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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, 2004
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
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
1720 North First Street, San Jose, California 95112
--------------------------------------------- -----
(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 whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes _X_ No __
The aggregate market value of the common stock held by non-affiliates of the
Registrant was $505 million on June 30, 2004, the last business day of the
registrant's most recently completed second fiscal quarter. The valuation is
based on the closing price of the registrant's common stock as traded on the New
York Stock Exchange.
Common stock outstanding at March 4, 2005 - 18,372,496 shares.
EXHIBIT INDEX
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of Registrant's Annual Report to Stockholders for the
calendar year ended December 31, 2004 (2004 Annual Report) are incorporated by
reference in Part I (Item 1and 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 2005 annual meeting of stockholders are incorporated by
reference in Part III (Items 10, 11, 12 and 14).
-2-
TABLE OF CONTENTS
Page
PART I
Item 1. Business.............................................. 5
Forward Looking Statements............................ 5
General Development of Business....................... 5
Financial Information about
Industry Segments................................. 6
Narrative Description of Business..................... 7
Geographical Service Areas and
Number of Customers at Year-end................... 7
Rates and Regulation.................................. 9
Water Supply.......................................... 10
Non-regulated Operations.............................. 13
Utility Plant Construction .......................... 14
Sale of Surplus Real Properties....................... 14
California Energy Situation........................... 14
Security at Company Facilities........................ 14
Quality of Water Supplies......................... 15
Competition and Condemnation.......................... 15
Environmental Matters ................................ 15
Human Resources....................................... 16
Financial Information about Foreign and
Domestic Operations and Export Sales.............. 16
Item 2. Properties ........................................... 16
Item 3. Legal Proceedings..................................... 17
Item 4. Submission of Matters to a Vote of
Security Holders.................................. 18
Executive Officers of the Registrant.................. 19
PART II
Item 5. Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity Securities.................... 21
Item 6. Selected Financial Data............................... 21
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 21
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk....................................... 21
Item 8. Financial Statements and Supplementary Data........... 21
-3-
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.............................. 21
Item 9A. Controls and Procedures............................... 22
Item 9B. Other Information..................................... 22
PART III
Item 10. Directors and Executive Officers
of the Registrant................................. 22
Item 11. Executive Compensation................................ 22
Item 12. Security Ownership of Certain Beneficial
Owners and Management ............................ 22
Item 13. Certain Relationships and Related
Transactions...................................... 22
Item 14. Principal Accountant Fees and Services................ 22
PART IV
Item 15. Exhibits, Financial Statement Schedules............... 23
Signatures............................................................. 24
Exhibit Index.......................................................... 26
-4-
PART I
Item 1. Business.
Forward Looking Statements
- --------------------------
This annual report, including all documents incorporated by
reference, contains forward-looking statements within the meaning
established by the Private Securities Litigation Reform Act of
1995 (Act). The forward-looking statements are intended to qualify
under provisions of the federal securities laws for "safe harbor"
treatment established by the Act. Forward-looking statements are
based on currently available information, expectations, estimates,
assumptions, 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; 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 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 451,800
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 96% of the total customers and 96% of the total
operating revenue.
-5-
Washington Water provides domestic water service to 15,000
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.
New Mexico Water provides service to 5,800 water and wastewater
customers in the Belen, Los Lunas and Elephant Butte areas in New
Mexico. Its regulated operations are subject to the jurisdiction
of the New Mexico Public Regulation Commission. New Mexico Water
accounts for 1% of the total customers and 1% of the total
operating revenue.
Hawaii Water provides water service to 500 customers on the island
of Maui, including several large resorts and condominium
complexes. Its regulated operations are subject to the
jurisdiction of the Hawaii Public Utilities Commission. Hawaii
Water accounts for less than 1% of the total customers and 1% of
the total operating revenue.
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
comprised 5% of the Company's total net income in 2004.
The regulatory entities governing the Company's regulated
operations are sometimes 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 are:
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, 2004, 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.
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.
-6-
c. Narrative Description of Business
---------------------------------
The business is conducted through the 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 and water rights brokerage. Earnings may be significantly
affected by the sale of surplus real property.
