UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .............to....................
Commission file No. 1-13883
CALIFORNIA WATER SERVICE GROUP
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0448994
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(State of Incorporation) (I.R.S. Employer Identification No.)
1720 North First Street, San Jose, California 95112
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(Address of Principal Executive Offices) (Zip Code)
(408) 367-8200
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: Name of Each Exchange on Which Registered:
-------------------- ------------------------------------------
Common Stock, $0.01 Par Value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ___ No _X_
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 of Section 15(d) of the Act. Yes ___ No _X_
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___ .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
1
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non- accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ].
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes ___ No _X_
The aggregate market value of the common stock held by non-affiliates of the
Registrant was $646.7 million on June 30, 2005, the last business day of the
registrant's most recently completed second fiscal quarter. The valuation is
based on the closing price of the registrant's common stock as traded on the New
York Stock Exchange.
Common stock outstanding at March 6, 2006, - 18,405,138 shares.
2
EXHIBIT INDEX
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of Registrant's Annual Report to Stockholders for the
calendar year ended December 31, 2005, (2005 Annual Report) are incorporated by
reference in Part I (Item 1 and 2) and Part II (Items 5, 6, 7, 7A, 8 and 9A).
Designated portions of the Registrant's Proxy Statement (Proxy Statement)
relating to the 2006 annual meeting of stockholders are incorporated by
reference in Part III (Items 10, 11, 12 and 14).
3
<Page>
TABLE OF CONTENTS
Page
PART I
Item 1. Business.............................................. 6
Forward-Looking Statements............................ 6
General Development of Business....................... 6
Financial Information about
Industry Segments................................. 8
Narrative Description of Business..................... 8
Geographical Service Areas and
Number of Customers at Year-end................... 8
Rates and Regulation.................................. 10
Water Supply.......................................... 11
Non-regulated Operations.............................. 14
Utility Plant Construction ........................... 15
Sale of Surplus Real Properties....................... 15
California Energy Situation........................... 15
Security at Company Facilities........................ 15
Quality of Water Supplies............................. 16
Competition and Condemnation.......................... 16
Environmental Matters ................................ 16
Human Resources....................................... 17
Financial Information about Foreign and
Domestic Operations and Export Sales.............. 17
Item 1A Risk Factors ......................................... 17
Item 1B Unresolved Staff Comments ............................ 20
Item 2. Properties ........................................... 21
Item 3. Legal Proceedings..................................... 21
Item 4. Submission of Matters to a Vote of
Security Holders.................................. 22
Executive Officers of the Registrant.................. 22
PART II
Item 5. Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity Securities.................... 25
Item 6. Selected Financial Data............................... 25
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 25
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk....................................... 25
Item 8. Financial Statements and Supplementary Data........... 25
4
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 25
Item 9A. Controls and Procedures............................... 26
Item 9B. Other Information..................................... 26
PART III
Item 10. Directors and Executive Officers of the Registrant.... 26
Item 11. Executive Compensation................................ 26
Item 12. Security Ownership of Certain Beneficial
Owners and Management .......................... 26
Item 13. Certain Relationships and Related Transactions........ 26
Item 14. Principal Accountant Fees and Services................ 27
PART IV
Item 15. Exhibits, Financial Statement Schedules............... 27
Signatures.......................................................... 28
Exhibit Index....................................................... 30
5
PART I
Item 1. Business.
Forward-Looking Statements
- --------------------------
This annual report, including all documents incorporated by reference, contains
forward-looking statements within the meaning established by the Private
Securities Litigation Reform Act of 1995 (Act). The forward-looking statements
are intended to qualify under provisions of the federal securities laws for
"safe harbor" treatment established by the Act. Forward-looking statements are
based on currently available information, expectations, estimates, assumptions,
projections, and management's judgment about the Company, the water utility
industry, and general economic conditions. Such words as expects, intends,
plans, believes, estimates, assumes, anticipates, projects, predicts, forecasts,
or variations of such words or similar expressions are intended to identify
forward-looking statements. The forward-looking statements are not guarantees of
future performance. They are subject to uncertainty and changes in
circumstances. Actual results may vary materially from what is contained in a
forward-looking statement.
Factors that may cause a result different than expected or anticipated include:
governmental and regulatory commissions' decisions, including decisions on
proper disposition of property; changes in regulatory commissions' policies and
procedures; the timeliness of regulatory commissions' actions concerning rate
relief; new legislation; changes in accounting valuations and estimates; the
ability to satisfy requirements related to the Sarbanes-Oxley Act and other
regulations on internal controls; electric power interruptions; increases in
suppliers' prices and the availability of supplies including water and power;
fluctuations in interest rates; changes in environmental compliance and water
quality requirements; acquisitions and the ability to successfully integrate
acquired companies; the ability to successfully implement business plans;
changes in customer water use patterns; the impact of weather on water sales and
operating results; access to sufficient capital on satisfactory terms; civil
disturbances or terrorist threats or acts, or apprehension about the possible
future occurrences of acts of this type; the involvement of the United States in
war or other hostilities; restrictive covenants in or changes to the credit
ratings on current or future debt that could increase financing costs or affect
the ability to borrow, make payments on debt, or pay dividends; and other risks
and unforeseen events. When considering forward-looking statements, the reader
should keep in mind the cautionary statements included in this paragraph. The
Company assumes no obligation to provide public updates on forward-looking
statements.
a. General Development of Business
-------------------------------
California Water Service Group (the Company) is a holding company incorporated
in Delaware with five operating subsidiaries: California Water Service Company
(Cal Water), CWS Utility Services (Utility Services), New Mexico Water Service
Company (New Mexico Water), Washington Water Service Company (Washington Water),
and Hawaii Water Service Company, Inc. (Hawaii Water). Cal Water, New Mexico
Water, Washington Water, and Hawaii Water are regulated public utilities. The
regulated utility entities also provide some non-regulated services. Utility
Services provides non-regulated services to private companies and
municipalities. Cal Water was the originating company and began operations in
1926. The other entities were incorporated within the last 10 years.
California water operations are conducted by the Cal Water and Utility Services
entities, which provide service to approximately 456,700 customers in 75
California communities through 26 separate districts. Of these 26 districts, 24
districts are regulated water systems, which are subject to regulation by the
California Public Utilities Commission (CPUC). The other 2 districts, the City
of Hawthorne and the City of Commerce, are governed through their respective
city councils and are considered non-regulated because they are outside of the
CPUC's jurisdiction. Their activities are reflected in the Company's operating
revenue and operating costs, as the risks and rewards of these operations are
similar to the Company's regulated activities. California water operations
account for 95% of the total customers and 96% of the total operating revenue of
the Company.
Washington Water provides domestic water service to 15,311 customers in the
Tacoma and Olympia areas. Washington Water's utility operations are regulated by
the Washington Utilities and Transportation Commission. Washington Water
accounts for 3% of the total customers and 2% of the total operating revenue of
the Company.
6
New Mexico Water provides service to 6,480 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 of the Company.
Hawaii Water provides water service to 537 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 of the Company.
Other non-regulated activities consist primarily of operating water systems,
which are owned by other entities; providing meter reading and billing services;
leasing communication antenna sites on the Company's properties; operating
recycled water systems; providing brokerage services for water rights; providing
lab services for water quality testing; and selling surplus property. The
results of these activities are reported below operating profit on the income
statement and therefore the revenue is not included in operating revenue. Due to
the variety of services provided and activities being outside of the Company's
core business, the number of customers is not tracked for these non-regulated
activities except customers for the City of Hawthorne and the City of Commerce.
Non-regulated activities, excluding gains on sale of non-utility property,
comprised 6% of the Company's total net income in 2005.
The state regulatory entities governing the Company's regulated operations are
referred to as the Commissions in this report. Rates and operations for
regulated customers are subject to the jurisdiction of the respective state's
regulatory commission. The Commissions require that water and wastewater rates
for each regulated district be independently determined. The Commissions are
expected to authorize rates sufficient to recover normal operating expenses and
allow the utility to earn a fair and reasonable return on invested capital.
Rates for the City of Hawthorne and City of Commerce water systems are
established in accordance with operating agreements and are subject to
ratification by the respective city councils. Fees for other non-regulated
activities are based on contracts negotiated between the parties.
The Company's mailing address and contact information is:
California Water Service Group
1720 North First Street
San Jose, California 95112-4598
telephone number: 408-367-8200
www.calwatergroup.com
Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to these reports are available free of charge through
the Company's website. The reports are available on the Company's website on the
same day they appear on the SEC's website.
During the year ended December 31, 2005, there were no significant changes in
the kind of products produced or services rendered or those provided by the
Company's operating subsidiaries, or in the markets or methods of distribution.
7
b. Financial Information about Industry Segments
---------------------------------------------
The Company operates primarily in one business segment, the supply and
distribution of water and providing water-related utility services.
c. Narrative Description of Business
---------------------------------
The business is conducted through the Company's operating subsidiaries. The bulk
of the business consists of the production, purchase, storage, treatment,
testing, distribution and sale of water for domestic, industrial, public and
irrigation uses, and for fire protection. Also provided are non-regulated
water-related services under agreements with municipalities and other private
companies. The non-regulated services include full water system operation,
billing and meter reading services. Non-regulated operations also include the
lease of communication antenna sites, lab services, water rights brokerage, and
our Extended Service Protection program. Earnings may be significantly affected
by the sale of surplus real properties if and when they occur.
Operating results from the water business fluctuate according to the demand for
water, which is often influenced by seasonal conditions, such as summer
temperatures or the amount and timing of precipitation in the Company's service
areas. Revenue, expenses and income are affected by changes in water sales.
Expenses for purchased water, purchased power and pump taxes will vary due to
changes in water sales. The majority of other costs, such as payroll and
benefits, depreciation, interest on long-term debt and property taxes are more
predictable, remain fairly constant, and are not significantly impacted by
variations in the amount of water sold. As a result, earnings are highest in the
high use, warm weather summer months when rainfall is lower. Earnings are lower
in the cool winter months when most rainfall takes place in the Company's
service territories.
