Ten-Year Financial Review
California Water Service Group
(Dollars in thousands, except
common share data) 2004 2003 2002 2001 2000
SUMMARY OF OPERATIONS
Operating revenue
Residential $221,323 $194,903 $184,894 $173,823 $171,234
Business 55,803 49,666 46,404 44,944 44,211
Industrial 13,592 11,255 11,043 9,907 11,014
Public authorities 15,118 12,789 12,706 11,860 11,609
Other 9,731 8,515 8,104 6,286 6,738
-------- -------- -------- -------- --------
Total operating revenue 315,567 277,128 263,151 246,820 244,806
Operating expenses 274,084 246,894 232,404 221,116 211,610
Interest expense, other income
and expenses, net 15,457 10,817 11,674 10,739 13,233
-------- -------- -------- -------- --------
Net income $ 26,026 $ 19,417 $ 19,073 $ 14,965 $ 19,963
-------- -------- -------- -------- --------
COMMON SHARE DATA
Earnings per share diluted $ 1.46 $ 1.21 $ 1.25 $ 0.97 $ 1.31
Dividend declared 1.130 1.125 1.120 1.115 1.100
Dividend payout ratio 77% 93% 90% 115% 84%
Book value $15.66 $ 14.44 $ 13.12 $ 12.95 $ 13.13
Market price at year-end 37.65 27.40 23.65 25.75 27.00
Common shares outstanding
at year-end in thousands) 18,367 16,932 15,182 15,182 15,146
Return on average common
stockholders equity 9.8% 9.1% 9.7% 7.6% 10.1%
Long-term debt interest coverage 3.38 2.78 2.73 2.64 3.31
-------- -------- -------- -------- --------
BALANCE SHEET DATA
Net utility plant $800,305 $759,498 $696,988 $624,342 $582,782
Utility plant expenditures
(company-funded and
developer-funded) 68,573 74,253 88,361 62,049 37,161
Total assets 942,853 873,035 798,478 710,214 666,605
Long-term debt including
current portion 275,921 273,130 251,365 207,981 189,979
Capitalization ratios:
Common stockholders equity 50.8% 47.0% 44.0% 48.8% 51.1%
Preferred stock 0.6% 0.7% 0.7% 0.9% 0.9%
Long-term debt 48.6% 52.3% 55.3% 50.3% 48.0%
-------- -------- -------- -------- --------
OTHER DATA
Water production
(millions of gallons)
Wells and surface supply 72,279 68,416 69,414 65,283 65,408
Purchased 66,760 63,264 62,811 61,343 62,237
-------- -------- -------- -------- --------
Total water production 139,039 131,680 132,225 126,626 127,645
-------- -------- -------- -------- --------
Metered customers 395,286 387,579 380,087 371,281 366,242
Flat-rate customers 77,869 78,843 78,901 79,146 78,104
-------- -------- -------- -------- --------
Customers at year-end 473,155 466,422 458,988 450,427 444,346
-------- -------- -------- -------- --------
New customers added 6,733 7,434 8,561 6,081 5,219
Revenue per customer $ 667 $ 594 $ 579 $ 552 $ 554
Utility plant per customer 2,418 2,313 2,182 2,020 1,916
Employees at year-end 837 813 802 783 797
-------- -------- -------- -------- --------
(Dollars in thousands, except
common share data) 1999 1998 1997 1996 1995
SUMMARY OF OPERATIONS
Operating revenue
Residential $163,681 $150,491 $158,210 $148,313 $132,859
Business 41,246 38,854 40,520 37,605 35,873
Industrial 12,695 10,150 10,376 9,748 9,952
Public authorities 10,898 9,654 11,173 10,509 9,585
Other 6,417 5,777 4,886 4,083 4,833
-------- -------- -------- -------- --------
Total operating revenue 234,937 214,926 225,165 210,258 193,102
Operating expenses 201,890 183,245 188,020 177,356 164,958
Interest expense, other income
and expenses, net 11,076 11,821 11,388 11,502 11,176
-------- -------- -------- -------- --------
Net income $ 21,971 $ 19,860 $ 25,757 $ 21,400 $ 16,968
-------- -------- -------- -------- --------
COMMON SHARE DATA
Earnings per share diluted $ 1.44 $ 1.31 $ 1.71 $ 1.42 $ 1.13
Dividend declared 1.085 1.070 1.055 1.040 1.020
Dividend payout ratio 75% 82% 62% 73% 90%
Book value $ 12.89 $ 12.49 $ 12.15 $ 11.47 $ 10.97
Market price at year-end 30.31 31.31 29.53 21.00 16.38
Common shares outstanding
at year-end in thousands) 15,094 15,015 15,015 15,015 14,934
Return on average common
stockholders equity 11.5% 10.8% 14.5% 12.8% 10.6%
Long-term debt interest coverage 3.79 3.64 4.37 3.81 3.41
-------- -------- -------- -------- --------
BALANCE SHEET DATA
Net utility plant $564,390 $538,741 $515,917 $495,985 $471,994
Utility plant expenditures
(company-funded and
developer-funded) 48,599 41,061 37,511 40,310 31,031
Total assets 645,507 613,143 594,444 569,745 553,027
Long-term debt including
current portion 171,613 152,674 153,271 151,725 154,416
Capitalization ratios:
Common stockholders equity 53.0% 54.6% 53.8% 52.7% 50.9%
Preferred stock 0.9% 1.0% 1.0% 1.1% 1.1%
Long-term debt 46.1% 44.4% 45.2% 46.2% 48.0%
-------- -------- -------- -------- --------
OTHER DATA
Water production
(millions of gallons)
Wells and surface supply 65,144 57,482 63,736 60,964 54,818
Purchased 58,618 54,661 59,646 56,769 57,560
-------- -------- -------- -------- --------
Total water production 123,762 112,143 123,382 117,733 112,378
-------- -------- -------- -------- --------
Metered customers 361,235 354,832 350,139 345,307 335,238
Flat-rate customers 77,892 77,568 77,878 77,991 78,330
-------- -------- -------- -------- --------
Customers at year-end 439,127 432,400 428,017 423,298 413,568
-------- -------- -------- -------- --------
New customers added 6,727 4,383 4,719 9,730 2,263
Revenue per customer $ 539 $ 500 $ 529 $ 502 $ 468
Utility plant per customer 1,851 1,768 1,694 1,632 1,580
Employees at year-end 790 759 752 740 738
-------- -------- -------- -------- --------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
California Water Service Group
FORWARD-LOOKING STATEMENTS
This annual report, including the Letter to Stockholders and Managements
Discussion and Analysis, contains forward-looking statements within the meaning
established by the Private Securities Litigation Reform Act of 1995 (Act). The
forward-looking statements are intended to qualify under provisions of the
federal securities laws for safe harbor treatment established by the Act.
Forward-looking statements are based on currently available information,
expectations, estimates, assumptions, projections, and managements judgment
about the Company, the water utility industry, and general economic conditions.
Such words as expects, intends, plans, believes, estimates, assumes,
anticipates, projects, predicts, forecasts, or variations of such words or
similar expressions are intended to identify forward-looking statements. The
forward-looking statements are not guarantees of future performance. They are
subject to uncertainty and changes in circumstances. Actual results may vary
materially from what is contained in a forward-looking statement.
Factors that may cause a result different than expected or anticipated
include: governmental and regulatory commissions decisions, including decisions
on proper disposition of property; changes in regulatory commissions policies
and procedures; the timeliness of regulatory commissions actions concerning rate
relief; new legislation; the ability to satisfy requirements related to the
Sarbanes-Oxley Act and other regulations on internal controls; electric power
interruptions; increases in suppliers prices and the availability of supplies
including water and power; fluctuations in interest rates; changes in
environmental compliance and water quality requirements; acquisitions and the
ability to successfully integrate acquired companies; the ability to
successfully implement business plans; changes in customer water use patterns;
the impact of weather on water sales and operating results; access to sufficient
capital on satisfactory terms; civil disturbances or terrorist threats or acts,
or apprehension about possible future occurrences of acts of this type; the
involvement of the United States in war or other hostilities; restrictive
covenants in or changes to the credit ratings on current or future debt that
could increase financing costs or affect the ability to borrow, make payments on
debt, or pay dividends; and other risks and unforeseen events. When considering
forward-looking statements, the reader should keep in mind the cautionary
statements included in this paragraph. The Company assumes no obligation to
provide public updates on forward-looking statements.
OVERVIEW
California Water Service Group provides water utility services to customers
in California, Washington, New Mexico, and Hawaii. The majority of the business
is regulated by the respective states public utility commission. The Company's
California water utility service operations comprise the majority of the
business and contributed 96% of revenues and 83% of net income in 2004. The
Company also has a regulated wastewater business in New Mexico. Non-regulated
activities relate primarily to the water utility business and include operating,
maintenance, billing, meter reading, and water testing services.
The regulatory entities governing the Company's regulated operations are
referred to as the Commissions in this report. Revenues, income, and cash flows
are earned primarily through delivering drinking water through pipes to homes
and businesses. Rates charged to customers for the regulated business are
determined by the Commissions. These rates are intended to allow recovery of
operating costs and a reasonable rate of return on capital.
Major factors affecting the financial performance of the Company are: the
process and timing of setting rates charged to customers; weather; water quality
standards; other regulatory standards; water supply; quality of water sources;
and level of capital expenditures.
The most significant risk and challenge to the business during the past
several years has been obtaining timely rate relief to cover increased costs and
investments. The Company addresses this risk by having an experienced team
dedicated solely to pursuing rate increases and managing Commissions issues. The
business can also be impacted by weather. Weather risk is partially mitigated by
having operations in both northern and southern California, as well as in three
other states. Another risk in the water industry is obtaining adequate
financing, as the capital expenditures needed for infrastructure replacements
and improvements may significantly exceed the cash flow generated by operations.
Management believes that the Company has a strong balance sheet and is capable
of supporting the financing needs of the business through use of debt and common
stock. Finally, the water industry is highly regulated and must comply with a
multitude of standards related to water quality and service. To address the
compliance issues, the Company has a highly trained, focused team that uses
state-of-the-art technology and works closely with government agencies to
monitor water supplies and operations.
For 2004, net income was $26.0 million compared to $19.4 million in 2003,
an increase of 34%. Diluted earnings per share for 2004 were $1.46 compared to
$1.21 in 2003, an increase of 21%. The increase in earnings per share was
primarily due to increased rates, which were approved by the Commissions.
Partially offsetting the increased rates were higher operating costs, lower
gains from property sales, and the dilutive effect of having more shares
outstanding. The Company plans to continue to seek additional rate increases in
future years to recover its operating cost increases and receive reasonable
returns on invested capital. Due to more stringent water quality standards and
investments in infrastructure, the Company plans to increase capital
expenditures in 2005. For each of the five years subsequent to 2005, capital
expenditures are expected to be lower compared to 2005, but will remain at much
higher levels than depreciation expense. Cash from operations is not expected to
be sufficient to fund the cash needs of the Company (capital expenditures,
dividends, and other cash needs); therefore, the Company expects to fund
anticipated cash shortfalls through a combination of debt and common stock
offerings in the next five years. In 2004, the Company received many different
types of rate increases, some of which were temporary in nature. As such, the
high growth in earnings in 2004 is not expected to be repeated in 2005. A
significant factor in 2005 earnings will be the timing and the amount of the
approved General Rate Case (GRC) filings expected to be received in the fourth
quarter of 2005.
BUSINESS
California Water Service Group is a holding company incorporated in
Delaware with five operating subsidiaries: California Water Service Company (Cal
Water), CWS Utility Services (Utility Services), New Mexico Water Service
Company (New Mexico Water), Washington Water Service Company (Washington Water),
and Hawaii Water Service Company, Inc. (Hawaii Water). Cal Water, New Mexico
Water, Washington Water, and Hawaii Water are regulated public utilities. The
regulated utility entities also provide some non-regulated services. Utility
Services provides non-regulated water operations and related services to private
companies and municipalities.
California water operations are conducted by the Cal Water and Utility
Services entities and provide service to 451,785 customers in 75 California
communities through 26 separate districts. Of these 26 districts, 24 districts
are regulated water systems, which are subject to regulation by the California
Public Utilities Commission (CPUC). The other two districts, the City of
Hawthorne and the City of Commerce, are governed through their respective city
councils and are considered non-regulated because they are outside of the CPUCs
jurisdiction. Their activities are reflected in operating revenue and operating
costs, as the risks and rewards of these operations are similar to those of the
regulated activities. California water operations account for 95% of the total
customers and 96% of the total operating revenue.
Washington Water provides domestic water service to 15,015 customers in the
Tacoma and Olympia areas. Washington Waters utility operations are regulated by
the Washington Utilities and Transportation Commission. Washington Water
accounts for 3% of the total customers and 2% of the total operating revenue.
New Mexico Water provides service to 5,835 water and wastewater customers
in the Belen, Los Lunas, and Elephant Butte areas in New Mexico. Its regulated
operations are subject to the jurisdiction of the New Mexico Public Regulation
Commission. New Mexico Water accounts for 1% of the total customers and 1% of
the total operating revenue.
Hawaii Water provides water service to 520 customers on the island of Maui,
including several large resorts and condominium complexes. Its regulated
operations are subject to the jurisdiction of the Hawaii Public Utilities
Commission. Hawaii Water accounts for less than 1% of the total customers and 1%
of the total operating revenue.
Other non-regulated activities consist primarily of operating water systems
owned by other entities; pro- viding meter reading and billing services; leasing
communication antenna sites on the Company's properties; operating recycled
water systems; providing brokerage services for water rights; providing lab
services; and selling surplus property. These activities are reported below
operating profit on the income statement; therefore, the revenue is not included
in operating revenue. Due to the variety of services provided and the fact that
the activities are outside of the Company's core business, the number of
customers is not tracked for these non-regulated activities. Non-regulated
activities comprised 5% of the total net income in 2004.
Rates and operations for regulated customers are subject to the
jurisdiction of the respective states regulatory commission. The Commissions
require that water and wastewater rates for each regulated district be
independently determined. The Commissions are expected to authorize rates
sufficient to recover normal operating expenses and allow the utility to earn a
fair and reasonable return on invested capital. Rates for the City of Hawthorne
and City of Commerce water systems are established in accordance with operating
agreements and are subject to ratification by the respective city councils. Fees
for other non-regulated activities are based on contracts negotiated between the
parties.
RESULTS OF OPERATIONS
Earnings and Dividends. Net income in 2004 was $26.0 million compared to
$19.4 million in 2003 and $19.1 million in 2002. Diluted earnings per common
share were $1.46 in 2004, $1.21 in 2003, and $1.25 in 2002. The weighted average
number of common shares outstanding used in the diluted earnings per share
calculation was 17,674,000 in 2004, 15,893,000 in 2003, and 15,185,000 in 2002.
As explained below, the increase in 2004 earnings per share resulted from these
primary factors: receiving rate relief on GRC filings and balancing accounts;
customer growth; and increased usage due to improved weather conditions.
Partially offsetting these positive factors were: higher purchased water costs;
higher operating costs; decreased gains from property sales; and increased
common shares outstanding.