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, 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:
-7-
Regulated Customers, City of Hawthorne and City of Commerce Customers at
December 31,
SAN FRANCISCO BAY AREA 2004 2003
------- -------
Mid-Peninsula (serving San Mateo and San Carlos) 36,100 36,100
South San Francisco (including Colma and Broadmoor) 16,700 16,600
Bear Gulch (serving Menlo Park, Atherton, Woodside
and Portola Valley) 17,700 17,600
Los Altos (including portions of Cupertino, Los Altos Hills,
Mountain View and Sunnyvale) 18,500 18,400
Livermore 17,900 17,600
------- -------
106,900 106,300
------- -------
SACRAMENTO VALLEY
Chico (including Hamilton City) 25,900 25,200
Oroville 3,500 3,500
Marysville 3,800 3,800
Dixon 2,900 2,900
Willows 2,300 2,300
Redwood Valley 2,000 1,900
------- -------
40,400 39,600
------- -------
SALINAS VALLEY
Salinas 27,800 27,700
King City 2,300 2,300
------- -------
30,100 30,000
------- -------
SAN JOAQUIN VALLEY
Bakersfield 62,400 60,900
Stockton 41,800 42,000
Visalia 34,500 33,300
Selma 5,800 5,600
Kern River Valley 4,200 4,200
Antelope Valley 1,400 1,300
------- -------
150,100 147,300
------- -------
LOS ANGELES AREA
East Los Angeles (including portions of the
cities of Commerce and Montebello) 27,700 27,600
Hermosa-Redondo (serving Hermosa Beach,
Redondo Beach and a portion of Torrance) 26,000 25,900
Dominguez (Carson and portions of Compton, Harbor City,
Long Beach, Los Angeles and Torrance) 33,500 33,400
Palos Verdes (incl. Palos Verdes Estates, Rancho Palos Verdes,
Rolling Hills Estates and Rolling Hills) 24,000 23,900
Westlake (a portion of Thousand Oaks) 7,000 7,000
Hawthorne (leased municipal system) 6,100 6,100
------- -------
124,300 123,900
------- -------
CALIFORNIA TOTAL 451,800 447,100
HAWAII 500 500
NEW MEXICO 5,800 4,100
WASHINGTON 15,000 14,700
------- -------
COMPANY TOTAL 473,100 466,400
======= =======
-8-
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 2005, 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.
During 2003, Cal Water received decisions for its 2001 GRC applications in
September 2003, 26 months after being submitted. The decisions on 2002 GRC
applications were received in April 2004. For the 2003 GRC applications,
decisions were received on schedule in September 2004. 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. 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 levels included in
prior GRC decisions are tracked in off-line expense balancing or
memorandum accounts. The cost increases are referred to as offsetable
expenses. When the CPUC authorizes a rate increase to recover the costs
tracked in expense balancing or memorandum accounts, the rate increase is
referred to as an offset rate increase. The Company does not record
revenue 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 limitation based on a review of district earnings for the past
calendar year. If the recorded return on net utility plant (rate base)
exceeds the rate authorized by the Commission, recovery of the balancing
account balance is adjusted by the amount of earnings above the authorized
return.
See Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations-- RATES AND REGULATIONS" section for more
information on rates and regulation.
-9-
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 2004, approximately 48 percent of the
Cal Water supply was obtained from wells, 48 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.
-10-
During 2004, the Company delivered 139 billion gallons of water to its
customers, up 6% from the 132 billion gallons delivered in 2003. 2004
average daily water production was 380 million gallons, while the maximum
single day production was 635 million gallons. By comparison, in 2003,
average daily water production was 361 million gallons and the maximum
single day production was 661 million gallons. The increase was due to
increased customers and improved overall weather conditions.