The Company distributes water in accordance with accepted water utility methods.
Where applicable, the Company holds franchises and permits in the cities and
communities where it operates. The franchises and permits allow the Company to
operate and maintain facilities in public streets and right- of-ways as
necessary.
The Company operates the City of Hawthorne and the City of Commerce water
systems under lease agreements. In accordance with the lease agreements, the
Company receives all revenues from operating the systems and is responsible for
paying the operating costs. Under other contract arrangements, the Company
operates municipally owned water systems, privately owned water systems, and
recycled water distribution systems, but is not responsible for all operating
costs. These contracts are fee-per-service, fixed-fee or cost-plus contracts.
The Company also provides billing and other customer services to a number of
municipalities.
The Company intends to continue exploring opportunities to expand its regulated
and non-regulated businesses in the western United States. The opportunities
could include system acquisitions, lease arrangements similar to the City of
Hawthorne contract, full service system operation and maintenance agreements,
meter reading, billing contracts and other utility-related services. Management
believes that a holding company structure facilitates providing non-regulated
utility services, which are not subject to Commission jurisdiction.
Geographical Service Areas and Number of Customers at Year-end
- -----------------------------------------------------------------
The Company's principal markets are users of water within its service areas.
Most of the geographical service areas or districts are regulated. In addition,
the City of Hawthorne and City of Commerce are included due to similarities in
structure and risk of operations. The approximate number of customers served in
each district is as follows:
8
Regulated Customers, City of Hawthorne and City of Commerce Customers at
December 31,
2005 2004
----------- -----------
SAN FRANCISCO BAY AREA
Mid-Peninsula (serving San Mateo and San Carlos) 36,100 36,100
South San Francisco (including Colma and Broadmoor) 16,800 16,700
Bear Gulch (serving portions of Menlo Park, Atherton,
Woodside and Portola Valley) 18,000 17,700
Los Altos (including portions of Cupertino, Los Altos Hills,
Mountain View and Sunnyvale) 18,500 18,500
Livermore 18,100 17,900
----------- -----------
107,500 106,900
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SACRAMENTO VALLEY
Chico (including Hamilton City) 26,400 25,900
Oroville 3,600 3,500
Marysville 3,800 3,800
Dixon 2,900 2,900
Willows 2,300 2,300
Redwood Valley (Lucerne, Duncans Mills, Guerneville, Dillon Beach, Noel
Heights & portions of Santa Rosa) 2,000 2,000
----------- -----------
41,000 40,400
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SALINAS VALLEY
Salinas 27,800 27,800
King City 2,400 2,300
----------- -----------
30,200 30,100
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SAN JOAQUIN VALLEY
Bakersfield 63,600 62,400
Stockton 42,300 41,800
Visalia 35,800 34,500
Selma 6,000 5,800
Kern River Valley 4,300 4,200
Antelope Valley (Fremont Valley, Lake Hughes, Lancaster & Leona Valley) 1,400 1,400
----------- -----------
153,400 150,100
----------- -----------
LOS ANGELES AREA
East Los Angeles (including portions of the City of Commerce) 27,800 27,700
Hermosa-Redondo (serving Hermosa Beach, Redondo Beach
and a portion of Torrance) 26,100 26,000
Dominguez (Carson and portions of Compton, Harbor City,
Long Beach, Los Angeles and Torrance) 33,600 33,500
Palos Verdes (including Palos Verdes Estates, Rancho Palos Verdes,
Rolling Hills Estates and Rolling Hills) 24,000 24,000
Westlake (a portion of Thousand Oaks) 7,000 7,000
Hawthorne (leased municipal system) 6,100 6,100
----------- -----------
124,600 124,300
----------- -----------
CALIFORNIA TOTAL 456,700 451,800
HAWAII 500 500
NEW MEXICO 6,500 5,800
WASHINGTON 15,300 15,000
----------- -----------
COMPANY TOTAL 479,000 473,100
=========== ===========
9
Rates and Regulation
- --------------------
The Company's water utility rates and service for the regulated business are
subject to the jurisdiction of the state regulatory commissions. The
Commissions' decisions and the timing of those decisions can have a significant
impact on the operations and earnings.
Since the Company's 24 California-regulated operating districts are not
physically integrated, rates are set independently for each district as required
by the CPUC. General office (headquarters) expenses and capital expenditures are
considered separately and allocated ratably to the operating districts.
General and Step Rate Increases
- -------------------------------
General rate case (GRC) applications in California address district and general
office operating costs and capital requirements for a forward-looking three-year
period. GRC decisions typically authorize an immediate rate increase and annual
step rate increases for the three-year cycle. Step rate increases are generally
effective at the start of each calendar year, and are designed to maintain the
return on equity (ROE) authorized in the initial decision in succeeding years.
Effective January 1, 2003, Cal Water is required to file a GRC for each
operating district every three years. Previously, Cal Water's GRC preliminary
applications were submitted in July of each year. Effective in 2004, preliminary
applications are scheduled for submission in May and each year thereafter.
According to the CPUC's processing schedule, a final decision should be expected
about 12 months after the filings are accepted by the CPUC. The backlog of Cal
Water's overdue filings has been cleared and there are no pending filings that
have gone beyond the expected decision date. In 2004 and 2005, Cal Water
received GRC decisions on a timely basis. Cal Water expects future filings to
receive decisions on the CPUC's published processing time line. If decisions are
delayed in the future, legislation enacted in 2003 gives the Company protection
by establishing an effective date when the decision should have been made,
allowing interim rates to be charged and retroactive adjustments once the CPUC
renders a decision.
Because districts are on different three-year GRC rate case cycles, the number
of customers affected by GRC filings varies from year to year.
Water rates for Washington Water and New Mexico Water regulated operations are
set based on historic 12-month data. Applications are filed on an "as needed"
basis and can be submitted annually. Water rates for Hawaii Water are set based
on a combination of historical base and forward-looking methodology and are
allowed to be filed annually. In these states, regulatory procedures do not
provide for step rate increases or offset increases, (see "Offsetable Expenses
and Balancing Accounts" below) except for Hawaii which allows immediate rate
adjustments to changes in purchased power rates.
Offsetable Expenses and Balancing Accounts
- ------------------------------------------
The Company records costs for purchased water, purchased power and pump taxes as
incurred. Expenses for these categories above or below levels included in prior
GRC decisions are tracked in off-line expense balancing or memorandum accounts.
The cost differences are referred to as offsetable expenses. When the CPUC
authorizes a rate change to recover the costs tracked in expense balancing or
memorandum accounts, the rate change is referred to as an offset rate change.
The Company does not record revenue or refunds related to the balancing accounts
until authorized by the CPUC, and then only as the authorized rates are included
in customers' monthly billings. Currently, recovery of balancing and memorandum
accounts is subject to a downward adjustment only based on a review of each
district's earnings for the past calendar year. If the recorded return on rate
base exceeds the rate authorized by the Commission, recovery of the balancing
account balance is adjusted downward by the amount of earnings above the
authorized return.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- RATES AND REGULATIONS" section for more information on
rates and regulation.
10
Water Supply
- ------------
Cal Water obtains its water supply from wells, surface runoff or diversion, and
by purchase from public agencies and other wholesale suppliers. The Company's
water supply has been adequate to meet customer demand; however, during periods
of drought some districts have experienced mandatory water rationing.
California's rainy season usually begins in November and continues through March
with the most rain typically falling in December, January and February. During
winter months, reservoirs and underground aquifers are replenished by rainfall.
Snow accumulated in the mountains provides an additional water source when
spring and summer temperatures melt the snowpack, producing runoff into streams
and reservoirs, and also replenishing underground aquifers.
Washington and Hawaii receive rain in all seasons with the majority falling
during winter months. Washington Water and Hawaii Water draw all of their water
supply by pumping from wells.
New Mexico Water's rainfall normally occurs in all seasons, but is heaviest in
the summer monsoon season. New Mexico Water pumps all of its water supply from
wells based on its water rights.
The Company's water business is seasonal in nature and weather conditions can
have a pronounced effect on customer usage and thus, impact operating revenues
and net income. Customer demand for water generally is lower during the cooler
and rainy, winter months. Demand increases in the spring when warmer weather
returns and the rains end, and customers use more water for outdoor purposes,
such as landscape irrigation. Warm temperatures during the generally dry summer
months result in increased demand. Water usage declines during the fall as
temperatures decrease and the rainy season begins.
During years in which precipitation is especially heavy or extends beyond the
spring into the early summer, customer demand can decrease from historic normal
levels, generally due to reduced outdoor water usage. Likewise, an early start
to the rainy season during the fall can cause a decline in customer usage and
have a negative impact on revenue. When summer temperatures are cooler than
normal, water usage is generally lower and can result in lower revenue and lower
earnings. A warmer than normal summer can result in higher customer usage and an
increase in revenue and earnings.
Drought can have an impact on the business. When rainfall is below average for
consecutive years, drought conditions can develop and certain customers may be
required to reduce consumption to preserve available supply. As an example, from
1987 to 1993, California experienced a six-year period when rainfall was below
historic average. During that period, some districts issued water-rationing
requirements to their customers. In certain districts, penalties were assessed
on customers who exceeded monthly allotments, which was approved by the CPUC
after local governments enacted ordinances for drought. During past drought
periods, the CPUC has allowed modifications to Cal Water's customer billings
that provided a means to recover a portion of revenue that was deemed lost due
to conservation measures, although there are no assurances the CPUC would do so
in future droughts.
As noted above, Washington Water, New Mexico Water and Hawaii Water obtain their
entire water supply from wells. Historically, about half of Cal Water's water
supply is purchased from wholesale suppliers with the balance pumped from wells.
During 2005, approximately 46 percent of the Cal Water supply was obtained from
wells, 50 percent was purchased from wholesale suppliers and 4 percent was
obtained from surface supplies. Well water is generally less expensive and Cal
Water strives to maximize the use of its well sources in districts where there
is an option between well or purchased supply sources.
