-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, nA4tFhbGfmly3GL2idOth6I5VxFEHkFivCZfThC/pDPWOwS1aiS49bsGwsWdgeNo c+b3KhAxQ1xBRy8ySm97TQ== 0000016422-95-000001.txt : 199507120000016422-95-000001.hdr.sgml : 19950711 ACCESSION NUMBER: 0000016422-95-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA WATER SERVICE CO CENTRAL INDEX KEY: 0000016422 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 940362795 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11309 FILM NUMBER: 95523790 BUSINESS ADDRESS: STREET 1: 1720 N FIRST ST CITY: SAN JOSE STATE: CA ZIP: 95112 BUSINESS PHONE: 4084518200 MAIL ADDRESS: STREET 1: 1720 NORTH FIRST STREET CITY: SAN JOSE STATE: CA ZIP: 95112 10-K 1 Total Number of Pages - 70 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, 1994 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. 0-464 CALIFORNIA WATER SERVICE COMPANY (Exact name of registrant as specified in its charter) California 94-0362795 (State or other jurisdiction (I.R.S. Employer Identification No.) of Incorporation) 1720 North First Street San Jose, California 95112 (Address of Principal Executive Offices) (Zip Code) 1-408-451-8200 (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 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Cumulative Preferred Stock, Par Value, $25 (Title of Class) (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. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant - $199,905,088 at February 28, 1995. Common stock outstanding at February 28, 1995 - 6,247,034 shares. 1 EXHIBIT INDEX The exhibit index to this Form 10-K is on page 25. DOCUMENTS INCORPORATED BY REFERENCE Designated portions of Registrant's Annual Report to Shareholders for the calendar year ended December 31, 1994 ("1994 Annual Report") are incorporated by reference in Part I (Item 1), Part II (Items 5, 6, 7 and 8) and in Part IV (Item 14(a)(1)) Designated portions of the Registrant's Proxy Statement dated March 13, 1995, relating to the 1995 annual meeting of shareholders ("Proxy Statement") are incorporated by reference in Part III (Items 10, 11 and 12) as of the date the Proxy Statement was filed with the Securities and Exchange Commission. 2 TABLE OF CONTENTS Page PART I Item 1. Business............................ 5 a. General Development of Business..... 5 Regulation and Rates.............. 5 b. Financial Information about Industry Segments................. 7 c. Narrative Description of Business... 8 Geographical Service Areas and Number of Customers at Year-End.......................... 9 Water Supply........................ 10 Utility Plant Construction Program and Acquisitions.................. 13 Quality of Supplies................. 13 Competition and Condemnation........ 13 Environmental Matters .............. 14 Human Resources..................... 14 d. Financial Information about Foreign and Domestic Operations and Export Sales ................. 14 Item 2. Properties ......................... 14 Item 3. Legal Proceedings................... 15 Item 4. Submission of Matters to a Vote of Security Holders.................. 15 Executive Officers of the Registrant......... 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............... 17 Item 6. Selected Financial Data............. 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 17 3 Item 8. Financial Statements and Supplementary Data................ 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 18 PART III Item 10. Directors and Executive Officers of the Registrant................. 18 Item 11. Executive Compensation.............. 18 Item 12. Security Ownership of Certain Beneficial Owners and Management.. 18 Item 13. Certain Relationships and Related Transactions...................... 18 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 19 Signatures........................................ 21 Independent Auditors' Report...................... 23 Schedules......................................... 24 Exhibit Index..................................... 25 Exhibits.......................................... 30 4 PART I Item 1 Business. a. General Development of Business. California Water Service Company (the "Company") is a public utility water company which owns and operates 20 water systems serving 38 cities and communities and adjacent territories in California with an estimated population of more than 1,500,000. The Company, one of the largest investor-owned water companies in the United States, was incorporated under the laws of the State of California on December 21, 1926. Its principal executive offices are located at 1720 North First Street, San Jose, California, and its mailing address is Post Office Box 1150, San Jose, California 95108 (telephone number:1-408-451-8200). Effective April 8, 1994 the Company's Common Stock began trading on the New York Stock Exchange under the symbol CWT. The Company was previously in the over-the-counter market and quoted by the National Association of Securities Dealers Automated Quotation System (NASDAQ) under the symbol CWTR During the fiscal year ended December 31, 1994 (the "1994 fiscal year"), there were no significant changes in the kind of products produced or services rendered by the Company, or in the Company's markets or methods of distribution. Regulation and Rates. The Company is subject to regulation of its rates, service and other matters affecting its business by the Public Utilities Commission of the State of California ("Commission" or "PUC"). The Company's systems, which are operated as 20 separate districts in the State of California, are not integrated with one another, and except for allocation of general office expenses and the determination of cost of capital, the expenses and revenues of individual districts are not affected by operations in other districts. Cost of capital (i.e. return on debt and equity) is determined on a Company-wide basis. Otherwise, the PUC requires that each district be considered a separate and distinct entity for rate-making purposes. 5 The Commission requires that water rates for each Company operating district be determined independently. Each year the Company attempts to file general rate increase applications for approximately one-third of its operating districts. According to its rate case processing procedures for water utilities, the Commission attempts to issue decisions within eight months of acceptance of the Application. Rates are set prospectively for a three-year period, with a provision for step increases to maintain the authorized rate of return. Offset rate adjustments are also allowed as required for changes in purchased water, power and pump tax costs. During 1994, general rate increase applications were filed with the Commission requesting rate relief of $3,023,000 in six Company districts representing 15 percent of the Company's customer base. The applications requested a rate of return on common equity of 12 percent. However, the Commission staff has recommended a rate of return of 10.9 percent. Public hearings for these cases were completed February 1995 and the Commission's decision is expected in mid- May. In the meantime, step rate increases for 15 districts totaling approximately $2,102,000 became effective in January 1995. In July 1994 the Commission issued a decision of general rate cases filed in July 1993, for three districts representing 13 percent of customer base, resulting in the authorization of $540,000 in additional revenue and authorizing a return on common equity of 10.2 percent In 1994 the Commission issued its long awaited decision in its investigation of the financial and operational risks for water utilities. While the Commission concluded that no fundamental change in its ratemaking procedures is necessary, it authorized water utilities to accrue interest on balancing and memorandum accounts. Additionally, the decision allows water utilities to request prospective recovery for unanticipated Safe Drinking Water Act compliance costs. The Company does not expect the decision to have a material effect on its operations. Effective March 14, 1994, the Commission closed all voluntary conservation memorandum accounts. The Company has filed an advice letter seeking authority to transfer $1,748,000 in conservation expenses from the drought memorandum accounts to its expense balancing accounts. These amounts would be recoverable on a district by district basis through the Commission's offset procedures which allow surcharges to amortize account balances. 6 Offset rate increases of $1,944,000 and $2,327,000 were authorized during the year for water production cost increases and balancing account undercollections, respectively. Additionally, the Commission approved rate increases of $292,000 to recover increased costs from the 1993 general office renovation, $87,000 for a new water tank in the South San Francisco district, and $215,000 for post-retirement benefits other than pensions. This latter rate increase relates to an expense which was incurred as a result of accounting changes mandated by Statement of Financial Accounting Standards No. 106. In January 1995 a consultant retained by the Commission's Division of Ratepayer Advocates delivered a report on the reasonableness of the Second Amended Contract between the Company, Stockton-East Water District, the City of Stockton and certain other governmental bodies, pertaining to the sale and delivery of water to the Company's Stockton District by the Stockton-East Water District. The report alleges that the Company was required to receive prior Commission approval before entering into the Second Amended Contract and furthermore challenges the reasonableness of the Second Amended Contract for ratemaking purposes. However the report does not include specific ratemaking recommendations. It is difficult and premature at this time to assess the potential impact on the Company if the report were to be adopted by the Commission. However, the Company anticipates that if there is any adverse financial impact as a result of the report, such impact would be prospective, affecting only future rates for the Stockton district. Hearings have not yet been scheduled on the report by the assigned administrative law judge. Following hearings at which the Company intends to present evidence to rebut the report, the assigned administrative law judge will render a proposed decision for comment and then Commission consideration. The management of the Company intends to vigorously defend its position that the Second Amended Contract did not require prior Commission approval and is reasonable for ratemaking purposes. b. Financial Information about Industry Segments. The Company has only one business segment. 7 c. Narrative Description of Business. The business of the Company consists of the production, purchase, storage, purification, distribution and sale of water for domestic, industrial, public, and irrigation uses, and for fire protection. The Company's business fluctuates according to the demand for water, which is partially dictated by seasonal conditions, such as summer temperatures or the amount and timing of rain during the year. The Company holds such franchises or permits in the communities it serves as it judges necessary to operate and maintain its facilities in the public streets. The Company distributes its water to customers in accordance with accepted water utility methods, which include pumping from storage and gravity feed from high elevation reservoirs. The Company has various contracts under which it operates three municipally owned water systems and two reclaimed water distribution systems and provides billing services for certain cities. 8 Geographical Service Areas and Number of Customers at Year-End. The principal markets for the Company's products are users of water within the Company's service areas. The Company's geographical service areas and the approximate number of customers served in each at December 31, 1994, are as follows: SAN FRANCISCO BAY AREA Mid-Peninsula (San Mateo and San Carlos) 35,300 South San Francisco (including Colma and Broadmoor) 15,300 Bear Gulch (including Menlo Park, Atherton, Woodside and Portola Valley) 17,100 Los Altos (including Los Altos and portions of Cupertino, Los Altos Hills, Mountain View and Sunnyvale) 17,800 Livermore 14,900 100,400 SACRAMENTO VALLEY Chico (including Hamilton City) 20,700 Oroville 3,500 Marysville 3,800 Dixon 2,700 Willows 2,200 32,900 SALINAS VALLEY Salinas 23,000 King City 1,900 24,900 SAN JOAQUIN VALLEY Bakersfield 54,400 Stockton 40,800 Visalia 26,200 Selma 4,600 126,000 LOS ANGELES AREA East Los Angeles (including portions of City of Commerce and Montebello) 26,400 Hermosa Beach and Redondo Beach (including a portion of Torrance) 24,800 Palos Verdes (including Palos Verdes Estates, Rancho Palos Verdes, Rolling Hills Estates and Rolling Hills) 23,400 Westlake (a portion of Thousand Oaks) 6,700 81,300 TOTAL 365,500 9 Water Supply The Company's water supply is obtained from wells, surface runoff or diversion and by purchase from public agencies and other suppliers. The effects of the recent California drought (which ended after the 1992-93 winter) and 1994 winter rains are discussed below. Except for periods of drought, the Company in the past has had adequate water supplies to meet the existing requirements of its service areas. During drought periods, some districts experienced water rationing. The Company delivered approximately 100 billion gallons of water during the 1994 fiscal year of which approximately 51% was obtained from wells and 49% was purchased from the following suppliers: % of Supply District Purchased Source of Purchased Supply SAN FRANCISCO BAY AREA Mid-Peninsula 100% San Francisco Water Department South San Francisco 83% San Francisco Water Department Bear Gulch 95% San Francisco Water Department Los Altos 82% Santa Clara Valley Water District Livermore 65% Alameda County Flood Control and Water Conservation District SACRAMENTO VALLEY Oroville 70% Pacific Gas and Electric Company 6% County of Butte SAN JOAQUIN VALLEY Bakersfield 20% Kern County Water Agency Stockton 75% Stockton-East Water District LOS ANGELES AREA East Los Angeles 89% Central Basin Municipal Water District Hermosa Beach and Redondo Beach 95% West Basin Municipal Water District 10 % of Supply District Purchased Source of Purchased Supply LOS ANGELES AREA (Continued) Palos Verdes 100% West Basin Municipal Water District Westlake 100% Russell Valley Municipal Water District The balance of the required supply for the above districts is obtained from wells, except for Bear Gulch where the balance is obtained from surface runoff from a local watershed. 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. In these districts, although groundwater levels declined during the six consecutive years of below normal precipitation (1986-1992), they remain, in the opinion of the Company, adequate for anticipated future needs. However, in the Salinas Valley, declining water tables have resulted in salt water intrusion in some areas adjacent to Monterey Bay. Operational changes have been made in the Salinas district in an attempt to retard the movement of salt water toward the Company's production wells. Pumping of vulnerable wells has been curtailed and supply supplemented by boosting water from other zones. The Company continues to cooperate with the Monterey County Water Resources Agency and other groups on long-term mitigation plans. Purchases for the Los Altos, Livermore, Oroville, Stockton and Bakersfield districts are pursuant to long-term contracts expiring on various dates after 2011. A new 30 year contract for the Livermore District with Zone 7 of the Alameda County Flood Control and Water Conservation District was signed on November 16, 1994. The supplies for the East Los Angeles, Hermosa-Redondo, Palos Verdes and Westlake districts are provided to the Company by public agencies pursuant to an obligation of continued nonpreferential service to persons within their boundaries. Purchases for the South San Francisco, Mid-Peninsula and Bear Gulch districts are pursuant to long-term contracts with the San Francisco Water Department expiring June 30, 2009. The 1993-1994 water season was California's fourth driest year on record, leading the Department of Water resources to declare a 'drought watch' in May of 1994. But these fears began to be allayed as early as November 1994 when a series of storms began pouring rain and snow throughout the state's watersheds. 