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EXHIBIT 13
(annual report cover)
CALIFORNIA WATER SERVICE GROUP
H2O (accompanied by a photo of water in a testing glass)
1998 Annual Report
2
(inside front cover)
We are dedicated to being the leader in providing communities and customers with
traditional and innovative utility services.
step 1: contract
Arrangements under which water quality services are provided to customers.
step 2: site
The place within a specific service area where treatment facilities are located.
step 3: contaminant
The substance the treatment facility is designed to remove.
step 4: benefit
What this process provides to our customers.
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CALIFORNIA WATER SERVICE GROUP Page 1
Photo of Chairman and Chief Executive Officer:
Robert W. Foy, Chairman of the Board (right)
Peter C. Nelson, President and Chief Executive Officer (left)
LETTER TO OUR SHAREHOLDERS
1998 was a memorable business year for the California Water Service Group.
In fact, 1998 was the first full-year of operation for the California Water
Service Group (the Group), the holding company for the California Water Service
Company (Cal Water) and CWS Utility Services. At year's start, we knew the
unusually wet El Nino weather would make it unlikely to top the all-time
financial records set in 1997. While this forecast was correct, we did produce
strong financial results, business growth and process improvements that
increased the level of customer service.
One of our proudest accomplishments of 1998, and indeed in our 72-year history,
was the agreement to merge with Dominguez Services Corporation. It is the
largest merger in our history and the largest ever of two investor-owned water
utilities in California.
DOMINGUEZ MERGER
On November 13, 1998, the Boards of the California Water Service Group and
Dominguez Services Corporation (DSC) of Long Beach, California, announced an
agreement to merge. Incorporated in 1911, DSC has nearly 40,000 service
connections, almost all held by its main subsidiary, the Dominguez Water
Company, in the South Bay region of Los Angeles. This system is adjacent to our
Hermosa-Redondo and Palos Verdes districts and together will serve almost 90,000
customers. The synergies that result should produce long-term cost savings for
our customers and position us as a much stronger competitor for future growth
opportunities in Los Angeles. In addition, DSC has operations in fast-growing
northeast Los Angeles County, near our Bakersfield district and in Northern
California. DSC also brings experience in the growing area of water rights
trading, enabling us to maximize the value and usefulness of our combined water
rights.
The merger must be approved by DSC shareholders and the California Public
Utilities Commission. Another water company has submitted a competing offer to
merge with Dominguez. The offer will be evaluated by Dominguez. In the event
Dominguez completes a merger with another company, it must pay the Group $2.7
million in settlement fees.
1998 FINANCIAL RESULTS
1998 was a very good year for the Group. Operating revenues totaled
$186,273,000, net income was $18,395,000, earnings per share equaled $1.45,
while the price-per-share and market capitalization at the end of the year
reached $31-5/16 and $395,000,000, respectively. Although we expected 1998's
results to be lower than the record highs set in 1997 - and for all but share
price and market capitalization, we were correct - we were pleased by the small
differences between 1998's and 1997's results. For example, operating revenues
were less than five percent below the $195 million reached in 1997.
In 1998, it was common practice to blame virtually any misfortune on abnormal
weather patterns caused by El Nino, the periodic warming of the Pacific Ocean's
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CALIFORNIA WATER SERVICE GROUP Page 2
surface waters. In fact customer demand dropped dramatically in response to
precipitation levels that were twice normal in January, three times normal in
February, four times normal in May - with statewide precipitation reaching 170
percent of normal by the end of that month. When normal weather patterns
returned in the summer, growth in revenues outpaced those in expenses. The third
quarter turned out to be the single most profitable quarter in our 72-year
history.
We don't expect the weather to have as great an impact in 1999. Weather patterns
will be influenced by La Nina, a cooling of the Pacific's surface waters,
typified by short, heavy rainfalls and colder-than-normal temperatures. Though
we cannot predict 1999's precipitation, carryover storage from last year is
excellent and that alone should ensure sufficient supply well into 1999.
In January 1999, the Board of Directors voted to raise the dividend on common
stock from $1.07 to $1.085 per share, the 32nd consecutive annual dividend
increase. In 1999, we anticipate issuing new long-term debt to meet our capital
construction budget after meeting long-term financing needs with internally
generated funds for three years in a row. This transaction is expected to be
completed in the first quarter of 1999. And, as already discussed, 1999 will see
the culmination of the most significant business transaction the Group has
undertaken since the formation of its predecessor in 1926: the merger of the
Group and Dominguez Services Corporation.
CUSTOMER SERVICE AND WATER QUALITY
Our vision statement says it all: "We are dedicated to being the leader in
providing communities and customers with traditional and innovative utility
services." To continue this leadership into the next century, we are vigorously
pursuing improvements in the excellent service we provide customers. Every
employee in our 21 operating districts and General Office is continuously
focusing on improving business processes that serve customers. An area that
receives special attention is water quality. Not surprisingly, our customers
identified safe, fresh and good-tasting water as their number one need in a
recent survey.
The new treatment facilities underway in Bakersfield and Torrance featured on
pages 4-7, are tangible evidence of our commitment to meeting this key customer
need. To support these facilities, Cal Water has a state-certified in-house
water quality laboratory focused on improving water quality. And as the table on
the reverse of the attached map shows, water quality has always been a top
priority of the Group and Cal Water sometimes anticipating both regulatory and
technological requirements.
BOARD DEVELOPMENTS
We are very pleased that George A. Vera was elected to the Board of Directors in
March to fill the vacancy left with the retirement of Edwin E. van Bronkhorst.
Like Mr. van Bronkhorst, George has ties to the founders of Silicon Valley:
Messrs. Packard and Hewlett. He serves as director of finance and administration
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CALIFORNIA WATER SERVICE GROUP Page 3
for the Packard Foundation - the nation's third largest private foundation, with
an endowment of $9 billion, distributing annual grants in excess of $400
million.
Y2K
Group has been taking steps for over a year to address potential Year 2000 (Y2K)
computer problems. These include: an internal assessment in both 1998 and 1999
of our readiness; transferring most non-billing computer functions to a
Y2K-compliant computer by mid-1999; converting our mainframe billing computer to
handle Y2K dates; working with critical suppliers and customers - like power
companies and hospitals - to ensure readiness; and developing contingency plans
for water delivery should, despite all these preparations, a problem arise that
threatens our ability to supply customers. An outside, independent consultant
reviewed our preparations and gave us a positive review. Additional information
about Y2K efforts is found on page 15 of this report.
CONCLUSION
The changes that the California Water Service Group and its subsidiaries saw in
1998 were some of the most dramatic in its history. At the same time that we are
creating unparalleled growth opportunities, the marketplace is becoming more
crowded. Financial market expectations of strong growth and dividend increases
remain unchanged, meaning our people must improve customer service and business
processes and contribute to profitable growth. A tall order, but one well within
the reach of our 658 employees, particularly now that we have all been trained
in the Continuous Improvement Process, an approach to business that focuses on
customer service, operating efficiency and developing the potential and
contribution of every employee.
In 1998, the California Water Service Group was buffeted by rainstorms of nearly
unprecedented magnitude. Our people met these challenges and produced a very
successful year. We are working hard to ensure that 1999 is equally successful
and are confident unprecedented results await us in the next century. Just look
at the map of California at the back of this annual report. It shows how
geographically diverse the Group is, and how we are positioned to take advantage
of a projected 25 percent increase in California's population over the next 20
years in an economy that is already the world's seventh largest. 1998 has indeed
set the tone for a very promising future.
/S/ Robert W. Foy
Robert W. Foy
Chairman of the Board
February 12, 1999
/S/ Peter C. Nelson
Peter C. Nelson
President and Chief Executive Officer
February 12, 1999
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CALIFORNIA WATER SERVICE GROUP Page 4
NORTHEAST BAKERSFIELD
SURFACE WATER TREATMENT PLANT
(a small map outlining the state of California appears with the general location
of Bakersfield depicted)
Kern County is one of the State's most productive agricultural regions. The
California Department of Finance projects the population of Kern County to more
than double from 648,000 today, to over 1.6 million by 2040. Where will all
these people live? Bakersfield, by far the largest city in Kern County, is
taking steps to channel development to the northeast, away from the westside's
prime agricultural land. To serve this area, the California Water Service
Company is working with Bakersfield to make high-quality Kern River water
available by building a 10 million gallon per day (MGD) treatment plant. This
plant will be expandable to 60 MGD and may ultimately supply a population of
180,000. Cal Water will design, build, finance, own and operate this facility.
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Unnumbered Page
Principles of Agreement between Cal Water and the City of Bakersfield
establishes us as the owner/operator.
It will be built on an 80-acre site near the Kern River.
Sediment and microbes often found in surface water will be removed.
Safe, healthful drinking water will enable families and communities to flourish.
(four boxes appear horizontally across the page with graphics that depict the
Northeast Bakersfield agreement, the future treatment plant, removal of microbes
from the water and delivery of water through a faucet)
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CALIFORNIA WATER SERVICE GROUP Page 5
(A photograph of the area in Northeast Bakersfield where the new treatment plant
will be built appears on the page; it is accompanied by the word "microbes")
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CALIFORNIA WATER SERVICE GROUP Page 6
TORRANCE DESALINATION FACILITY
(a small map outlining the state of California appears with the general location
of Torrance desalination facility)
The West Coast Groundwater Basin lies under one of the most heavily populated
areas of the country and is bordered to the west by the Pacific Ocean. In the
50s, the California Department of Water Resources proclaimed this basin "one of
the most critically overdrawn ground water sources in southern California,"
resulting in seawater intrusion. To combat the further inland spread of
seawater, the Water Replenishment District (WRD) was formed in 1955 to halt it,
a job that has been accomplished through injecting treated surface water into
the underground basin.
Now the mission is to clean up and reuse seawater trapped inland. In cooperation
with WRD, CWS Utility Services is making surplus land in Torrance available for
the desalination facility that will help achieve this new goal.