The Company has five California water treatment plants in the Bakersfield, Bear
Gulch, Kernville, Oroville and Redwood Valley districts. A new plant was put
into service during 2003 in Bakersfield, with a capacity of 20 million gallons
per day. Water for operation of the plant is drawn from the Kern River under a
long-term contract with the City of Bakersfield. The smaller Bakersfield
treatment plant was removed from service when the new plant became fully
functional. The other four plants have a capacity of 13 million gallons per day.
11
During 2005, the Company delivered 132 billion gallons of water to its
customers, down 3% from the 139 billion gallons delivered in 2004. The 2005
average daily water production was 356 million gallons, while the maximum single
day production was 471 million gallons. By comparison, in 2004, the average
daily water production was 380 million gallons and the maximum single day
production was 635 million gallons.
The following table shows the quantity of water purchased and the percentage of
purchased water to total water production in each California operating district
that purchased water in 2005. All other districts receive 100% of their water
supply from wells.
(MG)
Water
Production Supply
District Purchased Purchased Source of Purchased Supply
- -------- --------- --------- --------------------------
SAN FRANCISCO BAY AREA
Mid-Peninsula 5,948 100% San Francisco Water Department
South San Francisco 3,140 100% San Francisco Water Department
Bear Gulch 3,830 87% San Francisco Water Department
Los Altos 3,126 65% Santa Clara Valley Water District
Livermore 2,719 73% Alameda County Flood Control and Water
Conservation District
SACRAMENTO VALLEY
Oroville 937 86% Pacific Gas and Electric Co. and County
of Butte
Redwood Valley 153 77% County of Lake
SAN JOAQUIN VALLEY
Antelope/Kern 295 34% Antelope Valley-East Kern Water Agency
and City of Bakersfield
Bakersfield 5,792 22% Kern County Water Agency and City of
Bakersfield
Stockton 6,371 61% Stockton East Water District
LOS ANGELES AREA
East Los Angeles 4,579 70% Central Basin Municipal Water District
Dominguez 11,738 89% West Basin Municipal Water District
City of Commerce 196 24% Central Basin Municipal Water District
Hawthorne 1,480 90% West Basin Municipal Water District
Hermosa-Redondo 4,036 85% West Basin Municipal Water District
Palos Verdes 6,682 100% West Basin Municipal Water District
Westlake 3,006 100% Calleguas Municipal Water District
MG = million gallons
The Bear Gulch district obtains a portion of its water supply from surface
runoff from the local watershed. In the Oroville and Redwood Valley districts,
the water purchased is from a surface supply. The surface sources are processed
through the water treatment plants before being delivered to the distribution
system. In the Bakersfield and Kern River Valley districts, the Company
purchases surface supply then processes the water through its treatment plants.
In addition, the Bakersfield district purchases treated water as a component of
its water supply.
The Chico, Marysville, Dixon, and Willows districts in the Sacramento Valley,
the Salinas and King City districts in the Salinas Valley, and the Selma and
Visalia districts in the San Joaquin Valley obtain their entire supply from
wells.
12
In the Salinas district, which solely depends upon ground water, several wells
were taken out of service in the last 24 months primarily due to poor water
quality. The Company has installed treatment systems on some of these wells.
Management believes that water supply issues in the Salinas district will be
adequately resolved in 2006 and beyond.
Purchases for the Los Altos, Livermore, Oroville, Redwood Valley, Stockton, and
Bakersfield districts are pursuant to long-term contracts expiring on various
dates after 2011.
The water supplies purchased for the Dominguez, East Los Angeles,
Hermosa-Redondo, Palos Verdes, and Westlake districts, the City of Hawthorne
system, and the City of Commerce system are provided by public agencies pursuant
to a statutory obligation of continued non-preferential service to purveyors
within the agencies' boundaries.
Purchases for the South San Francisco, Mid-Peninsula, and Bear Gulch districts
are in accordance with long-term contracts with the San Francisco Water
Department (SFWD) expiring on June 30, 2009.
Management anticipates that the Company will be able to renew each of the water
supply contracts as they expire. The price of wholesale water purchases is
subject to pricing changes imposed by the various wholesale suppliers. Price
changes are generally beyond the Company's control. Management expects that the
Company will be allowed to recover the wholesale water suppliers' rate increases
in customers' future rates, although recovery is subject to approval by the
CPUC.
Shown below are wholesaler price rates and increases that became effective in
2005, and estimated wholesaler price rates changes for 2006.
2005 2006
Effective Percent Effective Percent
District Month Change Unit Cost Month Change Unit Cost
-------- ----- ------ --------- ----- ------ ---------
Antelope July 0.0% $220/af July 8.6% $239/af
Bakersfield * July 7.7% 136/af July 7.4% 146/af
Bear Gulch July 4.4% 1.02/ccf July 0.0% 1.02/ccf
City of Commerce Jan 2.9% 488/af Jan 2.0% 498/af
Dominguez Jan 2.9% 536/af Jan. 1.7% 545/af
East Los Angeles July 6.8% 488/af July 2.0% 498/af
Hawthorne Jan 2.9% 536/af Jan. 1.7% 545/af
Hermosa-Redondo Jan 2.9% 536/af Jan. 1.7% 545/af
Livermore Jan. 0.0% 1.29/ccf Jan. 5.2% 1.36/ccf
Los Altos July 6.1% 510/af July 2.9% 525/af
Oroville Jan 8.4% 69,200/yr Jan. 8.4% 75,000/yr
Palos Verdes Jan 2.9% 536/af Jan. 1.7% 545/af
Mid-Peninsula July 4.4% 1.02/ccf July 0.0% 1.02/ccf
Redwood Valley May 4.0% 46.17/af May 4.0% 48.00/af
So. San Francisco July 4.4% 1.02/ccf July 0.0% 1.02/ccf
Stockton April 23.5% 376,292/mo April -2.7% 366,146/mo
Westlake Jan. 8.4% 650/af Jan. 3.8% 675/af
af = acre foot; ccf = hundred cubic feet; yr = fixed annual cost; mo = fixed
monthly cost * untreated water
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - WATER SUPPLY" concerning more information on adequacy of
supplies.
The Company works with all local suppliers and agencies responsible for water
supply to insure adequate, long-term supply for each system.
13
Non-regulated Operations
- ------------------------
Non-regulated operations include full service operation and maintenance of water
systems for cities and private owners, operation of recycled water systems,
meter reading services, utility billing services, laboratory services, water
rights brokering, sales of surplus properties, leases of antenna sites, and our
Extended Service Protection program.
Non-regulated revenue received from water system operations is generally
determined on a fee-per-customer basis. With the exception of the agreements for
operation of the City of Hawthorne and City of Commerce water systems, revenue
and expenses from non-regulated operations are accounted for in other income and
expense on a pretax basis in the Consolidated Statements of Income. The Company
reports revenue and expenses for the City of Hawthorne and City of Commerce
leases in operating revenue and operating expenses because the Company is
entitled to retain all customer billings and is generally responsible for all
operating expenses.
The Company operates municipally owned water systems under contract for the
various cities. Washington Water operates numerous private water systems under
contract arrangements. The City of Hawthorne lease is a 15-year lease and
expires in 2011. The City of Commerce lease is a 15-year lease and expires in
2018. The terms of other operating agreements range from one-year to three-year
periods with provisions for renewals.
The Company provides meter reading and customer billing services for several
municipalities in California. The Company also provides sewer and refuse billing
services to several municipalities.
In February 1996, the Company entered into an agreement to operate the City of
Hawthorne water system. The system, which is located near the Hermosa-Redondo
district, serves about half of Hawthorne's population. The agreement required
the Company to make an up-front $6.5 million lease payment to the city that is
being amortized over the lease term. Additionally, annual lease payments of $0.1
million are made to the city and indexed to changes in water rates. Under the
lease, the Company is responsible for all aspects of system operation and
capital improvements, although title to the system and system improvements
reside with the city. At the end of the lease, the city is required to reimburse
the Company for the unamortized value of capital improvements made during the
term of the lease. In exchange, the Company receives all revenue from the water
system, which was $5.8 million and $5.9 million in 2005 and 2004, respectively.
In July 2003, an agreement was negotiated with the City of Commerce to lease and
operate its water system. At this time, the lease has not been formally executed
by the parties. Both parties are in agreement with substantially all terms and
are operating as if the agreement was executed. The lease requires the Company
to pay $0.8 million per year in monthly installments and pay $200 per acre-foot
for water usage exceeding 2,000 acre-feet per year plus a percentage of certain
operational savings that may be realized. Under the lease agreement, the Company
is responsible for all aspects of the system's operations. The city is
responsible for capital expenditures, and title to the system and system
improvements resides with the city. The Company has risks of operation and
collection of amounts billed to customers. The agreement includes a procedure to
request rate changes for costs changes outside of the Company's control and
other cost changes. In exchange, the Company receives all revenue from the
system, which totaled $1.7 million for 2005 and $1.8 million for 2004.
The Company leases antenna sites to telecommunication companies, which place
equipment at various Company-owned sites. Individual lease payments range from
$700 to $2,600 per month. The antennas are used in cellular phone and personal
communication applications. The Company continues to negotiate new leases for
similar uses.
The Company provides laboratory services to San Jose Water Company and Great
Oaks Water Company and for the systems under operation and maintenance
agreements.
In 2005, the Company implemented an Extended Service Protection program, which
covers repairs to the customer's water line between the meter and the home.
14
Utility Plant Construction
- --------------------------
The Company has continually extended, enlarged, and replaced its facilities as
required to meet increasing demands and to maintain the water systems. The
Company obtains construction financing using funds from operations, short-term
bank borrowings, long-term financing, advances for construction and
contributions in aid of construction that are funded by developers. The amounts
received from these sources are shown in the section captioned "Statements of
Cash Flows" in the annual report, which is incorporated into this document by
reference. Advances for construction are cash deposits from developers for
construction of water facilities or water facilities deeded from developers.