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 2004. 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 6,255 100% San Francisco Water Department
South San Francisco 3,387 100% San Francisco Water Department
Bear Gulch 4,665 95% San Francisco Water Department
Los Altos 3,092 60% Santa Clara Valley Water District
Livermore 3,087 75% Alameda County Flood Control and Water
Conservation District
SACRAMENTO VALLEY
Oroville 1,072 94% Pacific Gas and Electric Co. and County
of Butte
Redwood Valley 150 73% County of Lake
SAN JOAQUIN VALLEY
Antelope/Kern 206 23% Antelope Valley East Kern Water District
Bakersfield 3,680 15% Kern County Water Agency and City of
Bakersfield
Stockton 6,268 58% Stockton-East Water District
LOS ANGELES AREA
East Los Angeles 4,810 71% Central Basin Municipal Water District
Dominguez 11,791 85% West Basin and Central Basin Municipal
Water Districts
City of Commerce 146 17% West Basin Municipal Water District
Hawthorne 1,569 94% West Basin Municipal Water District
Hermosa-Redondo 4,068 85% West Basin Municipal Water District
Palos Verdes 6,952 100% West Basin Municipal Water District
Westlake 3,193 100% Calleguas Municipal Water District
MG = million gallons
The Bear Gulch district obtains a portion of the 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 district, the
Company purchases surface supply then processes the water through its
treatment plant. In addition, the Bakersfield district purchases treated
water as a component to 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.
-11-
In the Salinas district, which accounts for 4% of the Company's revenue,
several wells representing approximately 25% of the district's supply were
taken out of service in the last twelve months. The Company is installing
treatment systems on some of the wells that have been taken out of
service. The treatment systems may not be in service in time for 2005 peak
summer demand. It may be necessary for customers to conserve in the spring
and summer to insure adequate system pressures. Management believes upon
successful execution of its plans that water supply issues in the Salinas
district can 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 customer future rates,
although recovery is subject to approval by the CPUC.
Shown below are wholesaler price rates and increases that became effective
in 2004, and estimated wholesaler price rates changes for 2005.
2004 2005
Effective Percent Effective Percent
District Month Change Unit Cost Month Change Unit Cost
-------- ----- ------ --------- ----- ------ ----------
Antelope/Kern July 0.0% $220/af July 0.0% $220/af
Bakersfield * July 18.3% 136/af July 7.4% 146/af
Bear Gulch July 2.7% 1.13/ccf July 4.4% 1.18/ccf
City of Commerce Jan 2.0% 520/af Jan 2.9% 535/af
Dominguez Jan 2.0% 520/af Jan. 2.9% 535/af
East Los Angeles July 0.0% 457/af July 6.8% 488/af
Hawthorne Jan 2.0% 520/af Jan. 2.9% 535/af
Hermosa-Redondo Jan 2.0% 520/af Jan. 2.9% 535/af
Livermore Jan. 0.0% 1.29/ccf Jan. 0.0% 1.29/ccf
Los Altos July 7.6% 495/af July 6.1% 525/af
Oroville Jan 0.0% 69,200/yr Jan. 8.4% 75,000/yr
Palos Verdes Jan 2.0% 520/af Jan. 2.9% 535/af
Mid Peninsula July 2.7% 1.13/ccf July 4.4% 1.18/ccf
Redwood Valley May 5.0% 46.17/af May 4.0% 48.00/af
So. San Francisco July 2.7% 1.13/ccf July 4.4% 1.18/ccf
Stockton April -10.9% 304,592/mo April 23.5% 376,292/mo
Westlake Jan. 4.1% 587/af Jan. 8.4% 636/af
af = acre foot; ccf = hundred cubic feet; yr = fixed annual cost; mo =
fixed monthly cost * treated water
See Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations - WATER SUPPLY" concerning more information on
adequacy of supplies.
-12-
The Company works with all local suppliers and agencies responsible for
water supply to insure adequate, long-term supply for each system.
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, and leases
of antenna sites.
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 $5.9 million and $5.4 million in 2004 and 2003,
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 dollars per acre-foot for water usage
exceeding 2,000 acre-feet per year plus a percentage of certain
operational savings that may be realized. Under the lease agreement, 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 $1.8 million for 2004
and $0.8 million for the six month period ended December 2003.
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 dollars 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.
-13-
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. In response to supply shortages,
electric power rates were increased significantly in 2001 and 2002.
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 2004 or 2003. The Company continues to use
power efficiently to pass lower power costs 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.
