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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .............to....................
Commission file No. 1-13883
CALIFORNIA WATER SERVICE GROUP
(Exact name of registrant as specified in its charter)
Delaware 77-0448994
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(State of Incorporation) (I.R.S. Employer Identification No.)
1720 North First Street, San Jose, California 95112
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(Address of Principal Executive Offices) (Zip Code)
(408) 367-8200
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: Name of Each Exchange on Which Registered:
Common Stock, $0.01 Par Value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes _X_ No ___
The aggregate market value of the common stock held by non-affiliates of the
Registrant was $427 million on June 30, 2003, the last business day of the
registrant's most recently completed second fiscal quarter. The valuation is
based on the closing price of the registrant's common stock as traded on the New
York Stock Exchange.
Common stock outstanding at March 4, 2004 - 16,932,046 shares.
EXHIBIT INDEX
THE EXHIBIT INDEX TO THIS FORM 10-K IS ON PAGE 28
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of Registrant's Annual Report to Stockholders for the
calendar year ended December 31, 2003 (2003 Annual Report) are incorporated by
reference in Part I (Item 1and 2) and Part II (Items 5, 6, 7, 7A and 8).
Designated portions of the Registrant's Proxy Statement (Proxy Statement)
relating to the 2004 annual meeting of stockholders are incorporated by
reference in Part III (Items 10, 11, 12 and 14).
2
TABLE OF CONTENTS
Page
PART I
Item 1. Business ............................................................... 5
Forward Looking Statements ............................................. 5
General Development of Business ........................................ 5
Financial Information about Industry Segments .......................... 7
Narrative Description of Business ...................................... 7
Geographical Service Areas and Number of Customers at Year-end ......... 8
Rates and Regulation ...................................................10
Water Supply ...........................................................10
Nonregulated Operations ................................................13
Utility Plant Construction Program .....................................14
Sale of Surplus Real Properties ........................................15
California Energy Situation ............................................15
Security at Company Facilities .........................................15
Quality of Water Supplies ..............................................15
Competition and Condemnation ...........................................16
Environmental Matters ..................................................16
Human Resources ........................................................17
Financial Information about Foreign and Domestic Operations and
Export Sales .......................................................17
Item 2. Properties .............................................................17
Item 3. Legal Proceedings ......................................................18
Item 4. Submission of Matters to a Vote of Security Holders ....................19
Executive Officers of the Registrant ...................................20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ..22
Item 6. Selected Financial Data ................................................22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............22
Item 8. Financial Statements and Supplementary Data ............................22
3
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .................................................22
Item 9A. Controls and Procedures ................................................23
PART III
Item 10. Directors and Executive Officers of the Registrant .....................24
Item 11. Executive Compensation .................................................24
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters ...........................24
Item 13. Certain Relationships and Related Transactions .........................24
Item 14. Principal Accountant Fees and Services .................................24
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......25
Signatures ..............................................................................26
Exhibit Index ...........................................................................28
4
PART I
Item 1 Business.
Forward Looking Statements
This annual report, including all documents incorporated by
reference, contains forward-looking statements within the meaning
established by the Private Securities Litigation Reform Act of
1995 (Act). The forward-looking statements are intended to qualify
under provisions of the federal securities laws for "safe harbor"
treatment established by the Act. Forward-looking statements are
based on currently available information, expectations, estimates,
assumptions and projections, and management's judgment about the
Company, the water utility industry and general economic
conditions. Such words as expects, intends, plans, believes,
estimates, assumes, anticipates, projects, predicts, forecasts or
variations of such words or similar expressions are intended to
identify forward-looking statements. The forward-looking
statements are not guarantees of future performance. They are
subject to uncertainty and changes in circumstances. Actual
results may vary materially from what is contained in a
forward-looking statement. Factors that may cause a result
different than expected or anticipated include: governmental and
regulatory commissions' decisions; changes in regulatory
commissions' policies and procedures; the timeliness of regulatory
commissions' actions concerning rate relief; new legislation;
electric power interruptions; increases in suppliers' prices and
the availability of supplies including water and power;
fluctuations in interest rates; changes in environmental
compliance and water quality requirements; acquisitions and our
ability to successfully integrate acquired companies; the ability
to successfully implement business plans; changes in customer
water use patterns; the impact of weather on water sales and
operating results; access to sufficient capital on satisfactory
terms; civil disturbances or terrorist threats or acts, or
apprehension about the possible future occurrences of acts of this
type; the involvement of the United States in war or other
hostilities; restrictive covenants in or changes to the credit
ratings on our current or future debt that could increase our
financing costs or affect our ability to borrow, make payments on
debt or pay dividends; and, other risks and unforeseen events.
When considering forward-looking statements, you should keep in
mind the cautionary statements included in this paragraph. We
assume no obligation to provide public updates of forward-looking
statements.
a. General Development of Business
California Water Service Group is a holding company incorporated
in Delaware with five operating subsidiaries: California Water
Service Company (Cal Water), CWS Utility Services (Utility
Services), New Mexico Water Service Company (New Mexico Water),
Washington Water Service Company (Washington Water) and Hawaii
Water Service Company, Inc. (Hawaii Water). Cal Water, New Mexico
Water, Washington Water and Hawaii Water are regulated public
utilities. The regulated utility entities also provide some
non-regulated services. Utility Services provides non-regulated
services to private companies and municipalities.
Cal Water, which began operation in 1926, is a public utility
supplying water service to 446,000 customers in 75 California
communities through 25 separate water systems or districts. Cal
Water's 24 regulated systems, which are subject to regulation by
the California Public Utilities Commission (CPUC), serve 439,900
customers. An additional 6,100 customers receive service through a
long-term lease of the City of Hawthorne system by Cal Water,
which is not subject to CPUC regulation. Cal Water accounts for
96% of the total customers and 96% of the total operating revenue.
Washington Water started operations in 1999 through the
acquisition of two water companies. It provides domestic water
service to 14,700 customers in the Tacoma and Olympia areas.
Washington Water's utility operations are regulated by the
Washington Utilities and Transportation Commission. Washington
Water accounts for 3% of the total customers and 2% of the total
operating revenue.
5
New Mexico Water began providing non-regulated meter reading
services in 2000, and assumed regulated operations in July 2002
with the purchase of the assets of Rio Grande Utility Corporation.
New Mexico Water provides service to 2,400 water and 1,700
wastewater customers south of Albuquerque, New Mexico. Its
regulated operations are subject to the jurisdiction of the New
Mexico Public Regulation Commission. New Mexico Water accounts for
1% of the total customers and 1% of the total operating revenue
Hawaii Water was formed in May 2003 with the acquisition of
Kaanapali Water Corporation. Hawaii Water provides water service
to 500 customers on the island of Maui, including several large
resorts and condominium complexes. Its regulated operations are
subject to the jurisdiction of the Hawaii Public Utilities
Commission. Hawaii Water accounts for less than 1% of the total
customers and 1% of the total operating revenue.
Utility Services has only non-regulated activities. Included in
Utility Services operations is a long-term lease agreement with
the City of Commerce which serves approximately 1,100 customers.
Non-regulated activities are primarily contracted in Utility
Services and include contracting with other private companies and
municipalities to operate water systems and provide meter reading
and billing services. Other non-regulated activities include
leasing communication antenna sites, operating recycled water
systems, providing brokerage services for water rights, providing
lab services and selling non-utility property. Due to the
different mix of services we provide, customers are not tracked
for non-regulated activities. Excluding sales of non-operating
property, non-regulated activities comprised 6% of the total net
income in 2003.
The regulatory entities governing our regulated operations are
referred to as the Commissions in this report. Rates and
operations for regulated customers are subject to the jurisdiction
of the respective state's regulatory commission. The Commissions
require that water and wastewater rates for each regulated
district be independently determined. The Commissions are expected
to authorize rates sufficient to recover normal operating expenses
and allow the utility to earn a fair and reasonable return on
capital. Rates for the City of Hawthorne and City of Commerce
water systems are established in accordance with an operating
agreement and are subject to ratification by the respective city
council. Fees for other non-regulated activities are based on
contracts negotiated between the parties.