11 By late January 1995, cumulative average Sierra snowpack was at 175 percent of normal, storage in the state's 155 reservoirs was at more than 90 percent of average and the drought watch was cancelled. These promising figures substantially improve the likelihood that 100 percent of state water project deliveries will be made in 1995. Substantial water reserves remain in the groundwater aquifers that supply Company districts served by well water. While recovery from drought-related depletion of these reserves was interrupted by drier than normal conditions in 1994, the mean groundwater levels in these districts were stable. In addition, districts located in regions with existing groundwater management mechanisms showed noticeable improvements in storage. Regional groundwater management planning is receiving greater attention throughout the state as its importance as a tool for addressing long-term water supply concerns is realized. The passage of legislation that enables management of this resource by existing local government agencies further stimulated this attention. Despite the promise of an abundant water year, California is expected to have long-term water supply problems. To compensate for this trend, the Company continues to promote water conservation programs initiated during the drought on a district-by-district basis outlined in our water management plans and as permitted by the Commission. Significant developments affecting future water supply occurred in several of our districts. On August 16, 1994 the State Water Resources Control Board (SWRCB) informed the Monterey County Board of Supervisors that it was initiating an investigation into the groundwater supply issues in the Salinas Valley. This is a prelude to a possible adjudication of the groundwater basin by the SWRCB should Monterey County fail to develop short and long-term solutions to the nitrate contamination and saltwater intrusion threatening the aquifers. In a related matter the SWRCB refused to consider a separate investigation of groundwater use in our King City district. This action will save the Company a considerable amount of litigation expense. In Solano County, the location of our Dixon district, the Solano County Water Agency agreed to reimburse the Company for costs it incurred as a party to the Putah Creek adjudication. This action will determine the rights to water from Putah Creek which recharges the groundwater from which our Dixon district derives its water supply. 12 Utility Plant Construction Program and Acquisitions. The Company is continually extending and enlarging its facilities as required to meet increasing demands and to maintain its service. Capital expenditures for these purposes and for the replacement of existing facilities amounted to approximately $28 million in 1994. Financing was obtained from funds from operations, short-term bank borrowings, sale of common stock, advances for construction, and contributions in aid of construction as set forth in the section entitled "Statement of Cash Flows" on page 26 of the Company's 1994 Annual Report and is incorporated herein by reference. Advances for construction of main extensions are received by the Company from subdivision developers under the rules of the PUC. These advances are refundable without interest over a period of years. Contributions in aid of construction consist of nonrefundable cash deposits or facilities received from developers. The Company now estimates that additions and improvements to its facilities during 1995 will amount to approximately $20,700,000 (exclusive of additions and improvements financed through advances for construction and contributions in aid of construction), which is expected to be financed with internally generated funds and short-term borrowings to be refinanced by funds from the anticipated issuance of approximately $20,000,000 of long-term debt in 1995. Quality of Supplies. The Company maintains procedures to produce potable water in accordance with accepted water utility practice. All water entering the distribution systems from surface sources is chlorinated and in most cases filtered. Samples of water from each district are analyzed regularly by Company bacteriologists. Competition and Condemnation. The Company is a public utility regulated by the PUC. The Company provides service within filed service areas approved by the PUC. Under the laws of the State of California, no privately owned public utility may compete with the Company in any territory already served by the Company without first obtaining a certificate of public convenience and necessity from the PUC. Under PUC practice, such certificate will be issued only on a showing that the Company's service in such territory is inadequate. California law also provides that whenever a public agency constructs facilities to extend a utility service into the service area of a privately owned public utility, such an act constitutes the taking of property and for such taking the public utility is to be paid just compensation. 13 Under the constitution and statutes of the State of California, municipalities, water districts and other public agencies have been authorized to engage in the ownership and operation of water systems. Such agencies are empowered to condemn properties already operated by privately owned public utilities upon payment of just compensation and are further authorized to issue bonds (including revenue bonds) for the purpose of acquiring or constructing water systems. To the Company's knowledge, no municipality, water district or other public agency has pending any action to condemn any of the Company's systems. Environmental Matters. The Company is subject to environmental regulation by various governmental authorities. Compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, as of the date of filing of this Form 10-K, any material effect on the Company's capital expenditures, earnings or competitive position. No such material effect is anticipated for the fiscal years ending December 31, 1995 and 1996. Human Resources. As of December 31, 1994, the Company had 624 employees, of whom 158 were executive and administrative officials and supervisory employees, and 466 were members of unions. The Company presently has two-year collective bargaining agreements expiring December 31, 1995, with the Utility Workers of America, AFL-CIO, representing the majority of employees, and the International Federation of Professional and Technical Engineers, AFL-CIO, representing certain engineering department employees. The Company plans to enter negotiations to renew the collective bargaining agreements prior to their expiration. The agreements have been successfully renewed in the past without a labor interruption. d. Financial Information about Foreign and Domestic Operations and Export Sales. The Company makes no export sales. Item 2.Properties. The Company's physical properties consist of offices and water systems for the production, storage, purification, and distribution of water. These properties are located in or near the service areas listed above in the section entitled "Water Supply." The Company maintains all of its properties in good operating condition. 14 The Company holds all its principal properties in fee, subject to the lien of the indenture securing the Company's first mortgage bonds, of which there were outstanding at December 31, 1994, $128,944,000 in principal amount. Item 3.Legal Proceedings. The Company is involved in only routine litigation which is incidental to the business. 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 fiscal year 1994. 15 Executive Officers of the Registrant. Name Positions and Offices with the Company Age C. H. Stump Chairman of the Board since 1991. 69 Director since 1976 and Member of Executive Committee since 1977. Mr. Stump was Secretary of the Company from 1959 to 1966, Secretary and Treasurer from 1966 to 1975, Executive Vice President from 1975 to 1981, President and Chief Operating Officer from 1981 to 1986, and President and Chief Executive Officer from 1986 to May 1992. Donald L. Houck President and Chief Executive Officer 62 since May 1992. Director since 1988. Mr. Houck was Executive Vice President and Chief Operating Officer from 1986 to 1992 and a Vice President since 1977. Prior to that, Mr. Houck was a supervising engineer with the California Public Utilities Commission with eighteen years experience in the rate-making process. Gerald F. Feeney Vice President, Chief Financial Officer and 50 Treasurer since November 1994. Controller, Assistant Secretary and Assistant Treasurer from 1976 to 1994. From 1970 to 1976, Mr. Feeney was an audit manager with Peat Marwick Mitchell & Co. Francis S. Ferraro Vice President since August 1989. Mr. 45 Ferraro previously had 15 years experience in regulatory matters with the California Public Utilities Commission, from June 1985 through August 1989 in the capacity of an administrative law judge. James L. Good Vice President since December 1994. 31 Mr. Good was Director of Congressional Relations for the National Association of Water Companies from 1991 to 1994. Raymond H. Taylor Vice President since April 1990. Mr. Taylor 49 had been director of water quality since 1986 and previously had been employed by the Environmental Protection Agency before joining the Company in 1982. Helen Mary Kasley Secretary and Legal Counsel since 43 1993. From 1990 to 1992, Mrs. Kasley was Secretary. From 1986 to 1990, she was an associate attorney with McCutchen, Doyle, Brown & Enersen. 16 Calvin L. Breed Controller, Assistant Secretary and Assistant 39 Treasurer since November 1994. Previously Mr. Breed served as Treasurer of TCI International, Inc. John S. Simpson Assistant Secretary since 1992. Mr. 50 Simpson has been Manager of New Business Development for the past nine years and has held various management positions with the Company since 1967. 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 was selected as an executive officer, other than those with directors or officers of the Company acting solely in their capacities as such. PART II Item 5.Market for Registrant's Common Equity and Related Stockholder Matters The information required by this item is contained in the Section captioned "Quarterly Financial and Common Stock Market Data" on pages 34 and 35 of the Company's 1994 Annual Report and is incorporated herein by reference. The number of holders listed in such section includes the Company's record holders and also individual participants in security position listings. Item 6.Selected Financial Data. The information required by this item is contained in the section captioned "California Water Service Company Ten Year Financial Review" on pages 16 and 17 of the Company's 1994 Annual Report and is incorporated herein by reference. Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required by this item is contained in the sections captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations," on pages 18 through 21 of the Company's 1994 Annual Report and is incorporated herein by reference. Item 8.Financial Statements and Supplementary Data. The information required by this item is contained in the sections captioned "Balance Sheet," "Statement of Income," "Statement of Common Shareholders' Equity," "Statement of Cash Flows," "Notes to Financial Statements" and "Independent Auditors' Report" on pages 22 through 35 of the Company's 1994 Annual Report and is incorporated herein by reference. 17 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10.Directors and Executive Officers of the Registrant. Information regarding executive officers of the Company is included in a separate item captioned "Executive Officers of the Registrant" contained in Part I of this report. The information required by this item as to directors of the Company is contained in the section captioned "Election of Directors" on pages 2 through 6 of the Proxy Statement and is incorporated herein by reference. (The Proxy Statement was filed under EDGAR on March 10, 1995). Item 11.Executive Compensation. The information required by this item as to directors and executive officers of the Company is contained in the section captioned "Compensation of Executive Officers" on pages 8 through 11 of the Proxy Statement and is incorporated herein by reference. (The Proxy Statement was filed under EDGAR on March 10, 1995). Item 12.Security Ownership of Certain Beneficial Owners and Management. The information required by this item is contained in the sections captioned "Election of Directors," "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" pages 2 through 6 and 13, respectively, of the Proxy Statement and is incorporated herein by reference. (The Proxy Statement was filed under EDGAR on March 10, 1995). Item 13.Certain Relationships and Related Transactions. None. 18 PART IV Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) Financial Statements: Balance Sheet as of December 31, 1994 and 1993. Statement of Income for the years ended December 31, 1994, 1993, and 1992. Statement of Common Shareholders' Equity for the years ended December 31, 1994, 1993, and 1992. Statement of Cash Flows for the years ended December 31, 1994, 1993, and 1992. Notes to Financial Statements, December 31, 1994, 1993, and 1992. The above financial statements are contained in sections bearing the same captions on pages 22 through 35 of the Company's 1994 Annual Report and are incorporated herein by reference. (2) Financial Statement Schedule: Schedule Number Independent Auditors' Report January 20, 1995. II Valuation and Qualifying Accounts and Reserves--years ending December 31, 1994, 1993, and 1992. All other schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. 19 (3) Exhibits required to be filed by Item 601 of Regulation S-K. See Exhibit Index on page 25 of this document which is incorporated herein by reference. The exhibits filed herewith are attached hereto (except as noted) and those indicated on the Exhibit Index which are not filed herewith were previously filed with the Securities and Exchange Commission as indicated. Except where stated otherwise, such exhibits are hereby incorporated by reference. Exhibits filed herewith and attached hereto under separate cover will be furnished to security holders of the Company upon written request and payment of a fee of $.30 per page which fee covers only the Company's reasonable expenses in furnishing such exhibits. (b) Report on Form 8-K. None required to be filed during the last quarter of 1994. 20 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 COMPANY Date: March 15, 1995 By /s/ Donald L. Houck DONALD L. HOUCK, President and Chief Executive Officer 21 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: March 15, 1995 /s/ William E. Ayer WILLIAM E. AYER, Member, Board of Directors Date: March 15, 1995 /s/ Robert W. Foy ROBERT W. FOY, Member, Board of Directors Date: March 15, 1995 /s/ Edward D. Harris, Jr. EDWARD D. HARRIS, JR. M.D., Member, Board of Directors Date: March 15, 1995 /s/ Donald L. Houck DONALD L. HOUCK President, Chief Executive Officer, Member, Board of Directors Date: March 15, 1995 /s/ Robert K. Jaedicke ROBERT K. JAEDICKE, Member, Board of Directors Date: March 15, 1995 /s/ Linda R. Meier LINDA R. MEIER, Member, Board of Directors Date: March 15, 1995 /s/ J. W. Weinhardt J. W. WEINHARDT, Member, Board of Directors Date: March 15, 1995 /s/ C. H. Stump C. H. STUMP, Chairman of the Board, Member, Board of Directors Date: March 15, 1995 /s/ Edwin E. van Bronkhorst EDWIN E. VAN BRONKHORST, Member, Board of Directors Date: March 15, 1995 /s/ Gerald F. Feeney GERALD F. FEENEY, Vice President, Chief Financial Officer and Treasurer Date: March 15, 1995 /s/ Calvin L. Breed CALVIN L. BREED, Controller, Assistant Secretary and Assistant Treasurer 22 Independent Auditors' Report Shareholders and Board of Directors California Water Service Company: Under date of January 20, 1995, we reported on the balance sheet of California Water Service Company as of December 31, 1994 and 1993, and the related statements of income, common shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994, as contained in the 1994 annual report to shareholders. These financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1994. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement schedule as listed in accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. San Jose, California /s/ KPMG Peat Marwick,LLP January 20, 1995 23 CALIFORNIA WATER SERVICE COMPANY Schedule II Valuation and Qualifying Accounts and Reserves Years Ended December 31, 1994, 1993 and 1992
