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, 2001
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 or other jurisdiction (IRS Employer Identification No.)
of Incorporation)
1720 North First Street San Jose, California 95112
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(Address of Principal Executive Offices) (Zip Code)
(408) 367 8200
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: Name of Each Exchange on Which Registered:
Common Stock, $0.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Cumulative Preferred Stock, Par Value, $25
(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|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant - $373,478,000 on March 4, 2002.
Common stock outstanding at March 4, 2002 -15,182,046 shares.
EXHIBIT INDEX
The exhibit index to this Form 10-K is on page 30.
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of Registrant's Annual Report to Stockholders for the
calendar year ended December 31, 2001 (2001 Annual Report) are incorporated by
reference in Part I (Item 1), Part II (Items 5, 6, 7 and 8) and in Part IV (Item
14(a)(1)).
Designated portions of the Registrant's Proxy Statement ("Proxy Statement"),
dated March 25, 2002, relating to the 2002 annual meeting of stockholders are
incorporated by reference in Part III (Items 10, 11 and 12) as of the date the
Proxy Statement was filed with the Securities and Exchange Commission (SEC). The
Proxy Statement was filed with the SEC via EDGAR on March 19, 2002.
2
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business....................................... 5
Forward Looking Statements..................... 5
General Development of Business................ 5
Rates and Regulation........................... 6
Financial Information about
Industry Segments.......................... 8
Narrative Description of Business.............. 8
Geographical Service Areas and
Number of Customers at Year-end........... 10
Water Supply................................... 11
Nonregulated Operations........................ 14
Utility Plant Construction Program
and Acquisitions........................... 15
California Energy Situation.................... 15
Security at Company Facilities................. 16
Quality of Water Supplies.................. 16
Competition and Condemnation................... 16
Environmental Matters.......................... 17
Human Resources................................ 17
Financial Information about Foreign and
Domestic Operations and Export Sales..... 17
Item 2. Properties..................................... 18
Item 3. Legal Proceedings.............................. 18
Item 4. Submission of Matters to a Vote of
Security Holders........................... 19
Executive Officers of the Registrant....................... 20
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters............ 22
Item 6. Selected Financial Data........................ 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 22
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.................................... 22
Item 8. Financial Statements and Supplementary Data... 22
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure....................... 22
3
PART III
Item 10. Directors and Executive Officers
of the Registrant.......................... 23
Item 11. Executive Compensation......................... 23
Item 12. Security Ownership of Certain
Beneficial Owners and Management.......... 23
Item 13. Certain Relationships and Related
Transactions............................... 23
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................ 24
Independent Auditors' Reports................................... 25
Schedules....................................................... 27
Signatures...................................................... 28
Exhibit Index................................................... 30
4
PART I
Item 1 Business.
Forward Looking Statements
This annual report, including the Letter to Stockholders and Management's
Discussion and Analysis, contains forward-looking statements within the
meaning established by the Private Securities Litigation Reform Act of 1995
("Act"). The forward-looking statements are intended to qualify under
provisions of the federal securities laws for "safe harbor" treatment
established by the Act. Forward-looking statements are based on currently
available information, expectations, estimates, assumptions and
projections, and management's judgment about the Company, the water utility
industry and general economic conditions. Such words as expects, intends,
plans, believes, estimates, anticipates, projects 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: governmental and regulatory commissions'
decisions, changes in regulatory commissions' policies or procedures, the
timeliness of regulatory commissions' actions concerning rate relief, new
legislation, electric power interruptions, increases in suppliers' prices
and the availability of supplies including water and power, changes in
environmental compliance requirements, acquisitions, the ability to
successfully implement business plans, changes in customer water use
patterns and the impact of weather on operating results, especially as it
impacts water sales. The Company assumes no obligation to provide public
updates of forward-looking statements.
a. General Development of Business
California Water Service Company (Cal Water) began business in 1926. On
December 31, 1997, California Water Service Group was formed as the parent
company of Cal Water and a second subsidiary, CWS Utility Services (Utility
Services). In 1999, the Company acquired Harbor Water Company and South
Sound Utility Company. These two companies were merged to form Washington
Water Service Company (Washington Water). New Mexico Water Service Company
(New Mexico Water) was created during 2000.
During 2000, the Company completed the largest acquisition in its history
with the issuance of 2,210,000 shares of common stock in exchange for all
of the outstanding shares of Dominguez Services Corporation. The
acquisition which was accounted for as a pooling of interests was completed
on May 25, 2000. The financial statements have been restated to include the
Dominguez accounts in all periods.
Cal Water's regulated operations are subject to the jurisdiction of the
California Public Utilities Commission (CPUC). Washington Water's regulated
operations are subject to the jurisdiction of the Washington Utilities and
Transportation Commission (WUTC). Both companies also provide nonregulated
water service under operation and maintenance agreements. Jointly the CPUC
and WUTC are referred to as the Commissions. New Mexico Water was formed to
conduct both regulated and non-regulated water operations. Utility Services
provides nonregulated water operations and related utility services under
agreements with other private operators and municipalities. Nonregulated
operations are described in Item 1.c., "Narrative Description of Business -
Nonregulated Operations."