-14-
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 chloramined for disinfection. Water samples
from each water system are analyzed on a regular, scheduled basis in
compliance with regulatory requirements. The Company operates two
state-certified water quality laboratories at the San Jose General Office
and Kern River Valley facilities that provide testing for most California
operations. Certain tests in California are contracted with independent
certified labs qualified under the Environmental Laboratory Accreditation
Program. Local independent state certified labs provide water sample
testing for the Washington, New Mexico and Hawaii operations.
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. Such an action was
being contemplated in the Company's Selma district, but upon further
review, this condemnation action was rejected by the city council. 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 participated in the industry consolidation by acquiring Dominguez
Services Corporation in 2000, making other small acquisitions and pursuing
expansion of its non-regulated operations. The Company intends to continue
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 above ground fuel storage tank regulations, hazardous
materials management plans, hazardous waste regulations, air quality
permitting requirements, wastewater discharge limitations and employee
safety issues related to hazardous materials. Also, the Company actively
investigates alternative technologies for meeting environmental
regulations and continues the traditional practices of meeting environment
regulations.
-15-
Human Resources
---------------
At year-end 2004, the Company had 837 employees, including 43 at
Washington Water, 15 at New Mexico Water and 6 at Hawaii Water. The
Company had 813 and 802 employees in 2003 and 2002, 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, 2004,
there were 556 union employees. In December 2002, the Company negotiated
three-year agreements with both unions covering 2003 through 2005.
Improvements in employee benefit plans, principally pension benefits, and
wage increases were part of the agreement. Wage increases under the
agreements are 1% in 2003, 1.5% in 2004 and 2% in 2005. For 2005, the
agreements allowed for re-negotiations of wage increases, which were
subsequently changed to 2.5% for 2005. The agreements are scheduled for
renewal in the second half of 2005 and 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 2. Properties.
The Company's physical properties consist of offices and water systems 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
staffs 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, 2004. 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 654 wells and operates 10 leased wells. There were 386
owned storage tanks with a capacity of 251 million gallons, 31 managed
storage tanks with a capacity of 28 million gallons, and 3 reservoirs with
a capacity of 220 million gallons. There are 5,400 miles of supply and
distribution mains in the various systems.
Washington Water owns 306 wells and manages 94 wells. There are 110 owned
storage tanks and 37 managed storage tanks with a storage capacity of 7
million gallons. There are 386 miles of supply and distribution lines.
New Mexico Water owns 10 wells. There are 6 storage tanks with a storage
capacity of 4 million gallons. There are 94 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 30 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."
-16-
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 liable for the estimated cleanup of $8.7 million. A mediation
process has begun and no settlement demands by any party have been made at
this time. Management believes that insurance coverage exists for this
claim and if Cal Water were ultimately held responsible for a portion of
the cleanup costs, there would not be a material adverse effect to its
financial position or results of operations. Cal Water's insurance carrier
is currently paying the cost of legal representation in this matter.
In February 2003, the CPUC's Office of Ratepayer Advocates (ORA), a
division of the CPUC responsible for representing ratepayers, recommended
that Cal Water be fined up to $9.6 million and refund $0.5 million in
revenue for failing to report three acquisitions as required by the CPUC.
One acquisition was completed prior to adoption of the reporting
requirement by the CPUC; the others were inadvertently not reported by Cal
Water. In July 2004, the CPUC issued decision D. 04-07-033, in which Cal
Water was assessed a fine of $75,000 and a reduction of 50 basis points
(0.5%) in the allowed return on equity for its Salinas district, the
district that included two of the three acquisitions. The reduction in the
allowed return on equity will be terminated upon CPUC approval of the next
GRC filing for the Salinas district, which is expected in the fourth
quarter of 2005. Cal Water declined to appeal the decision.
In June 2004, the City Council of Selma took initial steps to negotiate
the purchase of the Company's Selma water system under condemnation
procedures. In October 2004, the City Council voted unanimously not to
adopt a resolution of necessity and to abandon its condemnation effort.
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. Management strongly disagrees
with ORA's conclusions and recommendations.
During the period under review, Cal Water's cumulative gains from surplus
property sales were $19.2 million, which included an inter-company gain
related to a transaction with Utility Services and a like-kind exchange
with a third party. If the CPUC finds any surplus property sale or
transfer was recorded inappropriately, Cal Water's rate base could be
reduced, which would lower future revenues, net income, and cash flows.