Additions --------------------- Balance at Charged to Charged to Balance beginning costs and other at end Description of period expenses accounts Deductions of period - ---------------------------------------------------------------------------------------------------------------------------------- 1994 (A) Reserves deducted in the balance sheet from assets to which they apply: Allowance for doubtful accounts $72,696 $363,284 $71,235(3) $456,399(1) $50,816 Allowance for obsolete materials and supplies 61,395 11,000 69,002(2) 3,393 ----------- -------- -------- ---------- ----------- (B) Reserves classified as liabilities in the balance sheet: Miscellaneous reserves: General Liability $1,064,300 $340,000 $0 $442,148(2) $962,152 Employees' group health plan 882,143 2,549,056 12,262 3,243,074(2) 200,387 Retirees' group health plan 237,000 480,998 189,000 481,000(2) 425,998 Workers compensation 150,523 648,374 0 691,321(2) 107,576 Deferred revenue - contributions in aid of construction 1,649,386 572,366 304,366(6) 1,917,386 Disability insurance 97,352 256,969 238,191(2) 116,130 ----------- ---------- --------- ---------- ------------ Total $4,080,704 $4,018,428 $1,030,597 $5,400,100 $3,729,629 ----------- ---------- ---------- ---------- ----------- Contributions in aid of construction $34,915,778 $3,858,961(4) $907,940(5) $37,866,799 ----------- ---------- ---------- ---------- ------------ 1993 (A) Reserves deducted in the balance sheet from assets to which they apply: Allowance for doubtful accounts $75,155 $316,748 $65,280(3) $384,487(1) $72,696 Allowance for obsolete materials and supplies 5,000 72,000 15,605(2) 61,395 ----------- ---------- ---------- ---------- ------------ (B) Reserves classified as liabilities in the balance sheet: Miscellaneous reserves: General Liability $1,200,000 $330,000 $44,401 $510,101(2) $1,064,300 Employees' group health plan 511,985 2,240,000 9,578 1,879,420(2) 882,143 Retirees' group health plan 0 480,000 267,360 510,360(2) 237,000 Workers compensation 226,386 497,043 0 572,906(2) 150,523 Deferred revenue - contributions in aid of construction 1,247,256 758,380 356,250(6) 1,649,386 Disability insurance 47,113 255,017 204,778(2) 97,352 ----------- ---------- ---------- ---------- ------------ Total $3,232,740 $3,547,043 $1,334,736 $4,033,815 $4,080,704 ----------- ---------- ---------- ---------- ------------ Contributions in aid of construction $32,119,906 $3,637,420(4) $841,548(5) $34,915,778 ----------- ---------- ---------- ---------- ------------ 1992 (A) Reserves deducted in the balance sheet from assets to which they apply: Allowance for doubtful accounts $79,767 $319,280 $66,374(3) $390,266(1) $75,155 Allowance for obsolete materials and supplies 5,000 190,527 190,527(2) 5,000 ----------- ---------- --------- ---------- ------------ (B) Reserves classified as liabilities in the balance sheet: Miscellaneous reserves: General Liability $1,081,494 $315,443 $196,937(2) $1,200,000 Employees' group health plan 322,404 2,842,000 248,696 2,901,115(2) 511,985 Workers compensation 188,120 487,153 32,112 480,999(2) 226,386 Deferred revenue - contributions in aid of construction 1,058,112 466,429 277,285(6) 1,247,256 Disability insurance 63,929 239,296 256,112(2) 47,113 ---------- ---------- ---------- ---------- ----------- Total $2,714,059 $3,644,596 $986,533 $4,112,448 $3,232,740 ---------- ---------- ---------- ---------- ----------- Contributions in aid of construction $29,349,230 $3,515,621(4) $744,945(5) $32,119,906 ----------- ---------- ---------- ---------- ----------- Notes: (1) Accounts written off during the year. (2) Expenditures and other charges made during the year. (3) Recovery of amounts previously charged to reserve. (4) Properties acquired at no cost, cash contributions and net transfer on non-refundable balances from advances to construction. (5) Depreciation of utility plant acquired by contributions charged to a balance sheet account. (6) Amortized to revenue. 24
EXHIBIT INDEX Sequential Page Numbers Exhibit Number in this Report 3. Articles of Incorporation and By-Laws: 3.1 Restated Articles of Incorporation dated 25 March 20, 1968 Certificate of Ownership Merging Palos Verdes Water Company into California Water Service Company dated December 22, 1972; Certificate of Amendment of Restated Articles of Incorporation dated April 7, 1975; Certificate of Amendment of Restated Articles of Incorporation dated April 16, 1984; Certificate of Amendment of Restated Articles of Incorporation dated July 31, 1987; Certificate of Amendment of Restated Articles of Incorporation dated October 19, 1987 (Exhibit 3.1 to Form 10-K for fiscal year 1987, File No. 0-464) 3.2 Certificates of Determination of Preferences 25 for Series C Preferred Stock (Exhibit 3.2 to Form 10-K for fiscal year 1987, File No. 0-464) 3.3 Certificate of Amendment of the Company's 25 Restated Articles of Incorporation dated April 27, 1988. (Exhibit 3.3 to Form 10-K for fiscal year 1989, File No. 0-464) 3.4 By-Laws dated September 21, 1977, as 25 amended 24 November 19, 1980, April 21, 1982, June 15, 1983, September 17, 1984, and November 16, 1987 (Exhibit 3.3 to Form 10-K for fiscal year 1987, File No. 0-464). 3.5 Amendment to By-laws dated May 16, 1988. 25 (Exhibit 3.5 to Form 10-K for fiscal year 1991, File No. 0-464) 25 4. Instruments Defining the Rights of Security 26 Holders, including Indentures: Mortgage of Chattels and Trust Indenture 26 dated April 1, 1928; Eighth Supplemental Indenture dated November 1, 1945, covering First Mortgage 3.25% Bonds, Series C; Fifteenth Supplemental Indenture dated November 1, 1965, covering First Mortgage 4.85% Bonds, Series J; Sixteenth Supplemental Indenture dated November 1, 1966, covering First Mortgage 6.25% Bonds, Series K; Seventeenth Supplemental Indenture dated November 1, 1967, covering First Mortgage 6.75% Bonds, Series L; Twenty-First Supplemental Indenture dated October 1, 1972, cover First Mortgage 7.875% Bonds, Series P; Twenty-Fourth Supplemental Indenture dated November 1, 1973, covering First Mortgage 8.50% Bonds, Series S (Exhibits 2(b), 2(c), 2(d), Registration Statement No. 2-53678, of which certain exhibits are incorporated by reference to Registration Statement Nos. 2-2187, 2-5923, 2-9681, 2-10517 and 2-11093.) Twenty-Sixth Supplemental Indenture dated May 1, 26 1976 (Exhibit 4 to Form 10-K for fiscal year 1986, File No. 0-464). Twenty-Seventh Supplemental indenture dated 26 November 1, 1977; Twenty-Eighth Supplemental Indenture dated May 1, 1978; Twenty-Ninth Supplemental Indenture dated November 1, 1979 (Exhibit 4 to Form 10-K for fiscal year 1989, File No. 0-464). Thirty-Fifth Supplemental Indenture dated as of 26 November 1, 1992, covering First Mortgage 8.63% Bonds, Series DD. (Exhibit 4 to Form 10-Q dated September 30, 1992, File No. 0-464) Thirty-Sixth Supplemental Indenture dated as of 26 May 1, 1993, covering First Mortgage 7.90% Bonds Series EE (Exhibit 4 to Form 10-Q dated June 30, 1993, File No. 0-464) Thirty-Seventh Supplemental Indenture dated as 26 of September 1, 1993, covering First Mortgage 6.95% Bonds, Series FF (Exhibit 4 to Form 10-Q dated September 30, 1993, File No. 0-464) Thirty-Eighth Supplemental Indenture dated as 26 of October 15, 1993, covering First Mortgage 6.98% Bonds, Series GG (Exhibit 4 to Form 10-K for fiscal year 1994, File No. 0-464) 26 Sequential Page Numbers Exhibit Number in this Report 10. Material Contracts. 10.1 Water Supply Contract between the Company 27 and the County of Butte relating to the Company's Oroville District; Water Supply Contract between the Company and the Kern County Water Agency relating to the Company's Bakersfield District; Water Supply Contract between the Company and Stockton East Water District relating to the Company's Stockton District. (Exhibits 5(g), 5(h), 5(i), 5(j), Registration Statement No. 2-53678, which incorporates said exhibits by reference to Form 1O-K for fiscal year 1974, File No. 0-464). 10.2 Settlement Agreement and Master Water Sales 27 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 the Company and the City and County of San Francisco relating to the Company's Bear Gulch District dated August 8, 1984; Water Supply Contract between the Company and the City and County of San Francisco relating to the Company's San Carlos District dated August 8, 1984; Water Supply Contract between the Company and the City and County of San Francisco relating to the Company's San Mateo District dated August 8, 1984; Water Supply Contract between the Company and the City and County of San Francisco relating to the Company's South San Francisco District dated August 8, 1984. (Exhibit 10.2 to Form l0-K for fiscal year 1984, File No. 0-464). 10.3 Water Supply Contract dated January 27, 27 1981, between the Company and the Santa Clara Valley Water District relating to the Company's Los Altos District (Exhibit 10.3 to Form 10-K for fiscal year 1992, File No. 0-464) 10.4 Amendments No. 3, 6 and 7 and Amendment 27 dated June 17, 1980, to Water Supply Contract between the Company and the County of Butte relating to the Company's Oroville District. (Exhibit 10.5 to Form 10-K for fiscal year 1992, File No. 0-464) 27 Sequential Page Numbers Exhibit Number in this Report 10.5 Amendment dated May 31, 1977, to Water 28 Supply Contract between the Company and Stockton-East Water District relating to the Company's Stockton District. (Exhibit 10.6 to Form 10-K for fiscal year 1992, File No. 0-464) 10.6 Second Amended Contract dated September 25, 28 1987 among the Stockton East Water District, the 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 Form 10-K for fiscal year 1987, File No. 0-464). 10.7 Dividend Reinvestment Plan. (Exhibit 10.8 to 28 Form 10-Q dated March 31, 1994, File No. 0-464) 10.8 Water Supply Contract dated April 19, 1927, 28 and Supplemental Agreement dated June 5, 1953, between the Company and Pacific Gas and Electric Company relating to the Company's Oroville District. (Exhibit 10.9 to Form 10-K for fiscal year 1992, File No. 0-464) 10.9 California Water Service Company Pension Plan 28 (Exhibit 10.10 to Form 10-K for fiscal year 1992, File No. 0-464) 10.10 California Water Service Company Supplemental 28 Executive Retirement Plan. (Exhibit 10.11 to Form 10-K for fiscal year 1992, File No.0-464) 10.11 California Water Service Company Salaried 28 Employees' Savings Plan. (Exhibit 10.12 to Form 10-K for fiscal year 1992, File No. 0-464) 10.12 California Water Service Company 28 Directors Deferred Compensation Plan (Exhibit 10.13 to Form 10-K for fiscal year 1992, File No. 0-464) 10.13 Board resolution setting forth 28 the terms of the retirement plan, as amended, for Directors of California Water Service Company (Exhibit 10.14 to Form 10-K for fiscal year 1992, File No. 0-464) 28 Sequential Page Numbers Exhibit Number in this Report 10.14 Registration statement on Form S-3, 29 dated September 8, 1994 regarding the sale of 550,000 shares of Registrant's common stock (filed with the Commission on September 8, 1994, Registration No. 33-55233, File No. 0-464) 10.15 Water Supply Contract dated November 16, 1994, 30 between the Company and Alameda County Flood Control and Water Conservation District relating to the Company's Livermore District 13. Annual Report to Security Holders, Form 10-Q 46 or Quarterly Report to Security Holders: 1994 Annual Report. The sections of the 1994 Annual Report which are incorporated by reference in this 10-K filing. This includes those sections referred to in Part II, Item 5, Market for Registrant's Common Equity and Related Shareholder Matters; Part II, Item 6, Selected Financial Data; Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations; and Part II, Item 8, Financial Statement and Supplementary Data. 27. Financial Data Schedule as of December 31, 1994 70 29 EX-10 2 CONTRACT BETWEEN EXHIBIT 10.15 ZONE 7 OF ALAMEDA COUNTY FLOOD CONTROL AND WATER CONSERVATION DISTRICT AND CALIFORNIA WATER SERVICE COMPANY FOR A MUNICIPAL & INDUSTRIAL WATER SUPPLY THIS CONTRACT, made and entered into this 16th day of November , 1994 , by and between ZONE 7 OF ALAMEDA COUNTY FLOOD CONTROL AND WATER CONSERVATION DISTRICT, commonly known as the Zone 7 Water Agency, hereinafter referred to as "Zone 7" and the CALIFORNIA WATER SERVICE COMPANY, hereinafter referred to as "Contractor." W I T N E S S E T H: For and in consideration of the terms and conditions herein contained, Zone 7 agrees to furnish and provide a water supply to Contractor, and Contractor agrees to purchase and accept such water supply consistent with the provisions herein. A. INTRODUCTORY PROVISIONS 1. Definitions When used in this contract, the following terms shall have the meanings hereinafter set forth: a. "Board" shall mean the Board of Directors of Zone 7 of Alameda County Flood Control and Water Conservation District. b. "Each Contractor" or "Other Contractor" shall mean any entity, public or private, contracting with Zone 7 for a Municipal & Industrial Water Supply. c. "Extract," "Extraction" or "Extracting" shall mean obtaining groundwater, by pumping or any other means, from wells, shafts, tunnels, excavations or other sources of such groundwater, for domestic, municipal, irrigation, industrial or other use. d. "Groundwater Pumping Quota" shall mean that quantity of water that the Contractor is entitled to extract from the Main Basin without paying a recharge fee to Zone 7. e. "In-Lieu Treated Water" shall mean that quantity of treated water delivered from Zone 7 in exchange for an equal reduction in Contractor's extraction of its Groundwater Pumping Quota. f. "Main Basin" shall mean that part of the Livermore-Amador Valley groundwater basin located essentially within the valley floor sections of the Castle, Bernal, Amador and Mocho (II) Subbasins as defined in Bulletin No. 118-2, Evaluation of Groundwater Resources: Livermore and Sunol Valleys, State of California, Department of Water Resources and shown in Exhibit A attached. g. "Municipal & Industrial Water Supply" shall mean a supply of water from Zone 7 to Each Contractor regardless of the source of said water or Contractor's use of said water. 30 h. "Other Sources" shall mean a water source from any person, corporation or entity, whether public or private, other than from Zone 7. i. "Recharge" or "Recharged" shall mean managed replenishment of the Main Basin including but not limited to spreading on natural or improved channels or basins or well injection with imported, locally developed, or recycled water, or through In-Lieu Treated Water. Applied irrigation water percolation shall not be considered recharge. j. "Recycled Water" shall mean wastewater treated for reuse as permitted by the California Department of Health Services, the Regional Water Quality Control Board and other agencies that from time to time may have jurisdiction. k. "Safe Yield" shall mean the quantity of water that can be successfully extracted from the Main Basin on an annual basis over an extended number of years without reducing groundwater storage. Such safe yield is the net quantity of groundwater added to the Main Basin by stream percolation (including percolation from stream releases required for prior water rights), rainfall percolation, applied irrigation water percolation, and net subsurface inflow. l. "Treated Water" shall mean water that is processed as necessary to comply with drinking water requirements of the California Department of Health Services, the United States Environmental Protection Agency and other agencies that from time to time may have jurisdiction. m. "Turnout Facilities" shall mean the facilities required to provide treated water deliveries from Zone 7's water system to the Contractor's water system. See Exhibit B for a schematic of a typical turnout facility. n. "Zone 7 Boundary" shall mean the boundary of Zone 7 as shown on Exhibit C and as may be revised from time to time. 2. Term of Contract This contract shall become fully effective upon execution of the duly authorized signatures of the parties hereto and shall remain in effect for a period of thirty (30) years from the date hereof, unless terminated or extended prior to expiration of term by mutual agreement at an earlier date. B. WATER SERVICE PROVISIONS 3. Quantity of Water Contractor shall purchase from Zone 7 all water required by Contractor for use within Contractor's service area as defined in Section 6 except that Contractor may extract groundwater as provided in the Groundwater Extraction Provisions herein or 31 obtain water from Other Sources under the conditions in Section 5. No quantity of water purchased from Zone 7 or extracted as part of Contractor's Groundwater Pumping Quota shall be delivered by or provided from Contractor to any area other than Contractor's service area, except for short-term emergency and/or public health purposes. 4. Quality of Water All treated water to be delivered by Zone 7 to Contractor shall be of a quality that complies with the Requirements for Drinking Water of the California Department of Health Services and the United States Environmental Protection Agency or their successor regulatory agencies. Zone 7 will endeavor to provide treated water that is aesthetically acceptable to the Contractor's customers. Zone 7 will blend its different sources of water within its operational capabilities to provide water of approximately equal quality to Each Contractor. 