.6 million, respectively.
Property and Other Taxes
For 2013, property and other tax expenses increased
$2.3 million, or 11.9% from 2012. The increase was primarily due to increased property taxes for utility plant placed in service during 2012, increased payroll taxes, and increased franchise taxes. For 2012, property and other tax expenses increased $0.9 million, or 4.9% from 2011. The increase was primarily due to increased property taxes due to utility plant additions during 2011 and an increase in payroll taxes.
Non-Regulated Revenue and Expense, Net
The major components of non-regulated income are revenue and operating expenses related to the following activities:
º operating and maintenance services (O&M) and meter reading and billing
services; º • º antenna site leases; º • º design and construction services; º • º billing of optional third-party insurance program to our residential customers; º • º interest income; º • º selling surplus property; º • º change in cash surrender value of life insurance; and º • º non-regulated and new business expenses. Revenues from antenna site leases to telecommunication companies were
$2.0 million, $2.0 million, and $1.9 millionin 2013, 2012, and 2011, respectively. Revenues from the billing and marketing contract with Home Serve USAwere $2.0 millionin 2013, 2012, and 2011. Changes to the cash surrender value (CSV) of life insurance contracts associated with our benefit plans have had a significant impact to non-regulated expenses. There was an unrealized gain of $1.9 millionin 2013, an unrealized gain of 49
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In 2013, non-regulated income net of expenses decreased
$1.0 million, or 33%, compared to 2012. The decrease was primarily due to a lower unrealized gain on the life insurance contracts associated with our benefit plans during 2013 and increased costs of new business opportunities. In 2012, nonregulated income net of expenses increased $2.9 million, or 1,105% compared to 2011. The increase was primarily due to an unrealized gain on the life insurance contracts associated with our benefit plans during 2012.
Gain on Sale of Non-Utility Property
For 2013, 2012, and 2011, there were no significant non-utility property sales. Earnings and cash flow from these transactions are sporadic and may or may not continue in future periods, depending upon market conditions. The Company has other non-utility properties that may be marketed in the future based on real estate market conditions.
In 2013, interest expense increased
$0.7 millioncompared to 2012. This increase was attributable to decreased capitalized interest charged to construction projects during 2013, which was partially offset by decreased financing costs on the Company's short-term lines of credit. In 2012, interest expense decreased $1.6 millioncompared to 2011. This decrease was attributable to lower financing costs on the Company's short-term lines of credit, the TIRBA balancing account interest charges ending on December 31, 2011, and an increase in capitalized interest charged to construction projects during 2012.
Rates and Regulation
The following is a summary of 2013 rate filings and the anticipated annual impact on revenues.
Californiadecisions and resolutions may be found on the CPUC website at www.cpuc.ca.gov. Increase (Decrease) CA District/ Type of Filing Decision/Resolution Approval Date Annual Revenue Subsidiary GRC, Step Rate and Offset Filings Step Rate Increase AL 2090-2092 Jan 2013 $ 9.2 million19 districts 2013 Expense Offset AL 2100-2104 Apr 2013 $ 3.6 million5 districts 2013 Expense Offset AL 2107 Jun 2013 $ 1.3 million1 districts 2013 Expense Offset Various(1) Sep 2013 $ 0.8 million5 districts 2013 Rate Base Offset AL 2094-2095 Mar 2013 $ 0.4 million2 districts Surcharges and Surcredits Cost of Capital AL 2088 Jan 2013 $ (3.7) millionAll districts
º Increases result from advice letters 2110, 2111, 2112, 2113, and 2115.
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The estimated impact of current and prior year rate changes on operating revenues compared to prior years is listed in the following table:
2013 2012 2011 Dollars in millions General Rate Case (GRC)(a)
$ 1.2 $ 3.8 $ 28.1Step rate increases 9.2 8.5 1.8 Offset (purchased water/pump taxes) 9.2 17.1 21.4 Balancing accounts, net 0.2 0.2 1.0 Other rate (decreases) increases (6.2 ) (0.7 ) 0.9 Total rate increases $ 13.6 $ 28.9 $ 53.2
º The 2009 GRC was the first filing for all 24 districts with rate increases
Water. Water Supply Our source of supply varies among our operating districts. Certain districts obtain all of their supply from wells; some districts purchase all of their supply from wholesale suppliers; and other districts obtain supply from a combination of wells and wholesale suppliers. A small portion of supply comes from surface sources and is processed through Company-owned water treatment plants. To the best of management's knowledge, we are meeting water quality, environmental, and other regulatory standards for all company-owned systems.