At the January 2005 meeting, the Board of Directors declared the quarterly
dividend, increasing it for the 38th consecutive year. Dividends have been paid
for 60 consecutive years. The annual dividend paid per common share in 2004,
2003, and 2002 was $1.130, $1.125, and $1.120, respectively. The dividend
increases were based on projections that the higher dividend could be sustained
while still providing adequate financial resources and flexibility. Earnings not
paid as dividends are reinvested in the business for the benefit of
stockholders. The dividend payout ratio was 77% in 2004, 93% in 2003, and 90% in
2002, an average of 87% over the three-year period.
Operating Revenue. Operating revenue was $315.6 million, an increase of
$38.5 million, or 14%, above 2003. Operating revenue in 2003 was $277.1 million,
an increase of $14.0 million, or 5%, above 2002. The estimated sources of
changes in operating revenue were:
Dollars in millions 2004 2003
----- -----
Customer usage $ 3.3 $(4.6)
Rate increases 29.8 12.6
Usage by new customers 5.4 6.0
----- -----
Net change $38.5 $14.0
----- -----
Average revenue per customer per year (in dollars) $ 667 $ 594
New customers added 6,700 7,400
Overall, temperatures in the Company's service areas for 2004 were
comparable to 2003. Rainfall in the California service areas in 2004 was lower
in the spring and higher in the fall. For the entire year, 2004 rainfall in the
California service areas was lower, which impacted the Company's revenues and
earnings positively. For 2003, rainfall was higher than 2002, which had a
negative impact on revenues and earnings. For Washington Water service areas,
rainfall was higher in 2004 than in 2003, and 2003 rainfall was lower than 2002.
In addition to the overall favorable weather, 2004 revenues were positively
impacted compared to 2003 by increases in rates and customer growth.
The estimated impact of rate changes compared to the prior year is listed
in the following table:
Dollars in millions 2004 2003
----- -----
Step rate increases $4.4 $2.2
Bakersfield Treatment Plant 4.2 2.3
General Rate Cases (GRC) 13.3 3.7
Offset (purchased water/pump taxes) 4.7 0.9
Balancing accounts 0.4 1.9
Catch-up surcharge 2.2 1.3
Other 0.6 0.3
----- -----
Total rate increases $29.8 $12.6
The step rates, Bakersfield Treatment Plant, GRCs, and offset rate changes
are permanent until the next rate filing for the applicable districts. Most step
rates approved in 2004 were effective in January 2004; therefore, they will not
increase revenues in 2005, assuming similar customer usage. Some step rates were
approved during 2004 and are estimated to increase 2005 revenues by $0.4
million, assuming similar usage. Rate changes previously approved for the
Bakersfield Treatment Plant will have no incremental impact on 2005 revenues due
to the effective dates being January 2004 or prior. The GRCs that were approved
during 2004 are estimated to increase revenues in 2005 by $2.1 million, assuming
similar usage. The offset filings approved during 2004 are estimated to increase
2005 revenues by $0.5 million, assuming similar usage.
The balancing account rate surcharges and catch-up surcharge have specific
termination dates. The balancing accounts termination dates range from one to
three years from the effective date. For 2005, management estimates the net
impact to revenues from balancing accounts compared to 2004 will be a $3.2
million increase, assuming similar usage. This estimate incorporates the effects
of balancing account surcharges that will terminate and balancing accounts
approved in 2004. The catch-up surcharge ended in September 2004; therefore, the
impact to 2005 revenue compared to 2004 will be a $3.5 million decrease to
revenue.
Effective January 2005, step rate increases were approved for $4.1 million
on an annual basis.
See the RATES AND REGULATION section of this report for more information on
regulatory activity occurring in 2003, 2004, and through March 1, 2005.
The number of customers in 2004 increased by approximately 6,700, or 1%,
from 2003 levels. This increase includes 1,700 customers related to an
acquisition in New Mexico completed in 2004. In 2003, customer growth was
approximately 7,400, or 2%, which included 520 customers related to the
acquisition of Kaanapali Water Corporation in Hawaii and 1,100 customers related
to the arrangement with the City of Commerce.
Water Production Expenses. Water production expenses, which consist of
purchased water, purchased power, and pump taxes, comprise the largest segment
of total operating costs. Water production costs accounted for 43.5%, 44.2%, and
45.6% of total operating costs in 2004, 2003, and 2002, respectively. The rates
charged for wholesale water supplies, electricity, and pump taxes are
established by various public agencies. As such, these rates are beyond the
Company's control. The table below provides the amount of increases (decreases)
and percent changes in water production expense during the past two years:
Dollars in millions 2004 2003
-------------------------- -------------------------
Amount Change % Change Amount Change % Change
Purchased water $89.7 $ 8.9 11% $ 80.8 $ 4.1 5%
Purchased power 21.8 (0.1) (1%) 21.9 (1.0) (4%)
Pump taxes 7.6 1.3 20% 6.3 -- --
------ ------ ------ ------ ------ ------
Total water
production expenses $119.1 $ 10.1 9% $109.0 $ 3.1 3%
------ ------ ------ ------ ------ ------
Two of the principal factors affecting water production expenses are the
amount of water produced and the source of the water. Generally, water from
wells costs less than water purchased from wholesale suppliers. The table below
provides the amounts, percentage change, and source mix for the respective
years:
Millions of gallons (MG) 2004 2003 2002
------------------------------------------------------------------------
MG % of Total MG % of Total MG % of Total
Source:
Wells 66,951 48.2% 66,009 50.0% 68,663 51.9%
% change from prior year 1% (4%) 6%
Purchased 66,760 48.0% 63,264 48.2% 62,811 47.5%
% change from prior year 6% 1% 2%
Surface 5,328 3.8% 2,407 1.8% 751 0.6%
% change from prior year 121% 221% 18%
Total 139,039 100.0% 131,680 100.0% 132,225 100.0%
% change from prior year 6% (1%) 4%
Purchased water expenses are affected by changes in quantities purchased,
supplier prices, and cost differentials between wholesale suppliers. For 2004,
the $8.9 million increase in purchased water costs was driven by a combination
of increased wholesale rates charged by wholesale suppliers in the Stockton and
San Francisco Bay-Area districts, and increases in quantities purchased. On an
overall blended basis, wholesale water rates increased 5% on a
cost-per-million-gallon basis. Included in purchased water expenses was an
additional adjustment of $0.9 million, which related to the settlement of a
meter malfunction matter in the Stockton district. Purchased power expenses are
affected by water pumped from wells, water moved through the distribution
system, rates charged by electric utility companies, and rate structures applied
for usage during peak and non-peak times of the day or season. The change in
purchased power expenses was primarily due to lower rates charged by suppliers,
which were partially offset by higher volume and no credits received in 2004
compared to $0.9 million credits received in 2003. Pump taxes were higher
primarily due to additional pumping in one district that has a high pump tax
rate.
For 2003, the $4.1 million increase in purchased water costs was primarily
driven by increased wholesale rates charged by wholesale suppliers in the
Stockton and San Francisco Bay-Area districts. Overall, wholesale water rates
increased 5% on a cost-per-million-gallon basis. Included in purchased water was
an estimate of $0.7 million, which related to a meter malfunction matter in the
Stockton district. The majority of the change in purchased power expenses in
2003 was attributable to credits received from the electric utility companies
($0.9 million) and lower quantities of water pumped from wells. Pump taxes were
lower due to the decrease in well water production.
Administrative and General Expenses. Administrative and general expenses
include payroll related to administrative and general functions, all company
benefits charged to expense accounts, insurance expenses, legal fees, audit
fees, regulatory utility commissions expenses, board of directors fees, and
general corporate expenses.
During 2004, administrative and general expenses increased $6.1 million, or
15%, compared to 2003. Payroll expenses increased $1.0 million, or 13%, due to
the addition of new employees and wage increases. Employee benefits increased
$1.4 million, due primarily to increases in employee/retiree health-care
expenses of $1.7 million, or 25%. The Company is primarily self-insured but does
have stop-loss coverage for very large claims. The Company experienced more
large-dollar claims (claims above $50,000), which was the primary reason for the
increase. The Company also experienced higher costs for workers compensation,
general liability claims, and insurance premiums. These costs increased $1.3
million, or 40%. Higher expenses were incurred to comply with the Sarbanes-Oxley
Act, section 404 on internal controls, which increased expenses by $0.9 million
for consultants and auditors. Fees to the CPUC increased $0.5 million due to the
increased revenue, as these fees are calculated as a percentage of revenue.
Other expense elements contributed to the balance of the change, but none were
individually significant.
During 2003, administrative and general expenses increased $3.8 million, or
10%, compared to 2002. Payroll expenses increased $0.6 million, or 9%, due to
the addition of new employees and wage increases. Employee benefits increased
$3.0 million, due primarily to increases in retirement plan expenses of $2.3
million, or 51%, and employee/retiree health-care expenses of $0.4 million, or
7%. The retirement plan cost increase was due primarily to changes in the
pension plan effective January 1, 2003, which improved benefits to employees. As
part of the negotiations with the unions, lower pay increases were offset by
increased pension benefits. Other expense elements contributed to the balance of
the change, but none were individually significant.
Other Operations Expenses. The components of other operations expenses
include payroll, material and supplies, and contractor costs related to
operating water systems. This includes the costs associated with water
transmission and distribution, pumping, water quality, meter reading, billing,
and operations of district offices.
For 2004, other operating expenses increased $2.5 million, or 7%, from
2003. Payroll costs charged to other operating expenses increased $1.3 million,
or 6%, due to general wage increases and an increase in the number of employees.
Labor increases were in water quality, transmission and distribution, and
customer service categories. Other major cost increases were operations of the
Bakersfield Treatment Plant of $0.6 million and additional rent of $0.4 million
for the City of Commerce operation. Other expense elements contributed to the
balance of the change, but none were individually significant.
For 2003, other operating expenses increased $3.4 million, or 10%, from
2002. Payroll costs charged to other operating expenses increased $1.1 million,
or 6%, due to general wage increases, labor related to the Bakersfield Treatment
Plant, and labor related to customer service in district offices. Other major
cost increases were related to lab expenses of $0.5 million, or 56%; chemicals
and filters of $0.5 million, or 42%; uncollectible account expenses of $0.4
million, or 73%; and rent expenses of $0.4 million, or 45%. Other expense
elements contributed to the balance of the change, but none were individually
significant.
Maintenance. Maintenance expenses increased $0.5 million, or 4%, in 2004
compared to 2003. For 2003, maintenance expenses increased $1.1 million, or 10%,
compared to 2002. The variance was caused by a variety of factors. In 2004,
expenses increased primarily for service lines, which are pipes from the mains
to the meter boxes. In 2003, more repairs were needed related to leaks and
breaks in both mains and service lines. Also, the Company incurred increased
maintenance expenses for pumps, and $0.2 million was expended on a well and
treatment plant in Hawthorne.
Depreciation and Amortization. Depreciation and amortization increased due
to the level of Company-funded capital expenditures. See the LIQUIDITY AND
CAPITAL RESOURCES section for more information.
Property and Other Taxes. For 2004, expenses increased $1.0 million, or 9%,
compared to 2003. For 2003, expenses increased $0.7 million, or 7 %. Increased
property taxes were the primary cause for the increase in both years.
Non-Regulated Income, Net. The major components of non-regulated income are
revenue and operating expenses related to the following activities: operating
and maintenance services (O&M), meter reading and billing services, leases for
cellular phone antennas, water rights brokering, and design and construction
services. For 2004, non-regulated income increased $0.3 million compared to
2003, with increases primarily from meter reading and billing services, and
reduced expenses related to business development. For 2003, non-regulated income
was relatively flat compared to 2002, with increases primarily from O&M and
cellular phone antennas offset by decreases in water rights brokerage income.
Water rights brokerage income is sporadic and is affected by market
opportunities and price volatility. See Footnote 3 of the Consolidated Financial
Statements for additional information.
Gain on Sale of Surplus Property. For 2004, there were minimal gains from
surplus property sales. For 2003 and 2002, pretax gains from surplus property
sales were $4.6 million and $3.0 million, respectively. The 2003 gains were
primarily from three properties sold in the San Francisco Bay Area. Earnings and
cash flow from these transactions are sporadic and may or may not continue in
future periods depending upon market conditions and other factors. The Company
has other surplus properties that may be marketed in the future based on real
estate market conditions.
Interest Expenses. Interest expenses increased in 2004 and 2003 by $0.3
million, or 2%, and $0.7 million, or 4%, respectively. For 2004, the interest
expense increase was primarily due to lower capitalized interest, which reduces
net interest expenses. Partially offsetting this increase was reduced interest
expense from lesser amounts of short-term borrowings. For 2003, the increased
expense was due primarily to higher borrowing of long-term debt. Refinancing
activities and lower short-term interest rates partially offset the increase.
See the LIQUIDITY AND CAPITAL RESOURCES section for more information.
RATES AND REGULATIONS
Following are summaries of approved and pending rate filings. The amounts
reported are annual amounts; therefore, the impact to recorded revenue will
normally be recognized over a 12-month period from the effective date of the
decision. Most increases are permanent until the next rate filing, except for
the increases related to the 2001 GRC catch-up and the balancing accounts
(offsetable expenses), which have specific time frames for recovery.
2004 Regulatory Activity Approved Filings.In 2004, Cal Water received
approval from the CPUC for step rate increases of $4.4 million on an annual
basis, of which $3.9 million was effective in January 2004 and $0.5 million was
effective in April 2004. Step increases allow recovery of cost increases,
primarily from inflation, between GRC filings. GRC filings are normally made
every three years for each Cal Water district.
In February 2004, the CPUC authorized an advice letter for $0.7 million for
the Stockton district related to increased purchased water rates. The rate
change was effective in February 2004.
In April 2004, Cal Water received authorization from the CPUC on its 2002
GRC. The GRC included four districts and increased rates $3.6 million on an
annual basis, effective April 2004.
In May 2004, Cal Water received approval from the CPUC to refund $1.5
million in rates, effective May 2004, which relates primarily to over-collection
of specific expenses incurred over multiple years in the King City and Dominguez
districts. The refunds will primarily occur over a 12-month period, with a minor
amount occurring over a 36-month period.
In June 2004, Cal Water received approval from the CPUC to recover in rates
$0.4 million in balancing accounts, effective June 2004. This amount relates
primarily to recoverable expenses incurred in 2001 for the Salinas district.
This amount will be recovered over a two-year period.
In July 2004, Cal Water received authorization from the CPUC on its Salinas
district 2001 filing, which increased rates $1.1 million on an annual basis,
effective July 2004.
In August 2004, Cal Water received authorization from the CPUC for step
rate increases for four districts, which increased rates $0.5 million on an
annual basis, effective August 2004.
In September 2004, Cal Water received authorization from the CPUC on its
2003 GRC filing for the South San Francisco and Bakersfield districts, which
increased rates a net $0.4 million on an annual basis, effective October 2004.
In September 2004, Cal Water received authorization from the CPUC on its
Los Altos advice letter filing related to purchased water and pump taxes, which
increased rates $0.5 million on an annual basis, effective October 2004.
In the October-December 2004 period, Cal Water received authorization for
recovery of $9.2 million in balancing accounts, which will be collected over one
to three years varying by district. These amounts relate primarily to
recoverable expenses incurred in 2002 and 2003 for several districts. The
effective dates range from October 2004 to January 2005.
No filings were approved during 2004 for Washington Water, New Mexico
Water, or Hawaii Water.
2003 Regulatory Activity Approved Filings.In January 2003, Cal Water
received approval for step rate increases totaling $2.2 million.