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Unnumbered Page
CWS Utility Services will operate the facility under a 20-year O&M contract.
Facility will be housed at our retired well sites.
By removing chlorides, the reverse osmosis process will produce potable water.
Safe drinking water will be produced at a discount to alternative supplies.
(four boxes appear horizontally across the page with graphics that depict the
Torrance agreement, the future desalination facility, removal of chlorides from
the water and delivery of water in a glass)
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CALIFORNIA WATER SERVICE GROUP Page 7
(A photograph of a desalination facility appears on the page; it is accompanied
by the word "chlorides")
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CALIFORNIA WATER SERVICE GROUP Page 8
TEN YEAR FINANCIAL REVIEW
(Dollars in thousands, except common share data)
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
SUMMARY OF OPERATIONS
OPERATING REVENUE
Residential $135,733 $143,327 $134,035 $119,814 $114,751 $111,526 $101,842 $ 87,560 $ 90,178 $ 84,295
Business 31,591 32,916 30,924 28,230 27,023 25,247 23,670 20,759 20,910 19,870
Industrial 6,238 6,282 6,150 5,836 5,478 5,123 4,925 4,490 5,146 5,166
Public authorities 8,368 9,636 9,023 8,149 7,995 7,396 6,892 5,734 6,412 6,225
Other 4,343 3,163 2,632 3,057 2,024 2,424 2,476 8,633 1,741 1,932
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total operating
revenue 186,273 195,324 182,764 165,086 157,271 151,716 139,805 127,176 124,387 117,488
Operating expense 156,199 160,975 152,397 139,694 131,766 123,861 116,031 102,855 101,017 95,150
Interest expense,
other income and
expenses, net 11,679 11,044 11,300 10,694 11,097 12,354 11,245 10,393 9,004 8,566
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income $ 18,395 $ 23,305 $ 19,067 $ 14,698 $ 14,408 $ 15,501 $ 12,529 $ 13,928 $ 14,366 $ 13,772
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
COMMON SHARE DATA*
Earnings per share $ 1.45 $ 1.83 $ 1.50 $ 1.16 $ 1.22 $ 1.35 $ 1.09 $ 1.21 $ 1.25 $ 1.20
Dividends declared $ 1.070 $ 1.055 $ 1.040 $ 1.020 $ 0.990 $ 0.960 $ 0.930 $ 0.900 $ 0.870 $ 0.840
Dividend payout
ratio 74% 58% 69% 88% 81% 71% 85% 74% 70% 70%
Book value $ 13.38 $ 13.00 $ 12.22 $ 11.72 $ 11.56 $ 10.90 $ 10.51 $ 10.35 $ 10.04 $ 9.66
Market price
at year-end 31.31 29.53 21.00 16.38 16.00 20.00 16.50 14.00 13.38 14.00
Common shares
outstanding in
thousands) 12,619 12,619 12,619 12,538 12,494 11,378 11,378 11,378 11,378 11,378
Return on average
commonshareholders'
equity 11.1% 14.6% 12.7% 10.2% 10.6% 12.4% 10.4% 11.7% 12.4% 12.4%
Long-term debt
interest
coverage 3.5 4.2 3.6 3.2 3.2 3.2 2.9 3.2 3.6 3.4
* Common share data is restated to reflect the effective two-for-one stock
split on December 31, 1997.
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CALIFORNIA WATER SERVICE GROUP Page 9
(Dollars in thousands, except other data)
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
BALANCE SHEET DATA
Net utility
plant $478,305 $460,407 $443,588 $422,175 $407,895 $391,703 $374,613 $349,937 $325,409 $307,802
Utility plant
expenditures 34,553 32,907 35,683 27,250 28,275 28,829 35,188 34,459 26,861 27,277
Total assets 548,499 531,297 512,390 497,626 462,794 446,619 403,448 393,609 369,055 339,348
Long-term debt
including current
portion 138,585 139,205 142,153 145,540 128,944 129,608 122,069 103,505 104,905 86,012
Capitalization ratios:
Common shareholders'
equity 54.3% 53.5% 51.4% 49.7% 52.2% 48.2% 48.8% 52.4% 51.3% 55.1%
Preferred stock 1.1% 1.1% 1.2% 1.2% 1.3% 1.4% 1.4% 1.5% 1.6% 1.8%
Long-term debt 44.6% 45.4% 47.4% 49.1% 46.5% 50.4% 49.8% 46.1% 47.1% 43.1%
OTHER DATA
Water production
(million gallons)
Wells 49,955 56,612 53,372 49,755 50,325 47,205 52,000 48,930 51,329 51,350
Purchased 49,436 53,190 51,700 49,068 49,300 48,089 40,426 36,686 45,595 45,978
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total water
production 99,391 109,802 105,072 98,823 99,625 95,294 92,426 85,616 96,924 97,328
Metered customers 305,900 302,100 298,400 289,200 286,700 282,100 278,700 275,200 272,100 269,200
Flat rate
customers 77,100 77,400 77,700 77,900 78,800 80,800 82,000 82,400 81,200 79,400
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Customers at
year-end 383,000 379,500 376,100 367,100 365,500 362,900 360,700 357,600 353,300 348,600
New customers
added 3,500 3,400 9,000 1,600 2,600 2,200 3,100 4,300 4,700 3,800
Revenue per
customer $ 486 $ 515 $ 486 $ 450 $ 430 $ 418 $ 388 $ 356 $ 352 $ 337
Utility plant
per customer $ 1,777 $ 1,707 $ 1,644 $ 1,592 $ 1,530 $ 1,469 $ 1,406 $ 1,327 $ 1,251 $ 1,198
Employees at
year-end 658 649 633 630 624 614 610 593 581 565
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CALIFORNIA WATER SERVICE GROUP Page 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
California Water Service Group ("Group") was formed on December 31, 1997 as a
holding company with two operating subsidiaries, California Water Service
Company ("Company") and CWS Utility Services ("Services"). The Company is a
regulated public utility. Its assets and operating revenues currently comprise
virtually all of the Group's assets and revenues. Services provides
non-regulated water operations and related services. The following discussion
and analysis provides information regarding the Group, its assets, operations
and financial condition.
FORWARD LOOKING STATEMENTS
This annual report, including the Letter to Shareholders, Management's
Discussion and Analysis and other sections of this report contain forward
looking statements within the meaning of federal securities laws. Such
statements are based on currently available information, expectations,
estimates, assumptions and projections, and management's judgment about the
Group, the water utility industry and general economic conditions. Such words as
expects, intends, plans, believes, estimates, anticipates 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. Actual results may vary materially from what is contained in a
forward looking statement. Factors which may cause a result different than
expected or anticipated include regulatory commission decisions, new
legislation, increases in suppliers' prices, changes in environmental compliance
requirements, acquisitions, changes in customer water use patterns and the
impact of weather on operating results. The Group assumes no obligation to
provide public updates of forward looking statements.
BUSINESS
The Company is a public utility supplying water service to 383,000 customers in
58 California communities through 21 separate water systems or districts. In the
Company's 20 regulated systems, serving 377,000 customers as shown on the
enclosed map, rates and operations are subject to the jurisdiction of the
California Public Utilities Commission ("CPUC"). An additional 6,000 customers
receive service through a long-term lease of the City of Hawthorne water system,
which is not subject to CPUC regulations. Group's subsidiaries also have
contracts with various municipalities to operate water systems and provide
billing services for an additional 30,700 customers, and operate two reclaimed
water systems and lease communication antenna sites.
The CPUC requires that water rates for each regulated district be determined
independently. Rates for the City of Hawthorne system are established in
accordance with an operating agreement and are subject to ratification by the
City council. Fees for other operating agreements are based on contracts
negotiated among the parties.
RESULTS OF OPERATIONS
EARNINGS AND DIVIDENDS. 1998 net income was $18,395,000 compared to $23,305,000
in 1997 and $19,067,000 in 1996. Earnings per common share were $1.45 in 1998,
$1.83 in 1997 and $1.50 in 1996. 1997 revenue, net income and earnings per share
represent the highest levels ever achieved by the Group. The weighted average
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number of common shares outstanding in each of the three years was 12,619,000,
12,619,000 and 12,580,000, respectively.
At its January 1998 meeting, the Board of Directors increased the common stock
dividend rate for the 31st consecutive year. 1998 also marked the 54th
consecutive year that a dividend had been paid on the Company's common stock.
The annual dividend rate paid in 1998 was $1.07, an increase of 1.4% over the
1997 rate of $1.055 per share which was an increase of 1.4% compared with the
1996 dividend of $1.04 per share. The dividend increases were based on
projections that the higher dividend could be sustained while still providing
the Group with adequate financial flexibility. Earnings not paid as dividends
are reinvested in the business. The dividend payout ratio was 74% in 1998, 58%
in 1997 and 69% in 1996, an average of 67% for the three-year period. The
variation in payout ratios among the three years is primarily attributable to
earnings per share fluctuations.
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CALIFORNIA WATER SERVICE GROUP Page 11
OPERATING REVENUE. Operating revenue, including revenue from City of Hawthorne
customers, was $186.3 million, $9.1 million or 5% less than the record
established the previous year of $195.3 million. 1996 revenue was $182.8
million. The sources of change in operating revenue are set forth in the
following table:
(In millions) 1998 1997 1996
----- ----- -----
Customer water usage $(12.6) $3.9 $3.1
General and step rate increases 1.9 6.4 7.8
Water production costs-offset rate increases 0.2 0.2 2.2
Usage by new customers 1.4 2.1 4.6
----- ----- -----
Net change $(9.1) $12.6 $17.7
Average revenue per customer (dollars) $486 $515 $486
Average metered customer usage (ccf) 285 315 303
New customers added 3,500 3,400 9,000
During the first half of 1998, weather in our service areas was wet and cool,
very much the reverse of 1997's favorable weather pattern. Weather in the second
half of the year returned to a more normal pattern. However, the wet, cool
weather in the early part of the year resulted in an overall 9% decrease in 1998
water usage, negatively impacting revenue. The impact of rate changes is
discussed in a following separate section. The year-end customer count was
383,000, a 0.9% increase.