5. Water from Other Sources In order to protect Zone 7's financial interest, Contractor shall not contract for, purchase or receive, with or without compensation, either directly or indirectly, any water for use in its service area from any source other than by extraction of its Groundwater Pumping Quota or from purchase from Zone 7, except for any one or more of the following: (a) The water received is for fire flow or fire storage requirements or other emergency purposes; (b) The water delivered through Zone 7's turnout facility does not comply with drinking water requirements of California Department of Health Services, United States Environmental Protection Agency, or successor regulatory agencies. The quantity of water obtained shall be limited to that necessary to meet Contractor's treated water needs as a result of Zone 7's non-compliance with said drinking water requirements; (c) Zone 7 is unable to deliver the quantity of treated water necessary to satisfy the requirements of Contractor. Zone 7 shall specify the quantity of treated water that it cannot deliver and the time period for which it cannot satisfy the Contractor's requirements. Contractor is otherwise obligated to secure all water from Zone 7 to the extent Zone 7 can provide it; (d) Zone 7 is able to meet Contractor's water delivery request, and Contractor has paid Zone 7 for obligated fixed costs of Zone 7 associated with the quantity of water the Contractor will obtain from Other Sources. These obligated fixed costs shall include but are not limited to water facility improvements, water contract obligations, and debt service thereto incurred by Zone 7 in supplying water that would have gone to the Contractor, and for which said costs would have been recovered through the sale of said water to 32 Contractor. The Contractor shall obtain the prior written approval from the Board which approval shall not be unreasonably withheld; (e) The source of water is groundwater extracted within Zone 7's boundary but outside the Main Basin provided said extraction does not cause an adverse impact on the Main Basin; or (f) The source of water is recycled water from Contractor's or Other Contractors' treated wastewater. 6. Contractor's Service Area As used herein, the Contractor's service area shall include all areas presently served water by Contractor. Contractor's service area shall also include any future areas to be served by the Contractor within the boundaries of Zone 7 subject to Subsection 32c. Contractor may include any future areas outside the boundaries of Zone 7 upon a finding of the Board that providing water to said area is in the best interests of Zone 7 and after written modification of this contract providing for said service area. The Contractor's present service area is designated on the map attached hereto as Exhibit D. Contractor shall promptly notify Zone 7 of changes in its service area, as may occur from time to time, by furnishing a map to Zone 7 showing any change in said service area so that Zone 7 can maintain a map indicating the most recent Zone 7 water service area. Said changes in service area shall be in accordance with the requirements of the Local Agency Formation Commission, Public Utility Commission or other agency having authority to set service areas. Any future areas outside Zone 7 boundaries to be served by Contractor which receive water from sources other than Zone 7 or the Main Basin shall not be considered part of the Contractor's service area under the terms of this contract. 7. Turnout Facilities a. Turnout facilities shall be constructed at the general location requested by Contractor. The exact location shall be determined by Zone 7 after consultation with Contractor. Turnout facilities shall be designed and/or constructed either by Zone 7 or by Contractor (upon the written approval of Zone 7) based on the ranges of flow set forth in Section 9. Turnout facilities shall include the necessary valves, piping, meter and recording equipment, vaults, telemetry equipment and any other appurtenances necessary to meet the standards and operational needs of Zone 7. Zone 7 shall submit its design of new turnout facilities to contractor for review and written approval. b. Contractor shall reimburse Zone 7 for all costs incurred by Zone 7 related to the new turnout facilities including but not limited to design, engineering, design review, 33 construction, right-of-way and acquisition thereof, inspection, and contract administration. Contractor shall also pay all costs for the installation of all associated landscaping and recognizes that Zone 7 shall not be responsible for maintenance of landscaping under the terms and conditions of this contract. Contractor further agrees to grant or cause to be granted to Zone 7 the necessary permanent right-of-way and right of ingress thereto and egress therefrom, as determined by Zone 7, for the purposes of constructing, operating and maintaining said turnout facilities. c. Zone 7 shall install the nozzle outlet portion of all turnout facilities requested by Contractor prior to the construction of the transmission pipeline. For turnout facilities requested by Contractor subsequent to the construction of Zone 7's transmission pipeline, Contractor shall pay for the nozzle outlet portion of the turnout facility, and all costs set forth in subsection b. above. Ownership of turnout facility, including the shut off valve downstream of the turnout facility, shall be with Zone 7, and Contractor shall have no obligation to operate, maintain, repair, replace or relocate the same. 8. Measurement of Treated Water Deliveries At any time or times, Contractor may, upon request, inspect said turnout facilities (in the presence of a Zone 7 representative), and the measurements and records taken therefrom. Zone 7 shall test and calibrate the instrumentation at each turnout meter at least annually and furnish such results to the Contractor. When requested by the Contractor, Zone 7 shall test and calibrate any meter through which treated water is served to Contractor. The Contractor shall have the right to be represented by a qualified observer at and during any instrumentation and/or meter tests and/or calibration. Whenever testing and/or calibration of the instrumentation and/or the meter is requested by Contractor, and in the event that any such test shall disclose an error exceeding two percent (2.0%), an adjustment shall be made in charges against the Contractor covering the known or estimated period of duration of such error, but in no event exceeding six (6) months, and the expenses of such test shall be borne by Zone 7; otherwise, such expenses shall be borne by Contractor requesting such tests. 9. Ranges of Flow a. It is recognized that the range of flow rates of water through a turnout facility may vary considerably over the contract term. A normal range of flow rates for a turnout facility is hereby established as from ten percent (10%) to one hundred percent (100%) of a maximum design flow rate. Contractor shall provide Zone 7 with the following information for each turnout facility prior to the design of such facilities: (1) Anticipated ultimate (future) maximum flow rate, (2) Anticipated present design range of flow rates. (The 34 maximum design flow rate shall not exceed ten (10) times the minimum design flow rate for this range in normal installations.) (3) Anticipated pressure ranges for (1) and (2) above on the Contractor's side of the turnout facility. b. Zone 7 shall design the metering and/or recording installation for the range set forth in accordance with Subsections (2) and (3) above with provisions for future modifications in accordance with a range based on Subsections (1) and (3) above. c. Contractor shall regulate the flow demands through the turnout facility such that the range of flow rates set forth in accordance with Subsection b above will be maintained insofar as such regulation is reasonable and practicable. Zone 7 shall make modification of the metering and/or recording equipment upon request of Contractor or at such time that the actual flow rate exceeds the maximum design flow rate or is less than the minimum design flow rate; provided, however, that flow rates resulting from emergencies shall not apply to such requirement for modification. Said modification will be at the expense of the Contractor and payment thereof shall be in accordance with Section 27. 10. Delivery Schedule of Municipal & Industrial Water Each year, the Contractor shall submit in writing to Zone 7 a preliminary water delivery schedule on a form provided by Zone 7 indicating the anticipated quantity of treated water and groundwater in excess of its Groundwater Pumping Quota required by Contractor during each month of the succeeding five (5) calendar years and the anticipated peak day treated water demand from Zone 7 for each such year. Zone 7 shall review such schedule, and after consultation with Contractor, shall approve such schedule in a timely manner or make such revisions in the same as may, in the judgment of Zone 7, be necessary to make such deliveries. To the extent water is available to Zone 7, Zone 7 will approve in writing, a delivery schedule each year for delivery to Contractor during the next succeeding calendar year of an amount of water not less than the amount of water set forth in the approved schedule for the then-current calendar year. The amount of water set forth in the approved delivery schedule for the next succeeding calendar year shall be the basis for which Zone 7 shall contract with the State of California or other entity for delivery to Zone 7. Zone 7 shall identify the reason for any revisions or disapproval of Contractor's delivery request. Zone 7 shall only revise or disapprove Contractor's delivery request for the reasons set forth in Sections 12, 13, 14 or 15. 11. Reporting Use of Water The Contractor shall report to Zone 7 on or before the tenth day of each month the total volume, in acre-feet, of groundwater extracted from the Main Basin and any water obtained from Other Sources (including any water recharged to the Main Basin) for the preceding month. The report shall become the basis for which 35 water charge determinations and hydrologic inventory calculations of the Main Basin are made by Zone 7. Said report shall be made on a form or forms provided by or acceptable to Zone 7. The measurement and recordation of such flows shall be subject to the same provisions for inspection and testing of meters and instrumentation by Zone 7 as is provided to Contractor in Section 8. 12. Peak Demands The Zone 7 system is not designed to serve all Contractor's peak demands. As water demands increase, it may be necessary to curtail peak deliveries to conform to Zone 7 system capacity as it exists from time to time. However, so long as water and line capacity are available, Zone 7 will endeavor to meet all reasonable demands for peak deliveries and will use reasonable diligence to provide a regular and uninterrupted supply of water from its turnout facility, but shall not be liable to Contractor for damages, breach of contract, or otherwise, for failure, suspension, diminution, or other variations of service occasioned by any cause beyond the control of, or without the fault or negligence of Zone 7. Such causes may include, but are not restricted to, acts of God, acts of war, or criminal acts of others, acts of Contractor or Other Contractors, water shortages, fires, floods, earthquakes, epidemics, quarantine restrictions, strikes, or failure or breakdown of transmission or other facilities. 13. Curtailment of Delivery During Maintenance Periods Zone 7 will make all reasonable effort to provide continuous service to Contractor but may schedule to temporarily discontinue or reduce the delivery of water to Contractor for the purpose of necessary investigation, inspection, maintenance, repair or replacement of any of the facilities necessary for the delivery of treated water to Contractor. Zone 7 shall notify Contractor as far in advance as possible of any scheduled discontinuance or reduction and the estimated duration of such discontinuance or reduction. Recognizing that Contractor may rely on Zone 7 for deliveries of water with minimal interruption, particularly during the high water consumption months, Zone 7 shall use its best efforts to make any such discontinuance or reduction in the delivery of water only during the period of November through March. In the event of any discontinuance or reduction in delivery of water, Contractor may elect to receive the amount of water that otherwise would have been delivered to it during such period under the approved water delivery schedule at other times during the year, consistent with Zone 7's delivery ability considering the then current delivery schedules of all Other Contractors. 14. Availability of Water In any year in which a shortage occurs due to drought or other cause in the supply of water available for delivery to Each Contractor such that the supply to Zone 7 is less than the total amount included in the approved delivery schedule of Each Contractor for that year, Zone 7 shall reduce deliveries to Each 36 Contractor in an amount that results in a reduction of total water used within Contractor's service area that is equal to the percent reduction for total water used within Zone 7's service area for that year, all as determined by Zone 7; provided, that Zone 7 may apportion on another basis if such is required to meet minimum demands for domestic supply, fire protection, or public health during the year. The amount of water available under this contract and Zone 7's obligation to supply water shall be subject to the terms and conditions of the contract between Zone 7 and the State of California for water service via the South Bay Aqueduct and any other contracts Zone 7 may enter into for water supply; provided, further, that wherever the provisions of the contract with the State of California or other entity as to the availability of water conflict with the provisions of this contract, the terms and provisions of this contract shall prevail. Zone 7 shall give Contractor written notice as far in advance as possible of any reduction in deliveries that would be necessary because of a shortage in water supply. Neither Zone 7 nor any of its officers, agents, or employees shall be liable for any damage, direct or indirect, arising from this contract caused by drought, regulatory constraints, operation of area of origin statutes, or any other cause beyond the control or without the negligence of Zone 7. 15. Suspension of Service In the event that Contractor shall be delinquent in the payment for water for more than ninety (90) days after the due date (as said due date is defined in Section 28), such delinquency shall be called to the attention of the Board and the Board may, in its discretion and after giving Contractor an opportunity to be heard, order the suspension or reduction of service to Contractor. C. GROUNDWATER EXTRACTION PROVISIONS 16. Groundwater Pumping from the Main Basin Zone 7 acknowledges Contractor's right to extract groundwater based on Contractor's historical groundwater extractions and based on the mutually agreed upon limitations in Contractor's original water supply contract with Zone 7. Contractor acknowledges that Zone 7 manages the Main Basin and that Zone 7 recharges, stores, and extracts from the Main Basin as necessary to supply water to Each Contractor. Accordingly, Contractor shall not extract under this agreement, more than 3,069 acre- feet (1,000 million gallons), its Groundwater Pumping Quota, from the Main Basin in any calendar year except as follows: (a) The Contractor pays Zone 7 a recharge fee for recharging the Main Basin as set forth in Section 17; (b) The groundwater extracted is Contractor's accumulated carry- over of its Groundwater Pumping Quota from prior years as provided in Section 18; or 37 (c) The source of the groundwater extracted is from Other Sources obtained by Contractor pursuant to 5(c), 5(d), and 5(f) herein and the Contractor has previously recharged said groundwater into the Main Basin. Said recharged water shall not adversely impact Zone 7's use of the Main Basin, including the recharge, storage or extraction thereof. 