Our mailing address and contact information are:
California Water Service Group
1720 North First Street
San Jose, California 95112-4598
telephone number: 408-367-8200
www.calwatergroup.com
Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to these reports are
available free of charge through our website. We make these
reports available on our website on the same day they appear on
the SEC's website.
During the year ended December 31, 2003, there were no significant
changes in the kind of products produced or services we rendered
or those provided by our operating subsidiaries, or in our markets
or methods of distribution.
6
b. Financial Information about Industry Segments
We operate primarily in one business segment, the supply and
distribution of water and providing water-related utility
services.
c. Narrative Description of Business
California Water Service Group is the sole shareholder of the five
operating subsidiaries: California Water Service Company, New
Mexico Water Service Company, Washington Water Service Company,
Hawaii Water Service Company, Inc. and CWS Utility Services.
We conduct business through our operating subsidiaries. Our
business consists of the production, purchase, storage,
purification, testing, distribution and sale of water for
domestic, industrial, public and irrigation uses, and for fire
protection. We also provide water-related services under
agreements with municipalities and other private companies which
are non-regulated. The non-regulated services include full water
system operation, and billing and meter reading services.
Nonregulated operations also include the lease of communication
antenna sites, lab services and water rights brokerage. Our
earnings may be significantly enhanced by the sale of non-utility,
surplus real property.
The operating results from the water business fluctuate according
to the demand for water which is often influenced by seasonal
conditions, such as summer temperatures or the amount and timing
of precipitation in our service areas. Our revenue, expenses and
income are affected by changes in water sales. Costs, such as
payroll and benefits, depreciation, interest rates on long-term
debt and property taxes are more predictable, remain fairly
constant, and are not significantly impacted by variations in the
amount of water sold. As a result, earnings are highest in the
high use, warm weather summer months and lowest in the cool winter
months when most rainfall takes place in our service territories.
We distribute water in accordance with accepted water utility
methods. Where applicable, we hold franchises and permits in the
cities and communities where we operate. The franchises and
permits allow us to operate and maintain facilities in public
streets and right of ways as necessary.
We operate the City of Hawthorne and the City of Commerce water
systems under lease agreements. In accordance with the lease
agreements, we receive all revenue from operating the systems and
we are responsible for paying the operating costs. Under other
contract arrangements, we operate municipally owned water systems,
privately owned water systems and recycled water distribution
systems, but we are not responsible for all operating costs. These
contracts are fee per service, fixed-fee or cost-plus contracts.
We also provide billing and customer services to a number of
municipalities.
We intend to continue exploring opportunities to expand our
regulated and nonregulated businesses in the western United
States. The opportunities could include system acquisitions, lease
arrangements similar to the City of Hawthorne contract, full
service system operation and maintenance agreements, meter reading
and billing contracts and other utility related services. We
believe that a holding company structure facilitates providing
non-regulated utility services, which are not subject to
Commission jurisdiction.
7
Geographical Service Areas and Number of Customers at Year-end
Our principal markets are users of water within our service areas. Our
geographical service areas or districts are regulated. In addition,
City of Hawthorne and City of Commerce are included due to similarities
in structure and risk of operations. The approximate number of
customers served in each area are listed below:
8
Regulated Customers, City of Hawthorne and City of Commerce Customers at
December 31, 2003
SAN FRANCISCO BAY AREA
Mid-Peninsula (serving San Mateo and San Carlos) 36,100
South San Francisco (including Colma and Broadmoor) 16,600
Bear Gulch (serving Menlo Park, Atherton, Woodside
and Portola Valley) 17,600
Los Altos (including portions of Cupertino, Los Altos Hills,
Mountain View and Sunnyvale) 18,400
Livermore 17,600
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106,300
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SACRAMENTO VALLEY
Chico (including Hamilton City) 25,200
Oroville 3,500
Marysville 3,800
Dixon 2,900
Willows 2,300
Redwood Valley (Lucerne, Duncans Mills, Guerneville, Dillon
Beach, portion of Santa Rosa) 1,900
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39,600
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SALINAS VALLEY
Salinas 27,700
King City 2,300
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30,000
-------
SAN JOAQUIN VALLEY
Bakersfield 60,900
Stockton 42,000
Visalia 33,300
Selma 5,600
Kern River Valley (Bodfish, Kernville, Lakeland, Mountain
Shadows, Onyx, Squirrel Valley, South Lake and Wofford Heights) 4,200
Antelope Valley (Fremont Valley, Lake Hughes, Lancaster and
Leona Valley) 1,300
-------
147,300
-------
LOS ANGELES AREA
East Los Angeles (including portions of
the cities of Commerce and Montebello) 27,600
Hermosa Redondo (serving Hermosa Beach,
Redondo Beach and a portion of Torrance) 25,900
Dominguez (Carson and portions of Compton, Harbor City,
Long Beach, Los Angeles and Torrance) 33,400
Palos Verdes (including Palos Verdes Estates, Rancho Palos Verdes,
Rolling Hills Estates and Rolling Hills) 23,900
Westlake (a portion of Thousand Oaks) 7,000
Hawthorne (leased municipal system) 6,100
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123,900
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CALIFORNIA TOTAL 447,100
NEW MEXICO 4,100
HAWAII 500
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WASHINGTON 14,700
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COMPANY TOTAL 466,400
9
Rates and Regulation
Our water utility rates and service for the regulated business are
subject to the jurisdiction of the state regulatory commissions. The
Commissions' decisions and the timing of those decisions can have a
significant impact on our operations and earnings.
Since our 24 California regulated operating districts are not
physically integrated, rates are set independently for each district as
required by the CPUC. General office (headquarters) expenses and plant
investments are considered separately and allocated ratably to the
operating districts.
General and Step Rate Increases
General rate case (GRC) applications in California address district and
general office operating costs and capital requirements for a
forward-looking three-year period. GRC decisions typically authorize an
immediate rate increase and annual step rate increases for the
three-year cycle. Step rate increases are generally effective at the
start of each calendar year, and are designed to maintain the return on
equity (ROE) authorized in the initial decision in succeeding years.
Effective January 1, 2003, we are required to file a GRC for each
operating district every three years. Cal Water's GRC applications are
normally submitted in July of each year. According to the CPUC's
processing time line, a final decision should be expected about 12
months after the filings are accepted by the CPUC. During 2003, we
received decisions for our 2001 GRC applications in September, 26
months after they were submitted. We expect to return to a more normal
cycle for the 2004 filings. The 2002 GRC was re-filed in January 2003
and approval was received for interim rate increases for inflation and
establishment of an effective date of October 2003. Except for the
interim rate increases, GRC filings initiated in 2002 and 2003 are
pending as of the date of this report.
Because districts are on different three-year GRC rate case cycles, the
number of customers affected by GRC filings varies from year to year.
Water rates for our Washington Water and New Mexico Water regulated
operations are set based on historic 12-month data. We are allowed to
submit GRC applications annually. Water rates for Hawaii Water are set
based on a forward-looking methodology and are allowed to be filed
annually. In these states, regulatory procedures do not provide for
step rate increases or offset increases.
Offsettable Expenses and Balancing Accounts
In California, we charge to expense increases in purchased water,
purchased power and pump taxes as they are incurred. Expenses for these
categories above levels included in prior GRC decisions are tracked in
off-line expense balancing or memorandum accounts. The cost increases
are referred to as "offsetable expenses". When the CPUC authorizes a
rate increase to recover the costs tracked in expense balancing or
memorandum accounts, the rate increase is referred to as an offset rate
increase. We do not record revenue related to the balancing accounts
until authorized by the CPUC, and then only as the increased costs are
included in customers' monthly billings. Currently, recovery of
balancing and memorandum accounts is subject to limitation based on a
review of district earnings for the past calendar year. If recorded
return on net utility plant (rate base) exceeds the rate authorized by
the Commission, recovery of the balancing account balance is adjusted
by the amount of earnings above the authorized return.
See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- RATES AND REGULATIONS" section
for more information on rates and regulation.