Upon formation of the holding company structure on December 31, 1997, each
share of Cal Water common stock was exchanged on a two-for-one basis for
the Company's common stock. Per share data was restated where necessary to
reflect the effective two-for-one stock split. Each share of Cal Water
preferred stock was converted into one share of the Company's preferred
stock. To maintain
5
relative voting strength, the number of votes to which each preferred share
is entitled was doubled from eight to sixteen.
Cal Water, a California corporation, is the largest investor-owned water
company in California and the third largest in the United States. It
provides water service to 436,700 residential, commercial, public authority
and industrial customers in 75 California cities and communities through 25
separate water systems or districts. In its 24 regulated systems, which
serve 430,600 customers, rates and operations are subject to the
jurisdiction of CPUC. An additional 6,100 customers receive service through
a long-term lease of the City of Hawthorne water system, which is not
subject to CPUC regulation.
Washington Water is the largest investor owned water utility in the state.
It is incorporated under the laws of the state of Washington. Washington
Water provides water service to 13,700 customers subject to the regulation
of the WUTC. An additional 2,300 customers are served under operating
agreements with privately owned systems and are not subject to WUTC
regulation.
The Company's mailing address and principal executive offices are located
at 1720 North First Street, San Jose, California 95112-4598; telephone
number: 408-367-8200. The Company maintains a web site that can be accessed
via the Internet at http://www.calwater.com.
During the year ended December 31, 2001, there were no significant changes
in the kind of products produced or services rendered by the Company or its
operating subsidiaries, or in its markets or methods of distribution.
Rates and Regulation
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 operations and earnings.
Since the Company's 26 California operating districts are not physically
integrated, rates are set independently for each district. General office
expenses and plant investments are considered separately and allocated
ratably to the operating districts.
General rate case (GRC) applications in California address district
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,
which are generally effective at the start of each calendar year, are
designed to maintain the return on equity (ROE) authorized in the initial
decision in succeeding years. Annually, districts that are eligible for GRC
filings are reviewed by the Company's regulatory staff and applications,
where appropriate, are submitted in July. According to the CPUC's
processing schedule, a final decision should be expected in about 10
months. During 2001, the Commission did not issue its GRC decisions until
late summer or about 14 months after they were submitted. Decisions on the
applications submitted in July 2001 are also expected in late summer of
2002.
Increases in purchased water, purchased power and pump taxes above levels
considered in prior GRC decisions are tracked in off-line balancing
accounts. The cost increases are referred to as "offsetable expenses". The
Company does not record revenue related to the balancing accounts until
authorized by the CPUC, and then only as the increased costs are included
in customers' monthly billings.
During 2001, the CPUC revised its procedures for the recovery of offsetable
expenses by adopting its staff's recommendation to implement interim
practices and policies. As ordered by the Commission, requests to recover
offsetable expenses will be processed only if a GRC has been filed for a
district within its three-year rate case cycle, and the district is not
earning more than its authorized rate of return on a forward-looking,
pro-forma basis. Neither of these requirements applied to offset rate
increases prior to adoption of the resolution. The Company can continue to
track offsetable expenses
6
in regulatory memorandum accounts for potential recovery subject to the
Commission's future determination of appropriate practices and policies.
The CPUC directed its staff to open a proceeding to evaluate offsetable
expense recovery practices and policies, and recommend permanent revisions.
Historically, offset rate increases have enabled water utilities to recover
increases in offsetable expenses that were not anticipated when customer
rates were established and are beyond the utility's control.
The CPUC's change in handling offset rate increases had a significant
impact on the Company during 2001. Rates charged to the Company by electric
power suppliers increased about 50% or almost $6 million in 2001. In May
2001, immediately after the CPUC authorized substantial electric rate
increases for the state's two largest power companies, the Company filed
requests to recover $5,930,000 in higher power costs for 23 of its 24
regulated California districts. Several months later, the Company was
authorized rate increases in four districts totaling $2,760,000 in
additional annual revenue. Since the Company's requests to recover power
cost increases in 16 other districts were not in accordance with the
resolution adopted by the CPUC, they were not processed. Although the
Company is hopeful that it will be authorized to recover the additional
offsetable expenses, it is unable to predict the timing or amount of such
recoveries.
Key factors considered in determining the need to file a GRC application
include:
o current earnings of the district
o expected future rates of return
o cost of debt and equity capital
o capital structure
o future operating expectations
o staffing requirements
o water supply and water quality issues
o projected capital expenditures
Since districts are on varying rate case cycles, the number of customers
affected by GRC filings varies from year-to-year. For example, no GRC
applications were filed in 1999, but in 2000 GRCs impacting 25 percent of
the customers were filed and the 2001 applications affect over 60 percent
of the customers.
