-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Enp8gdUYa0AOfFPHJ51nSVgECqghB6F3zt6/a9XdKtnljOkRWLfwW9mQwaPycxRN yVNvdvrtoYiXr4RhMy9G0g== 0000950005-05-000264.txt : 20050315 0000950005-05-000264.hdr.sgml : 20050315 20050315172420 ACCESSION NUMBER: 0000950005-05-000264 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050315 DATE AS OF CHANGE: 20050315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA WATER SERVICE GROUP CENTRAL INDEX KEY: 0001035201 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 770448994 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13883 FILM NUMBER: 05682656 BUSINESS ADDRESS: STREET 1: 1720 N FIRST ST STREET 2: C/O CALIFORNIA WATER SERVICE CO CITY: SAN JOSE STATE: CA ZIP: 95112 BUSINESS PHONE: 4083678200 MAIL ADDRESS: STREET 1: 1720 FIRST ST STREET 2: C/O CALIFORNIA WATER SERVICE CO CITY: SAN JOSE STATE: CA ZIP: 95112 10-K 1 p19230_10k.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 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 No. 1-13883 CALIFORNIA WATER SERVICE GROUP (Exact name of registrant as specified in its charter) Delaware 77-0448994 -------- ---------- (State of Incorporation) (I.R.S. Employer Identification No.) 1720 North First Street, San Jose, California 95112 --------------------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) (408) 367-8200 -------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class: Name of Each Exchange on Which Registered: Common Stock, $0.01 Par Value New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) 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 __. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes _X_ No __ The aggregate market value of the common stock held by non-affiliates of the Registrant was $505 million on June 30, 2004, the last business day of the registrant's most recently completed second fiscal quarter. The valuation is based on the closing price of the registrant's common stock as traded on the New York Stock Exchange. Common stock outstanding at March 4, 2005 - 18,372,496 shares. EXHIBIT INDEX DOCUMENTS INCORPORATED BY REFERENCE Designated portions of Registrant's Annual Report to Stockholders for the calendar year ended December 31, 2004 (2004 Annual Report) are incorporated by reference in Part I (Item 1and 2) and Part II (Items 5, 6, 7, 7A, 8 and 9A). Designated portions of the Registrant's Proxy Statement (Proxy Statement) relating to the 2005 annual meeting of stockholders are incorporated by reference in Part III (Items 10, 11, 12 and 14). -2- TABLE OF CONTENTS Page PART I Item 1. Business.............................................. 5 Forward Looking Statements............................ 5 General Development of Business....................... 5 Financial Information about Industry Segments................................. 6 Narrative Description of Business..................... 7 Geographical Service Areas and Number of Customers at Year-end................... 7 Rates and Regulation.................................. 9 Water Supply.......................................... 10 Non-regulated Operations.............................. 13 Utility Plant Construction .......................... 14 Sale of Surplus Real Properties....................... 14 California Energy Situation........................... 14 Security at Company Facilities........................ 14 Quality of Water Supplies......................... 15 Competition and Condemnation.......................... 15 Environmental Matters ................................ 15 Human Resources....................................... 16 Financial Information about Foreign and Domestic Operations and Export Sales.............. 16 Item 2. Properties ........................................... 16 Item 3. Legal Proceedings..................................... 17 Item 4. Submission of Matters to a Vote of Security Holders.................................. 18 Executive Officers of the Registrant.................. 19 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.................... 21 Item 6. Selected Financial Data............................... 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 21 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................... 21 Item 8. Financial Statements and Supplementary Data........... 21 -3- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................. 21 Item 9A. Controls and Procedures............................... 22 Item 9B. Other Information..................................... 22 PART III Item 10. Directors and Executive Officers of the Registrant................................. 22 Item 11. Executive Compensation................................ 22 Item 12. Security Ownership of Certain Beneficial Owners and Management ............................ 22 Item 13. Certain Relationships and Related Transactions...................................... 22 Item 14. Principal Accountant Fees and Services................ 22 PART IV Item 15. Exhibits, Financial Statement Schedules............... 23 Signatures............................................................. 24 Exhibit Index.......................................................... 26 -4- PART I Item 1. Business. Forward Looking Statements - -------------------------- This annual report, including all documents incorporated by reference, contains forward-looking statements within the meaning established by the Private Securities Litigation Reform Act of 1995 (Act). The forward-looking statements are intended to qualify under provisions of the federal securities laws for "safe harbor" treatment established by the Act. Forward-looking statements are based on currently available information, expectations, estimates, assumptions, projections, and management's judgment about the Company, the water utility industry, and general economic conditions. Such words as expects, intends, plans, believes, estimates, assumes, anticipates, projects, predicts, forecasts, or variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not guarantees of future performance. They are subject to uncertainty and changes in circumstances. Actual results may vary materially from what is contained in a forward-looking statement. Factors that may cause a result different than expected or anticipated include: governmental and regulatory commissions' decisions, including decisions on proper disposition of property; changes in regulatory commissions' policies and procedures; the timeliness of regulatory commissions' actions concerning rate relief; new legislation; the ability to satisfy requirements related to the Sarbanes-Oxley Act and other regulations on internal controls; electric power interruptions; increases in suppliers' prices and the availability of supplies including water and power; fluctuations in interest rates; changes in environmental compliance and water quality requirements; acquisitions and the ability to successfully integrate acquired companies; the ability to successfully implement business plans; changes in customer water use patterns; the impact of weather on water sales and operating results; access to sufficient capital on satisfactory terms; civil disturbances or terrorist threats or acts, or apprehension about the possible future occurrences of acts of this type; the involvement of the United States in war or other hostilities; restrictive covenants in or changes to the credit ratings on current or future debt that could increase financing costs or affect the ability to borrow, make payments on debt, or pay dividends; and other risks and unforeseen events. When considering forward-looking statements, the reader should keep in mind the cautionary statements included in this paragraph. The Company assumes no obligation to provide public updates on forward-looking statements. a. General Development of Business ------------------------------- California Water Service Group is a holding company incorporated in Delaware with five operating subsidiaries: California Water Service Company (Cal Water), CWS Utility Services (Utility Services), New Mexico Water Service Company (New Mexico Water), Washington Water Service Company (Washington Water) and Hawaii Water Service Company, Inc. (Hawaii Water). Cal Water, New Mexico Water, Washington Water and Hawaii Water are regulated public utilities. The regulated utility entities also provide some non-regulated services. Utility Services provides non-regulated services to private companies and municipalities. Cal Water was the originating company and began operations in 1926. The other entities were incorporated within the last 10 years. California water operations are conducted by the Cal Water and Utility Services entities, which provide service to 451,800 customers in 75 California communities through 26 separate districts. Of these 26 districts, 24 districts are regulated water systems, which are subject to regulation by the California Public Utilities Commission (CPUC). The other 2 districts, the City of Hawthorne and the City of Commerce, are governed through their respective city councils and are considered non-regulated because they are outside of the CPUC's jurisdiction. Their activities are reflected in the Company's operating revenue and operating costs, as the risks and rewards of these operations are similar to the Company's regulated activities. California water operations account for 96% of the total customers and 96% of the total operating revenue. -5- Washington Water provides domestic water service to 15,000 customers in the Tacoma and Olympia areas. Washington Water's utility operations are regulated by the Washington Utilities and Transportation Commission. Washington Water accounts for 3% of the total customers and 2% of the total operating revenue. New Mexico Water provides service to 5,800 water and wastewater customers in the Belen, Los Lunas and Elephant Butte areas in New Mexico. Its regulated operations are subject to the jurisdiction of the New Mexico Public Regulation Commission. New Mexico Water accounts for 1% of the total customers and 1% of the total operating revenue. Hawaii Water provides water service to 500 customers on the island of Maui, including several large resorts and condominium complexes. Its regulated operations are subject to the jurisdiction of the Hawaii Public Utilities Commission. Hawaii Water accounts for less than 1% of the total customers and 1% of the total operating revenue. Other non-regulated activities consist primarily of operating water systems, which are owned by other entities; providing meter reading and billing services; leasing communication antenna sites on the Company's properties; operating recycled water systems; providing brokerage services for water rights; providing lab services for water quality testing; and selling surplus property. The results of these activities are reported below operating profit on the income statement and therefore the revenue is not included in operating revenue. Due to the variety of services provided and activities being outside of the Company's core business, the number of customers is not tracked for these non-regulated activities except customers for the City of Hawthorne and the City of Commerce. Non-regulated activities comprised 5% of the Company's total net income in 2004. The regulatory entities governing the Company's regulated operations are sometimes referred to as the Commissions in this report. Rates and operations for regulated customers are subject to the jurisdiction of the respective state's regulatory commission. The Commissions require that water and wastewater rates for each regulated district be independently determined. The Commissions are expected to authorize rates sufficient to recover normal operating expenses and allow the utility to earn a fair and reasonable return on invested capital. Rates for the City of Hawthorne and City of Commerce water systems are established in accordance with operating agreements and are subject to ratification by the respective city councils. Fees for other non-regulated activities are based on contracts negotiated between the parties. The Company's mailing address and contact information are: California Water Service Group 1720 North First Street San Jose, California 95112-4598 telephone number: 408-367-8200 www.calwatergroup.com --------------------- Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports are available free of charge through the Company's website. The reports are available on the Company's website on the same day they appear on the SEC's website. During the year ended December 31, 2004, there were no significant changes in the kind of products produced or services rendered or those provided by the Company's operating subsidiaries, or in the markets or methods of distribution. b. Financial Information about Industry Segments --------------------------------------------- The Company operates primarily in one business segment, the supply and distribution of water and providing water-related utility services. -6- c. Narrative Description of Business --------------------------------- The business is conducted through the operating subsidiaries. The bulk of the business consists of the production, purchase, storage, treatment, testing, distribution and sale of water for domestic, industrial, public and irrigation uses, and for fire protection. Also provided are non-regulated water-related services under agreements with municipalities and other private companies. The non-regulated services include full water system operation, billing and meter reading services. Non-regulated operations also include the lease of communication antenna sites, lab services and water rights brokerage. Earnings may be significantly affected by the sale of surplus real property. Operating results from the water business fluctuate according to the demand for water, which is often influenced by seasonal conditions, such as summer temperatures or the amount and timing of precipitation in the Company's service areas. Revenue, expenses and income are affected by changes in water sales. Expenses for purchased water, purchased power and pump taxes will vary due to changes in water sales. The majority of other costs, such as payroll and benefits, depreciation, interest on long-term debt and property taxes are more predictable, remain fairly constant, and are not significantly impacted by variations in the amount of water sold. As a result, earnings are highest in the high use, warm weather summer months when rainfall is lower. Earnings are lower in the cool winter months when most rainfall takes place in the Company's service territories. The Company distributes water in accordance with accepted water utility methods. Where applicable, the Company holds franchises and permits in the cities and communities where it operates. The franchises and permits allow the Company to operate and maintain facilities in public streets and right of ways as necessary. The Company operates the City of Hawthorne and the City of Commerce water systems under lease agreements. In accordance with the lease agreements, the Company receives all revenues from operating the systems and is responsible for paying the operating costs. Under other contract arrangements, the Company operates municipally owned water systems, privately owned water systems, and recycled water distribution systems, but is not responsible for all operating costs. These contracts are fee-per-service, fixed-fee or cost-plus contracts. The Company also provides billing and other customer services to a number of municipalities. The Company intends to continue exploring opportunities to expand its regulated and non-regulated businesses in the western United States. The opportunities could include system acquisitions, lease arrangements similar to the City of Hawthorne contract, full service system operation and maintenance agreements, meter reading, billing contracts and other utility related services. Management believes that a holding company structure facilitates providing non-regulated utility services, which are not subject to Commission jurisdiction. Geographical Service Areas and Number of Customers at Year-end -------------------------------------------------------------- The Company's principal markets are users of water within its service areas. Most of the geographical service areas or districts are regulated. In addition, City of Hawthorne and City of Commerce are included due to similarities in structure and risk of operations. The approximate number of customers served in each district is as follows: -7- Regulated Customers, City of Hawthorne and City of Commerce Customers at December 31,
SAN FRANCISCO BAY AREA 2004 2003 ------- ------- Mid-Peninsula (serving San Mateo and San Carlos) 36,100 36,100 South San Francisco (including Colma and Broadmoor) 16,700 16,600 Bear Gulch (serving Menlo Park, Atherton, Woodside and Portola Valley) 17,700 17,600 Los Altos (including portions of Cupertino, Los Altos Hills, Mountain View and Sunnyvale) 18,500 18,400 Livermore 17,900 17,600 ------- ------- 106,900 106,300 ------- ------- SACRAMENTO VALLEY Chico (including Hamilton City) 25,900 25,200 Oroville 3,500 3,500 Marysville 3,800 3,800 Dixon 2,900 2,900 Willows 2,300 2,300 Redwood Valley 2,000 1,900 ------- ------- 40,400 39,600 ------- ------- SALINAS VALLEY Salinas 27,800 27,700 King City 2,300 2,300 ------- ------- 30,100 30,000 ------- ------- SAN JOAQUIN VALLEY Bakersfield 62,400 60,900 Stockton 41,800 42,000 Visalia 34,500 33,300 Selma 5,800 5,600 Kern River Valley 4,200 4,200 Antelope Valley 1,400 1,300 ------- ------- 150,100 147,300 ------- ------- LOS ANGELES AREA East Los Angeles (including portions of the cities of Commerce and Montebello) 27,700 27,600 Hermosa-Redondo (serving Hermosa Beach, Redondo Beach and a portion of Torrance) 26,000 25,900 Dominguez (Carson and portions of Compton, Harbor City, Long Beach, Los Angeles and Torrance) 33,500 33,400 Palos Verdes (incl. Palos Verdes Estates, Rancho Palos Verdes, Rolling Hills Estates and Rolling Hills) 24,000 23,900 Westlake (a portion of Thousand Oaks) 7,000 7,000 Hawthorne (leased municipal system) 6,100 6,100 ------- ------- 124,300 123,900 ------- ------- CALIFORNIA TOTAL 451,800 447,100 HAWAII 500 500 NEW MEXICO 5,800 4,100 WASHINGTON 15,000 14,700 ------- ------- COMPANY TOTAL 473,100 466,400 ======= =======
-8- Rates and Regulation - -------------------- The Company's water utility rates and service for the regulated business are subject to the jurisdiction of the state regulatory commissions. The Commissions' decisions and the timing of those decisions can have a significant impact on the operations and earnings. Since the Company's 24 California regulated operating districts are not physically integrated, rates are set independently for each district as required by the CPUC. General office (headquarters) expenses and capital expenditures are considered separately and allocated ratably to the operating districts. General and Step Rate Increases General rate case (GRC) applications in California address district and general office operating costs and capital requirements for a forward-looking three-year period. GRC decisions typically authorize an immediate rate increase and annual step rate increases for the three-year cycle. Step rate increases are generally effective at the start of each calendar year, and are designed to maintain the return on equity (ROE) authorized in the initial decision in succeeding years. Effective January 1, 2003, Cal Water is required to file a GRC for each operating district every three years. Previously, Cal Water's GRC preliminary applications were submitted in July of each year. Effective in 2005, preliminary applications are scheduled for submission in May and each year thereafter. According to the CPUC's processing schedule, a final decision should be expected about 12 months after the filings are accepted by the CPUC. During 2003, Cal Water received decisions for its 2001 GRC applications in September 2003, 26 months after being submitted. The decisions on 2002 GRC applications were received in April 2004. For the 2003 GRC applications, decisions were received on schedule in September 2004. The backlog of Cal Water's overdue filings has been cleared and there are no pending filings that have gone beyond the expected decision date. Cal Water expects future filings to receive decisions on the CPUC's published processing time line. If decisions are delayed in the future, legislation enacted in 2003 gives the Company protection by establishing an effective date when the decision should have been made, allowing interim rates to be charged and retroactive adjustments once the CPUC renders a decision. Because districts are on different three-year GRC rate case cycles, the number of customers affected by GRC filings varies from year to year. Water rates for Washington Water and New Mexico Water regulated operations are set based on historic 12-month data. Applications are filed on an "as needed" basis and can be submitted annually. Water rates for Hawaii Water are set based on a combination of historical base and forward-looking methodology and are allowed to be filed annually. In these states, regulatory procedures do not provide for step rate increases or offset increases, (see "Offsetable Expenses and Balancing Accounts" below) except for Hawaii which allows immediate rate adjustments to changes in purchased power rates. Offsetable Expenses and Balancing Accounts The Company records costs for purchased water, purchased power and pump taxes as incurred. Expenses for these categories above levels included in prior GRC decisions are tracked in off-line expense balancing or memorandum accounts. The cost increases are referred to as offsetable expenses. When the CPUC authorizes a rate increase to recover the costs tracked in expense balancing or memorandum accounts, the rate increase is referred to as an offset rate increase. The Company does not record revenue related to the balancing accounts until authorized by the CPUC, and then only as the authorized rates are included in customers' monthly billings. Currently, recovery of balancing and memorandum accounts is subject to limitation based on a review of district earnings for the past calendar year. If the recorded return on net utility plant (rate base) exceeds the rate authorized by the Commission, recovery of the balancing account balance is adjusted by the amount of earnings above the authorized return. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-- RATES AND REGULATIONS" section for more information on rates and regulation. -9- Water Supply - ------------ Cal Water obtains its water supply from wells, surface runoff or diversion, and by purchase from public agencies and other wholesale suppliers. The Company's water supply has been adequate to meet customer demand; however, during periods of drought some districts have experienced mandatory water rationing. California's rainy season usually begins in November and continues through March with the most rain typically falling in December, January and February. During winter months, reservoirs and underground aquifers are replenished by rainfall. Snow accumulated in the mountains provides an additional water source when spring and summer temperatures melt the snowpack producing runoff into streams and reservoirs, and also replenishing underground aquifers. Washington and Hawaii receive rain in all seasons with the majority falling during winter months. Washington Water and Hawaii Water draw all of their water supply by pumping from wells. New Mexico Water's rainfall normally occurs in all seasons, but is heaviest in the summer monsoon season. New Mexico Water pumps all of its water supply from wells based on its water rights. The Company's water business is seasonal in nature and weather conditions can have a pronounced effect on customer usage and thus, impact operating revenues and net income. Customer demand for water generally is lower during the cooler and rainy winter months. Demand increases in the spring when warmer weather returns and the rains end, and customers use more water for outdoor purposes, such as landscape irrigation. Warm temperatures during the generally dry summer months result in increased demand. Water usage declines during the fall as temperatures decrease and the rainy season begins. During years in which precipitation is especially heavy or extends beyond the spring into the early summer, customer demand can decrease from historic normal levels, generally due to reduced outdoor water usage. Likewise, an early start to the rainy season during the fall can cause a decline in customer usage and have a negative impact on revenue. When summer temperatures are cooler than normal, water usage is generally lower and can result in lower revenue and lower earnings. A warmer than normal summer can result in higher customer usage and an increase in revenue and earnings. Drought can have an impact on the business. When rainfall is below average for consecutive years, drought conditions can develop and certain customers may be required to reduce consumption to preserve available supply. As an example, from 1987 to 1993, California experienced a six-year period when rainfall was below historic average. During that period, some districts issued water-rationing requirements to their customers. In certain districts, penalties were assessed on customers who exceeded monthly allotments, which was approved by the CPUC after local governments enacted ordinances for drought. During past drought periods, the CPUC has allowed modifications to Cal Water's customer billings that provided a means to recover a portion of revenue that was deemed lost due to conservation measures, although there are no assurances the CPUC would do so in future droughts. As noted above, Washington Water, New Mexico Water and Hawaii Water obtain their entire water supply from wells. Historically, about half of Cal Water's water supply is purchased from wholesale suppliers with the balance pumped from wells. During 2004, approximately 48 percent of the Cal Water supply was obtained from wells, 48 percent was purchased from wholesale suppliers and 4 percent was obtained from surface supplies. Well water is generally less expensive and Cal Water strives to maximize the use of its well sources in districts where there is an option between well or purchased supply sources. The Company has five California water treatment plants in the Bakersfield, Bear Gulch, Kernville, Oroville and Redwood Valley districts. A new plant was put into service during 2003 in Bakersfield, with a capacity of 20 million gallons per day. Water for operation of the plant is drawn from the Kern River under a long-term contract with the City of Bakersfield. The smaller Bakersfield treatment plant was removed from service when the new plant became fully functional. The other four plants have a capacity of 13 million gallons per day. -10- During 2004, the Company delivered 139 billion gallons of water to its customers, up 6% from the 132 billion gallons delivered in 2003. 2004 average daily water production was 380 million gallons, while the maximum single day production was 635 million gallons. By comparison, in 2003, average daily water production was 361 million gallons and the maximum single day production was 661 million gallons. The increase was due to increased customers and improved overall weather conditions. The following table shows the quantity of water purchased and the percentage of purchased water to total water production in each California operating district that purchased water in 2004. All other districts receive 100% of their water supply from wells.
(MG) Water Production Supply District Purchased Purchased Source of Purchased Supply - -------- --------- --------- -------------------------- SAN FRANCISCO BAY AREA Mid-Peninsula 6,255 100% San Francisco Water Department South San Francisco 3,387 100% San Francisco Water Department Bear Gulch 4,665 95% San Francisco Water Department Los Altos 3,092 60% Santa Clara Valley Water District Livermore 3,087 75% Alameda County Flood Control and Water Conservation District SACRAMENTO VALLEY Oroville 1,072 94% Pacific Gas and Electric Co. and County of Butte Redwood Valley 150 73% County of Lake SAN JOAQUIN VALLEY Antelope/Kern 206 23% Antelope Valley East Kern Water District Bakersfield 3,680 15% Kern County Water Agency and City of Bakersfield Stockton 6,268 58% Stockton-East Water District LOS ANGELES AREA East Los Angeles 4,810 71% Central Basin Municipal Water District Dominguez 11,791 85% West Basin and Central Basin Municipal Water Districts City of Commerce 146 17% West Basin Municipal Water District Hawthorne 1,569 94% West Basin Municipal Water District Hermosa-Redondo 4,068 85% West Basin Municipal Water District Palos Verdes 6,952 100% West Basin Municipal Water District Westlake 3,193 100% Calleguas Municipal Water District MG = million gallons
The Bear Gulch district obtains a portion of the water supply from surface runoff from the local watershed. In the Oroville and Redwood Valley districts, the water purchased is from a surface supply. The surface sources are processed through the water treatment plants before being delivered to the distribution system. In the Bakersfield district, the Company purchases surface supply then processes the water through its treatment plant. In addition, the Bakersfield district purchases treated water as a component to its water supply. The Chico, Marysville, Dixon, and Willows districts in the Sacramento Valley, the Salinas and King City districts in the Salinas Valley, and the Selma and Visalia districts in the San Joaquin Valley obtain their entire supply from wells. -11- In the Salinas district, which accounts for 4% of the Company's revenue, several wells representing approximately 25% of the district's supply were taken out of service in the last twelve months. The Company is installing treatment systems on some of the wells that have been taken out of service. The treatment systems may not be in service in time for 2005 peak summer demand. It may be necessary for customers to conserve in the spring and summer to insure adequate system pressures. Management believes upon successful execution of its plans that water supply issues in the Salinas district can be adequately resolved in 2006 and beyond. Purchases for the Los Altos, Livermore, Oroville, Redwood Valley, Stockton, and Bakersfield districts are pursuant to long-term contracts expiring on various dates after 2011. The water supplies purchased for the Dominguez, East Los Angeles, Hermosa-Redondo, Palos Verdes, and Westlake districts, the City of Hawthorne system, and the City of Commerce system are provided by public agencies pursuant to a statutory obligation of continued non-preferential service to purveyors within the agencies' boundaries. Purchases for the South San Francisco, Mid-Peninsula, and Bear Gulch districts are in accordance with long-term contracts with the San Francisco Water Department (SFWD) expiring on June 30, 2009. Management anticipates that the Company will be able to renew each of the water supply contracts as they expire. The price of wholesale water purchases is subject to pricing changes imposed by the various wholesale suppliers. Price changes are generally beyond the Company's control. Management expects that the Company will be allowed to recover the wholesale water suppliers' rate increases in customer future rates, although recovery is subject to approval by the CPUC. Shown below are wholesaler price rates and increases that became effective in 2004, and estimated wholesaler price rates changes for 2005.