Water Supply
Cal Water obtains its water supply from wells, surface runoff or
diversion, and by purchase from public agencies and other wholesale
suppliers. Our supply has been adequate to meet customer demand;
however, during periods of drought some of our districts have
experienced mandatory water rationing. California's rainy season
usually begins in November and continues through March with December,
January and
10
February historically recording the most rainfall. During winter
months, reservoirs and underground aquifers are replenished by
rainfall. Snow accumulated in the mountains provides an additional
water source when spring and summer temperatures melt the snowpack
producing runoff into streams and reservoirs, and also replenishing
underground aquifers.
Washington and Hawaii receive rain in all seasons with the majority
falling during winter months. Washington Water and Hawaii Water draw
all their water supply by pumping from wells.
New Mexico Water's normal rainfall occurs in all seasons, but is
heaviest in the summer monsoon season. New Mexico Water pumps all of
its water supply from wells based on its water rights.
Our water business is seasonal in nature and weather conditions can
have a pronounced effect on customer usage and thus our operating
revenues and net income. Customer demand for water generally is lower
during the normally cooler and rainy winter months. Demand increases in
the spring when warmer weather returns and the rains end, and customers
use more water for outdoor purposes, such as landscape irrigation. Warm
temperatures during the generally dry summer months result in increased
demand. Water usage declines during the fall as temperatures decrease
and the rainy season begins.
During years in which precipitation is especially heavy or extends
beyond the spring into the early summer, customer demand can decrease
from historic normal levels, generally due to reduced outdoor water
usage. Likewise, an early start to the rainy season during the fall can
cause a decline in customer usage and have a negative impact on
revenue. When summer temperatures are cooler than normal, water usage
is generally lower and can result in us receiving lower revenue and a
reduction in our earnings. A warmer than normal summer can result in
higher customer usage and an increase in our revenue.
During years of less than normal rainfall, customer demand can increase
as outdoor water usage continues into the fall and winter. When
rainfall is below average for consecutive years, drought conditions can
develop and certain customers may be required to reduce consumption to
preserve available supply. As an example, from 1987 to 1993 California
experienced a six-year period when rainfall was annually below historic
average. The drought period ended with the winter of 1992-93. During
that period, some of our districts issued water-rationing requirements
to their customers. In certain districts, penalties were assessed on
customers who exceeded monthly allotments which was approved by the
CPUC. During past drought periods, the CPUC has allowed modifications
to our customer billings that provided us a means to recover a portion
of revenue that was deemed lost due to conservation measures.
As noted above, Washington Water, New Mexico Water and Hawaii Water
obtain their entire water supply from wells. Historically, about half
of Cal Water's water supply is purchased from wholesale suppliers with
the balance pumped from wells. During 2003, approximately 49 percent of
the Cal Water supply was obtained from wells, 49 percent was purchased
from wholesale suppliers and 2 percent was obtained from surface
supplies. Well water is generally less expensive and Cal Water strives
to maximize the use of its well sources in districts where there is an
option between well or purchased supply sources.
We have five California water treatment plants in our Bakersfield, Bear
Gulch, Kernville, Oroville and Redwood Valley districts. A new plant
was put into service during 2003 in Bakersfield, with a capacity of 20
million gallons per day. Water for operation of the plant is drawn from
the Kern River under a long-term contract with the City of Bakersfield.
We removed from service the existing, smaller Bakersfield treatment
plant when the new plant became fully functional. The other four plants
have a capacity of 13 million gallons per day.
During 2003, we delivered 132 billion gallons of water to our
customers, approximately the same amount as in 2002. Our 2003 average
daily water production was 361 million gallons, while the maximum
single day production was 661 million gallons. By comparison, in 2002
our average daily water production was 352 million gallons and the
maximum single day production was 647 million gallons.
11
The following table shows the quantity of water we purchased and the
percentage of purchased water to total water production in each
California operating district during 2003.
(MG)
Water
Production Supply
District Purchased Purchased Source of Purchased Supply
- -------- --------- --------- --------------------------
SAN FRANCISCO BAY AREA
Mid-Peninsula 5,990 100% San Francisco Water Department
South San Francisco 3,277 100% San Francisco Water Department
Bear Gulch 4,089 91% San Francisco Water Department
Los Altos 3,360 70% Santa Clara Valley Water District
Livermore 2,789 72% Alameda County Flood Control and Water
Conservation District
SACRAMENTO VALLEY
Oroville 984 93% Pacific Gas and Electric Co. and County
of Butte
Redwood Valley 154 74% County of Lake
SAN JOAQUIN VALLEY
Antelope/Kern 92 12% Antelope Valley East Kern Water District
Bakersfield 5,085 20% Kern County Water Agency and City of
Bakersfield
Stockton 6,557 61% Stockton-East Water District
LOS ANGELES AREA
East Los Angeles 4,966 74% Central Basin Municipal Water District
Dominguez 10,777 80% West Basin and Central Basin Municipal
Water Districts
City of Commerce 95 27% West Basin Municipal Water District
Hawthorne 1,597 100% West Basin Municipal Water District
Hermosa Redondo 3,810 80% West Basin Municipal Water District
Palos Verdes 6,725 100% West Basin Municipal Water District
Westlake 2,918 100% Calleguas Municipal Water District
MG = million gallons
The balance of our required supply for the above districts is obtained
principally from wells. In our Bear Gulch district, we obtain a portion
of the water supply from surface runoff from the local watershed. In
our Oroville and Redwood Valley districts, the water we purchase is
from a surface supply. The surface sources are processed through our
water treatment plants before being delivered to the distribution
system. In our Bakersfield district, we purchase surface supply then
process the water through our treatment plant. In addition, we also
purchase treated water as a component to our water supply.
The Chico, Marysville, Dixon and Willows districts in the Sacramento
Valley, the Salinas and King City districts in the Salinas Valley, and
the Selma and Visalia districts in the San Joaquin Valley obtain their
entire supply from wells.
Our purchases for the Los Altos, Livermore, Oroville, Redwood Valley,
Stockton and Bakersfield districts are pursuant to long-term contracts
expiring on various dates after 2011.
12
The water supplies we purchase for the Dominguez, East Los Angeles,
Hermosa-Redondo, Palos Verdes, and Westlake districts, the City of
Hawthorne system and the City of Commerce system are provided by public
agencies pursuant to a statutory obligation of continued
non-preferential service to purveyors within the agencies' boundaries.
Purchases for the South San Francisco, Mid-Peninsula and Bear Gulch
districts are in accordance with long-term contracts we have with the
San Francisco Water Department (SFWD) expiring on June 30, 2009.
We anticipate that we will be able to renew each of the water supply
contracts as they expire. The price of wholesale water purchases is
subject to pricing changes imposed by the various wholesale suppliers.
Price changes are generally beyond our control. We expect that we will
be allowed to recover the wholesale water suppliers' rate increases in
customer future rates, although recovery is subject to a decision by
the CPUC.
Shown below are wholesaler price rates and increases that became
effective for our operating districts in 2003, and estimated wholesaler
price rates changes for 2004.
2003 2004
Effective Percent Effective Percent
District Month Change Unit Cost Month Change Unit Cost
-------- ----- ------ --------- ----- ------ ---------
Antelope/Kern July 29.4% $220/af July 0.0% $220/af
Bakersfield * July -16.1% 115/af July 18.3% 136/af
Bear Gulch July 25.0% 1.10/ccf July 9.1% 1.20/ccf
City of Commerce Jan -3.4% 510/af Jan 2.0% 520/af
Dominguez Jan -3.4% 510/af Jan. 2.0% 520/af
East Los Angeles July -4.4% 457/af July 2.2% 467/af
Hawthorne Jan -3.4% 510/af Jan. 2.0% 520/af
Hermosa Redondo Jan -3.4% 510/af Jan. 2.0% 520/af
Livermore Jan. 2.5% 1.290/ccf Jan. 0.0% 1.290/ccf
Los Altos July 9.5% 460/af July 7.6% 495/af
Oroville Jan 0.0% 69,200/yr Jan. 8.4% 75,000/yr
Palos Verdes Jan -3.4% 510/af Jan. 2.0% 520/af
Mid Peninsula July 25.0% 1.10/ccf July 9.1% 1.20/ccf
Redwood Valley May 5.0% 43.97/af May 0.0% 43.97/af
So. San Francisco July 25.0% 1.10/ccf July 9.1% 1.20/ccf
Stockton April 46.6% 342,146/mo April 12.8% 385,800/mo
Westlake Jan. 0.7% 564/af Jan. 1.8% 574/af
af = acre foot; ccf = hundred cubic feet; yr = fixed annual cost; mo =
fixed monthly cost * treated water
See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - WATER SUPPLY" concerning adequacy
of supplies.