Rainfall for the 1996-97 season was concentrated in December 1996 and January
1997, then virtually ceased. Average consumption per metered account was at a
record level due to summer months that were dry and warm. The customer count
increased 0.9% to 379,500. The City of Hawthorne system was operated for the
full year, while in 1996 operation was for a ten-month period.
OPERATING AND INTEREST EXPENSES. Operating expenses, including those for the
Hawthorne operation, were $156.2 million in 1998, $161.0 million in 1997 and
$152.4 million in 1996. These amounts reflect a decrease in 1998 of $4.8 million
and an increase in 1997 of $8.6 million.
Well production and water purchases from wholesale suppliers each supplied 49.7%
of the required water deliveries in 1998. The remaining 0.6% was obtained from
the Company's Bear Gulch district watershed. For 1997, wells produced 51.2 % of
the supply, 48.4% was purchased and 0.4% came from the watershed. Information
regarding water production costs which includes purchased water, purchased power
and pump taxes is tabulated in the following table:
(In millions) 1998 1997 1996
----- ----- -----
Purchased water $50.4 $52.2 $51.5
Purchased power 11.1 12.5 12.1
Pump taxes 3.9 4.3 3.8
----- ----- -----
Total water production costs $65.4 $69.0 $67.4
----- ----- -----
Change from prior year (5%) 2% 8%
----- ----- -----
Water production (billion gallons) 99 110 105
----- ----- -----
Change from prior year (10%) 5% 6%
----- ----- -----
Water production in 1998 reflects a decline in customer usage, while production
levels in 1997 and 1996 reflect increased customer usage. The changes were
influenced by each year's predominant weather pattern as discussed above in the
operating revenue section. In each of the three years, purchased water expense,
the largest component of operating expense, was affected by wholesale supplier
rate increases. Well production decreased in 1998 due to a decline in water
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sales and because several wells were out of service for maintenance. With less
well production, purchased power and pump tax expenses also declined. In 1997,
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CALIFORNIA WATER SERVICE GROUP Page 12
purchased water expense was reduced by two nonrecurring refunds totaling $2.5
million received from two wholesale water suppliers. Well production increased
6% in 1997 because of increased demand causing a $0.9 million increase in pump
taxes and purchased power costs.
Employee payroll and benefits charged to operations and maintenance expense was
$33.7 million this past year, $32.9 million in 1997 and $31.2 million in 1996.
The increases in payroll and related benefits are attributable to general wage
increases effective at the start of each year and additional hours worked. At
year-end 1998, 1997 and 1996, there were 658, 649 and 633 employees,
respectively.
Income taxes were $10.6 million in 1998, $14.0 million in 1997 and $12.2 million
in 1996. The changes in taxes are generally due to variations in taxable income.
Long-term debt interest expense decreased $0.2 million in 1998 and $0.3 million
in 1997 due to the retirement of Series K bonds in November 1996 and Series L
bonds in November 1997, annual sinking fund payments each year and the absence
of new long-term financing since 1995.
Interest expense from short-term bank borrowings in 1998 was $0.7 million
greater than in 1997. In 1997, short-term interest expense was $0.3 million more
than in 1996. The additional interest expense in the past two years reflects a
higher level of short-term bank borrowings. Interest coverage of long-term debt
before interest and income taxes was 3.5 times in 1998, 4.2 times in 1997 and
3.6 times in 1996. There was $22.5 million in temporary borrowings at the end of
1998 and $14.5 million at the end of 1997.
OTHER INCOME. Other income is derived from management contracts under which the
Company operates three municipally owned water systems, contracts for operation
of five privately owned water systems, agreements for operation of two reclaimed
water systems, meter reading and billing services to various cities, leasing
certain facilities, other nonutility sources and interest on short-term
investments. Total other income was $1.1 million in 1998 and 1997, and $0.8
million in 1996. Income from the various operating and billing contracts
excluding short-term interest income was $1.1 million in 1998, $1.0 million in
1997 and $0.7 million in 1996.
RATES AND REGULATION
The 1998 rate case applications were filed with the CPUC in July. The
applications request rate increases in four districts representing 25% of total
accounts. An application covering General Office operations was also submitted.
Based on the CPUC's processing schedule, a decision regarding the applications
is expected in the second quarter of 1999. It is estimated that the decision
will provide the Company with between $1.5 and $2.0 million of additional
revenue in the first twelve months following the decision.
CPUC decisions were received in July 1998 for the general rate applications
filed in July 1997. Additional annual revenue from these decisions is expected
to be $299,000 in 1998, $267,000 in 1999 and $121,000 in the years 2000 and
2001. In a variance from its past practice, future rate increases for operating
costs and capital requirements over the next five years in the Oroville and
Selma districts are tied to changes in a price index.
The decision maintained the ROE at 10.35%.
During 1996, general rate case applications were filed with the CPUC for two
districts. The CPUC granted an ROE of 10.35%. Additional 1997 revenue, including
memorandum and balancing account adjustments, was $2.4 million. The decision
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included provisions for future step rate increases to become effective in the
next three years of $1.7 million in 1998 and $0.1 million in 1999 and 2000. The
CPUC also authorized step rate increases for 1997 in various districts totaling
$1.5 million and $1.4 million for undercollection of expense balancing accounts.
During 1999, 10 districts, representing about 55% of all customers, are eligible
for rate increase filings. The Company will review earnings levels in those
districts and file for additional rate consideration as it deems appropriate.
The Company expects to file any rate applications in July with decisions
received from the CPUC in the second quarter of 2000.
WATER SUPPLY
The Company's source of supply varies among its 21 operating districts. Certain
districts obtain all of their supply from wells, some districts purchase all of
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CALIFORNIA WATER SERVICE GROUP Page 13
their supply from wholesale suppliers and other districts obtain their supply
from both sources. As a general rule, about half of the water is provided from
wells and about half purchased. Total water production for 1998, 1997 and 1996
was 99.4, 109.8 and 105.1 million gallons, respectively.
Generally, between mid-spring and mid-fall little precipitation falls in the
Company's service areas. Water demand is highest during the normally warm, dry
summer period and less in the cool, wet winter. Rain and snow during the winter
months replenish underground water basins and fill reservoirs providing the
water supply for subsequent delivery to customers. To date, snow and rainfall
accumulation during the 1998-99 water year has been less than normal; however,
the prior three years exceeded normal levels. Water storage in state reservoirs
at the end of 1998 exceeded historic levels. The Company believes that its water
sources from both underground aquifers and purchased sources should be adequate
to meet customer demand during 1999.
ENVIRONMENTAL MATTERS
The Company is subject to regulations of the United States Environmental
Protection Agency (EPA), the California Department of Health Services and
various county health departments concerning water quality matters. It is also
subject to the jurisdiction of various state and local regulatory agencies
relating to environmental matters, including handling and disposal of hazardous
materials.
The Company believes it is in compliance with all monitoring and treatment
requirements set forth by the various agencies. In the past several years,
substantially all of the Company's wells have been equipped with chlorinators,
providing disinfection of water extracted from underground sources. The cost of
the new treatment is being recovered in customer rates as authorized by the
CPUC. Water purchased from wholesale suppliers is treated before delivery to the
Company.
Various regulatory agencies could require increased monitoring and possibly
additional treatment of water supplies. The Company intends to request recovery
for any additional treatment costs through the ratemaking process.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. The Group's liquidity is provided by utilization of a $50 million
short-term bank line of credit and internally generated funds. Under the bank
line, Group has available $20 million and Company $30 million. Prior to 1997,
the line of credit was $30 million. The Group's $20 million portion of the bank
credit line may be drawn upon for use by the Group, including funding operations
of either of its two operating subsidiaries. The Company's $30 million portion
of the credit line may be used solely for purposes of regulated water
operations. Additional information regarding the bank line of credit is
presented in Note 4 to the Consolidated Financial Statements. Internally
generated funds come from retention of earnings not paid out as dividends,
depreciation and deferred income taxes.
Because of the seasonal nature of the water business, the need for short-term
borrowings under the line of credit generally increases during the first six
months of the year when water sales are lowest. Greater summer usage and larger
customer bills increase cash flow and allow bank borrowings to be repaid.
The Company believes that long-term financing is available to it through equity
and debt markets. Standard & Poor's and Moody's have maintained their ratings of
the Company's first mortgage bonds at AA- and Aa3, respectively. Long-term
financing, which includes issuance of common stock, first mortgage bonds, senior
21
notes and other debt securities is used to replace short-term borrowings and
fund construction. Developer contributions in aid of construction and refundable
advances for construction are also sources of funds for various construction
projects.
Additional long-term financing was not necessary in 1998 or 1997. Operating and
capital requirements were met by borrowings under the short-term bank line of
credit and by internally generated funds. The most recent financing was Series
A, 7.28%, 30-year senior notes issued in 1995. A new $20 million long-term debt
financing is expected to be completed in the first quarter of 1999. The funds
will be used to repay short-term borrowings.
During the first quarter of 1998, the Group implemented a new Dividend
Reinvestment and Stock Purchase Plan (DRSP). About 10% of outstanding
22
CALIFORNIA WATER SERVICE GROUP Page 14
shares participate in the DRSP which replaced the Company's former Dividend
Reinvestment Plan. Under the DRSP, shareholders may reinvest dividends to
purchase additional Group common stock. Another feature of the DRSP allows
existing shareholders and other interested investors to purchase Group common
shares. Shares required for the DRSP may be purchased on the open market or from
newly issued shares. Therefore, the DRSP will provide the Group with an
alternative means of developing additional equity if new shares were to be
issued. During 1998 and 1997 shares required by the new and former plans were
purchased on the open market. At this time, Group intends to continue purchasing
shares required for the DRSP on the open market. However, if new shares were
issued to satisfy future DRSP requirements, the impact on earnings per share
could be dilutive because of the added shares outstanding. Also, shareholders
not participating in the DRSP may experience dilution of their ownership
percentage.