These advances are generally refundable without interest over a period of 40
years by equal annual payments. Contributions in aid of construction consist of
nonrefundable cash deposits or facilities transferred from developers, primarily
for fire protection and relocation projects. The Company cannot control the
amount received from developers. This amount fluctuates from year-to-year as the
level of construction activity carried on by developers varies. This activity is
impacted by the demand for housing, commercial development, and general business
conditions, including interest rates.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - LIQUIDITY AND CAPITAL RESOURCES" for additional
information.
Sale of Surplus Real Properties
- -------------------------------
When properties are no longer used and useful for public utility purposes, the
Company is no longer allowed to earn a return on its investment in the property
in the regulated business. The surplus property is transferred out of the
regulated operations and some properties have been sold or offered for sale. As
these sales are subject to local real estate market conditions and can take
several months or years to close, income from the sale of surplus properties may
or may not be consistent from year-to-year. The CPUC is currently reviewing the
Company's handling of these surplus properties, which may adversely impact
future sales, results of operations and cash flows. See item 3, "LEGAL
PROCEEDINGS" for additional information.
California Energy Situation
- ---------------------------
The business uses electrical power primarily to pump water from its sources and
move it through the distribution systems. The California energy crisis was well
publicized. Electricity rates stabilized during 2003 and the Company received
credits from the electrical power companies. Electricity rates were lower in
2004 as compared to 2003. Electrical power costs are described in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - RESULTS OF OPERATIONS."
There is still uncertainty about the state's ability to avoid future rolling
electric blackouts, although the Company did not experience any major electric
blackouts during 2005 or 2004. The Company continues to use power efficiently to
minimize the power expenses passed on to its customers. The Company maintains
backup power systems to continue water service to its customers if the power
companies' supplies are interrupted. Many of the Company's well sites are
equipped with emergency electric generators designed to produce electricity to
keep the wells operating during power outages. Storage tanks also provide
customers with water during blackout periods.
Security at Company Facilities
- ------------------------------
Due to terrorist and other risks, the Company has heightened security at its
facilities over the past few years and has taken added precautions to protect
its employees and the water delivered to customers. In 2002, federal legislation
was enacted that resulted in new regulations concerning security of water
facilities, including submitting vulnerability assessment studies to the federal
government. The Company has complied with EPA regulations concerning
vulnerability assessments and has made filings to the EPA as required. In
addition, communication plans have been developed as a component of the
Company's procedures. While the Company does not make public comments on its
security programs, the Company has been in contact with federal, state, and
local law enforcement agencies to coordinate and improve water delivery systems'
security.
15
Quality of Water Supplies
- -------------------------
The Company operating practices are designed to produce potable water in
accordance with accepted water utility practices. Water entering the
distribution systems from surface sources is treated in compliance with federal
and state Safe Drinking Water Acts (SWDA) standards. Most well supplies are
chlorinated or chloraminated for disinfection. Water samples from each water
system are analyzed on a regular, scheduled basis in compliance with regulatory
requirements. The Company operates a state-certified water quality laboratory at
the San Jose General Office that provides testing for most of its California
operations. Certain tests in California are contracted with independent
certified labs qualified under the Environmental Laboratory Accreditation
Program. Local independent state certified labs provide water sample testing for
the Washington, New Mexico and Hawaii operations.
In recent years, federal and state water quality regulations have continued to
increase water testing requirements. The SDWA continues to be amended to reflect
new public health concerns. The Company monitors water quality standard changes
and upgrades its treatment capabilities to maintain compliance with the various
regulations.
Competition and Condemnation
- ----------------------------
The Company's principal operations are regulated by the Commission of each
state. Under state laws, no privately owned public utility may compete within
any service territory that the Company already serves without first obtaining a
certificate of public convenience and necessity from the Commission. Issuance of
such a certificate would only be made upon finding that the Company's service is
deficient. To management's knowledge, no application to provide service to an
area served by the Company has been made.
State law provides that whenever a public agency constructs facilities to extend
a utility system into the service area of a privately owned public utility, such
an act constitutes the taking of property and requires reimbursement to the
utility for its loss. State statutes allow municipalities, water districts and
other public agencies to own and operate water systems. These agencies are
empowered to condemn properties already operated by privately owned public
utilities. The agencies are also authorized to issue bonds, including revenue
bonds, for the purpose of acquiring or constructing water systems. However, if a
public agency were to acquire utility property by eminent domain action, the
utility would be entitled to just compensation for its loss. To management's
knowledge, no municipality, water district, or other public agency is
contemplating or has any action pending to acquire or condemn any of the
Company's systems.
In recent years, consolidation within the water industry has accelerated. A
number of publicly traded water companies have been acquired or merged into
larger domestic companies. Several acquisitions of publicly traded companies
have also been completed by much larger foreign companies. The Company intends
to continue the pursuit of opportunities to expand its business in the western
United States.
Environmental Matters
- ---------------------
The Company's operations are subject to environmental regulation by various
governmental authorities. Environmental affairs programs have been designed to
provide compliance with water discharge regulations, underground and aboveground
fuel storage tank regulations, hazardous materials management plans, hazardous
waste regulations, air quality permitting requirements, wastewater discharge
limitations and employee safety issues related to hazardous materials. Also, the
Company actively investigates alternative technologies for meeting environmental
regulations and continues the traditional practices of meeting environment
regulations.
16
Human Resources
- ---------------
At year-end 2005, the Company had 840 employees, including 41 at Washington
Water, 15 at New Mexico Water and 7 at Hawaii Water. The Company had 837 and 813
employees in 2004 and 2003, respectively. In California, most non-supervisory
employees are represented by the Utility Workers Union of America, AFL-CIO,
except certain engineering and laboratory employees who are represented by the
International Federation of Professional and Technical Engineers, AFL-CIO.
At December 31, 2005, there were 566 union employees. In December 2005 and
January 2006, the Company negotiated two-year agreements with both unions.
Improvements in tuition reimbursement, increase in 401k employee contributions,
and wage increases were part of the agreement. Wage increases under the
agreements are 3.5% for 2006. Wages for 2007 will be negotiated in October 2006.
The Company maintains good relationships with the unions. Employees at
Washington Water, New Mexico Water, and Hawaii Water do not belong to unions.
d. Financial Information about Foreign and Domestic Operations and Export
---------------------------------------------------------------------------
Sales.
------
The Company does not have export sales.
Item 1A. Risk Factors.
Readers and prospective investors in our securities should carefully
consider the following risk factors as well as the other information contained
or incorporated by reference in this report:
The risks and uncertainties described below are not the only ones facing
us. Additional risks and uncertainties that management is not aware of or
focused on or that management currently deems immaterial may also impair our
business operations. This report is qualified in its entirety by these risk
factors.
If any of the following risks actually occur, the Company's financial
condition and results of operations could be materially and adversely affected.
If this were to happen, the value of the Company's securities could decline
significantly, and you could lose all or part of your investment.
Our business is heavily regulated and decisions by state regulatory commissions
and changes in laws and regulations can significantly affect our business.
California Water Service Company, New Mexico Water Service Company,
Washington Water Service Company and Hawaii Water Service Company, Inc., are
regulated public utilities which provide water service to our customers. The
rates that the Companies charge their water customers are subject to the
jurisdiction of the regulatory commission in the states in which we operate.
These Commissions set water rates for each operating district independently
because the systems are not interconnected. The Commissions authorize us to
charge rates which they consider to be sufficient to recover our normal
operating expenses, to provide funds for adding new or replacing water
infrastructure, and to allow us to earn what the Commissions consider to be a
fair and reasonable return on our invested capital.
Our ability to meet our financial objectives is dependent upon the rates
authorized by the Commissions. We periodically file rate increase applications
with the Commissions. The ensuing administrative and hearing process may be
lengthy and costly. We can provide no assurances that our rate increase requests
will be granted by the Commissions. Even if approved, there is no guarantee that
approval will be given in a timely manner or at a sufficient level to cover our
expenses and provide a reasonable return on our investment. If the authorized
rates are insufficient to cover operating expenses and capital expenditure
requirements, and allow a reasonable return on invested capital, or the rate
increase decisions are delayed, our earnings may be adversely affected.
Our liquidity and earnings could be adversely affected by increases in
electricity prices.
Purchased power expense represents electricity purchased to operate the
wells and pumps which are needed to supply water to our customers. Purchased
power is a significant operating expense. During 2005 and 2004, purchased power
expense represented 7.9% and 8.5%, respectively, of our total operating costs.
These costs can and do increase unpredictably and in substantial amounts, as
occurred in California during 2001 when rates we paid for electricity increased
48%. The increases are beyond our control. California regulation regarding
17
recovery of increases in electric rates changed in 2001. For over 20 years prior
to 2001, the California Public Utilities Commission allowed recovery of electric
rate increases under its operating rules. However, in 2001, the Commission
revised its rules and deferred our recovery of the higher electric costs until
the filing of a general rate case. In 2003, the California Public Utilities
Commission reinstated its policy to allow utilities to adjust their rates for
rate changes by the power companies. Cash flows between general rate case
filings and earnings of the Company maybe adversely impacted until the
Commission authorizes a rate change. The Company is allowed to track the expense
differences caused by the rate change and request future recovery which is
subject to an earnings test.
Changes in water supply costs directly affect our earnings.
The cost to obtain water for delivery to our customers varies depending on
the sources of supply, wholesale suppliers' prices and the quantity of water
produced to supply customer water usage. Our source of supply varies by
operating district. Certain districts obtain all of their supply from wells,
some districts purchase all of the supply from wholesale suppliers and other
districts obtain the supply from a combination of well and purchased sources. A
small portion of the supply is from surface sources and processed through
Company-owned water treatment plants. On average, slightly more than half of the
water delivered to customers is pumped from wells or received from a surface
supply with the remainder purchased from wholesale suppliers. During 2005 and
2004, the cost of purchased water for delivery to customers represented 33.5%
and 34.9%, respectively, of our total operating costs.