During January and February 2002, step rate increases became effective in
eight districts that are designed to provide annual revenue of $1,950,000.
An offset rate increase for higher power costs in one district is expected
to be effective in March and will add approximately $1 million to 2002's
annual revenue.
During 2001, GRC decisions for five districts added $1,508,000 to revenue,
step rate increases in five districts added $3,060,000, and power offset
rate increases in four districts added $814,000, for a combined total of
$5,382,000 of new 2001 revenue from rate increases.
In Washington, GRC applications can be submitted annually. Decisions are
generally issued within three months after filing. Rates are set based on
12 months of historic data. The WUTC's regulatory procedures do not provide
for step rate increases.
2001 Rate Application Filings
The Company's regulatory staff reviewed 17 Cal Water districts that were
eligible for general rate filings in 2001. Based on current earnings
levels, projected expense increases, including higher electric power costs,
and projected capital expenditures, applications were filed in July 2001
for 14 districts covering about 60% of the regulated California customers.
The applications request an 11.5% return on equity. Decisions in these
applications are anticipated late in the third quarter of 2002. There is no
assurance that rate increases will be granted as requested; historically,
the amounts authorized by the CPUC have been less than requested by the
Company.
7
A GRC was filed for the Washington operation in February 2002 requesting
$1,318,000 of additional annual revenue. A decision is expected in March
2002.
2000 Rate Application Filings
The Company's regulatory staff reviewed 15 Cal Water districts that were
eligible for general rate filings in 2000. Based on then current earnings
levels, projected expense increases and expected capital expenditures,
applications were filed in July 2000 for three districts representing about
25% of Cal Water customers. The applications requested a 10.75% Return on
Equity (ROE) that would have provided $3.4 million in new revenue in 2001
and $7.2 million in 2002. In August 2001, the CPUC approved increases for
two of the three districts totaling $2.9 million in new annual revenue. The
ROE granted was 9.8%. The CPUC denied a decision on the third district; the
Company intends to refile the application in July 2002.
A general rate case application was filed for Washington Water in late
2000. The WUTC issued its decision in February 2001, granting $105,000 in
additional revenue.
1999 Rate Application Filings
During 1999, no general rate applications were filed for regulated
customers. The Company's regulatory staff reviewed each of the eligible
districts and determined that no general rate applications were warranted.
A rate increase was submitted for the City of Hawthorne water system. The
Hawthorne City Council exercised regulatory authority over the proceeding.
After a series of hearings, new rates became effective in August 2000. The
new rates will add revenue of $300,000 during the first twelve months
following the decision. On July 1, 2001 a step rate increase intended to
produce $200,000 in annual revenue became effective. Another step rate
increase will be effective on July 1, 2002, also designed to increase
annual revenue by $200,000. Additionally, a surcharge was added to customer
rates starting in August 2001 designed to generate $500,000 in annual
revenue.
Second Amended Contract - Stockton East Water District
In January 1995, a consultant retained by the CPUC's Organization of
Ratepayer Advocates completed a report on the reasonableness of the Second
Amended Contract. The contract pertains to the sale and delivery of water
to Cal Water's Stockton District by the Stockton-East Water District.
Parties to the contract are Cal Water, Stockton-East Water District, the
City of Stockton and San Joaquin County. The consultant's report alleged
that the Company was required to receive CPUC approval prior to entering
into the Second Amended Contract and furthermore challenges the
reasonableness of the Second Amended Contract for ratemaking purposes.
However, the report did not include specific ratemaking recommendations.
While no action is now in process or pending, the issue may be revisited in
the Company's next Stockton district general rate application. Also refer
to a discussion of this issue under "Item 3. Legal Proceedings".
b. Financial Information about Industry Segments
The Company operates in one business segment, the supply and distribution
of water, and providing water related services.
c. Narrative Description of Business
The Company is the sole shareholder of its four operating subsidiaries:
California Water Service Company, New Mexico Water Service Company,
Washington Water Service Company and CWS Utility Services.
8
The Company's business, which is carried on through its operating
subsidiaries, consists of the production, purchase, storage, purification,
distribution and sale of water for domestic, industrial, public and
irrigation uses, and for fire protection. It also provides water related
services under agreements with municipalities and other private companies.
The nonregulated services include full water system operation, and billing
and meter reading services.
The operating results from the water business fluctuate according to the
demand for water, which is often influenced by seasonal conditions, such as
summer temperatures or the amount and timing of precipitation in the
Company's service territories. Revenue, expenses and income are affected by
the changes in water sales. Costs, such as payroll and benefits,
depreciation, interest on long-term debt and property taxes, remain fairly
constant despite variations in the amount of water sold. As a result,
earnings are highest in the high use, warm weather summer months and lowest
in the cool winter months when most rainfall takes place in the Company's
service territories.
The Company distributes water in accordance with accepted water utility
methods. Franchises and permits are held in the cities and communities
where the Company operates. The franchises and permits allow the Company to
operate and maintain facilities in public streets and right of ways as
necessary.