CAPITAL REQUIREMENTS. Capital requirements consist primarily of new construction
expenditures for expanding and replacing the Company's utility plant facilities,
and the acquisition of new water properties. They also include refunds of
advances for construction and retirement of bonds.
During 1998, utility plant expenditures totaled $34.6 million compared to $32.9
million in 1997. This year's expenditures included $30.1 million provided by
Company funding and $4.5 million received from developers through contributions
in aid of construction and refundable advances for construction. Company
projects were funded by internally generated funds and borrowings under the
short-term bank line of credit.
The Board of Directors authorized a $30.7 million 1999 construction budget for
the Company. The funds for this program are expected to be provided by cash from
operations, bank borrowings and long-term debt financing. New subdivision
construction generally will be financed by developers' contributions and
refundable advances. Company funded construction budgets over the next five
years are projected to be about $170 million.
CAPITAL STRUCTURE. The Group's total capitalization at December 31, 1998 and
1997 was $310.9 million and $306.7 million, respectively. Capital ratios were:
1998 1997
------ -----
Common equity 54.3% 53.5%
Preferred stock 1.1% 1.1%
Long-term debt including current maturities 44.6% 45.4%
During the year, no new debt was sold or equity issued. The common equity
percentage increase from 1997 to 1998 and the corresponding decrease in the
long-term debt percentage were caused by several factors. Shareholders' equity
increased by the amount of earnings not paid out for dividends, while the amount
of outstanding debt decreased due to annual November bond sinking fund payments.
The 1998 return on average common equity was 11.1% compared with 14.6% in 1997
and 12.7% in 1996. The most recent CPUC authorized rate of return on common
equity is 10.35%.
REAL ESTATE PROGRAM. The Group's subsidiaries own more than 850 real estate
parcels. Certain parcels are not necessary for or used in water utility
operations. A program has been developed to realize the value of certain surplus
properties through the sale or lease of those properties. The program will be
ongoing over a period of several years. Over the next four years, Group
estimates that gross property transactions totaling six million dollars could be
completed.
23
SHAREHOLDER RIGHTS PLAN. As explained in Note 3 to the Consolidated Financial
Statements, in January 1998, the Board of Directors adopted a Shareholder Rights
Plan (Plan). The Plan is designed to protect shareholders and maximize
shareholder value in the event of an unsolicited takeover proposal by
encouraging a prospective acquirer to negotiate with the Board.
24
CALIFORNIA WATER SERVICE GROUP Page 15
DOMINGUEZ MERGER
On November 13, 1998, the boards of Group and Dominguez Services Corporation
(Dominguez) agreed to the merger of the two companies. Dominguez is a utility
holding company. Its largest subsidiary, Dominguez Water Company, is a regulated
water utility providing water service to about 40,000 customers in 21 California
communities. Its other subsidiary conducts water brokering and has an equity
investment in a manufacturer of chlorine generators used by the water and
wastewater industries. Dominguez' 1997 operating revenue was $26.8 million. At
December 31, 1997, net utility plant was $41.4 million and total assets $51.7
million.
The merger agreement provides that each outstanding Dominguez common
share will be exchanged on a tax-free basis for 1.18 Group common shares. At
December 31, 1998, there were 1,561,000 shares of Dominguez common stock
outstanding. Group also expects to assume approximately $10.5 million of
outstanding Dominguez debt. The transaction is expected to be accounted for as a
pooling of interests.
The merger is subject to review by various state and federal agencies including
the CPUC. Final regulatory approval is expected in 1999's fourth quarter. The
transaction is also subject to approval by Dominguez shareholders. Several
inquiries indicating interest in submitting a competing proposal have been
received by Dominguez from another water company. Subsequently, that company
submitted a formal proposal that will be evaluated by Dominguez. In the event
Dominguez completes a merger with another company, it must pay Group $2.7
million in settlement fees.
REINCORPORATION IN DELAWARE
The Board of Directors has approved a resolution to reincorporate Group in the
State of Delaware. Among the advantages considered by the Board in adopting the
resolution of incorporating in Delaware were: the legislature is responsive to
business needs and acts quickly to enact relevant new laws; Delaware has the
most extensive case law on corporate issues of any state, thereby providing
corporations with more certainty about the application of laws in particular
circumstances; courts that specialize in corporate law have developed an
expertise in dealing with corporate issues; and the state has developed a
sharper definition of director responsibilities so that boards may act with
greater certainty on issues affecting shareholders.
The reincorporation is subject to shareholder approval. Shareholders will vote
on the proposal at their annual meeting in April 1999. If shareholders approve
the proposal, the reincorporation is expected to be effective in the second or
third quarter of 1999. Only Group will be reincorporated in Delaware, Company
and Services will remain California corporations.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The statement establishes new accounting and reporting
standards for derivative financial instruments and hedging activities. In 1998,
the American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities." This SOP
provides guidance on the financial reporting of start-up costs and organization
costs. The Group, which will adopt SFAS No. 133 and SOP 98-5 during 1999, does
not anticipate that either statement will have material impact on its financial
position or operating results.
25
YEAR 2000
READINESS. The Group has assembled a team to address Year 2000 preparedness
issues and the team has developed a Year 2000 readiness plan. The Group retained
an outside independent consultant who reviewed and evaluated the Year 2000
readiness plan. The consultant's report was positive. Recommendations from the
consultant are being addressed.
26
CALIFORNIA WATER SERVICE GROUP Page 16
Generally, computer operations are centralized at a single location. The
information technology (IT) group has inventoried its various software programs
and identified modifications required to make the programs Year 2000 ready. Most
computer applications are currently processed on a mainframe-based system.
However, as part of a technology upgrade, a local area network (LAN) computer
system that includes Year 2000 ready servers and personal computers, was
installed during 1998. A new Year 2000 compatible accounting, purchasing and
human resources software package is being installed on the LAN system. Certain
accounting applications have already been migrated to the LAN system and others
are in the process of being converted. It is anticipated that most non-customer
billing applications will be migrated to the LAN system by mid-1999 and the
process continues on schedule. The mainframe customer billing system has been
converted to handle Year 2000 dates. The customer billing system will not be
switched to the LAN system until sometime after 2000.
Group has also identified non-computer equipment and operating systems that may
contain embedded date-sensitive chips. Steps have been taken to make the
equipment and systems Year 2000 ready.
Suppliers and vendors with whom the Group has a material business relationship
were contacted during 1998 to assess their Year 2000 preparedness. The intent of
these contacts is to determine that suppliers and vendors will not encounter
Year 2000 problems that might disrupt the Group's business processes. Those
contacted include water wholesalers, power supply companies, chemical vendors,
fuel suppliers, banks and stock registrar. This process is being repeated in
1999 as operating units continue to work with suppliers and vendors to assure
availability of necessary products and supplies. A survey of each of the Group's
district water operations has also been completed to assess specific needs
within each district.
COSTS. The total estimated remediation cost for Year 2000 preparedness is about
$300,000. Included in the estimate is the cost of the outside consultant and
computer programming time. The costs of the new LAN system and software package
were not included in the estimate since their implementation and installation
date were not Year 2000 driven. No IT projects have been deferred as a result of
the Year 2000 efforts.
RISKS. In a worst-case scenario, the Group may be unable to deliver water to its
customers because wholesale suppliers cannot provide water to the Group or power
supplies are not available to operate pumping equipment. Additionally, it may be
impossible to produce customer bills or maintain accounting functions if power
sources are not available or computer billing programs do not function due to
Year 2000 failures. The Group is not able to estimate the potential financial
impact of these scenarios.
Because there is an increased threat of litigation due to potential Year 2000
problems, the Group is evaluating its insurance policies to determine if they
afford coverage of Year 2000 issues.
CONTINGENCY PLANS. Group maintains emergency response plans that are reviewed
and updated on a regular basis. These plans are designed to provide for
alternative operating plans and procedures in the event normal procedures are
interrupted. The emergency plans are the basis for developing Year 2000 service
interruption plans.
Fixed site and portable auxiliary power generators are located throughout the
service territories. These generators are designed to produce electric power for
wells and pumps to supply water to customers in the event of power company
outages. If a power supplier is unable to deliver electricity, the auxiliary
generators would be used as a substitute source.
27
Emergency water connections are maintained between certain of the Group's water
systems and those of adjacent purveyors. In the event of loss of a wholesale
water supply or a power outage, the emergency connections could be operated to
provide a water supply.
Each district has identified high-profile water users, such as hospitals, and
developed contingency plans for continued service in the event of a Year 2000
disruption.
28
CALIFORNIA WATER SERVICE GROUP Page 17
CONSOLIDATED BALANCE SHEET
December 31,
(In thousands) 1998 1997
-------- --------
ASSETS
UTILITY PLANT:
Land $ 8,139 $ 7,860
Depreciable plant and equipment 653,524 627,584
Construction work in progress 10,613 4,026
Intangible assets 8,414 8,178
-------- --------
Total utility plant 680,690 647,648
Less depreciation and amortization 202,385 187,241
-------- --------
Net utility plant 478,305 460,407
-------- --------
CURRENT ASSETS:
Cash and cash equivalents 591 1,742
Receivables:
Customers 10,439 10,890
Other 3,071 3,972
Unbilled revenue 5,896 5,136
Materials and supplies at average cost 2,107 2,105
Taxes and other prepaid expenses 4,491 4,423
-------- --------
Total current assets 26,595 28,268
-------- --------
OTHER ASSETS:
Regulatory assets 39,538 38,345
Unamortized debt premium and expense 3,556 3,748
Other 505 529
-------- --------
Total other assets 43,599 42,622
-------- --------
$548,499 $531,297
-------- --------
See accompanying notes to consolidated financial statements.