17. Recharge Water In any calendar year, if Contractor should extract groundwater from the Main Basin in an amount in excess of its Groundwater Pumping Quota plus any accumulated carry-over and any groundwater recharged by Contractor per 16 (c), Contractor shall pay Zone 7, in addition to other payments required by this contract, a recharge fee as set forth in the rate schedule and Sections 23 and 24 herein, for each acre-foot of water (or portion thereof) in excess of said amount. In express consideration of Contractor's agreement to pay such recharge fee, as aforesaid, Zone 7 shall recharge the Main Basin in an amount aggregating the quantity of such excess water. Because said recharge fee would be in the nature of an assessment fee upon annual extractions in excess of the Groundwater Pumping Quota, if Zone 7 (or any other public body or agency) shall impose a valid replenishment assessment fee or other charge upon or measured by the pumping or extraction of water for use in Contractor's service area, then the provisions of this Section shall be superseded accordingly, except as to any payment attributable to a period prior to the effective date of any such assessment fee or other charge. 18. Carry-over of Groundwater Pumping Quota If, in any calendar year, Contractor does not extract its entire Groundwater Pumping Quota from the Main Basin, Contractor may carry-over from that calendar year the unextracted portion of Groundwater Pumping Quota for extraction from the Main Basin during subsequent calendar years. Said carry-over or accumulated carry-over shall not exceed 20 percent of the Contractor's Groundwater Pumping Quota. Said carry-over shall not include any Groundwater Pumping Quota waived under the In-Lieu Treated Water provision of Section 19. 19. In-Lieu Treated Water During periods when sufficient water is available to Zone 7 at reasonable cost and Zone 7 desires to raise or maintain groundwater levels, Zone 7 will offer delivery of treated water at a cost that is less than treated water rates to Contractor in lieu of Contractor extracting groundwater per its Groundwater Pumping Quota. The amount of In-Lieu Treated Water that Contractor may receive shall not exceed its Groundwater Pumping Quota plus any accumulated carry-over or its operational capability to extract said Groundwater Pumping Quota and accumulated carry-over. Zone 7's offer to deliver In-Lieu Treated Water for a given calendar year will be made on or about May 1 of that year, however, said rates may be retroactive for 38 the entire calendar year or other mutually agreed upon portion thereof. Credit or payment for In-Lieu Treated Water will be as provided for under Section 25. Contractor is not required to take or purchase any In-Lieu Treated Water. Contractor acknowledges that any credits or payments received under Section 25 are received in-lieu of the Contractor's right to extract its Groundwater Pumping Quota, and Contractor agrees that its Groundwater Pumping Quota and any accumulated carry-over shall be reduced by an amount equivalent to the amount of In-Lieu Treated Water delivered by Zone 7 to Contractor for the year in which the delivery is made. 20. Water Delivery Shortage Emergency Extractions During a water supply emergency, as declared by the Board, in which Zone 7 is unable to deliver the quantity of treated water as approved on the delivery schedule, the Contractor may extract water from the Main Basin in excess of the Contractor's Groundwater Pumping Quota at a reduced recharge rate. Said rate shall be the same as the In-Lieu Treated Water rate. 21. Transfer of Groundwater Pumping Quota Temporary or permanent transfer of Contractor's Groundwater Pumping Quota outside of the Zone 7 boundary shall not be permitted. Temporary or permanent transfer of Contractor's Groundwater Pumping Quota within Zone 7's boundary shall be permitted provided that it is transferred to an Other Contractor. Said transfer of Contractor's Groundwater Pumping Quota shall be permitted upon written notification to Zone 7 from each contractor that is a party to the transfer. 22. Changes in Contractor's Groundwater Pumping Quota The annual Safe Yield of the Main Basin, estimated as approximately 13,200 acre-feet per year in 1993, is essentially the same as the long-term average extraction by existing groundwater producers. The Board shall not increase any Other Contractor's Groundwater Pumping Quota unless such increase in Groundwater Pumping Quota is acceptable to Each Contractor with a Groundwater Pumping Quota. Neither Contractor nor Zone 7 waives any rights to pursue a court adjudication of the safe yield of the Main Basin or any other court action on extraction of groundwater from the Main Basin that may change Contractor's Groundwater Pumping Quota. Furthermore, Zone 7 reserves its authority to levy a replenishment assessment on the extraction of any groundwater, including Contractor's Groundwater Pumping Quota (excluding any adjudication of the safe yield), as necessary to protect the water supplies for users within Zone 7. D. CHARGE AND PAYMENT PROVISIONS 23. Rate Schedule Zone 7 shall charge for water in accordance with a rate schedule 39 for water service, as such rate schedule is established or amended by the Board. The Board shall review the rate schedule and establish a rate schedule for each calendar year period in accordance with the most recent costs and revenues of Zone 7. The Board shall review the rate schedule at the September regular meeting and endeavor to establish the rate schedule at the November regular meeting prior to January 1 of the following calendar year for which the rate schedule is to be effective. The rates, including but not limited to the treated water, in-lieu treated water, meter fee, and recharge fee, to be so established, shall be based on the cost of providing service, and shall not be unreasonable, arbitrary, or discriminatory. In the event the Board fails, in conformity to the preceding schedule, to establish a new rate schedule for any calendar year the rate schedule in effect for the prior calendar year shall be continued in full force and effect until otherwise modified by the Board. 24. Recharge Fee The recharge fee shall be charged to Contractor in accordance with the rates included in the rate schedule. Contractor shall be invoiced by Zone 7 in accordance with Section 26 at the time in which Contractor exceeds its Groundwater Pumping Quota as provided in Section 17. Section 28 herein shall apply to said charges. The recharge fee shall be based upon Zone 7's costs including but not limited to the cost to purchase or develop the water, as well as the cost to construct, maintain, and operate the facilities needed to import, distribute, store, treat and recharge said water into the Main Basin for the benefit of Each Contractor. 25. In-Lieu Treated Water Credit In any calendar year in which the Contractor has foregone pumping of its Groundwater Pumping Quota, plus accumulated carry-over, as set forth in Section 19, Zone 7 shall determine the amount of delivered treated water that should be charged at the In-Lieu Treated Water rate, and shall credit or make payment to the Contractor the difference between the treated water rate and the In-Lieu Treated Water rate. 26. Time for Payment Contractor shall be invoiced on a calendar month basis for charges. Contractor shall pay promptly all charges invoiced by Zone 7, such invoices to be rendered on or about the 5th day of each month for charges incurred in the preceding month and to become due and payable within 30 days from date of invoice. In the event that Contractor in good faith contests the accuracy of any invoices submitted to it pursuant to this Section, it shall give Zone 7 notice thereof at least ten (10) days prior to the day upon which payment of the stated amount is due. To the extent that Zone 7 finds Contractor's contentions regarding the statement to be correct, it shall revise the statement accordingly and Contractor shall make payment of the revised amounts on or before the due date. To the extent that Zone 7 does not find Contractor's contentions to be correct or where time is not available for a review of such contentions prior to 40 the due date, Contractor shall make payment of the invoiced amount on or before the due date and make the contested part of such payment under protest and seek to recover the amount thereof from Zone 7. 27. Payment for Turnout Facilities Prior to commencing with the design of a turnout facility, Contractor shall deposit with Zone 7 an amount of money estimated by Zone 7 to cover all costs to be incurred by Zone 7 for designing said turnout facility or shall request in writing to be invoiced for such design in accordance with Section 26. The option of invoicing Contractor shall be at the sole discretion of Zone 7. Prior to constructing said turnout facility, Contractor shall deposit with Zone 7 an amount of money estimated by Zone 7 to cover all costs to be incurred by Zone 7 for completion of turnout facility or request to be invoiced for such construction in accordance with Section 26. Following completion of the construction of the turnout facility, Zone 7 shall submit to Contractor a statement for the actual costs incurred for completion of the design and construction of said turnout facility as provided in Section 7. The deposit shall be applied to the actual costs incurred by Zone 7, and the appropriate refund or invoicing to Contractor will be made. Contractor shall make payment of any such invoicing to Zone 7 within thirty (30) days of submission of said statement. Zone 7 shall refund any deposit in excess of actual cost within thirty days of Zone 7's determination of said cost. Contractor shall have the right to audit the records of Zone 7 for the purpose of verifying actual costs. 28. Delinquent Payments In the event that Contractor is delinquent in the payment of invoiced charges for more than thirty (30) days after the due date, delinquent amounts shall accrue at the legal rate of interest commencing on the due date and continuing each month thereafter until payment of both the principal amount of such charges and the interest thereon is paid in full insofar as permitted by law. Unless otherwise determined by law, the legal rate of interest shall be the combined per annum discount rate of the Federal Reserve Bank of San Francisco on the 25th day of the current month and five percent (5%). E. GENERAL PROVISIONS 29. Remedies By reason of the specialized nature of the water service rendered, and for the further reason that the extent of any damage caused to either party by the other by reason of any breach of this contract or agreement may be extremely difficult to determine, it is agreed by the parties hereto that an action for damages is an inadequate remedy for any breach, and that specific performance, without precluding any other remedy 41 available in equity or law, will be necessary to furnish either party hereto with an adequate remedy for the breach thereof. 30. Assignment This contract is not for the benefit of any person, corporation or other entity, other than the parties hereto, and no person, corporation or other entity except the parties hereto, shall have any rights or interest in or under this contract unless otherwise specifically provided herein. Contractor shall not assign or transfer any rights or privileges under this contract, either in whole or in part, without the prior written consent of Zone 7, which consent shall not be unreasonably withheld, or make any transfer of all or any part of its water system, or allow the use thereof, in any manner whereby any provisions of this contract will not continue to be binding on it, its assignee or transferee, or such user of the system. This contract and the rights and responsibilities provided for herein shall be binding on the successors and assigns of the parties hereto. 31. Contract Modification This contract may be amended or modified any time only by mutual written agreement of the parties. 32. Liabilities a. Zone 7 and/or any of its officers, agents or employees shall not be liable for the control, carriage, handling, use, disposal, or distribution of treated water supplied to Contractor by Zone 7, after such water has passed through the turnout facility or for claims of damage of any nature whatsoever, including but not limited to property damage, personal injury or death, arising out of or connected with the control, carriage, handling, use, disposal or distribution of such water beyond said turnout facility. Contractor shall indemnify, save and hold harmless Zone 7 and its officers, agents, and employees from any such damages or claims of damages. Contractor shall further reimburse Zone 7 for costs of repair of Zone 7's facilities and other damages resulting from the operations of Contractor. b. Contractor and/or any of its officers, agents, or employees shall not be liable for the control, carriage, handling, use, disposal, or distribution of water prior to such water being delivered through the turnout facility or for claims of damage of any nature whatsoever, including but not limited to property damage, personal injury or death, arising out of or connected with the control, carriage, handling, use, disposal, or distribution of such water prior to its delivery to Contractor, excepting, however, claims by Zone 7 for costs of repair to Zone 7's facilities and other damages resulting from the operations of the Contractor. Zone 7 shall indemnify, save and hold harmless the Contractor and its officers, agents, and employees from any such damages or claims of damages, except claims by Zone 7 42 for costs of repair of Zone 7's facilities and other damages resulting from the operations of Contractor. c. Zone 7 needs to be protected from any obligation to supply water to projects or consumers which the contractor has supplied from sources other than what has been directly purchased from Zone 7. Accordingly, any other provision herein notwithstanding, Zone 7 shall not be obligated nor liable to provide, without exception, that quantity of water obtained by Contractor pursuant to Subsections 5a-f, to Contractor or any customer of Contractor regardless of purpose. Accordingly, Contractor shall indemnify, save and hold harmless Zone 7 from any and all obligations, liability, responsibility, costs, expenses, or fees associated in any way with any claims, demands, requests, suits, causes of action of whatever type or nature concerning the provision of any quantity of water obtained by Contractor pursuant to Subsections 5a-f herein. d. Likewise, if pursuant to Section 3 herein, Contractor is instructed by Zone 7 to acquire water from Zone 7 which has been previously acquired from third parties pursuant to Subsections 5a-f herein, Zone 7 shall save and hold harmless Contractor from any and all obligations, liability, responsibility, costs, expenses, or fees that may arise from such third parties. 33. Renewability At the expiration of the thirty (30) year term of this contract, said contract may be renewed upon the mutual consent of the parties hereto. If no such renewal shall take place and in the absence of any new contract, Zone 7 shall nevertheless continue delivery to Contractor in accordance with this contract, that quantity of water set forth in the approved delivery schedule for the last full calendar year before the expiration of the term of this contract. However, if a new contract is not entered into within two (2) years from the date of expiration of this contract, then the Board may, at its option, set the terms and conditions for a Municipal & Industrial Water Supply. 34. Notices All notices or other writings in this contract provided to be given or made or sent, or which may be given or made or sent, by one party hereto to another, shall be deemed to have been fully given or made or sent when made in writing and deposited in the United States mail, registered, certified or first class, postage prepaid, and addressed as follows: To Zone 7: General Manager Zone 7 Water Agency 5997 Parkside Drive Pleasanton, CA 94588 43 To Contractor: President California Water Service Company 1720 North First Street San Jose, CA 95112-4598 The address to which any notice or other writing may be given or made or sent to any party may be changed upon written notice given by such party as provided above. 35. Severability If any one or more of the terms or conditions set forth in this contract to be performed on the part of Zone 7 or Contractor, or either of them, should be contrary to any provisions of law or contrary to the policy of law to such an extent as to be unenforceable in any court of competent jurisdiction, then such terms or conditions, shall be null and void and shall be deemed severable from the remaining terms or conditions and shall not affect the validity of the remaining provisions of this contract. 