The City of Hawthorne water system is operated under a 15-year lease that
commenced in February 1996. In accordance with the lease agreement, the
Company received all revenue from operating the system and is responsible
for the operating costs. At the end of the lease, undepreciated capital
improvements made by the Company will be purchased by the City. Under other
contract arrangements, three municipally owned water systems, numerous
privately owned water systems and two recycled water distribution systems
are operated by the Company. Billing and customer services are also
provided to a number of municipalities. These operations are discussed in
more detail in a following section titled "Nonregulated Operations."
The Company intends to continue to explore opportunities to expand its
regulated and nonregulated businesses. The opportunities could include
system acquisitions, lease arrangements similar to the City of Hawthorne
contract, full service system operation and maintenance agreements, billing
contracts and other utility related services. The Company believes that a
holding company structure, as discussed above, makes it more competitive in
providing nonregulated utility services, which are not be subject to
Commission jurisdiction. The Company continually investigates new business
opportunities in the western United States as evidenced by its expansion
into the states of New Mexico and Washington.
9
Geographical Service Areas and Number of Customers at Year-end
The Company's principal markets for its services are users of water within
the Company's service areas. The Company's geographical service areas or
districts for both the regulated and nonregulated operations and the
approximate number of customers served in each area at December 31, 2001,
are listed below.
SAN FRANCISCO BAY AREA
Mid-Peninsula (serving San Mateo and San Carlos) 35,800
South San Francisco (including Colma and Broadmoor) 16,300
Bear Gulch (serving Menlo Park, Atherton, Woodside
and Portola Valley) 21,800
Los Altos (including portions of Cupertino, Los Altos Hills,
Mountain View and Sunnyvale) 18,400
Livermore 17,200 109,500
------
SACRAMENTO VALLEY
Chico (including Hamilton City) 23,800
Oroville 3,500
Marysville 3,800
Dixon 2,800
Willows 2,300
Redwood Valley (Lucerne, Duncans Mills, Guerneville, Dillon
Beach, portion of Santa Rosa 1,900 38,100
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SALINAS VALLEY
Salinas 27,300
King City 2,200 29,500
--------
SAN JOAQUIN VALLEY
Bakersfield 85,400
Stockton 42,000
Visalia 31,300
Selma 5,300
Kern River Valley (Bodfish, Kernville, Lakeland, Mountain
Shadows, Onyx, Squirrel Valley, South Lake and Wofford Heights) 4,600
Antelope Valley (Fremont Valley, Lake Hughes, Lancaster and
Leona Valley) 1,700 170,300
--------
LOS ANGELES AREA
East Los Angeles (including portions of
the cities of Commerce and Montebello) 29,100
Hermosa Redondo (serving Hermosa Beach,
Redondo Beach and a portion of Torrance) 39,100
Dominguez (Carson and portions of Compton, Harbor City,
Long Beach, Los Angeles and Torrance) 33,100
Palos Verdes (including Palos Verdes Estates, Rancho Palos Verdes,
Rolling Hills Estates and Rolling Hills) 23,600
Westlake (a portion of Thousand Oaks) 7,000
Hawthorne (leased municipal system) 6,100 138,000
-------
NEW MEXICO
Los Alamos and Santa Fe (meter reading contracts) 49,000 49,000
------
WASHINGTON
Gig Harbor and near Olympia 16,000
---------
TOTAL 550,400
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Water Supply
Cal Water obtains its water supply for the 25 operating districts from
wells, surface runoff or diversion, and by purchase from public agencies
and other wholesale suppliers. The Company's supply has been adequate to
meet consumption demands, 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 December,
January and February historically recording the most rainfall. During
winter months reservoirs and underground aquifers are replenished by
rainfall. Snow accumulated in the mountains provides an additional water
source when spring and summer temperatures melt the snowpack producing
runoff into streams and reservoirs, and also replenishing underground
aquifers.
Washington receives rain in all seasons with the majority falling during
winter months. Washington Water draws all its water supply by pumping from
wells.
The Company's water business is seasonal in nature and weather conditions
can have a pronounced effect on customer usage and thus operating revenues
and net income. Customer demand for water generally is less during the
normally cooler and rainy winter months. Demand increases in the spring
when warmer weather returns and the rains end, and customers use more water
for outdoor purposes, such as landscape irrigation. Warm temperatures
during the generally dry summer months result in increased demand. Water
usage declines during the fall as temperatures decrease and the rainy
season begins.
During years in which precipitation is especially heavy or extends beyond
the spring into the early summer, customer demand can decrease from
historic normal levels, generally due to reduced outdoor water usage. This
was the case during 1998, when winter rains continued well into the spring
and were accompanied by cooler than normal temperatures. 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 temperatures are cooler
than normal, water usage is generally lower which converts to lower revenue
and earnings. This was the weather pattern that impacted 2001.