Wholesaler water suppliers may increase their prices for water delivered to
us based on factors that affect their operating costs. Purchased water rate
increases are beyond our control. In California, our ability to recover
increases in the cost of purchased water is subject to decisions by the
regulatory commission. If we are not allowed to recover the higher costs, our
cash flows and our capital resources and liquidity can be negatively impacted.
Also, our profit margins may be adversely affected, unless the Commissions allow
us to seek reimbursement of those costs from our customers.
Environmental regulation has increased, and is expected to continue to increase,
our operating costs.
Our water and wastewater services are governed by various federal and state
environmental protection and health and safety laws and regulations. These
provisions establish criteria for drinking water and for discharges of water,
wastewater and airborne substances. If we violate these provisions, we could be
subject to substantial fines or otherwise sanctioned.
Environmental laws are complex and change frequently. They have tended to
become more stringent over time. As new or stricter standards are introduced,
they could increase our operating costs. There can be no assurance that the
Commissions would approve rate increases to enable us to recover these
additional compliance costs.
We are required to test our water quality for certain chemicals and
potential contaminants on a regular basis. If the test results indicate that we
exceed allowable limits, we may be required either to commence treatment to
remove the contaminant or to develop an alternate water source. Either of these
results may be costly, and there can be no assurance that the Commissions would
approve rate increases to enable us to recover these additional compliance
costs.
All of the above factors may have a material adverse effect on our
business, financial position and results of operations.
The adequacy of our water supplies depends upon a variety of factors beyond our
control. Interruption in the water supply may adversely affect our earnings.
We depend on an adequate water supply to meet the present and future needs
of our customers. Whether we have an adequate supply varies depending upon a
variety of factors, including: rainfall, the amount of water stored in
18
reservoirs, underground water supply from which well water is pumped, changes in
the amount of water used by our customers, water quality, legal limitations on
water use such as rationing restrictions during a drought, and population
growth.
Also, the water business is seasonal. The normal water use pattern within
our service territories sees the highest customer usage and highest revenue
during the warmer summer months due primarily to increased usage for watering
outside landscape, cooling and swimming pools. Customer usage and revenue are
lower during the cool, rainy winter months. Demand also varies with rainfall
levels. If summer temperatures are cooler than normal or the rainy season
extends into the summer months or begins early in the fall months, any of these
factors can cause a decline in customer usage and result in lower revenue.
Drought conditions may affect our ability to serve our current and future
customers, and may affect our customers' use of water. Restrictions imposed on
the amount of water customers are allowed to use during a drought may result in
decreased customer billings. Customers may use less water even after a drought
has passed because of conservation patterns developed during the drought. Lower
use for any reason could lead to continued lower revenue.
Since the September 11, 2001, terrorist attacks, we have heightened
security at our facilities and taken added precautions for the safety of our
employees and water we deliver to our customers. We have also assigned a high
priority to completing work necessary to comply with new Environmental
Protection Agency requirements concerning security of water facilities. These
actions have increased our costs.
The Company purchases its water supply from various governmental agencies
and others. Water supply availability may be impacted by weather conditions,
funding and other political and environmental considerations. The Company has
entered into long-term agreements, which commit the Company to payments whether
or not the Company purchases any water. For further information on Company
commitments, see the Water Supply section (page 11).
All of these factors may adversely affect our earnings and financial condition:
Our business requires significant capital expenditures that are dependent
on our ability to secure appropriate funding.
The water utility business is capital-intensive. We invest significant
dollars to add or replace property, plant and equipment. We fund these projects
from cash received from operations and funds received from developers. We also
borrow funds from banks under short-term bank lending arrangements. We may seek
to meet our long-term capital needs by raising equity through common or
preferred stock issues or issuing debt obligations.
Water shortages may adversely affect us by causing us to rely on more
purchased water. This could cause increases in capital expenditures needed to
build pipelines to secure alternative water sources.
Our rate increase applications are designed to recover our investments in
utility plant. We cannot assure you that the rates the Commissions will allow us
to charge will be sufficient for this purpose.
Moody's Investor Services, Inc. and Standard & Poor's Ratings Services
issue ratings on California Water Service Company's ability to repay debt
obligations. The credit rating agencies could downgrade our credit rating based
on reviews of our financial performance and projections or upon the occurrence
of other events that could impact our business outlook. In 2002, Moody's and
Standard & Poor's did lower the ratings on California Water Service Company's
first mortgage bonds. In 2003, Moody's placed its rating on California Water
Service Company's first mortgage bonds on review for possible downgrade. In
February 2004, Moody's issued a report lowering California Water Service
Company's senior secured debt from A1 to A2 and noted the rating as stable. In
November 2003, Standard & Poor's issued a report keeping its rating of A+, but
changed its outlook from stable to negative. Both cited concerns about the lack
of timely rate relief from the California Public Utilities Commission and the
projected capital expenditure requirements for water infrastructure and
environmental compliance needs. Moody's also issued a report about the water
industry, citing the difficulties small operators face in financing needed
capital expenditures and delays in commission rulings as two main concerns. The
19
rating actions were attributed to delays in receipt of decisions by the
California Public Utilities Commission for rate increase applications and
ongoing capital expenditures to maintain water infrastructure and meet
environmental compliance requirements. A downgrade could increase our cost of
capital by causing potential investors to require a higher interest rate due to
a perceived risk increase related to our ability to repay outstanding debt
obligations. Lower ratings by the agencies could also restrict our ability to
access equity and debt capital. During 2005, management met separately with the
two credit rating agencies during their annual rating reviews. Both agencies
maintain their ratings of A2 for Moody's and A+ for S&P as of the filing date of
this report. There is no assurance that the rating agencies will maintain
ratings which allow us to borrow under advantageous conditions and at reasonable
interest rates.
There is no assurance that our existing funding sources will continue to be
adequate or that the cost of funds will remain at levels permitting us to remain
profitable.
Any of these factors may have an adverse effect on our earnings and financial
condition.
Risks associated with potential acquisitions or divestitures or restructuring
may adversely affect us.
We may seek to acquire or invest in other companies, technologies, services
or products that complement our business. There is no assurance that we will
succeed in finding attractive acquisition candidates or investments. These
transactions may result in the issuance of equity securities that could be
dilutive if the acquisition or business opportunity does not develop in
accordance with our business plan. They may also result in significant
write-offs and an increase in our debt. The occurrence of any of these events
could have a material adverse effect on our business, financial condition and
results of operations.
Any of these transactions could involve numerous additional risks. For
example, we may experience difficulty in getting required regulatory approvals.
We may also have difficulty assimilating a new business or separating old
businesses. Transactions such as these may also divert management's attention
from other business concerns and otherwise disrupt our business. We might see a
loss of key employees from our acquisition targets and as a result the
integration of the new business opportunity into our existing business might be
more difficult.
All of these events may have a material adverse effect on our business.
There can be no assurance that we will be successful in overcoming these or any
other significant risks encountered.
The accuracy of the Company's judgments and estimates about financial and
accounting matters will impact operating results and financial condition.
The discussion under "Critical Accounting Policies and Estimates" in this
report and the information referred to in that discussion is incorporated by
reference in this paragraph. The Company makes certain estimates and judgments
in preparing its financial statements. The quality and accuracy of those
estimates and judgments will have an impact on the Company's operating results
and financial condition.
The Company's controls and procedures may fail or be circumvented.
Management regularly reviews and updates the Company's internal control
over financial reporting, disclosure controls and procedures, and corporate
governance policies and procedures. Any system of controls and procedures,
however well designed and operated, is based in part on certain assumptions and
can provide only reasonable, not absolute, assurances that the objectives of the
system are met. Any failure or circumvention of the Company's controls and
procedures or failure to comply with regulations related to controls and
procedures could have a material adverse effect on the Company's business,
results of operations and financial condition.
Item 1B. Unresolved Staff Comments. None
20
Item 2. Properties.
The Company's physical properties consist of offices and water facilities to
accomplish the production, storage, treatment, and distribution of water. These
properties are located in or near the Geographic Service Areas listed above in
Item 1.c. "Narrative Description of the Business." The general office, which
houses accounting, engineering, information systems, human resources,
purchasing, regulatory, water quality, and executive staff, is located in San
Jose, California. All properties are maintained in good operating condition.
The real properties owned are held in fee simple title. Properties owned by Cal
Water are subject to the indenture securing first mortgage bonds of which $27
million remained outstanding at December 31, 2005. Washington Water has
long-term bank loans that are secured primarily by utility plant. New Mexico
Water has a long-term loan which is secured by utility plant.
Cal Water owns 628 wells and operates 5 leased wells. There were 387 owned
storage tanks with a capacity of 252 million gallons, 43 managed storage tanks
with a capacity of 35 million gallons, and 3 reservoirs with a capacity of 220
million gallons. There are 5,453 miles of supply and distribution mains in the
various systems.
Washington Water owns 314 wells and manages 85 wells. There are 115 owned
storage tanks and 28 managed storage tanks with a storage capacity of 6 million
gallons. There are 309 miles of supply and distribution lines.
New Mexico Water owns 11 wells. There are 8 storage tanks with a storage
capacity of 4 million gallons. There are 138 miles of supply and distribution
lines.
Hawaii Water owns 6 wells. There are 3 storage tanks with a storage capacity of
5 million gallons. There are 35 miles of supply and distribution lines.
In the leased City of Hawthorne and City of Commerce systems or in systems that
are operated under contract for municipalities or private companies, title to
the various properties is held exclusively by the municipality or private
company.
Water supply, security, environmental, condemnation and utility plant
construction items are discussed in Item 1.c, "Narrative of the Business."
Utility plant construction items are also discussed in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
LIQUIDITY AND CAPITAL RESOURCES."
Item 3. Legal Proceedings.