2004 2005 Effective Percent Effective Percent District Month Change Unit Cost Month Change Unit Cost -------- ----- ------ --------- ----- ------ ---------- Antelope/Kern July 0.0% $220/af July 0.0% $220/af Bakersfield * July 18.3% 136/af July 7.4% 146/af Bear Gulch July 2.7% 1.13/ccf July 4.4% 1.18/ccf City of Commerce Jan 2.0% 520/af Jan 2.9% 535/af Dominguez Jan 2.0% 520/af Jan. 2.9% 535/af East Los Angeles July 0.0% 457/af July 6.8% 488/af Hawthorne Jan 2.0% 520/af Jan. 2.9% 535/af Hermosa-Redondo Jan 2.0% 520/af Jan. 2.9% 535/af Livermore Jan. 0.0% 1.29/ccf Jan. 0.0% 1.29/ccf Los Altos July 7.6% 495/af July 6.1% 525/af Oroville Jan 0.0% 69,200/yr Jan. 8.4% 75,000/yr Palos Verdes Jan 2.0% 520/af Jan. 2.9% 535/af Mid Peninsula July 2.7% 1.13/ccf July 4.4% 1.18/ccf Redwood Valley May 5.0% 46.17/af May 4.0% 48.00/af So. San Francisco July 2.7% 1.13/ccf July 4.4% 1.18/ccf Stockton April -10.9% 304,592/mo April 23.5% 376,292/mo Westlake Jan. 4.1% 587/af Jan. 8.4% 636/af af = acre foot; ccf = hundred cubic feet; yr = fixed annual cost; mo = fixed monthly cost * treated water
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - WATER SUPPLY" concerning more information on adequacy of supplies. -12- The Company works with all local suppliers and agencies responsible for water supply to insure adequate, long-term supply for each system. Non-regulated Operations ------------------------ Non-regulated operations include full service operation and maintenance of water systems for cities and private owners, operation of recycled water systems, meter reading services, utility billing services, laboratory services, water rights brokering, sales of surplus properties, and leases of antenna sites. Non-regulated revenue received from water system operations is generally determined on a fee-per-customer basis. With the exception of the agreements for operation of the City of Hawthorne and City of Commerce water systems, revenue and expenses from non-regulated operations are accounted for in other income and expense on a pretax basis in the Consolidated Statements of Income. The Company reports revenue and expenses for the City of Hawthorne and City of Commerce leases in operating revenue and operating expenses because the Company is entitled to retain all customer billings and is generally responsible for all operating expenses. The Company operates municipally owned water systems under contract for the various cities. Washington Water operates numerous private water systems under contract arrangements. The City of Hawthorne lease is a 15-year lease and expires in 2011. The City of Commerce lease is a 15-year lease and expires in 2018. The terms of other operating agreements range from one-year to three-year periods with provisions for renewals. The Company provides meter reading and customer billing services for several municipalities in California. The Company also provides sewer and refuse billing services to several municipalities. In February 1996, the Company entered into an agreement to operate the City of Hawthorne water system. The system, which is located near the Hermosa-Redondo district, serves about half of Hawthorne's population. The agreement required the Company to make an up-front $6.5 million lease payment to the city that is being amortized over the lease term. Additionally, annual lease payments of $0.1 million are made to the city and indexed to changes in water rates. Under the lease, the Company is responsible for all aspects of system operation and capital improvements, although title to the system and system improvements reside with the city. At the end of the lease, the city is required to reimburse the Company for the unamortized value of capital improvements made during the term of the lease. In exchange, the Company receives all revenue from the water system, which was $5.9 million and $5.4 million in 2004 and 2003, respectively. In July 2003, an agreement was negotiated with the City of Commerce to lease and operate its water system. At this time, the lease has not been formally executed by the parties. Both parties are in agreement with substantially all terms and are operating as if the agreement was executed. The lease requires the Company to pay $0.8 million per year in monthly installments and pay $200 dollars per acre-foot for water usage exceeding 2,000 acre-feet per year plus a percentage of certain operational savings that may be realized. Under the lease agreement, the Company is responsible for all aspects of the system's operations. The city is responsible for capital expenditures, and title to the system and system improvements resides with the city. The Company has risks of operation and collection of amounts billed to customers. The agreement includes a procedure to request rate changes for costs changes outside of the Company's control and other cost changes. In exchange, the Company receives all revenue from the system, which totaled $1.8 million for 2004 and $0.8 million for the six month period ended December 2003. The Company leases antenna sites to telecommunication companies, which place equipment at various Company owned sites. Individual lease payments range from $700 to $2,600 dollars per month. The antennas are used in cellular phone and personal communication applications. The Company continues to negotiate new leases for similar uses. The Company provides laboratory services to San Jose Water Company and Great Oaks Water Company and for the systems under operation and maintenance agreements. -13- Utility Plant Construction -------------------------- The Company has continually extended, enlarged, and replaced its facilities as required to meet increasing demands and to maintain the water systems. The Company obtains construction financing using funds from operations, short-term bank borrowings, long-term financing, advances for construction and contributions in aid of construction that are funded by developers. The amounts received from these sources are shown in the section captioned "Statements of Cash Flows" in the annual report, which is incorporated into this document by reference. Advances for construction are cash deposits from developers for construction of water facilities or water facilities deeded from developers. These advances are generally refundable without interest over a period of 40 years by equal annual payments. Contributions in aid of construction consist of nonrefundable cash deposits or facilities transferred from developers, primarily for fire protection and relocation projects. The Company cannot control the amount received from developers. This amount fluctuates from year-to-year as the level of construction activity carried on by developers varies. This activity is impacted by the demand for housing, commercial development, and general business conditions, including interest rates. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - LIQUIDITY AND CAPITAL RESOURCES" for additional information. Sale of Surplus Real Properties ------------------------------- When properties are no longer used and useful for public utility purposes, the Company is no longer allowed to earn a return on its investment in the property in the regulated business. The surplus property is transferred out of the regulated operations and some properties have been sold or offered for sale. As these sales are subject to local real estate market conditions and can take several months or years to close, income from the sale of surplus properties may or may not be consistent from year to year. The CPUC is currently reviewing the Company's handling of these surplus properties, which may adversely impact future sales, results of operations and cash flows. See item 3, "LEGAL PROCEEDINGS" for additional information. California Energy Situation --------------------------- The business uses electrical power primarily to pump water from its sources and move it through the distribution systems. The California energy crisis was well publicized. In response to supply shortages, electric power rates were increased significantly in 2001 and 2002. Electricity rates stabilized during 2003 and the Company received credits from the electrical power companies. Electricity rates were lower in 2004 as compared to 2003. Electrical power costs are described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - RESULTS OF OPERATIONS." There is still uncertainty about the state's ability to avoid future rolling electric blackouts, although the Company did not experience any major electric blackouts during 2004 or 2003. The Company continues to use power efficiently to pass lower power costs on to its customers. The Company maintains backup power systems to continue water service to its customers if the power companies' supplies are interrupted. Many of the Company's well sites are equipped with emergency electric generators designed to produce electricity to keep the wells operating during power outages. Storage tanks also provide customers with water during blackout periods. Security at Company Facilities ------------------------------ Due to terrorist and other risks, the Company has heightened security at its facilities over the past few years and has taken added precautions to protect its employees and the water delivered to customers. In 2002, federal legislation was enacted that resulted in new regulations concerning security of water facilities, including submitting vulnerability assessment studies to the federal government. The Company has complied with EPA regulations concerning vulnerability assessments and has made filings to the EPA as required. In addition, communication plans have been developed as a component of the Company's procedures. While the Company does not make public comments on its security programs, the Company has been in contact with federal, state, and local law enforcement agencies to coordinate and improve water delivery systems' security. -14- Quality of Water Supplies ------------------------- The Company operating practices are designed to produce potable water in accordance with accepted water utility practices. Water entering the distribution systems from surface sources is treated in compliance with federal and state Safe Drinking Water Acts (SWDA) standards. Most well supplies are chlorinated or chloramined for disinfection. Water samples from each water system are analyzed on a regular, scheduled basis in compliance with regulatory requirements. The Company operates two state-certified water quality laboratories at the San Jose General Office and Kern River Valley facilities that provide testing for most California operations. Certain tests in California are contracted with independent certified labs qualified under the Environmental Laboratory Accreditation Program. Local independent state certified labs provide water sample testing for the Washington, New Mexico and Hawaii operations. In recent years, federal and state water quality regulations have continued to increase water testing requirements. The SDWA continues to be amended to reflect new public health concerns. The Company monitors water quality standard changes and upgrades its treatment capabilities to maintain compliance with the various regulations. Competition and Condemnation ---------------------------- The Company's principal operations are regulated by the Commission of each state. Under state laws, no privately owned public utility may compete within any service territory that the Company already serves without first obtaining a certificate of public convenience and necessity from the Commission. Issuance of such a certificate would only be made upon finding that the Company's service is deficient. To management's knowledge, no application to provide service to an area served by the Company has been made. State law provides that whenever a public agency constructs facilities to extend a utility system into the service area of a privately owned public utility, such an act constitutes the taking of property and requires reimbursement to the utility for its loss. State statutes allow municipalities, water districts and other public agencies to own and operate water systems. These agencies are empowered to condemn properties already operated by privately owned public utilities. The agencies are also authorized to issue bonds, including revenue bonds, for the purpose of acquiring or constructing water systems. However, if a public agency were to acquire utility property by eminent domain action, the utility would be entitled to just compensation for its loss. Such an action was being contemplated in the Company's Selma district, but upon further review, this condemnation action was rejected by the city council. To management's knowledge, no municipality, water district, or other public agency is contemplating or has any action pending to acquire or condemn any of the Company's systems. In recent years, consolidation within the water industry has accelerated. A number of publicly traded water companies have been acquired or merged into larger domestic companies. Several acquisitions of publicly traded companies have also been completed by much larger foreign companies. The Company participated in the industry consolidation by acquiring Dominguez Services Corporation in 2000, making other small acquisitions and pursuing expansion of its non-regulated operations. The Company intends to continue pursuit of opportunities to expand its business in the western United States. Environmental Matters --------------------- The Company's operations are subject to environmental regulation by various governmental authorities. Environmental affairs programs have been designed to provide compliance with water discharge regulations, underground and above ground fuel storage tank regulations, hazardous materials management plans, hazardous waste regulations, air quality permitting requirements, wastewater discharge limitations and employee safety issues related to hazardous materials. Also, the Company actively investigates alternative technologies for meeting environmental regulations and continues the traditional practices of meeting environment regulations. -15- Human Resources --------------- At year-end 2004, the Company had 837 employees, including 43 at Washington Water, 15 at New Mexico Water and 6 at Hawaii Water. The Company had 813 and 802 employees in 2003 and 2002, respectively. In California, most non-supervisory employees are represented by the Utility Workers Union of America, AFL-CIO, except certain engineering and laboratory employees who are represented by the International Federation of Professional and Technical Engineers, AFL-CIO. At December 31, 2004, there were 556 union employees. In December 2002, the Company negotiated three-year agreements with both unions covering 2003 through 2005. Improvements in employee benefit plans, principally pension benefits, and wage increases were part of the agreement. Wage increases under the agreements are 1% in 2003, 1.5% in 2004 and 2% in 2005. For 2005, the agreements allowed for re-negotiations of wage increases, which were subsequently changed to 2.5% for 2005. The agreements are scheduled for renewal in the second half of 2005 and the Company maintains good relationships with the unions. Employees at Washington Water, New Mexico Water, and Hawaii Water do not belong to unions. d. Financial Information about Foreign and Domestic Operations and Export Sales. ----------------------------------------------------------------------------- The Company does not have export sales. Item 2. Properties. The Company's physical properties consist of offices and water systems to accomplish the production, storage, treatment, and distribution of water. These properties are located in or near the Geographic Service Areas listed above in Item 1.c. "Narrative Description of the Business." The general office, which houses accounting, engineering, information systems, human resources, purchasing, regulatory, water quality, and executive staffs is located in San Jose, California. All properties are maintained in good operating condition. The real properties owned are held in fee simple title. Properties owned by Cal Water are subject to the indenture securing first mortgage bonds of which $27 million remained outstanding at December 31, 2004. Washington Water has long-term bank loans that are secured primarily by utility plant. New Mexico Water has a long-term loan which is secured by utility plant. Cal Water owns 654 wells and operates 10 leased wells. There were 386 owned storage tanks with a capacity of 251 million gallons, 31 managed storage tanks with a capacity of 28 million gallons, and 3 reservoirs with a capacity of 220 million gallons. There are 5,400 miles of supply and distribution mains in the various systems. Washington Water owns 306 wells and manages 94 wells. There are 110 owned storage tanks and 37 managed storage tanks with a storage capacity of 7 million gallons. There are 386 miles of supply and distribution lines. New Mexico Water owns 10 wells. There are 6 storage tanks with a storage capacity of 4 million gallons. There are 94 miles of supply and distribution lines. Hawaii Water owns 6 wells. There are 3 storage tanks with a storage capacity of 5 million gallons. There are 30 miles of supply and distribution lines. In the leased City of Hawthorne and City of Commerce systems or in systems that are operated under contract for municipalities or private companies, title to the various properties is held exclusively by the municipality or private company. Water supply, security, environmental, condemnation and utility plant construction items are discussed in Item 1.c, Narrative of the Business. Utility Plant construction items are also discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - LIQUIDITY AND CAPITAL RESOURCES." -16- Item 3. Legal Proceedings. In 1995, the State of California's Department of Toxic Substances Control (DTSC) named Cal Water as a potential responsible party for cleanup of a toxic contamination plume in the Chico groundwater. The toxic spill occurred when cleaning solvents, which were discharged into the city's sewer system by local dry cleaners, leaked into the underground water supply. The DTSC contends that Cal Water's responsibility stems from its operation of wells in the surrounding vicinity that caused the contamination plume to spread. While Cal Water is cooperating with the cleanup effort, Cal Water denies any responsibility for the contamination or the resulting cleanup and intends to vigorously resist any action that may be brought against Cal Water. In December 2002, Cal Water was named along with other defendants in two lawsuits filed by DTSC for the cleanup of the plume. The suits assert that the defendants are jointly and severally liable for the estimated cleanup of $8.7 million. A mediation process has begun and no settlement demands by any party have been made at this time. Management believes that insurance coverage exists for this claim and if Cal Water were ultimately held responsible for a portion of the cleanup costs, there would not be a material adverse effect to its financial position or results of operations. Cal Water's insurance carrier is currently paying the cost of legal representation in this matter. In February 2003, the CPUC's Office of Ratepayer Advocates (ORA), a division of the CPUC responsible for representing ratepayers, recommended that Cal Water be fined up to $9.6 million and refund $0.5 million in revenue for failing to report three acquisitions as required by the CPUC. One acquisition was completed prior to adoption of the reporting requirement by the CPUC; the others were inadvertently not reported by Cal Water. In July 2004, the CPUC issued decision D. 04-07-033, in which Cal Water was assessed a fine of $75,000 and a reduction of 50 basis points (0.5%) in the allowed return on equity for its Salinas district, the district that included two of the three acquisitions. The reduction in the allowed return on equity will be terminated upon CPUC approval of the next GRC filing for the Salinas district, which is expected in the fourth quarter of 2005. Cal Water declined to appeal the decision. In June 2004, the City Council of Selma took initial steps to negotiate the purchase of the Company's Selma water system under condemnation procedures. In October 2004, the City Council voted unanimously not to adopt a resolution of necessity and to abandon its condemnation effort. In 1995, the California Legislature enacted the Water Utility Infrastructure Improvement Act of 1995 (Infrastructure Act) to encourage water utilities to sell surplus properties and reinvest in needed water utility facilities. In September 2003, the CPUC issued decision D.03-09-021 in Cal Water's 2001 GRC filing. In this decision, the CPUC ordered Cal Water to file an application setting up an Infrastructure Act memorandum account with an up-to-date accounting of all real property that was at any time in rate base and that Cal Water had sold since the effective date of the Infrastructure Act. Additionally, the decision directed the CPUC staff to file a detailed report on its review of Cal Water's application. On January 11, 2005, the ORA issued a report expressing its opinion that Cal Water had not proven that surplus properties sold since 1996 were no longer used and useful. The ORA recommended that Cal Water be fined $160,000 and that gains from property sales should generally benefit ratepayers. Management strongly disagrees with ORA's conclusions and recommendations. During the period under review, Cal Water's cumulative gains from surplus property sales were $19.2 million, which included an inter-company gain related to a transaction with Utility Services and a like-kind exchange with a third party. If the CPUC finds any surplus property sale or transfer was recorded inappropriately, Cal Water's rate base could be reduced, which would lower future revenues, net income, and cash flows. Management believes it has fully complied with the Infrastructure Act and that ORA's conclusions and recommendations are without merit. Cal Water intends to vigorously oppose ORA's findings. Accordingly, Cal Water has not accrued a liability in the financial statements for ORA's recommendations. At this time, Cal Water does not know when or how the CPUC will rule in this matter. -17- Periodically, the Company is involved in other proceedings or litigation arising in the ordinary course of business. Management does not believe that the ultimate resolution of these matters will materially affect the Company's financial position, results of operations, or cash flows. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders in the fourth quarter of 2004. -18- Executive Officers of the Registrant - ------------------------------------
Name Positions and Offices with California Water Service Group Age - ---- --------------------------------------------------------- --- Robert W. Foy Chairman of the Board since January 1, 1996. A director since 68 (1) 1977. Formerly President and Chief Executive Officer of Pacific Storage Company, a diversified transportation and warehousing company with operations in Stockton, Modesto, Sacramento, San Jose, Vallejo, Merced and Auburn, California, where he had been employed for 32 years Peter C. Nelson President and Chief Executive Officer since February 1, 1996. 57 (2) Formerly Vice President, Division Operations (1994-1995) and Region Vice President (1989-1994), Pacific Gas & Electric Company, a gas and electric public utility Richard D. Nye Vice President, Chief Financial Officer and Treasurer since 50 (3) March 2003. Formerly Acting Chief Financial Officer (2001-2002) and Vice President of Finance and Administration (1998-2002) of Cornerstone Propane Partners, L.P., a propane distribution company; previously served in various finance management positions with Frito-Lay, Inc., a snack food company (1989-1998) Paul G. Ekstrom Corporate Secretary since August 1996; Operations 52 (4) Coordinator, 1993 to 1996; District Manager, Livermore, 1988 to 1993; previously served in various field management positions since 1979; an employee since 1972 Calvin L. Breed Controller, Assistant Secretary and Assistant Treasurer since 49 (5) Nov. 1994; previously Treasurer of TCI International, Inc. (1984-1994); a certified public accountant with Arthur Andersen & Co. (1980-1983) (1) Holds the same position with California Water Service Company, New Mexico Water Service Company, Washington Water Service Company, Hawaii Water Service Company, Inc. and CWS Utility Services (2) Holds the same position with California Water Service Company and CWS Utility Services; Chief Executive Officer of New Mexico Water Service Company, Washington Water Service Company and Hawaii Water Service Company, Inc. (3) Holds the same position with California Water Service Company, New Mexico Water Service Company, Washington Water Service Company, Hawaii Water Service Company, Inc. and CWS Utility Services. As noted, Mr. Nye previously served as Vice President Finance and Administration and Acting Chief Financial Officer of Cornerstone Propane Partners, L.P. Cornerstone markets and distributes propane gas in the United States. On June 3, 2004, approximately 19 months after the departure of Mr. Nye, Cornerstone filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. At that time, Cornerstone announced that it was filing for bankruptcy in connection with an agreement it had reached with its senior secured creditors to restructure the company. On December 20, 2004, Cornerstone announced that it had emerged from bankruptcy. Cornerstone Propane Partners, L.P., Debtor Case No. 04-13855 (U.S. Bankruptcy Court S.D.N.Y.). (4) Vice President, Customer Service with California Water Service Company, and Corporate Secretary of California Water Service Company, New Mexico Water Service Company, Washington Water Service Company, Hawaii Water Service Company, Inc. and CWS Utility Services (5) Holds the same position with California Water Service Company
-19-
Name Positions and Offices with California Water Service Company Age - ---- ----------------------------------------------------------- --- Francis S. Ferraro Vice President, Regulatory Matters and Corporate Development 55 (1) since May 2001; Vice President, Regulatory Matters, August 1989 to May 2001. Employed by the California Public Utilities Commission for 16 years, including 1985 through 1989 as an administrative law judge; an employee since 1989 Robert R. Guzzetta Vice President, Engineering and Water Quality since August 1996; 50 (2) Chief Engineer, 1990 to 1996; Assistant Chief Engineer, 1988 to 1990; various engineering department positions since 1977 Christine L. McFarlane Vice President, Human Resources since August 1996; Director 58 of Human Resources, 1991 to 1996; Assistant Director of Personnel, 1989 to 1991; an employee since 1969 Dan L. Stockton Vice President, Information Systems since April 2001; 60 from 1991 to 2001 he served as Chief Operating Officer of Great Oaks Water Company Raymond H. Taylor Vice President, Operations since April 1995; Vice President and 59 Director of Water Quality, 1990 to 1995; Director of Water Quality, 1986 to 1990; an employee since 1982; prior to 1982 an employee of the United States Environmental Protection Agency (1) Also, Vice President, Corporate Development with CWS Utility Services, Vice President, Regulatory Matters with Hawaii Water Service Company, Inc., and Vice President, Regulatory Matters with New Mexico Water Service Company. (2) Also, Vice President, Engineering with CWS Utility Services.