In April 2003, the CPUC authorized a second advice letter filing related to
the new Bakersfield Treatment Plant. This advice letter allowed an increase in
rates of $1.8 million on an annual basis for the plant, which became operational
in the second quarter of 2003 and had a total project cost of approximately $50
million.
In May 2003, the CPUC authorized the recovery of $5.4 million in balancing
accounts, of which approximately $3.6 million was collected from May 2003
through May 2004, and approximately $1.8 million is being collected from May
2004 through May 2005. Partially offsetting this increase was a $0.8 million
decrease for one district that was effective from June 2003 through June 2004.
In September 2003, the CPUC approved Cal Waters 2001 GRC applications.
These filings were submitted in July 2001 for 14 of Cal Waters 24 California
regulated districts. This GRC decision authorized an 8.9% return on rate base
and added an estimated $12.8 million to annual revenues. In addition, Cal Water
received approval to collect an additional $4.5 million in revenues over 12
months to reflect an effective date of April 3, 2003. The 2001 GRC also
authorized the filing of step rate increases for $2.7 million annually for 2004
and 2005 that are effective in January of each year pending approval by the
CPUC.
In the September-December 2003 period, the CPUC approved increases to
recover higher purchased water costs for Cal Waters districts in the San
Francisco Bay Area. The total annual amount of these filings is $4.8 million.
In October 2003, the CPUC authorized a third advice letter filing related
to the Bakersfield Treatment Plant. This allowed an increase in rates of $4.2
million on an annual basis. Due to depreciation expense for the plant beginning
in January 2004, only $0.4 million was billed in the October-December 2003
period. The full $4.2 million annual amount was effective in January 2004.
No filings were approved during 2003 for Washington Water, New Mexico
Water, or Hawaii Water.
Balancing Accounts, Offsetable Expenses, and Memorandum Accounts.The
following discussion relates to changes in the Company's expense balancing
memorandum accounts (see Expense Balancing and Memorandum Accounts section in
CRITICAL ACCOUNTING POLICIES).
Remaining Balances from Previously Authorized Balancing Account
Recoveries/Refunds.For the balancing accounts authorized in May 2003, the net
amount remaining to be collected in rates was $0.6 million as of December 2004
and $2.8 million as of December 2003. The balance is expected to be recovered by
May 2005.
For the balancing accounts authorized in May 2004, the amount remaining to
be refunded as of December 2004 was $0.6 million. The balance is expected to be
primarily refunded by May 2005 and the remainder refunded by May 2007.
For the balancing accounts authorized in June 2004, the amount remaining to
be collected in rates as of December 2004 was $0.3 million. The balance is
expected to be recovered by June 2006.
For the balancing accounts authorized in the October-December 2004 period,
the net amount remaining to be collected in rates as of December 2004 was $8.3
million. The net balance is expected to be fully recovered by January 2008.
2005 Regulatory Activity Approved Filings through March 1, 2005.In January
2005, Cal Water received approval from the CPUC for step rate increases of $4.1
million on an annual basis, which were effective in January 2005.
Pending Filings as of March 1, 2005. Cal Water has pending its 2004 GRC
filings covering eight districts. The amount requested is $26.5 million, which
may change due to a variety of factors. Over the past few years, the amount
approved by the CPUC has been substantially less than the requested amount. The
Company is unable to predict the timing and final amount of these filings at
this time.
New Mexico Water has submitted a rate filing for its wastewater operations,
and Hawaii Water has submitted a rate filing for its water operations. When
approved, these filings are not expected to materially affect the total Company
results. The Company is unable to predict the timing and final amount of these
filings at this time. Washington Water is planning to submit a rate filing in
2005, but has not filed as of the date of this report.
Failure to Report Acquisitions. In February 2003, the CPUCs Office of
Ratepayer Advocates (ORA), a division of the CPUC responsible for representing
ratepayers, recommended that Cal Water be fined up to $9.6 million and refund
$0.5 million in revenue for failing to report three acquisitions as required by
the CPUC. One acquisition was completed prior to adoption of the reporting
requirement by the CPUC; the others were inadvertently not reported by Cal
Water. In July 2004, the CPUC issued decision D. 04-07-033, in which Cal Water
was assessed a fine of $75,000 and a reduction of 50 basis points (0.5%) in the
allowed return on equity for its Salinas district, the district that included
two of the three acquisitions. The reduction in the allowed return on equity
will be terminated upon CPUC approval of the next GRC filing for the Salinas
district, which is expected in the fourth quarter of 2005. Cal Water declined to
appeal the decision.
Review of Property Sales by CPUC.In 1995, the California Legislature
enacted the Water Utility Infrastructure Improvement Act of 1995 (Infrastructure
Act) to encourage water utilities to sell surplus properties and reinvest in
needed water utility facilities. In September 2003, the CPUC issued decision
D.03-09-021 in Cal Waters 2001 GRC filing. In this decision, the CPUC ordered
Cal Water to file an application setting up an Infrastructure Act memorandum
account with an up-to-date accounting of all real property that was at any time
in rate base and that Cal Water had sold since the effective date of the
Infrastructure Act. Additionally, the decision directed the CPUC staff to file a
detailed report on its review of Cal Waters application. On January 11, 2005,
the ORA issued a report expressing its opinion that Cal Water had not proven
that surplus properties sold since 1996 were no longer used and useful. ORA
recommended that Cal Water be fined $160,000 and that gains from property sales
should generally benefit ratepayers. Management strongly disagrees with ORAs
conclusions and recommendations.
During the period under review, Cal Waters cumulative gains from surplus
property sales were $19.2 million, which included an inter-company gain related
to a transaction with Utility Services and a like-kind exchange with a third
party. If the CPUC finds any surplus property sale or transfer was recorded
inappropriately, Cal Waters rate base could be reduced, which would lower future
revenues, net income, and cash flows. Management believes it has fully complied
with the Infrastructure Act and that ORAs conclusions and recommendations are
without merit. Cal Water intends to vigorously oppose ORAs findings.
Accordingly, Cal Water has not accrued a liability in the financial statements
for ORAs recommendations. At this time, Cal Water does not know when or how the
CPUC will rule in this matter.
WATER SUPPLY
The Company's source of supply varies among its operating districts.
Certain districts obtain all of their supply from wells; some districts purchase
all of their supply from wholesale suppliers; and other districts obtain supply
from a combination of wells and wholesale suppliers. A small portion of supply
comes from surface sources and is processed through Company-owned water
treatment plants. The Company is meeting water quality, environmental, and other
regulatory standards.
California's normal weather pattern yields little precipitation between
mid-spring and mid-fall. The Washington service areas receive precipitation in
all seasons, with the heaviest amounts during the winter. New Mexicos rainfall
is heaviest in the summer monsoon season. Hawaii receives precipitation
throughout the year, with the largest amounts in the winter months. Water usage
in all service areas is highest during the warm and dry summers and declines in
the cool winter months. Rain and snow during the winter months replenish
underground water aquifers and fill reservoirs, providing the water supply for
subsequent delivery to customers. To date, snow and rainfall during the
2004-2005 water year have been above average. Precipitation in the prior five
years was near normal levels. Water storage in Californias reservoirs at the end
of 2004 was at average levels. Management believes that the supply pumped from
underground aquifers and purchased from wholesale suppliers will be adequate to
meet customer demand during 2005 and beyond. Long-term water supply plans are
developed for each of the Company's districts to help assure an adequate water
supply under various operating and supply conditions. Some districts have unique
challenges in meeting water quality standards, but management believes that
supplies will meet current standards using current treatment processes. The
Company is executing a plan to meet a more stringent EPA standard for arsenic,
which will become effective in January 2006.
LIQUIDITY AND CAPITAL RESOURCES
Short-Term Financing. Short-term liquidity is provided by bank lines of
credit and internally generated funds. Long-term financing is accomplished
through use of both debt and common stock. Short-term bank borrowings were zero
at December 31, 2004 and $6.5 million at December 31, 2003. Cash and cash
equivalents were $18.8 million at December 31, 2004 and $2.9 million at December
31, 2003. In addition, the Company expects to receive $7.2 million in tax
refunds in 2005, which will not impact net income. Given the Company's ability
to access its lines of credit on a daily basis, cash balances are managed to
levels required for daily cash needs and excess cash is invested in short-term
instruments. Minimal operating levels of cash are maintained for Washington
Water, New Mexico Water, and Hawaii Water.
The water business is seasonal. Revenue is lower in the cool, wet winter
months when less water is used compared to the warm, dry summer months when
water use is higher. During the winter period, the need for short-term
borrowings under the bank lines of credit increases. The increase in cash flow
during the summer allows short-term borrowings to be paid down. In years when
more than normal precipitation falls in the Company's service areas or
temperatures are lower than normal, especially in the summer months, customer
water usage can be lower than normal. The reduction in water usage reduces cash
flow from operations and increases the need for short-term bank borrowings. In
addition, short-term borrowings are used to finance capital expenditures until
long-term financing is arranged.
Cal Water has a $45 million credit facility. The term of the current
agreement expires in April 2007. The agreement requires a 30-day out-of-debt
consecutive period during any 24 consecutive months and a requirement for
outstanding balances to be below $10 million for a 30-day consecutive period
during any 12-consecutive-month period. In addition, the agreement requires debt
as a percent of total capitalization to be less than 67%. The Company has met
all covenant requirements. In addition to borrowings, the credit facility allows
for letters of credit up to $10 million. One letter of credit was outstanding at
December 31, 2004 for $0.5 million related to an insurance policy, which reduces
the amount available to borrow. Interest is charged on a variable basis and fees
are charged for unused amounts. As of December 31, 2004, there were no
borrowings against the credit facility.
A $10 million credit facility exists for California Water Service Group,
CWS Utility Services, Washington Water Service Company, New Mexico Water Service
Company, and Hawaii Water Service Company, Inc. The term of the current
agreement expires in April 2007. The agreement requires a 30-day out-of-debt
consecutive period during any 24 consecutive months and a requirement for
outstanding balances to be below $5 million for a 30-day consecutive period
during any 12-consecutive-month period. In addition, the agreement requires debt
as a percent of total capitalization to be less than 67%. The Company has met
all covenant requirements. In addition to borrowings, the credit facility allows
for letters of credit up to $5 million, which would reduce the amount available
to borrow. No letters of credit were outstanding at December 31, 2004. Interest
is charged on a variable basis and fees are charged for unused amounts. As of
December 31, 2004, there were no borrowings against the credit facility.
Generally, short-term borrowings used for capital expenditures are paid
down through the issuance of long-term debt or issuance of common stock.
Credit Ratings. Cal Waters first mortgage bonds are rated by Moodys
Investors Service (Moodys) and Standard & Poors (S&P). Previously, the two major
credit facility agreements contained covenants related to these debt ratings.
The current agreements do not contain such covenants. During 2004, management
met separately with the two credit rating agencies during their annual rating
reviews. Both agencies maintain their ratings of A2 for Moodys and A+ for S&P as
of the filing date of this report. The last time ratings were changed was in
February 2004, when Moodys issued a report lowering Cal Waters senior secured
debt from A1 to A2 and characterizing the rating as stable. In November 2003,
S&P did not change its rating of A+, but changed its outlook from stable to
negative. Although the Company's financial performance and capitalization
structure improved in 2004 compared to 2003, which was recognized by both
agencies, they noted concerns related to the rate-setting process and decisions
by the CPUC. Also, concerns were raised about the Company's level of capital
expenditures, which will need to be partially financed through long-term
borrowings or common stock offerings. Management believes the Company would be
able to meet financing needs even if ratings were downgraded, but a rating
change may result in a higher interest rate on new debt.
Long-Term Financing. Long-term financing, which includes senior notes,
other debt securities, and common stock, has been used to replace short-term
borrowings and fund capital expenditures. Internally generated funds, after
making dividend payments, provide positive cash flow, but have not been at a
level to meet all of the Company's capital expenditure needs. Management expects
this trend to continue given the Company's capital expenditures plan for the
next five years. In addition to Company-funded capital expenditures, some
capital expenditures are funded by developers contributions in aid of
construction, which are not refundable, and advances for construction, which are
refundable. Management believes long-term financing is available to meet the
Company's cash flow needs through issuances in both debt and equity markets.
On June 24, 2004, the Company announced the sale of 1,250,000 shares of
common stock. A prospectus supplement and prospectus were filed with the SEC
under rule 424 (b) (2) on that date. The shares were sold at $27.25 per share.
After the underwriters exercised their over-allotment option, the total number
of shares issued was 1,409,700 shares. The net proceeds were $36.8 million and
the transaction was closed on June 29, 2004. The funds were used to pay down
short-term borrowings and invest in short-term money market instruments pending
their use for general corporate purposes. After issuance of these shares, $35.6
million remains in securities under the Company's shelf registration, which is
available for future issuance.
In September 2004, the CPUC issued a decision granting Cal Water authority
to complete up to $250 million of equity and debt financing through 2010,
subject to certain restrictions. No financing has been applied against this
authorization as of December 31, 2004. The prior authorization expired with the
approval of the September 2004 decision.
In November 2004, New Mexico Water entered into a long-term debt
arrangement for $3.4 million. The interest rate is 5.65%, the loan terminates in
May 2014, and principal payments are required during the term of the loan. The
funds were used to retire debt of $2.3 million, fund an acquisition, fund
capital expenditures, and for general corporate purposes.
Washington Water has long-term debt primarily from two banks to meet its
operating and capital equipment purchase requirements at interest rates
negotiated with the banks. Washington Water did not incur additional long-term
debt in 2004. Both Washington Water and Hawaii Water have inter-company debt
with the holding company, which is eliminated at consolidation. Hawaii Water
does not have any debt with third parties.
During 2003, additional long-term debt was issued as part of a refinancing
program that began in 2002. In May 2003, Cal Water issued $10 million, 5.54%,
20-year Series I Senior Notes and $10 million, 5.44%, 15-year Series J Senior
Notes. Both notes were unsecured. The proceeds from these borrowings were used
to prepay First Mortgage Bonds Series EE that had an interest rate of 7.9%. The
principal, call premiums, and transaction costs were approximately $20 million.
In October 2003, Cal Water issued a $20 million, 5.55% Series N Senior Note. The
note is unsecured and matures on December 1, 2013. Payment of principal is due
at maturity. Funds received were used to prepay First Mortgage Bonds Series FF,
which accrued interest at a rate of 6.95% and had a principal balance of $19.1
million. In addition to the prepayment of the principal balance, funds were used
to pay a call premium related to Series FF and transaction costs and for general
corporate purposes. In November 2003, Cal Water issued a $20 million, 5.52%
Series M Senior Note. The note is unsecured and matures on November 1, 2013.
Payment of principal is due at maturity. Funds received were used to prepay
First Mortgage Bonds Series GG, which accrued interest at a rate of 6.98% and
had a principal balance of $19.1 million. In addition to the prepayment of the
principal balance, funds were used to pay a call premium related to Series GG
and transaction costs and for general corporate purposes.
In 2003, incremental long-term financing was provided by issuance of senior
notes by Cal Water and common equity by California Water Service Group as
detailed below.
In February 2003, Cal Water completed the issuance of $10 million, 4.58%,
7-year Series K Senior Notes and $10 million, 5.48%, 15-year Series L Senior
Notes. Both notes were unsecured. The proceeds were used to pay down short-term
borrowings and to fund capital expenditures.