During years of less than normal rainfall, customer demand can increase as
outdoor water usage continues into the fall and winter. When rainfall is
below average for consecutive years, drought conditions can develop and
certain customers may be required to reduce consumption to preserve
available supply. As an example, California experienced a six-year period
when rainfall was annually below historic average. The drought period ended
with the winter of 1992-93. During that six-year period some districts had
water rationing requirements imposed on their customers. In certain
districts, penalties were collected from customers who exceeded monthly
allotments. During past drought periods, the CPUC has allowed modifications
to consumer billings that provided the Company a means to recover a portion
of revenue that was deemed lost due to conservation measures.
Historically, about half of the water supply is purchased from wholesale
suppliers with the balance pumped from wells. Well water is generally less
expensive and the Company strives to maximize use of its well sources in
districts where there is an option between well or purchased supply
sources. A small portion of the water supply is received from surface
runoff in the Company's Bakersfield and Bear Gulch districts. During 2001,
127 billion gallons of water were delivered to customers. Approximately 51
percent of the supply was obtained from wells and 48 percent was purchased
from wholesale suppliers and the remainder was from surface supplies. The
following table shows the quantity of water purchased in each operating
district during 2001.
Supply
District Purchased Source of Purchased Supply
-------- --------- --------------------------
SAN FRANCISCO BAY AREA
Mid-Peninsula 100% San Francisco Water Department
South San Francisco 89% San Francisco Water Department
Bear Gulch 94% San Francisco Water Department
11
Los Altos 74% Santa Clara Valley Water District
Livermore 67% Alameda County Flood Control
and Water Conservation District
SACRAMENTO VALLEY
Oroville 96% Pacific Gas and Electric Co.
3% County of Butte
Redwood Valley 77% County of Lake
SAN JOAQUIN VALLEY
Antelope/Kern 7% Antelope-Kern Valley East Kern WD
Bakersfield 16% Kern County Water Agency
Stockton 59% Stockton-East Water District
LOS ANGELES AREA
East Los Angeles 86% Central Basin Municipal Water District
Dominguez 71% West Basin and Central Basin Municipal
Water Districts
Hawthorne 89% West Basin Municipal Water District
Hermosa Redondo 87% West Basin Municipal Water District
Palos Verdes 100% West Basin Municipal Water District
Westlake 100% Calleguas Municipal Water District
The balance of the required supply for the above districts was obtained
from wells, except for Bakersfield which obtains a portion of the supply
from a river source and Bear Gulch where the balance is obtained from
surface runoff from the local watershed. In the Oroville district, the
water purchased is from a surface supply. The surface sources are processed
through the Company's treatment plants before being delivered to the
distribution system.
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. Harbor and South Sound districts in Washington also
obtain their entire supplies from wells.
Purchases for the Los Altos, Livermore, Oroville, Stockton and Bakersfield
districts are pursuant to long-term contracts expiring on various dates
after 2011.
The purchased supplies for the Dominguez, East Los Angeles,
Hermosa-Redondo, Palos Verdes and Westlake districts, and the City of
Hawthorne system are provided by public agencies pursuant to an obligation
of continued nonpreferential 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.
The Company anticipates that it 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.
12
Shown below are wholesaler price rates and increases that became effective
in 2001, and estimated wholesaler price rates and estimated changes for
2002.
2001 2002
---- ----
Effective Percent Effective Percent
District Month Change Unit Cost Month Change Unit Cost
-------- ----- ------ --------- ----- ------ ----------
Antelope/Kern 0.0% $170/af 0.0% $170/af
Bakersfield July 9.6% 137/af 0.0% 137/af
Bear Gulch July 2.3% 0.88/ccf July 9.1% 0.96/ccf
Dominguez 0.0% 528/af 0.0% 528/af
East Los Angeles 0.0% 478/af 0.0% 478/af
Hawthorne 0.0% 528/af 0.0% 528/af
Hermosa Redondo 0.0% 528/af 0.0% 528/af
Livermore 0.0% 1.237/ccf Jan. 2.0% 1.262/ccf
Los Altos July 7.9% 410/af July 2.4% 420/af
Oroville Jan. 14.8% 69,200/yr Jan. 1.7% 70,400/yr
Palos Verdes 0.0% 528/af 0.0% 528/af
Mid Peninsula July 2.3% 0.88/ccf July 9.1% 0.96/ccf
Redwood Valley 0.0% 37/af 5.1% 39/af
So. San Francisco July 2.3% 0.88/ccf July 9.1% 0.96/ccf
Stockton April -0.3% 285,842/mo April -9.0% 260,000/mo
Westlake Jan. 1.2% 567/af Jan. 0.0% 560/af
af = acre foot; ccf = hundred cubic feet; yr = fixed annual cost;
mo = fixed monthly cost
While the water supply outlook for 2002 is good, California faces long-term
water supply challenges. The Company is actively working to meet the
challenges by continuing to educate customers on responsible water use
practices, particularly in the districts with conservation programs
approved by the CPUC.