Name Positions and Offices with Washington Water Service Company Age - ---- ----------------------------------------------------------- --- Michael P. Ireland President since December 1999; previously President of Harbor Water 51 Company, Gig Harbor, Washington from 1985 to 1999
No officer or director has any family relationship to any other executive officer or director. No executive officer is appointed for any set term. There are no agreements or understandings between any executive officer and any other person pursuant to which he/she was selected as an executive officer. -20- PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock is traded on the New York Stock exchange under the symbol "CWT". At December 31, 2004, there were 18,367,246 common shares and 139,000 preferred shares outstanding and 4,000 stockholders of record. Additional information required by this Item is contained in the section captioned "Quarterly Financial Data" in the 2004 Annual Report to Stockholders and is incorporated herein by reference. The 2004 Annual Report to Stockholders is included with this report as Exhibit 13.1. Item 6. Selected Financial Data. The information required by this Item is contained in the section captioned "Ten-Year Financial Review" in the 2004 Annual Report to Stockholders and is incorporated herein by reference. The 2004 Annual Report to Stockholders is included with this report as Exhibit 13.1. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required by this Item is contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the 2004 Annual Report to Stockholders and is incorporated herein by reference. The 2004 Annual Report to Stockholders is included with this report as Exhibit 13.1. Item 7A Quantitative and Qualitative Disclosures About Market Risk The information required by this Item is contained in the section captioned "Financial Risk Management" in the 2004 Annual Report to Stockholders and is incorporated herein by reference. The 2004 Annual Report to Stockholders is included with this report as Exhibit 13.1. Item 8. Financial Statements and Supplementary Data. The information required by this Item is contained in the 2004 Annual Report to Stockholders and is incorporated herein by reference. The 2004 Annual Report to Stockholders is included with this report as Exhibit 13.1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. -21- Item 9A. Controls and Procedures The information required by this Item is contained in the sections, "Controls and Procedures" and "Report of Independent Registered Public Accounting Firm" in the 2004 Annual Report to Stockholders and is incorporated herein by reference. The 2004 Annual Report to Stockholders is included with this report as Exhibit 13.1. Item 9B. Other Information None. PART III Item 10. Directors and Executive Officers of the Registrant. The information required by this Item as to directors of the Company is contained in the sections captioned "Board Structure," "Proposals of the Board; Proposal No. 1 - Election of Directors" and "Other Matters - Code of Ethics" of the 2005 Proxy Statement, and is incorporated herein by reference. Information regarding executive officers is included in a separate section captioned "Executive Officers of the Registrant" contained in Part I of this report. Item 11. Executive Compensation. The information required by this Item as to directors of the Company is included under the caption "Director Compensation Arrangements" of the 2005 Proxy Statement and is incorporated herein by reference. The information required by this Item as to compensation of executive officers, including officers who are directors, is included under the caption "Executive Compensation" of the 2005 Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this Item is contained in the section captioned "Stock Ownership of Management and Certain Beneficial Owners" of the 2005 Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. Cal Water provides laboratory services to a subsidiary of SJW Corp., which has ownership of over 5% of the Company's common stock outstanding. The rates charged are comparable to rates charged to other third parties. The revenue for 2004 was approximately $0.1 million. The revenue and income from these activities are not significant to the business. Item 14. Principal Accountant Fees and Services The information required by this Item is contained in the section captioned "Relationship with the Independent Registered Public Accounting Firm" of the 2005 Proxy Statement and is incorporated herein by reference. -22- PART IV Item 15. Exhibits, Financial Statement Schedules. (a) As part of this Form 10-K, the following documents are being filed: 1. Financial Statements: Consolidated Balance Sheets as of December 31, 2004 and 2003 Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 Consolidated Statements of Common Stockholders' Equity and Comprehensive Income for the years ended December 31, 2004, 2003 and 2002 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 Notes to Consolidated Financial Statements, December 31, 2004, 2003 and 2002 Controls and Procedures Reports of Independent Registered Public Accounting Firm The above financial statements are contained in sections bearing the same captions in the 2004 Annual Report to Stockholders which is filed with this Form 10-K and incorporated herein by reference. Refer to Exhibit 13.1 of this Form 10-K. 2. Financial Statement Schedules: No financial statement schedules are being included since the information otherwise required is included in the financial statements and the notes thereto. 3. Exhibits required to be filed by Item 601 of Regulation S-K: The Exhibit Index on page 26 of this Form 10-K is incorporated herein by reference. (a) The exhibits filed as part of this Form 10-K are attached, unless otherwise indicated. The exhibits listed in the Exhibit Index that are not filed with this Form 10-K were previously filed with the Securities and Exchange Commission as indicated and are hereby incorporated by reference. (b) Exhibits required to be filed by Item 601 of Regulation S-K. Refer to Item (a) 3 above and the Exhibit Index on page 26 of this Form 10-K. (c) Additional Financial Statement Schedules. No filings are required under this Item. -23- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CALIFORNIA WATER SERVICE GROUP Date: February 23, 2005 By /s/ Peter C. Nelson PETER C. NELSON, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Date: February 23, 2005 /s/ Robert W. Foy ROBERT W. FOY Chairman, Board of Directors Date: February 23, 2005 /s/ Douglas M. Brown DOUGLAS M. BROWN Member, Board of Directors Date: February 23, 2005 /s/ Edward D. Harris, Jr. EDWARD D. HARRIS, JR., M.D. Member, Board of Directors Date: February 23, 2005 /s/ Bonnie G. Hill BONNIE G. HILL Member, Board of Directors Date: February 23, 2005 /s/ David N. Kennedy DAVID N. KENNEDY Member, Board of Directors Date: February 23, 2005 /s/ Richard P. Magnuson RICHARD P. MAGNUSON Member, Board of Directors Date: February 23, 2005 /s/ Linda R. Meier LINDA R. MEIER Member, Board of Directors Date: February 23, 2005 /s/ Peter C. Nelson PETER C. NELSON President and Chief Executive Officer, Principal Executive Officer Member, Board of Directors Date: February 23, 2005 /s/ George A. Vera GEORGE A. VERA Member, Board of Directors -24- Date: February 23, 2005 /s/ Richard D. Nye RICHARD D. NYE Vice President, Chief Financial Officer and Treasurer; Principal Financial Officer Date: February 23, 2005 /s/ Calvin L. Breed CALVIN L. BREED Controller, Assistant Secretary and Assistant Treasurer; Principal Accounting Officer -25- EXHIBIT INDEX Exhibit Number - ------ Unless filed with this Form 10-K, the documents listed are incorporated by reference to the filings referred to: 3. Articles of Incorporation and By-laws: 3.1 Certificate of Incorporation of California Water Service Group (Filed as Exhibit B of the California Water Service Group Proxy Statement dated March 18, 1999) 3.2 Restated By-laws of California Water Service Group as amended on January 26, 2000 (Exhibit E-2 to Current Report on Form 8-K filed February 3, 2000) 4. Instruments Defining the Rights of Security Holders of California Water Service Group, including Indentures: 4.1 Shareholder Rights Plan; an agreement between California Water Service Group and BankBoston, N.A., rights agent, dated January 28, 1998 (Exhibit 1 to Registration Statement on Form 8-A filed February 13, 1998) 4.2 Certificate of Designations regarding Series D Participating Preferred Stock, as filed with Delaware Secretary of State on September 16, 1999 (Exhibit 4.2 to Annual Report on Form 10-K for the year ended December 31, 2003) 4.3 Thirty-fourth Supplemental Indenture dated as of November 1, 1990, covering First Mortgage 9.86% Bonds, Series CC. (Exhibit 4 to Annual Report on Form 10-K for the year ended December 31, 1990) 4.4 [reserved] 4.5 [reserved] 4.6 [reserved] 4.7 Note Agreement dated August 15, 1995, pertaining to issuance of $20,000,000, 7.28% Series A Unsecured Senior Notes, due November 1, 2025 (Exhibit 4 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995) 4.8 Note Agreement dated March 1, 1999, pertaining to issuance of $20,000,000, 6.77% Series B Unsecured Senior Notes, due November 1, 2028 (Exhibit 4.1 to Annual Report on Form 10-K for the year ended December 31, 1999) -26- 4.9 First Supplement dated October 1, 2000, to Note Agreement of March 1, 1999, pertaining to issuance of $20,000,000, 8.15% Series C Unsecured Senior Notes, due November 1, 2030 (Exhibit 4.12 to Annual Report on Form 10-K for year ended December 31, 2000) 4.10 Second Supplement dated September 1, 2001, to Note Agreement of March 1, 1999, pertaining to issuance of $20,000,000, 7.13% Series D Unsecured Senior Notes, due November 1, 2031 (Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2001) 4.11 Third Supplement dated May 1, 2002, to Note Agreement of March 1, 1999, pertaining to issuance of $20,000,000, 7.11% Series E Unsecured Senior Notes, due May 1, 2032 (Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2002) 4.12 Fourth Supplement dated August 15, 2002, to Note Agreement of March 1, 1999, pertaining to issuance of $20,000,000, 5.90% Series F Unsecured Senior Notes, due November 1, 2017 (Exhibit 4.14 to Annual Report on Form 10-K for the year ended December 31, 2002) 4.13 Fifth Supplement dated November 1, 2002, to Note Agreement of March 1, 1999, pertaining to issuance of $20,000,000, 5.29% Series G Unsecured Senior Notes, due November 1, 2022 (Exhibit 4.15 to Annual Report on Form 10-K for the year ended December 31, 2002) 4.14 Sixth Supplement dated December 1, 2002, to Note Agreement of March 1, 1999, pertaining to issuance of $20,000,000, 5.29% Series H Unsecured Senior Notes, due December 1, 2022 (Exhibit 4.16 to Annual Report on Form 10-K for the year ended December 31, 2002) 4.15 Ninth Supplement dated February 15, 2003, to Note Agreement of March 1, 1999, pertaining to issuance of $10,000,000, 4.58% Series K Unsecured Senior Notes, due June 30, 2010 (Exhibit 4.17 to Annual Report on Form 10-K for the year ended December 31, 2002) 4.16 Tenth Supplement dated February 15, 2003, to Note Agreement of March 1, 1999, pertaining to issuance of $10,000,000, 5.48% Series L Unsecured Senior Notes, due March 1, 2018 (Exhibit 4.18 to Annual Report on Form 10-K for the year ended December 31, 2002) 4.17 Thirteenth Supplemental Trust Indenture whereby California Water Service Company became the successor to Dominguez Water Corporation in the original trust indenture for Dominguez Water Corporation dated August 1, 1954 (Exhibit 4.13 to Annual Report on Form 10-K for the year ended December 31, 2000 [included within Exhibit 4.12 to such report]) 4.18 Eleventh Supplemental Trust Indenture dated as of December 8, 1992, covering First Mortgage 8.86% Bonds, Series J (Exhibit 10.2 to Annual Report on Form 10-K for the year ended December 31, 1997, of Dominguez Services Corporation) -27- 4.19 Twelfth Supplemental Indenture dated as of December 1, 1997, covering First Mortgage 6.94% Bonds, Series K due 2012 (Exhibit 10.3 to Annual Report on Form 10-K for the year ended December 31, 1997, of Dominguez Services Corporation) 4.20 Seventh Supplement dated May 1, 2003, to Note Agreement of March 1, 1999, pertaining to issuance of $10,000,000, 5.54% Series I Unsecured Senior Notes, due May 1, 2023 (Exhibit 4.22 to Quarterly Report on Form 10-Q for the quarter ended March 31, 2003) 4.21 Amended and Restated Eighth Supplement dated May 1, 2003, to Note Agreement of March 1, 1999, pertaining to issuance of $10,000,000, 5.44% Series J Unsecured Senior Notes, due May 1, 2018 (Exhibit 4.23 to Quarterly Report on Form 10-Q for the quarter ended March 31, 2003) 4.22 Twelfth Supplement dated October 24, 2003 to Note Agreement of March 1, 1999, pertaining to the issuance of $20,000,000, 5.55%, Series N Unsecured Senior Notes due December 1, 2013 (Exhibit 4.24 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2003) 4.23 Eleventh Supplement dated November 3, 2003, to Note Agreement of March 1, 1999, pertaining to the issuance of $20,000,000, 5.52%, Unsecured Series M Senior Notes due November 1, 2013 (Exhibit 4.25 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2003) 10. Material Contracts. 10.1 Water Supply Contract between Cal Water and County of Butte relating to Cal Water's Oroville District; Water Supply Contract between Cal Water and the Kern County Water Agency relating to Cal Water's Bakersfield District; Water Supply Contract between Cal Water and Stockton East Water District relating to Cal Water's Stockton District. (Exhibits 5(g), 5(h), 5(i), 5(j), Registration Statement No. 2-53678, which exhibits are incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1974) 10.2 Settlement Agreement and Master Water Sales Contract between the City and County of San Francisco and Certain Suburban Purchasers dated August 8, 1984; Supplement to Settlement Agreement and Master Water Sales Contract, dated August 8, 1984; Water Supply Contract between Cal Water and the City and County of San Francisco relating to Cal Water's Bear Gulch District dated August 8, 1984; Water Supply Contract between Cal Water and the City and County of San Francisco relating to the Cal Water's San Carlos District dated August 8, 1984; Water Supply Contract between Cal Water and the City and County of San Francisco relating to Cal Water's San Mateo District dated August 8, 1984; Water Supply Contract between Cal Water and the City and County of San Francisco relating to Cal Water's South San Francisco District dated August 8, 1984. (Exhibit 10.2 to Annual Report on Form l0-K for the year ended December 31,1984) -28- 10.3 Water Supply Contract dated January 27, 1981, between Cal Water and the Santa Clara Valley Water District relating to Cal Water's Los Altos District (Exhibit 10.3 to Annual Report on Form 10-K for the year ended December 31, 1992) 10.4 Amendments No. 3, 6 and 7 and Amendment dated June 17, 1980, to Water Supply Contract between Cal Water and the County of Butte relating to Cal Water's Oroville District. (Exhibit 10.5 to Annual Report on Form 10-K for the year ended December 31, 1992) 10.5 Amendment dated May 31, 1977, to Water Supply Contract between Cal Water and Stockton-East Water District relating to Cal Water's Stockton District. (Exhibit 10.6 to Annual Report on Form 10-K for the year ended December 31, 1992) 10.6 Second Amended Contract dated September 25, 1987, among Stockton East Water District, California Water Service Company, the City of Stockton, the Lincoln Village Maintenance District, and the Colonial Heights Maintenance District Providing for the Sale of Treated Water. (Exhibit 10.7 to Annual Report on Form 10-K for the year ended December 31, 1987) 10.7 Water Supply Contract dated April 19, 1927, and Supplemental Agreement dated June 5, 1953, between Cal Water and Pacific Gas and Electric Company relating to Cal Water's Oroville District. (Exhibit 10.9 to Annual Report on Form 10-K for the year ended December 31, 1992) 10.8 [reserved] 10.9 [reserved] 10.10 Agreement between the City of Hawthorne and California Water Service Company for the 15-year lease of the City's water system. (Exhibit 10.17 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1996) 10.11 Water Supply Agreement dated September 25, 1996, between the City of Bakersfield and California Water Service Company. (Exhibit 10.18 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1996) 10.12 Water Supply Contract dated November 16, 1994, between California Water Service Company and Alameda County Flood Control and Water Conservation District relating to Cal Water's Livermore District (Exhibit 10.15 to Annual Report on Form 10-K for the year ended December 31, 1994) 10.13 [reserved] 10.14 California Water Service Group Directors Retirement Plan (Exhibit 10.16 to Annual Report on Form 10-K for the year ended December 31, 1997) * -29- 10.15 $60,000,000 Business Loan Agreements between Bank of America as lead arranger/bank and California Water Service Group, and CWS Utility Services and California Water Service Company, and JCC Homes dated August 1, 2001; terminated February 28, 2003 (Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2001) 10.16 $10,000,000 Business Loan Agreement between Bank of America and California Water Service Group and CWS Utility Services dated February 28, 2003 (Exhibit 10.17 to Annual Report on Form 10-K for the year ended December 31, 2002) 10.17 $55,000,000 Business Loan Agreement between Bank of America and California Water Service Company dated February 28, 2003 (Exhibit 10.18 to Annual Report on Form 10-K for the year ended December 31, 2002) 10.18 Executive Severance Plan (Exhibit 10.24 to Annual Report on Form 10-K for the year ended December 31, 1998) * 10.19 California Water Service Group Long-Term Incentive Plan (filed as Appendix A of the California Water Service Group proxy statement dated March 17, 2000) * 10.20 California Water Service Group Deferred Compensation Plan effective January 1, 2001 (Exhibit 10.22 to Annual Report on Form 10-K for the year ended December 31, 2000) * 10.21 California Water Service Company Supplemental Executive Retirement Plan effective January 1, 2001 (Exhibit 10.23 to Annual Report on Form 10-K for the year ended December 31, 2000) * 10.22 Amendment No. 1 to California Water Service Company Supplemental Executive Retirement Plan effective January 1, 2001 (Exhibit 10.22 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)* 10.23 Amendment No. 1 effective June 25, 2003, to agreement with Bank of America dated February 28, 2003 (Exhibit 10.24 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2003) 10.24 Water Supply Contract 99-73 between the City of Bakersfield and California Water Service Company, dated March 31, 1999 (Exhibit 10.25 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2003) 10.25 Amendment No. 1 to Water Supply Contract between the City of Bakersfield and California Water Service Company, dated October 3, 2001 (Exhibit 10.26 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2003) 10.26 Amendment No. 2 effective February 18, 2004, to agreement with Bank of America dated February 28, 2003 (Exhibit 10.26 to Annual Report on Form 10-K for the year ended December 31, 2003) 10.27 Amendment No. 2 to California Water Service Company Supplemental Executive Retirement Plan effective January 1, 2001 (Exhibit 10.27 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)* -30- 10.28 $10,000,000 Business Loan Agreement between Bank of America, N.A. and California Water Service Group, CWS Utility Services, New Mexico Water Service Company, Washington Water Service Company, and Hawaii Water Service Company, Inc dated December 23, 2004. (Exhibit 10.1 to Current Report on Form 8-K filed on February 8, 2005) 10.29 $45,000,000 Business Loan Agreement between Bank of America, N.A. and California Water Service Company dated December 23, 2004. (Exhibit 10.2 to Current Report on Form 8-K filed on February 8, 2005) 13. Annual Report to Security Holders: 13.1 2004 Annual Report. Certain sections of the 2004 Annual Report to Stockholders are incorporated by reference in this 10-K filing and filed with this Form 10-K as Exhibit 13. This includes those sections referred to in Part I, Item 1, Business; Part I, Item 2, Properties; Part II, Item 5, Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities; Part II, Item 6, Selected Financial Data; Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations; Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk; Part II, Item 8, Financial Statements and Supplementary Data; and Item 9A, Controls and Procedures 21. Subsidiaries of the Registrant 23. Consents of Experts and Counsel 23.1 Consent of Independent Registered Public Accounting Firm 31. Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.1 Chief Executive Officer certification of financial statements pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Chief Financial Officer certification of financial statements pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32. Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Management contract or compensatory plan or arrangement -31- EX-13 2 p19230_ex13-1.txt ANNUAL REPORT Ten-Year Financial Review California Water Service Group
(Dollars in thousands, except common share data) 2004 2003 2002 2001 2000 SUMMARY OF OPERATIONS Operating revenue Residential $221,323 $194,903 $184,894 $173,823 $171,234 Business 55,803 49,666 46,404 44,944 44,211 Industrial 13,592 11,255 11,043 9,907 11,014 Public authorities 15,118 12,789 12,706 11,860 11,609 Other 9,731 8,515 8,104 6,286 6,738 -------- -------- -------- -------- -------- Total operating revenue 315,567 277,128 263,151 246,820 244,806 Operating expenses 274,084 246,894 232,404 221,116 211,610 Interest expense, other income and expenses, net 15,457 10,817 11,674 10,739 13,233 -------- -------- -------- -------- -------- Net income $ 26,026 $ 19,417 $ 19,073 $ 14,965 $ 19,963 -------- -------- -------- -------- -------- COMMON SHARE DATA Earnings per share diluted $ 1.46 $ 1.21 $ 1.25 $ 0.97 $ 1.31 Dividend declared 1.130 1.125 1.120 1.115 1.100 Dividend payout ratio 77% 93% 90% 115% 84% Book value $15.66 $ 14.44 $ 13.12 $ 12.95 $ 13.13 Market price at year-end 37.65 27.40 23.65 25.75 27.00 Common shares outstanding at year-end in thousands) 18,367 16,932 15,182 15,182 15,146 Return on average common stockholders equity 9.8% 9.1% 9.7% 7.6% 10.1% Long-term debt interest coverage 3.38 2.78 2.73 2.64 3.31 -------- -------- -------- -------- -------- BALANCE SHEET DATA Net utility plant $800,305 $759,498 $696,988 $624,342 $582,782 Utility plant expenditures (company-funded and developer-funded) 68,573 74,253 88,361 62,049 37,161 Total assets 942,853 873,035 798,478 710,214 666,605 Long-term debt including current portion 275,921 273,130 251,365 207,981 189,979 Capitalization ratios: Common stockholders equity 50.8% 47.0% 44.0% 48.8% 51.1% Preferred stock 0.6% 0.7% 0.7% 0.9% 0.9% Long-term debt 48.6% 52.3% 55.3% 50.3% 48.0% -------- -------- -------- -------- -------- OTHER DATA Water production (millions of gallons) Wells and surface supply 72,279 68,416 69,414 65,283 65,408 Purchased 66,760 63,264 62,811 61,343 62,237 -------- -------- -------- -------- -------- Total water production 139,039 131,680 132,225 126,626 127,645 -------- -------- -------- -------- -------- Metered customers 395,286 387,579 380,087 371,281 366,242 Flat-rate customers 77,869 78,843 78,901 79,146 78,104 -------- -------- -------- -------- -------- Customers at year-end 473,155 466,422 458,988 450,427 444,346 -------- -------- -------- -------- -------- New customers added 6,733 7,434 8,561 6,081 5,219 Revenue per customer $ 667 $ 594 $ 579 $ 552 $ 554 Utility plant per customer 2,418 2,313 2,182 2,020 1,916 Employees at year-end 837 813 802 783 797 -------- -------- -------- -------- --------