On July 11, 2003, a shelf registration became effective, which provides for
the issuance from time to time of up to $120 million in common stock, preferred
stock, and/or debt securities. The Company may issue any of these types of
securities until the amount registered is exhausted, and will add the net
proceeds from the sale of the securities to its general funds to be used for
general corporate purposes, which may include investment in subsidiaries,
working capital, capital expenditures, repayment of short-term borrowings,
refinancing of existing long-term debt, acquisitions, and other business
opportunities.
On August 4, 2003, the Company issued 1,750,000 shares of common stock from
the shelf registration statement. A prospectus supplement and prospectus were
filed with the SEC under Rule 424 (b) (2) on August 5, 2003. The shares were
sold at $26.25 per share. The net proceeds were $43.8 million and the
transaction was closed on August 7, 2003. The funds were used to pay down
short-term borrowings and to invest in short-term money market instruments
pending their use for general corporate purposes.
The Company does not utilize off-balance-sheet financing or utilize special
purpose entity arrangements for financing. The Company does not have equity
ownership through joint ventures or partnership arrangements.
Additional information regarding the bank borrowings and long-term debt is
presented in Footnotes 8 and 9 in the Consolidated Financial Statements.
Dividend Reinvestment and Stock Purchase Plan. The Company's transfer agent
offers stockholders a Dividend Reinvestment and Stock Purchase Plan (Plan).
Under the Plan, stockholders may reinvest dividends to purchase additional
Company common stock without commission fees. The Plan also allows existing
stockholders and other interested investors to purchase Company common stock
without brokerage fees through the transfer agent up to certain limits. The
transfer agent operates the Plan and purchases shares on the open market to
provide shares for the Plan.
2005 Financing Plan. The Company's 2005 financing plan includes raising
approximately $20-$40 million of new capital. The plan includes issuance of
long-term debt to meet funding needs. Currently, the Company does not plan to
issue additional common stock in 2005, although this may change depending on a
variety of factors. Beyond 2005, management intends to fund capital needs
through a relatively balanced approach between long-term debt and common stock.
Contractual Obligations. The Company's contractual obligations are
summarized in the table below. Long-term debt payments include annual sinking
fund payments on first mortgage bonds, maturities of long-term debt, and annual
payments on other long-term obligations. Advances for construction represent
annual contract refunds to developers for the cost of water systems paid for by
the developers. The contracts are non-interest bearing, and refunds are
generally on a straight-line basis over a 40-year period. Operating leases are
generally rents for office space. The total amount presented for operating
leases is for a 20-year period.
Less Than After
Contractual obligations (In thousands) Total 1 Year 1-3 Years 3-5 Years 5 Years
Long-term debt $275,921 $1,100 $2,077 $1,987 $270,757
Advances for construction 131,292 5,036 8,959 8,708 108,589
Operating leases 14,227 1,469 2,678 2,317 7,763
Take-or-pay purchase agreements 58,252 8,782 18,632 20,153 10,685
Cal Water has water supply contracts with wholesale suppliers in 16 of its
operating districts. For each contract, the cost of water is established by the
wholesale supplier and is generally beyond the Company's control. The amount
paid annually to the wholesale suppliers is charged to purchased water expense
on the statement of income. Most contracts do not require minimum annual
payments and vary with the volume of water purchased.
The Company has two material contracts, one in Los Altos and one in
Bakersfield, which contain minimal purchase provisions (take or pay). These
contract payments vary with the volume of water purchased above the minimal
levels. Management plans to continue to purchase and use at least the minimum
water requirement under these contracts in the future. Both contracts renew
annually. Obligations were estimated assuming a five-year horizon beyond 2004.
The wholesale water contract with Stockton East Water District (SEWD) is a
fixed-fee contract. The SEWD payments, excluding payments related to a prior
year meter issue, will total $3.7 million covering SEWDs fiscal year of April
2004 to March 2005. Payments are made monthly. Management estimates the annual
price to increase $0.9 million for the SEWD contract effective April 2005, and
management intends to apply for rate relief for this increase. Management is
unable to estimate price changes beyond a one-year period. SEWD payments are not
included in the above table.
Capital Requirements. Capital requirements consist primarily of new
construction expenditures for expanding and replacing utility plant facilities
and the acquisition of water systems. They also include refunds of advances for
construction.
Company-funded utility plant expenditures were $50.4 million, $53.9
million, and $71.6 million in 2004, 2003, and 2002, respectively. A major
project during this time frame was the $50 million water treatment plant and
related water transmission and distribution pipelines in Bakersfield,
California. Expenditures to construct the plant were incurred over a five-year
period, with the largest portion, $27.1 million, incurred in 2002. The plant
became operational in 2003. Other major components of capital expenditures were
mains and water treatment equipment.
For 2005, Company-funded capital expenditures are budgeted at approximately
$85 million. The increase in 2005 is primarily related to compliance with the
new arsenic standard effective in January 2006. For years beyond 2005, capital
expenditures are estimated at $70-$80 million per year for the next five years
and will be primarily for mains, related water distribution equipment, pumping,
and water quality equipment.
Other capital expenditures are funded through developer advances and
contributions in aid of construction (non-company-funded). The expenditure
amounts were $18.2 million, $20.4 million, and $16.8 million in 2004, 2003, and
2002, respectively. The changes from year to year reflect expansion projects by
developers in the Company's service areas. Funds are received in advance of
incurring costs for these projects. Advances are normally refunded over a
40-year period without interest. Future payments for advances received are
listed under contractual obligations above.
Management expects the Company to incur non-company-funded expenditures in
2005. These expenditures will be financed by developers through refundable
advances for construction and non-refundable contributions in aid of
construction. Developers are required to deposit the cost of a water
construction project with the Company prior to commencing construction work, or
the developers may construct the facilities themselves and deed the completed
facilities to the Company. Because non-company-funded construction activity is
solely at the discretion of developers, management cannot predict the level of
future activity. The cash flow impact is expected to be minor due to the
structure of the arrangements.
Capital Structure. In 2004, common stockholders equity increased $43.1
million, or 18%, primarily due to the issuance of common stock in August 2004.
The long-term debt portion of the capital structure increased in 2004 by $2.6
million, primarily due to additional debt issued for New Mexico Water. See
Long-Term Financing section above for additional information.
Total capitalization at December 31, 2004 was $565.9 million and $520.2
million at December 31, 2003. The Company expects that its plan for using a
balanced approach of common stock and long-term debt for financing, coupled with
increased earnings above dividend growth, will increase the equity portion of
capitalization in future years. At December 31, capitalization ratios were:
2004 2003
---- ----
Common equity 50.8% 47.0%
Preferred stock 0.6% 0.7%
Long-term debt 48.6% 52.3%
The return (from both regulated and non-regulated operations) on average
common equity was 9.8% in 2004 compared to 9.1% in 2003.
Acquisitions. Although there were no significant acquisitions in the
periods presented, the following acquisitions were completed in 2004 and 2003:
In April 2004, the Company acquired the stock of National Utility Company
(NUC) and land from owners of NUC for $0.9 million in cash. The Company retired
NUCs stock and merged it into New Mexico Water Service Company. Revenue for NUC
for the 8-month period in 2004 was $0.4 million and net income was break-even.
The purchase price was approximately equal to rate base, and an immaterial
amount of goodwill was recorded for the transaction.
In April 2003, the Company acquired the Kaanapali Water Corporation for
$6.1 million in cash after certain adjustments. After completing the
acquisition, the entitys name was changed to Hawaii Water Service Company, Inc.
Hawaii Water provides water utility services to 520 customers in Maui, Hawaii.
The final purchase price is expected to be lowered by $0.1 million, which will
be collected from the seller after certain matters are resolved. For 2004,
revenue was $3.3 million and net income was $0.2 million.
Real Estate Program. The Company owns a certain amount of real estate. From
time to time, certain parcels are deemed unnecessary or no longer useful in
water utility operations. Most surplus properties have a low cost basis. A
program was developed to realize the value of certain surplus properties through
sale or lease of those properties. The program will be ongoing for a period of
several years. Property sales produced no pretax gains in 2004, and $4.6 million
and $3.0 million in 2003 and 2002, respectively. As sales are dependent on real
estate market conditions, future sales may or may not be at prior year levels.
Due to the issues reported in the RATES and REGULATIONS section, future sales
may be impacted if the CPUC rules against the Company's position on these
transactions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company maintains its accounting records in accordance with accounting
principles generally accepted in the United States of America and as directed by
the regulatory commissions to which its operations are subject. The process of
preparing financial statements requires the use of estimates on the part of
management. The estimates used by management are based on historical experience
and an understanding of current facts and circumstances. A summary of
significant accounting policies are listed in Footnote 2 of the Consolidated
Financial Statements, and other footnotes provide additional information. The
following sections describe the level of subjec- tivity, judgment, and
variability of estimates that could have a material impact on the financial
condition, operating performance, and cash flows of the business.
Regulated Utility Accounting. Because the Company operates extensively in a
regulated business, it is subject to the provisions of Statement of Financial
Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types
of Regulation. Application of SFAS No. 71 requires accounting for certain
transactions in accordance with regulations defined by the respective regulatory
commission of that state. In the event that a portion of the Company's
operations were no longer subject to the provisions of SFAS No. 71, the Company
would be required to write off related regulatory assets and liabilities that
are not specifically recoverable and determine if other assets might be
impaired. If a regulatory commission determined that a portion of the Company's
assets were not recoverable in customer rates, the Company would be required to
determine if it had suffered an asset impairment that would require a write-down
in the assets valuation. There had been no such asset impairment as of December
31, 2004. Additional information relating to regulatory assets and liabilities
are listed in Footnote 2 of the Consolidated Financial Statements.
Revenue Recognition. Revenue is estimated for metered customers for water
used between the last reading of the customers meter and the end of the
accounting period. This estimate is based on the usage from the last bill to the
customer, which normally covers a 30-day period, and is prorated from the last
meter read date to the end of the accounting period. The amount of variability
is low at December 31, as this is one of the lowest usage months of the year and
usage for the previous 30-day period is relatively consistent during this time
of the year. Actual usage may vary from this estimate.
Flat-rate customers are billed in advance at the beginning of the service
period. Since these are constant amounts, appropriate adjustments can be
calculated to determine the revenue related to the applicable period.
Estimated Expenses. Some expenses are recorded using estimates, as actual
payments are not known or processed by the accounting deadline. Estimates are
made for unbilled purchased water, unbilled purchased power, unbilled pump
taxes, payroll, and other types of similar expenses. While management believes
its estimates are reasonable, actual results could vary. Differences between
actual results and estimates are recorded in the period when the information is
known.
Expense-Balancing and Memorandum Accounts. Expense-balancing accounts and
memorandum accounts (offsetable expenses) represent recoverable costs incurred
but not billed to customers. The amounts included in these accounts relate to
rate changes charged to the Company for purchased water, purchased power, and
pump taxes that are different from amounts incorporated into the rates approved
by the CPUC. The Company does not record expense-balancing or memorandum
accounts in its financial statements as revenue, nor as a receivable, until the
CPUC and other regulators have authorized recovery of the higher costs and
customers have been billed. Therefore, a timing difference may occur between
when costs are recognized and the recognition of associated revenues. The
balancing and memorandum accounts are only used to track the specific costs
outside of the financial statements. The cost changes, which are beyond the
Company's control, are referred to as offsetable expenses because under certain
circumstances, they are recoverable from customers in future offset rate
increases. During 2003 and 2004, the CPUC gave approval to charge customers for
a portion of the offsetable expenses (see Rates and Regulations). Additionally,
the Company may file with the CPUC for its offsetable expenses incurred in 2004.
The amounts requested may not be ultimately collected through rates, as amounts
may be disallowed during the review process or subject to an earnings test.
While the adjustments would not impact previously recorded amounts, the
adjustments may change future earnings and cash flows. The Company has not
compiled its offsetable expenses related to 2004 and therefore cannot provide
estimates of what the ultimate collection will be from these accounts.
Washington Water, New Mexico Water, and Hawaii Water did not have material
amounts in expense-balancing or memorandum accounts.
Income Taxes. Significant judgment is required in determining the provision
for income taxes. The process involves estimating current tax exposure and
assessing temporary differences resulting from treatment of certain items, such
as depreciation, for tax and financial statement reporting. These differences
result in deferred tax assets and liabilities, which are reported in the
consolidated balance sheet. Management must also assess the likelihood that
deferred tax assets will be recovered in future taxable income. To the extent
recovery is unlikely, a valuation allowance would be required. If a valuation
allowance was required, it could significantly increase income tax expense. In
managements view, a valuation allowance was not required at December 31, 2004.
Detailed schedules relating to income taxes are provided in Footnote 11 of the
Consolidated Financial Statements.
Employee Benefit Plans. The Company incurs costs associated with its
pension and postretirement health care benefits plans. To measure the expense of
these benefits, management must estimate compensation increases, mortality
rates, future health cost increases, and discount rates used to value related
liabilities and to determine appropriate funding. Management works with
independent actuaries to measure these benefits. Different estimates and/or
actual amounts could result in significant variances in the costs and
liabilities recognized for these benefit plans. The estimates used are based on
historical experience, current facts, future expectations, and recommendations
from independent advisors and actuaries.
The Company uses an investment advisor to provide expert advice for
managing investments in these plans. To diversify investment risk, the plans
goal is to invest 40%-60% of the assets in domestic equity mutual funds, 5%-15%
in foreign equity mutual funds, and 35%-45% in bond funds. At December 31, 2004,
50% of the assets were invested in domestic equity mutual funds, 10% in foreign
equity mutual funds, and 40% in bond funds. Based on the market values of the
investment funds for the year ended December 31, 2004, the total return on the
pension plan assets was 13%. For 2003 and 2002, returns were 19% and a negative
3.3%, respectively. Future returns on investments could vary significantly from
estimates and could impact earnings and cash flows. Management expects any
changes to these costs to be recovered in future rate filings, mitigating the
financial impact.
For measurement in 2004, management estimated the discount rate at 6.0%,
which approximates the rate of Moodys AA-rated bonds at December 2004. The
discount rate used for 2003 was 6.25% using the same methodology. Management
assumed the rate of compensation to increase 3.0% in 2005 and 3.0% thereafter.
Any change in these assumptions would have an effect on the service costs,
interest costs, and accumulated benefit obligations. Additional information
related to employee benefit plans is listed in Footnote 12 of the Consolidated
Financial Statements.
Workers Compensation, General Liability, and Other Claims. For workers
compensation, the Company utilizes an actuary firm to estimate the discounted
liability associated with claims submitted and claims not yet submitted based on
historical data. These estimates could vary significantly from actual claims
paid, which could impact earnings and cash flows. For general liability claims
and other claims, management estimates the cost incurred but not yet paid using
historical information. Although the Company has insurance policies, it is
primarily self-insured due to the high deductibles. Actual costs could vary from
these estimates. Management believes actual costs incurred would be allowed in
future rates, mitigating the financial impact.
Contingencies. The Company did not record any provisions relating to the
contingencies reported in Footnote 15 of the Consolidated Financial Statements,
as these did not qualify for recording under SFAS No. 5, Accounting for
Contingencies, or other accounting standards. If managements assessment is
incorrect, these items could have a material impact on the financial condition,
results of operations, and cash flows of the business.