California'snormal weather pattern yields little precipitation between mid-spring and mid-fall. The Washington Waterservice areas receive precipitation in all seasons, with the heaviest amounts during the winter. New Mexico Water's rainfall is heaviest in the summer monsoon season. Hawaii Water receives precipitation throughout the year, with the largest amounts in the winter months. Water usage in all service areas is highest during the warm and dry summers and declines in the cool winter months. Rain and snow during the winter months replenish underground water aquifers and fill reservoirs, providing the water supply for subsequent delivery to customers. To date, snowpack water content and rainfall accumulation during the 2013-2014 water year is 19% of normal (as of January 1, 2014per the California Department of Water Resources). Precipitation in latter half of 2011 was below average. Management believes that supply pumped from underground aquifers and purchased from wholesale suppliers will be adequate to meet customer demand during 2014 and beyond. However, water rationing may be required in future periods, if declared by the state or local jurisdictions. Long-term water supply plans are developed for each of our districts to help assure an adequate water supply under various operating and supply conditions. Some districts have unique challenges in meeting water quality standards, but management believes that supplies will meet current standards using current treatment processes.
Liquidity and Capital Resources
Cash flow from Operations
During 2013, we generated cash flow from operations of
$124.2 million, compared to $131.9 millionduring 2012, and $111.3 millionduring 2011. In general, cash flow from operations is primarily generated by net income, non-cash expenses for depreciation and amortization, deferred income taxes, regulatory liabilities, other current liabilities, changes of prepaid income taxes, and the amortization periods allowed by the commission to recover MCBA and other incurred costs. Cash generated by operations varies during the year. The decrease during 2013 compared to 2012 was primarily due to income tax payments of $7.7 millionin 2013 compared to an income tax refund of $5.3 millionin 2012. The decrease was partially offset by higher billing rates in 2013 due to the 2009 GRC. The timing of the collection from customers, the 51
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timing of employee pensions and other benefit payments, and the timing of liability payments also impacted the decrease. The increase during 2012 compared to 2011 was primarily due to higher billing rates due to the 2009 GRC, a reduction of
$10.5 millionin federal and state income tax payments mostly due to the repairs and maintenance deductions, a $3.5 millionreduction of the December 31, 2011undercollected net WRAM and MCBA receivable balances due to a reduction in the amortization periods and customer usage, the timing of employee pensions and other benefit payments, and the timing of liability payments. The water business is seasonal. Billed revenue is lower in the cool, wet winter months when less water is used compared to the warm, dry summer months when water use is highest. This seasonality results in the possible need for short-term borrowings under the bank lines of credit in the event cash is not sufficient to cover operating and capital costs during the winter period. The increase in cash flow during the summer allows short-term borrowings to be paid down. Customer water usage can be lower than normal in years when more than normal precipitation falls in our service areas or temperatures are lower than normal, especially in the summer months. The reduction in water usage reduces cash flow from operations and increases the need for short-term bank borrowings. In addition, short-term borrowings are used to finance capital expenditures until long-term financing is arranged.