Management believes it has fully complied with the Infrastructure Act and
that ORA's conclusions and recommendations are without merit. Cal Water
intends to vigorously oppose ORA's findings. Accordingly, Cal Water has
not accrued a liability in the financial statements for ORA's
recommendations. At this time, Cal Water does not know when or how the
CPUC will rule in this matter.
-17-
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 2004.
-18-
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 68
(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 had been employed for
32 years
Peter C. Nelson President and Chief Executive Officer since February 1, 1996. 57
(2) Formerly Vice President, Division Operations (1994-1995) and
Region Vice President (1989-1994), Pacific Gas & Electric
Company, a gas and electric public utility
Richard D. Nye Vice President, Chief Financial Officer and Treasurer since 50
(3) March 2003. Formerly Acting Chief Financial Officer (2001-2002)
and Vice President of Finance and Administration (1998-2002) of
Cornerstone Propane Partners, L.P., a propane distribution company;
previously served in various finance management positions with
Frito-Lay, Inc., a snack food company (1989-1998)
Paul G. Ekstrom Corporate Secretary since August 1996; Operations 52
(4) Coordinator, 1993 to 1996; District Manager, Livermore,
1988 to 1993; previously served in various field management
positions since 1979; an employee since 1972
Calvin L. Breed Controller, Assistant Secretary and Assistant Treasurer since 49
(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. As noted, Mr. Nye
previously served as Vice President Finance and Administration and Acting
Chief Financial Officer of Cornerstone Propane Partners, L.P. Cornerstone
markets and distributes propane gas in the United States. On June 3, 2004,
approximately 19 months after the departure of Mr. Nye, Cornerstone filed
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. At that
time, Cornerstone announced that it was filing for bankruptcy in
connection with an agreement it had reached with its senior secured
creditors to restructure the company. On December 20, 2004, Cornerstone
announced that it had emerged from bankruptcy. Cornerstone Propane
Partners, L.P., Debtor Case No. 04-13855 (U.S. Bankruptcy Court S.D.N.Y.).
(4) Vice President, Customer Service with California Water Service Company,
and Corporate Secretary of California Water Service Company, New Mexico
Water Service Company, Washington Water Service Company, Hawaii Water
Service Company, Inc. and CWS Utility Services
(5) Holds the same position with California Water Service Company
-19-
Name Positions and Offices with California Water Service Company Age
- ---- ----------------------------------------------------------- ---
Francis S. Ferraro Vice President, Regulatory Matters and Corporate Development 55
(1) since May 2001; Vice President, Regulatory Matters, August 1989
to May 2001. Employed by the California Public Utilities
Commission for 16 years, including 1985 through 1989 as an
administrative law judge; an employee since 1989
Robert R. Guzzetta Vice President, Engineering and Water Quality since August 1996; 50
(2) Chief Engineer, 1990 to 1996; Assistant Chief Engineer, 1988 to
1990; various engineering department positions since 1977
Christine L. McFarlane Vice President, Human Resources since August 1996; Director 58
of Human Resources, 1991 to 1996; Assistant Director of
Personnel, 1989 to 1991; an employee since 1969
Dan L. Stockton Vice President, Information Systems since April 2001; 60
from 1991 to 2001 he served as Chief Operating Officer of
Great Oaks Water Company
Raymond H. Taylor Vice President, Operations since April 1995; Vice President and 59
Director of Water Quality, 1990 to 1995; Director of Water Quality,
1986 to 1990; an employee since 1982; prior to 1982 an employee of
the United States Environmental Protection Agency
(1) Also, Vice President, Corporate Development with CWS Utility Services, 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 51
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.
-20-
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, 2004, there were 18,367,246
common shares and 139,000 preferred shares outstanding and 4,000
stockholders of record.