29
1998 1997
-------- --------
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stock, no par value; 25,000 shares
authorized, 12,619 shares outstanding $ 44,941 $ 44,941
Retained earnings 123,863 119,124
-------- --------
Total common shareholders' equity 168,804 164,065
Preferred stock without mandatory
redemption provision, $25 par value;
380 shares authorized, 139 shares outstanding 3,475 3,475
Long-term debt, less current maturities 136,345 138,585
-------- --------
Total capitalization 308,624 306,125
-------- --------
CURRENT LIABILITIES:
Current maturities of long-term debt 2,240 620
Short-term borrowings 22,500 14,500
Accounts payable 15,881 15,499
Accrued taxes 3,484 2,985
Accrued interest 1,933 1,919
Other accrued liabilities 9,490 8,241
-------- --------
Total current liabilities 55,528 43,764
UNAMORTIZED INVESTMENT TAX CREDITS 2,924 3,006
DEFERRED INCOME TAXES 27,925 25,761
REGULATORY LIABILITIES 12,697 12,493
ADVANCES FOR CONSTRUCTION 95,701 95,878
CONTRIBUTIONS IN AID OF CONSTRUCTION 45,100 44,270
-------- --------
$548,499 $531,297
-------- --------
30
CALIFORNIA WATER SERVICE GROUP Page 18
CONSOLIDATED STATEMENT OF INCOME
For the years ended December 31,
(In thousands, except per share data) 1998 1997 1996
-------- -------- --------
OPERATING REVENUE $186,273 $195,324 $182,764
-------- -------- --------
OPERATING EXPENSES:
Operations:
Purchased water 50,377 52,155 51,514
Purchased power 11,145 12,462 12,075
Pump taxes 3,850 4,302 3,753
Administrative and general 24,384 23,521 21,664
Other 24,498 24,019 23,000
Maintenance 9,030 9,319 8,317
Depreciation and amortization 14,563 13,670 12,665
Income taxes 10,550 13,950 12,150
Property and other taxes 7,802 7,577 7,259
-------- -------- --------
Total operating expenses 156,199 160,975 152,397
-------- -------- --------
Net operating income 30,074 34,349 30,367
OTHER INCOME AND EXPENSES, NET 767 858 607
-------- -------- --------
Income before interest expense 30,841 35,207 30,974
-------- -------- --------
INTEREST EXPENSE:
Long-term debt interest 11,259 11,405 11,663
Other interest 1,187 497 244
-------- -------- --------
Total interest expense 12,446 11,902 11,907
-------- -------- --------
NET INCOME $ 18,395 $ 23,305 $ 19,067
-------- -------- --------
BASIC EARNINGS PER SHARE OF COMMON STOCK $ 1.45 $ 1.83 $ 1.50
-------- -------- --------
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 12,619 12,619 12,580
-------- -------- --------
See accompanying notes to consolidated financial statements.
31
CALIFORNIA WATER SERVICE GROUP Page 19
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Common Shares Common Retained
Outstanding Stock Earnings Total
---------- ------ ------- -------
(In thousands, except shares)
BALANCE AT DECEMBER 31, 1995 12,538,702 $43,507 $103,442 $146,949
Net income 19,067 19,067
---------- ------ ------- -------
Dividends paid:
Preferred stock 153 153
Common stock 13,071 13,071
---------- ------ ------- -------
Total dividends paid 13,224 13,224
---------- ------ ------- -------
Income reinvested in business 5,843 5,843
Dividend reinvestment 80,438 1,434 - 1,434
---------- ------ ------- -------
BALANCE AT DECEMBER 31, 1996 12,619,140 44,941 109,285 154,226
Net income 23,305 23,305
Dividends paid:
Preferred stock 153 153
Common stock 13,313 13,313
---------- ------ ------- -------
Total dividends paid 13,466 13,466
---------- ------ ------- -------
Income reinvested in business 9,839 9,839
---------- ------ ------- -------
BALANCE AT DECEMBER 31, 1997 12,619,140 44,941 119,124 164,065
Net income 18,395 18,395
Dividends paid:
Preferred stock 153 153
Common stock 13,503 13,503
---------- ------ ------- -------
Total dividends paid 13,656 13,656
---------- ------ ------- -------
Income reinvested in business 4,739 4,739
---------- ------ ------- -------
BALANCE AT DECEMBER 31, 1998 12,619,140 $44,941 $123,863 $168,804
---------- ------ ------- -------
See accompanying notes to consolidated financial statements.
32
CALIFORNIA WATER SERVICE GROUP Page 20
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31,
(In thousands) 1998 1997 1996
-------- -------- --------
OPERATING ACTIVITIES:
Net income $18,395 $23,305 $19,067
-------- -------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,563 13,670 12,665
Deferred income taxes and investment
tax credits, net 2,082 1,945 (2,169)
Regulatory assets and liabilities, net (989) (923) 503
Changes in operating assets and liabilities:
Receivables 1,352 (1,897) 698
Unbilled revenue (760) 441 729
Accounts payable 382 807 (115)
Other current liabilities 1,762 543 1,579
Other changes, net 734 1,510 235
-------- -------- --------
Net adjustments 19,126 16,096 14,125
-------- -------- --------
Net cash provided by operating activities 37,521 39,401 33,192
-------- -------- --------
INVESTING ACTIVITIES:
Utility plant expenditures:
Company funded (30,051) (25,491) (27,631)
Developer advances and contributions
in aid of construction (4,502) (7,416) (8,052)
-------- -------- --------
Net cash used in investing activities (34,553) (32,907) (35,683)
-------- -------- --------
FINANCING ACTIVITIES:
Net short-term borrowings 8,000 7,000 7,500
Proceeds from issuance of common stock -- -- 1,434
Advances for construction 3,744 4,536 4,998
Refunds of advances for construction (3,757) (3,685) (3,631)
Contributions in aid of construction 2,170 2,443 3,896
Retirements of first mortgage bonds (620) (2,948) (3,387)
Dividends paid (13,656) (13,466) (13,224)
-------- -------- --------
Net cash used in financing activities (4,119) (6,120) (2,414)
-------- -------- --------
CHANGE IN CASH AND CASH EQUIVALENTS (1,151) 374 (4,905)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 1,742 1,368 6,273
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 591 $ 1,742 $ 1,368
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 11,053 $ 11,734 $ 11,721
Income taxes $ 8,725 $ 14,525 $ 12,775
See accompanying notes to consolidated financial statements.
33
CALIFORNIA WATER SERVICE GROUP Page 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of California Water
Service Group (Group) and its wholly-owned subsidiaries, California Water
Service Company (Company) and CWS Utility Services (Services), collectively
referred to as the Group. The Company is a utility, regulated by the California
Public Utilities Commission (CPUC). Services provides non-regulated water
operations and related services. Intercompany transactions and balances have
been eliminated.
The accounting records of the Group are maintained in accordance with the
uniform system of accounts prescribed by the CPUC. Certain prior years' amounts
have been reclassified, where necessary, to conform to the current presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." It establishes disclosure requirements
concerning operating business segments, products and services, geographic areas
and major customers. The Group adopted this pronouncement in 1998. The Group
operates primarily in one business segment, providing water utility services.
The non-utility segment is not material to the Group's revenues, net income or
assets.
REVENUE. Revenue consists of monthly cycle customer billings for regulated water
service at rates authorized by the CPUC and billings to the City of Hawthorne
customers. Revenue from metered accounts includes unbilled amounts based on the
estimated usage from the latest meter reading to the end of the accounting
period. Flat rate accounts which are billed at the beginning of the service
period are included in revenue on a pro rata basis for the portion applicable to
the current accounting period.
UTILITY PLANT. Utility plant is carried at original cost when first constructed
or purchased, except for certain minor units of property recorded at estimated
fair values at dates of acquisition. Cost of depreciable plant retired is
eliminated from utility plant accounts and such costs are charged against
accumulated depreciation. Maintenance of utility plant, other than
transportation equipment, is charged to operating expenses. Maintenance and
depreciation of transportation equipment are charged to a clearing account and
subsequently distributed primarily to operations. Interest is capitalized on
plant expenditures during the construction period and amounted to $224,000 in
1998, $267,000 in 1997, and $261,000 in 1996.
Intangible assets acquired as part of water systems purchased are stated at
amounts as prescribed by the CPUC. All other intangibles have been recorded at
cost. Included in intangible assets is $6,500,000 paid to the City of Hawthorne
to lease the city's water system and associated water rights. The lease payment
is being amortized on a straight-line basis over the 15-year life of the lease.
The Group continually evaluates the recoverability of utility plant by assessing
34
whether the amortization of the balance over the remaining life can be recovered
through the expected and undiscounted future cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for Costs of Computer Software Developed
or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides guidance on
accounting for the cost of computer software developed or obtained for internal
use. The Group's adoption of this SOP 98-1 in 1998 did not have a material
effect on the financial position or results from operations.
LONG-TERM DEBT, PREMIUM, DISCOUNT AND EXPENSE. The discount and expense on
long-term debt is being amortized over the original lives of the related debt
issues. Premiums paid on the early redemption of certain debt issues and
unamortized original issue discount and expense of such issues are amortized
over the life of new debt issued in conjunction with the early redemption.
CASH EQUIVALENTS. Cash equivalents include highly liquid investments, primarily
U.S. Treasury and U.S. Government agency interest bearing securities, stated at
cost with original maturities of three months or less.
35
CALIFORNIA WATER SERVICE GROUP Page 22
DEPRECIATION. Depreciation of utility plant for financial statement purposes is
computed on the straight-line remaining life method at rates based on the
estimated useful lives of the assets, ranging from 5 to 65 years. The provision
for depreciation expressed as a percentage of the aggregate depreciable asset
balances was 2.6% in 1998, and 2.5% in 1997 and 1996. For income tax purposes,
as applicable, the Company computes depreciation using the accelerated methods
allowed by the respective taxing authorities. Plant additions since June 1996
are depreciated on a straight-line basis for tax purposes.