(Dollars in thousands, except common share data) 1999 1998 1997 1996 1995 SUMMARY OF OPERATIONS Operating revenue Residential $163,681 $150,491 $158,210 $148,313 $132,859 Business 41,246 38,854 40,520 37,605 35,873 Industrial 12,695 10,150 10,376 9,748 9,952 Public authorities 10,898 9,654 11,173 10,509 9,585 Other 6,417 5,777 4,886 4,083 4,833 -------- -------- -------- -------- -------- Total operating revenue 234,937 214,926 225,165 210,258 193,102 Operating expenses 201,890 183,245 188,020 177,356 164,958 Interest expense, other income and expenses, net 11,076 11,821 11,388 11,502 11,176 -------- -------- -------- -------- -------- Net income $ 21,971 $ 19,860 $ 25,757 $ 21,400 $ 16,968 -------- -------- -------- -------- -------- COMMON SHARE DATA Earnings per share diluted $ 1.44 $ 1.31 $ 1.71 $ 1.42 $ 1.13 Dividend declared 1.085 1.070 1.055 1.040 1.020 Dividend payout ratio 75% 82% 62% 73% 90% Book value $ 12.89 $ 12.49 $ 12.15 $ 11.47 $ 10.97 Market price at year-end 30.31 31.31 29.53 21.00 16.38 Common shares outstanding at year-end in thousands) 15,094 15,015 15,015 15,015 14,934 Return on average common stockholders equity 11.5% 10.8% 14.5% 12.8% 10.6% Long-term debt interest coverage 3.79 3.64 4.37 3.81 3.41 -------- -------- -------- -------- -------- BALANCE SHEET DATA Net utility plant $564,390 $538,741 $515,917 $495,985 $471,994 Utility plant expenditures (company-funded and developer-funded) 48,599 41,061 37,511 40,310 31,031 Total assets 645,507 613,143 594,444 569,745 553,027 Long-term debt including current portion 171,613 152,674 153,271 151,725 154,416 Capitalization ratios: Common stockholders equity 53.0% 54.6% 53.8% 52.7% 50.9% Preferred stock 0.9% 1.0% 1.0% 1.1% 1.1% Long-term debt 46.1% 44.4% 45.2% 46.2% 48.0% -------- -------- -------- -------- -------- OTHER DATA Water production (millions of gallons) Wells and surface supply 65,144 57,482 63,736 60,964 54,818 Purchased 58,618 54,661 59,646 56,769 57,560 -------- -------- -------- -------- -------- Total water production 123,762 112,143 123,382 117,733 112,378 -------- -------- -------- -------- -------- Metered customers 361,235 354,832 350,139 345,307 335,238 Flat-rate customers 77,892 77,568 77,878 77,991 78,330 -------- -------- -------- -------- -------- Customers at year-end 439,127 432,400 428,017 423,298 413,568 -------- -------- -------- -------- -------- New customers added 6,727 4,383 4,719 9,730 2,263 Revenue per customer $ 539 $ 500 $ 529 $ 502 $ 468 Utility plant per customer 1,851 1,768 1,694 1,632 1,580 Employees at year-end 790 759 752 740 738 -------- -------- -------- -------- --------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS California Water Service Group FORWARD-LOOKING STATEMENTS This annual report, including the Letter to Stockholders and Managements Discussion and Analysis, contains forward-looking statements within the meaning established by the Private Securities Litigation Reform Act of 1995 (Act). The forward-looking statements are intended to qualify under provisions of the federal securities laws for safe harbor treatment established by the Act. Forward-looking statements are based on currently available information, expectations, estimates, assumptions, projections, and managements judgment about the Company, the water utility industry, and general economic conditions. Such words as expects, intends, plans, believes, estimates, assumes, anticipates, projects, predicts, forecasts, or variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not guarantees of future performance. They are subject to uncertainty and changes in circumstances. Actual results may vary materially from what is contained in a forward-looking statement. Factors that may cause a result different than expected or anticipated include: governmental and regulatory commissions decisions, including decisions on proper disposition of property; changes in regulatory commissions policies and procedures; the timeliness of regulatory commissions actions concerning rate relief; new legislation; the ability to satisfy requirements related to the Sarbanes-Oxley Act and other regulations on internal controls; electric power interruptions; increases in suppliers prices and the availability of supplies including water and power; fluctuations in interest rates; changes in environmental compliance and water quality requirements; acquisitions and the ability to successfully integrate acquired companies; the ability to successfully implement business plans; changes in customer water use patterns; the impact of weather on water sales and operating results; access to sufficient capital on satisfactory terms; civil disturbances or terrorist threats or acts, or apprehension about possible future occurrences of acts of this type; the involvement of the United States in war or other hostilities; restrictive covenants in or changes to the credit ratings on current or future debt that could increase financing costs or affect the ability to borrow, make payments on debt, or pay dividends; and other risks and unforeseen events. When considering forward-looking statements, the reader should keep in mind the cautionary statements included in this paragraph. The Company assumes no obligation to provide public updates on forward-looking statements. OVERVIEW California Water Service Group provides water utility services to customers in California, Washington, New Mexico, and Hawaii. The majority of the business is regulated by the respective states public utility commission. The Company's California water utility service operations comprise the majority of the business and contributed 96% of revenues and 83% of net income in 2004. The Company also has a regulated wastewater business in New Mexico. Non-regulated activities relate primarily to the water utility business and include operating, maintenance, billing, meter reading, and water testing services. The regulatory entities governing the Company's regulated operations are referred to as the Commissions in this report. Revenues, income, and cash flows are earned primarily through delivering drinking water through pipes to homes and businesses. Rates charged to customers for the regulated business are determined by the Commissions. These rates are intended to allow recovery of operating costs and a reasonable rate of return on capital. Major factors affecting the financial performance of the Company are: the process and timing of setting rates charged to customers; weather; water quality standards; other regulatory standards; water supply; quality of water sources; and level of capital expenditures. The most significant risk and challenge to the business during the past several years has been obtaining timely rate relief to cover increased costs and investments. The Company addresses this risk by having an experienced team dedicated solely to pursuing rate increases and managing Commissions issues. The business can also be impacted by weather. Weather risk is partially mitigated by having operations in both northern and southern California, as well as in three other states. Another risk in the water industry is obtaining adequate financing, as the capital expenditures needed for infrastructure replacements and improvements may significantly exceed the cash flow generated by operations. Management believes that the Company has a strong balance sheet and is capable of supporting the financing needs of the business through use of debt and common stock. Finally, the water industry is highly regulated and must comply with a multitude of standards related to water quality and service. To address the compliance issues, the Company has a highly trained, focused team that uses state-of-the-art technology and works closely with government agencies to monitor water supplies and operations. For 2004, net income was $26.0 million compared to $19.4 million in 2003, an increase of 34%. Diluted earnings per share for 2004 were $1.46 compared to $1.21 in 2003, an increase of 21%. The increase in earnings per share was primarily due to increased rates, which were approved by the Commissions. Partially offsetting the increased rates were higher operating costs, lower gains from property sales, and the dilutive effect of having more shares outstanding. The Company plans to continue to seek additional rate increases in future years to recover its operating cost increases and receive reasonable returns on invested capital. Due to more stringent water quality standards and investments in infrastructure, the Company plans to increase capital expenditures in 2005. For each of the five years subsequent to 2005, capital expenditures are expected to be lower compared to 2005, but will remain at much higher levels than depreciation expense. Cash from operations is not expected to be sufficient to fund the cash needs of the Company (capital expenditures, dividends, and other cash needs); therefore, the Company expects to fund anticipated cash shortfalls through a combination of debt and common stock offerings in the next five years. In 2004, the Company received many different types of rate increases, some of which were temporary in nature. As such, the high growth in earnings in 2004 is not expected to be repeated in 2005. A significant factor in 2005 earnings will be the timing and the amount of the approved General Rate Case (GRC) filings expected to be received in the fourth quarter of 2005. BUSINESS California Water Service Group is a holding company incorporated in Delaware with five operating subsidiaries: California Water Service Company (Cal Water), CWS Utility Services (Utility Services), New Mexico Water Service Company (New Mexico Water), Washington Water Service Company (Washington Water), and Hawaii Water Service Company, Inc. (Hawaii Water). Cal Water, New Mexico Water, Washington Water, and Hawaii Water are regulated public utilities. The regulated utility entities also provide some non-regulated services. Utility Services provides non-regulated water operations and related services to private companies and municipalities. California water operations are conducted by the Cal Water and Utility Services entities and provide service to 451,785 customers in 75 California communities through 26 separate districts. Of these 26 districts, 24 districts are regulated water systems, which are subject to regulation by the California Public Utilities Commission (CPUC). The other two districts, the City of Hawthorne and the City of Commerce, are governed through their respective city councils and are considered non-regulated because they are outside of the CPUCs jurisdiction. Their activities are reflected in operating revenue and operating costs, as the risks and rewards of these operations are similar to those of the regulated activities. California water operations account for 95% of the total customers and 96% of the total operating revenue. Washington Water provides domestic water service to 15,015 customers in the Tacoma and Olympia areas. Washington Waters utility operations are regulated by the Washington Utilities and Transportation Commission. Washington Water accounts for 3% of the total customers and 2% of the total operating revenue. New Mexico Water provides service to 5,835 water and wastewater customers in the Belen, Los Lunas, and Elephant Butte areas in New Mexico. Its regulated operations are subject to the jurisdiction of the New Mexico Public Regulation Commission. New Mexico Water accounts for 1% of the total customers and 1% of the total operating revenue. Hawaii Water provides water service to 520 customers on the island of Maui, including several large resorts and condominium complexes. Its regulated operations are subject to the jurisdiction of the Hawaii Public Utilities Commission. Hawaii Water accounts for less than 1% of the total customers and 1% of the total operating revenue. Other non-regulated activities consist primarily of operating water systems owned by other entities; pro- viding meter reading and billing services; leasing communication antenna sites on the Company's properties; operating recycled water systems; providing brokerage services for water rights; providing lab services; and selling surplus property. These activities are reported below operating profit on the income statement; therefore, the revenue is not included in operating revenue. Due to the variety of services provided and the fact that the activities are outside of the Company's core business, the number of customers is not tracked for these non-regulated activities. Non-regulated activities comprised 5% of the total net income in 2004. Rates and operations for regulated customers are subject to the jurisdiction of the respective states regulatory commission. The Commissions require that water and wastewater rates for each regulated district be independently determined. The Commissions are expected to authorize rates sufficient to recover normal operating expenses and allow the utility to earn a fair and reasonable return on invested capital. Rates for the City of Hawthorne and City of Commerce water systems are established in accordance with operating agreements and are subject to ratification by the respective city councils. Fees for other non-regulated activities are based on contracts negotiated between the parties. RESULTS OF OPERATIONS Earnings and Dividends. Net income in 2004 was $26.0 million compared to $19.4 million in 2003 and $19.1 million in 2002. Diluted earnings per common share were $1.46 in 2004, $1.21 in 2003, and $1.25 in 2002. The weighted average number of common shares outstanding used in the diluted earnings per share calculation was 17,674,000 in 2004, 15,893,000 in 2003, and 15,185,000 in 2002. As explained below, the increase in 2004 earnings per share resulted from these primary factors: receiving rate relief on GRC filings and balancing accounts; customer growth; and increased usage due to improved weather conditions. Partially offsetting these positive factors were: higher purchased water costs; higher operating costs; decreased gains from property sales; and increased common shares outstanding. At the January 2005 meeting, the Board of Directors declared the quarterly dividend, increasing it for the 38th consecutive year. Dividends have been paid for 60 consecutive years. The annual dividend paid per common share in 2004, 2003, and 2002 was $1.130, $1.125, and $1.120, respectively. The dividend increases were based on projections that the higher dividend could be sustained while still providing adequate financial resources and flexibility. Earnings not paid as dividends are reinvested in the business for the benefit of stockholders. The dividend payout ratio was 77% in 2004, 93% in 2003, and 90% in 2002, an average of 87% over the three-year period. Operating Revenue. Operating revenue was $315.6 million, an increase of $38.5 million, or 14%, above 2003. Operating revenue in 2003 was $277.1 million, an increase of $14.0 million, or 5%, above 2002. The estimated sources of changes in operating revenue were: Dollars in millions 2004 2003 ----- ----- Customer usage $ 3.3 $(4.6) Rate increases 29.8 12.6 Usage by new customers 5.4 6.0 ----- ----- Net change $38.5 $14.0 ----- ----- Average revenue per customer per year (in dollars) $ 667 $ 594 New customers added 6,700 7,400 Overall, temperatures in the Company's service areas for 2004 were comparable to 2003. Rainfall in the California service areas in 2004 was lower in the spring and higher in the fall. For the entire year, 2004 rainfall in the California service areas was lower, which impacted the Company's revenues and earnings positively. For 2003, rainfall was higher than 2002, which had a negative impact on revenues and earnings. For Washington Water service areas, rainfall was higher in 2004 than in 2003, and 2003 rainfall was lower than 2002. In addition to the overall favorable weather, 2004 revenues were positively impacted compared to 2003 by increases in rates and customer growth. The estimated impact of rate changes compared to the prior year is listed in the following table: Dollars in millions 2004 2003 ----- ----- Step rate increases $4.4 $2.2 Bakersfield Treatment Plant 4.2 2.3 General Rate Cases (GRC) 13.3 3.7 Offset (purchased water/pump taxes) 4.7 0.9 Balancing accounts 0.4 1.9 Catch-up surcharge 2.2 1.3 Other 0.6 0.3 ----- ----- Total rate increases $29.8 $12.6 The step rates, Bakersfield Treatment Plant, GRCs, and offset rate changes are permanent until the next rate filing for the applicable districts. Most step rates approved in 2004 were effective in January 2004; therefore, they will not increase revenues in 2005, assuming similar customer usage. Some step rates were approved during 2004 and are estimated to increase 2005 revenues by $0.4 million, assuming similar usage. Rate changes previously approved for the Bakersfield Treatment Plant will have no incremental impact on 2005 revenues due to the effective dates being January 2004 or prior. The GRCs that were approved during 2004 are estimated to increase revenues in 2005 by $2.1 million, assuming similar usage. The offset filings approved during 2004 are estimated to increase 2005 revenues by $0.5 million, assuming similar usage. The balancing account rate surcharges and catch-up surcharge have specific termination dates. The balancing accounts termination dates range from one to three years from the effective date. For 2005, management estimates the net impact to revenues from balancing accounts compared to 2004 will be a $3.2 million increase, assuming similar usage. This estimate incorporates the effects of balancing account surcharges that will terminate and balancing accounts approved in 2004. The catch-up surcharge ended in September 2004; therefore, the impact to 2005 revenue compared to 2004 will be a $3.5 million decrease to revenue. Effective January 2005, step rate increases were approved for $4.1 million on an annual basis. See the RATES AND REGULATION section of this report for more information on regulatory activity occurring in 2003, 2004, and through March 1, 2005. The number of customers in 2004 increased by approximately 6,700, or 1%, from 2003 levels. This increase includes 1,700 customers related to an acquisition in New Mexico completed in 2004. In 2003, customer growth was approximately 7,400, or 2%, which included 520 customers related to the acquisition of Kaanapali Water Corporation in Hawaii and 1,100 customers related to the arrangement with the City of Commerce. Water Production Expenses. Water production expenses, which consist of purchased water, purchased power, and pump taxes, comprise the largest segment of total operating costs. Water production costs accounted for 43.5%, 44.2%, and 45.6% of total operating costs in 2004, 2003, and 2002, respectively. The rates charged for wholesale water supplies, electricity, and pump taxes are established by various public agencies. As such, these rates are beyond the Company's control. The table below provides the amount of increases (decreases) and percent changes in water production expense during the past two years: Dollars in millions 2004 2003 -------------------------- ------------------------- Amount Change % Change Amount Change % Change Purchased water $89.7 $ 8.9 11% $ 80.8 $ 4.1 5% Purchased power 21.8 (0.1) (1%) 21.9 (1.0) (4%) Pump taxes 7.6 1.3 20% 6.3 -- -- ------ ------ ------ ------ ------ ------ Total water production expenses $119.1 $ 10.1 9% $109.0 $ 3.1 3% ------ ------ ------ ------ ------ ------ Two of the principal factors affecting water production expenses are the amount of water produced and the 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:
Millions of gallons (MG) 2004 2003 2002 ------------------------------------------------------------------------ MG % of Total MG % of Total MG % of Total Source: Wells 66,951 48.2% 66,009 50.0% 68,663 51.9% % change from prior year 1% (4%) 6% Purchased 66,760 48.0% 63,264 48.2% 62,811 47.5% % change from prior year 6% 1% 2% Surface 5,328 3.8% 2,407 1.8% 751 0.6% % change from prior year 121% 221% 18% Total 139,039 100.0% 131,680 100.0% 132,225 100.0% % change from prior year 6% (1%) 4%
Purchased water expenses are affected by changes in quantities purchased, supplier prices, and cost differentials between wholesale suppliers. For 2004, the $8.9 million increase in purchased water costs was driven by a combination of increased wholesale rates charged by wholesale suppliers in the Stockton and San Francisco Bay-Area districts, and increases in quantities purchased. On an overall blended basis, wholesale water rates increased 5% on a cost-per-million-gallon basis. Included in purchased water expenses was an additional adjustment of $0.9 million, which related to the settlement of a meter malfunction matter in the Stockton district. Purchased power expenses are affected by water pumped from wells, water moved through the distribution system, rates charged by electric utility companies, and rate structures applied for usage during peak and non-peak times of the day or season. The change in purchased power expenses was primarily due to lower rates charged by suppliers, which were partially offset by higher volume and no credits received in 2004 compared to $0.9 million credits received in 2003. Pump taxes were higher primarily due to additional pumping in one district that has a high pump tax rate. For 2003, the $4.1 million increase in purchased water costs was primarily driven by increased wholesale rates charged by wholesale suppliers in the Stockton and San Francisco Bay-Area districts. Overall, wholesale water rates increased 5% on a cost-per-million-gallon basis. Included in purchased water was an estimate of $0.7 million, which related to a meter malfunction matter in the Stockton district. The majority of the change in purchased power expenses in 2003 was attributable to credits received from the electric utility companies ($0.9 million) and lower quantities of water pumped from wells. Pump taxes were lower due to the decrease in well water production. Administrative and General Expenses. Administrative and general expenses include payroll related to administrative and general functions, all company benefits charged to expense accounts, insurance expenses, legal fees, audit fees, regulatory utility commissions expenses, board of directors fees, and general corporate expenses. During 2004, administrative and general expenses increased $6.1 million, or 15%, compared to 2003. Payroll expenses increased $1.0 million, or 13%, due to the addition of new employees and wage increases. Employee benefits increased $1.4 million, due primarily to increases in employee/retiree health-care expenses of $1.7 million, or 25%. The Company is primarily self-insured but does have stop-loss coverage for very large claims. The Company experienced more large-dollar claims (claims above $50,000), which was the primary reason for the increase. The Company also experienced higher costs for workers compensation, general liability claims, and insurance premiums. These costs increased $1.3 million, or 40%. Higher expenses were incurred to comply with the Sarbanes-Oxley Act, section 404 on internal controls, which increased expenses by $0.9 million for consultants and auditors. Fees to the CPUC increased $0.5 million due to the increased revenue, as these fees are calculated as a percentage of revenue. Other expense elements contributed to the balance of the change, but none were individually significant. During 2003, administrative and general expenses increased $3.8 million, or 10%, compared to 2002. Payroll expenses increased $0.6 million, or 9%, due to the addition of new employees and wage increases. Employee benefits increased $3.0 million, due primarily to increases in retirement plan expenses of $2.3 million, or 51%, and employee/retiree health-care expenses of $0.4 million, or 7%. The retirement plan cost increase was due primarily to changes in the pension plan effective January 1, 2003, which improved benefits to employees. As part of the negotiations with the unions, lower pay increases were offset by increased pension benefits. Other expense elements contributed to the balance of the change, but none were individually significant. Other Operations Expenses. The components of other operations expenses include payroll, material and supplies, and contractor costs related to operating water systems. This includes the costs associated with water transmission and distribution, pumping, water quality, meter reading, billing, and operations of district offices. For 2004, other operating expenses increased $2.5 million, or 7%, from 2003. Payroll costs charged to other operating expenses increased $1.3 million, or 6%, due to general wage increases and an increase in the number of employees. Labor increases were in water quality, transmission and distribution, and customer service categories. Other major cost increases were operations of the Bakersfield Treatment Plant of $0.6 million and additional rent of $0.4 million for the City of Commerce operation. Other expense elements contributed to the balance of the change, but none were individually significant. For 2003, other operating expenses increased $3.4 million, or 10%, from 2002. Payroll costs charged to other operating expenses increased $1.1 million, or 6%, due to general wage increases, labor related to the Bakersfield Treatment Plant, and labor related to customer service in district offices. Other major cost increases were related to lab expenses of $0.5 million, or 56%; chemicals and filters of $0.5 million, or 42%; uncollectible account expenses of $0.4 million, or 73%; and rent expenses of $0.4 million, or 45%. Other expense elements contributed to the balance of the change, but none were individually significant. Maintenance. Maintenance expenses increased $0.5 million, or 4%, in 2004 compared to 2003. For 2003, maintenance expenses increased $1.1 million, or 10%, compared to 2002. The variance was caused by a variety of factors. In 2004, expenses increased primarily for service lines, which are pipes from the mains to the meter boxes. In 2003, more repairs were needed related to leaks and breaks in both mains and service lines. Also, the Company incurred increased maintenance expenses for pumps, and $0.2 million was expended on a well and treatment plant in Hawthorne. Depreciation and Amortization. Depreciation and amortization increased due to the level of Company-funded capital expenditures. See the LIQUIDITY AND CAPITAL RESOURCES section for more information. Property and Other Taxes. For 2004, expenses increased $1.0 million, or 9%, compared to 2003. For 2003, expenses increased $0.7 million, or 7 %. Increased property taxes were the primary cause for the increase in both years. Non-Regulated Income, Net. The major components of non-regulated income are revenue and operating expenses related to the following activities: operating and maintenance services (O&M), meter reading and billing services, leases for cellular phone antennas, water rights brokering, and design and construction services. For 2004, non-regulated income increased $0.3 million compared to 2003, with increases primarily from meter reading and billing services, and reduced expenses related to business development. For 2003, non-regulated income was relatively flat compared to 2002, with increases primarily from O&M and cellular phone antennas offset by decreases in water rights brokerage income. Water rights brokerage income is sporadic and is affected by market opportunities and price volatility. See Footnote 3 of the Consolidated Financial Statements for additional information. Gain on Sale of Surplus Property. For 2004, there were minimal gains from surplus property sales. For 2003 and 2002, pretax gains from surplus property sales were $4.6 million and $3.0 million, respectively. The 2003 gains were primarily from three properties sold in the San Francisco Bay Area. Earnings and cash flow from these transactions are sporadic and may or may not continue in future periods depending upon market conditions and other factors. The Company has other surplus properties that may be marketed in the future based on real estate market conditions. Interest Expenses. Interest expenses increased in 2004 and 2003 by $0.3 million, or 2%, and $0.7 million, or 4%, respectively. For 2004, the interest expense increase was primarily due to lower capitalized interest, which reduces net interest expenses. Partially offsetting this increase was reduced interest expense from lesser amounts of short-term borrowings. For 2003, the increased expense was due primarily to higher borrowing of long-term debt. Refinancing activities and lower short-term interest rates partially offset the increase. See the LIQUIDITY AND CAPITAL RESOURCES section for more information. RATES AND REGULATIONS Following are summaries of approved and pending rate filings. The amounts reported are annual amounts; therefore, the impact to recorded revenue will normally be recognized over a 12-month period from the effective date of the decision. Most increases are permanent until the next rate filing, except for the increases related to the 2001 GRC catch-up and the balancing accounts (offsetable expenses), which have specific time frames for recovery. 