In 1995, the State of California's Department of Toxic Substances Control (DTSC)
named Cal Water as a potential responsible party for cleanup of a toxic
contamination plume in the Chico groundwater. The toxic spill occurred when
cleaning solvents, which were discharged into the city's sewer system by local
dry cleaners, leaked into the underground water supply. The DTSC contends that
Cal Water's responsibility stems from its operation of wells in the surrounding
vicinity that caused the contamination plume to spread. While Cal Water is
cooperating with the cleanup effort, Cal Water denies any responsibility for the
contamination or the resulting cleanup and intends to vigorously resist any
action that may be brought against Cal Water. In December 2002, Cal Water was
named along with other defendants in two lawsuits filed by DTSC for the cleanup
of the plume. The suits assert that the defendants are jointly and severally
21
liable for the estimated cleanup of $8.7 million. The parties have undertaken
settlement negotiations. In response to Cal Water's request to participate in
settlement negotiations, the insurance carrier threatened to exercise its
reservation of right letter to seek reimbursement of past defense costs. Past
defense costs approximate $0.6 million. Cal Water believes that the carrier
clearly has a duty to defend and is not entitled to any defense cost
reimbursement. Furthermore, Cal Water believes that insurance coverage exists
for this claim. If Cal Water's claim is ultimately found to be excludable under
its policies, Cal Water believes any damages will be covered by the ratepayer,
as pump-and-treat is the most economical approach to the cleanup effort. Cal
Water believes that there will not be a material adverse effect to its financial
position or results of operations.
In 1995, the California Legislature enacted the Water Utility Infrastructure
Improvement Act of 1995 (Infrastructure Act) to encourage water utilities to
sell surplus properties and reinvest in needed water utility facilities. In
September 2003, the CPUC issued decision D.03-09-021 in Cal Water's 2001 GRC
filing. In this decision, the CPUC ordered Cal Water to file an application
setting up an Infrastructure Act memorandum account with an up-to-date
accounting of all real property that was at any time in rate base and that Cal
Water had sold since the effective date of the Infrastructure Act. Additionally,
the decision directed the CPUC staff to file a detailed report on its review of
Cal Water's application. On January 11, 2005, the ORA issued a report expressing
its opinion that Cal Water had not proven that surplus properties sold since
1996 were no longer used and useful. The ORA recommended that Cal Water be fined
$160,000 and that gains from property sales should generally benefit ratepayers.
During the period under review, Cal Water's cumulative gains from surplus
property sales were $19.2 million, which included an intercompany gain related
to a transaction with Utility Services and a like-kind exchange with a third
party.
On December 1, 2005, the CPUC issued its D.05-12-002. This decision finds that
Cal Water appropriately reclassified all properties as non-utility property
prior to being sold and that criteria Cal Water followed to reclassify its
properties was reasonable and consistent with the requirements of the CPUC.
Since the properties were properly reclassified, the CPUC found that approval of
the property sales was not required and no penalty was warranted. Furthermore,
the decision found that Cal Water should be allowed to include in rate base the
remaining $1,182,462 of the Chico customer center.
Although the decision concluded that all gains for the property sales qualified
for reinvestment in accordance with the Infrastructure Act, the decision defers
the ratemaking issue regarding treatment of sale proceeds to its Order
Instituting Rulemaking (R.) 04-09-003. On November 5, 2005, the CPUC mailed its
draft decision (Draft Decision) regarding the allocation of proceeds from the
sale of utility assets. The Draft Decision states that the CPUC has limited
discretion in how it allocates gains on sale of real property that meets the
criteria in the Infrastructure Act, provided that water companies reinvest the
proceeds in new water infrastructure. If the Draft Decision is adopted, the
Company will be entitled to earn its full authorized return on the proceeds
reinvested in utility plant.
Based on the D. 05-12-002 and the Draft Decision, Cal Water has not accrued a
liability in its financial statements. Cal Water does not know when the CPUC
will issue its decision in the matter of R.04-09-003. If the CPUC finds any
portion of the property sales should be allocated to the ratepayer, Cal Water's
rate base could be reduced, which would lower future revenues, net income, and
cash flows.
Periodically, the Company is involved in other proceedings or litigation arising
in the ordinary course of business. Management does not believe that the
ultimate resolution of these matters will materially affect the Company's
financial position, results of operations, or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders in the fourth quarter of
2005.
Executive Officers of the Registrant
- ------------------------------------
Name Positions and Offices with California Water Service Group Age
- ---- --------------------------------------------------------- ---
Robert W. Foy Chairman of the Board since January 1, 1996. A director since 69
(1) 1977. Formerly President and Chief Executive Officer of Pacific
Storage Company, a diversified transportation and warehousing
company with operations in Stockton, Modesto, Sacramento,
San Jose, Vallejo, Merced and Auburn, California, where he has
been employed for 42 years
22
Peter C. Nelson President and Chief Executive Officer since February 1, 1996. 58
(2) Formerly Vice President, Division Operations (1994-1995) and
Region Vice President (1989-1994), Pacific Gas & Electric
Company, a gas and electric public utility
John S. Tootle Acting CFO and Treasurer since October 28, 2005; Formerly 51
(3) Corporate Counsel from 2000-2005 and previously CFO
Dominguez Services Corporation
Dan Stockton Vice President, Corporate Development and Corporate Secretary 61
(4) since October 2005; Vice President, Information Systems from
April 2001 to September 2005; from 1991 to 2001 he
served as Chief Operating Officer of Great Oaks Water Company
Calvin L. Breed Controller, Assistant Secretary and Assistant Treasurer since 50
(5) Nov. 1994; previously Treasurer of TCI International, Inc. (1984-1994);
a certified public accountant with Arthur Andersen & Co. (1980-1983)
(1) Holds the same position with California Water Service Company, New Mexico
Water Service Company, Washington Water Service Company, Hawaii Water
Service Company, Inc., and CWS Utility Services
(2) Holds the same position with California Water Service Company and CWS
Utility Services; Chief Executive Officer of New Mexico Water Service
Company, Washington Water Service Company and Hawaii Water Service Company,
Inc.
(3) Holds the same position with California Water Service Company, New Mexico
Water Service Company, Washington Water Service Company, Hawaii Water
Service Company, Inc., and CWS Utility Services.
(4) Vice President, and Corporate Secretary of California Water Service
Company, New Mexico Water Service Company, Washington Water Service
Company, Hawaii Water Service Company, Inc., and CWS Utility Services
(5) Holds the same position with California Water Service Company
23
Name Positions and Offices with California Water Service Company Age
- ---- ----------------------------------------------------------- ---
Paul G. Ekstrom Vice President Customer Service and Information Systems since 54
October 2005; Corporate Secretary, 1996 to 2005; Operations
Coordinator, 1993 to 1996; District Manager, Livermore, 1988 to
1993; previously served in various field management positions
since 1979; an employee since 1972
Francis S. Ferraro Vice President, Regulatory Matters and Corporate Relations since 56
(1) October 2005; Vice President, Regulatory Matters and Corporate
Development, 2001 to 2005; Vice President, Regulatory Matters,
1989 to 2001. Employed by the California Public Utilities
Commission for 16 years, including 1985 through 1989 as an
Administrative Law Judge; an employee since 1989
Robert R. Guzzetta Vice President, Operations since October 2005; Vice President 51
Engineering and Water Quality from 1996 to 2005; Assistant Chief
Engineer, 1988 to 1990; various engineering department positions
since 1977
Christine L. McFarlane Vice President, Human Resources since August 1996; Director 59
of Human Resources, 1991 to 1996; Assistant Director of
Personnel, 1989 to 1991; an employee since 1969
Michael Rossi Vice President, Engineering and Water Quality since October 2005; 52
(2) Chief Engineer from 1997 to 2005; Assistant Chief Engineer from 1988
to 1997; an employee since 1977
(1) Also, Vice President, Corporate Relations with CWS Utility Services, Vice
President, Regulatory Matters with Hawaii Water Service Company, Inc., and
Vice President, Regulatory Matters with New Mexico Water Service Company.
(2) Also, Vice President, Engineering with CWS Utility Services.
Name Positions and Offices with Washington Water Service Company Age
- ---- ----------------------------------------------------------- ---
Michael P. Ireland President since December 1999; previously President of Harbor Water 52
Company, Gig Harbor, Washington from 1985 to 1999
No officer or director has any family relationship to any other executive
officer or director. No executive officer is appointed for any set term. There
are no agreements or understandings between any executive officer and any other
person pursuant to which he/she was selected as an executive officer.
24
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
The Company's common stock is traded on the New York Stock exchange under the
symbol "CWT." At December 31, 2005, there were 18,389,996 common shares and
139,000 preferred shares outstanding and 3,161 stockholders of record.
Additional information required by this Item is contained in the section
captioned "Quarterly Financial Data" in the 2005 Annual Report to Stockholders
and is incorporated herein by reference. The 2005 Annual Report to Stockholders
is included with this report as Exhibit 13.1.
Item 6. Selected Financial Data.
The information required by this Item is contained in the section captioned
"Ten-Year Financial Review" in the 2005 Annual Report to Stockholders and is
incorporated herein by reference. The 2005 Annual Report to Stockholders is
included with this report as Exhibit 13.1.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required by this Item is contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," in the 2005 Annual Report to Stockholders and is incorporated
herein by reference. The 2005 Annual Report to Stockholders is included with
this report as Exhibit 13.1.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item is contained in the section captioned
"Financial Risk Management" in the 2005 Annual Report to Stockholders and is
incorporated herein by reference. The 2005 Annual Report to Stockholders is
included with this report as Exhibit 13.1.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is contained in the 2005 Annual Report to
Stockholders and is incorporated herein by reference. The 2005 Annual Report to
Stockholders is included with this report as Exhibit 13.1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
25
Item 9A. Controls and Procedures
The information required by this Item is contained in the sections "Controls and
Procedures" and "Report of Independent Registered Public Accounting Firm" in the
2005 Annual Report to Stockholders and is incorporated herein by reference. The
2005 Annual Report to Stockholders is included with this report as Exhibit 13.1.
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item as to directors of the Company is
contained in the sections captioned "Board Structure," "Proposals of the Board;
Proposal No. 1 - Election of Directors" and "Other Matters - Code of Ethics" of
the 2006 Proxy Statement, and is incorporated herein by reference. Information
regarding executive officers is included in a separate section captioned
"Executive Officers of the Registrant" contained in Part I of this report.