ADVANCES FOR CONSTRUCTION. Advances for Construction consist of payments
received from developers for installation of water production and distribution
facilities to serve new developments. Advances are excluded from rate base. Such
payments are refundable to the developer without interest over a 20-year or
40-year period. Refund amounts under the 20-year contracts are based on annual
revenues from the extensions. Unrefunded balances at the end of the contract
period are credited to Contributions in Aid of Construction and are no longer
refundable. Refunds on contracts entered into since 1982 are made in equal
annual amounts over 40 years. At December 31, 1998, the amounts refundable under
the 20-year contracts were $8,328,000 and under 40-year contracts $87,373,000.
Estimated refunds for 1999 for all water main extension contracts are
$4,000,000.
CONTRIBUTIONS IN AID OF CONSTRUCTION. Contributions in Aid of Construction
represent payments received from developers, primarily for fire protection
purposes, which are not subject to refunds. Facilities funded by contributions
are included in utility plant, but excluded from rate base. Depreciation related
to contributions is charged to Contributions in Aid of Construction.
INCOME TAXES. The Group accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Measurement of the deferred tax assets and liabilities is at enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
It is anticipated that future rate action by the CPUC will reflect revenue
requirements for the tax effects of temporary differences recognized which have
previously been flowed through to customers.
The CPUC has granted the Company customer rate increases to reflect the
normalization of the tax benefits of the federal accelerated methods and
available investment tax credits (ITC) for all assets placed in service after
1980. ITC are deferred and amortized over the lives of the related properties.
Advances for Construction and Contributions in Aid of Construction received from
developers subsequent to 1986 are taxable for federal income tax purposes and
subsequent to 1991 subject to state income tax. In 1996 the federal tax law, and
in 1997 the state tax law, changed and the major portion of future advances and
contributions are nontaxable.
EARNINGS PER SHARE. Basic earnings per share (EPS) is calculated using income
available to common shareholders divided by the weighted average shares
outstanding during the year. The Group has no dilutive securities, accordingly,
diluted EPS is not shown.
NOTE 2. PREFERRED STOCK
36
As of December 31, 1998 and 1997, 380,000 shares of preferred stock were
authorized. Dividends on outstanding shares are payable quarterly at a fixed
rate before any dividends can be paid on common stock. Preferred shares are
entitled to sixteen votes each with the right to cumulative votes at any
elections of directors.
The outstanding 139,000 shares of $25 par value cumulative, 4.4% Series C
preferred shares are not convertible to common stock. A premium of $243,250
would be due upon voluntary liquidation of Series C. There is no premium in the
event of an involuntary liquidation.
37
CALIFORNIA WATER SERVICE GROUP Page 23
NOTE 3. COMMON SHAREHOLDERS' EQUITY
The Company is authorized to issue 25,000,000 shares of no par value common
stock. All share data has been restated to reflect the 2-for-1 stock split
effective December 31, 1997. As of December 31, 1998 and 1997, 12,619,140 shares
of common stock were issued and outstanding. All shares of common stock are
eligible to participate in the Company's dividend reinvestment plan.
Approximately 10% of shareholders participate in the plan.
SHAREHOLDER RIGHTS PLAN. In January 1998, the Board of Directors adopted a
Shareholder Rights Plan (the Plan) and authorized a dividend distribution of one
right (Right) to purchase 1/100th share of Series D Preferred Stock for each
outstanding share of Common Stock. The Rights became effective in February 1998
and expire in February 2008. The Plan is designed to provide shareholders
protection and to maximize shareholder value by encouraging a prospective
acquirer to negotiate with the Board.
Each Right represents a right to purchase 1/100th share of Series D Preferred
Stock at the price of $120, subject to adjustment (the Purchase Price). Each
share of Series D Preferred Stock is entitled to receive a dividend equal to 100
times any dividend paid on common stock and 100 votes per share in any
shareholder election. The Rights become exercisable upon occurrence of a
Distribution Date. A Distribution Date event occurs if (a) any person
accumulates 15% of the then outstanding Common Stock, (b) any person presents a
tender offer which caused the person's ownership level to exceed 15% and the
Board determined the tender offer not to be fair to Group's shareholders, or (c)
the Board determines that a shareholder maintaining a 10% interest in the Common
Stock could have an adverse impact on the Group or could attempt to pressure
Group to repurchase the holder's shares at a premium.
Until the occurrence of a Distribution Date, each Right trades with the Common
Stock and is not separately transferable. When a Distribution Date occurs: (a)
Group would distribute separate Rights Certificates to Common Stockholders and
the Rights would subsequently trade separately from the Common Stock; and (b)
each holder of a Right, other than the acquiring person (whose Rights will
thereafter be void), will have the right to receive upon exercise at its then
current Purchase Price that number of shares of Common Stock having a market
value of two times the Purchase Price of the Right. If Group merges into the
acquiring person or enters into any transaction that unfairly favors the
acquiring person or disfavors Group's other shareholders, the Right becomes a
right to purchase Common Stock of the acquiring person having a market value of
two times the Purchase Price.
The Board may determine that in certain circumstances a proposal which would
cause a Distribution Date is in the Group shareholders' best interest.
Therefore, the Board may, at its option, redeem the Rights at a redemption price
of $.001 per Right.
NOTE 4. SHORT-TERM BORROWINGS
As of December 31, 1998, the Group maintained a bank line of credit providing
unsecured borrowings of up to $20,000,000 at the prime lending rate or lower
rates as quoted by the bank. The Company maintained a bank line of credit for an
additional $30,000,000 on the same terms as the Group. The line of credit
agreements, which expire April 1999, do not require minimum or specific
compensating balances. The following table represents borrowings under the bank
line of credit.
(Dollars in thousands) 1998 1997 1996
------- ------- ------
Maximum short-term borrowings $24,000 $14,500 $9,500
Average amount outstanding 15,740 5,164 1,662
38
Weighted average interest rate 7.09% 7.22% 6.94%
Interest rate at December 31 6.97% 7.29% 6.98%
39
CALIFORNIA WATER SERVICE GROUP Page 24
NOTE 5. LONG-TERM DEBT
As of December 31, 1998 and 1997, long-term debt outstanding was:
(In thousands) 1998 1997
-------- --------
First Mortgage Bonds:
Series P 7.875% due 2002 $2,610 $2,625
Series S 8.50% due 2003 2,625 2,640
Series BB 9.48% due 2008 16,650 16,740
Series CC 9.86% due 2020 18,800 18,900
Series DD 8.63% due 2022 19,400 19,500
Series EE 7.90% due 2023 19,500 19,600
Series FF 6.95% due 2023 19,500 19,600
Series GG 6.98% due 2023 19,500 19,600
----- -------- -------- --------
$118,585 $119,205
Senior Notes:
Series A 7.28% due 2025 20,000 20,000
----- -------- -------- --------
Total long-term debt $138,585 $139,205
Less current maturities 2,240 620
-------- --------
$136,345 $138,585
-------- --------
The first mortgage bonds are held by institutional investors and secured by
substantially all of the Company's utility plant. Aggregate maturities and
sinking fund requirements for each of the succeeding five years 1999 through
2003 are $2,240,000, $2,240,000, $2,240,000, $4,790,000 and $4,775,000,
respectively. The senior notes are held by institutional investors and are
unsecured and require interest-only payments until maturity.
NOTE 6. INCOME TAXES
Income tax expense consists of the following:
(In thousands) Federal State Total
-------- -------- --------
1998
Current $ 6,105 $ 2,281 $ 8,386
Deferred 2,520 (356) 2,164
-------- -------- --------
Total $ 8,625 $ 1,925 $ 10,550
-------- -------- --------
1997
Current $ 8,970 $ 2,894 $ 11,864
Deferred 2,280 (194) 2,086
-------- -------- --------
Total $ 11,250 $ 2,700 $ 13,950
-------- -------- --------
1996
Current $ 9,356 $ 3,274 $ 12,630
Deferred 444 (924) (480)
-------- -------- --------
Total $ 9,800 $ 2,350 $ 12,150
-------- -------- --------
40
CALIFORNIA WATER SERVICE GROUP Page 25
Income tax expense computed by applying the current federal tax rate of 35% to
pretax book income differs from the amount shown in the Consolidated Statement
of Income. The difference is reconciled in the table below:
(In thousands) 1998 1997 1996
-------- -------- --------
Computed "expected" tax expense $ 10,131 $ 13,039 $ 10,926
Increase (reduction) in taxes due to:
State income taxes net of
federal tax benefit 1,251 1,755 1,528
Investment tax credits (156) (152) (119)
Other (676) (692) (185)
-------- -------- --------
Total income tax $ 10,550 $ 13,950 $ 12,150
-------- -------- --------
The components of deferred income tax expense in 1998, 1997 and 1996 were:
(In thousands) 1998 1997 1996
------- ------- -------
Depreciation $ 2,691 $ 2,457 $ 3,544
Developer advances and contributions (798) (334) (3,749)
Bond redemption premiums (62) (62) (73)
Investment tax credits (93) (93) (93)
Other 426 118 (109)
------- ------- -------
Total deferred income tax expense $ 2,164 $ 2,086 $ (480)
------- ------- -------
The tax effects of differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997
are presented in the following table:
(In thousands) 1998 1997
-------- --------
Deferred tax assets:
Developer deposits for extension agreements
and contributions in aid of construction $ 42,251 $ 43,980
Federal benefit of state tax deductions 2,524 2,998
Book plant cost reduction for future deferred
ITC amortization 1,727 1,776
Insurance loss provisions 271 334
-------- --------
Total deferred tax assets $ 46,773 $ 49,088
-------- --------
Deferred tax liabilities:
Utility plant, principally due to
depreciation differences $ 74,186 $ 74,029
Premium on early retirement of bonds 1,152 1,215
Other (640) (395)
-------- --------
Total deferred tax liabilities $ 74,698 $ 74,849
-------- --------
Net deferred tax liabilities $ 27,925 $ 25,761
-------- --------
A valuation allowance was not required during 1998 and 1997. Based on historical
taxable income and future taxable income projections over the periods in which
the deferred assets are deductible, management believes it is more likely than
not the Group will realize the benefits of the deductible differences.