We continue to work with all local suppliers and agencies responsible
for water supply to insure we have adequate, long-term supply for each
system.
Nonregulated Operations
Our nonregulated operations include full service operation and
maintenance of water systems for cities and private owners, operation
of recycled water systems, utility billing services, laboratory
services, water rights brokering, sales of surplus properties and
leases of antenna sites.
Nonregulated revenue that we receive from water system operations is
generally determined on a fee per customer basis. With the exception of
our agreement for operation of the City of Hawthorne and City of
Commerce water systems, revenue and expenses from nonregulated
operations are accounted for in other
13
income and expense on a pretax basis in the Consolidated Statements of
Income. We include revenue and expenses for the City of Hawthorne and
City of Commerce lease in operating revenue and operating expenses
because we are entitled to retain all customer billings and are
generally responsible for all operating expenses.
We operate municipally owned water systems under contract for the
various cities which collectively contribute less than 5% of total net
income. In Washington, we operate numerous private water systems under
contract arrangements. The City of Hawthorne lease is a 15 year lease
and expires in 2011. The City of Commerce lease is a 15 year lease and
expires in 2018. The terms of other operating agreements range from
one-year to three-year periods with provisions for renewals.
We provide meter reading and customer billing services for several
municipalities in California and in New Mexico for the County of Los
Alamos. We also provide sewer and/or refuse billing services to several
municipalities.
Since February 1996, we have operated the City of Hawthorne water
system under terms of a 15-year agreement. The system, which is located
near our Hermosa-Redondo district, serves about half of Hawthorne's
population. The lease required us to make an up-front $6.5 million
lease payment to the city which we are amortizing over the lease term.
Additionally, we make annual lease payments to the city of $0.1 million
indexed to changes in water rates. Under the lease, we are responsible
for all aspects of system operation and capital improvements, although
title to the system and system improvements reside with the city. At
the end of the lease, the city is required to reimburse us for the
unamortized value of capital improvements we made during the term of
the lease. In exchange, we receive all revenue from the water system,
which was $5.4 million in 2003.
In July 2003, we negotiated an agreement with the City of Commerce to
lease and operate its water system, and are operating under the terms
of the lease. At this time, the lease has not been formally executed by
the parties. The lease requires us to pay $0.8 million per year in
monthly installments and pay $200 dollars per acre foot for water usage
exceeding 2,000 acre feet per year plus a percentage of certain
operational savings that may be realized. Under the lease agreement, we
are responsible for all aspects of the system's operations. The City is
responsible for capital expenditures and title to the system and system
improvements resides with the city. We have risks of operation and
collection of amounts billed to customers. The agreement has a process
to request rate increases for costs outside of our control and other
cost increases. In exchange, we receive all revenue from the system,
which was $0.8 million for the six month period ended December 2003.
During 1997, we signed an agreement with the Rural North Vacaville
Water District near our Dixon district to design and build a water
distribution system. Construction of the system has been completed and
we began operating the system in February 2003 under a contract with
the water district. The new system will initially provide water to
about 300 customers.
We lease antenna sites to telecommunication companies which place
equipment at various sites. Individual lease payments range from $700
to $2,600 dollars per month. The antennas are used in cellular phone
and personal communication applications. We continue to negotiate new
leases for similar uses.
We provide laboratory services to San Jose Water Company and Great Oaks
Water Company and for the systems that we serve under operation and
maintenance agreements, and for numerous small water systems.
Utility Plant Construction
We continually extend, enlarge and replace our facilities as required
to meet increasing demands and to maintain the water systems. We obtain
construction financing from operations, short-term bank borrowings,
advances for construction and contributions in aid of construction that
are funded by developers. The amounts received from these sources are
shown in our "Statements of Cash Flows" in our annual report, which is
incorporated into this document by reference. Advances for construction
are cash
14
deposits from developers for construction of water facilities or water
facilities deeded from developers. The advances are generally
refundable without interest over a period of 40 years by equal annual
payments. Contributions in aid of construction consist of nonrefundable
cash deposits or facilities transferred from developers, primarily for
fire protection and relocation projects. We cannot control the amount
received from developers. This amount fluctuates from year to year as
the level of construction activity carried on by developers varies.
This activity is impacted by the demand for housing, commercial
development and general business conditions, including interest rates.
See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - LIQUIDITY AND CAPITAL RESOURCES"
for additional information.
Sale of Surplus Real Properties
When properties are no longer used and useful for public utility
purposes, we are no longer allowed to earn a return on our investment
in the property in the regulated business. The surplus property may be
transferred out of the regulated operations and can be offered for
sale. Income from the sale of surplus properties depends not only on
changes in operations, but also on local real estate market conditions.
California Energy Situation
Our business uses electrical power primarily to pump water from our
sources and move it through the distribution systems. The California
energy crisis was well publicized. In response to supply shortages,
electric power rates were increased significantly in prior years.
Electricity rates stabilized during 2003 and we received credits from
the electrical power companies. Expenses in electrical power costs are
described in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - RESULTS OF OPERATIONS."
There is still uncertainty about the state's ability to avoid future
rolling electric blackouts, although we did not experience any major
electric blackouts during 2003. We continue to use power as efficiently
as we believe possible and at the lowest cost to our customers. We
maintain backup power systems to continue water service to our
customers if the power companies' supplies are interrupted. Many of our
well sites are equipped with emergency electric generators. The
generators are designed to produce electricity to keep the wells
operating during power outages. Storage tanks also provide customers
with water during blackout periods.
Security at Company Facilities
We have heightened security at our facilities and have taken added
precautions to safeguard our employees and the water we deliver to our
customers. While we do not make public comments about the details of
our security programs, we have been in contact with federal, state and
local law enforcement agencies to coordinate and improve water delivery
systems security. In 2002, Federal legislation was enacted which
resulted in new regulations concerning security of water facilities,
including submitting vulnerability assessment studies to the Federal
Government. The timing of submission of these studies was based on size
of operations. We have submitted the studies that are required and plan
to complete this program in 2004.
Quality of Water Supplies
We maintain operating practices to produce potable water in accordance
with accepted water utility practices. Water entering the distribution
systems from surface sources is treated in compliance with federal and
state Safe Drinking Water Acts (SWDA) standards. Most well supplies are
chlorinated for disinfection. Water samples from each water system are
analyzed on a regular, scheduled basis in compliance with regulatory
requirements. We operate a state certified water quality laboratory at
our San Jose General Office facility that provides testing for most
California operations. Certain tests in California are contracted with
independent certified labs qualified under the Environmental Laboratory
Accreditation Program. Local independent state certified labs provide
water sample testing for the Washington, New Mexico and Hawaii
operations.
15
In recent years, federal and state water quality regulations have
continued to increase water testing requirements. The SDWA continues to
be amended to reflect new public health concerns. We monitor water
quality and upgrade our treatment capabilities to maintain compliance
with the various regulations.
Competition and Condemnation
Our operating companies, Cal Water, Washington Water, New Mexico Water
and Hawaii Water are regulated public utilities providing water service
within filed service areas approved by the Commissions. New Mexico
Water also provides regulated wastewater services. Under state laws, no
privately owned public utility may compete within any service territory
that we already serve without first obtaining a certificate of public
convenience and necessity from the Commission. Issuance of such a
certificate would only be made upon finding that our service is
deficient. To our knowledge, no application to provide service to an
area we serve has been made.