Effective March 13, 2006, the Company appointed Martin (Marty) A. Kropelnicki as
Vice President, Chief Financial Officer and Treasurer. Prior to joining the
Company, Mr. Kropelnicki was the Chief Financial Officer of PowerLight
Corporation.
Item 11. Executive Compensation.
The information required by this Item as to directors of the Company is included
under the caption "Director Compensation Arrangements" of the 2006 Proxy
Statement and is incorporated herein by reference. The information required by
this Item as to compensation of executive officers, including officers who are
directors, is included under the caption "Executive Compensation" of the 2006
Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is contained in the section captioned
"Stock Ownership of Management and Certain Beneficial Owners" of the 2006 Proxy
Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Cal Water provides laboratory services to a subsidiary of SJW Corp., which has
ownership of over 5% of the Company's common stock outstanding. The rates
charged are comparable to rates charged to other third parties. The revenue for
2005 was less than $0.1 million. The revenue and income from these activities
are not significant to the business.
26
Item 14. Principal Accountant Fees and Services
The information required by this Item is contained in the section captioned
"Relationship with the Independent Registered Public Accounting Firm" of the
2006 Proxy Statement and is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) As part of this Form 10-K, the following documents are being filed:
1. Financial Statements:
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Income for the years ended December 31,
2005, 2004 and 2003
Consolidated Statements of Common Stockholders' Equity and
Comprehensive Income for the years ended December 31, 2005, 2004 and
2003
Consolidated Statements of Cash Flows for the years ended December 31,
2005, 2004 and 2003
Notes to Consolidated Financial Statements, December 31, 2005, 2004
and 2003
Reports of Independent Registered Public Accounting Firm
Controls and Procedures
The above financial statements are contained in sections bearing the
same captions in the 2005 Annual Report to Stockholders which is filed
with this Form 10-K and incorporated herein by reference. Refer to
Exhibit 13.1 of this Form 10-K.
2. Financial Statement Schedules: No financial statement schedules are
being included since the information otherwise required is included in
the financial statements and the notes thereto.
3. Exhibits required to be filed by Item 601 of Regulation S-K: The
Exhibit Index on page 30 of this Form 10-K is incorporated herein by
reference.
(a) The exhibits filed as part of this Form 10-K are attached, unless
otherwise indicated. The exhibits listed in the Exhibit Index
that are not filed with this Form 10-K were previously filed with
the Securities and Exchange Commission as indicated and are
hereby incorporated by reference.
(b) Exhibits required to be filed by Item 601 of Regulation S-K.
Refer to Item (a) 3 above and the Exhibit Index on page 30 of
this Form 10-K.
(c) Additional Financial Statement Schedules. No filings are required
under this Item.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CALIFORNIA WATER SERVICE GROUP
Date: February 22, 2006 By /s/ Peter C. Nelson
PETER C. NELSON,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Date: February 22, 2006 /s/ Robert W. Foy
ROBERT W. FOY
Chairman, Board of Directors
Date: February 22, 2006 /s/ Douglas M. Brown
DOUGLAS M. BROWN
Member, Board of Directors
Date: February 22, 2006 /s/ Edward D. Harris, Jr.
EDWARD D. HARRIS, JR., M.D.
Member, Board of Directors
Date: February 22, 2006 /s/ Bonnie G. Hill
BONNIE G. HILL
Member, Board of Directors
Date: February 22, 2006 /s/ David N. Kennedy
DAVID N. KENNEDY
Member, Board of Directors
Date: February 22, 2006 /s/ Richard P. Magnuson
RICHARD P. MAGNUSON
Member, Board of Directors
Date: February 22, 2006 /s/ Linda R. Meier
LINDA R. MEIER
Member, Board of Directors
Date: February 22, 2006 /s/ Peter C. Nelson
PETER C. NELSON
President and Chief Executive Officer,
Principal Executive Officer
Member, Board of Directors
Date: February 22, 2006 /s/ George A. Vera
GEORGE A. VERA
Member, Board of Directors
28
Date: February 22, 2006 /s/ John S. Tootle
JOHN S. TOOTLE
Acting Chief Financial
Officer and Treasurer;
Principal Financial Officer
Date: February 22, 2006 /s/ Calvin L. Breed
CALVIN L. BREED
Controller, Assistant Secretary and
Assistant Treasurer;
Principal Accounting Officer
29
EXHIBIT INDEX
Exhibit
Number
- ------
Unless filed with this Form 10-K, the documents listed are incorporated by
reference to the filings referred to:
3. Articles of Incorporation and Bylaws:
3.1 Certificate of Incorporation of California Water Service Group
(Filed as Exhibit B of the California Water Service Group Proxy
Statement dated March 18, 1999)
3.2 Restated Bylaws of California Water Service Group as amended on
January 26, 2000 (Exhibit E-2 to Current Report on Form 8-K filed
February 3, 2000)
4. Instruments Defining the Rights of Security Holders of California Water
Service Group, including Indentures:
4.1 Shareholder Rights Plan; an agreement between California Water
Service Group and BankBoston, N.A., rights agent, dated January 28,
1998 (Exhibit 1 to Registration Statement on Form 8-A filed February
13, 1998)
4.2 Certificate of Designations regarding Series D Participating
Preferred Stock, as filed with Delaware Secretary of State on
September 16, 1999 (Exhibit 4.2 to Annual Report on Form 10-K for
the year ended December 31, 2003)
4.3 Thirty-fourth Supplemental Indenture dated as of November 1, 1990,
covering First Mortgage 9.86% Bonds, Series CC. (Exhibit 4 to Annual
Report on Form 10-K for the year ended December 31, 1990)
4.4 [reserved]
4.5 [reserved]
4.6 [reserved]
4.7 Note Agreement dated August 15, 1995, pertaining to issuance of
$20,000,000, 7.28% Series A Unsecured Senior Notes, due November 1,
2025 (Exhibit 4 to Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995)
4.8 Note Agreement dated March 1, 1999, pertaining to issuance of
$20,000,000, 6.77% Series B Unsecured Senior Notes, due November 1,
2028 (Exhibit 4.1 to Annual Report on Form 10-K for the year ended
December 31, 1999)
30
4.9 First Supplement dated October 1, 2000, to Note Agreement of March
1, 1999, pertaining to issuance of $20,000,000, 8.15% Series C
Unsecured Senior Notes, due November 1, 2030 (Exhibit 4.12 to Annual
Report on Form 10-K for year ended December 31, 2000)
4.10 Second Supplement dated September 1, 2001, to Note Agreement of
March 1, 1999, pertaining to issuance of $20,000,000, 7.13% Series D
Unsecured Senior Notes, due November 1, 2031 (Exhibit 4.1 to
Quarterly Report on Form 10-Q for the quarter ended September 30,
2001)
4.11 Third Supplement dated May 1, 2002, to Note Agreement of March 1,
1999, pertaining to issuance of $20,000,000, 7.11% Series E
Unsecured Senior Notes, due May 1, 2032 (Exhibit 4.1 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002)
4.12 Fourth Supplement dated August 15, 2002, to Note Agreement of March
1, 1999, pertaining to issuance of $20,000,000, 5.90% Series F
Unsecured Senior Notes, due November 1, 2017 (Exhibit 4.14 to Annual
Report on Form 10-K for the year ended December 31, 2002)
4.13 Fifth Supplement dated November 1, 2002, to Note Agreement of March
1, 1999, pertaining to issuance of $20,000,000, 5.29% Series G
Unsecured Senior Notes, due November 1, 2022 (Exhibit 4.15 to Annual
Report on Form 10-K for the year ended December 31, 2002)
4.14 Sixth Supplement dated December 1, 2002, to Note Agreement of March
1, 1999, pertaining to issuance of $20,000,000, 5.29% Series H
Unsecured Senior Notes, due December 1, 2022 (Exhibit 4.16 to Annual
Report on Form 10-K for the year ended December 31, 2002)
4.15 Ninth Supplement dated February 15, 2003, to Note Agreement of March
1, 1999, pertaining to issuance of $10,000,000, 4.58% Series K
Unsecured Senior Notes, due June 30, 2010 (Exhibit 4.17 to Annual
Report on Form 10-K for the year ended December 31, 2002)
4.16 Tenth Supplement dated February 15, 2003, to Note Agreement of March
1, 1999, pertaining to issuance of $10,000,000, 5.48% Series L
Unsecured Senior Notes, due March 1, 2018 (Exhibit 4.18 to Annual
Report on Form 10-K for the year ended December 31, 2002)
4.17 Thirteenth Supplemental Trust Indenture whereby California Water
Service Company became the successor to Dominguez Water Corporation
in the original trust indenture for Dominguez Water Corporation
dated August 1, 1954 (Exhibit 4.13 to Annual Report on Form 10-K for
the year ended December 31, 2000 [included within Exhibit 4.12 to
such report])
4.18 Eleventh Supplemental Trust Indenture dated as of December 8, 1992,
covering First Mortgage 8.86% Bonds, Series J (Exhibit 10.2 to
Annual Report on Form 10-K for the year ended December 31, 1997, of
Dominguez Services Corporation)
31
4.19 Twelfth Supplemental Indenture dated as of December 1, 1997,
covering First Mortgage 6.94% Bonds, Series K due 2012 (Exhibit 10.3
to Annual Report on Form 10-K for the year ended December 31, 1997,
of Dominguez Services Corporation)
4.20 Seventh Supplement dated May 1, 2003, to Note Agreement of March 1,
1999, pertaining to issuance of $10,000,000, 5.54% Series I
Unsecured Senior Notes, due May 1, 2023 (Exhibit 4.22 to Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003)
4.21 Amended and Restated Eighth Supplement dated May 1, 2003, to Note
Agreement of March 1, 1999, pertaining to issuance of $10,000,000,
5.44% Series J Unsecured Senior Notes, due May 1, 2018 (Exhibit 4.23
to Quarterly Report on Form 10-Q for the quarter ended March 31,
2003)
4.22 Twelfth Supplement dated October 24, 2003, to Note Agreement of
March 1, 1999, pertaining to the issuance of $20,000,000, 5.55%,
Series N Unsecured Senior Notes due December 1, 2013, (Exhibit 4.24
to Quarterly Report on Form 10-Q for the quarter ended September 30,
2003)
4.23 Eleventh Supplement dated November 3, 2003, to Note Agreement of
March 1, 1999, pertaining to the issuance of $20,000,000, 5.52%,
Unsecured Series M Senior Notes due November 1, 2013 (Exhibit 4.25
to Quarterly Report on Form 10-Q for the quarter ended September 30,
2003)