During 2013 and 2012, we used
During 2013 the Company sold 5,750,000 shares of its common stock in an underwritten public offering for cash proceeds of approximately
$105.6 million, net of $5.1 millionof underwriting discounts and commissions and offering expenses. The net proceeds from the sale of common stock were added to our general funds to be used for general corporate purposes. In April 2013, the Company used a portion of the net proceeds from the offering to repay outstanding borrowings on the Company and Cal Water lines of credit of $68.3 millionand $25.0 million, respectively. During 2012, there were no significant long-term debt or equity offerings; however, on June 29, 2011, the Company and Cal Water entered into new Syndicated Credit Agreements, which provide for unsecured revolving credit facilities of up to an initial aggregate amount of $400 million. The Syndicated Credit Facilities amend, expand, and replace the Company's and its subsidiaries' existing credit facilities originally entered into on October 27, 2009. The new credit facilities extended the terms until June 29, 2016, increased the Company's and Cal Water's unsecured revolving lines of credit, and lowered interest rates and fees. The Company and subsidiaries which it designates may borrow up to $100 millionunder the Company's revolving credit facility. Cal Water may borrow up to $300 millionunder its revolving credit facility; however, all borrowings need to be repaid within twelve months unless otherwise authorized by the CPUC. The proceeds from the revolving credit facilities may be used for working capital purposes, including the short-term financing of capital projects. The base loan rate may vary from LIBORplus 72.5 basis points to LIBORplus 95 basis points, depending on the Company's total capitalization ratio. Likewise, the unused commitment fee may vary from 8 basis points to 12.5 basis points based on the same ratio. The undercollected net WRAM and MCBA receivable balances were $46.3 millionand $46.1 millionas of December 31, 2013and 2012, respectively. On April 19, 2012, the CPUC issued a decision to shorten the amortization periods for Cal Water's undercollected net WRAM and MCBA receivable balances for calendar years 2013, 2012, and 2011. The increase of $0.2 millionto the undercollected net WRAM and MCBA receivable balances during 2013 was due to timing of when cost-offset filings were authorized and when water production cost increases occurred in 2013. The undercollected net WRAM and MCBA receivable balances were primarily financed by Cal Water with short-term and long-term financing arrangements to meet operational cash requirements. Interest on the undercollected net WRAM and 52
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MCBA receivable balances, the interest recoverable from ratepayers, is limited to the current 90-day commercial paper rates which is significantly lower than Cal Water's short and long-term financing rates. The Company borrowed
$70.6 millionon our bank lines of credit, repaid $113.3 millionof short-term borrowings, and added $10.6 millionof advances and contributions in aid of construction, which was reduced by refunds to developers of $6.9 million. On October 4, 2011, Cal Water entered into a capital lease arrangement with the City of Hawthorneto operate the City's water system for a 15-year period. The capital lease increased debt $9.4 millionduring 2011. Bond principal and other long-term debt payments were $47.2 millionduring 2013, compared to $7.0 millionduring 2012. The increase in 2013 compared to 2012 was primarily due to the $40.0 millionrepayment of series MMM and NNN during 2013. Bond principal and other long-term debt payments were $7.0 millionduring 2012 compared to $3.0 millionduring 2011. The increase in 2012 compared to 2011 was primarily due to the $3.7 millionrepayment of series GGG and HHH. We raised the dividend rate in January 2013to $0.640from the 2012 rate of $0.630. The annual dividend rate has increased from $0.570per share of common stock in 2005 to $0.640per share of common stock in 2013.