41
CALIFORNIA WATER SERVICE GROUP Page 26
NOTE 7. EMPLOYEE BENEFIT PLANS
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" was released in 1998 and revises employers' disclosure requirements
about pension and other postretirement benefit plans. This SFAS was implemented
by the Group in 1998 and prior years' amounts have been restated to conform to
the current year presentation.
PENSION PLAN. The Company provides a qualified defined benefit,
non-contributory, pension plan for substantially all employees. The cost of the
plan was charged to expense and utility plant. The Company makes annual
contributions to fund the amounts accrued for pension cost. Plan assets are
invested in mutual funds, pooled equity, and bond and short-term investment
accounts. The data below includes the unfunded, non-qualified, supplemental
executive retirement plan.
SAVINGS PLAN. The Company sponsors a 401(k) qualified, defined contribu-tion
savings plan that allows participants to contribute up to 15% of pre-tax
compensation. The Company matched fifty cents for each dollar contributed by the
employee up to a maximum Company match of 4.0% of the employee's compensation in
1998 and 1997, and 3.5% of the employee's compensation in 1996. Company
contributions were $1,078,000, $1,045,000, and $858,000, for the years 1998,
1997 and 1996, respectively.
OTHER POSTRETIREMENT PLANS. The Company provides substantially all active
employees with medical, dental and vision benefits through a self-insured plan.
Employees retiring at or after age 58 with 10 or more years of service are
offered, along with their spouses and dependents, continued participation in the
plan by a payment of a premium. Retired employees are also provided with a
$5,000 life insurance benefit. Plan assets are invested in a mutual fund,
short-term money market instruments and commercial paper.
The Company records the costs of postretirement benefits during the employees'
years of active service. The CPUC has issued a decision which authorizes rate
recovery of tax deductible funding of postretirement benefits and permits
recording of a regulatory asset for the portion of costs that will be
recoverable in future rates.
The following table reconciles the funded status of the plans with the accrued
pension liability and the net postretirement benefit liability as of December
31, 1998 and 1997:
Pension Benefits Other Benefits
(In thousands) 1998 1997 1998 1997
-------- -------- -------- --------
CHANGE IN BENEFIT OBLIGATION:
Beginning of year $ 44,576 $ 39,296 $ 8,230 $ 5,873
Service cost 1,899 1,545 370 280
Interest cost 3,011 2,805 577 549
Assumption change 2,313 3,190 303 415
Plan amendment -- 991 1,101 --
Experience (gain) or loss 220 744 (872) 1,424
Benefits paid (2,085) (3,995) (488) (311)
-------- -------- -------- --------
End of year $ 49,934 $ 44,576 $ 9,221 $ 8,230
-------- -------- -------- --------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at
beginning of year 42,390 38,293 936 582
Actual return on plan assets 2,433 6,023 131 84
Employer contribution 2,208 2,069 635 581
42
Retiree contributions -- -- 357 340
Benefits paid (2,085) (3,995) (845) (651)
-------- -------- -------- --------
Fair value of plan assets at
end of year $ 44,946 $ 42,390 $ 1,214 $ 936
-------- -------- -------- --------
43
CALIFORNIA WATER SERVICE GROUP Page 27
Pension Benefits Other Benefits
(In thousands) 1998 1997 1998 1997
------- ------- ------- -------
Funded status $(4,988) $(2,186) $(8,007) $(7,294)
Unrecognized actuarial
(gain) or loss (1,708) (5,203) 1,485 2,129
Unrecognized prior service cost 4,758 5,370 1,030 --
Unrecognized transition
obligation -- -- 3,476 3,724
Unrecognized net initial asset 858 1,144 -- --
------- ------- ------- -------
Net amount recognized $(1,080) $ (875) $(2,016) $(1,441)
------- ------- ------- -------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 6.75% 7.0% 6.75% 7.0%
Long-term rate of return on
Plan assets 8.0% 8.0% 8.0% 8.0%
Rate of compensation increase 4.5% 4.5% -- --
Net periodic benefit costs for the pension and other postretirement plans for
the years ending December 31, 1998, 1997 and 1996 included the following
components:
Pension Benefits Other Benefits
-------------------------------- --------------------------------
(In thousands) 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Service cost $1,899 $1,545 $1,543 $ 370 $ 280 $ 166
Interest cost 3,011 2,805 2,583 577 549 383
Pension Benefits Other Benefits
--------------------------------------- ---------------------------------------
(In thousands) 1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- -------
Expected return on
Plan assets (3,320) (2,876) (2,696) (83) (52) (33)
Net amortization
and deferral 823 768 701 346 338 248
------- ------- ------- ------- ------- -------
Net periodic
benefit cost $ 2,413 $ 2,242 $ 2,131 $ 1,210 $ 1,115 $ 764
------- ------- ------- ------- ------- -------
Postretirement benefit expense recorded in 1998, 1997, and 1996 was $635,000,
$581,000, and $523,000, respectively. $2,016,000, which is recoverable through
future customer rates, is recorded as a regulatory asset. The Company intends to
make annual contributions to the plan up to the amount deductible for tax
purposes.
For 1998 measurement purposes, a 5.5% annual rate of increase in the per capita
cost of covered benefits was assumed; the rate was assumed to decrease gradually
to 5% in the year 2000 and remain at that level thereafter. The health care cost
trend rate assumption has a significant effect on the amounts reported. A
one-percentage point change in assumed health care cost trends would have the
following effect:
1-percentage 1-percentage
Point Increase Point Decrease
Effect on total service and
interest costs $175 $(153)
Effect on accumulated postretirement
benefit obligation $1,402 $(1,133)
44
CALIFORNIA WATER SERVICE GROUP Page 28
NOTE 8. AGREEMENT OF MERGER WITH DOMINGUEZ
SERVICES CORPORATION
On November 13, 1998, the Boards of Directors of Group and Dominguez Services
Corporation (Dominguez) agreed to a merger of the two companies. Dominguez' 1997
operating revenue was $26.8 million, net income was $2.0 million and basic
earnings per share was $1.34. At December 31, 1997, its net utility plant was
$41.4 million and its total assets were $51.7 million.
The merger agreement provides that each outstanding Dominguez common share will
be exchanged on a tax-free basis for 1.18 Group common shares. At December 31,
1998, there were 1,561,000 shares of Dominguez common stock outstanding. Group
also expects to assume approximately $10.5 million of outstanding Dominguez
debt. The transaction is expected to be accounted for as a pooling of interests.
The merger is subject to review by various state and federal agencies including
the CPUC. The transaction is also subject to approval by Dominguez shareholders.
Several inquiries indicating interest in submitting a competing proposal have
been received by Dominguez from another water company. Subsequently, that
company submitted a formal proposal that will be evaluated by Dominguez. In the
event Dominguez completes a merger with another company, it must pay Group $2.7
million in settlement fees.
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
For those financial instruments for which it is practicable to estimate a fair
value the following methods and assumptions were used:
CASH EQUIVALENTS. The carrying amount of cash equivalents approximates fair
value because of the short-term maturity of the instruments.
LONG-TERM DEBT. The fair value of the Company's long-term debt is estimated at
$153,900,000 as of December 31, 1998 and $155,000,000 as of December 31, 1997,
using a discounted cash flow analysis, based on the current rates available to
the Company for debt of similar maturities.
ADVANCES FOR CONSTRUCTION. The fair value of advances for construction contracts
is estimated at $30,000,000 as of December 31, 1998 and $22,000,000 as of
December 31, 1997, based on data provided by brokers.
NOTE 10. QUARTERLY FINANCIAL AND COMMON STOCK
MARKET DATA (UNAUDITED)
The Group's common stock is traded on the New York Stock Exchange under the
symbol "CWT". There were approximately 11,000 holders of common stock at
December 31, 1998. Quarterly dividends have been paid on common stock for 216
consecutive quarters and the quarterly rate has been increased during each year
since 1968.
(In thousands, except per share amounts) 1998
----------
First Second Third Fourth
----- ------ ----- ------
Operating revenue $ 35,225 $ 44,455 $ 62,263 $ 44,330
Net operating income 4,501 6,574 12,003 6,996
Net income 1,590 3,561 9,141 4,103
Earnings per share .12 .28 .72 .33
Common stock market
price range:
High 33.75 30.19 27.69 33.13
45
Low 24.31 21.50 20.75 21.25
Dividends paid .2675 .2675 .2675 .2675
1997
--------
Operating revenue $ 37,558 $ 55,083 $ 59,551 $ 43,132
Net operating income 5,712 11,788 10,540 6,309
Net income 2,921 8,878 7,860 3,646
Earnings per share .23 .70 .62 .28
Common stock market
price range:
High 22.63 23.88 25.22 29.59
Low 19.50 18.63 21.13 23.44
Dividends paid .264 .264 .264 .264
46
CALIFORNIA WATER SERVICE GROUP Page 29
INDEPENDENT AUDITORS' REPORT
SHAREHOLDERS AND BOARD OF DIRECTORS
CALIFORNIA WATER SERVICE GROUP:
We have audited the accompanying consolidated balance sheet of California Water
Service Group and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, common shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of California Water
Service Group and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Mountain View, California
January 22, 1999
47
CALIFORNIA WATER SERVICE GROUP Page 30
CORPORATE INFORMATION
STOCK TRANSFER, DIVIDEND DISBURSING AND REINVESTMENT AGENT
The First National Bank of Boston
(Boston EquiServe)
P.O. Box 644,
Boston, MA 02102-0644
1-800-736-3001
HOW TO TRANSFER STOCK
A change of ownership of shares requires a transfer of stock. This can happen
when you sell stock, make a gift of stock or add or delete owners of stock
certificates. You should complete the assignment on the back of the certificate
and sign it exactly as your name appears on the front. Your signature must be
guaranteed by an eligible guarantor institution (banks, stock brokers, savings
and loan associations and credit unions with membership in an approved signature
medallion program) pursuant to SEC Rule 17Ad-15.