36. Section Headings Section headings in this contract are for convenience only and are not to be construed as a part of this contract or in any way limiting or amplifying the provisions hereof. 37. Waiver None of these terms or conditions herein contained can be waived except by mutual written consent. 38. Water Conservation In order to increase water supply by demand reduction or to comply with regulatory requirements, Zone 7 will undertake and support water conservation programs. To that end, Zone 7 will develop, implement or participate in such programs and enter into agreements with Other Contractors, and other entities to make more efficient use of water supplies through water conservation programs so long as such agreements serve a beneficial purpose to the residents of Zone 7. 39. Contracts to be Substantially Similar Zone 7 agrees that each contract for a Municipal & Industrial Water Supply hereafter entered into by Zone 7 with any Other Contractor shall contain provisions substantially similar to those herein set forth and shall not contain any provisions of a material nature more favorable to the Other Contractor than the provisions herein applicable to Contractor. This section shall not restrict Zone 7 from considering other terms and conditions for subsequent Municipal & Industrial Water Supply contracts provided that if such other terms and conditions are not substantially similar, Zone 7 shall notify all Other Contractors and offer such other terms and conditions in accordance with Section 31 to Each Contractor. This section shall not limit Zone 7 from entering into other contracts for services not provided 44 for under the terms and conditions of this contract. IN WITNESS WHEREOF, the parties hereto and have executed this contract on the date and year first above written. CALIFORNIA WATER SERVICE ZONE 7 WATER AGENCY COMPANY BY \s\ DONALD L. HOUCK BY \s\ DAVID W. LAYTON President Chairman, Board of Directors ATTEST: ATTEST: BY \s\ HELEN MARY KASLEY BY \s\ JIM DIXON Secretary Secretary APPROVED AS TO FORM: KELVIN H. BOOTY, JR., COUNTY COUNSEL BY \s\ BRIAN WASHINGTON Deputy County Counsel 45 EX-13 3 EXHIBIT XIII SERVICE AREAS AND CUSTOMERS A map of State of California indicating the twenty districts in which the company operates is included on this page. SAN FRANCISCO BAY AREA Mid-Peninsula (San Mateo and San Carlos) 35,300 South San Francisco (including Colma and Broadmoor) 15,300 Bear Gulch (including Menlo Park, Atherton, Woodside and Portola Valley) 17,100 Los Altos (including Los Altos and portions of Cupertino, Los Altos Hills, Mountain View and Sunnyvale) 17,800 Livermore 14,900 100,400 SACRAMENTO VALLEY Chico (including Hamilton City) 20,700 Oroville 3,500 Marysville 3,800 Dixon 2,700 Willows 2,200 32,900 SALINAS VALLEY Salinas 23,000 King City 1,900 24,900 SAN JOAQUIN VALLEY Bakersfield 54,400 Stockton 40,800 Visalia 26,200 Selma 4,600 126,000 LOS ANGELES AREA East Los Angeles (including portions of City of Commerce and Montebello 26,400 Hermosa Beach and Redondo Beach (including a portion of Torrance) 24,800 Palos Verdes (including Palos Verdes Estates, Rancho Palos Verdes, Rolling Hills Estates and Rolling Hills) 23,400 Westlake (a portion of Thousand Oaks) 6,700 81,300 365,500 46 NEW BUSINESS DEVELOPMENT New business activity improved somewhat over 1993. New residential and commercial services added through installation of new mains totaled 2,018, up approximately 21 percent from last year. Nine districts showed an increase in new business activity above the figures posted in 1993. The Visalia district was by far the growth leader for the Company in 1994. This district increased its activity by nearly 75 percent over the already high level of activity experienced in 1993. This year, Visalia accounted for nearly one-third of the Company's total new business growth. Net refundable advances and contributions received from developers in 1994 were $8,800,000 compared with $8,400,000 received in 1993. The Company, in cooperation with San Mateo County and a local homeowners association, is acquiring Palomar Park County Water District #3. Palomar Park, containing about 200 customers, will be a welcome addition to our Mid-Peninsula district. The Company has entered into a number of contracts to include municipal utility bills on customers' monthly water bills. Agreement was reached with the City of Willows and the City of King to bill city residents for sewer charges. In Visalia, we were awarded a similar contract for sewer and refuse billing services. These contracts are a promising area of growth for the Company. We will continue to seek these opportunities where they arise. Agreements were signed with the Central and West Basin Municipal Water Districts in Los Angeles for the operation and maintenance of their recycled water distribution systems. As with billing contracts, the Company is quickly developing expertise in the operation of recycled water distribution systems, and is now involved with three such systems. As California's growing population continues to exert pressure on the state's water supply, so too grows the use of recycled water for non-potable uses such as municipal irrigation and industrial processes. The Company believes this sector is a promising growth area. 47 RATES AND REGULATION The California Public Utilities Commission requires that rates for each district be determined independently. Each year, the Company files general rate increase applications for approximately one-third of its operating districts. The Commission attempts to resolve these within eight months of acceptance. Offset rate adjustments are also allowed for changes in purchased water, power costs and pump taxes. During 1994, general rate increase applications were filed with the Commission requesting rate relief of $3,023,000 in six districts representing 15 percent of the Company's customer base. The applications requested a rate of return on common equity of 12 percent. However, the Commission staff has recommended a rate of return of 10.9 percent. Public hearings for these cases were completed in early February 1995, the Commission's decision is expected in mid-May. Step increases authorized in previous rate decisions for 15 districts totaling approximately $2,102,000 became effective in January 1995. In July 1994, the Commission issued a decision on general rate cases filed in July 1993, for three districts representing 13 percent of customer base, resulting in $540,000 in additional revenue and yielding a return on common equity of 10.2 percent. The Commission issued its long awaited decision in its investigation of the financial and operational risks for water utilities. While the Commission concluded that no fundamental change in its ratemaking procedures is necessary, it authorized water utilities to accrue interest on balancing and memorandum accounts. Additionally, the decision allows water utilities to request prospective recovery for unanticipated Safe Drinking Water Act compliance costs. Effective March 14, 1994, the Commission closed all voluntary conservation memorandum accounts. The Company is seeking to transfer $1,748,000 in lost revenue and conservation expenses from the drought memorandum accounts to its expense balancing accounts. These amounts would be recoverable through the Commission's offset procedures which allow surcharges to amortize account balances. Offset rate increases of $1,944,000 and $2,327,000 were authorized during the year for water production cost increases and balancing account undercollections, respectively. Additionally, the Commission approved rate increases of $292,000 to recover increased costs from the 1993 general office renovation; $87,000 for a new water tank in the South San Francisco district; and $215,000 for post-retirement benefits other than pensions. This latter expense was a result of accounting changes mandated by Statement of Financial Accounting Standards No. 106. 48 WATER QUALITY AND ENVIRONMENTAL AFFAIRS The trends of the past few years continued in 1994. Increasing numbers of stringent federal and state water quality regulations require increased monitoring and analysis of all sources and distribution systems. Particular effort was devoted to preparation of reports in compliance with the second phase of the United States Environmental Protection Agency's lead and copper rule. Changes in the federal Safe Drinking Water Act which would have brought treatment costs in line with the actual health threat posed by contaminants were not adopted by Congress in 1994. Meanwhile, the Company continued to upgrade its treatment capabilities to ensure compliance with all regulations now and in the future. These upgrades include the installation of: ~ Chlorinators on all wells to ensure compliance with bacteriological regulations. ~ An innovative granular activated carbon system in Bakersfield for removal of hydrogen sulfide taste and odor. ~ Our third treatment system in Chico for the removal of volatile organic compounds (VOCs). We also agreed to operate a granular activated carbon system for the removal of VOCs installed by the State Environmental Protection Agency. In other environmental areas, the Company continues to maintain an aggressive employee training program in recycling, hazardous materials management, and hazardous waste management. The training program is an essential part of ensuring that all operations are conducted in accordance with good environmental practice, and in compliance with all applicable environmental laws, regulations and rules. WATER SUPPLY The 1993-94 water season was California's fourth driest year on record, leading the Department of Water Resources to declare a 'drought watch' in May. But these fears began to be allayed as early as November 1994 when a seemingly endless series of storms began pouring rain and snow throughout the state's watersheds. By late January 1995, cumulative average Sierra snowpack was at 175 percent of normal; storage in the state's 155 reservoirs was at more than 90 percent of 49 average and the drought watch was cancelled. These promising figures guarantee 100 percent of state water project deliveries will be made in 1995. Substantial water reserves remain in the groundwater aquifers that supply Company districts served by well water. While recovery from drought-related depletion of these reserves was interrupted by drier than normal conditions in 1994, the mean groundwater levels in these districts were stable. In addition, districts located in regions with existing groundwater management mechanisms showed noticeable improvements in storage. Regional groundwater management planning is receiving greater attention throughout the state as its importance as a tool for addressing long-term water supply concerns is realized. The passage of legislation that enables management of this resource by existing local government agencies further stimulated this attention. Despite the promise of an abundant water year, California is expected to have long-term water supply problems. To compensate for this trend, the Company continues to promote water conservation programs initiated during the drought on a district-by-district basis outlined in our water management plans and as permitted by the California Public Utilities Commission. Significant developments affecting future water supply occurred in several of our districts. On August 16, 1994, the State Water Resources Control Board (SWRCB) informed the Monterey County Board of Supervisors that it was initiating an investigation into the groundwater supply issues in the Salinas Valley. This is a prelude to a possible adjudication of the groundwater basin by the SWRCB should Monterey County fail to develop short- and long-term solutions to the nitrate contamination and saltwater intrusion threatening the aquifers. In a related matter, the SWRCB refused to consider a separate investigation of groundwater use in our King City district. This action will save the Company a considerable amount of litigation expenses. In Solano County, the location of our Dixon district, the Solano County Water Agency agreed to reimburse the Company for costs it incurred as a party to the Putah Creek adjudication. This action will determine the rights to water from Putah Creek which recharges the groundwater from which our Dixon district derives its water supply. 50 TEN YEAR FINANCIAL REVIEW
(Dollars in thousands except common share and other data) 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 SUMMARY OF OPERATIONS Operating revenue Residential $114,751 $111,526 $101,842 $87,560 $90,178 $84,295 $81,404 $82,254 $79,131 $75,508 Business 27,023 25,247 23,670 20,759 20,910 19,870 19,480 19,986 19,095 17,847 Industrial 5,478 5,123 4,925 4,490 5,146 5,166 4,754 4,361 4,539 4,636 Public authorities 7,995 7,396 6,892 5,734 6,412 6,225 6,232 6,491 6,285 6,118 Other 2,024 2,424 2,476 8,633 1,741 1,932 1,885 693 1,385 1,382 TOTAL OPERATING REVENUE 157,271 151,716 139,805 127,176 124,387 117,488 113,755 113,785 110,435 105,491 Operating expenses 131,766 123,861 116,031 102,855 101,017 95,150 91,265 90,587 87,788 83,722 Interest expense, other income and expenses, net 11,097 12,354 11,245 10,393 9,004 8,566 8,416 8,026 8,808 9,115 Net income $14,408 $15,501 $12,529 $13,928 $14,366 $13,772 $14,074 $15,172* $13,839 $12,654 COMMON SHARE DATA Earnings per share $2.44 $2.70 $2.18 $2.42 $2.50 $2.40 $2.45 $2.63* $2.40 $2.21 Dividends paid 1.98 1.92 1.86 1.80 1.74 1.68 1.60 1.48 1.40 1.30 DIVIDEND PAYOUT RATIO 81% 71% 85% 74% 70% 70% 65% 49% 58% 59% Book value at year-end $23.12 $21.80 $21.02 $20.70 $20.08 $19.32 $18.59 $17.72 $16.11 $15.03 Market price at year-end 32.00 40.00 33.00 28.00 26.75 28.00 25.50 30.00 26.625 22.625 Common shares outstanding at year-end (in thousands) 6,247 5,689 5,689 5,689 5,689 5,689 5,672 5,636 5,607 5,576 Return on common shareholders equity 10.6% 12.4% 10.4% 11.7% 12.4% 12.4% 13.2% 14.8% 14.9% 14.7% Bond interest coverage 3.2 3.2 2.9 3.2 3.6 3.4 3.8 4.3 3.9 3.5 BALANCE SHEET DATA Net utility plant $407,895 $391,703 $374,613 $349,937 $325,409 $307,802 $289,363 $273,619 $262,216 $246,467 Utility plant expenditures 28,275 28,829 35,188 34,459 26,861 27,277 23,994 19,511 22,710 16,469 Advances for construction 92,190 90,812 89,127 84,424 77,202 69,016 59,145 54,887 50,907 45,790 Capitalization: Common shareholders equity 144,447 123,999 119,574 117,779 114,244 109,929 105,435 99,897 90,336 83,818 Preferred stock 3,475 3,475 3,475 3,475 3,475 3,475 3,475 5,783 5,909 6,031 First mortgage bonds 128,944 129,608 122,069 103,505 104,905 86,012 86,959 73,930 77,056 84,009 Total capitalization 276,866 257,082 245,118 224,759 222,624 199,416 195,869 179,610 173,301 173,858 Capitalization ratios: Common shareholders equity 52.2% 48.2% 48.8% 52.4% 51.3% 55.1% 53.8% 55.6% 52.1% 48.2% Preferred stock 1.3% 1.4% 1.4% 1.5% 1.6% 1.8% 1.8% 3.2% 3.4% 3.5% First mortgage bonds 46.5% 50.4% 49.8% 46.1% 47.1% 43.1% 44.4% 41.2% 44.5% 48.3% OTHER DATA Water production (million gallons) Wells 50,325 47,205 52,000 48,930 51,329 51,350 48,828 48,097 45,222 43,589 Purchased 49,300 48,089 40,426 36,686 45,595 45,978 48,254 50,744 50,782 50,328 Total water production 99,625 95,294 92,426 85,616 96,924 97,328 97,082 98,841 96,004 93,917 Customers Metered 286,700 282,100 278,700 275,200 272,100 269,200 267,000 261,000 258,600 256,000 Flat rate 78,800 80,800 82,000 82,400 81,200 79,400 77,800 76,800 75,600 74,300 Total customers at year-end 365,500 362,900 360,700 357,600 353,300 348,600 344,800 337,800 334,200 330,300 New customers added 2,600 2,200 3,100 4,300 4,700 3,800 7,000 3,600 3,900 4,200 Revenue per customer $430 $418 $388 $356 $352 $337 $330 $337 $330 $319 Utility plant per customer $1,530 $1,469 $1,406 $1,327 $1,251 $1,198 $1,140 $1,098 $1,058 $1,007 Employees at year-end 624 614 610 593 581 565 550 534 528 525 * Net income excludes $2,196 for a change in accounting for unbilled revenue;$.39 is excluded from earnings per share. Common share data is adjusted to reflect the 2-for-1 stock split effective October 1987. 