State law provides that whenever a public agency constructs facilities
to extend a utility system into the service area of a privately owned
public utility, such an act constitutes the taking of property and
requires reimbursement to the utility for its loss. State statutes
allow municipalities, water districts and other public agencies to own
and operate water systems. These agencies are empowered to condemn
properties already operated by privately owned public utilities. The
agencies are also authorized to issue bonds, including revenue bonds,
for the purpose of acquiring or constructing water systems. However, if
a public agency were to acquire utility property by eminent domain
action, the utility would be entitled to just compensation for its
loss. To our knowledge, no municipality, water district or other public
agency is contemplating or has any action pending to acquire or condemn
any of our systems.
In recent years, consolidation within the water industry has
accelerated. A number of publicly traded water companies have been
acquired or merged into larger domestic companies. Several acquisitions
of publicly traded companies have also been completed by much larger
foreign companies. We participated in the industry consolidation by
acquiring Dominguez Services Corporation in 2000 and by making other
small acquisitions and pursuing expansion of our nonregulated
operations. We intend to continue pursuit of opportunities to expand
our business in the western United States.
Environmental Matters
Our operations are subject to environmental regulation by various
governmental authorities. Our environmental affairs program is designed
to provide compliance with underground and above ground fuel storage
tank regulations, hazardous materials management plans, hazardous waste
regulations, air quality permitting requirements, wastewater discharge
limitations and employee safety issues related to hazardous materials.
We are actively involved in the formulation of air quality standards
related to water utilities. Also, we actively investigate alternative
technologies for meeting environmental regulations and continuing the
traditional practices of water quality.
16
Human Resources
At year-end 2003, we had 813 employees, including 41 at Washington
Water, 13 at New Mexico Water and 7 at Hawaii Water. We had 802 and 783
employees in 2002 and 2001, respectively. In California, most
non-supervisory employees are represented by the Utility Workers Union
of America, AFL-CIO, except certain engineering and laboratory
employees are represented by the International Federation of
Professional and Technical Engineers, AFL-CIO. At December 31, 2003,
there were 541 union employees. In December 2002, we negotiated
three-year agreements with both unions covering 2003 through 2005. Wage
increases under the new agreements are 1% in 2003, 1.5% in 2004 and 2%
in 2005. Improvements in employee benefit plans were also negotiated.
Employees at Washington Water, New Mexico Water and Hawaii Water do not
belong to unions.
d. Financial Information about Foreign and Domestic Operations and Export
Sales.
We make no export sales.
Item 2. Properties.
Our physical properties consist of offices and water systems to
accomplish the production, storage, purification and distribution of
water. These properties are located in or near our Geographic Service
Areas listed above in Item 1.c. "Narrative Description of the
Business." Our general office, which houses accounting, engineering,
information systems, human resources, purchasing, regulatory, water
quality and executive staffs is located in San Jose, California. All
properties are maintained in good operating condition.
The real properties that we own are held in fee simple title.
Properties owned by Cal Water are subject to the indenture securing
first mortgage bonds of which $27 million remained outstanding at
December 31, 2003. Washington Water has long-term bank loans that are
secured primarily by utility plant. New Mexico Water has outstanding
bank loans which are secured by utility plant.
In Cal Water, we own 620 wells and operate ten leased wells. There were
382 owned storage tanks with a capacity of 247 million gallons, 31
managed storage tanks with a capacity of 29 million gallons and three
reservoirs with a capacity of 220 million gallons. There are 5,200
miles of supply and distribution mains in the various systems.
In Washington Water, we own 300 wells and manage 82 wells. There are
109 owned storage tanks and 28 managed storage tanks with a storage
capacity of 7.1 million gallons. There are 544 miles of supply and
distribution lines.
In New Mexico Water, we own three wells. There are three storage tanks
with a storage capacity of 2.5 million gallons. There are 44 miles of
supply and distribution lines.
In Hawaii Water, we own six wells. There are three storage tanks with a
storage capacity of 4.5 million gallons. There are 40 miles of supply
and distribution lines.
In the leased City of Hawthorne and City of Commerce systems or in
systems that we operate under contract for municipalities or private
companies, title to the various properties is held exclusively by the
municipality or private company.
17
Water supply, security, environmental, condemnation and utility plant
construction items are discussed in Item 1.c, Narrative of the
Business. Utility Plant construction items are also discussed in Item
7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - LIQUIDITY AND CAPITAL RESOURCES."
Item 3. Legal Proceedings.
In 1995, the State of California's Department of Toxic Substances
Control (DTSC) named Cal Water as a potential responsible party for
cleanup of a toxic contamination plume in the Chico groundwater. The
toxic spill occurred when cleaning solvents, which were discharged into
the city's sewer system by local dry cleaners, leaked into the
underground water supply. The DTSC contends that Cal Water's
responsibility stems from its operation of wells in the surrounding
vicinity that caused the contamination plume to spread. While we are
cooperating with the cleanup effort, we deny any responsibility for the
contamination or the resulting cleanup and intend to vigorously resist
any action that may be brought against us. We have negotiated with DTSC
regarding dismissal of Cal Water from the claim in exchange for our
cooperation in the cleanup effort. However, no agreement has been
reached with DTSC regarding dismissal of Cal Water from the DTSC
action. In December 2002, Cal Water was named along with eight other
defendants in a lawsuit filed by DTSC for the cleanup of the plume. The
suit asserts that the defendants are jointly and severally liable for
the estimated cleanup of $8.7 million. We believe that insurance
coverage exists for this claim and that if we were ultimately held
responsible for a portion of the cleanup costs, there would not be a
material adverse effect on our financial position or results of
operations. Our insurance carrier is currently paying the cost of legal
representation in this matter.
In 2003, Cal Water was served with a lawsuit in state court naming it
as one of several defendants for damages alleged to have resulted from
waste oil contamination in the groundwater in the Marysville District.
The suit did not specify a dollar amount. We do not believe that the
complaint alleges any facts under which we may be held liable. The
Court has twice dismissed the complaint on various grounds raised by
us, but the Court has continued to grant the plaintiff leave to amend
the complaint. If necessary, we intend to vigorously defend the suit.
In 2002, the plaintiff in this action brought a suit against Cal Water
in federal court with similar allegations concerning groundwater
contamination. The suit was dismissed; however, the Court did not bar
the plaintiff from filing a state claim. If an assessment were
determined by a court, we believe that our insurance policy will cover
costs related to this matter under the terms of the policy.
In December 2001, Cal Water and several other defendants were served
with a lawsuit by the estate and immediate family members of a deceased
employee of a pipeline construction contractor. The contractor's
employee had worked on various Cal Water projects over a number of
years. The plaintiffs allege that Cal Water and other defendants are
responsible for an asbestos-related disease that is claimed to have
caused the death of the contractor's employee. The complaint seeks
damages in excess of $0.1 million, in addition to unspecified punitive
damages. We have denied responsibility in the case and intend to
vigorously defend ourself against the claim. Pursuant to an indemnity
provision in the contracts between the contractor and us, the
contractor has accepted liability for the claim against us and is
reimbursing our defense costs.
In February 2003, the CPUC's Office of Ratepayer Advocates recommended
that Cal Water be fined up to $9.6 million and refund $0.5 million in
revenue for failing to report two acquisitions as required by the CPUC.
One acquisition was completed prior to adoption of the reporting
requirement by the CPUC; the other was inadvertently not reported. Cal
Water acquired the two water systems, which serve 283 customers, for
approximately $0.1 million. The staff's recommendation does not
challenge the level of service provided or amounts charged for water
service to the customers; it is based solely on the fact that Cal Water
failed to report the acquisitions to the CPUC. On July 10, 2003, the
CPUC issued Resolution W-4390. In this resolution, the CPUC's staff
challenged whether Cal Water was properly authorized to make these two
acquisitions, as a result of the failure to report. The resolution
grants Cal Water's request to consult and work with the CPUC's Water
Division to resolve the matters.
18
Since the CPUC's policy is to encourage large water utilities to
acquire small water systems, we believe that a reasonable resolution
will be reached. At this time, we cannot estimate the costs or the
timing of the resolution of these issues. We do not believe that the
staff's recommendation will be upheld when this matter is considered by
the CPUC. Accordingly, no liability was accrued in the financial
statements.
Periodically, we are involved in other proceedings or litigation
arising in the ordinary course of business. We do not believe that the
ultimate resolution of these matters will materially affect our
financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders in the fourth
quarter of 2003.