Short-term liquidity is provided by the bank lines of credit described above and by internally generated funds. Long-term financing is accomplished through the use of both debt and equity. As of
December 31, 2013, there were short-term borrowings of $46.8 millionoutstanding on our unsecured revolving line of credit compared to $89.5 millionoutstanding on our original unsecured revolving line of credit as of December 31, 2012. The decrease during 2013 was mostly due to the repayment of the outstanding borrowings from the net cash proceeds of the Company's common stock public offerings on March 26, 2013. The increase in short-term borrowing in 2012 compared to 2011 was to finance Cal Water, HawaiiWater, and Washington Watercapital projects and operating activities. Given our ability to access our lines of credit on a daily basis, cash balances are managed to levels required for daily cash needs and excess cash is invested in short-term or cash equivalent instruments. Minimal operating levels of cash are maintained for Washington Water, New Mexico Water, and Hawaii Water. California Water Service Groupand subsidiaries which it designates may borrow up to $100 millionunder its new short-term credit facility. California Water Service Companymay borrow up to $300 millionunder its new credit facility; however, all borrowings need to be repaid within twelve months unless otherwise authorized by the CPUC. Both short-term credit agreements contain affirmative and negative covenants and events of default customary for credit facilities of this type including, among other things, limitations and prohibitions relating to additional indebtedness, liens, mergers, and asset sales. Also, these unsecured credit agreements contain financial covenants governing the Company and its subsidiaries' consolidated total capitalization ratio not to exceed 66.7% and interest coverage ratio of three or more. As of December 31, 2013, the Company's total capitalization ratio was 55.0% (trade payable is included as debt for this calculation) and interest ratio was four and three fourths. In summary, we have met all of the covenant requirements and are eligible to use the full amounts of these credit agreements. There was $0.1 millionof new debt added to long-term debt during 2013, and we made principal payments on Cal Water's first mortgage bonds and other long-term debt of $47.2 millionduring 2013. In 2012, there was $0.1 millionof new debt added to long-term debt, and we made principal payments on Cal Water's first mortgage bonds and other long-term debt of $7.0 million. 53
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Long-term financing, which includes first mortgage bonds, senior notes, other debt securities, and common stock, has typically been used to replace short-term borrowings and fund capital expenditures. Internally generated funds, after making dividend payments, provide positive cash flow, but have not been at a level to meet the needs of our capital expenditure requirements. Management expects this trend to continue given our capital expenditures plan for the next five years. Some capital expenditures are funded by payments received from developers for contributions in aid of construction or advances for construction. Funds received for contributions in aid of construction are non-refundable, whereas funds classified as advances in construction are refundable. Management believes long-term financing is available to meet our cash flow needs through issuances in both debt and equity instruments.
January 7, 2010, Cal Water filed an application for additional financing authority with the CPUC. This request was approved on September 23, 2010, and the CPUC decision authorizes Cal Water to issue $350 millionof debt and common stock to finance capital projects and operations. In November 2010, Cal Water issued $100 millionof first mortgage bonds in accordance with the CPUC decision. During 2013 the Company sold 5,750,000 shares of its common stock in an underwritten public offering for cash proceeds of approximately $105.6 million, net of $5.1 millionof underwriting discounts and commissions and offering expenses. The net proceeds from the sale of common stock were added to our general funds to be used for general corporate purposes. In future periods, management anticipates funding our capital needs through a relatively balanced approach between long term debt and equity.
Additional information regarding the bank borrowings and long-term debt is presented in Notes 7 and 8 in the Notes to Consolidated Financial Statements.
Off-Balance Sheet Transactions
We do not utilize off-balance-sheet financing or utilize special purpose entity arrangements for financing. We do not have equity ownership through joint ventures or partnership arrangements.
The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations and commitments. Changes in our business needs, cancellation provisions and changes in interest rates, as well as action by third parties and other factors, may cause these estimates to change. Therefore, our actual payments in future periods may vary from those presented in the table below. The following table summarizes our contractual obligations as of
December 31, 2013. Less than After Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years (In thousands) Long-term debt(*) $ 424,743 $ 7,693 $ 12,578 $ 42,298 $ 362,174Interest payments 339,233 25,887 50,729 47,926 214,691 Advances for construction 183,393 7,394 14,722 14,609 146,668 Pension and post retirement benefits(**) 147,202 7,611 18,769 24,603 96,219 Capital lease obligations(***) 13,045 1,109 2,218 2,125 7,593 Facility leases 5,552 786 903 545 3,318 System leases 3,873 845 1,690 1,338 - Water supply contracts 617,085 22,560 45,333 45,546 503,646 TOTAL $ 1,734,126 $ 73,885 $ 146,942 $ 178,990 $ 1,334,309