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS California Water Service Company is a public utility supplying water service through 20 separate water systems to 365,500 customers living in 38 California communities. These systems, or districts, are located throughout the state as shown in the tabulation on page 4. The Company's rates and operations are regulated by the California Public Utilities Commission (Commission) with the rates for each district determined separately. A detailed discussion of Rates and Regulation begins on page 11 of this report. The six-year drought in California which required water rationing in a number of the Company's districts was declared officially ended after near-record precipitation in the first three months of 1993. A detailed discussion of Water Supply begins on page 14 of this report. RESULTS OF OPERATIONS EARNINGS AND DIVIDENDS The Company's earnings per share for 1994 were $2.44, compared with $2.70 in 1993 and $2.18 in 1992. Net income was $14,408,000 in 1994 compared with $15,501,000 in 1993 and $12,529,000 in 1992. Earnings and revenue in 1992 were impacted by mandatory water rationing in some Company districts and water conservation in all districts. In January 1994, the Board of Directors increased the dividend rate for the twenty-seventh consecutive year. The annual rate paid in 1994 was $1.98 per share, an increase of 3.1% compared with the 1993 dividend of $1.92 per share, which represented an increase of 3.2% over the 1992 dividend of $1.86 per share. The increased dividends were based on projections that the higher dividend could be sustained while still providing the Company with adequate financial flexibility. The dividend payout ratio was 81% in 1994 compared with 71% in 1993 and 85% in 1992, an average of 79% for the three-year period. Earnings not paid as dividends are reinvested in the Company. OPERATING REVENUE Operating revenue was a record $157.3 million in 1994, compared with $151.7 million in 1993 and $139.8 million in 1992. The increase was $5.6 million, or 4% over 1993. Step and general rate increases accounted for $4.1 million of added revenue. Offset rate adjustments, primarily for purchased water and pump tax cost increases, added $2.7 million. Average water consumption per customer increased 4%, adding $2.4 million to revenue. During 1993, $2.9 million of rationing loss recoveries were recorded, and as authorized by the Commission, conservation penalties totaling $1.6 million were transferred to revenue to offset undercollections in expense balancing accounts. Since there were no similar revenue sources in 1994, revenue decreased by $4.5 million. Sales to 2,600 new customers accounted for $0.9 million in additional revenue. 52 In 1993, operating revenue increased $11.9 million, or 9% from 1992. Step and general rate increases accounted for $2.7 million of added revenue. Offset rate adjustments, primarily for purchased water and pump tax rate increases, added $7.3 million. Average water consumption per customer increased 3%, adding $2.3 million to revenue. However, rationing loss recoveries declined $1.2 million from 1992 due to the ending of rationing. Sales to 2,200 new customers accounted for $0.8 million in additional revenue. In 1992, operating revenue increased $12.6 million from 1991. Step and general rate increases accounted for $3.4 million of added revenue. Offset rate adjustments, primarily for purchased water and pump tax cost increases, added $7.0 million. Average water consumption per customer increased 6%, adding $3.9 million to revenue. The discontinuance of mandatory rationing in four districts in April 1992 helped account for higher water consumption. However, this also resulted in lower rationing loss recoveries of $4.0 million compared with $6.9 million in 1991. Sales to 3,100 new customers accounted for $1.2 million in additional revenue. OPERATING AND INTEREST EXPENSES Operating expenses in 1994 increased $7.9 million compared with increases of $7.8 million in 1993 and $13.2 million in 1992. Purchased water expense continued to be the largest component of operating expense at $42.8 million, an increase of $4.4 million. This was attributable to a 3% increase in water purchases to 49 billion gallons and to wholesale water suppliers' rate increases. Total water production, including well production and surface supplies was up 5% from 1993 to 100 billion gallons. Total cost of water production, including purchased water, purchased power and pump taxes, was $58.3 million in 1994, $52.9 million in 1993, and $50.2 million in 1992. Commission regulatory procedures allow offset rate adjustments for changes in these costs through use of balancing accounts. However, there was a delay in recovery of some cost increases as discussed under the caption Rates and Regulation on page 11. Employee payroll and benefits charged to operations and maintenance expense was $28.0 million in 1994 compared with $26.2 million in 1993 and $24.8 million in 1992. The increases in payroll and benefits is attributable to wage increases and additional employees. At year-end 1994, 1993 and 1992 there were 624, 614 and 610 employees, respectively. Income taxes were $9.6 million in 1994, $10.6 million in 1993, and $8.2 million in 1992. The changes in taxes are due to variations in taxable income and the increase in the Federal tax rate to 35% from 34% effective in 1993. Interest on first mortgage bonds decreased $1.4 million in 1994 due to the bond refinancing program completed at lower interest rates in 1993. In 1993, bond interest expense increased $1.5 million over 1992 due to the sale of $20 million new bonds in November 1992 and the sale of additional new bonds in 1993. Bond financing is discussed under the caption Liquidity and Capital Resources. Interest on short-term bank borrowings in 1994 increased $.2 million due to increased borrowings at higher interest rates than in the prior year. The increase in 1993 bond interest was partially offset by a $.3 million reduction in interest on short-term debt due to reduced borrowings. Bond interest coverage before income taxes was 3.2 in 1994 and 1993, and 2.9 in 1992. 53 OTHER INCOME Other income increased to $.4 million in 1994. Other income in 1993 was $.3 million and $.2 million in 1992. Other income is derived from management contracts under which the Company operates three municipally owned water systems, agreements for operation of two reclaimed water systems, billing services provided to various cities, interest on short-term investments and other non-utility sources. The Company intends to continue to pursue opportunities to expand these revenue sources. ACCOUNTING STANDARDS The Financial Accounting Standards Board issued three new statements which affected the financial statements in 1993 or 1992. These are Statement No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions", Statement No. 107 "Disclosures About Fair Value of Financial Instruments", and Statement No. 109 "Accounting for Income Taxes". The effect of these statements is discussed in Notes to Financial Statements: Note 5-Income Taxes; Note 6-Employee Benefit Plans; and Note 7-Fair Value of Financial Instruments. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY The Company's liquidity is primarily provided by cash generated from operations and the utilization of a short-term bank line of credit of $30 million as described in Note 3 to the financial statements. The credit line was temporarily increased to $40 million during the bond refinancing periods in May and November 1993 to allow for short-term cash requirements between the calling of bonds and the issuance of new bonds. The sale of 550,000 common shares was completed in September 1994 at an offer price of $33.375. Proceeds of $17.4 million, net of underwriters' commissions and issuance costs, were used to repay $15.5 million of short-term bank borrowings which had been incurred to fund the 1994 construction program and for temporary working capital requirements. The Company's regular practice has been to purchase shares for the dividend reinvestment plan in the market, however, for the first quarter 1994 dividend, 8,280 new common shares were issued under the reinvestment plan. A major refinancing program was completed in 1993. Eight series of bonds in he principal amount of $49,593,000 and bearing coupons ranging from 8.6% to 12-7/8% were called prior to maturity using a portion of the proceeds from the sale of three $20 million dollar bond issues. Series EE 7.9% first mortgage bonds were issued in June 1993, Series FF 6.95% bonds were issued in October 1993 and Series GG 6.98% bonds were issued in November 1993. Interest savings from the refunding was approximately $1.9 million annually. Standard & Poor's and Moody's maintained their bond ratings of AA- and Aa3 respectively on the new Series GG bond issue. Capital requirements consist primarily of new construction expenditures for expanding and replacing the Company's utility plant facilities. They also include refunds of advances for construction and retirement of bonds. 54 CAPITAL REQUIREMENTS During 1994, utility plant expenditures totaled $28.3 million including $20.8 million covered by Company funding and $7.5 million received from developers through refundable advances and contributions in aid of construction. Company funded expenditures were in the following areas: wells, pumping and water treatment equipment, and storage facilities, $5.7 million; distribution systems, $8.0 million; services and meters, $4.7 million; equipment, $2.4 million. Company projects were funded through cash generated from operations, the use of the short-term line of credit and the proceeds from the common stock offering. The 1995 Company construction program has been authorized by the Directors for $20.7 million. Expenditures are expected to be in the following areas: wells, pumping and water treatment equipment, and storage facilities, $4.6 million; distribution systems, $7.4 million; services and meters, $6.0 million; and equipment, $2.7 million. The funds for this program are expected to be provided by cash from operations and a new bond issue. New subdivision construction will be financed generally by developers' refundable advances and contributions. Company funded construction budgets over the next five years are projected to total $110 million. CAPITAL STRUCTURE The Company's total capitalization at December 31, 1994 and 1993 was $276.9 million and $257.1 million, respectively. Capital ratios were: 1994 1993 Common shareholders' equity 52.2% 48.2% Preferred stock 1.3% 1.4% Long-term debt 46.5% 50.4% The increase in the common equity percentage from 1993 to 1994 and the corresponding decrease in the long-term debt percentage were primarily caused by the common stock offering, completed in September 1994. The return on year-end common equity was 10.6% compared with 12.4% in 1993 and 10.4% in 1992. 55 BALANCE SHEET December 31, 1994 1993 (In thousands) ASSETS UTILITY PLANT: Land $ 6,904 $ 6,742 Depreciable plant and equipment 549,044 522,614 Construction work in progress 2,589 3,466 Intangible assets 643 391 Total utility plant 559,180 533,213 Less depreciation 151,285 141,510 Net utility plant 407,895 391,703 CURRENT ASSETS: Cash and cash equivalents 1,301 1,461 Accounts receivable: Customers 9,121 8,984 Other 4,040 1,851 Unbilled revenue 5,992 7,548 Materials and supplies at average cost 3,018 2,853 Taxes and other prepaid expenses 3,927 3,716 Total current assets 27,399 26,413 OTHER ASSETS: Regulatory assets 24,135 23,404 Unamortized debt premium and expense 4,247 4,467 Other 552 632 Total other assets 28,934 28,503 $464,228 $446,619 See accompanying notes to financial statements. 56 1994 1993 CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common stock $ 42,800 $ 25,059 Retained earnings 101,647 98,940 Total common shareholders' equity 144,447 123,999 Preferred stock without mandatory redemption provision 3,475 3,475 First mortgage bonds 128,944 129,608 Total capitalization 276,866 257,082 CURRENT LIABILITIES: Short-term borrowings 7,000 15,000 Accounts payable 12,231 11,234 Accrued taxes 2,561 2,810 Accrued interest 1,788 1,788 Other accrued liabilities 6,548 7,124 Total current liabilities 30,128 37,956 Unamortized investment tax credits 3,265 3,341 Deferred income taxes 12,445 11,045 Regulatory liabilities 11,467 11,467 Advances for construction 92,190 90,812 Contributions in aid of construction 37,867 34,916 $464,228 $446,619 57 STATEMENT OF INCOME For the years ended December 31, 1994 1993 1992 (In thousands, except per share data) Operating revenue $157,271 $151,716 $139,805 Operating expenses: Operations: Purchased water 42,812 38,454 33,065 Purchased power 12,641 11,852 12,766 Pump taxes 2,859 2,601 4,370 Administrative and general 18,210 16,910 16,349 Other 20,405 19,718 19,051 Maintenance 7,855 7,250 6,965 Depreciation 10,958 10,304 9,412 Income taxes 9,600 10,600 8,250 Property and other taxes 6,426 6,172 5,803 Total operating expenses 131,766 123,861 116,031 Net operating income 25,505 27,855 23,774 Other income and expenses, net 287 273 169 Income before interest expense 25,792 28,128 23,943 Interest expense: Bond interest 10,557 11,992 10,443 Other interest 827 635 971 Total interest expense 11,384 12,627 11,414 Net income $ 14,408 $ 15,501 $ 12,529 Earnings per share of common stock $ 2.44 $ 2.70 $ 2.18 Average number of common shares outstanding 5,838 5,689 5,689 See accompanying notes to financial statements. 58 STATEMENT OF COMMON SHAREHOLDERS' EQUITY COMMON For the years ended December 31, SHARES COMMON RETAINED (In thousands, except shares) OUTSTANDING STOCK EARNINGS TOTAL Balance at December 31, 1991 5,688,754 $ 25,059 $ 92,720 $117,779 Net income 12,529 12,529 Dividends paid: preferred stock 153 153 common stock 10,581 10,581 Total dividends paid 10,734 10,734 Income reinvested in business 1,795 1,795 Balance at December 31, 1992 5,688,754 25,059 94,515 119,574 Net income 15,501 15,501 Dividends paid: preferred stock 153 153 common stock 10,923 10,923 Total dividends paid 11,076 11,076 Income reinvested in business 4,425 4,425 Balance at December 31, 1993 5,688,754 25,059 98,940 123,999 Net income 14,408 14,408 Dividends paid: preferred stock 153 153 common stock 11,548 11,548 Total dividends paid 11,701 11,701 Income reinvested in business 2,707 2,707 Dividend reinvestment shares issued 8,280 304 304 Issuance of common stock, net 550,000 17,437 17,437 Balance at December 31, 1994 6,247,034 $ 42,800 $101,647 $144,447 See accompanying notes to financial statements. 59 STATEMENT OF CASH FLOWS For the years ended December 31, 1994 1993 1992 (In thousands) Operating activities: Net income $ 14,408 $ 15,501 $ 12,529 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 10,958 10,304 9,412 Deferred income taxes and investment tax credits, net 1,324 12,355 (821) Regulatory assets and liabilities, net (731) (11,937) 0 Changes in operating assets and liabilities: Accounts receivable (2,326) 908 (2,633) Unbilled revenue 1,556 (804) 842 Accounts payable 997 2,124 1,218 Other current liabilities (825) (1,338) 1,084 Other changes, net 130 247 645 Net adjustments 11,083 11,859 9,747 Net cash provided by operating activities 25,491 27,360 22,276 Investing activities: Utility plant expenditures (28,275) (28,829) (35,188) Financing activities: Net short-term borrowings (8,000) 3,500 (2,500) Proceeds from issuance of common stock, net 17,741 0 0 Proceeds from sale of first mortgage bonds 0 60,000 20,000 Advances for construction 4,980 5,024 8,187 Refunds of advances for construction (3,565) (3,428) (3,443) Contributions in aid of construction 3,833 3,402 3,446 Retirements of first mortgage bonds including premiums (664) (55,391) (1,458) Dividends paid (11,701) (11,076) (10,734) Net cash provided by financing activities 2,624 2,031 13,498 Change in cash and cash equivalents (160) 562 586 Cash and cash equivalents at beginning of year 1,461 899 313 Cash and cash equivalents at end of year $1,301 $1,461 $899 Supplemental disclosures of cash flow information Cash paid during the year for: Interest (net of amounts capitalized) $ 11,165 $ 12,763 $ 11,042 Income taxes $ 10,950 $ 9,188 $ 11,384 See accompanying notes to financial statements. 60 NOTES TO FINANCIAL STATEMENTS December 31, 1994, 1993 and 1992 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting records of the Company are maintained in accordance with the uniform system of accounts prescribed by the California Public Utilities Commission (Commission). Certain prior years' amounts have been reclassified, where necessary, to conform to the current presentation. REVENUE Revenue consists of monthly cycle customer billings for water service at rates authorized by the Commission. 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. In October 1991 the Commission issued a decision on its investigation into the effects of the drought on water utilities which permitted the Company to recover revenue lost through water conservation as recorded in memorandum accounts. During 1992, $4,087,000 of revenue lost due to water conservation was recorded as revenue and accrued in unbilled revenue. Of that amount, $2,355,000 was recovered through customer surcharges and penalty charge transfers collected from customers who had exceeded their monthly allotments. As of December 31, 1992, a total of $2,151,000 of revenue lost due to water conservation was included in unbilled revenue. In 1993, $2,904,000 was recorded as lost water conservation revenue and accrued in unbilled revenue, while $2,631,000 was recovered through customer surcharges and penalty charge transfers. As of December 31, 1993, $2,424,000 of lost water conservation revenue was included in unbilled revenue. In 1994, $32,000 was recorded as lost water conservation revenue and accrued in unbilled revenue, while $1,445,000 was recovered through customer surcharges and penalty charge transfers. As of December 31, 1994, $1,011,000 of lost water conservation revenue remains in unbilled revenue. 