19
Executive Officers of the Registrant
Name Positions and Offices with California Water Service Group Age
- ---- --------------------------------------------------------- ---
Robert W. Foy Chairman of the Board since January 1, 1996. A director since 67
(1) 1977. Formerly President and Chief Executive Officer of Pacific
Storage Company, a diversified transportation and
warehousing company serving Stockton, Modesto,
Sacramento, San Jose, Vallejo, and Merced
California, where he had been employed for 32 years.
Peter C. Nelson President and Chief Executive Officer since February 1, 1996. 56
(2) Formerly Vice President, Division Operations (1994-1995) and
Region Vice President (1989-1994), Pacific Gas &
Electric Company, a gas and electric public utility.
Richard D. Nye Vice President, Chief Financial Officer and Treasurer since 49
(1) March 2003. Formerly Acting Chief Financial Officer (2001-2002)
and Vice President of Finance and Administration (1998-2002) of
Cornerstone Propane Partners, L.P., a propane distribution company,
Previously served in various finance management positions with
Frito-Lay, Inc., a snack food company (1989-1998).
Paul G. Ekstrom Corporate Secretary since August 1996; Operations 51
(3) Coordinator, 1993 to 1996; District Manager, Livermore,
1988 to 1993; previously served in various field
management positions since 1979; an employee since
1972.
Calvin L. Breed Controller, Assistant Secretary and Assistant Treasurer since 48
(4) Nov. 1994; previously Treasurer of TCI International, Inc. (1984-1994);
a certified public accountant with Arthur Andersen & Co. (1980-1983)
(1) Holds the same position with California Water Service Company, New Mexico
Water Service Company, Washington Water Service Company, Hawaii Water
Service Company, Inc. and CWS Utility Services
(2) Holds the same position with California Water Service Company and CWS
Utility Services; Chief Executive Officer of New Mexico Water Service
Company, Washington Water Service Company and Hawaii Water Service
Company, Inc.
(3) Vice President, Customer Service with California Water Service Company,
and Corporate Secretary of California Water Service Company, New Mexico
Water Service Company, Washington Water Service Company, Hawaii Water
Service Company, Inc. and CWS Utility Services
(4) Holds the same position with California Water Service Company
Name Positions and Offices with California Water Service Group Age
- ---- --------------------------------------------------------- ---
Francis S. Ferraro Vice President, Regulatory Matters and Corporate Development 54
(1) since May 2001; Vice President, Regulatory Matters, August 1989
to May 2001. Employed by the California Public
Utilities Commission for 16 years, including 1985
through 1989 as an administrative law judge; an
employee since 1989.
20
Name Positions and Offices with California Water Service Group Age
- ---- --------------------------------------------------------- ---
Robert R. Guzzetta Vice President, Engineering and Water Quality since August 1996; 49
(2) Chief Engineer, 1990 to 1996; Assistant Chief Engineer, 1988 to
1990; various engineering department positions since 1977.
Christine L. McFarlane Vice President, Human Resources since August 1996; Director 57
of Human Resources, 1991 to 1996; Assistant Director of
Personnel, 1989 to 1991; an employee since 1969.
Dan L. Stockton Vice President, Information Systems since April 2001; 59
from 1991 to 2001 he served as Chief Operating Officer of
Great Oaks Water Company.
Raymond H. Taylor Vice President, Operations since April 1995; Vice President and 58
Director of Water Quality, 1990 to 1995; Director of Water Quality,
1986 to 1990; an employee since 1982; prior to 1982 an employee of
the United States Environmental Protection Agency.
(1) Also, Vice President, Corporate Development with CWS Utility Services, and
Vice President, Regulatory Matters with New Mexico Water Service Company.
(2) Also, Vice President, Engineering with CWS Utility Services.
Name Positions and Offices with California Water Service Group Age
- ---- --------------------------------------------------------- ---
Michael P. Ireland President since December 1999; previously President of Harbor Water 50
Company, Gig Harbor, Washington from 1985 to 1999.
No officer or director has any family relationship to any other executive
officer or director. No executive officer is appointed for any set term. There
are no agreements or understandings between any executive officer and any other
person pursuant to which he was selected as an executive officer.
21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on the New York Stock exchange under the
symbol "CWT". At December 31, 2003, there were 16,932,046 common shares
and 139,000 preferred shares outstanding. As of December 31, 2003,
there were 4,500 stockholders of record.
Additional information required by this Item is contained in the
section captioned "Quarterly Financial Data" in our 2003 Annual Report
to Stockholders and is incorporated herein by reference. The 2003
Annual Report to Stockholders is included with this report as Exhibit
13.1.
Item 6. Selected Financial Data.
The information required by this Item is contained in the section
captioned "Ten-Year Financial Review" in our 2003 Annual Report to
Stockholders and is incorporated herein by reference. The 2003 Annual
Report to Stockholders is included with this report as Exhibit 13.1.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required by this Item is contained in the section
captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations," in our 2003 Annual Report to Stockholders
and is incorporated herein by reference. The 2003 Annual Report to
Stockholders is included with this report as Exhibit 13.1.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item is contained in the section
captioned "Financial Risk Management" in our 2003 Annual Report to
Stockholders and is incorporated herein by reference. The 2003 Annual
Report to Stockholders is included with this report as Exhibit 13.1.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is contained in the 2003 Annual
Report to Stockholders and is incorporated herein by reference. The
2003 Annual Report to Stockholders is included with this report as
Exhibit 13.1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
22
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision of and
with the participation of our management, including our principal
executive and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of
the end of the period covered by this report, pursuant to Rule
13a-15(e) under the Securities Exchange Act of 1934. Based on their
review of our disclosure controls and procedures, the principal
executive officer and principal financial officer have concluded that
our disclosure controls and procedures are effective in timely alerting
us to material information that is required to be included in periodic
SEC filings.
(b) Changes to Internal controls
There was no change in our internal control over financial
reporting that occurred during the last fiscal quarter of 2003 that has
materially affected, or is reasonably likely to materially affect, such
control.
23
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item as to directors of the Company is
contained in the sections captioned "Board Structure," of the 2004
Proxy Statement, "Proposals of the Board; Proposal No. 1 - Election of
Directors" of the 2004 Proxy Statement, and "Other Matters - Code of
Ethics" of the 2004 Proxy Statement, and is incorporated herein by
reference. Information regarding executive officers is included in a
separate section captioned "Executive Officers of the Registrant"
contained in Part I of this report.
Item 11. Executive Compensation.
The information required by this Item as to directors of the Company is
included under the caption "Director Compensation Arrangements" of the
2004 Proxy Statement and is incorporated herein by reference. The
information required by this Item as to compensation of executive
officers, including officers who are directors, is included under the
caption "Executive Compensation" of the 2004 Proxy Statement and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information required by this Item is contained in the section
captioned "Stock Ownership of Management and Certain Beneficial Owners"
of the 2004 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Cal Water provides laboratory services to a subsidiary of SJW Corp.,
which has ownership of over 5% of the common stock outstanding. The
rates charged are comparable to rates charged to other third parties.
The revenue for 2003 was approximately $0.1 million. The revenue and
income from these activities are not significant to our business.
Item 14. Principal Accountant Fees and Services
The information required by this Item is contained in the section
captioned "Relationship with Independent Auditors" of the 2004 Proxy
Statement and is incorporated herein by reference.
24
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) As part of this Form 10-K, the following documents are being filed:
1. Financial Statements:
Consolidated Balance Sheets as of December 31, 2003 and 2002.
Consolidated Statements of Income for the years ended December 31,
2003, 2002 and 2001.
Consolidated Statements of Common Stockholders' Equity and
Comprehensive Income for the years ended December 31, 2003, 2002
and 2001.
Consolidated Statements of Cash Flows for the years ended December
31, 2003, 2002 and 2001.
Notes to Consolidated Financial Statements, December 31, 2003,
2002 and 2001.
Independent Auditors' Report.
The above financial statements are contained in sections bearing
the same captions in the 2003 Annual Report to Stockholders which
is filed with this Form 10-K and incorporated herein by reference.