Rainfall in the Company's service areas for the 2001-2002 season is about
normal as of February 15, 2002. The mountain snowpack is above normal.
Water levels in underground aquifers that provide supply to districts
served by well water improved in recent years due to above average rainfall
and most regions have recorded positive changes in groundwater levels
during that period. Regional groundwater management planning continues as
required. Existing laws provide a mechanism for local agencies to maintain
control of their groundwater supply. The Company continually updates water
supply long range projections and works with local wholesale suppliers to
ensure an adequate future supply to meet customer needs.
For a number of years, the Company has worked with the Salinas Valley water
users and the Monterey County Water Resources Agency (MCWRA) to address
seawater intrusion into the water supply for the Salinas district. MCWRA
completed construction of the Castroville Seawater Intrusion Project in
1998. This project is designed to deliver up to 20,000 acre feet of
recycled water annually to agricultural users in the nearby Castroville
area. It is intended to help mitigate seawater intrusion into the region by
reducing the need to pump groundwater. To date, the project has produced
marginal results.
With the City and County of San Francisco, and the cities of San Bruno and
Daly City, the Company work continues to prepare a groundwater management
plan for the Westside Basin from which the South San Francisco district
pumps a portion of its supply. The plan will address a protest that has
been filed concerning the extraction of water by pumping from this local
basin. The Company's pumping levels have remained within a consistent
range.
Additionally, the Company worked with the City of San Francisco in its
development of a long-range water supply master plan for the entire area to
which the SFWD is the wholesale water supplier. The Company's South San
Francisco, Mid-Peninsula and Bear Gulch districts are included in SFWD
service area. The plan has been completed, but no further action taken
place.
13
Nonregulated Operations
Nonregulated operations include full service operation and maintenance of
water systems for cities and private owners, operation of recycled water
systems, utility billing services, laboratory services, water rights
brokering, sales of surplus properties and leases of antenna sites.
Nonregulated revenue from water system operations is generally determined
on a fee per customer basis. With the exception of the City of Hawthorne
water system, revenue and expenses from nonregulated operations are
accounted for in other income on a pretax basis. Revenue and expenses for
the City of Hawthorne lease are included in operating revenue and operating
expenses because the Company is entitled to retain all customer billings
and is generally responsible for all operating expenses.
Municipally owned water systems are operated under contract for the cities
of Bakersfield, Commerce and Montebello and for numerous private water
company systems in the Antelope Valley, Bakersfield, Livermore, Kern,
Redwood Valley, Salinas and Visalia districts. In Washington, the Company
operates numerous private water systems under contract arrangements.
Wastewater collection systems are operated in Bakersfield and Livermore.
With the exception of the 15-year Hawthorne lease discussed below, the
terms of the operating agreements range from one-year to three-year periods
with provisions for renewals. The first operating agreement was signed with
the City of Bakersfield in 1977.
Recycled water distribution systems located in the Los Angeles Basin are
operated for the West Basin and Central Basin municipal water districts.
Some engineering department services are also provided for these two
recycled water systems.
Contracted meter reading, billing and customer service are provided for the
City of Menlo Park's water customers. Meter reading is performed under
contract for the City of Manhattan Beach in California and in New Mexico in
Santa Fe and Los Alamos. The Santa Fe contract arrangement is on a
month-to-month basis and expected to terminate during the first quarter of
2002 when the City of Santa Fe takes over full system operation
responsibility. Sewer and/or refuse billing services are provided to six
municipalities.
Since February 1996, the City of Hawthorne's 6,100 account water system has
been operated under terms of a 15-year agreement. The system which is
located near the Hermosa-Redondo district serves about half of Hawthorne's
population. The lease required an up-front $6.5 million lease payment to
the City which is being amortized over the lease term. Additionally, annual
lease payments to the City of $100,000 indexed to changes in water rates
are required. The Company is responsible for all aspects of system
operation and capital improvements, although title to the system and system
improvements resides with the City. At the end of the lease, the Company
will be reimbursed for the unamortized value of capital improvements. In
exchange, the Company receives all system revenues which amounted to $4.6
million in 2001.
During 1997, an agreement was signed with the Rural North Vacaville Water
District near the Dixon district to design and build a water distribution
system. The Company is currently constructing the system on behalf of the
district. The new system will initially provide water to about 400
customers. The Company has also negotiated an agreement to operate the
system once construction is complete, which is expect to occur in 2002.
The Company leases 57 antenna sites to telecommunication companies.
Individual lease payments range from $700 to $2,600 per month. The antennas
are used in cellular phone and personal communication applications. Other
leases are being negotiated for similar uses.
Laboratory services are provided for San Jose Water Company, systems that
are served under operation and maintenance agreements, and for numerous
small water systems.