2004 Regulatory Activity Approved Filings.In 2004, Cal Water received approval from the CPUC for step rate increases of $4.4 million on an annual basis, of which $3.9 million was effective in January 2004 and $0.5 million was effective in April 2004. Step increases allow recovery of cost increases, primarily from inflation, between GRC filings. GRC filings are normally made every three years for each Cal Water district. In February 2004, the CPUC authorized an advice letter for $0.7 million for the Stockton district related to increased purchased water rates. The rate change was effective in February 2004. In April 2004, Cal Water received authorization from the CPUC on its 2002 GRC. The GRC included four districts and increased rates $3.6 million on an annual basis, effective April 2004. In May 2004, Cal Water received approval from the CPUC to refund $1.5 million in rates, effective May 2004, which relates primarily to over-collection of specific expenses incurred over multiple years in the King City and Dominguez districts. The refunds will primarily occur over a 12-month period, with a minor amount occurring over a 36-month period. In June 2004, Cal Water received approval from the CPUC to recover in rates $0.4 million in balancing accounts, effective June 2004. This amount relates primarily to recoverable expenses incurred in 2001 for the Salinas district. This amount will be recovered over a two-year period. In July 2004, Cal Water received authorization from the CPUC on its Salinas district 2001 filing, which increased rates $1.1 million on an annual basis, effective July 2004. In August 2004, Cal Water received authorization from the CPUC for step rate increases for four districts, which increased rates $0.5 million on an annual basis, effective August 2004. In September 2004, Cal Water received authorization from the CPUC on its 2003 GRC filing for the South San Francisco and Bakersfield districts, which increased rates a net $0.4 million on an annual basis, effective October 2004. In September 2004, Cal Water received authorization from the CPUC on its Los Altos advice letter filing related to purchased water and pump taxes, which increased rates $0.5 million on an annual basis, effective October 2004. In the October-December 2004 period, Cal Water received authorization for recovery of $9.2 million in balancing accounts, which will be collected over one to three years varying by district. These amounts relate primarily to recoverable expenses incurred in 2002 and 2003 for several districts. The effective dates range from October 2004 to January 2005. No filings were approved during 2004 for Washington Water, New Mexico Water, or Hawaii Water. 2003 Regulatory Activity Approved Filings.In January 2003, Cal Water received approval for step rate increases totaling $2.2 million. In April 2003, the CPUC authorized a second advice letter filing related to the new Bakersfield Treatment Plant. This advice letter allowed an increase in rates of $1.8 million on an annual basis for the plant, which became operational in the second quarter of 2003 and had a total project cost of approximately $50 million. In May 2003, the CPUC authorized the recovery of $5.4 million in balancing accounts, of which approximately $3.6 million was collected from May 2003 through May 2004, and approximately $1.8 million is being collected from May 2004 through May 2005. Partially offsetting this increase was a $0.8 million decrease for one district that was effective from June 2003 through June 2004. In September 2003, the CPUC approved Cal Waters 2001 GRC applications. These filings were submitted in July 2001 for 14 of Cal Waters 24 California regulated districts. This GRC decision authorized an 8.9% return on rate base and added an estimated $12.8 million to annual revenues. In addition, Cal Water received approval to collect an additional $4.5 million in revenues over 12 months to reflect an effective date of April 3, 2003. The 2001 GRC also authorized the filing of step rate increases for $2.7 million annually for 2004 and 2005 that are effective in January of each year pending approval by the CPUC. In the September-December 2003 period, the CPUC approved increases to recover higher purchased water costs for Cal Waters districts in the San Francisco Bay Area. The total annual amount of these filings is $4.8 million. In October 2003, the CPUC authorized a third advice letter filing related to the Bakersfield Treatment Plant. This allowed an increase in rates of $4.2 million on an annual basis. Due to depreciation expense for the plant beginning in January 2004, only $0.4 million was billed in the October-December 2003 period. The full $4.2 million annual amount was effective in January 2004. No filings were approved during 2003 for Washington Water, New Mexico Water, or Hawaii Water. Balancing Accounts, Offsetable Expenses, and Memorandum Accounts.The following discussion relates to changes in the Company's expense balancing memorandum accounts (see Expense Balancing and Memorandum Accounts section in CRITICAL ACCOUNTING POLICIES). Remaining Balances from Previously Authorized Balancing Account Recoveries/Refunds.For the balancing accounts authorized in May 2003, the net amount remaining to be collected in rates was $0.6 million as of December 2004 and $2.8 million as of December 2003. The balance is expected to be recovered by May 2005. For the balancing accounts authorized in May 2004, the amount remaining to be refunded as of December 2004 was $0.6 million. The balance is expected to be primarily refunded by May 2005 and the remainder refunded by May 2007. For the balancing accounts authorized in June 2004, the amount remaining to be collected in rates as of December 2004 was $0.3 million. The balance is expected to be recovered by June 2006. For the balancing accounts authorized in the October-December 2004 period, the net amount remaining to be collected in rates as of December 2004 was $8.3 million. The net balance is expected to be fully recovered by January 2008. 2005 Regulatory Activity Approved Filings through March 1, 2005.In January 2005, Cal Water received approval from the CPUC for step rate increases of $4.1 million on an annual basis, which were effective in January 2005. Pending Filings as of March 1, 2005. Cal Water has pending its 2004 GRC filings covering eight districts. The amount requested is $26.5 million, which may change due to a variety of factors. Over the past few years, the amount approved by the CPUC has been substantially less than the requested amount. The Company is unable to predict the timing and final amount of these filings at this time. New Mexico Water has submitted a rate filing for its wastewater operations, and Hawaii Water has submitted a rate filing for its water operations. When approved, these filings are not expected to materially affect the total Company results. The Company is unable to predict the timing and final amount of these filings at this time. Washington Water is planning to submit a rate filing in 2005, but has not filed as of the date of this report. Failure to Report Acquisitions. In February 2003, the CPUCs Office of Ratepayer Advocates (ORA), a division of the CPUC responsible for representing ratepayers, recommended that Cal Water be fined up to $9.6 million and refund $0.5 million in revenue for failing to report three acquisitions as required by the CPUC. One acquisition was completed prior to adoption of the reporting requirement by the CPUC; the others were inadvertently not reported by Cal Water. In July 2004, the CPUC issued decision D. 04-07-033, in which Cal Water was assessed a fine of $75,000 and a reduction of 50 basis points (0.5%) in the allowed return on equity for its Salinas district, the district that included two of the three acquisitions. The reduction in the allowed return on equity will be terminated upon CPUC approval of the next GRC filing for the Salinas district, which is expected in the fourth quarter of 2005. Cal Water declined to appeal the decision. Review of Property Sales by CPUC.In 1995, the California Legislature enacted the Water Utility Infrastructure Improvement Act of 1995 (Infrastructure Act) to encourage water utilities to sell surplus properties and reinvest in needed water utility facilities. In September 2003, the CPUC issued decision D.03-09-021 in Cal Waters 2001 GRC filing. In this decision, the CPUC ordered Cal Water to file an application setting up an Infrastructure Act memorandum account with an up-to-date accounting of all real property that was at any time in rate base and that Cal Water had sold since the effective date of the Infrastructure Act. Additionally, the decision directed the CPUC staff to file a detailed report on its review of Cal Waters application. On January 11, 2005, the ORA issued a report expressing its opinion that Cal Water had not proven that surplus properties sold since 1996 were no longer used and useful. ORA recommended that Cal Water be fined $160,000 and that gains from property sales should generally benefit ratepayers. Management strongly disagrees with ORAs conclusions and recommendations. During the period under review, Cal Waters cumulative gains from surplus property sales were $19.2 million, which included an inter-company gain related to a transaction with Utility Services and a like-kind exchange with a third party. If the CPUC finds any surplus property sale or transfer was recorded inappropriately, Cal Waters rate base could be reduced, which would lower future revenues, net income, and cash flows. Management believes it has fully complied with the Infrastructure Act and that ORAs conclusions and recommendations are without merit. Cal Water intends to vigorously oppose ORAs findings. Accordingly, Cal Water has not accrued a liability in the financial statements for ORAs recommendations. At this time, Cal Water does not know when or how the CPUC will rule in this matter. WATER SUPPLY The Company's source of supply varies among its 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. The Company is meeting water quality, environmental, and other regulatory standards. California's normal weather pattern yields little precipitation between mid-spring and mid-fall. The Washington service areas receive precipitation in all seasons, with the heaviest amounts during the winter. New Mexicos rainfall is heaviest in the summer monsoon season. Hawaii 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, snow and rainfall during the 2004-2005 water year have been above average. Precipitation in the prior five years was near normal levels. Water storage in Californias reservoirs at the end of 2004 was at average levels. Management believes that the supply pumped from underground aquifers and purchased from wholesale suppliers will be adequate to meet customer demand during 2005 and beyond. Long-term water supply plans are developed for each of the Company's 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. The Company is executing a plan to meet a more stringent EPA standard for arsenic, which will become effective in January 2006. LIQUIDITY AND CAPITAL RESOURCES Short-Term Financing. Short-term liquidity is provided by bank lines of credit and internally generated funds. Long-term financing is accomplished through use of both debt and common stock. Short-term bank borrowings were zero at December 31, 2004 and $6.5 million at December 31, 2003. Cash and cash equivalents were $18.8 million at December 31, 2004 and $2.9 million at December 31, 2003. In addition, the Company expects to receive $7.2 million in tax refunds in 2005, which will not impact net income. Given the Company's ability to access its 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 instruments. Minimal operating levels of cash are maintained for Washington Water, New Mexico Water, and Hawaii Water. The water business is seasonal. 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 higher. During the winter period, the need for short-term borrowings under the bank lines of credit increases. The increase in cash flow during the summer allows short-term borrowings to be paid down. In years when more than normal precipitation falls in the Company's service areas or temperatures are lower than normal, especially in the summer months, customer water usage can be lower than normal. 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. Cal Water has a $45 million credit facility. The term of the current agreement expires in April 2007. The agreement requires a 30-day out-of-debt consecutive period during any 24 consecutive months and a requirement for outstanding balances to be below $10 million for a 30-day consecutive period during any 12-consecutive-month period. In addition, the agreement requires debt as a percent of total capitalization to be less than 67%. The Company has met all covenant requirements. In addition to borrowings, the credit facility allows for letters of credit up to $10 million. One letter of credit was outstanding at December 31, 2004 for $0.5 million related to an insurance policy, which reduces the amount available to borrow. Interest is charged on a variable basis and fees are charged for unused amounts. As of December 31, 2004, there were no borrowings against the credit facility. A $10 million credit facility exists for California Water Service Group, CWS Utility Services, Washington Water Service Company, New Mexico Water Service Company, and Hawaii Water Service Company, Inc. The term of the current agreement expires in April 2007. The agreement requires a 30-day out-of-debt consecutive period during any 24 consecutive months and a requirement for outstanding balances to be below $5 million for a 30-day consecutive period during any 12-consecutive-month period. In addition, the agreement requires debt as a percent of total capitalization to be less than 67%. The Company has met all covenant requirements. In addition to borrowings, the credit facility allows for letters of credit up to $5 million, which would reduce the amount available to borrow. No letters of credit were outstanding at December 31, 2004. Interest is charged on a variable basis and fees are charged for unused amounts. As of December 31, 2004, there were no borrowings against the credit facility. Generally, short-term borrowings used for capital expenditures are paid down through the issuance of long-term debt or issuance of common stock. Credit Ratings. Cal Waters first mortgage bonds are rated by Moodys Investors Service (Moodys) and Standard & Poors (S&P). Previously, the two major credit facility agreements contained covenants related to these debt ratings. The current agreements do not contain such covenants. During 2004, management met separately with the two credit rating agencies during their annual rating reviews. Both agencies maintain their ratings of A2 for Moodys and A+ for S&P as of the filing date of this report. The last time ratings were changed was in February 2004, when Moodys issued a report lowering Cal Waters senior secured debt from A1 to A2 and characterizing the rating as stable. In November 2003, S&P did not change its rating of A+, but changed its outlook from stable to negative. Although the Company's financial performance and capitalization structure improved in 2004 compared to 2003, which was recognized by both agencies, they noted concerns related to the rate-setting process and decisions by the CPUC. Also, concerns were raised about the Company's level of capital expenditures, which will need to be partially financed through long-term borrowings or common stock offerings. Management believes the Company would be able to meet financing needs even if ratings were downgraded, but a rating change may result in a higher interest rate on new debt. Long-Term Financing. Long-term financing, which includes senior notes, other debt securities, and common stock, has 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 all of the Company's capital expenditure needs. Management expects this trend to continue given the Company's capital expenditures plan for the next five years. In addition to Company-funded capital expenditures, some capital expenditures are funded by developers contributions in aid of construction, which are not refundable, and advances for construction, which are refundable. Management believes long-term financing is available to meet the Company's cash flow needs through issuances in both debt and equity markets. On June 24, 2004, the Company announced the sale of 1,250,000 shares of common stock. A prospectus supplement and prospectus were filed with the SEC under rule 424 (b) (2) on that date. The shares were sold at $27.25 per share. After the underwriters exercised their over-allotment option, the total number of shares issued was 1,409,700 shares. The net proceeds were $36.8 million and the transaction was closed on June 29, 2004. The funds were used to pay down short-term borrowings and invest in short-term money market instruments pending their use for general corporate purposes. After issuance of these shares, $35.6 million remains in securities under the Company's shelf registration, which is available for future issuance. In September 2004, the CPUC issued a decision granting Cal Water authority to complete up to $250 million of equity and debt financing through 2010, subject to certain restrictions. No financing has been applied against this authorization as of December 31, 2004. The prior authorization expired with the approval of the September 2004 decision. In November 2004, New Mexico Water entered into a long-term debt arrangement for $3.4 million. The interest rate is 5.65%, the loan terminates in May 2014, and principal payments are required during the term of the loan. The funds were used to retire debt of $2.3 million, fund an acquisition, fund capital expenditures, and for general corporate purposes. Washington Water has long-term debt primarily from two banks to meet its operating and capital equipment purchase requirements at interest rates negotiated with the banks. Washington Water did not incur additional long-term debt in 2004. Both Washington Water and Hawaii Water have inter-company debt with the holding company, which is eliminated at consolidation. Hawaii Water does not have any debt with third parties. During 2003, additional long-term debt was issued as part of a refinancing program that began in 2002. In May 2003, Cal Water issued $10 million, 5.54%, 20-year Series I Senior Notes and $10 million, 5.44%, 15-year Series J Senior Notes. Both notes were unsecured. The proceeds from these borrowings were used to prepay First Mortgage Bonds Series EE that had an interest rate of 7.9%. The principal, call premiums, and transaction costs were approximately $20 million. In October 2003, Cal Water issued a $20 million, 5.55% Series N Senior Note. The note is unsecured and matures on December 1, 2013. Payment of principal is due at maturity. Funds received were used to prepay First Mortgage Bonds Series FF, which accrued interest at a rate of 6.95% and had a principal balance of $19.1 million. In addition to the prepayment of the principal balance, funds were used to pay a call premium related to Series FF and transaction costs and for general corporate purposes. In November 2003, Cal Water issued a $20 million, 5.52% Series M Senior Note. The note is unsecured and matures on November 1, 2013. Payment of principal is due at maturity. Funds received were used to prepay First Mortgage Bonds Series GG, which accrued interest at a rate of 6.98% and had a principal balance of $19.1 million. In addition to the prepayment of the principal balance, funds were used to pay a call premium related to Series GG and transaction costs and for general corporate purposes. In 2003, incremental long-term financing was provided by issuance of senior notes by Cal Water and common equity by California Water Service Group as detailed below. In February 2003, Cal Water completed the issuance of $10 million, 4.58%, 7-year Series K Senior Notes and $10 million, 5.48%, 15-year Series L Senior Notes. Both notes were unsecured. The proceeds were used to pay down short-term borrowings and to fund capital expenditures. On July 11, 2003, a shelf registration became effective, which provides for the issuance from time to time of up to $120 million in common stock, preferred stock, and/or debt securities. The Company may issue any of these types of securities until the amount registered is exhausted, and will add the net proceeds from the sale of the securities to its general funds to be used for general corporate purposes, which may include investment in subsidiaries, working capital, capital expenditures, repayment of short-term borrowings, refinancing of existing long-term debt, acquisitions, and other business opportunities. On August 4, 2003, the Company issued 1,750,000 shares of common stock from the shelf registration statement. A prospectus supplement and prospectus were filed with the SEC under Rule 424 (b) (2) on August 5, 2003. The shares were sold at $26.25 per share. The net proceeds were $43.8 million and the transaction was closed on August 7, 2003. The funds were used to pay down short-term borrowings and to invest in short-term money market instruments pending their use for general corporate purposes. The Company does not utilize off-balance-sheet financing or utilize special purpose entity arrangements for financing. The Company does not have equity ownership through joint ventures or partnership arrangements. Additional information regarding the bank borrowings and long-term debt is presented in Footnotes 8 and 9 in the Consolidated Financial Statements. Dividend Reinvestment and Stock Purchase Plan. The Company's transfer agent offers stockholders a Dividend Reinvestment and Stock Purchase Plan (Plan). Under the Plan, stockholders may reinvest dividends to purchase additional Company common stock without commission fees. The Plan also allows existing stockholders and other interested investors to purchase Company common stock without brokerage fees through the transfer agent up to certain limits. The transfer agent operates the Plan and purchases shares on the open market to provide shares for the Plan. 2005 Financing Plan. The Company's 2005 financing plan includes raising approximately $20-$40 million of new capital. The plan includes issuance of long-term debt to meet funding needs. Currently, the Company does not plan to issue additional common stock in 2005, although this may change depending on a variety of factors. Beyond 2005, management intends to fund capital needs through a relatively balanced approach between long-term debt and common stock. Contractual Obligations. The Company's contractual obligations are summarized in the table below. 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. Operating leases are generally rents for office space. The total amount presented for operating leases is for a 20-year period.