º * º Excludes capital lease obligations as reported below. 54
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º Pension and post retirement benefits include
º Capital lease obligations represent total cash payments to be made in the
future and includes interest expense of
Our contractual obligations are summarized in the table above. For pension and post retirement benefits other than pension obligations see Note 11 of the Notes to the consolidated Financial Statements. Long-term debt payments include annual sinking fund payments on first mortgage bonds, maturities of long-term debt, and annual payments on other long-term obligations. Advances for construction represent annual contract refunds to developers for the cost of water systems paid for by the developers. The contracts are non-interest bearing, and refunds are generally on a straight-line basis over a 40-year period. System and office leases include obligations associated with leasing water systems and rents for office space. There are three capital leases; the most significant was the
City of Hawthornewater system. In 2011, we entered into a 15-year capital lease agreement to operate the City of Hawthornewater system. The system, which is located near the Hermosa Redondo district, serves about half of Hawthorne'spopulation. The lease agreement required us to make an up-front $8.1 millionlease payment to the city that is being amortized over the lease term. Additionally, annual lease payments of $0.9 millionare made to the city and shall be increased or decreased each year on July 1, by the same percentage that the rates charged to customers served by the water system increased or decreased, exclusive of pass-through increases or decreases in the cost of water, power, and city-imposed fees, compared to the rates in effect on July 1of the prior year, provided, that in no event will the annual lease payment be less than $0.9 million. Under the lease, we are responsible for all aspects of system operation and capital improvements, although title to the system and system improvements reside with the city. In exchange, we receive all revenue from the water system, which was $7.7 million, $7.6 million, and $7.5 millionin 2013, 2012, and 2011, respectively. At the end of the lease, the city is required to reimburse us for the unamortized value of capital improvements made during the term of the lease. Cal Water has water supply contracts with wholesale suppliers in 14 of its operating districts and for the two leased systems in Hawthorneand Commerce. For each contract, the cost of water is established by the wholesale supplier and is generally beyond our control. The amount paid annually to the wholesale suppliers is charged to purchased water expense on our statement of income. Most contracts do not require minimum annual payments and vary with the volume of water purchased. We have a contract with the Santa Clara Valley Water District, which contains minimum purchase obligations. The contract payment varies with the volume of water purchased above the minimum purchase levels. Management plans to continue to purchase and use at least the minimum quantity of water that is required to purchase under this contract in the future. Total paid to Santa Clara Valley Water Districtwas $7.4 millionin 2013, $6.2 millionin 2012, and $5.5 millionin 2011. The water supply contract with Stockton East Water District(SEWD) expires on April 1, 2035, requires a fixed, annual payment and does not vary during the year with the quantity of water delivered by the district. Due to the fixed price arrangement, we utilize as much water as possible from SEWD in order to minimize the cost of operating Company-owned wells used to supplement SEWD deliveries. The total paid under the contract was $10.0 millionin 2013, $6.6 millionin 2012, $6.7 millionin 2011. Pricing under the contract varies annually. Estimated annual contractual obligations in the above table are based on the same payment level as 2013. Future cost increases by SEWD are expected to be offset by a decline in the allocation of costs to us as more of these costs are expected to be allocated to other SEWD customers due to growth within their service areas. On September 21, 2005, we entered into an agreement with Kern County Water Agency(Agency) to obtain treated water for our operations. The term of the agreement is to January 1, 2035, or until the Agency's bonds are repaid. The Agency's bonds are described below. Under the terms of the agreement, 55
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we were obligated to purchase approximately 18,500 acre feet of treated water in 2013 and an incrementally higher volume of water for each subsequent year until 2018, when we are obligated to purchase 20,500 acre feet of treated water per year. We are obligated to pay a capital facilities charge and a treated water charge regardless of whether we can use the water in our operation, and we are obligated for these charges even if the Agency cannot produce an adequate amount to supply the 20,500 acre feet in the year. This agreement supersedes a prior agreement with