FINANCIAL RISK MANAGEMENT
The Company does not participate in hedge arrangements, such as forward
contracts, swap agreements, options, or other contractual agreements relative to
the impact of market fluctuations on the Company's assets, liabilities,
production, or contractual commitments. The Company operates only in the United
States and, therefore, is not subject to foreign currency exchange rate risks.
Terrorism Risk. Due to terrorist risks, the Company has heightened security
at its facilities over the past few years and has taken added precautions to
protect its employees and the water delivered to customers. The Company has
complied with the United States Environmental Protection Agency (EPA)
regulations concerning vulnerability assessments and has made filings to the EPA
as required. In addition, communication plans have been developed as a component
of the Company's procedures related to this risk. While the Company does not
make public comments on its security programs, the Company has been in contact
with federal, state, and local law enforcement agencies to coordinate and
improve water delivery systems security.
Interest Rate Risk. The Company is subject to interest rate risk, although
this risk is lessened because the Company operates in a regulated industry. If
interest costs were to increase, management believes rates would increase
accordingly. The majority of debt is long-term, fixed-rate. Interest rate risk
does exist on short-term borrowings within the Company's credit facilities, as
these interest rates are variable. The Company also has interest rate risk on
new financing, as higher interest cost may occur on new debt if interest rates
increase.
Stock Price Risk. Because the Company operates primarily in a regulated
industry, its stock price risk is somewhat lessened; however, regulated
parameters also can be recognized as limitations to operations, earnings, and
the ability to respond to certain business condition changes. Prior to 2004, the
Company experienced stock price risk because of the impact on earnings caused by
the delay of certain CPUC decisions. An adverse change in the stock price could
make use of common stock more expensive in the future.
Stock Market Performance Risk. The Company's stock price could be impacted
by changes in the general stock market. This could impact the costs of obtaining
funds through the equity markets. Stock market performance could also impact the
Company through the investments by the Company's defined benefit plan and
postretirement medical benefit plan. The Company is responsible for funding
these plans. Plan investments are made in stock market equities using mutual
funds and in corporate bonds. Poor performance of the equity and bond markets
could result in increased costs and additional funding requirements due to lower
investment returns. Management believes the Company would be able to recover
these higher costs in customer rates.
Equity Risk. The Company does not have equity investments and, therefore,
does not have equity risks.
RECENT ACCOUNTING PRONOUNCEMENTS AND LAW CHANGES
The description and impact of recent accounting pronouncements that are
effective for the periods reported are described in Footnote 2 of the
Consolidated Financial Statements.
As of the filing date, there were no accounting pronouncements affecting
future periods that are expected to have a material impact on the Company's
financial condition, results of operations, or cash flows.
CONSOLIDATED BALANCE SHEETS
California Water Service Group
In thousands, except per share data
December 31, 2004 2003
--------- ---------
ASSETS
Utility plant:
Land $ 13,070 $ 12,318
Depreciable plant and equipment 1,102,932 1,038,058
Construction work in progress 13,248 13,770
Intangible assets 14,824 14,829
--------- ---------
Total utility plant 1,144,074 1,078,975
Less accumulated depreciation
and amortization 343,769 319,477
--------- ---------
Net utility plant 800,305 759,498
--------- ---------
Current assets:
Cash and cash equivalents 18,820 2,856
Receivables, net of allowance
for uncollectible accounts
Customers 15,867 18,434
Income taxes 7,298 --
Other 3,147 5,125
Unbilled revenue 9,307 8,522
Materials and supplies at
weighted average cost 3,161 2,957
Prepaid pension expense 3,671 --
Taxes and other prepaid expenses 9,122 5,609
--------- ---------
Total current assets 70,393 43,503
--------- ---------
Other assets:
Regulatory assets 53,477 53,326
Unamortized debt premium and expense 8,411 9,071
Other 10,267 7,637
--------- ---------
Total other assets 72,155 70,034
--------- ---------
$ 942,853 $ 873,035
--------- ---------
2004 2003
--------- ---------
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $0.01 par value,
25,000 shares authorized,
18,367 and 16,932 outstanding
in 2004 and 2003, respectively $ 184 $ 169
Additional paid-in capital 131,271 93,748
Retained earnings 156,851 150,908
Accumulated other comprehensive loss (701) (301)
--------- ---------
Total common
stockholders equity 287,605 244,524
Preferred stock without mandatory
redemption provision,
$25 par value, 380 shares
authorized, 139 shares outstanding 3,475 3,475
Long-term debt, less
current maturities 274,821 272,226
--------- ---------
Total capitalization 565,901 520,225
--------- ---------
Current liabilities:
Current maturities of long-term debt 1,100 904
Short-term borrowings -- 6,454
Accounts payable 19,745 23,776
Accrued taxes 1,912 2,074
Accrued interest 2,676 2,896
Other accrued liabilities 31,779 27,460
--------- ---------
Total current liabilities 57,212 63,564
--------- ---------
Unamortized investment tax credits 2,721 2,925
Deferred income taxes 54,826 38,005
Regulatory liabilities 18,811 16,676
Advances for construction 131,292 121,952
Contributions in aid of construction 94,915 90,529
Other long-term liabilities 17,175 19,159
Commitments and contingencies -- --
--------- ---------
$ 942,853 $ 873,035
--------- ---------
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
California Water Service Group
In thousands, except per share data
For the years ended December 31, 2004 2003 2002
--------- --------- ---------
Operating revenue $ 315,567 $ 277,128 $ 263,151
--------- --------- ---------
Operating expenses:
Operations:
Purchased water 89,787 80,831 76,672
Purchased power 21,801 21,921 22,897
Pump taxes 7,555 6,272 6,344
Administrative and general 47,078 40,969 37,196
Other 39,929 37,476 34,073
Maintenance 13,228 12,717 11,587
Depreciation and amortization 26,114 23,256 21,238
Income taxes 17,084 12,898 12,568
Property and other taxes 11,508 10,554 9,829
--------- --------- ---------
Total operating expenses 274,084 246,894 232,404
--------- --------- ---------
Net operating income 41,483 30,234 30,747
--------- --------- ---------
Other income and expenses:
Non-regulated income, net 2,375 2,097 2,187
Gain on the sale of
non-utility property 8 4,603 2,980
--------- --------- ---------
Total other income
and expenses 2,383 6,700 5,167
--------- --------- ---------
Interest expense:
Interest expense 18,664 19,512 18,314
Less capitalized interest 824 1,995 1,473
Net interest expense 17,840 17,517 16,841
--------- --------- ---------
Net income $ 26,026 $ 19,417 $ 19,073
--------- --------- ---------
Earnings per share:
Basic $ 1.46 $ 1.21 $ 1.25
Diluted $ 1.46 $ 1.21 $ 1.25
Weighted average number of common shares outstanding:
Basic 17,652 15,882 15,182
Diluted 17,674 15,893 15,185
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
California Water Service Group
In thousands
Accumulated
Additional Other Total
For the years ended Common Paid-in Retained Comprehensive Stockholders
December 31, 2004, 2003 and 2002 Stock Capital Earnings Income/(Loss) Equity
Balance at December 31, 2001 $ 152 $ 49,984 $ 147,299 $ (816) $ 196,619
-------- -------- --------- -------- ---------
Net income -- -- 19,073 -- 19,073
Net other comprehensive income -- -- -- 682 682
-------- -------- --------- -------- ---------
Comprehensive income -- -- -- -- 19,755
Dividends paid:
Preferred stock -- -- 153 -- 153
Common stock -- -- 17,004 -- 17,004
-------- -------- --------- -------- ---------
Total dividends paid -- -- 17,157 -- 17,157
-------- -------- --------- -------- ---------
Balance at December 31, 2002 152 49,984 149,215 (134) 199,217
-------- -------- --------- -------- ---------
Net income -- -- 19,417 -- 19,417
Net other comprehensive loss -- -- -- (167) (167)
-------- -------- --------- -------- ---------
Comprehensive income -- -- -- -- 19,250
Issuance of common stock 17 43,764 -- -- 43,781
Dividends paid:
Preferred stock -- -- 153 -- 153
Common stock -- -- 17,571 -- 17,571
-------- -------- --------- -------- ---------
Total dividends paid -- -- 17,724 -- 17,724
-------- -------- --------- -------- ---------
Balance at December 31, 2003 169 93,748 150,908 (301) 244,524
-------- -------- --------- -------- ---------
Net income -- -- 26,026 -- 26,026
Net other comprehensive loss -- -- -- (400) (400)
-------- -------- --------- -------- ---------
Comprehensive income -- -- -- -- 25,626
Issuance of common stock 15 37,523 -- -- 37,538
Dividends paid:
Preferred stock -- -- 153 -- 153
Common stock -- -- 19,930 -- 19,930
Total dividends paid -- -- 20,083 -- 20,083
-------- -------- --------- -------- ---------
Balance at December 31, 2004 $ 184 $131,271 $ 156,851 $ (701) $ 287,605
-------- -------- --------- -------- ---------
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
CONSOLIDATED STATEMENTS OF CASH FLOWS
California Water Service Group
In thousands
For the years ended December 31, 2004 2003 2002
Operating activities:
Net income $ 26,026 $ 19,417 $ 19,073
-------- -------- --------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 26,114 23,256 21,238
Deferred income taxes, investment
tax credits, and regulatory
assets and liabilities, net 17,637 2,834 786
Gain on sale of non-utility property (8) (4,603) (2,980)
Changes in operating assets and liabilities:
Receivables (2,720) 1,292 (1,088)
Unbilled revenue (771) (554) (561)
Taxes and other prepaid expenses (7,168) (2,876) (86)
Accounts payable (4,042) (301) (431)
Other current assets (203) (197) (613)
Other current liabilities 2,713 7,537 1,911
Other changes, net (2,167) (1,374) (696)
-------- -------- --------
Net adjustments 29,385 25,014 17,480
-------- -------- --------
Net cash provided by
operating activities 55,411 44,431 36,553
-------- -------- --------
Investing activities:
Utility plant expenditures:
Company-funded (50,388) (53,884) (71,553)
Developer advances and contributions in
aid of construction (18,185) (20,369) (16,808)
Proceeds from sale of non-utility assets 14 4,803 3,006
Acquisitions (900) (6,094) (2,300)
-------- -------- --------
Net cash used in investing
activities (69,459) (75,544) (87,655)
-------- -------- --------
Financing activities:
Net changes in short-term borrowings (6,454) (29,925) 12,435
Issuance of common stock, net of expenses 37,538 43,781 --
Issuance of long-term debt, net of expenses 3,501 80,114 79,718
Advances for construction 14,388 13,248 12,545
Refunds of advances for construction (5,049) (4,838) (4,597)
Contributions in aid of construction 6,882 9,311 7,740
Retirement of long-term debt (711) (61,061) (39,472)
Dividends paid (20,083) (17,724) (17,157)
-------- -------- --------
Net cash provided by
financing activities 30,012 32,906 51,212
-------- -------- --------
Change in cash and cash equivalents 15,964 1,793 110
Cash and cash equivalents at beginning of year 2,856 1,063 953
-------- -------- --------
Cash and cash equivalents at end of year $ 18,820 $ 2,856 $ 1,063
-------- -------- --------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 18,884 $ 17,672 $ 16,527
Income taxes 8,026 6,188 10,205
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
California Water Service Group
December 31, 2004, 2003, and 2002
Amounts in thousands, except per share data and share data
1
ORGANIZATION AND OPERATIONS
California Water Service Group (Company), a holding company operating
through its wholly owned subsidiaries, provides water utility and other related
services in California, Washington, New Mexico, and Hawaii. California Water
Service Company (Cal Water), Washington Water Service Company (Washington
Water),New Mexico Water Service Company (New Mexico Water), and Hawaii Water
Service Company, Inc. (Hawaii Water) provide regulated utility services under
the rules and regulations of their respective states regulatory commissions
(jointly referred to as the Commissions). CWS Utility Services provides
non-regulated water utility and utility-related services. The Company operates
primarily in one business segment, providing water and related utility services.
2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Accounting Records.The consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries. Inter-company transactions and balances have been eliminated. The
accounting records of the Company are maintained in accordance with the uniform
system of accounts prescribed by the Commissions.
Reclassifications. Certain prior years amounts have been reclassified,
where necessary, to conform to the current year presentation. Use of
Estimates. The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue. Revenue consists of monthly cycle customer billings for regulated
water and wastewater services at rates authorized by the Commissions and
billings to certain non-regulated customers. Revenue from metered accounts
includes unbilled amounts based on the estimated usage from the latest meter
reading to the end of the accounting period. Flat-rate accounts, which are
billed at the beginning of the service period, are included in revenue on a pro
rata basis for the portion applicable to the current accounting period.
The Company provides an allowance for doubtful accounts. The balance of
customer receivables is net of the allowance for doubtful accounts at December
31, 2004 and 2003 of $287 and $289, respectively. The activity in the reserve
account is as follows:
2004 2003
Beginning balance $ 289 $ 181
Provision for uncollectible accounts 1,073 833
Net write-off of uncollectible accounts (1,075) (725)
------ ------
Ending balance $ 287 $ 289
------ ------
Non-Regulated Revenue.Revenues from non-regulated operations and
maintenance agreements are recognized when services have been rendered to
companies or municipalities under such agreements. Expenses are netted against
the revenue billed and are reported in Other income and expenses on the
Consolidated Statements of Income. Other non-regulated revenue is recognized
when title has transferred to the buyer, or ratably over the term of the lease.
For construction and design services, revenue is generally recognized on the
completed contract method, as most projects are completed in less than three
months. One construction and design project spanned multiple years, and revenue
was recognized using the percentage-of-completion method based on a zero profit
margin until project completion in 2002. See Footnote 3, Other Income and
Expenses.
Expense-Balancing and Memorandum Accounts. Expense-balancing and memorandum
accounts are used to track suppliers rate changes for purchased water, purchased
power, and pump taxes that are not included in customer water rates. The cost
changes are referred to as offsetable expenses, because under certain
circumstances, they are recoverable from customers (or refunded to customers) in
future rates designed to offset the cost changes from the suppliers. The Company
does not record the balancing and memorandum accounts until the Commission has
authorized a change in customer rates and the customer has been billed.
Utility Plant. Utility plant is carried at original cost when first
constructed or purchased, except for certain minor units of property recorded at
estimated fair values at the date of acquisition. When depreciable plant is
retired, the cost is eliminated from utility plant accounts and such costs are
charged against accumulated depreciation. Maintenance of utility plant is
charged to operating expenses as incurred. Maintenance projects are not accrued
for in advance. Interest is capitalized on plant expenditures during the
construction period and amounted to $824 in 2004, $1,995 in 2003, and $1,473 in
2002.
Intangible assets acquired as part of water systems purchased are stated at
amounts as prescribed by the Commissions. All other intangibles have been
recorded at cost and are amortized over their useful lives. Included in
intangible assets is $6,515 paid to the City of Hawthorne in 1996 to lease the
citys water system and associated water rights. The asset is being amortized on
a straight-line basis over the 15-year life of the lease.