Less Than After Contractual obligations (In thousands) Total 1 Year 1-3 Years 3-5 Years 5 Years Long-term debt $275,921 $1,100 $2,077 $1,987 $270,757 Advances for construction 131,292 5,036 8,959 8,708 108,589 Operating leases 14,227 1,469 2,678 2,317 7,763 Take-or-pay purchase agreements 58,252 8,782 18,632 20,153 10,685
Cal Water has water supply contracts with wholesale suppliers in 16 of its operating districts. For each contract, the cost of water is established by the wholesale supplier and is generally beyond the Company's control. The amount paid annually to the wholesale suppliers is charged to purchased water expense on the statement of income. Most contracts do not require minimum annual payments and vary with the volume of water purchased. The Company has two material contracts, one in Los Altos and one in Bakersfield, which contain minimal purchase provisions (take or pay). These contract payments vary with the volume of water purchased above the minimal levels. Management plans to continue to purchase and use at least the minimum water requirement under these contracts in the future. Both contracts renew annually. Obligations were estimated assuming a five-year horizon beyond 2004. The wholesale water contract with Stockton East Water District (SEWD) is a fixed-fee contract. The SEWD payments, excluding payments related to a prior year meter issue, will total $3.7 million covering SEWDs fiscal year of April 2004 to March 2005. Payments are made monthly. Management estimates the annual price to increase $0.9 million for the SEWD contract effective April 2005, and management intends to apply for rate relief for this increase. Management is unable to estimate price changes beyond a one-year period. SEWD payments are not included in the above table. Capital Requirements. 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 utility plant expenditures were $50.4 million, $53.9 million, and $71.6 million in 2004, 2003, and 2002, respectively. A major project during this time frame was the $50 million water treatment plant and related water transmission and distribution pipelines in Bakersfield, California. Expenditures to construct the plant were incurred over a five-year period, with the largest portion, $27.1 million, incurred in 2002. The plant became operational in 2003. Other major components of capital expenditures were mains and water treatment equipment. For 2005, Company-funded capital expenditures are budgeted at approximately $85 million. The increase in 2005 is primarily related to compliance with the new arsenic standard effective in January 2006. For years beyond 2005, capital expenditures are estimated at $70-$80 million per year for the next five years and will be primarily for mains, related water distribution equipment, pumping, and water quality equipment. Other capital expenditures are funded through developer advances and contributions in aid of construction (non-company-funded). The expenditure amounts were $18.2 million, $20.4 million, and $16.8 million in 2004, 2003, and 2002, respectively. The changes from year to year reflect expansion projects by developers in the Company's service areas. Funds are 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. Management expects the Company to incur non-company-funded expenditures in 2005. 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 the Company prior to commencing construction work, or the developers may construct the facilities themselves and deed the completed facilities to the Company. Because non-company-funded construction activity is solely at the discretion of developers, management cannot predict the level of future activity. The cash flow impact is expected to be minor due to the structure of the arrangements. Capital Structure. In 2004, common stockholders equity increased $43.1 million, or 18%, primarily due to the issuance of common stock in August 2004. The long-term debt portion of the capital structure increased in 2004 by $2.6 million, primarily due to additional debt issued for New Mexico Water. See Long-Term Financing section above for additional information. Total capitalization at December 31, 2004 was $565.9 million and $520.2 million at December 31, 2003. The Company expects that its plan for using a balanced approach of common stock and long-term debt for financing, coupled with increased earnings above dividend growth, will increase the equity portion of capitalization in future years. At December 31, capitalization ratios were: 2004 2003 ---- ---- Common equity 50.8% 47.0% Preferred stock 0.6% 0.7% Long-term debt 48.6% 52.3% The return (from both regulated and non-regulated operations) on average common equity was 9.8% in 2004 compared to 9.1% in 2003. Acquisitions. Although there were no significant acquisitions in the periods presented, the following acquisitions were completed in 2004 and 2003: In April 2004, the Company acquired the stock of National Utility Company (NUC) and land from owners of NUC for $0.9 million in cash. The Company retired NUCs stock and merged it into New Mexico Water Service Company. Revenue for NUC for the 8-month period in 2004 was $0.4 million and net income was break-even. The purchase price was approximately equal to rate base, and an immaterial amount of goodwill was recorded for the transaction. In April 2003, the Company acquired the Kaanapali Water Corporation for $6.1 million in cash after certain adjustments. After completing the acquisition, the entitys name was changed to Hawaii Water Service Company, Inc. Hawaii Water provides water utility services to 520 customers in Maui, Hawaii. The final purchase price is expected to be lowered by $0.1 million, which will be collected from the seller after certain matters are resolved. For 2004, revenue was $3.3 million and net income was $0.2 million. Real Estate Program. The Company owns a certain amount of real estate. From time to time, certain parcels are deemed unnecessary or no longer useful in water utility operations. Most surplus properties have a low cost basis. A program was developed 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 no pretax gains in 2004, and $4.6 million and $3.0 million in 2003 and 2002, respectively. As sales are dependent on real estate market conditions, future sales may or may not be at prior year levels. Due to the issues reported in the RATES and REGULATIONS section, future sales may be impacted if the CPUC rules against the Company's position on these transactions. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company maintains its accounting records in accordance with accounting principles generally accepted in the United States of America and as directed by the regulatory commissions to which its 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 historical experience and an understanding of current facts and circumstances. A summary of significant accounting policies are listed in Footnote 2 of the Consolidated Financial Statements, and other footnotes provide additional information. The following sections describe the level of subjec- tivity, judgment, and variability of estimates that could have a material impact on the financial condition, operating performance, and cash flows of the business. Regulated Utility Accounting. Because the Company operates extensively in a regulated business, it is subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation. Application of SFAS No. 71 requires accounting for certain transactions in accordance with regulations defined by the respective regulatory commission of that state. In the event that a portion of the Company's operations were no longer subject to the provisions of SFAS No. 71, the Company would be required to write off related regulatory assets and liabilities that are not specifically recoverable and determine if other assets might be impaired. If a regulatory commission determined that a portion of the Company's assets were not recoverable in customer rates, the Company would be required to determine if it had suffered an asset impairment that would require a write-down in the assets valuation. There had been no such asset impairment as of December 31, 2004. Additional information relating to regulatory assets and liabilities are listed in Footnote 2 of the Consolidated Financial Statements. Revenue Recognition. Revenue is estimated for metered customers for water used between the last reading of the customers meter and the end of the accounting period. This estimate is based on the usage from the last bill to the customer, which normally covers a 30-day period, and is prorated from the last meter read date to the end of the accounting period. The amount of variability is low at December 31, as this is one of the lowest usage months of the year and usage for the previous 30-day period is relatively consistent during this time of the year. Actual usage may vary from this estimate. Flat-rate customers are billed in advance at the beginning of the service period. Since these are constant amounts, appropriate adjustments can be calculated to determine the revenue related to the applicable period. Estimated Expenses. Some expenses are recorded using estimates, as actual payments are not known or processed by the accounting deadline. Estimates are made for unbilled purchased water, unbilled purchased power, unbilled pump taxes, payroll, and other types of similar expenses. While management believes its estimates are reasonable, actual results could vary. Differences between actual results and estimates are recorded in the period when the information is known. Expense-Balancing and Memorandum Accounts. Expense-balancing accounts and memorandum accounts (offsetable expenses) represent recoverable costs incurred but not billed to customers. The amounts included in these accounts relate to rate changes charged to the Company for purchased water, purchased power, and pump taxes that are different from amounts incorporated into the rates approved by the CPUC. The Company does not record expense-balancing or memorandum accounts in its financial statements as revenue, nor as a receivable, until the CPUC and other regulators have authorized recovery of the higher costs and customers have been billed. Therefore, a timing difference may occur between when costs are recognized and the recognition of associated revenues. The balancing and memorandum accounts are only used to track the specific costs outside of the financial statements. The cost changes, which are beyond the Company's control, are referred to as offsetable expenses because under certain circumstances, they are recoverable from customers in future offset rate increases. During 2003 and 2004, the CPUC gave approval to charge customers for a portion of the offsetable expenses (see Rates and Regulations). Additionally, the Company may file with the CPUC for its offsetable expenses incurred in 2004. The amounts requested may not be ultimately collected through rates, as amounts may be disallowed during the review process or subject to an earnings test. While the adjustments would not impact previously recorded amounts, the adjustments may change future earnings and cash flows. The Company has not compiled its offsetable expenses related to 2004 and therefore cannot provide estimates of what the ultimate collection will be from these accounts. Washington Water, New Mexico Water, and Hawaii Water did not have material amounts in expense-balancing or memorandum accounts. Income Taxes. Significant judgment is required in determining the provision for income taxes. The process involves estimating current tax exposure and assessing temporary differences resulting from treatment of certain items, such as depreciation, for tax and financial statement reporting. These differences result in deferred tax assets and liabilities, which are reported in the consolidated balance sheet. Management must also assess the likelihood that deferred tax assets will be recovered in future taxable income. To the extent recovery is unlikely, a valuation allowance would be required. If a valuation allowance was required, it could significantly increase income tax expense. In managements view, a valuation allowance was not required at December 31, 2004. Detailed schedules relating to income taxes are provided in Footnote 11 of the Consolidated Financial Statements. Employee Benefit Plans. The Company incurs costs associated with its pension and postretirement health care benefits plans. To measure the expense of these benefits, management must estimate compensation increases, mortality rates, future health cost increases, and discount rates used to value related liabilities and to determine appropriate funding. Management works with independent actuaries to measure these benefits. Different estimates and/or actual amounts could result in significant variances in the costs and liabilities recognized for these benefit plans. The estimates used are based on historical experience, current facts, future expectations, and recommendations from independent advisors and actuaries. The Company uses an investment advisor to provide expert advice for managing investments in these plans. To diversify investment risk, the plans goal is to invest 40%-60% of the assets in domestic equity mutual funds, 5%-15% in foreign equity mutual funds, and 35%-45% in bond funds. At December 31, 2004, 50% of the assets were invested in domestic equity mutual funds, 10% in foreign equity mutual funds, and 40% in bond funds. Based on the market values of the investment funds for the year ended December 31, 2004, the total return on the pension plan assets was 13%. For 2003 and 2002, returns were 19% and a negative 3.3%, respectively. Future returns on investments could vary significantly from estimates and could impact earnings and cash flows. Management expects any changes to these costs to be recovered in future rate filings, mitigating the financial impact. For measurement in 2004, management estimated the discount rate at 6.0%, which approximates the rate of Moodys AA-rated bonds at December 2004. The discount rate used for 2003 was 6.25% using the same methodology. Management assumed the rate of compensation to increase 3.0% in 2005 and 3.0% thereafter. Any change in these assumptions would have an effect on the service costs, interest costs, and accumulated benefit obligations. Additional information related to employee benefit plans is listed in Footnote 12 of the Consolidated Financial Statements. Workers Compensation, General Liability, and Other Claims. For workers compensation, the Company utilizes an 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 general liability claims and other claims, management estimates the cost incurred but not yet paid using historical information. Although the Company has insurance policies, it is primarily self-insured due to the high deductibles. Actual costs could vary from these estimates. Management believes actual costs incurred would be allowed in future rates, mitigating the financial impact. Contingencies. The Company did not record any provisions relating to the contingencies reported in Footnote 15 of the Consolidated Financial Statements, as these did not qualify for recording under SFAS No. 5, Accounting for Contingencies, or other accounting standards. If managements assessment is incorrect, these items could have a material impact on the financial condition, results of operations, and cash flows of the business. FINANCIAL RISK MANAGEMENT The Company does not participate in hedge arrangements, such as forward contracts, swap agreements, options, or other contractual agreements relative to the impact of market fluctuations on the Company's assets, liabilities, production, or contractual commitments. The Company operates only in the United States and, therefore, is not subject to foreign currency exchange rate risks. Terrorism Risk. Due to terrorist risks, the Company has heightened security at its facilities over the past few years and has taken added precautions to protect its employees and the water delivered to customers. The Company has complied with the United States Environmental Protection Agency (EPA) regulations concerning vulnerability assessments and has made filings to the EPA as required. In addition, communication plans have been developed as a component of the Company's procedures related to this risk. While the Company does not make public comments on its security programs, the Company has been in contact with federal, state, and local law enforcement agencies to coordinate and improve water delivery systems security. Interest Rate Risk. The Company is subject to interest rate risk, although this risk is lessened because the Company operates in a regulated industry. If interest costs were to increase, management believes rates would increase accordingly. The majority of debt is long-term, fixed-rate. Interest rate risk does exist on short-term borrowings within the Company's credit facilities, as these interest rates are variable. The Company also has interest rate risk on new financing, as higher interest cost may occur on new debt if interest rates increase. Stock Price Risk. Because the Company operates primarily in a regulated industry, its stock price risk is somewhat lessened; however, regulated parameters also can be recognized as limitations to operations, earnings, and the ability to respond to certain business condition changes. Prior to 2004, the Company experienced stock price risk because of the impact on earnings caused by the delay of certain CPUC decisions. An adverse change in the stock price could make use of common stock more expensive in the future. Stock Market Performance Risk. The Company's stock price could be impacted by changes in the general stock market. This could impact the costs of obtaining funds through the equity markets. Stock market performance could also impact the Company through the investments by the Company's defined benefit plan and postretirement medical benefit plan. The Company is responsible for funding these plans. Plan investments are made in stock market equities using mutual funds and in corporate bonds. Poor performance of the equity and bond markets could result in increased costs and additional funding requirements due to lower investment returns. Management believes the Company would be able to recover these higher costs in customer rates. Equity Risk. The Company does not have equity investments and, therefore, does not have equity risks. RECENT ACCOUNTING PRONOUNCEMENTS AND LAW CHANGES The description and impact of recent accounting pronouncements that are effective for the periods reported are described in Footnote 2 of the Consolidated Financial Statements. As of the filing date, there were no accounting pronouncements affecting future periods that are expected to have a material impact on the Company's financial condition, results of operations, or cash flows. CONSOLIDATED BALANCE SHEETS California Water Service Group In thousands, except per share data December 31, 2004 2003 --------- --------- ASSETS Utility plant: Land $ 13,070 $ 12,318 Depreciable plant and equipment 1,102,932 1,038,058 Construction work in progress 13,248 13,770 Intangible assets 14,824 14,829 --------- --------- Total utility plant 1,144,074 1,078,975 Less accumulated depreciation and amortization 343,769 319,477 --------- --------- Net utility plant 800,305 759,498 --------- --------- Current assets: Cash and cash equivalents 18,820 2,856 Receivables, net of allowance for uncollectible accounts Customers 15,867 18,434 Income taxes 7,298 -- Other 3,147 5,125 Unbilled revenue 9,307 8,522 Materials and supplies at weighted average cost 3,161 2,957 Prepaid pension expense 3,671 -- Taxes and other prepaid expenses 9,122 5,609 --------- --------- Total current assets 70,393 43,503 --------- --------- Other assets: Regulatory assets 53,477 53,326 Unamortized debt premium and expense 8,411 9,071 Other 10,267 7,637 --------- --------- Total other assets 72,155 70,034 --------- --------- $ 942,853 $ 873,035 --------- --------- 2004 2003 --------- --------- CAPITALIZATION AND LIABILITIES Capitalization: Common stock, $0.01 par value, 25,000 shares authorized, 18,367 and 16,932 outstanding in 2004 and 2003, respectively $ 184 $ 169 Additional paid-in capital 131,271 93,748 Retained earnings 156,851 150,908 Accumulated other comprehensive loss (701) (301) --------- --------- Total common stockholders equity 287,605 244,524 Preferred stock without mandatory redemption provision, $25 par value, 380 shares authorized, 139 shares outstanding 3,475 3,475 Long-term debt, less current maturities 274,821 272,226 --------- --------- Total capitalization 565,901 520,225 --------- --------- Current liabilities: Current maturities of long-term debt 1,100 904 Short-term borrowings -- 6,454 Accounts payable 19,745 23,776 Accrued taxes 1,912 2,074 Accrued interest 2,676 2,896 Other accrued liabilities 31,779 27,460 --------- --------- Total current liabilities 57,212 63,564 --------- --------- Unamortized investment tax credits 2,721 2,925 Deferred income taxes 54,826 38,005 Regulatory liabilities 18,811 16,676 Advances for construction 131,292 121,952 Contributions in aid of construction 94,915 90,529 Other long-term liabilities 17,175 19,159 Commitments and contingencies -- -- --------- --------- $ 942,853 $ 873,035 --------- --------- See accompanying Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF INCOME California Water Service Group
In thousands, except per share data For the years ended December 31, 2004 2003 2002 --------- --------- --------- Operating revenue $ 315,567 $ 277,128 $ 263,151 --------- --------- --------- Operating expenses: Operations: Purchased water 89,787 80,831 76,672 Purchased power 21,801 21,921 22,897 Pump taxes 7,555 6,272 6,344 Administrative and general 47,078 40,969 37,196 Other 39,929 37,476 34,073 Maintenance 13,228 12,717 11,587 Depreciation and amortization 26,114 23,256 21,238 Income taxes 17,084 12,898 12,568 Property and other taxes 11,508 10,554 9,829 --------- --------- --------- Total operating expenses 274,084 246,894 232,404 --------- --------- --------- Net operating income 41,483 30,234 30,747 --------- --------- --------- Other income and expenses: Non-regulated income, net 2,375 2,097 2,187 Gain on the sale of non-utility property 8 4,603 2,980 --------- --------- --------- Total other income and expenses 2,383 6,700 5,167 --------- --------- --------- Interest expense: Interest expense 18,664 19,512 18,314 Less capitalized interest 824 1,995 1,473 Net interest expense 17,840 17,517 16,841 --------- --------- --------- Net income $ 26,026 $ 19,417 $ 19,073 --------- --------- --------- Earnings per share: Basic $ 1.46 $ 1.21 $ 1.25 Diluted $ 1.46 $ 1.21 $ 1.25 Weighted average number of common shares outstanding: Basic 17,652 15,882 15,182 Diluted 17,674 15,893 15,185 See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME California Water Service Group
In thousands Accumulated Additional Other Total For the years ended Common Paid-in Retained Comprehensive Stockholders December 31, 2004, 2003 and 2002 Stock Capital Earnings Income/(Loss) Equity Balance at December 31, 2001 $ 152 $ 49,984 $ 147,299 $ (816) $ 196,619 -------- -------- --------- -------- --------- Net income -- -- 19,073 -- 19,073 Net other comprehensive income -- -- -- 682 682 -------- -------- --------- -------- --------- Comprehensive income -- -- -- -- 19,755 Dividends paid: Preferred stock -- -- 153 -- 153 Common stock -- -- 17,004 -- 17,004 -------- -------- --------- -------- --------- Total dividends paid -- -- 17,157 -- 17,157 -------- -------- --------- -------- --------- Balance at December 31, 2002 152 49,984 149,215 (134) 199,217 -------- -------- --------- -------- --------- Net income -- -- 19,417 -- 19,417 Net other comprehensive loss -- -- -- (167) (167) -------- -------- --------- -------- --------- Comprehensive income -- -- -- -- 19,250 Issuance of common stock 17 43,764 -- -- 43,781 Dividends paid: Preferred stock -- -- 153 -- 153 Common stock -- -- 17,571 -- 17,571 -------- -------- --------- -------- --------- Total dividends paid -- -- 17,724 -- 17,724 -------- -------- --------- -------- --------- Balance at December 31, 2003 169 93,748 150,908 (301) 244,524 -------- -------- --------- -------- --------- Net income -- -- 26,026 -- 26,026 Net other comprehensive loss -- -- -- (400) (400) -------- -------- --------- -------- --------- Comprehensive income -- -- -- -- 25,626 Issuance of common stock 15 37,523 -- -- 37,538 Dividends paid: Preferred stock -- -- 153 -- 153 Common stock -- -- 19,930 -- 19,930 Total dividends paid -- -- 20,083 -- 20,083 -------- -------- --------- -------- --------- Balance at December 31, 2004 $ 184 $131,271 $ 156,851 $ (701) $ 287,605 -------- -------- --------- -------- --------- See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS California Water Service Group