14
Utility Plant Construction Program and Acquisitions
The Company is continually extending, enlarging and replacing its
facilities as required to meet increasing demands and to maintain its
systems. Construction financing was provided by funds from operations and
short-term bank borrowings, advances for construction, and contributions in
aid of construction as set forth in the "Statement of Cash Flows" on page
30 of the Company's 2001 Annual Report which is incorporated herein by
reference. Advances for construction are cash deposits or facilities deeded
from subdivision developers. The advances are generally refundable without
interest over a period of 40 years by equal annual payments. Contributions
in aid of construction consist of nonrefundable cash deposits or facilities
transferred from developers, primarily for fire protection and relocation
projects. The amount received from developers fluctuates from year to year
as the level of construction activity carried on by developers varies. It
is impacted by the demand for housing, commercial development and general
business conditions, including interest rates.
The 2002 construction budget is authorized at $77.7 million, exclusive of
additions and improvements financed through advances for construction and
contributions in aid of construction. The budget is for the following
areas: land and structures, $4.1 million; wells, pumping and storage
facilities, $10.7 million; water treatment and purification equipment,
$29.6 million; distribution systems $17.3 million; services and meters,
$6.2 million; other equipment, $9.8 million. The new budget includes
significant expenditures for water treatment and distribution facilities,
especially in connection with water treatment plant being constructed in
the Bakersfield district.
The 2001 construction budget expenditures were $53.4 million, exclusive of
additions and improvements financed through advances for construction and
contributions in aid of construction. The expenditures were in the
following areas: land and structures, $2.6 million; wells, pumping and
storage facilities, $11.4 million; water treatment and purification
equipment, $2.8 million; distribution systems $23.2 million; services and
meters, $8.0 million; other equipment, $5.4 million.
During 2000, the Company funded expenditures were $33.5 million in the
following areas: land, water rights and structures, $0.7 million; wells,
pumping and storage facilities, $6.4 million; water treatment and
purification equipment, $2.0 million; distribution systems $11.7 million;
services and meters, $10.7 million; other equipment, $2.0 million. The
increased expenditure for treatment and purification equipment related to
the Hawthorne treatment plant. The other equipment expenditures included
computer equipment and software associated with corporate computer
technology upgrades.
In 1996, Congress enacted legislation which exempted from taxable income
proceeds received from developers to fund advances for construction and
contributions in aid of construction, except payments for installation of
services. Services represent about 20% of deposits received from
developers. The legislation also provided that water utility plant
additions be depreciated for federal tax purposes on a straight-line
25-year life basis. In 2000, developer deposits for fire protection
services were also exempted from tax. The federal tax exemption of
developer payments will reduce cash flow requirements for income tax
payments.
California Energy Situation
The California energy crisis has been well publicized. In response to
supply shortages, electric power rates have increased significantly. During
the second half of 2001, California was able to sustain its energy sources
and avoid rolling electric blackouts primarily because of consumer
conservation efforts and cooler than normal summer weather. There is still
uncertainty about the state's ability to avoid future rolling electric
blackouts. The Company continues its efforts to use power as efficiently as
possible and at the lowest cost to its customers. The Company maintains
backup power systems to continue water service to customers if the power
companies' supplies are interrupted. Many wellsites are equipped with
emergency electric generators. The generators are designed to produce
electricity to keep wells operating during power outages. Storage tanks
also provide customers with water during blackout periods.
15
Security at Company Facilities
As a result of the September 11th terrorist attacks in New York, Washington
DC and Pennsylvania, the Company has heightened security at its facilities
and taken added precautions to safeguard our employees and the water we
deliver to our customers. While the Company does not make public comments
on its security programs, it has been in contact with federal, state and
local law enforcement agencies to coordinate and improve water delivery
systems security.
Quality of Water Supplies
Operating practices are maintained to produce potable water in accordance
with acceptable water utility practices. Water entering the distribution
systems from surface sources is treated in compliance with federal and
state Safe Drinking Water Act (SWDA) standards. Most well supplies are
chlorinated for disinfection. Water samples from each water system are
analyzed on a regular, scheduled basis in compliance with regulatory
requirements. The Company operates a state certified water quality
laboratory at its San Jose General Office facility that provides testing
for most California operations. Certain tests in California are contracted
with independent certified labs qualified under the Environmental
Laboratory Accreditation Program. Local independent state certified labs
provide water sample testing for the Washington and Kern River Valley
districts.
In recent years, federal and state water quality regulations have continued
to increase water testing requirements. Changes in the SDWA, which are
expected to bring treatment costs more in line with the actual public
health threats posed by contaminants, were enacted by Congress during 1996.
The SDWA continues to be amended to reflect new public health concerns.