The following table represents depreciable plant and equipment as of
December 31:
2004 2003
Equipment $ 214,202 $ 199,157
Transmission and distribution plant 819,793 772,641
Office buildings and other structures 68,937 66,260
---------- ----------
Total $1,102,932 $1,038,058
---------- ----------
Depreciation of utility plant for financial statement purposes is computed
on a straight-line basis over the assets estimated useful lives as follows:
Useful Lives
Equipment 5-50 years
Transmission and distribution plant 40-65 years
Office buildings and other structures 50 years
The provision for depreciation expressed as a percentage of the aggregate
depreciable asset balances was 2.6% in 2004, 2.5% in 2003, and 2.4% in 2002. For
income tax purposes, as applicable, the Company computes depreciation using the
accelerated methods allowed by the respective taxing authorities. Plant
additions since June 1996 are depreciated on a straight-line basis for tax
purposes in accordance with tax regulations.
Cash Equivalents. Cash equivalents include highly liquid investments with
maturities of three months or less. As of December 31, 2004 and 2003,
investments in money market funds were $6,133 and $0, respectively, and
investments in high-quality commercial paper were $4,997 and $0, respectively.
Restricted Cash. Restricted cash primarily represents proceeds collected
through a surcharge on certain customers bills plus interest earned on the
proceeds and is used to service California Safe Drinking Water Bond obligations.
In addition, there are compensating balances at a bank in support of borrowings.
All restricted cash is classified in other prepaid expenses. At December 31,
2004 and 2003, the amounts of restricted cash were $1,337 and $1,154,
respectively.
Regulatory Assets and Liabilities. The Company records regulatory assets
for future revenues expected to be realized in customers rates when certain
items are recognized as expenses for rate-making purposes. The income tax
temporary differences relate primarily to the difference between book and income
tax depreciation on utility plant that was placed in service before the
regulatory Commissions adopted normalization for rate-making purposes.
Previously, the tax effect was passed onto customers. In the future, when such
timing differences reverse, the Company will be able to include the impact in
customer rates. The regulatory assets associated with income tax differences are
net of deferred income taxes that were provided at current tax rates. The
differences will reverse over the remaining book lives of the related assets.
In addition, regulatory assets include items that are recognized as
liabilities for financial statement purposes, which will be recovered in future
customer rates. The liabilities relate to postretirement benefits, vacation,
self-insured workers compensation, and asset retirement obligations.
Regulatory liabilities represent future benefits to ratepayers for tax
deductions that will be allowed in the future for funds received as Advances for
Construction and Contributions in Aid of Construction. Regulatory liabilities
also reflect timing differences provided at higher than the current tax rate,
and which will flow through to future ratepayers.
Regulatory assets and liabilities are comprised of the following as of
December 31:
2004 2003
REGULATORY ASSETS
Income tax temporary differences $29,196 $30,157
Asset retirement obligations 2,540 4,985
Postretirement benefits other than pensions 9,019 6,846
Accrued vacation and workers compensation 12,722 11,338
------- -------
Total regulatory assets $53,477 $53,326
------- -------
REGULATORY LIABILITIES
Future tax benefits due ratepayers $18,811 $16,676
------- -------
Long-Lived Assets. The Company regularly reviews its long-lived assets for
impairment annually, or when events or changes in business circumstances have
occurred that indicate the carrying amount of such assets may not be fully
realizable. Potential impairment of assets held for use is determined by
comparing the carrying amount of an asset to the future undiscounted cash flows
expected to be generated by that asset. If assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
value of the assets exceeds the fair value of the assets. There have been no
such impairments as of December 31, 2004 and 2003.
Long-Term Debt Premium, Discount and Expense. The discount and issuance
expense on long-term debt is amortized over the original lives of the related
debt issues. Premiums paid on the early redemption of certain debt issues and
unamortized original issue discount and expense of such issues are amortized
over the life of new debt issued in conjunction with the early redemption. These
amounts were $0, $3,154, and $2,449 in 2004, 2003, and 2002, respectively.
Amortization expense included in interest expense was $660, $415, and $183 for
2004, 2003, and 2002, respectively.
Accumulated Other Comprehensive Loss. The Company has an unfunded
Supplemental Executive Retirement Plan. The unfunded accumulated benefit
obligation of the plan, less the accrued benefit, exceeds the unrecognized prior
service cost resulting in an accumulated other comprehensive loss that has been
recorded net of tax as a separate component of Stockholders Equity.
Advances for Construction. Advances for Construction consist of payments
received from developers for installation of water production and distribution
facilities to serve new developments. Advances are excluded from rate base for
rate-setting purposes. Annual refunds are made to developers without interest
over a 20-year or 40-year period. Refund amounts under the 20-year contracts are
based on annual revenues from the extensions. Unrefunded balances at the end of
the contract period are credited to Contributions in Aid of Construction when
they are no longer refundable in accordance with the contracts.
Reclassifications were $0 in 2004 and $1,813 in 2003. Refunds on contracts
entered into since 1982 are made in equal annual amounts over 40 years. At
December 31, 2004 and 2003, the amounts refundable under the 20-year contracts
were $828 and $1,350, respectively, and under 40-year contracts were $129,730
and $119,699, respectively. In addition, other Advances for Construction
totaling $734 and $903 at December 31, 2004 and 2003, respectively, are
refundable based upon customer connections. Estimated refunds of advances for
each succeeding year (2005 through 2009) are $5,036, $4,556, $4,403, $4,364, and
$4,344, and $108,589 thereafter.
Contributions in Aid of Construction. Contributions in Aid of Construction
represent payments received from developers, primarily for fire protection
purposes, which are not subject to refunds. Facilities funded by contributions
are included in utility plant, but excluded from rate base. Depreciation related
to assets acquired from contributions is charged to Contributions in Aid of
Construction.
Income Taxes. The Company accounts for income taxes using the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Measurement of the deferred tax assets and liabilities is
at enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date.
The Company anticipates that future rate action by the Commissions will
reflect revenue requirements for the tax effects of temporary differences
recognized, which have previously been flowed through to customers. The
Commissions have granted the Company rate increases to reflect the normalization
of the tax benefits of the federal accelerated methods and available Investment
Tax Credits (ITC) for all assets placed in service after 1980. ITC are deferred
and amortized over the lives of the related properties for book purposes.
Advances for Construction and Contributions in Aid of Construction received
from developers subsequent to 1986 were taxable for federal income tax purposes,
and those received subsequent to 1991 were subject to California income tax. In
1996, the federal tax law, and in 1997, the California tax law, changed and only
deposits for new services were taxable. In late 2000, federal regulations were
further modified to exclude fire services from tax.
Worker's Compensation, General Liability and Other Claims. For workers
compensation, the Company utilized an actuary firm to estimate the discounted
liability associated with claims submitted and claims not yet submitted based on
historical data. For general liability claims and other claims, the Company
estimates the cost incurred but not yet paid using historical information.
Earnings Per Share. Basic earnings per share (EPS) is calculated by
dividing income available to common stockholders (net income less preferred
stock dividends of $153) by the weighted average shares outstanding during the
year. Diluted EPS is calculated by dividing income available to common
stockholders by the weighted average shares outstanding, including potentially
dilutive shares as determined by application of the treasury stock method. The
difference between basic and diluted weighted average number of common stock
outstanding is the effect of dilutive common stock options outstanding.
Stock-Based Compensation. The Company has a stockholder-approved Long-Term
Incentive Plan that allows granting of non-qualified stock options. The Company
has adopted the disclosure requirements of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation, "as amended
by SFAS No.148, "Accounting for Stock-Based Compensation - Transition Disclosure
- - An Amendment to SFAS No. 123," and as permitted by the statement, applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," for its plan. All of the Company's outstanding options have an
exercise price equal to the market price on the date they were granted. No
compensation expense was recorded for the years ended December 31, 2004, 2003,
or 2002.
The table below illustrates the effect on net income and earnings per share
as if the Company had applied the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation.
2004 2003 2002
Net income, as reported $26,026 $19,417 $19,073
Deduct: Total stock-based employee
compensation expense determined under
fair value-based method for all awards,
net of related tax effects 67 68 70
------- ------- -------
Pro forma net income $25,959 $19,349 $19,003
------- ------- -------
Earnings per share:
Basic-as reported $ 1.46 $ 1.21 $ 1.25
Basic-pro forma $ 1.46 $ 1.21 $ 1.24
Diluted-as reported $ 1.46 $ 1.21 $ 1.25
Diluted-pro forma $ 1.46 $ 1.21 $ 1.24
Recent Accounting Pronouncements. In December 2003, the Financial
Accounting Standards Board (FASB) issued Interpretation No. 46R, "Consolidation
of Variable Interest Entities," which amended Interpretation No. 46,
"Consolidation of Variable Interest Entities." The revision exempted certain
entities and modified the effective dates of Interpretation No. 46. The original
guidance issued under Interpretation No. 46 in January 2003 is still applicable.
Interpretation No. 46 and Interpretation No. 46R provide guidance for
determining when a primary beneficiary should consolidate a variable interest
entity or equivalent structure that functions to support the activities of the
primary beneficiary. Interpretation No. 46R was effective March 31, 2004. The
adoption of Interpretation No. 46R did not impact the Company's financial
position, results of operations, or cash flows.
In December 2003, the FASB issued Statements of Financial Accounting
Standards (SFAS) No. 132 (revised), "Employers' Disclosures about Pensions and
Other Postretirement Benefits - An Amendment of FASB Statements No. 87, 88, and
106," which changed certain disclosures. SFAS No. 132 (revised) was effective
for fiscal years ending after December 15, 2003, and was effective for
interim-period disclosures beginning after December 15, 2003. As the revision
relates to disclosure requirements, the adoption of SFAS No. 132 (revised) did
not impact the Company's financial position, results of operations, or cash
flows.
In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003." FSP No. 106-2 was effective
for the first quarter after June 15, 2004, and replaces FSP No. 106-1. FSP No.
106-1 was effective for the Company's consolidated financial statements for the
year ended December 31, 2003. The Company has determined its retiree health plan
is actuarially equivalent and would qualify for the subsidy. Because the Company
is regulated, FSP No. 106-2 did not have an impact to the income statement or
cash flows in 2004. The adjustment for FSP No. 106-2 impacted the balance sheet
only, decreasing liabilities and regulatory assets by $663. The Company believes
it will be eligible for the subsidy starting in 2006. The Company has estimated
the impact of the subsidy on premiums charged to retirees, but has not made a
final decision at this time; therefore, adjustments may occur once a decision
has been made.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
Amendment to ARB No. 43, Chapter 4." The statement clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material. The statement is effective for fiscal years beginning after June 15,
2005. The adoption of this statement is not expected to impact the Company's
financial position, results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary
Assets." The statement amends Opinion No. 29 to eliminate the exception for
non-monetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of non-monetary assets that do not have
commercial substance. The statement is effective for fiscal years beginning
after June 15, 2005. The adoption of this statement is not expected to impact
the Company's financial position, results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment, which revises SFAS No. 123, Accounting for Stock-Based Compensation.
The statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). The statement is effective
for the Company in the first interim period that begins after June 15, 2005. The
adoption of this statement is not expected to materially impact the Company's
financial position, results of operations, or cash flows for equity instruments
previously granted. The Company intends to request stockholder approval of a new
long-term incentive plan in 2005, which includes issuances of equity
instruments. At this time, the Company cannot estimate the impact of this new
long-term incentive plan on the Company's financial position, results of
operations, or cash flows.
In December 2004, the FASB issued FSP No. 109-1, "Application of FASB
Statement No. 109, Accounting for Income Tax, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creations Act of 2004." FSP
No. 109-1 gives guidance on the application of SFAS No. 109 to the provisions
within the American Jobs Creation Act of 2004 that allow a tax deduction on
qualified production activities. The guidance states that the deduction should
be accounted for as a special deduction in accordance with SFAS No. 109. The
adoption of this guidance is not expected to materially impact the Company's
financial position, results of operations, or cash flows.
3
OTHER INCOME EXPENSES
The Company conducts various non-regulated activities as reflected in the
table below. Income reflects revenue less direct and allocated costs. Income
taxes are not included.
2004 2003 2002
----------------------------------------------------------------------
Revenue Income Revenue Income Revenue Income
----------------------------------------------------------------------
Operating and maintenance $4,536 $ 997 $4,137 $ 939 $ 4,007 $ 800
Meter reading and billing 1,261 622 1,337 473 1,179 464
Leases 1,285 818 1,190 781 1,050 661
Water rights brokering -- (96) 196 112 1,382 515
Design and construction 606 209 1,305 204 6,267 206
Other and non-regulated expenses 385 (175) 320 (412) 262 (459)
------ ------ ------ ------ ------- ------
Total $8,073 $2,375 $8,485 $2,097 $14,147 $2,187
------ ------ ------ ------ ------- ------
Operating and maintenance services and meter reading and billing services
are provided for water and wastewater systems owned by private companies and
municipalities. The agreements call for a fee-per-service or a flat-rate amount
per month due from companies and municipalities. Leases have been entered into
with telecommunications companies for cellular phone antennas placed on the
Company's property. Water rights brokering activity involves purchasing water
rights from third parties and reselling those rights to other third parties.
Design and construction services are the design and installation of water mains
and other water infrastructure for others outside the Company's regulated
service areas.
4
ACQUISITIONS
In 2004, after receiving regulatory approval, the Company's wholly owned
subsidiary, New Mexico Water, acquired the stock of National Utility Company.
The purchase was for $900 in cash for the approximate amount of rate base of the
water system and for certain real estate used by the water system.
In 2003, after receiving regulatory approval, the Company acquired the
Kaanapali Water Corporation and renamed the corporation Hawaii Water Service
Company, Inc. The purchase was for $6,094 in cash for the approximate amount of
rate base. If the rate base is adjusted by the Commission in the next rate
proceeding, the purchase price will be adjusted accordingly.
During 2002, after receiving regulatory approval, the Company acquired the
assets of Rio Grande Utility Corporation (Rio Grande) through its wholly owned
subsidiary, New Mexico Water. The purchase includes the water and wastewater
assets of Rio Grande, which serves water and wastewater customers in
unincorporated areas of Valencia County, New Mexico. The purchase price was
$2,300 in cash, plus assumption of $3,100 in outstanding debt. Rate base for the
system is $5,400, including intangible water rights valued at $732.
Condensed balance sheets and pro forma results of operations for these
acquisitions have not been presented because the effects of these purchases are
not material. Acquisitions that involved purchase of assets were accounted for
under the purchase method of accounting. Minimal or no goodwill was recorded for
these acquisitions.
5
INTANGIBLE ASSETS
As of December 31, 2004 and 2003, intangible assets that will continue to
be amortized and those not amortized were:
2004 2003
-------------------------------------------------------------------------------------
Weighted
Average Gross Net Gross Net
Amortization Carrying Accumulated Carrying Carrying Accumulated Carrying
Period Value Amortization Value Value Amortization Value
------ ----- ------------ ----- ----- ------------ -----
Amortized intangible assets:
Hawthorne lease 15 $ 6,515 $ 3,837 $ 2,678 $ 6,515 $ 3,402 $ 3,113
Water pumping rights usage 1,046 8 1,038 1,046 8 1,038
Water planning studies 13 3,164 763 2,401 2,470 485 1,985
Leasehold improvements and other 19 1,130 624 506 1,849 853 996
----- -------- ---------- ------- ------- -------- -------
Total 15 $ 11,855 $ 5,232 $ 6,623 $11,880 $ 4,748 $ 7,132
----- -------- ---------- ------- ------- -------- -------
Unamortized intangible assets:
Perpetual water rights and other $ 2,969 -- $ 2,969 $ 2,949 -- $ 2,949
For the years ending December 31, 2004, 2003, and 2002, amortization of
intangible assets was $799, $713, and $670, respectively. Estimated future
amortization expense related to intangible assets for the succeeding five years
is $828, $812, $683, $655, and $633 for 2005 to 2009 and $3,012 thereafter.