10. Material Contracts.
10.1 Water Supply Contract between Cal Water and County of Butte relating
to Cal Water's Oroville District; Water Supply Contract between Cal
Water and the Kern County Water Agency relating to Cal Water's
Bakersfield District; Water Supply Contract between Cal Water and
Stockton East Water District relating to Cal Water's Stockton
District. (Exhibits 5(g), 5(h), 5(i), 5(j), Registration Statement
No. 2-53678, which exhibits are incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1974)
10.2 Settlement Agreement and Master Water Sales Contract between the
City and County of San Francisco and Certain Suburban Purchasers
dated August 8, 1984; Supplement to Settlement Agreement and Master
Water Sales Contract, dated August 8, 1984; Water Supply Contract
between Cal Water and the City and County of San Francisco relating
to Cal Water's Bear Gulch District dated August 8, 1984; Water
Supply Contract between Cal Water and the City and County of San
Francisco relating to the Cal Water's San Carlos District dated
August 8, 1984; Water Supply Contract between Cal Water and the City
and County of San Francisco relating to Cal Water's San Mateo
District dated August 8, 1984; Water Supply Contract between Cal
Water and the City and County of San Francisco relating to Cal
Water's South San Francisco District dated August 8, 1984. (Exhibit
10.2 to Annual Report on Form l0-K for the year ended December
31,1984)
32
10.3 Water Supply Contract dated January 27, 1981, between Cal Water and
the Santa Clara Valley Water District relating to Cal Water's Los
Altos District (Exhibit 10.3 to Annual Report on Form 10-K for the
year ended December 31, 1992)
10.4 Amendments No. 3, 6 and 7 and Amendment dated June 17, 1980, to
Water Supply Contract between Cal Water and the County of Butte
relating to Cal Water's Oroville District. (Exhibit 10.5 to Annual
Report on Form 10-K for the year ended December 31, 1992)
10.5 Amendment dated May 31, 1977, to Water Supply Contract between Cal
Water and Stockton East Water District relating to Cal Water's
Stockton District. (Exhibit 10.6 to Annual Report on Form 10-K for
the year ended December 31, 1992)
10.6 Second Amended Contract dated September 25, 1987, among Stockton
East Water District, California Water Service Company, the City of
Stockton, the Lincoln Village Maintenance District, and the Colonial
Heights Maintenance District Providing for the Sale of Treated
Water. (Exhibit 10.7 to Annual Report on Form 10-K for the year
ended December 31, 1987)
10.7 Water Supply Contract dated April 19, 1927, and Supplemental
Agreement dated June 5, 1953, between Cal Water and Pacific Gas and
Electric Company relating to Cal Water's Oroville District. (Exhibit
10.9 to Annual Report on Form 10-K for the year ended December 31,
1992)
10.8 [reserved]
10.9 [reserved]
10.10 Agreement between the City of Hawthorne and California Water Service
Company for the 15-year lease of the City's water system. (Exhibit
10.17 to Quarterly Report on Form 10-Q for the quarter ended March
31, 1996)
10.11 Water Supply Agreement dated September 25, 1996, between the City of
Bakersfield and California Water Service Company. (Exhibit 10.18 to
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996)
10.12 Water Supply Contract dated November 16, 1994, between California
Water Service Company and Alameda County Flood Control and Water
Conservation District relating to Cal Water's Livermore District
(Exhibit 10.15 to Annual Report on Form 10-K for the year ended
December 31, 1994)
10.13 [reserved]
10.14 California Water Service Group Directors' Retirement Plan (As
amended and restated on February 22, 2006)*
33
10.15 [reserved]
10.16 $10,000,000 Business Loan Agreement between Bank of America and
California Water Service Group and CWS Utility Services dated
February 28, 2003 (Exhibit 10.17 to Annual Report on Form 10-K for
the year ended December 31, 2002)
10.17 $55,000,000 Business Loan Agreement between Bank of America and
California Water Service Company dated February 28, 2003 (Exhibit
10.18 to Annual Report on Form 10-K for the year ended December 31,
2002)
10.18 Executive Severance Plan (Exhibit 10.24 to Annual Report on Form
10-K for the year ended December 31, 1998) *
10.19 California Water Service Group Long-Term Incentive Plan (filed as
Appendix A of the California Water Service Group proxy statement
dated March 17, 2000) *
10.20 California Water Service Group Deferred Compensation Plan effective
January 1, 2001 (Exhibit 10.22 to Annual Report on Form 10-K for the
year ended December 31, 2000) *
10.21 California Water Service Company Supplemental Executive Retirement
Plan effective January 1, 2001 (Exhibit 10.23 to Annual Report on
Form 10-K for the year ended December 31, 2000) *
10.22 Amendment No. 1 to California Water Service Company Supplemental
Executive Retirement Plan effective January 1, 2001 (Exhibit 10.22
to Quarterly Report on Form 10-Q for the quarter ended September 30,
2004)*
10.23 Amendment No. 1 effective June 25, 2003, to agreement with Bank of
America dated February 28, 2003 (Exhibit 10.24 to Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003)
10.24 Water Supply Contract 99-73 between the City of Bakersfield and
California Water Service Company, dated March 31, 1999 (Exhibit
10.25 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003)
10.25 Amendment No. 1 to Water Supply Contract between the City of
Bakersfield and California Water Service Company, dated October 3,
2001 (Exhibit 10.26 to Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003)
10.26 Amendment No. 2 effective February 18, 2004, to agreement with Bank
of America dated February 28, 2003 (Exhibit 10.26 to Annual Report
on Form 10-K for the year ended December 31, 2003)
10.27 Amendment No. 2 to California Water Service Company Supplemental
Executive Retirement Plan effective January 1, 2001 (Exhibit 10.27
to Quarterly Report on Form 10-Q for the quarter ended September 30,
2004)*
10.28 $10,000,000 Business Loan Agreement between Bank of America, N.A.
and California Water Service Group, CWS Utility Services, New Mexico
Water Service Company, Washington Water Service Company, and Hawaii
Water Service Company, Inc., dated December 23, 2004. (Exhibit 10.1
to Current Report on Form 8-K filed on February 8, 2005)
34
10.29 $45,000,000 Business Loan Agreement between Bank of America, N.A.
and California Water Service Company dated December 23, 2004.
(Exhibit 10.2 to Current Report on Form 8-K filed on February 8,
2005)
10.30 California Water Service Group Equity Incentive Plan (filed as
Appendix B of the California Water Service Group proxy statement
dated March 25, 2005, for its Annual Meeting of Stockholders to be
held on April 27, 2005, as filed with the SEC on March 22, 2005
(File No. 1-13883))*
10.31 The registrant's policy on option repricing under its Equity
Incentive Plan (incorporated by reference to Item 8.01 Other Events
in the registrant's Current Report on Form 8-K dated April 7, 2005)
*
10.32 Water Supply Contract dated September 21, 2005, between Cal Water
and the Kern County Water Agency. (Exhibit 10.1 to Current Report on
Form 8-K filed on September 21, 2005)
10.33 Separation Agreement between California Water Service Group and
Richard D. Nye. (Exhibit 10 to Current Report on Form 8-K filed on
December 22, 2005)*
10.34 Form of Stock Appreciation Right Grant Notice under the California
Water Service Group Equity Incentive Plan*
10.35 Form of Stock Appreciation Right Agreement under the California
Water Service Group Equity Incentive Plan with Notice of Exercise*
10.36 Form of Restricted Stock Award Grant Notice under the California
Water Service Group Equity Incentive Plan*
10.37 [reserved]
10.38 Form of Restricted Stock Award Agreement under the California Water
Service Group Equity Incentive Plan with Assignment Separate From
Certificate and Joint Escrow Instructions*
10.39 Form of Stock Option Grant Notice for outside director under the
California Water Service Group Equity Incentive Plan*
10.40 Form of Stock Option Grant Notice under the California Water Service
Group Equity Incentive Plan*
10.41 Form of Stock Option Agreement (Incentive Stock Option or
Nonstatutory Stock Option) under the California Water Service Group
Equity Incentive Plan with Notice of Exercise*
10.42 Offer Letter between the registrant and Martin A. Kropelnicki, dated
February 15, 2006 (incorporated by reference to Exhibit 10.1 to
Amendment No. 1 to Current Report on Form 8-K of the registrant,
dated February 22, 2006)*
35
13. Annual Report to Security Holders:
13.1 2005 Annual Report. Certain sections of the 2005 Annual Report to
Stockholders are incorporated by reference in this 10-K filing and
filed with this Form 10-K as Exhibit 13. This includes those
sections referred to in Part I, Item 1, Business; Part I, Item 2,
Properties; Part II, Item 5, Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer Repurchases of Equity
Securities; Part II, Item 6, Selected Financial Data; Part II, Item
7, Management's Discussion and Analysis of Financial Condition and
Results of Operations; Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk; Part II, Item 8,
Financial Statements and Supplementary Data; and Item 9A, Controls
and Procedures
21. Subsidiaries of the Registrant
23. Consents of Experts and Counsel
23.1 Consent of Independent Registered Public Accounting Firm
31. Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.1 Chief Executive Officer certification of financial statements
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer certification of financial statements
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32. Chief Executive Officer and Chief Financial Officer Certification pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Management contract or compensatory plan or arrangement
36