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 dates of acquisition. Costs of depreciable plant retired are eliminated from utility plant accounts and such costs are charged against accumulated depreciation. Maintenance of utility plant, other than transportation equipment, is charged to operation expenses. Maintenance and depreciation of transportation equipment are charged to a clearing account and subsequently distributed, primarily to operations. Interest is capitalized on plant expenditures during the construction period and amounted to $195,000 in 1994, $141,000 in 1993, and $523,000 in 1992. Intangible assets arising during the period of initial development of the Company and those acquired as parts of water systems purchased are stated at amounts as prescribed by the Commission. All other intangibles have been recorded at cost. 61 BOND PREMIUM, DISCOUNT AND EXPENSE The discount and expense on first mortgage bonds is being amortized over the original lives of the related bond issues. Premiums paid on the early redemption of bonds and unamortized original issue discount and expense of those bonds are amortized over the life of new bonds issued in conjunction with the early redemption. CASH EQUIVALENTS Cash equivalents include highly liquid investments, primarily a money market mutual fund, stated at cost with original maturities of three months or less. As of December 31, 1994, and 1993, cash equivalents were $124,000 and $135,000, respectively. DEPRECIATION Depreciation of utility plant for financial statement purposes is computed on the straight-line remaining life method at rates based on the estimated useful lives of the assets. The provision for depreciation expressed as a percentage of the aggregate depreciable asset balances was 2.4% in 1994 and 1993 and 2.3% in 1992. For income tax purposes, the Company computes depreciation using the accelerated methods allowed by the respective taxing authorities. ADVANCES FOR CONSTRUCTION Advances for construction of water main extensions are primarily refundable to depositors 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 and are no longer refundable. Contracts entered into since 1982 provide for full refunds at a 2.5% rate per year for 40 years. Estimated refunds for 1995 for all water main extension contracts are $3,800,000. INCOME TAXES Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". SFAS 109 requires a change from the deferred method of accounting for income taxes under APB Opinion 11 to the asset and liability method. Under SFAS 109 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. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Due to the implementation of SFAS 109 as of January 1, 1993, the Company recorded an increase in both net regulatory assets and net deferred income taxes of $9,905,000. There was no impact on the results of operations. It is anticipated that future rate action by the Commission will reflect revenue requirements for the tax effects of temporary differences recognized under SFAS 109 which have previously been flowed through to customers. 62 Prior to 1993, the provision for income taxes was based on income and expenses included in the Statement of Income as prescribed by APB Opinion 11. In accordance with Commission requirements, deferred taxes were not provided for items flowed through for rate-making and accounting purposes. Flow through items included excess state tax depreciation and excess federal depreciation on assets placed in service prior to 1981. Prior year amounts have not been restated to apply the provisions of SFAS 109. The Commission has granted the Company customer 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 since 1980. ITC are deferred and amortized over the lives of the related properties. Advances for Construction and Contributions in Aid of Construction received from developers subsequent to 1986 are taxable for federal income tax purposes and subsequent to 1991 subject to state income tax. EARNINGS PER SHARE Earnings per share are calculated using the weighted average number of common shares outstanding during the year after deducting dividend requirements on preferred stock. NOTE 2 - PREFERRED AND COMMON STOCK As of December 31, 1994, 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. Preferred shares are entitled to eight votes each with the right to cumulative votes at any elections of directors. 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 $243,250 would be due upon voluntary liquidation of Series C. There is no premium in the event of an involuntary liquidation. The Company is authorized to issue 8,000,000 shares of no par value common stock. In September 1994, the Company sold 550,000 shares of common stock in a public offering with net proceeds of $17,437,000. As of December 31, 1994 and 1993, 6,247,034 and 5,688,754 shares, respectively, of common stock were issued and outstanding. NOTE 3 - SHORT-TERM BORROWINGS As of December 31, 1994, the Company maintained a bank line of credit which provided for unsecured borrowings of up to $30,000,000 at the prime lending rate or lower rates as quoted by the bank. The agreement does not require minimum or specific compensating balances. The following table represents borrowings under bank line of credit. IN THOUSANDS 1994 1993 1992 Maximum short-term borrowings $21,500 $33,500 $24,500 Average amount outstanding 13,196 11,746 17,431 Weighted average interest rate 5.40% 4.31% 4.85% Interest rate at December 31 7.38% 4.38% 4.48% 63 NOTE 4 - FIRST MORTGAGE BONDS As of December 31, 1994 and 1993 first mortgage bonds outstanding were: IN THOUSANDS 1994 1993 Series J 4.85% due 1995 $ 2,565 $ 2,581 Series K 6.25% due 1996 2,580 2,595 Series L 6.75% due 1997 2,164 2,177 Series P 7.875% due 2002 2,670 2,685 Series S 8.50% due 2003 2,685 2,700 Series BB 9.48% due 2008 17,280 17,370 Series CC 9.86% due 2020 19,500 19,600 Series DD 8.63% due 2022 19,800 19,900 Series EE 7.90% due 2023 19,900 20,000 Series FF 6.95% due 2023 19,900 20,000 Series GG 6.98% due 2023 19,900 20,000 $128,944 $129,608 Aggregate maturities and sinking fund requirements for each of the succeeding five years 1995 through 1999 are $3,215,000, $3,197,000, $2,758,000, $620,000, and $2,240,000, respectively. The first mortgage bonds are secured by substantially all of the Company's utility plant. NOTE 5 - INCOME TAXES Income tax expense consists of the following: IN THOUSANDS FEDERAL STATE TOTAL 1994 Current $ 6,492 $ 2,567 $ 9,059 Deferred 908 (367) 541 Total $ 7,400 $ 2,200 $ 9,600 1993 Current $ 6,800 $ 2,408 $ 9,208 Deferred 1,400 (8) 1,392 Total $ 8,200 $ 2,400 $ 10,600 1992 Current $ 3,371 $ 1,650 $ 5,021 Deferred 3,229 3,229 Total $ 6,600 $ 1,650 $ 8,250 64 Income tax expense differs from the amount computed by applying the current federal tax rates of 35% in 1994 and 1993 and and 34% in 1992, to pretax book income from the amount shown in the Statement of Income. The differences are listed in the table below: IN THOUSANDS 1994 1993 1992 Computed "expected" tax expense $ 8,401 $ 9,135 $ 7,065 Increase (reduction) in taxes due to: State income taxes net of federal tax benefit 1,444 1,565 1,089 Investment tax credits (132) (100) (85) Other (113) 181 Total income tax $ 9,600 $10,600 $ 8,250 The components of deferred income tax expense in 1994, 1993 and 1992 were: IN THOUSANDS 1994 1993 1992 Depreciation $ 3,748 $ 3,858 $ 3,314 Developer advances and contributions (3,536) (3,951) Bond redemption premiums 75 1,333 Investment tax credits (90) (72) (85) Other 344 224 Total deferred income tax expense $ 541 $ 1,392 $ 3,229 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1994 and 1993 are presented in the following table: IN THOUSANDS 1994 1993 Deferred tax assets: Developer deposits for extension agreements and contributions in aid of construction $37,359 $31,270 Federal benefit of state tax deductions 3,895 3,798 Book plant cost reduction for future deferred ITC amortization 1,758 1,799 Insurance loss provisions 617 682 Total deferred tax assets 43,629 37,549 Deferred tax liabilities: Utility plant, principally due to depreciation differences 47,670 42,796 Premium on early retirement of bonds 2,081 1,918 Miscellaneous 6,323 3,880 Total deferred tax liabilities 56,074 48,594 Net deferred tax liability $12,445 $11,045 A valuation allowance was not required during 1994 and 1993. Based on historical taxable income and future taxable income projections over the periods in which the deferred assets are deductible, management believes it is more likely than not the Company will realize the benefits of the deductible differences. 65 NOTE 6 - EMPLOYEE BENEFIT PLANS PENSION PLANS The Company provides a qualified, defined benefit, noncontributory pension plan for substantially all employees. The cost of the plan was charged to expense and utility plant. The Company makes annual contributions to fund the amounts accrued for pension cost. Plan assets are invested in pooled equity, bond and short-term investment accounts. The data below includes an unfunded, non-qualified supplemental executive retirement plan. Net pension cost for the years ending December 31, 1994, 1993 and 1992 included the following components: IN THOUSANDS 1994 1993 1992 Service cost-benefits earned during the period $1,333 $1,167 $1,076 Interest cost on projected obligation 2,154 2,153 1,970 Actual loss (return) on plan assets 627 (3,672) (1,410) Net amortization and deferral (2,286) 2,132 (262) Net pension cost $1,828 $1,780 $1,374 The following table sets forth the plan's funded status as of December 31, 1994 and 1993: IN THOUSANDS 1994 1993 Accumulated benefit obligation, including vested benefits of $19,824 in 1994 and $20,719 in 1993 $(20,329) $(21,386) Projected benefit obligation $(30,246) $(31,179) Plan assets at fair value 27,833 29,319 Projected benefit obligation in excess of plan assets (2,413) (1,860) Unrecognized net gain (3,540) (4,556) Prior service cost not yet recognized in net periodic pension cost 3,543 3,925 Remaining net transition obligation at adoption date January 1, 1987 2,002 2,288 Accrued pension liability recognized in the balance sheet $ (408) $ (203) The projected long-term rate of return on plan assets used in determining pension cost was 8.0% for the years 1994 and 1993. A discount rate of 8.0% in 1994 and 7.0% in 1993 and future compensation increases of 5.0% in 1994 and 4.75% in 1993 were used to calculate the projected benefit obligations for 1994 and 1993. SAVINGS PLAN The Company sponsors a 401(k) qualified, defined contribution savings plan which allows participants to contribute up to 15% of pre-tax compensation. The Company matches fifty cents for each dollar contributed by the employee up to a maximum Company match of 3% of the employees' compensation. Company contributions were $678,000, $606,000 and $561,000 for the years 1994, 1993, and 1992, respectively. 66 OTHER POSTRETIREMENT PLANS The Company provides substantially all active employees medical, dental and vision benefits through a self-insured plan. Employees retiring at or after age 58 with 10 or more years of service are offered, along with their spouses and dependents, continued participation in the plan. Prior to 1993 the Company's share of the costs of this plan were recorded as expense as they were paid. Retired employees are also provided with a $5,000 life insurance benefit. In 1993 the Company adopted SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" which requires that the costs of postretirement benefits be accrued during the employees' years of active service. The Commission has issued a decision which authorizes rate recovery of tax deductible funding for postretirement benefits and permits recording of a regulatory asset for the portion of costs that will be recoverable in future rates. Net postretirement benefit cost for the years ending December 31, 1994 and 1993 included the following components: IN THOUSANDS 1994 1993 Service cost - benefits earned $120 $ 85 Interest cost on accumulated postretirement benefit obligation 326 384 Actual return on plan assets (4) Net amortization of transition obligation 228 248 Net periodic postretirement benefit cost $670 $717 Postretirement benefit expense recorded in 1994 and 1993 was $481,000 and $480,000, respectively. The remaining $426,000 which is recoverable through future customer rates, was recorded as a regulatory asset. The Company intends to make annual contributions to the plan up to the amount deductible for tax purposes. Plan assets are invested in a balanced mutual fund, short-term money market instruments and commercial paper. The following table sets forth the plan's funded status and the plan's accrued liability as of December 31, 1994 and 1993: IN THOUSANDS 1994 1993 Accumulated postretirement benefit obligation: Retirees $(2,882) $(2,850) Other fully eligible participants (366) (657) Other active participants (1,150) (1,542) Total (4,398) (5,049) Plan assets at fair value 172 215 Accumulated postretirement benefit obligation in excess of plan assets (4,226) (4,834) Unrecognized net gain (668) (119) Remaining unrecognized transition obligation 4,468 4,716 Net postretirement benefit liability included in current liabilities $ (426) $ (237) 67 For 1994 measurement purposes, an 8% annual rate of increase in the per capita cost of covered benefits was assumed; the rate was assumed to decrease gradually to 5% in the year 2000 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1994, by $527,000 and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for the year ended December 31, 1994, by $77,000. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 8% at December 31, 1994 and 7% at December 31, 1993. The long-term rate of return on plan assets was 8% for 1994 and 1993. NOTE 7 - 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 to estimate the fair value. CASH EQUIVALENTS The carrying amount of cash equivalents approximates fair value because of the short term maturity of the instruments. FIRST MORTGAGE BONDS The fair value of the Company's first mortgage bonds is estimated at $126,584,000 as of December 31,1994, and $133,415,000 as of December 31, 1993, using a discounted cash flow analysis, based on the current rates available to the Company for debt of similar maturities. ADVANCES FOR CONSTRUCTION The fair value of advances for construction contracts is estimated at $21,000,000 as of December 31, 1994, and $22,000,000 as of December 31, 1993, based on data provided by brokers. NOTE 8 - QUARTERLY FINANCIAL AND COMMON STOCK MARKET DATA (unaudited) The Company's common stock has traded on the New York Stock Exchange since April 8, 1994, under the symbol "CWT". Prior to April 8, 1994, the common stock was traded in the over-the-counter market and quoted in the NASDAQ National Market System under the symbol "CWTR". There were approximately 6,000 holders of common stock at December 31, 1994. Quarterly dividends have been paid on common stock for 200 consecutive quarters and the quarterly rate has been increased during each year since 1968. The 1994 and 1993 quarterly range of common stock market prices was supplied by The New York Stock Exchange since April 8, 1994, and by NASDAQ for earlier periods. 68 1994 (In Thousands, except per share amounts) first second third fourth Operating revenue $30,579 $40,147 $50,303 $36,242 Net operating income 4,164 6,892 8,730 5,719 Net income 1,395 4,070 5,857 3,086 Earnings per share .24 .71 1.02 .49 Common stock market price range: High 41 36-3/4 36 33-1/8 Low 34-1/4 33-3/4 32-7/8 29-3/8 Dividends paid .49-1/2 .49-1/2 .49-1/2 .49-1/2 1993 first second third fourth Operating revenue $27,833 $40,504 $47,431 $35,948 Net operating income 4,116 7,747 9,377 6,615 Net income 979 4,689 6,221 3,612 Earnings per share .17 .82 1.09 .62 Common stock market price range: High 37-1/4 36-3/4 40-1/2 41-1/4 Low 32-1/2 32-1/4 33-1/2 37-1/2 Dividends paid .48 .48 .48 .48 69 EX-27 4
UT YEAR DEC-31-1994 DEC-31-1994 PER-BOOK 407895000 0 27399000 4799000 24135000 464228000 42800000 0 101647000 144447000 0 3475000 128944000 7000000 0 0 0 0 0 0 180362000 464228000 157271000 9600000 122166000 131766000 25505000 287000 25792000 11384000 14408000 153000 14255000 11548000 10557000 25491000 2.44 0
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