6
PREFERRED STOCK
As of December 31, 2004 and 2003, 380,000 shares of preferred stock were
authorized. Dividends on outstanding shares are payable quarterly at a fixed
rate before any dividends can be paid on common stock.
The outstanding 139,000 shares of $25 par value cumulative, 4.4% Series C
preferred shares are not convertible to common stock. A premium of $243 would be
due to preferred stock shareholders upon voluntary liquidation of Series C.
There is no premium in the event of an involuntary liquidation. Each Series C
preferred share is entitled to 16 votes, with the right to cumulative votes at
any election of directors.
7
COMMON STOCKHOLDERS EQUITY
The Company is authorized to issue 25 million shares of $0.01 par value
common stock. As of December 31, 2004 and 2003, 18,367,246 shares and 16,932,046
shares, respectively, of common stock were issued and outstanding.
Dividend Reinvestment and Stock Purchase Plan. The Company's transfer agent
has a Dividend Reinvestment and Stock Purchase Plan (Plan). Under the Plan,
stockholders may reinvest dividends to purchase additional Company common stock
without commission fees. The Plan also allows existing stockholders and other
interested investors to purchase Company common stock through the transfer agent
up to certain limits. The Company's transfer agent operates the Plan and
purchases shares on the open market to provide shares for the Plan.
Stockholder Rights Plan. The Company's Stockholder Rights Plan (Plan) is
designed to provide stockholders protection and to maximize stockholder value by
encouraging a prospective acquirer to negotiate with the Board. The Plan was
adopted in 1998 and authorized a dividend distribution of one right (Right) to
purchase 1/100th share of Series D Preferred Stock for each outstanding share of
Common Stock in certain circumstances. The Rights are for a 10-year period that
expires in February 2008.
Each Right represents a right to purchase 1/100th share of Series D
Preferred Stock at the price of $120, subject to adjustment (Purchase Price).
Each share of Series D Preferred Stock is entitled to receive a dividend equal
to 100 times any dividend paid on common stock and 100 votes per share in any
stockholder election. The Rights become exercisable upon occurrence of a
Distribution Date. A Distribution Date event occurs if (a) any person
accumulates 15% of the then outstanding Common Stock, (b) any person presents a
tender offer which would cause the persons ownership level to exceed 15% and the
Board determines the tender offer not to be fair to the Company's stockholders,
or (c) the Board determines that a stockholder maintaining a 10% interest in the
Common Stock could have an adverse impact on the Company or could attempt to
pressure the Company to repurchase the holders shares at a premium.
Until the occurrence of a Distribution Date, each Right trades with the
Common Stock and is not separately transferable. When a Distribution Date
occurs: (a) the Company would distribute separate Rights Certificates to Common
Stockholders and the Rights would subsequently trade separate from the Common
Stock; and (b) each holder of a Right, other than the acquiring person (whose
Rights would thereafter be void), would have the right to receive upon exercise
at its then current Purchase Price that number of shares of Common Stock having
a market value of two times the Purchase Price of the Right. If the Company
merges into the acquiring person or enters into any transaction that unfairly
favors the acquiring person or disfavors the Company's other stockholders, the
Right becomes a right to purchase Common Stock of the acquiring person having a
market value of two times the Purchase Price.
The Board may determine that in certain circumstances a proposal that would
cause a Distribution Date is in the Company stockholders best interest.
Therefore, the Board may, at its option, redeem the Rights at a redemption price
of $0.001 per Right.
8
SHORT-TERM BORROWINGS
At December 31, 2004, the Company maintained a bank line of credit
providing unsecured borrowings of up to $10 million at the prime lending rate or
lower rates as quoted by the bank. Cal Water maintained a separate bank line of
credit for an additional $45 million on the same terms as the Company's line of
credit. Both agreements required a 30-day out-of-debt period during any 24
consecutive months. The $10 million and $45 million lines have a requirement
where the outstanding balance must be below $5 million and $10 million,
respectively, for a 30-day consecutive period during any 12-month period. Both
agreements have a covenant requiring debt as a percentage of total
capitalization to be less than 67%. At December 31, 2004, there were no
borrowings on the Company or Cal Water line.
The following table represents borrowings under the bank lines of credit:
2004 2003 2002
---- ---- ----
Maximum short-term borrowings $18,800 $58,633 $52,285
Average amount outstanding $ 4,330 $30,388 $25,495
Weighted average interest rate 2.94% 2.96% 3.44%
Interest rate at December 31 n/a 4.08% 3.61%
9
LONG-TERM DEBT
As of December 31, 2004 and 2003, long-term debt outstanding was:
Interest Maturity
Series Rate Date 2004 2003
First mortgage bonds: J 8.86% 2023 $ 3,800 $ 3,800
K 6.94% 2012 5,000 5,000
CC 9.86% 2020 18,200 18,300
-----------------------------------------
Total first mortgage bonds 27,000 27,100
---------------------------------------------------------
Senior notes: A 7.28% 2025 20,000 20,000
B 6.77% 2028 20,000 20,000
C 8.15% 2030 20,000 20,000
D 7.13% 2031 20,000 20,000
E 7.11% 2032 20,000 20,000
F 5.90% 2017 20,000 20,000
G 5.29% 2022 20,000 20,000
H 5.29% 2022 20,000 20,000
I 5.54% 2023 10,000 10,000
J 5.44% 2018 10,000 10,000
K 4.58% 2010 10,000 10,000
L 5.48% 2018 10,000 10,000
M 5.52% 2013 20,000 20,000
N 5.55% 2013 20,000 20,000
-----------------------------------------
Total senior notes 240,000 240,000
---------------------------------------------------------
California Department of
Water Resources loans 3.0% to 7.4% 2005-33 2,673 2,747
Other long-term debt 6,248 3,283
---------------------------------------------------------
Total long-term debt 275,921 273,130
Current maturities 1,100 904
---------------------------------------------------------
Long-term debt less current maturities $274,821 $272,226
---------------------------------------------------------
The first mortgage bonds and unsecured senior notes are obligations of Cal
Water. All bonds are held by institutional investors and secured by
substantially all of Cal Waters utility plant. The senior notes are held by
institutional investors and require interest-only payments until maturity,
except series G and H, which have an annual sinking fund requirement of $1.8
million starting in 2012. The Department of Water Resources (DWR) loans were
financed under the California Safe Drinking Water Bond Act. Repayment of
principal and interest on the DWR loans is done through a surcharge on customer
bills. Other long-term debt includes a term loan of $3.4 million for New Mexico
Water and other equipment and system acquisition financing arrangements with
financial institutions. Compensating balances of $228 as of December 31, 2004
are required by these institutions. Aggregate maturities and sinking fund
requirements for each of the succeeding five years (2005 through 2009) are
$1,100, $1,048, $1,029, $1,030, and $957, and $270,757, thereafter.
10
OTHER ACCRUED LIABILITIES
As of December 31, 2004 and 2003, other accrued liabilities were:
2004 2003
Accrued pension and postretirement benefits $13,032 $11,828
Accrued and deferred compensation 7,953 7,192
Accrued benefit and workers compensation claims 4,142 2,894
Other 6,652 5,546
------- -------
Total other accrued liabilities $31,779 $27,460
------- -------
11
INCOME TAXES
Income tax expense consists of the following:
Federal State Total
2004 Current $ 4,211 $3,623 $ 7,834
Deferred 9,146 104 9,250
------- ------ -------
Total $13,357 $3,727 $17,084
------- ------ -------
2003 Current $ 8,506 $2,604 $11,110
Deferred 1,697 91 1,788
------- ------ -------
Total $10,203 $2,695 $12,898
------- ------ -------
2002 Current $ 8,797 $2,406 $11,203
Deferred 1,039 326 1,365
------- ------ -------
Total $ 9,836 $2,732 $12,568
------- ------ -------
Income tax expense computed by applying the current federal 35% tax rate to
pretax book income differs from the amount shown in the Consolidated Statements
of Income. The difference is reconciled in the table below:
2004 2003 2002
---- ---- ----
Computed "expected" tax expense $15,089 $11,310 $11,074
Increase (reduction) in taxes due to:
State income taxes net of federal tax benefit 2,477 1,846 1,818
Investment tax credits (139) (91) (191)
Other (343) (167) (133)
------- ------- -------
Total income tax $17,084 $12,898 $12,568
------- ------- -------
The components of deferred income tax expense were:
2004 2003 2002
---- ---- ----
Depreciation $11,603 $3,110 $ 2,405
Developer advances and contributions (1,409) (1,136) (789)
Bond redemption premiums (231) 911 806
Investment tax credits (107) (110) (95)
Other (606) (987) (962)
------- ------ -------
Total deferred income tax expense $ 9,250 $1,788 $ 1,365
------- ------ -------
The tax effects of differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 2004 and
2003 are presented in the following table:
2004 2003
---- ----
Deferred tax assets:
Developer deposits for extension agreements
and contributions in aid of construction $ 47,688 $42,517
Federal benefit of state tax deductions 7,120 6,439
Book plant cost reduction for future
deferred ITC amortization 1,607 1,728
Insurance loss provisions 1,158 1,179
Pension plan 1,524 1,359
Other 190 945
-------- --------
Total deferred tax assets 59,827 54,167
-------- --------
Deferred tax liabilities:
Utility plant, principally due to
depreciation differences 111,506 89,464
Premium on early retirement of bonds 2,607 2,708
Total deferred tax liabilities 114,113 92,172
-------- --------
Net deferred tax liabilities $ 54,826 $38,005
-------- --------
A valuation allowance was not required at December 31, 2004 and 2003. Based
on historical taxable income and future taxable income projections over the
period in which the deferred assets are deductible, management believes it is
more likely than not that the Company will realize the benefits of the
deductible differences.
12
EMPLOYEE BENEFIT PLANS
Pension Plan. The Company provides a qualified, defined benefit,
non-contributory pension plan for substantially all employees. The Company also
maintains an unfunded, non-qualified, supplemental executive retirement plan.
The cost of plans are charged to expense and utility plant. The Company makes
annual contributions to fund the amounts accrued for pension cost. The Company
estimates that the annual contribution to the pension plan will be $5,400 in
2005. Plan assets in the pension plan as of December 31, 2004 and 2003 (the
measurement dates for the plan) were as follows:
Asset Category Target 2004 2003
Bond funds 35%-45% 39.4% 42.9%
Equity accounts 55%-65% 60.6% 57.1%
The investment objective of the fund is to maximize the return on assets,
commensurate with the risk the Company Trustees deem appropriate to meet the
obligations of the Plan, minimize the volatility of the pension expense, and
account for contingencies. The Trustees utilize the services of an outside
investment advisor and periodically measure fund performance against specific
indexes in an effort to generate a rate of return for the total portfolio that
equals or exceeds the actuarial investment rate assumptions.
Pension benefit payments are generally done in the form of purchasing an
annuity from a life insurance company. Benefit payments under the supplemental
executive retirement plan are paid currently. Benefits expected to be paid in
each year from 2005 to 2009 are $3,207, $3,509, $4,879, $6,494, and $7,148,
respectively. The aggregate benefit expected to be paid in the five years from
2010 to 2014 is $45,837. The expected benefit payments are based upon the same
assumption used to measure the Company's benefit obligation at December 31, 2004
and include estimated future employee service.
The accumulated benefit obligations of the pension plan are $65,938 and
$62,368 as of December 31, 2004 and 2003, respectively. The fair value of
pension plan assets was $75,064 and $63,216 as of December 31, 2004 and 2003,
respectively. The unfunded supplemental executive retirement plan accumulated
benefit obligations were $7,234 and $6,480 as of December 31, 2004 and 2003,
respectively.
The data in the tables below includes the unfunded, non-qualified,
supplemental executive retirement plan.
Savings Plan. The Company sponsors a 401(k) qualified, defined contribution
savings plan that allows participants to contribute up to 20% of pretax
compensation. The Company matches fifty cents for each dollar contributed by the
employee up to a maximum Company match of 4.0%. Company contributions were
$1,443, $1,433, and $1,422, for the years 2004, 2003, and 2002, respectively.
Other Postretirement Plans. The Company provides substantially all active,
permanent employees with medical, dental, and vision benefits through a
self-insured plan. Employees retiring at or after age 58, along with their
spouses and dependents, continue participation in the plan by payment of a
premium. Plan assets are invested in mutual funds, short-term money market
instruments, and commercial paper. Retired employees are also provided with a
$5,000 life insurance benefit.
The Company records the costs of postretirement benefits during the
employees years of active service. The Commissions have issued decisions that
authorize rate recovery of tax-deductible funding of postretirement benefits and
permit recording of a regulatory asset for the portion of costs that will be
recoverable in future rates.
The following table reconciles the funded status of the plans with the
accrued pension liability and the net postretirement benefit liability as of
December 31, 2004 and 2003:
Pension Benefits Other Benefits
--------------------------------------
2004 2003 2004 2003
Change in benefit obligation:
Beginning of year $ 88,356 $ 79,569 $ 22,219 $ 17,503
Service cost 4,608 3,879 1,461 1,033
Interest cost 5,613 5,374 1,560 1,224
Assumption change (5,992) 6,662 3,266 1,462
Medicare Modernization Act -- -- (4,360) --
Experience loss 2,938 2,058 8,130 1,106
Benefits paid, net of retiree premiums (7,907) (9,186) (1,406) (109)
-------- -------- -------- --------
End of year $ 87,616 $ 88,356 $ 30,870 $ 22,219
-------- -------- -------- --------
Change in plan assets:
Fair value of plan assets at
beginning of year $ 63,216 $ 56,303 $ 3,697 $ 2,465
Actual return on plan assets 8,298 10,667 294 364
Employer contributions 11,457 5,432 1,958 977
Retiree contributions -- -- 649 580
Benefits paid (7,907) (9,186) (2,055) (689)
-------- -------- -------- --------
Fair value of plan assets at end of year $ 75,064 $ 63,216 $ 4,543 $ 3,697
-------- -------- -------- --------
Funded status $(12,552) $(25,140) $(26,327) $(18,522)
Unrecognized actuarial (gain) or loss (2,783) 4,031 14,293 7,175
Unrecognized prior service cost 15,383 17,074 638 712
Unrecognized transition obligation -- -- 2,493 2,769
Unrecognized net initial asset -- -- (276) (276)
-------- -------- -------- --------
Net amount recognized $ 48 $ (4,035) $ (9,179) $ (8,142)
-------- -------- -------- --------
Amounts recognized on the balance sheet consist of:
Pension Benefits Other Benefits
--------------------------------------
2004 2003 2004 2003
Accrued benefit costs $ 48 $ (4,035) $ (9,179) $ (8,142)
Additional minimum liability (3,081) (2,992) -- --
Intangible asset 2,380 2,691 -- --
Accumulated other comprehensive loss 701 301 -- --
-------- -------- -------- --------
Net amount recognized $ 48 $ (4,035) $ (9,179) $ (8,142)
-------- -------- -------- --------
Below are the actuarial assumptions used for the benefit plans:
Pension Benefits Other Benefits
--------------------------------------
2004 2003 2004 2003
Weighted average assumptions as of December 31:
Discount rate 6.00% 6.25% 6.00% 6.25%
Long-term rate of return on plan assets 8.00% 8.00% 8.00% 8.00%
Rate of compensation increases 3.00% 1.5%-4.25% -- --
The long-term rate of return assumption is the expected rate of return on a
balanced portfolio invested roughly 60% in equities and 40% in fixed income
securities. The average return for the plan for the last five and 10 years was
6.4% and 10.1%, respectively.