Kern County Water Agencyfor the supply of 11,500 acre feet of water per year. Total expense, under the prior agreement, was $6.3 millionin 2013, $6.3 millionin 2012, and $6.1 millionin 2011. Three other parties, including the City of Bakersfield, are also obligated to purchase a total of 32,500 acre feet per year under separate agreements with the Agency. Further, the Agency has the right to proportionally reduce the water supply provided to all of the participants if it cannot produce adequate supplies. The participation of all parties in the transaction for expansion of the Agency's facilities, including its water purification plant, purchase of the water, and payment of interest and principal on the bonds being issued by the Agency to finance the transaction, is required as a condition to the obligation of the Agency to proceed with expansion of the Agency's facilities. If any of the other parties does not use its allocation in a given year, that party is still obligated to pay its contracted amount. The Agency has issued bonds to fund the project and will use the payments of the capital facilities charges by us and the other contracted parties to meet the Agency's obligations to pay interest and repay principal on the bonds. If any of the parties were to default on making payments of the capital facilities charge, then the other parties are obligated to pay for the defaulting party's share on a pro-rata basis. If there is a payment default by a party and the remaining parties have to make payments, they are also entitled to a pro-rata share of the defaulting party's water allocation. We expect to use all of its entitled water in our operations every year. If additional treated water is available, all parties have an option to purchase this additional treated water, subject to the Agency's right to allocate the water among the parties. If we were to pay for and receive additional amounts of water due to a default of another participating party, we believe we could use this additional water in our operations without incurring substantial increases in incremental costs. The total obligation of all parties, excluding us, is approximately $82.4 millionto the Agency. Based on the credit worthiness of the other participants, which are government entities, our management believes it to be highly unlikely that we would be required to assume any other parties' obligations under the contract due to their default. If a party defaults, we would receive entitlement to the additional water for assuming the additional obligation. We pay a capital facilities charge and charges related to treated water that together total $7.2 millionannually, which equates to $352 dollarsper acre foot. Total treated water charge for 2013 was $2.6 million. As treated water is being delivered, we will also be obligated for our portion of the operating costs; that portion is currently estimated to be $7 dollarsper acre foot. The actual amount will vary due to variations from estimates, inflation, and other changes in the cost structure. Our overall estimated cost of $352 dollarsper acre foot is less than the estimated cost of procuring untreated water (assuming water rights could be obtained) and then providing treatment.
Capital requirements consist primarily of new construction expenditures for expanding and replacing utility plant facilities and the acquisition of water systems. They also include refunds of advances for construction.
Company-funded and developer-funded utility plant expenditures were
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For 2014, the Company is estimating its capital expenditures to be between
$110and $130 million. We do not expect significant increases or declines in annual capital expenditure for the next five years. Management expects developer-funded expenditures in 2014. These expenditures will be financed by developers through refundable advances for construction and non-refundable contributions in aid of construction. Developers are required to deposit the cost of a water construction project with us prior to our commencing construction work, or the developers may construct the facilities themselves and deed the completed facilities to us. Funds are generally received in advance of incurring costs for these projects. Advances are normally refunded over a 40-year period without interest. Future payments for advances received are listed under contractual obligations above. Because non-company-funded construction activity is solely at the discretion of developers, we cannot predict the level of future activity. The cash flow impact is expected to be minor due to the structure of the arrangements.
Common stockholders' equity was
$598.8 millionat December 31, 2013compared to $473.7 millionat December 31, 2012. In 2013, the Company sold 5,750,000 shares of its common stock in an underwritten public offering for cash proceeds of $105.6 million, net of underwriting discounts and commissions and offering expenses. In addition, the Company incurred additional long-term debt in 2013 and 2012. Total capitalization, including the current portion of long-term debt, at December 31, 2013, was $1,033 millionand $955.0 millionat December 31, 2012. In future periods, the Company intends to issue common stock and long-term debt to finance our operations. The capitalization ratios will vary depending upon the method we choose to finance our operations. At December 31, capitalization ratios were: 2013 2012 Common equity 58.0 % 49.6 % Long-term debt 42.0 % 50.4 %
The return (from both regulated and non-regulated operations) on average common equity was 8.8% in 2013 compared to 10.6% in 2012.
Acquisitions In 2013, 2012, and 2011 there were no significant acquisitions. Real Estate Program We own real estate. From time to time, certain parcels are deemed no longer used or useful for water utility operations. Most surplus properties have a low cost basis. We developed a program to realize the value of certain surplus properties through sale or lease of those properties. The program will be ongoing for a period of several years. Property sales produced pretax gains of less than
$0.1 millionin 2013, 2012 and 2011. As sales are dependent on real estate market conditions, future sales, if any, may or may not be at prior year levels.