Refer to Exhibit 13.1 of this Form 10-K.
3. Exhibits required to be filed by Item 601 of Regulation S-K:
The Exhibit Index on page 28 of this Form 10-K is incorporated
herein by reference.
The exhibits filed as part of this Form 10-K are attached, unless
otherwise indicated. The exhibits listed in the Exhibit Index that
are not filed with this Form 10-K were previously filed with the
Securities and Exchange Commission as indicated and are hereby
incorporated by reference.
(b) Reports on Form 8-K.
Reports were furnished (but not filed) on Form 8-K on October 23,
2003 regarding the results for the third quarter and on January
28, 2004, regarding the results for the 4th quarter and year end
results for 2003. Both reports were furnished under Item 12 and
included condensed statements of income and condensed balance
sheets.
(c) Exhibits required to be filed by Item 601 of Regulation S-K.
Refer to Item (a) 3 above and the Exhibit Index on page 28 of this
Form 10-K.
(d) Additional Financial Statement Schedules.
No filings are required under this Item.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CALIFORNIA WATER SERVICE GROUP
Date: February 25, 2004 By /s/ Peter C. Nelson
PETER C. NELSON,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Date: February 25, 2004 /s/ Robert W. Foy
ROBERT W. FOY
Chairman, Board of Directors
Date: February 25, 2004 /s/ Douglas M. Brown
DOUGLAS M. BROWN
Member, Board of Directors
Date: February 25, 2004 /s/ Edward D. Harris, Jr.
EDWARD D. HARRIS, JR., M.D.
Member, Board of Directors
Date: February 25, 2004 /s/ Bonnie G. Hill
BONNIE G. HILL
Member, Board of Directors
Date: February 25, 2004 /s/ David N. Kennedy
DAVID N. KENNEDY
Member, Board of Directors
Date: February 25, 2004 /s/ Richard P. Magnuson
RICHARD P. MAGNUSON
Member, Board of Directors
Date: February 25, 2004 /s/ Linda R. Meier
LINDA R. MEIER
Member, Board of Directors
Date: February 25, 2004 /s/ Peter C. Nelson
PETER C. NELSON
President and Chief Executive Officer,
Principal Executive Officer
Member, Board of Directors
Date: February 25, 2004 /s/ George A. Vera
GEORGE A. VERA
Member, Board of Directors
26
Date: February 25, 2004 /s/ Richard D. Nye
RICHARD D. NYE
Vice President, Chief Financial
Officer and Treasurer;
Principal Financial Officer
Date: February 25, 2004 /s/ Calvin L. Breed
CALVIN L. BREED
Controller, Assistant Secretary and
Assistant Treasurer;
Principal Accounting Officer
27
(all page references will be updated at filing)
EXHIBIT INDEX
Exhibit
Number
Unless filed with this Form 10-K, the documents listed are incorporated by
reference to the filings referred to:
3. Articles of Incorporation and By-laws:
3.1 Certificate of Incorporation of California Water Service Group
(Filed as Exhibit B of the 1999 California Water Service Group
Proxy Statement)
3.2 Restated By-laws of California Water Service Group as amended on
January 26, 2000 (Exhibit E-2 to Form 8-K filed February 3, 2000)
4. Instruments Defining the Rights of Security Holders of California Water
Service Group, including Indentures:
4.1 Shareholder Rights Plan; an agreement between California Water
Service Group and BankBoston, N.A., rights agent, dated January
28, 1998 (Exhibit 1 to Form 8-A dated February 13, 1998)
4.2 Certificate of Designations regarding Series D Participating
Preferred Stock, as filed with Delaware Secretary of State on
September 16, 1999 (relating to Shareholder Rights Plan)
4.3 Thirty-fourth Supplemental Indenture dated as of November 1,
1990, covering First Mortgage 9.86% Bonds, Series CC. (Exhibit 4
to Form 10-K for fiscal year 1990)
4.4 Thirty-sixth Supplemental Indenture dated as of May 1, 1993,
covering First Mortgage 7.90% Bonds Series EE (Exhibit 4 to Form
10-Q dated June 30, 1993)
4.5 Thirty-seventh Supplemental Indenture dated as of September 1,
1993, covering First Mortgage 6.95% Bonds, Series FF (Exhibit 4
to Form 10-Q dated September 30, 1993)
4.6 Thirty-eighth Supplemental Indenture dated as of October 15,
1993, covering First Mortgage 6.98% Bonds, Series GG (Exhibit 4
to Form 10-K for fiscal year 1994)
4.7 Note Agreement dated August 15, 1995, pertaining to issuance of
$20,000,000, 7.28% Series A Unsecured Senior Notes, due November
1, 2025 (Exhibit 4 to Form 10-Q dated September 30, 1995)
28
4.8 Note Agreement dated March 1, 1999, pertaining to issuance of
$20,000,000, 6.77% Series B Unsecured Senior Notes, due November
1, 2028 (Exhibit 4.1 to Form 10-K dated December 31, 1999)
4.9 First Supplement dated October 1, 2000, to Note Agreement of
March 1, 1999, pertaining to issuance of $20,000,000, 8.15%
Series C Unsecured Senior Notes, due November 1, 2030 (Exhibit
4.10 to Form 10-K dated December 31, 2000)
4.10 Second Supplement dated September 1, 2001, to Note Agreement of
March 1, 1999, pertaining to issuance of $20,000,000, 7.13%
Series D Unsecured Senior Notes, due November 1, 2031 (Exhibit
4.1 to Form 10-Q dated September 30, 2002)
4.11 Third Supplement dated May 1, 2002, to Note Agreement of March 1,
1999, pertaining to issuance of $20,000,000, 7.11% Series E
Unsecured Senior Notes, due November 1, 2032 (Exhibit 4.1 to Form
10-Q dated June 30, 2002)
4.12 Fourth Supplement dated August 15, 2002, to Note Agreement of
March 1, 1999, Note Agreement dated August 15, 2002, pertaining
to issuance of $20,000,000, 5.90% Series F Unsecured Senior
Notes, due November 1, 2017 (Exhibit 4.14 to Form 10-K dated
December 31, 2002)
4.13 Fifth Supplement dated November 1, 2002, to Note Agreement of
March 1, 1999, pertaining to issuance of $20,000,000, 5.29%
Series G Unsecured Senior Notes, due November 1, 2022 (Exhibit
4.15 to Form 10-K dated December 31, 2002)
4.14 Sixth Supplement dated December 1, 2002, to Note Agreement of
March 1, 1999, pertaining to issuance of $20,000,000, 5.29%
Series H Unsecured Senior Notes, due December 1, 2022 (Exhibit 16
to Form 10-K dated December 31, 2002)
4.15 Ninth Supplement dated February 15, 2003, to Note Agreement of
March 1, 1999, pertaining to issuance of $10,000,000, 4.58%
Series K Unsecured Senior Notes, due June 30, 2010 (Exhibit 4.17
to Form 10-K dated December 31, 2002)
4.16 Tenth Supplement dated February 15, 2003, to Note Agreement of
March 1, 1999, pertaining to issuance of $10,000,000, 5.48%
Series L Unsecured Senior Notes, due March 18, 2018 (Exhibit 4.18
to Form 10-K dated December 31, 2002)
4.17 Thirteenth Supplemental Trust Indenture whereby California Water
Service Company became the successor to Dominguez Water
Corporation in the original trust indenture for Dominguez Water
Corporation dated August 1, 1954 (Exhibit 4.11 to Form 10-K dated
December 31, 2000)
29
4.18 Eleventh Supplemental Trust Indenture dated as of December 8,
1992, covering First Mortgage 8.86% Bonds, Series J (Exhibit 10.2
to Form 10-K as of December 31, 1997, and filed by Dominguez
Services Corporation on March 31, 1998)
4.19 Twelfth Supplemental Indenture dated as of December 1, 1997,
covering First Mortgage 6.94% Bonds, Series K due January 1, 2023
(Exhibit 10.2 to Form 10-K dated December 31, 1997, and filed by
Dominguez Services Corporation on March 31, 1998)
4.20 Seventh Supplement dated May 1, 2003, to Note Agreement of March
1, 1999, pertaining to issuance of $10,000,000, 5.54% Series I
Unsecured Senior Notes, due May 1, 2023 (Exhibit 4.22 to Form
10-Q dated March 31, 2003)
4.21 Eighth Supplement dated May 1, 2003, to Note Agreement of March
1, 1999, pertaining to issuance of $10,000,000, 5.44% Series J
Unsecured Senior Notes, due May 1, 2018 (Exhibit 4.22 to Form
10-Q dated March 31, 2003)
4.22 Twelfth Supplement dated October 23, 2003 to Note Agreement of
March 1, 1999, pertaining to the issuance of $20,000,000, 5.55%,
Series N Unsecured Senior Notes due December 1, 2013 (Exhibit
4.24 to Form 10-Q filed September 30, 2003)
4.23 Eleventh Supplement dated November 3, 2003, to Note Agreement of
March 1, 1999, pertaining to the issuance of $20,000,000, 5.52%,
Unsecured Series M Senior Notes due November 1, 2013 (Exhibit
4.25 to Form 10-Q filed September 30, 2003)