Additional information required by this Item is contained in the
section captioned "Quarterly Financial Data" in the 2004 Annual Report
to Stockholders and is incorporated herein by reference. The 2004
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 2004 Annual Report to
Stockholders and is incorporated herein by reference. The 2004 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 2004 Annual Report to Stockholders
and is incorporated herein by reference. The 2004 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 2004 Annual Report to
Stockholders and is incorporated herein by reference. The 2004 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 2004 Annual
Report to Stockholders and is incorporated herein by reference. The
2004 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.
-21-
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 2004 Annual Report to Stockholders and is
incorporated herein by reference. The 2004 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 2005 Proxy Statement, and is incorporated herein
by reference. Information regarding executive officers is included in a
separate section captioned "Executive Officers of the Registrant"
contained in Part I of this report.
Item 11. Executive Compensation.
The information required by this Item as to directors of the Company is
included under the caption "Director Compensation Arrangements" of the
2005 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 2005 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 2005 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 2004 was approximately $0.1 million. The
revenue and income from these activities are not significant to the
business.
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 2005 Proxy Statement and is incorporated herein
by reference.
-22-
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, 2004 and 2003
Consolidated Statements of Income for the years ended December 31,
2004, 2003 and 2002
Consolidated Statements of Common Stockholders' Equity and
Comprehensive Income for the years ended December 31, 2004, 2003
and 2002
Consolidated Statements of Cash Flows for the years ended December
31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements, December 31, 2004,
2003 and 2002
Controls and Procedures
Reports of Independent Registered Public Accounting Firm
The above financial statements are contained in sections bearing
the same captions in the 2004 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 26 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 26 of this Form 10-K.
(c) Additional Financial Statement Schedules. No filings are
required under this Item.
-23-
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 23, 2005 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 23, 2005 /s/ Robert W. Foy
ROBERT W. FOY
Chairman, Board of Directors
Date: February 23, 2005 /s/ Douglas M. Brown
DOUGLAS M. BROWN
Member, Board of Directors
Date: February 23, 2005 /s/ Edward D. Harris, Jr.
EDWARD D. HARRIS, JR., M.D.
Member, Board of Directors
Date: February 23, 2005 /s/ Bonnie G. Hill
BONNIE G. HILL
Member, Board of Directors
Date: February 23, 2005 /s/ David N. Kennedy
DAVID N. KENNEDY
Member, Board of Directors
Date: February 23, 2005 /s/ Richard P. Magnuson
RICHARD P. MAGNUSON
Member, Board of Directors
Date: February 23, 2005 /s/ Linda R. Meier
LINDA R. MEIER
Member, Board of Directors
Date: February 23, 2005 /s/ Peter C. Nelson
PETER C. NELSON
President and Chief Executive Officer,
Principal Executive Officer
Member, Board of Directors
Date: February 23, 2005 /s/ George A. Vera
GEORGE A. VERA
Member, Board of Directors
-24-
Date: February 23, 2005 /s/ Richard D. Nye
RICHARD D. NYE
Vice President, Chief Financial
Officer and Treasurer;
Principal Financial Officer
Date: February 23, 2005 /s/ Calvin L. Breed
CALVIN L. BREED
Controller, Assistant Secretary and
Assistant Treasurer;
Principal Accounting Officer
-25-
EXHIBIT INDEX
Exhibit
Number
- ------
Unless filed with this Form 10-K, the documents listed are incorporated by
reference to the filings referred to:
3. Articles of Incorporation and By-laws:
3.1 Certificate of Incorporation of California Water Service Group
(Filed as Exhibit B of the California Water Service Group Proxy
Statement dated March 18, 1999)
3.2 Restated By-laws 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)
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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)
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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)
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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 (Exhibit
10.16 to Annual Report on Form 10-K for the year ended December
31, 1997) *
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10.15 $60,000,000 Business Loan Agreements between Bank of America as
lead arranger/bank and California Water Service Group, and CWS
Utility Services and California Water Service Company, and JCC
Homes dated August 1, 2001; terminated February 28, 2003 (Exhibit
10.1 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001)
10.16 $10,000,000 Business Loan Agreement between Bank of America and
California Water Service Group and CWS Utility Services dated
February 28, 2003 (Exhibit 10.17 to 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)*
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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)
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)
13. Annual Report to Security Holders:
13.1 2004 Annual Report. Certain sections of the 2004 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
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