In thousands For the years ended December 31, 2004 2003 2002 Operating activities: Net income $ 26,026 $ 19,417 $ 19,073 -------- -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 26,114 23,256 21,238 Deferred income taxes, investment tax credits, and regulatory assets and liabilities, net 17,637 2,834 786 Gain on sale of non-utility property (8) (4,603) (2,980) Changes in operating assets and liabilities: Receivables (2,720) 1,292 (1,088) Unbilled revenue (771) (554) (561) Taxes and other prepaid expenses (7,168) (2,876) (86) Accounts payable (4,042) (301) (431) Other current assets (203) (197) (613) Other current liabilities 2,713 7,537 1,911 Other changes, net (2,167) (1,374) (696) -------- -------- -------- Net adjustments 29,385 25,014 17,480 -------- -------- -------- Net cash provided by operating activities 55,411 44,431 36,553 -------- -------- -------- Investing activities: Utility plant expenditures: Company-funded (50,388) (53,884) (71,553) Developer advances and contributions in aid of construction (18,185) (20,369) (16,808) Proceeds from sale of non-utility assets 14 4,803 3,006 Acquisitions (900) (6,094) (2,300) -------- -------- -------- Net cash used in investing activities (69,459) (75,544) (87,655) -------- -------- -------- Financing activities: Net changes in short-term borrowings (6,454) (29,925) 12,435 Issuance of common stock, net of expenses 37,538 43,781 -- Issuance of long-term debt, net of expenses 3,501 80,114 79,718 Advances for construction 14,388 13,248 12,545 Refunds of advances for construction (5,049) (4,838) (4,597) Contributions in aid of construction 6,882 9,311 7,740 Retirement of long-term debt (711) (61,061) (39,472) Dividends paid (20,083) (17,724) (17,157) -------- -------- -------- Net cash provided by financing activities 30,012 32,906 51,212 -------- -------- -------- Change in cash and cash equivalents 15,964 1,793 110 Cash and cash equivalents at beginning of year 2,856 1,063 953 -------- -------- -------- Cash and cash equivalents at end of year $ 18,820 $ 2,856 $ 1,063 -------- -------- -------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amounts capitalized) $ 18,884 $ 17,672 $ 16,527 Income taxes 8,026 6,188 10,205 See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS California Water Service Group December 31, 2004, 2003, and 2002 Amounts in thousands, except per share data and share data 1 ORGANIZATION AND OPERATIONS California Water Service Group (Company), a holding company operating through its wholly owned subsidiaries, provides water utility and other related services in California, Washington, New Mexico, and Hawaii. California Water Service Company (Cal Water), Washington Water Service Company (Washington Water),New Mexico Water Service Company (New Mexico Water), and Hawaii Water Service Company, Inc. (Hawaii Water) provide regulated utility services under the rules and regulations of their respective states regulatory commissions (jointly referred to as the Commissions). CWS Utility Services provides non-regulated water utility and utility-related services. The Company operates primarily in one business segment, providing water and related utility services. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Accounting Records.The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Inter-company transactions and balances have been eliminated. The accounting records of the Company are maintained in accordance with the uniform system of accounts prescribed by the Commissions. Reclassifications. Certain prior years amounts have been reclassified, where necessary, to conform to the current year presentation. Use of Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue. Revenue consists of monthly cycle customer billings for regulated water and wastewater services at rates authorized by the Commissions and billings to certain non-regulated customers. Revenue from metered accounts includes unbilled amounts based on the estimated usage from the latest meter reading to the end of the accounting period. Flat-rate accounts, which are billed at the beginning of the service period, are included in revenue on a pro rata basis for the portion applicable to the current accounting period. The Company provides an allowance for doubtful accounts. The balance of customer receivables is net of the allowance for doubtful accounts at December 31, 2004 and 2003 of $287 and $289, respectively. The activity in the reserve account is as follows: 2004 2003 Beginning balance $ 289 $ 181 Provision for uncollectible accounts 1,073 833 Net write-off of uncollectible accounts (1,075) (725) ------ ------ Ending balance $ 287 $ 289 ------ ------ Non-Regulated Revenue.Revenues from non-regulated operations and maintenance agreements are recognized when services have been rendered to companies or municipalities under such agreements. Expenses are netted against the revenue billed and are reported in Other income and expenses on the Consolidated Statements of Income. Other non-regulated revenue is recognized when title has transferred to the buyer, or ratably over the term of the lease. For construction and design services, revenue is generally recognized on the completed contract method, as most projects are completed in less than three months. One construction and design project spanned multiple years, and revenue was recognized using the percentage-of-completion method based on a zero profit margin until project completion in 2002. See Footnote 3, Other Income and Expenses. Expense-Balancing and Memorandum Accounts. Expense-balancing and memorandum accounts are used to track suppliers rate changes for purchased water, purchased power, and pump taxes that are not included in customer water rates. The cost changes are referred to as offsetable expenses, because under certain circumstances, they are recoverable from customers (or refunded to customers) in future rates designed to offset the cost changes from the suppliers. The Company does not record the balancing and memorandum accounts until the Commission has authorized a change in customer rates and the customer has been billed. Utility Plant. Utility plant is carried at original cost when first constructed or purchased, except for certain minor units of property recorded at estimated fair values at the date of acquisition. When depreciable plant is retired, the cost is eliminated from utility plant accounts and such costs are charged against accumulated depreciation. Maintenance of utility plant is charged to operating expenses as incurred. Maintenance projects are not accrued for in advance. Interest is capitalized on plant expenditures during the construction period and amounted to $824 in 2004, $1,995 in 2003, and $1,473 in 2002. Intangible assets acquired as part of water systems purchased are stated at amounts as prescribed by the Commissions. All other intangibles have been recorded at cost and are amortized over their useful lives. Included in intangible assets is $6,515 paid to the City of Hawthorne in 1996 to lease the citys water system and associated water rights. The asset is being amortized on a straight-line basis over the 15-year life of the lease. The following table represents depreciable plant and equipment as of December 31: 2004 2003 Equipment $ 214,202 $ 199,157 Transmission and distribution plant 819,793 772,641 Office buildings and other structures 68,937 66,260 ---------- ---------- Total $1,102,932 $1,038,058 ---------- ---------- Depreciation of utility plant for financial statement purposes is computed on a straight-line basis over the assets estimated useful lives as follows: Useful Lives Equipment 5-50 years Transmission and distribution plant 40-65 years Office buildings and other structures 50 years The provision for depreciation expressed as a percentage of the aggregate depreciable asset balances was 2.6% in 2004, 2.5% in 2003, and 2.4% in 2002. For income tax purposes, as applicable, the Company computes depreciation using the accelerated methods allowed by the respective taxing authorities. Plant additions since June 1996 are depreciated on a straight-line basis for tax purposes in accordance with tax regulations. Cash Equivalents. Cash equivalents include highly liquid investments with maturities of three months or less. As of December 31, 2004 and 2003, investments in money market funds were $6,133 and $0, respectively, and investments in high-quality commercial paper were $4,997 and $0, respectively. Restricted Cash. Restricted cash primarily represents proceeds collected through a surcharge on certain customers bills plus interest earned on the proceeds and is used to service California Safe Drinking Water Bond obligations. In addition, there are compensating balances at a bank in support of borrowings. All restricted cash is classified in other prepaid expenses. At December 31, 2004 and 2003, the amounts of restricted cash were $1,337 and $1,154, respectively. Regulatory Assets and Liabilities. The Company records regulatory assets for future revenues expected to be realized in customers rates when certain items are recognized as expenses for rate-making purposes. The income tax temporary differences relate primarily to the difference between book and income tax depreciation on utility plant that was placed in service before the regulatory Commissions adopted normalization for rate-making purposes. Previously, the tax effect was passed onto customers. In the future, when such timing differences reverse, the Company will be able to include the impact in customer rates. The regulatory assets associated with income tax differences are net of deferred income taxes that were provided at current tax rates. The differences will reverse over the remaining book lives of the related assets. In addition, regulatory assets include items that are recognized as liabilities for financial statement purposes, which will be recovered in future customer rates. The liabilities relate to postretirement benefits, vacation, self-insured workers compensation, and asset retirement obligations. Regulatory liabilities represent future benefits to ratepayers for tax deductions that will be allowed in the future for funds received as Advances for Construction and Contributions in Aid of Construction. Regulatory liabilities also reflect timing differences provided at higher than the current tax rate, and which will flow through to future ratepayers. Regulatory assets and liabilities are comprised of the following as of December 31: 2004 2003 REGULATORY ASSETS Income tax temporary differences $29,196 $30,157 Asset retirement obligations 2,540 4,985 Postretirement benefits other than pensions 9,019 6,846 Accrued vacation and workers compensation 12,722 11,338 ------- ------- Total regulatory assets $53,477 $53,326 ------- ------- REGULATORY LIABILITIES Future tax benefits due ratepayers $18,811 $16,676 ------- ------- Long-Lived Assets. The Company regularly reviews its long-lived assets for impairment annually, or when events or changes in business circumstances have occurred that indicate the carrying amount of such assets may not be fully realizable. Potential impairment of assets held for use is determined by comparing the carrying amount of an asset to the future undiscounted cash flows expected to be generated by that asset. If assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets. There have been no such impairments as of December 31, 2004 and 2003. Long-Term Debt Premium, Discount and Expense. The discount and issuance expense on long-term debt is amortized over the original lives of the related debt issues. Premiums paid on the early redemption of certain debt issues and unamortized original issue discount and expense of such issues are amortized over the life of new debt issued in conjunction with the early redemption. These amounts were $0, $3,154, and $2,449 in 2004, 2003, and 2002, respectively. Amortization expense included in interest expense was $660, $415, and $183 for 2004, 2003, and 2002, respectively. Accumulated Other Comprehensive Loss. The Company has an unfunded Supplemental Executive Retirement Plan. The unfunded accumulated benefit obligation of the plan, less the accrued benefit, exceeds the unrecognized prior service cost resulting in an accumulated other comprehensive loss that has been recorded net of tax as a separate component of Stockholders Equity. Advances for Construction. Advances for Construction consist of payments received from developers for installation of water production and distribution facilities to serve new developments. Advances are excluded from rate base for rate-setting purposes. Annual refunds are made to developers without interest over a 20-year or 40-year period. Refund amounts under the 20-year contracts are based on annual revenues from the extensions. Unrefunded balances at the end of the contract period are credited to Contributions in Aid of Construction when they are no longer refundable in accordance with the contracts. Reclassifications were $0 in 2004 and $1,813 in 2003. Refunds on contracts entered into since 1982 are made in equal annual amounts over 40 years. At December 31, 2004 and 2003, the amounts refundable under the 20-year contracts were $828 and $1,350, respectively, and under 40-year contracts were $129,730 and $119,699, respectively. In addition, other Advances for Construction totaling $734 and $903 at December 31, 2004 and 2003, respectively, are refundable based upon customer connections. Estimated refunds of advances for each succeeding year (2005 through 2009) are $5,036, $4,556, $4,403, $4,364, and $4,344, and $108,589 thereafter. Contributions in Aid of Construction. Contributions in Aid of Construction represent payments received from developers, primarily for fire protection purposes, which are not subject to refunds. Facilities funded by contributions are included in utility plant, but excluded from rate base. Depreciation related to assets acquired from contributions is charged to Contributions in Aid of Construction. Income Taxes. The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Measurement of the deferred tax assets and liabilities is 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The Company anticipates that future rate action by the Commissions will reflect revenue requirements for the tax effects of temporary differences recognized, which have previously been flowed through to customers. The Commissions have granted the Company rate increases to reflect the normalization of the tax benefits of the federal accelerated methods and available Investment Tax Credits (ITC) for all assets placed in service after 1980. ITC are deferred and amortized over the lives of the related properties for book purposes. Advances for Construction and Contributions in Aid of Construction received from developers subsequent to 1986 were taxable for federal income tax purposes, and those received subsequent to 1991 were subject to California income tax. In 1996, the federal tax law, and in 1997, the California tax law, changed and only deposits for new services were taxable. In late 2000, federal regulations were further modified to exclude fire services from tax. Worker's Compensation, General Liability and Other Claims. For workers compensation, the Company utilized an actuary firm to estimate the discounted liability associated with claims submitted and claims not yet submitted based on historical data. For general liability claims and other claims, the Company estimates the cost incurred but not yet paid using historical information. Earnings Per Share. Basic earnings per share (EPS) is calculated by dividing income available to common stockholders (net income less preferred stock dividends of $153) by the weighted average shares outstanding during the year. Diluted EPS is calculated by dividing income available to common stockholders by the weighted average shares outstanding, including potentially dilutive shares as determined by application of the treasury stock method. The difference between basic and diluted weighted average number of common stock outstanding is the effect of dilutive common stock options outstanding. Stock-Based Compensation. The Company has a stockholder-approved Long-Term Incentive Plan that allows granting of non-qualified stock options. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation, "as amended by SFAS No.148, "Accounting for Stock-Based Compensation - Transition Disclosure - - An Amendment to SFAS No. 123," and as permitted by the statement, applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for its plan. All of the Company's outstanding options have an exercise price equal to the market price on the date they were granted. No compensation expense was recorded for the years ended December 31, 2004, 2003, or 2002. The table below illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.
2004 2003 2002 Net income, as reported $26,026 $19,417 $19,073 Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects 67 68 70 ------- ------- ------- Pro forma net income $25,959 $19,349 $19,003 ------- ------- ------- Earnings per share: Basic-as reported $ 1.46 $ 1.21 $ 1.25 Basic-pro forma $ 1.46 $ 1.21 $ 1.24 Diluted-as reported $ 1.46 $ 1.21 $ 1.25 Diluted-pro forma $ 1.46 $ 1.21 $ 1.24
Recent Accounting Pronouncements. In December 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46R, "Consolidation of Variable Interest Entities," which amended Interpretation No. 46, "Consolidation of Variable Interest Entities." The revision exempted certain entities and modified the effective dates of Interpretation No. 46. The original guidance issued under Interpretation No. 46 in January 2003 is still applicable. Interpretation No. 46 and Interpretation No. 46R provide guidance for determining when a primary beneficiary should consolidate a variable interest entity or equivalent structure that functions to support the activities of the primary beneficiary. Interpretation No. 46R was effective March 31, 2004. The adoption of Interpretation No. 46R did not impact the Company's financial position, results of operations, or cash flows. In December 2003, the FASB issued Statements of Financial Accounting Standards (SFAS) No. 132 (revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits - An Amendment of FASB Statements No. 87, 88, and 106," which changed certain disclosures. SFAS No. 132 (revised) was effective for fiscal years ending after December 15, 2003, and was effective for interim-period disclosures beginning after December 15, 2003. As the revision relates to disclosure requirements, the adoption of SFAS No. 132 (revised) did not impact the Company's financial position, results of operations, or cash flows. In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003." FSP No. 106-2 was effective for the first quarter after June 15, 2004, and replaces FSP No. 106-1. FSP No. 106-1 was effective for the Company's consolidated financial statements for the year ended December 31, 2003. The Company has determined its retiree health plan is actuarially equivalent and would qualify for the subsidy. Because the Company is regulated, FSP No. 106-2 did not have an impact to the income statement or cash flows in 2004. The adjustment for FSP No. 106-2 impacted the balance sheet only, decreasing liabilities and regulatory assets by $663. The Company believes it will be eligible for the subsidy starting in 2006. The Company has estimated the impact of the subsidy on premiums charged to retirees, but has not made a final decision at this time; therefore, adjustments may occur once a decision has been made. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an Amendment to ARB No. 43, Chapter 4." The statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. The statement is effective for fiscal years beginning after June 15, 2005. The adoption of this statement is not expected to impact the Company's financial position, results of operations, or cash flows. In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary Assets." The statement amends Opinion No. 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. The statement is effective for fiscal years beginning after June 15, 2005. The adoption of this statement is not expected to impact the Company's financial position, results of operations, or cash flows. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which revises SFAS No. 123, Accounting for Stock-Based Compensation. The statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). The statement is effective for the Company in the first interim period that begins after June 15, 2005. The adoption of this statement is not expected to materially impact the Company's financial position, results of operations, or cash flows for equity instruments previously granted. The Company intends to request stockholder approval of a new long-term incentive plan in 2005, which includes issuances of equity instruments. At this time, the Company cannot estimate the impact of this new long-term incentive plan on the Company's financial position, results of operations, or cash flows. In December 2004, the FASB issued FSP No. 109-1, "Application of FASB Statement No. 109, Accounting for Income Tax, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creations Act of 2004." FSP No. 109-1 gives guidance on the application of SFAS No. 109 to the provisions within the American Jobs Creation Act of 2004 that allow a tax deduction on qualified production activities. The guidance states that the deduction should be accounted for as a special deduction in accordance with SFAS No. 109. The adoption of this guidance is not expected to materially impact the Company's financial position, results of operations, or cash flows. 3 OTHER INCOME EXPENSES The Company conducts various non-regulated activities as reflected in the table below. Income reflects revenue less direct and allocated costs. Income taxes are not included.
2004 2003 2002 ---------------------------------------------------------------------- Revenue Income Revenue Income Revenue Income ---------------------------------------------------------------------- Operating and maintenance $4,536 $ 997 $4,137 $ 939 $ 4,007 $ 800 Meter reading and billing 1,261 622 1,337 473 1,179 464 Leases 1,285 818 1,190 781 1,050 661 Water rights brokering -- (96) 196 112 1,382 515 Design and construction 606 209 1,305 204 6,267 206 Other and non-regulated expenses 385 (175) 320 (412) 262 (459) ------ ------ ------ ------ ------- ------ Total $8,073 $2,375 $8,485 $2,097 $14,147 $2,187 ------ ------ ------ ------ ------- ------
Operating and maintenance services and meter reading and billing services are provided for water and wastewater systems owned by private companies and municipalities. The agreements call for a fee-per-service or a flat-rate amount per month due from companies and municipalities. Leases have been entered into with telecommunications companies for cellular phone antennas placed on the Company's property. Water rights brokering activity involves purchasing water rights from third parties and reselling those rights to other third parties. Design and construction services are the design and installation of water mains and other water infrastructure for others outside the Company's regulated service areas. 4 ACQUISITIONS In 2004, after receiving regulatory approval, the Company's wholly owned subsidiary, New Mexico Water, acquired the stock of National Utility Company. The purchase was for $900 in cash for the approximate amount of rate base of the water system and for certain real estate used by the water system. In 2003, after receiving regulatory approval, the Company acquired the Kaanapali Water Corporation and renamed the corporation Hawaii Water Service Company, Inc. The purchase was for $6,094 in cash for the approximate amount of rate base. If the rate base is adjusted by the Commission in the next rate proceeding, the purchase price will be adjusted accordingly. During 2002, after receiving regulatory approval, the Company acquired the assets of Rio Grande Utility Corporation (Rio Grande) through its wholly owned subsidiary, New Mexico Water. The purchase includes the water and wastewater assets of Rio Grande, which serves water and wastewater customers in unincorporated areas of Valencia County, New Mexico. The purchase price was $2,300 in cash, plus assumption of $3,100 in outstanding debt. Rate base for the system is $5,400, including intangible water rights valued at $732. Condensed balance sheets and pro forma results of operations for these acquisitions have not been presented because the effects of these purchases are not material. Acquisitions that involved purchase of assets were accounted for under the purchase method of accounting. Minimal or no goodwill was recorded for these acquisitions. 5 INTANGIBLE ASSETS As of December 31, 2004 and 2003, intangible assets that will continue to be amortized and those not amortized were:
2004 2003 ------------------------------------------------------------------------------------- Weighted Average Gross Net Gross Net Amortization Carrying Accumulated Carrying Carrying Accumulated Carrying Period Value Amortization Value Value Amortization Value ------ ----- ------------ ----- ----- ------------ ----- Amortized intangible assets: Hawthorne lease 15 $ 6,515 $ 3,837 $ 2,678 $ 6,515 $ 3,402 $ 3,113 Water pumping rights usage 1,046 8 1,038 1,046 8 1,038 Water planning studies 13 3,164 763 2,401 2,470 485 1,985 Leasehold improvements and other 19 1,130 624 506 1,849 853 996 ----- -------- ---------- ------- ------- -------- ------- Total 15 $ 11,855 $ 5,232 $ 6,623 $11,880 $ 4,748 $ 7,132 ----- -------- ---------- ------- ------- -------- ------- Unamortized intangible assets: Perpetual water rights and other $ 2,969 -- $ 2,969 $ 2,949 -- $ 2,949
For the years ending December 31, 2004, 2003, and 2002, amortization of intangible assets was $799, $713, and $670, respectively. Estimated future amortization expense related to intangible assets for the succeeding five years is $828, $812, $683, $655, and $633 for 2005 to 2009 and $3,012 thereafter. 6 PREFERRED STOCK As of December 31, 2004 and 2003, 380,000 shares of preferred stock were authorized. Dividends on outstanding shares are payable quarterly at a fixed rate before any dividends can be paid on common stock. The outstanding 139,000 shares of $25 par value cumulative, 4.4% Series C preferred shares are not convertible to common stock. A premium of $243 would be due to preferred stock shareholders upon voluntary liquidation of Series C. There is no premium in the event of an involuntary liquidation. Each Series C preferred share is entitled to 16 votes, with the right to cumulative votes at any election of directors. 7 COMMON STOCKHOLDERS EQUITY The Company is authorized to issue 25 million shares of $0.01 par value common stock. As of December 31, 2004 and 2003, 18,367,246 shares and 16,932,046 shares, respectively, of common stock were issued and outstanding. Dividend Reinvestment and Stock Purchase Plan. The Company's transfer agent has a Dividend Reinvestment and Stock Purchase Plan (Plan). Under the Plan, stockholders may reinvest dividends to purchase additional Company common stock without commission fees. The Plan also allows existing stockholders and other interested investors to purchase Company common stock through the transfer agent up to certain limits. The Company's transfer agent operates the Plan and purchases shares on the open market to provide shares for the Plan. Stockholder Rights Plan. The Company's Stockholder Rights Plan (Plan) is designed to provide stockholders protection and to maximize stockholder value by encouraging a prospective acquirer to negotiate with the Board. The Plan was adopted in 1998 and authorized a dividend distribution of one right (Right) to purchase 1/100th share of Series D Preferred Stock for each outstanding share of Common Stock in certain circumstances. The Rights are for a 10-year period that expires in February 2008. Each Right represents a right to purchase 1/100th share of Series D Preferred Stock at the price of $120, subject to adjustment (Purchase Price). Each share of Series D Preferred Stock is entitled to receive a dividend equal to 100 times any dividend paid on common stock and 100 votes per share in any stockholder election. The Rights become exercisable upon occurrence of a Distribution Date. A Distribution Date event occurs if (a) any person accumulates 15% of the then outstanding Common Stock, (b) any person presents a tender offer which would cause the persons ownership level to exceed 15% and the Board determines the tender offer not to be fair to the Company's stockholders, or (c) the Board determines that a stockholder maintaining a 10% interest in the Common Stock could have an adverse impact on the Company or could attempt to pressure the Company to repurchase the holders shares at a premium. Until the occurrence of a Distribution Date, each Right trades with the Common Stock and is not separately transferable. When a Distribution Date occurs: (a) the Company would distribute separate Rights Certificates to Common Stockholders and the Rights would subsequently trade separate from the Common Stock; and (b) each holder of a Right, other than the acquiring person (whose Rights would thereafter be void), would have the right to receive upon exercise at its then current Purchase Price that number of shares of Common Stock having a market value of two times the Purchase Price of the Right. If the Company merges into the acquiring person or enters into any transaction that unfairly favors the acquiring person or disfavors the Company's other stockholders, the Right becomes a right to purchase Common Stock of the acquiring person having a market value of two times the Purchase Price. The Board may determine that in certain circumstances a proposal that would cause a Distribution Date is in the Company stockholders best interest. Therefore, the Board may, at its option, redeem the Rights at a redemption price of $0.001 per Right. 8 SHORT-TERM BORROWINGS At December 31, 2004, the Company maintained a bank line of credit providing unsecured borrowings of up to $10 million at the prime lending rate or lower rates as quoted by the bank. Cal Water maintained a separate bank line of credit for an additional $45 million on the same terms as the Company's line of credit. Both agreements required a 30-day out-of-debt period during any 24 consecutive months. The $10 million and $45 million lines have a requirement where the outstanding balance must be below $5 million and $10 million, respectively, for a 30-day consecutive period during any 12-month period. Both agreements have a covenant requiring debt as a percentage of total capitalization to be less than 67%. At December 31, 2004, there were no borrowings on the Company or Cal Water line. The following table represents borrowings under the bank lines of credit: 2004 2003 2002 ---- ---- ---- Maximum short-term borrowings $18,800 $58,633 $52,285 Average amount outstanding $ 4,330 $30,388 $25,495 Weighted average interest rate 2.94% 2.96% 3.44% Interest rate at December 31 n/a 4.08% 3.61% 9 LONG-TERM DEBT As of December 31, 2004 and 2003, long-term debt outstanding was: Interest Maturity Series Rate Date 2004 2003 First mortgage bonds: J 8.86% 2023 $ 3,800 $ 3,800 K 6.94% 2012 5,000 5,000 CC 9.86% 2020 18,200 18,300 ----------------------------------------- Total first mortgage bonds 27,000 27,100 --------------------------------------------------------- Senior notes: A 7.28% 2025 20,000 20,000 B 6.77% 2028 20,000 20,000 C 8.15% 2030 20,000 20,000 D 7.13% 2031 20,000 20,000 E 7.11% 2032 20,000 20,000 F 5.90% 2017 20,000 20,000 G 5.29% 2022 20,000 20,000 H 5.29% 2022 20,000 20,000 I 5.54% 2023 10,000 10,000 J 5.44% 2018 10,000 10,000 K 4.58% 2010 10,000 10,000 L 5.48% 2018 10,000 10,000 M 5.52% 2013 20,000 20,000 N 5.55% 2013 20,000 20,000 ----------------------------------------- Total senior notes 240,000 240,000 --------------------------------------------------------- California Department of Water Resources loans 3.0% to 7.4% 2005-33 2,673 2,747 Other long-term debt 6,248 3,283 --------------------------------------------------------- Total long-term debt 275,921 273,130 Current maturities 1,100 904 --------------------------------------------------------- Long-term debt less current maturities $274,821 $272,226 --------------------------------------------------------- The first mortgage bonds and unsecured senior notes are obligations of Cal Water. All bonds are held by institutional investors and secured by substantially all of Cal Waters utility plant. The senior notes are held by institutional investors and require interest-only payments until maturity, except series G and H, which have an annual sinking fund requirement of $1.8 million starting in 2012. The Department of Water Resources (DWR) loans were financed under the California Safe Drinking Water Bond Act. Repayment of principal and interest on the DWR loans is done through a surcharge on customer bills. Other long-term debt includes a term loan of $3.4 million for New Mexico Water and other equipment and system acquisition financing arrangements with financial institutions. Compensating balances of $228 as of December 31, 2004 are required by these institutions. Aggregate maturities and sinking fund requirements for each of the succeeding five years (2005 through 2009) are $1,100, $1,048, $1,029, $1,030, and $957, and $270,757, thereafter. 10 OTHER ACCRUED LIABILITIES As of December 31, 2004 and 2003, other accrued liabilities were: 2004 2003 Accrued pension and postretirement benefits $13,032 $11,828 Accrued and deferred compensation 7,953 7,192 Accrued benefit and workers compensation claims 4,142 2,894 Other 6,652 5,546 ------- ------- Total other accrued liabilities $31,779 $27,460 ------- ------- 11 INCOME TAXES Income tax expense consists of the following: Federal State Total 2004 Current $ 4,211 $3,623 $ 7,834 Deferred 9,146 104 9,250 ------- ------ ------- Total $13,357 $3,727 $17,084 ------- ------ ------- 2003 Current $ 8,506 $2,604 $11,110 Deferred 1,697 91 1,788 ------- ------ ------- Total $10,203 $2,695 $12,898 ------- ------ ------- 2002 Current $ 8,797 $2,406 $11,203 Deferred 1,039 326 1,365 ------- ------ ------- Total $ 9,836 $2,732 $12,568 ------- ------ ------- Income tax expense computed by applying the current federal 35% tax rate to pretax book income differs from the amount shown in the Consolidated Statements of Income. The difference is reconciled in the table below:
2004 2003 2002 ---- ---- ---- Computed "expected" tax expense $15,089 $11,310 $11,074 Increase (reduction) in taxes due to: State income taxes net of federal tax benefit 2,477 1,846 1,818 Investment tax credits (139) (91) (191) Other (343) (167) (133) ------- ------- ------- Total income tax $17,084 $12,898 $12,568 ------- ------- -------
The components of deferred income tax expense were:
2004 2003 2002 ---- ---- ---- Depreciation $11,603 $3,110 $ 2,405 Developer advances and contributions (1,409) (1,136) (789) Bond redemption premiums (231) 911 806 Investment tax credits (107) (110) (95) Other (606) (987) (962) ------- ------ ------- Total deferred income tax expense $ 9,250 $1,788 $ 1,365 ------- ------ -------
The tax effects of differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2004 and 2003 are presented in the following table:
2004 2003 ---- ---- Deferred tax assets: Developer deposits for extension agreements and contributions in aid of construction $ 47,688 $42,517 Federal benefit of state tax deductions 7,120 6,439 Book plant cost reduction for future deferred ITC amortization 1,607 1,728 Insurance loss provisions 1,158 1,179 Pension plan 1,524 1,359 Other 190 945 -------- -------- Total deferred tax assets 59,827 54,167 -------- -------- Deferred tax liabilities: Utility plant, principally due to depreciation differences 111,506 89,464 Premium on early retirement of bonds 2,607 2,708 Total deferred tax liabilities 114,113 92,172 -------- -------- Net deferred tax liabilities $ 54,826 $38,005 -------- --------
A valuation allowance was not required at December 31, 2004 and 2003. Based on historical taxable income and future taxable income projections over the period in which the deferred assets are deductible, management believes it is more likely than not that the Company will realize the benefits of the deductible differences. 12 EMPLOYEE BENEFIT PLANS Pension Plan. The Company provides a qualified, defined benefit, non-contributory pension plan for substantially all employees. The Company also maintains an unfunded, non-qualified, supplemental executive retirement plan. The cost of plans are charged to expense and utility plant. The Company makes annual contributions to fund the amounts accrued for pension cost. The Company estimates that the annual contribution to the pension plan will be $5,400 in 2005. Plan assets in the pension plan as of December 31, 2004 and 2003 (the measurement dates for the plan) were as follows: Asset Category Target 2004 2003 Bond funds 35%-45% 39.4% 42.9% Equity accounts 55%-65% 60.6% 57.1% The investment objective of the fund is to maximize the return on assets, commensurate with the risk the Company Trustees deem appropriate to meet the obligations of the Plan, minimize the volatility of the pension expense, and account for contingencies. The Trustees utilize the services of an outside investment advisor and periodically measure fund performance against specific indexes in an effort to generate a rate of return for the total portfolio that equals or exceeds the actuarial investment rate assumptions. Pension benefit payments are generally done in the form of purchasing an annuity from a life insurance company. Benefit payments under the supplemental executive retirement plan are paid currently. Benefits expected to be paid in each year from 2005 to 2009 are $3,207, $3,509, $4,879, $6,494, and $7,148, respectively. The aggregate benefit expected to be paid in the five years from 2010 to 2014 is $45,837. The expected benefit payments are based upon the same assumption used to measure the Company's benefit obligation at December 31, 2004 and include estimated future employee service. The accumulated benefit obligations of the pension plan are $65,938 and $62,368 as of December 31, 2004 and 2003, respectively. The fair value of pension plan assets was $75,064 and $63,216 as of December 31, 2004 and 2003, respectively. The unfunded supplemental executive retirement plan accumulated benefit obligations were $7,234 and $6,480 as of December 31, 2004 and 2003, respectively. The data in the tables below includes the unfunded, non-qualified, supplemental executive retirement plan. Savings Plan. The Company sponsors a 401(k) qualified, defined contribution savings plan that allows participants to contribute up to 20% of pretax compensation. The Company matches fifty cents for each dollar contributed by the employee up to a maximum Company match of 4.0%. Company contributions were $1,443, $1,433, and $1,422, for the years 2004, 2003, and 2002, respectively. Other Postretirement Plans. The Company provides substantially all active, permanent employees with medical, dental, and vision benefits through a self-insured plan. Employees retiring at or after age 58, along with their spouses and dependents, continue participation in the plan by payment of a premium. Plan assets are invested in mutual funds, short-term money market instruments, and commercial paper. Retired employees are also provided with a $5,000 life insurance benefit. The Company records the costs of postretirement benefits during the employees years of active service. The Commissions have issued decisions that authorize rate recovery of tax-deductible funding of postretirement benefits and permit recording of a regulatory asset for the portion of costs that will be recoverable in future rates. The following table reconciles the funded status of the plans with the accrued pension liability and the net postretirement benefit liability as of December 31, 2004 and 2003:
Pension Benefits Other Benefits -------------------------------------- 2004 2003 2004 2003 Change in benefit obligation: Beginning of year $ 88,356 $ 79,569 $ 22,219 $ 17,503 Service cost 4,608 3,879 1,461 1,033 Interest cost 5,613 5,374 1,560 1,224 Assumption change (5,992) 6,662 3,266 1,462 Medicare Modernization Act -- -- (4,360) -- Experience loss 2,938 2,058 8,130 1,106 Benefits paid, net of retiree premiums (7,907) (9,186) (1,406) (109) -------- -------- -------- -------- End of year $ 87,616 $ 88,356 $ 30,870 $ 22,219 -------- -------- -------- -------- Change in plan assets: Fair value of plan assets at beginning of year $ 63,216 $ 56,303 $ 3,697 $ 2,465 Actual return on plan assets 8,298 10,667 294 364 Employer contributions 11,457 5,432 1,958 977 Retiree contributions -- -- 649 580 Benefits paid (7,907) (9,186) (2,055) (689) -------- -------- -------- -------- Fair value of plan assets at end of year $ 75,064 $ 63,216 $ 4,543 $ 3,697 -------- -------- -------- -------- Funded status $(12,552) $(25,140) $(26,327) $(18,522) Unrecognized actuarial (gain) or loss (2,783) 4,031 14,293 7,175 Unrecognized prior service cost 15,383 17,074 638 712 Unrecognized transition obligation -- -- 2,493 2,769 Unrecognized net initial asset -- -- (276) (276) -------- -------- -------- -------- Net amount recognized $ 48 $ (4,035) $ (9,179) $ (8,142) -------- -------- -------- -------- Amounts recognized on the balance sheet consist of: Pension Benefits Other Benefits -------------------------------------- 2004 2003 2004 2003 Accrued benefit costs $ 48 $ (4,035) $ (9,179) $ (8,142) Additional minimum liability (3,081) (2,992) -- -- Intangible asset 2,380 2,691 -- -- Accumulated other comprehensive loss 701 301 -- -- -------- -------- -------- -------- Net amount recognized $ 48 $ (4,035) $ (9,179) $ (8,142) -------- -------- -------- --------
Below are the actuarial assumptions used for the benefit plans:
Pension Benefits Other Benefits -------------------------------------- 2004 2003 2004 2003 Weighted average assumptions as of December 31: Discount rate 6.00% 6.25% 6.00% 6.25% Long-term rate of return on plan assets 8.00% 8.00% 8.00% 8.00% Rate of compensation increases 3.00% 1.5%-4.25% -- --
The long-term rate of return assumption is the expected rate of return on a balanced portfolio invested roughly 60% in equities and 40% in fixed income securities. The average return for the plan for the last five and 10 years was 6.4% and 10.1%, respectively. Net periodic benefit costs for the pension and other postretirement plans for the years ending December 31, 2004, 2003, and 2002 included the following components:
Pension Benefits Other Benefits ---------------------------------------------------------------- 2004 2003 2002 2004 2003 2002 Service cost $ 4,608 $ 3,879 $ 2,968 $ 1,461 $ 1,033 $ 815 Interest cost 5,613 5,374 4,404 1,560 1,224 1,037 Expected return on plan assets (4,861) (4,757) (4,497) (340) (233) (216) Net amortization and deferral 2,014 1,861 1,166 894 637 500 ------- ------- ------- ------- ------- ------ Net periodic benefit cost $ 7,374 $ 6,357 $ 4,041 $ 3,575 $ 2,661 $2,136 ------- ------- ------- ------- ------- ------
Postretirement benefit expense recorded in 2004, 2003, and 2002 was $1,420, $1,160, and $1,157, respectively. The remaining net periodic benefit cost as of December 31, 2004 of $9,019 is recoverable through future customer rates and is recorded as a regulatory asset. The Company intends to make annual contributions to the plan up to the amount deductible for tax purposes. For 2004 measurement purposes, the Company assumed a 9.5% annual rate of increase in the per capita cost of covered benefits with the rate decreasing 1% per year for the next five years to a long-term annual rate of 4.5% per year. The health care cost trend rate assumption has a significant effect on the amounts reported. A one-percentage point change in assumed health care cost trends is estimated to have the following effect: 1-Percentage 1-Percentage Point Increase Point Decrease Effect on total service and interest costs $ 552 $ (618) Effect on accumulated postretirement benefit obligation $6,044 $(4,756) 13 STOCK-BASED COMPENSATION PLANS The Company has a stockholder-approved Long-Term Incentive Plan that allows granting of non-qualified stock options, performance shares, and dividend units. Under the plan, a total of 1,500,000 common shares are authorized for option grants. Options are granted at an exercise price that is not less than the per share common stock market price on the date of grant. The options vest at a 25% rate on their anniversary date over their first four years and are exercisable over a 10-year period. At December 31, 2004, 85,500 options were exercisable at a weighted average price of $24.82. No options were granted in 2004 or 2003. The fair value of stock options used to compute pro forma net income and earnings per share disclosures is the estimated fair value at grant date using the Black-Scholes option-pricing model with the following assumptions: 2004 2003 2002 Expected dividend n/a n/a 4.5% Expected volatility n/a n/a 14.4% Risk-free interest rate n/a n/a 3.25% Expected holding period in years n/a n/a 5.0 The following table summarizes the activity for the stock option plans:
Weighted Weighted Weighted Average Average Average Exercise Remaining Options Fair Shares Price Contractual Life Exercisable Value ------ ----- ---------------- ----------- ----- Outstanding at December 31, 2001 99,500 24.57 8.8 11,875 -- Granted 55,000 25.15 2.05 Outstanding at December 31, 2002 154,500 24.77 8.2 36,750 -- Cancelled (5,250) 24.78 Outstanding at December 31, 2003 149,250 24.77 7.2 74,625 -- Exercised (25,500) 23.67 Cancelled (2,250) 25.41 Outstanding at December 31, 2004 121,500 24.99 6.3 85,500 --
14 FAIR VALUE OF FINANCIAL INSTRUMENTS For those financial instruments for which it is practicable to estimate a fair value, the following methods and assumptions were used. For cash equivalents, accounts receivables, accounts payables, and short-term borrowings, the carrying amount approximates fair value because of the short-term maturity of the instruments. The fair value of the Company's long-term debt is estimated at $301 million and $289 million as of December 31, 2004 and 2003, respectively, using a discounted cash flow analysis, based on the current rates available to the Company for debt of similar maturities. The book value of the long-term debt is $276 million and $273 million as of December 31, 2004 and 2003, respectively. The fair value of advances for construction contracts is estimated at $51 million as of December 31, 2004 and $48 million as of December 31, 2003, based on data provided by brokers who purchase and sell these contracts. 15 COMMITMENTS AND CONTINGENCIES Commitments. The Company leases office facilities in many of its operating districts. The total paid and charged to operations for such leases was $632 in 2004, $577 in 2003, and $700 in 2002. The Company has long-term contracts with two wholesale water suppliers that require the Company to purchase minimum annual water quantities. Purchases are priced at the suppliers then current wholesale water rate. The Company operates to purchase sufficient water to equal or exceed the minimum quantities under both contracts. The total paid under the contracts was $7,918 in 2004, $8,557 in 2003, and $6,816 in 2002. The Company leases the City of Hawthorne water system, which in addition to the upfront lease payment, includes an annual payment. The 15-year lease expires in 2011. The annual payments in 2004, 2003, and 2002 were $116, $111, and $100, respectively. In July 2003, the Company entered into a 15-year lease of the City of Commerce water system. The lease includes an annual lease payment of $845 per year plus a cost savings sharing arrangement. Lease payments and payments called for in the above contracts are summarized below. Office Leases Water Contracts System Leases 2005 $508 $8,782 $ 961 2006 438 9,133 961 2007 318 9,499 961 2008 239 9,879 961 2009 156 10,274 961 Thereafter 375 10,685 7,388 The water supply contract with Stockton East Water District (SEWD) requires a fixed, annual payment and does not vary during the year with the quantity of water delivered by the district. Because of the fixed-price arrangement, the Company operates to receive 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 $4,392 in 2004, $3,779 in 2003, and $2,967 in 2002. Pricing under the contract varies annually. Contingencies. In 1995, the State of Californias Department of Toxic Substances Control (DTSC) named Cal Water as a potential responsible party for cleanup of a toxic contamination plume in the Chico ground- water. The toxic spill occurred when cleaning solvents, which were discharged into the citys sewer system by local dry cleaners, leaked into the underground water supply. The DTSC contends that Cal Waters responsibility stems from its operation of wells in the surrounding vicinity that caused the contamination plume to spread. While Cal Water is cooperating with the cleanup effort, Cal Water denies any responsibility for the contamination or the resulting cleanup and intends to vigorously resist any action that may be brought against Cal Water. In December 2002, Cal Water was named along with other defendants in two lawsuits filed by DTSC for the cleanup of the plume. The suits assert that the defendants are jointly and severally liable for the estimated cleanup of $8.7 million. A mediation process has begun and no settlement demands by any party have been made at this time. Management believes that insurance coverage exists for this claim, and if Cal Water were ultimately held responsible for a portion of the cleanup costs, there would not be a material adverse effect to its financial position or results of operations. Cal Waters insurance carrier is currently paying the cost of legal representation in this matter. In 1995, the California Legislature enacted the Water Utility Infrastructure Improvement Act of 1995 (Infrastructure Act) to encourage water utilities to sell surplus properties and reinvest in needed water utility facilities. In September 2003, the CPUC issued decision D.03-09-021 in Cal Waters 2001 GRC filing. In this decision, the CPUC ordered Cal Water to file an application setting up an Infrastructure Act memorandum account with an up-to-date accounting of all real property that was at any time in rate base and that Cal Water had sold since the effective date of the Infrastructure Act. Additionally, the decision directed the CPUC staff to file a detailed report on its review of Cal Waters application. On January 11, 2005, the Office of Ratepayer Advocates (ORA), a division of the CPUC responsible for representing ratepayers, issued a report expressing its opinion that Cal Water had not proven that surplus properties sold since 1996 were no longer used and useful. ORA recommended that Cal Water be fined $160 and that gains from property sales should generally benefit ratepayers. Management strongly disagrees with ORAs conclusions and recommendations. During the period under review, Cal Waters cumulative gains from surplus property sales were $19.2 million, which included an inter-company gain related to a transaction with CWS Utility Services and a like-kind exchange with a third party. If the CPUC finds any surplus property sale or transfer was recorded inappropriately, Cal Waters rate base could be reduced, which would lower future revenues, net income, and cash flows. Management believes it has fully complied with the Infrastructure Act and that ORAs conclusions and recommendations are without merit. Cal Water intends to vigorously oppose ORAs findings. Accordingly, Cal Water has not accrued a liability in the financial statements for ORAs recommendations. At this time, Cal Water does not know when or how the CPUC will rule in this matter. The Company is involved in other proceedings or litigation arising in the ordinary course of operations. The Company believes the ultimate resolution of such matters will not materially affect its financial position, results of operations, or cash flows. 16 QUARTERLY FINANCIAL DATA (UNAUDITED) The Company's common stock is traded on the New York Stock Exchange under the symbol "CWT." Through 2004, dividends have been paid on common stock for 59 consecutive years and the dividend amount per common share has been increased each year since 1967.
2004 in thousands except per share amounts First Second Third Fourth Operating revenue $60,240 $88,845 $97,104 $69,378 Net operating income 5,391 14,083 14,498 7,511 Net income 1,446 10,054 10,789 3,737 Diluted earnings per share 0.08 0.59 0.59 0.20 Common stock market price range: High 29.99 29.75 29.42 37.70 Low 27.25 26.60 26.19 28.20 Dividends paid .2825 .2825 .2825 .2825 2003 in thousands except per share amounts Operating revenue $51,311 $67,994 $88,197 $69,626 Net operating income 2,625 7,548 12,519 7,542 Net income (loss) (768) 4,585 8,587 7,013 Diluted earnings (loss) per share (0.05) 0.30 0.53 0.41 Common stock market price range: High 26.27 30.97 29.98 27.99 Low 23.92 25.79 25.20 25.51 Dividends paid .28125 .28125 .28125 .28125
CONTROLS AND PROCEDURES California Water Service Group MANAGEMENT'S EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company carried out an evaluation, under the supervision of and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2004, pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on their review of the disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective in timely alerting management to material information that is required to be included in periodic SEC filings. Management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company's disclosure controls and procedures or its internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of each control must be considered relative to its costs. Because of the inherent limitations in all control systems, no evaluation of a control system can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. There was no change in the Company's internal control over financial reporting during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Management has concluded that, as of December 31, 2004, the Company's internal control over financial reporting is effective based on these criteria. The Company's independent registered public accounting firm, KPMG LLP, which has audited the financial statements included in this Annual Report, has issued an audit report on managements assessment of the Company's internal control over financial reporting, which is included herein. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THE BOARD OF DIRECTORS AND STOCKHOLDERS CALIFORNIA WATER SERVICE GROUP We have audited management's assessment, included in the accompanying Managements Report on Internal Control over Financial Reporting, that California Water Service Group and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management of California Water Service Group is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the internal control over financial reporting of California Water Service Group and subsidiaries based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that California Water Service Group and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the COSO. Also, in our opinion, California Water Service Group and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control-Integrated Framework issued by the COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of California Water Service Group and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, common stockholders equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated February 22, 2005 expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP Mountain View, California February 22, 2005 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THE BOARD OF DIRECTORS AND STOCKHOLDERS CALIFORNIA WATER SERVICE GROUP We have audited the accompanying consolidated balance sheets of California Water Service Group and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, common stockholders equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the management of California Water Service Group. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of California Water Service Group and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the internal control over financial reporting of California Water Service Group and subsidiaries as of December 31, 2004, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 22, 2005 expressed an unqualified opinion on managements assessment of, and the effective operation of, internal control over financial reporting. /s/ KPMG LLP Mountain View, California February 22, 2005 CERTIFICATIONS As provided in the rules of the New York Stock Exchange, the Company's Chief Executive Officer has certified to the Exchange in writing that, as of February 23, 2005, he was not aware of any violation by the Company of the NYSEs Corporate Governance listing standards. The Company has included as Exhibits 31.1 and 31.2 to its Annual Report on Form 10-K for the year ended December 31, 2004, certifications from its Chief Executive Officer and Chief Financial Officer regarding the quality of the Company's public disclosure. CORPORATE INFORMATION STOCK TRANSFER, DIVIDEND DISBURSING, AND REINVESTMENT AGENT American Stock Transfer and Trust Company 57 Maiden Lane New York, NY 10038 (800) 937-5449 TO TRANSFER STOCK A change of ownership of shares (such as when stock is sold or gifted or when owners are deleted from or added to stock certificates) requires a transfer of stock. To transfer stock, the owner must complete the assignment on the back of the certificate and sign it exactly as his or her name appears on the front. This signature must be guaranteed by an eligible guarantor institution (banks, stock brokers, savings and loan associations, and credit unions with membership in approved signature medallion programs) pursuant to SEC Rule 17Ad-15. A notarys acknowledgement is not acceptable. This certificate should then be sent to American Stock Transfer and Trust Company by registered or certified mail with complete transfer instructions. EXECUTIVE OFFICE California Water Service Group 1720 North First Street San Jose, CA 95112-4598 (408) 367-8200 ANNUAL MEETING The Annual Meeting of Stockholders will be held on Wednesday, April 27, 2005, at 10 a.m. at the Company's Executive Office. Details of the business to be transacted during the meeting will be contained in the proxy material, which will be mailed to stockholders on or about March 26, 2005. DIVIDEND DATES FOR 2005 Quarter Declaration Record Date Payment Date First January 26 February 7 February 18 Second April 27 May 9 May 20 Third July 27 August 8 August 19 Fourth October 26 November 7 November 18 ANNUAL REPORT FOR 2004 ON FORM 10-K A copy of the Company's report for 2004 filed with the Securities and Exchange Commission (SEC) on Form 10-k will be available in March 2005 and can be obtained by any stockholder at no charge upon written request to the address below. The Company's filings with the SEC can viewed via the link to the SECs EDGAR system on the Company's web site. STOCKHOLDER INFORMATION California Water Service Group Attn: Stockholder Relations 1720 North First Street San Jose, CA 95112-4598 (408) 367-8200 or (800) 750-8200 http://www.calwatergroup.com EX-21 3 p19230_ex21.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Subsidiaries of the Registrant
Subsidiary Name State of Incorporation Business Name - --------------- ---------------------- ------------- California Water Service Company California California Water Service Company CWS Utility Services California CWS Utility Services New Mexico Water Service Company New Mexico New Mexico Water Service Company Washington Water Service Company Washington Washington Water Service Company Hawaii Water Service Company, Inc. Hawaii Hawaii Water Service Company
The Company and each of its subsidiaries operate in one business segment, the supply and distribution of water, and providing water related services. EX-23 4 p19230_ex23-1.txt CONSENT OF INDEPENDENT REGISTERED Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders California Water Service Group We consent to incorporation by reference in the registration statements (No. 333-103721) on Form S-3 and (No. 333-60810) on Form S-8 of California Water Service Group of our reports dated February 22, 2005, with respect to the consolidated balance sheets of California Water Service Group and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, common stockholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2004, management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2004, and the effectiveness of internal control over financial reporting as of December 31, 2004. /s/ KPMG LLP Mountain View, California February 22, 2005 EX-31 5 p19230_ex31-1.txt CERTIFICATIONS Exhibit 31.1 CERTIFICATIONS I, Peter Nelson, President and Chief Executive Officer of California Water Service Group, certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2004 of California Water Service Group; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered in this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the fourth fiscal quarter of 2004 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 23, 2005 By: /s/ Peter C. Nelson PETER C. NELSON President and Chief Executive Officer California Water Service Group EX-31 6 p19230_ex31-2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATIONS I, Richard Nye, Chief Financial Officer and Treasurer of California Water Service Group, certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2004 of California Water Service Group; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered in this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the fourth fiscal quarter of 2004 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 23, 2005 By: /s/ Richard D. Nye RICHARD D. NYE Chief Financial Officer and Treasurer California Water Service Group EX-32 7 p19230_ex32.txt CERTIFICATIONS Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned certifies that this Annual Report on Form 10-K for the year ended December 31, 2004 fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of California Water Service Group. Date: February 23, 2005 /s/ Peter C. Nelson PETER C. NELSON Chief Executive Officer California Water Service Group Date: February 23, 2005 /s/ Richard D. Nye RICHARD D. NYE Chief Financial Officer California Water Service Group -----END PRIVACY-ENHANCED MESSAGE-----