A notary's acknowledgement is not acceptable. This certificate should then be
sent to Boston EquiServe, Shareholder Services, by registered or certified mail
with complete transfer instructions.
STOCK CERTIFICATES
As a result of the merger of California Water Service Company into California
Water Service Group and the related stock split, Company stock certificates now
represent the same number of Group shares as they did Company shares. Stock
certificates issued since formation of the holding company are Group stock
certificates.
BOND REGISTRAR
US Bank Trust, N.A.
One California Street
Suite 400
San Francisco, CA 94111-5402
1-415-273-4580
EXECUTIVE OFFICE
California Water Service Group
1720 North First Street,
San Jose, CA 95112-4598
1-408-367-8200
ANNUAL MEETING
The Annual Meeting of Shareholders of the Group will be held on Wednesday, April
21, 1999 at 10 A.M. at the Executive Office of the Group, 1720 North First
Street, San Jose, California. Details of the business to be transacted during
the meeting will be contained in the proxy material, which will be mailed to
shareholders on or about March 11, 1999.
ANNUAL REPORT FOR 1998 ON FORM 10-K
A copy of the Group's report for 1998 filed with the Securities and Exchange
Commission on Form 10-K will be available in April 1999 and can be obtained by
any shareholder without charge upon written request to Shareholders Relations at
the address below:
SHAREHOLDER INFORMATION
California Water Service Group
Attn: Shareholders Relations
48
1720 North First Street
San Jose, CA 95112-4598
1-408-367-8200 or 1-800-750-8200
http://www.calwater.com
49
A TEAROUT SECTION
(a tearout section which opens to a four section map of the state of California
is inserted)
The map is titled CALIFORNIA WATER SERVICE GROUP
On the map are the locations of the Company's operating districts. A drawing of
redwood trees is printed in the northwest part of the state; a skier is depicted
in the region of Lake Tahoe; an electronic chip is shown in the area south of
San Francisco which is known as the Silicon Valley; a head of lettuce is shown
in the are of the San Joaquin Valley; and a movie camera is drawn in the area of
Hollywood.
Along the right margin of the map are various California Zip Codes. A large "CA"
is printed in the upper right hand corner of the map.
The following text is printed on the map regarding California and its economy:
"California has a land area of 156,000 square miles, big enough to hold the
states of New York, New Jersey, Pennsylvania and Connecticut - with room left
over to hold another New York!"
"California's 1997 population was 32,268,000. It is projected to reach 40
million by 2011 and almost 59 million by 2040, or twice its population in 1990."
"By comparison, New York, New Jersey and Pennsylvania have a combined population
of about 38 million."
"A DIVERSIFIED ECONOMY"
"California added 484,000 people in 1997; more than any other state in absolute
terms.*"
"California's population is growing at an annual rate of 1.5 percent compared to
a national average of 1 percent.*"
"The Central Valley, home to 45 percent of our customers, is growing at a rate
of 2.25 percent per year.*"
"Gross State Product (GSP) in 1996 was $963 billion, more than 50 percent
greater than New York, the number two state."
"In 1997, for the first time, California's GSP exceeded $1 tillion.**"
"California has the world's seventh largest economy.**"
Data Source: California Department of Finance unless otherwise indicated.
* Kiplinger California Letter, Vol. 35, No. 1, January 6, 1999.
** CA Trade and Commerce Agency.
Four graphs appear on the map with the following data:
FIRST GRAPH
BOOK VALUE AND MARKET VALUE PER SHARE OF COMMON STOCK FOR 1994 THROUGH 1998
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Book Value $11.56 $11.72 $12.22 $13.00 $13.38
Market Value 16.00 16.38 21.00 29.53 31.31
50
SECOND GRAPH
DIVIDENDS AND EARNINGS PER SHARE FOR 1994 THROUGH 1998
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Dividends $0.990 $1.020 $1.040 $1.055 $1.070
Earnings per Share 1.22 1.16 1.50 1.83 1.45
THIRD GRAPH
TOTAL CUSTOMERS AND INCREASE IN CUSTOMERS FOR 1994 THROUGH 1998
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Total customers 365,500 367,100 376,100 379,500 383,000
Increase in customers 2,600 1,600 9,000 3,400 3,500
FOURTH GRAPH
REVENUE AND NET INCOME FOR 1994 THROUGH 1998 (in thousands)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Revenue $157,271 $165,086 $182,764 $195,324 $186,273
Net Income 14,408 14,698 19,067 23,305 18,395
51
REVERSE SIDE OF TEAROUT MAP
(Four sections are printed on the reverse side of the tearout map)
FIRST SECTION
A photograph of mass of people with the number 32,286,000 printed under the
photograph. The number represents California's 1997 population.
SECOND SECTION
A summary of 1994 through 1998 FINANCIAL HIGHLIGHTS displayed in a table.
1994 1995 1996 1997 1998 Change
---- ---- ---- ---- ---- ------
Book Value $11.56 $11.72 $12.22 $13.00 $13.38 2.9%
Market price 16.00 16.38 21.00 29.53 31.31 6.0%
Earnings per Share 1.22 1.16 1.50 1.83 1.45 20.8%
Dividends per share 0.99 1.02 1.04 1.055 1.07 1.4%
Revenue (000) 157,300 165,100 182,800 195,300 186,300 4.6%
Net Income (000) 14,400 14,700 19,100 23,300 18,400 21.0%
THIRD SECTION
CUSTOMERS
District Name Regulated Non-Regulated
------------- --------- -------------
Bakersfield 55,700 23,300
Bear Gulch 17,400 4,000
Chico 22,200
Dixon 2,800
East Los Angeles 26,300 2,700
Hawthorne 6,000
Hermosa Redondo 25,100
King City 2,200
Livermore 16,300 400
Los Altos 18,300
Marysville 3,700
Oroville 3,500
Salinas 25,000 300
Mid-Peninsula 35,600
Selma 5,000
South San Francisco 15,900
Stockton 41,300
Visalia 27,900
Willows 2,300
Palos Verdes 23,600
Westlake 6,900
---------------------------------------------------------
Subtotal 377,000 36,700
---------------------------------------------------------
TOTAL 413,700
=========================================================
52
FOURTH SECTION
WELL TREATMENT SUMMARY
Treatment
Capacity
District Location Method (million gallons/day) Comments
-------- -------- ------ --------------------- --------
Bakersfield Five sites Carbon contactor 7.0 Catalytic removal*
City of
Bakersfield Four sites Carbon contactor 4.0 Catalytic removal*
Chico One site Air stripper 1.3
Three sites Carbon contactor 2.6 Adsorbtive removal
East Los One site Proprietary mixed media 0.1 Oxidation/Filter
Angeles One site Carbon contactor 0.8 Adsorbtive removal
Hawthorne One site Proprietary mixed media 3.6 Oxidation/Filter
Hermosa Three sites Proprietary mixed media 4.1 Oxidation/Filter
Redondo One site Reverse osmosis 5.0 Ultrafiltration
Salinas One site Carbon contactor 2.9 Adsorbtive removal
One site Proprietary mixed media 1.2 Oxidation/Filter
Selma One site Carbon contactor 1.4 Adsorbtive removal*
South San
Francisco One site Proprietary mixed media 1.6 Oxidation/Filter
Visalia Two sites Carbon contactor 2.4 Adsorbtive removal
One site Carbon contactor 1.3 Adsorbtive removal
* First use of this technology in California.
53
(INSIDE BACK COVER)
OFFICERS OF CALIFORNIA WATER SERVICE COMPANY
Robert W. Foy (1,2)
Chairman of the Board
Peter C. Nelson (1,2)
President and Chief Executive Officer
Gerald F. Feeney (1,2)
Vice President, Chief Financial Officer and Treasurer
Francis S. Ferraro
Vice President, Regulatory Matters
James L. Good (2)
Vice President, Corporate Communications and Marketing
Robert R. Guzzetta (2)
Vice President, Engineering and Water Quality
Christine L. McFarlane
Vice President, Human Resources
Raymond H. Taylor
Vice President, Operations
Raymond L. Worrell
Vice President, Chief Information Officer
Calvin L. Breed (1)
Controller, Assistant Secretary and Assistant Treasurer
Paul G. Ekstrom (1,2)
Corporate Secretary
John Simpson
Assistant Secretary, Manager of New Business
BOARD OF DIRECTORS
California Water Service Group
California Water Service Company
CWS Utility Services
Peter C. Nelson *
President and Chief Executive Officer
Robert W. Foy *
Chairman of the Board
C.H. Stump ++*
Former Chairman of the Board
and former CEO of California
Water Service Company
Linda R. Meier +++
Member, National Advisory Board, Haas Public Service Center; Member, Board of
Directors, Comerica Bank - California
J.W. Weinhardt +*
54
Chairman and CEO of SJW Corp. and Chairman of its subsidiary, San Jose Water
Company
Edward D. Harris, Jr., M.D. +*
George DeForest Barnett Professor of Medicine, Stanford University Medical
Center
George A. Vera +
Director of Finance and Administration, David and Lucile Packard Foundation
Richard P. Magnuson ++
Private Venture Capital Investor
Robert K. Jaedicke +++
Professor Emeritus of Accounting and former Dean, Stanford Graduate School of
Business
(A photograph of the members of the Board of Directors appears on the page with
the following identifying caption)
Board of Directors (from left to right) Front row: Robert W. Foy, Peter C.
Nelson, Robert K. Jaedicke, Linda R. Meier. Back row: George A. Vera, Richard P.
Magnuson, Edward D. Harris, Jr., M.D., J.W. Weinhardt, C.H. Stump.
1 Holds the same position with California Water Service Group
2 Holds the same position with CWS Utility Services
+ Member of the Audit Committee
++ Member of the Compensation Committee
* Member of the Executive Committee
55
BACK COVER
CALIFORNIA WATER SERVICE GROUP
1720 North First Street
San Jose, California 95112-4598
408-367-8200
(the logos for California Water Service Group, California Water Service Co. and
CWS Utility Services are printed under the address)