Net periodic benefit costs for the pension and other postretirement plans
for the years ending December 31, 2004, 2003, and 2002 included the following
components:
Pension Benefits Other Benefits
----------------------------------------------------------------
2004 2003 2002 2004 2003 2002
Service cost $ 4,608 $ 3,879 $ 2,968 $ 1,461 $ 1,033 $ 815
Interest cost 5,613 5,374 4,404 1,560 1,224 1,037
Expected return on plan assets (4,861) (4,757) (4,497) (340) (233) (216)
Net amortization and deferral 2,014 1,861 1,166 894 637 500
------- ------- ------- ------- ------- ------
Net periodic benefit cost $ 7,374 $ 6,357 $ 4,041 $ 3,575 $ 2,661 $2,136
------- ------- ------- ------- ------- ------
Postretirement benefit expense recorded in 2004, 2003, and 2002 was $1,420,
$1,160, and $1,157, respectively. The remaining net periodic benefit cost as of
December 31, 2004 of $9,019 is recoverable through future customer rates and is
recorded as a regulatory asset. The Company intends to make annual contributions
to the plan up to the amount deductible for tax purposes.
For 2004 measurement purposes, the Company assumed a 9.5% annual rate of
increase in the per capita cost of covered benefits with the rate decreasing 1%
per year for the next five years to a long-term annual rate of 4.5% per year.
The health care cost trend rate assumption has a significant effect on the
amounts reported. A one-percentage point change in assumed health care cost
trends is estimated to have the following effect:
1-Percentage 1-Percentage
Point Increase Point Decrease
Effect on total service and interest costs $ 552 $ (618)
Effect on accumulated postretirement
benefit obligation $6,044 $(4,756)
13
STOCK-BASED COMPENSATION PLANS
The Company has a stockholder-approved Long-Term Incentive Plan that allows
granting of non-qualified stock options, performance shares, and dividend units.
Under the plan, a total of 1,500,000 common shares are authorized for option
grants. Options are granted at an exercise price that is not less than the per
share common stock market price on the date of grant. The options vest at a 25%
rate on their anniversary date over their first four years and are exercisable
over a 10-year period. At December 31, 2004, 85,500 options were exercisable at
a weighted average price of $24.82. No options were granted in 2004 or 2003.
The fair value of stock options used to compute pro forma net income and
earnings per share disclosures is the estimated fair value at grant date using
the Black-Scholes option-pricing model with the following assumptions:
2004 2003 2002
Expected dividend n/a n/a 4.5%
Expected volatility n/a n/a 14.4%
Risk-free interest rate n/a n/a 3.25%
Expected holding period in years n/a n/a 5.0
The following table summarizes the activity for the stock option plans:
Weighted Weighted Weighted
Average Average Average
Exercise Remaining Options Fair
Shares Price Contractual Life Exercisable Value
------ ----- ---------------- ----------- -----
Outstanding at December 31, 2001 99,500 24.57 8.8 11,875 --
Granted 55,000 25.15 2.05
Outstanding at December 31, 2002 154,500 24.77 8.2 36,750 --
Cancelled (5,250) 24.78
Outstanding at December 31, 2003 149,250 24.77 7.2 74,625 --
Exercised (25,500) 23.67
Cancelled (2,250) 25.41
Outstanding at December 31, 2004 121,500 24.99 6.3 85,500 --
14
FAIR VALUE OF FINANCIAL INSTRUMENTS
For those financial instruments for which it is practicable to estimate a
fair value, the following methods and assumptions were used. For cash
equivalents, accounts receivables, accounts payables, and short-term borrowings,
the carrying amount approximates fair value because of the short-term maturity
of the instruments. The fair value of the Company's long-term debt is estimated
at $301 million and $289 million as of December 31, 2004 and 2003, respectively,
using a discounted cash flow analysis, based on the current rates available to
the Company for debt of similar maturities. The book value of the long-term debt
is $276 million and $273 million as of December 31, 2004 and 2003, respectively.
The fair value of advances for construction contracts is estimated at $51
million as of December 31, 2004 and $48 million as of December 31, 2003, based
on data provided by brokers who purchase and sell these contracts.
15
COMMITMENTS AND CONTINGENCIES
Commitments. The Company leases office facilities in many of its operating
districts. The total paid and charged to operations for such leases was $632 in
2004, $577 in 2003, and $700 in 2002.
The Company has long-term contracts with two wholesale water suppliers that
require the Company to purchase minimum annual water quantities. Purchases are
priced at the suppliers then current wholesale water rate. The Company operates
to purchase sufficient water to equal or exceed the minimum quantities under
both contracts. The total paid under the contracts was $7,918 in 2004, $8,557 in
2003, and $6,816 in 2002.
The Company leases the City of Hawthorne water system, which in addition to
the upfront lease payment, includes an annual payment. The 15-year lease expires
in 2011. The annual payments in 2004, 2003, and 2002 were $116, $111, and $100,
respectively. In July 2003, the Company entered into a 15-year lease of the City
of Commerce water system. The lease includes an annual lease payment of $845 per
year plus a cost savings sharing arrangement.
Lease payments and payments called for in the above contracts are
summarized below.
Office Leases Water Contracts System Leases
2005 $508 $8,782 $ 961
2006 438 9,133 961
2007 318 9,499 961
2008 239 9,879 961
2009 156 10,274 961
Thereafter 375 10,685 7,388
The water supply contract with Stockton East Water District (SEWD) requires
a fixed, annual payment and does not vary during the year with the quantity of
water delivered by the district. Because of the fixed-price arrangement, the
Company operates to receive as much water as possible from SEWD in order to
minimize the cost of operating Company-owned wells used to supplement SEWD
deliveries. The total paid under the contract was $4,392 in 2004, $3,779 in
2003, and $2,967 in 2002. Pricing under the contract varies annually.
Contingencies. In 1995, the State of Californias Department of Toxic
Substances Control (DTSC) named Cal Water as a potential responsible party for
cleanup of a toxic contamination plume in the Chico ground- water. The toxic
spill occurred when cleaning solvents, which were discharged into the citys
sewer system by local dry cleaners, leaked into the underground water supply.
The DTSC contends that Cal Waters responsibility stems from its operation of
wells in the surrounding vicinity that caused the contamination plume to spread.
While Cal Water is cooperating with the cleanup effort, Cal Water denies any
responsibility for the contamination or the resulting cleanup and intends to
vigorously resist any action that may be brought against Cal Water. In December
2002, Cal Water was named along with other defendants in two lawsuits filed by
DTSC for the cleanup of the plume. The suits assert that the defendants are
jointly and severally liable for the estimated cleanup of $8.7 million. A
mediation process has begun and no settlement demands by any party have been
made at this time. Management believes that insurance coverage exists for this
claim, and if Cal Water were ultimately held responsible for a portion of the
cleanup costs, there would not be a material adverse effect to its financial
position or results of operations. Cal Waters insurance carrier is currently
paying the cost of legal representation in this matter.
In 1995, the California Legislature enacted the Water Utility
Infrastructure Improvement Act of 1995 (Infrastructure Act) to encourage water
utilities to sell surplus properties and reinvest in needed water utility
facilities. In September 2003, the CPUC issued decision D.03-09-021 in Cal
Waters 2001 GRC filing. In this decision, the CPUC ordered Cal Water to file an
application setting up an Infrastructure Act memorandum account with an
up-to-date accounting of all real property that was at any time in rate base and
that Cal Water had sold since the effective date of the Infrastructure Act.
Additionally, the decision directed the CPUC staff to file a detailed report on
its review of Cal Waters application. On January 11, 2005, the Office of
Ratepayer Advocates (ORA), a division of the CPUC responsible for representing
ratepayers, issued a report expressing its opinion that Cal Water had not proven
that surplus properties sold since 1996 were no longer used and useful. ORA
recommended that Cal Water be fined $160 and that gains from property sales
should generally benefit ratepayers. Management strongly disagrees with ORAs
conclusions and recommendations.
During the period under review, Cal Waters cumulative gains from surplus
property sales were $19.2 million, which included an inter-company gain related
to a transaction with CWS Utility Services and a like-kind exchange with a third
party. If the CPUC finds any surplus property sale or transfer was recorded
inappropriately, Cal Waters rate base could be reduced, which would lower future
revenues, net income, and cash flows. Management believes it has fully complied
with the Infrastructure Act and that ORAs conclusions and recommendations are
without merit. Cal Water intends to vigorously oppose ORAs findings.
Accordingly, Cal Water has not accrued a liability in the financial statements
for ORAs recommendations. At this time, Cal Water does not know when or how the
CPUC will rule in this matter.
The Company is involved in other proceedings or litigation arising in the
ordinary course of operations. The Company believes the ultimate resolution of
such matters will not materially affect its financial position, results of
operations, or cash flows.
16
QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's common stock is traded on the New York Stock Exchange under
the symbol "CWT." Through 2004, dividends have been paid on common stock for 59
consecutive years and the dividend amount per common share has been increased
each year since 1967.
2004 in thousands except per share amounts First Second Third Fourth
Operating revenue $60,240 $88,845 $97,104 $69,378
Net operating income 5,391 14,083 14,498 7,511
Net income 1,446 10,054 10,789 3,737
Diluted earnings per share 0.08 0.59 0.59 0.20
Common stock market price range:
High 29.99 29.75 29.42 37.70
Low 27.25 26.60 26.19 28.20
Dividends paid .2825 .2825 .2825 .2825
2003 in thousands except per share amounts
Operating revenue $51,311 $67,994 $88,197 $69,626
Net operating income 2,625 7,548 12,519 7,542
Net income (loss) (768) 4,585 8,587 7,013
Diluted earnings (loss) per share (0.05) 0.30 0.53 0.41
Common stock market price range:
High 26.27 30.97 29.98 27.99
Low 23.92 25.79 25.20 25.51
Dividends paid .28125 .28125 .28125 .28125
CONTROLS AND PROCEDURES
California Water Service Group
MANAGEMENT'S EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision of and with
the participation of management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of December 31, 2004, pursuant
to Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on their
review of the disclosure controls and procedures, the Chief Executive Officer
and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective in timely alerting management to material
information that is required to be included in periodic SEC filings.
Management, including the Chief Executive Officer and Chief Financial
Officer, does not expect that the Company's disclosure controls and procedures
or its internal control over financial reporting will prevent or detect all
errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of each control must be considered relative to its costs. Because of
the inherent limitations in all control systems, no evaluation of a control
system can provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been prevented or detected.
There was no change in the Company's internal control over financial
reporting during the quarter ended December 31, 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended). Management
assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2004. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated Framework. Management
has concluded that, as of December 31, 2004, the Company's internal control over
financial reporting is effective based on these criteria. The Company's
independent registered public accounting firm, KPMG LLP, which has audited the
financial statements included in this Annual Report, has issued an audit report
on managements assessment of the Company's internal control over financial
reporting, which is included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CALIFORNIA WATER SERVICE GROUP
We have audited management's assessment, included in the accompanying
Managements Report on Internal Control over Financial Reporting, that California
Water Service Group and subsidiaries maintained effective internal control over
financial reporting as of December 31, 2004, based on the criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Management of California Water
Service Group is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness of the internal
control over financial reporting of California Water Service Group and
subsidiaries based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that California Water Service Group
and subsidiaries maintained effective internal control over financial reporting
as of December 31, 2004, is fairly stated, in all material respects, based on
criteria established in Internal Control-Integrated Framework issued by the
COSO. Also, in our opinion, California Water Service Group and subsidiaries
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control-Integrated Framework issued by the COSO.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of California Water Service Group and subsidiaries as of December 31,
2004 and 2003, and the related consolidated statements of income, common
stockholders equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2004, and our report dated
February 22, 2005 expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG LLP
Mountain View, California
February 22, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CALIFORNIA WATER SERVICE GROUP
We have audited the accompanying consolidated balance sheets of California
Water Service Group and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of income, common stockholders equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements are the
responsibility of the management of California Water Service Group. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of California
Water Service Group and subsidiaries as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
internal control over financial reporting of California Water Service Group and
subsidiaries as of December 31, 2004, based on the criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated February
22, 2005 expressed an unqualified opinion on managements assessment of, and the
effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Mountain View, California
February 22, 2005
CERTIFICATIONS
As provided in the rules of the New York Stock Exchange, the Company's
Chief Executive Officer has certified to the Exchange in writing that, as of
February 23, 2005, he was not aware of any violation by the Company of the NYSEs
Corporate Governance listing standards. The Company has included as Exhibits
31.1 and 31.2 to its Annual Report on Form 10-K for the year ended December 31,
2004, certifications from its Chief Executive Officer and Chief Financial
Officer regarding the quality of the Company's public disclosure.
CORPORATE INFORMATION
STOCK TRANSFER, DIVIDEND DISBURSING, AND REINVESTMENT AGENT
American Stock Transfer and Trust Company
57 Maiden Lane
New York, NY 10038
(800) 937-5449
TO TRANSFER STOCK
A change of ownership of shares (such as when stock is sold or gifted or
when owners are deleted from or added to stock certificates) requires a transfer
of stock. To transfer stock, the owner must complete the assignment on the back
of the certificate and sign it exactly as his or her name appears on the front.
This signature must be guaranteed by an eligible guarantor institution (banks,
stock brokers, savings and loan associations, and credit unions with membership
in approved signature medallion programs) pursuant to SEC Rule 17Ad-15. A
notarys acknowledgement is not acceptable. This certificate should then be sent
to American Stock Transfer and Trust Company by registered or certified mail
with complete transfer instructions.
EXECUTIVE OFFICE
California Water Service Group
1720 North First Street
San Jose, CA 95112-4598
(408) 367-8200
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on Wednesday, April 27,
2005, at 10 a.m. at the Company's Executive Office. Details of the business to
be transacted during the meeting will be contained in the proxy material, which
will be mailed to stockholders on or about March 26, 2005.
DIVIDEND DATES FOR 2005
Quarter Declaration Record Date Payment Date
First January 26 February 7 February 18
Second April 27 May 9 May 20
Third July 27 August 8 August 19
Fourth October 26 November 7 November 18
ANNUAL REPORT FOR 2004 ON FORM 10-K
A copy of the Company's report for 2004 filed with the Securities and
Exchange Commission (SEC) on Form 10-k will be available in March 2005 and can
be obtained by any stockholder at no charge upon written request to the address
below. The Company's filings with the SEC can viewed via the link to the SECs
EDGAR system on the Company's web site.
STOCKHOLDER INFORMATION
California Water Service Group
Attn: Stockholder Relations
1720 North First Street
San Jose, CA 95112-4598
(408) 367-8200 or (800) 750-8200
http://www.calwatergroup.com