10. Material Contracts.
10.1 Water Supply Contract between Cal Water and County of Butte
relating to Cal Water's Oroville District; Water Supply Contract
between Cal Water and the Kern County Water Agency relating to
Cal Water's Bakersfield District; Water Supply Contract between
Cal Water and Stockton East Water District relating to Cal
Water's Stockton District. (Exhibits 5(g), 5(h), 5(i), 5(j),
Registration Statement No. 2-53678, which exhibits are
incorporated by reference to Form 10-K for fiscal year 1974).
10.2 Settlement Agreement and Master Water Sales Contract between the
City and County of San Francisco and Certain Suburban Purchasers
dated August 8, 1984; Supplement to Settlement Agreement and
Master Water Sales Contract, dated August 8, 1984; Water Supply
Contract between Cal Water and the City and County of San
Francisco relating to Cal Water's Bear Gulch District dated
August 8, 1984; Water Supply Contract between Cal Water and the
City and County of San Francisco relating to the Cal Water's San
Carlos District dated August 8, 1984; Water Supply Contract
between Cal Water and the City and County of San Francisco
relating to Cal Water's San Mateo District dated August 8, 1984;
Water Supply Contract between
30
Cal Water and the City and County of San Francisco relating to
Cal Water's South San Francisco District dated August 8, 1984.
(Exhibit 10.2 to Form l0-K for fiscal year 1984).
10.3 Water Supply Contract dated January 27, 1981, between Cal Water
and the Santa Clara Valley Water District relating to Cal Water's
Los Altos District (Exhibit 10.3 to Form 10-K for fiscal year
1992)
10.4 Amendments No. 3, 6 and 7 and Amendment dated June 17, 1980, to
Water Supply Contract between Cal Water and the County of Butte
relating to Cal Water's Oroville District. (Exhibit 10.5 to Form
10-K for fiscal year 1992)
10.5 Amendment dated May 31, 1977, to Water Supply Contract between
Cal Water and Stockton-East Water District relating to Cal
Water's Stockton District. (Exhibit 10.6 to Form 10-K for fiscal
year 1992)
10.6 Second Amended Contract dated September 25, 1987, among Stockton
East Water District, California Water Service Company, the City
of Stockton, the Lincoln Village Maintenance District, and the
Colonial Heights Maintenance District Providing for the Sale of
Treated Water. (Exhibit 10.7 to Form 10-K for fiscal year 1987)
10.7 Water Supply Contract dated April 19, 1927, and Supplemental
Agreement dated June 5, 1953, between Cal Water and Pacific Gas
and Electric Company relating to Cal Water's Oroville District.
(Exhibit 10.9 to Form 10-K for fiscal year 1992)
10.8 California Water Service Company Pension Plan (Exhibit 10.10 to
Form 10-K for fiscal year 1992)
10.9 California Water Service Company Employees Savings Plan. (Exhibit
10.12 to Form 10-K for fiscal year 1992)
10.10 Agreement between the City of Hawthorne and California Water
Service Company for the 15-year lease of the City's water system.
(Exhibit 10.17 to Form 10-Q dated March 31, 1996)
10.11 Water Supply Agreement dated September 25, 1996, between the City
of Bakersfield and California Water Service Company. (Exhibit
10.18 to Form 10-Q dated September 30, 1996)
10.12 Water Supply Contract dated November 16, 1994, between California
Water Service Company and Alameda County Flood Control and Water
Conservation District relating to Cal Water's Livermore District
(Exhibit 10.15 to Form 10-K for 1994)
10.13 Dividend Reinvestment and Stock Purchase Plan dated February 17,
1998 (Filed on Form S-3 dated February 17, 1998)
10.14 California Water Service Group Directors Retirement Plan (Exhibit
10.18 to Form 10-K for fiscal year 1997) *
31
10.15 $60,000,000 Business Loan Agreements between Bank of America as
lead arranger/bank and California Water Service Group, and CWS
Utility Services and California Water Service Company, and JCC
Homes dated August 1, 2001; terminated February 28, 2003 (Exhibit
10.1 to Form 10-Q dated September 30, 2001)
10.16 $10,000,000 Business Loan Agreement between Bank of America and
California Water Service Group and CWS Utility Services dated
February 28, 2003 (Exhibit 10.17 to Form 10-K dated December 31,
2002)
10.17 $55,000,000 Business Loan Agreement between Bank of America and
California Water Service Company dated February 28, 2003 (Exhibit
10.18 to Form 10-K dated December 31, 2002)
10.18 Executive Severance Plan (Exhibit 10.24 to Form 10K for the
fiscal year 1998) *
10.19 California Water Service Group Long-Term Incentive Plan (filed as
Appendix A of the 2000 California Water Service Group Proxy) *
10.20 California Water Service Group Deferred Compensation Plan
effective January 1, 2001; this plan replaces the former
Directors Deferred Compensation Plan (Exhibit 10.22 to Form 10-K
for 2000) *
10.21 California Water Service Company Supplemental Executive
Retirement Plan (SERP) effective January 1, 2001; this plan
replaces a prior plan, see Exhibit 10.9 (Exhibit 10.23 to Form
10-K for 2000) *
10.22 Amendment to the California Water Service Company Supplemental
Executive Retirement Plan (SERP) effective January 1, 2003,
granting 60% retirement benefit after 15 years of service
(Exhibit 10.23 to Form 10-K for dated December 31, 2002)*
10.23 Amendment No. 1 effective June 25, 2003, to agreement with Bank
of America dated February 28, 2003 (Exhibit 10.24 to Form 10-Q
dated June 30, 2003)
10.24 Water Supply Contract 99-73 between the City of Bakersfield and
California Water Service Company, dated March 31, 1999 (Exhibit
10.25 to Form 10-Q dated September 30, 2003)
10.25 Amendment No. 1 to Water Supply Contract between the City of
Bakersfield and California Water Service Company, dated October
3, 2001 (Exhibit 10.26 to Form 10-Q dated September 30, 2003)
10.26 Amendment No. 2 effective February 18, 2004, to agreement with
Bank of America dated February 28, 2003
32
13. Annual Report to Security Holders, Form 10-Q or Quarterly Report to
Security Holders:
13.1 2003 Annual Report. Certain sections of the 2003 Annual Report to
Stockholders are incorporated by reference in this 10-K filing
and filed with this Form 10-K as Exhibit 13. This includes those
sections referred to in Part I, Item 1, Business; Part I, Item 2,
Properties; Part II, Item 5, Market for Registrant's Common
Equity and Related Stockholder Matters; Part II, Item 6, Selected
Financial Data; Part II, Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations; Part
II, Item 7A, Quantitative and Qualitative Disclosures About
Market Risk; and Part II, Item 8, Financial Statements and
Supplementary Data.
21. Subsidiaries of the Registrant
23. Consents of Experts and Counsel
23.1 Consent of KPMG LLP
31. Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.1 Chief Executive Officer certification of financial statements
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer certification of financial statements
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32. Chief Executive Officer and Chief Financial Officer Certification pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement
33