Water quality monitoring and upgrading treatment capabilities to maintain
compliance with the various regulations continues. These activities
include:
o monitoring of all vulnerable sources for MTBE, a gasoline additive
intended to reduce air pollution that has been widely used in
California
o monitoring all sources for Chromium 6 coming from natural or
industrial sources for potential future treatment requirements
o upgrading laboratory equipment and enhancing analytical testing
capabilities
o installation of dedicated sample sites to assure water samples are
drawn at a secure source
o maintaining a federal and state approved compliance monitoring program
required by the Safe Drinking Water Act
o completion of a source water assessment program for all water supplies
o completion of mandatory Information Collection Rule monitoring for
specified water systems
o ongoing training of laboratory and operating personnel
o installation of disinfection treatment at all well sources
o several well treatment systems that treat for elevated levels of iron
and manganese
o construction of a new iron and manganese treatment plant in the leased
Hawthorne system
o installation and operation of several granular activated carbon (GAC)
filtration systems for removal of hydrogen sulfide or volatile organic
chemicals
o assessing arsenic removal technologies that will be required at 75
wells in developing a coordinated plan to meet new arsenic water
quality standards mandated by EPA at 10 parts per billion
Competition and Condemnation
Cal Water and Washington Water are regulated public utilities, providing
water service within filed service areas approved by the Commissions. Under
California laws, no privately owned public utility may compete with the
Company in any territory already served by the Company without first
obtaining a certificate of public convenience and necessity from the CPUC.
Such certificates will be issued only upon finding that the Company's
service is deficient.
California 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. Further, the state's
constitution and statutes allows municipalities, water districts and other
public agencies to own and operate water systems. These agencies
16
are empowered to condemn properties already operated by privately owned
public utilities. The agencies are also authorized to issue bonds,
including revenue bonds, for the purpose of acquiring or constructing water
systems. However, if a public agency were to acquire utility property by
eminent domain action, the utility would be entitled to just compensation
for its loss. To the Company'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 has participated in the industry consolidation by its acquisition
of Dominguez Services Corporation and by expansion into Washington and New
Mexico, other smaller acquisitions and pursuit of expanding nonregulated
operations. The Company intends to continue pursuing opportunities to
expand its business in the western United States.
Environmental Matters
The Company is subject to environmental regulation by various governmental
authorities. Issues related to water quality are discussed separately
within this report.
Compliance with federal, state and local provisions which have been enacted
or adopted regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment, has not had, as of
the date of filing of this Form 10-K, any material effect on the Company's
capital expenditures, earnings or competitive position. The Company is
unaware of any pending environmental matters that will have a material
effect on its operations. Refer to Item 3, Legal Proceedings, for
additional information.
The Company's environmental affairs program is designed to provide
compliance with underground and above ground fuel storage tank regulations,
hazardous materials management plans, hazardous waste regulations, air
quality permitting requirements, wastewater discharge limitations, and
employee safety issues related to hazardous materials. The Company has been
actively involved in the formulation of air quality standards related to
water utilities. Also, the Company is proactive in looking to alternative
technologies in meeting environmental regulations and continuing the
traditional practices of water quality.
Human Resources
At December 31, 2001 there were 783 employees, of whom 229 were executive,
administrative and supervisory employees. Of the non-management employees,
566 are members of unions. In December 1999, a three-year collective
bargaining agreement, expiring December 31, 2002, was negotiated with the
Utility Workers Union of America, AFL-CIO, representing the majority of Cal
Water field and clerical union employees. Also in December 1999, a new
three-year collective bargaining agreement was negotiated with the
International Federation of Professional and Technical Engineers, AFL-CIO,
representing certain Cal Water engineering department and water quality
laboratory employees. Both agreements were ratified by the unions'
membership. As in the past, the agreements were successfully negotiated and
ratified without a work interruption.
d. Financial Information about Foreign and Domestic Operations and Export Sales.
The Company makes no export sales.
17
Item 2. Properties.
The Company's physical properties consist of offices and water systems to
accomplish the production, storage, purification and distribution of water.
These properties are located in or near the Geographic Service Areas listed
above under section Item 1.c. entitled "Narrative Description of the
Business." The Company's 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.
All principal properties are held in fee simple title. Properties owned by
Cal Water are subject to the indenture securing the Company's first
mortgage bonds of which $120,865,000 remained outstanding at December 31,
2001. Washington Water has long-term bank loans totaling about $3.3 million
that are secured primarily by utility plant.
The Company owns 625 wells and operates five leased wells. There were 450
storage tanks with a capacity of 461 million gallons and one reservoir
located in the Bear Gulch district with a 210 million gallon capacity.
There are 5,200 miles of supply and distribution mains in the various
systems. The Company has three treatment plants (Bakersfield, Bear Gulch
and Oroville). The three plants are designed to process seventeen million
gallons per day.
During 2001, the average daily water production was 348 million gallons,
while the maximum single day production was 663 million gallons. By
comparison, in 2000 the average daily water production was 345 million
gallons and the maximum single day production was 628 million gallons.
In the leased City of Hawthorne system 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.
Item 3. Legal Proceedings.
In 1995, the State of California's Department of Toxic Substances Control
(DTSC) named the Company as a potential responsible party for cleanup of a
toxic contamination plume in the Chico groundwater. The DTSC has prepared a
draft report titled "Preliminary Nonbinding Allocation of Financial
Responsibility" for the cleanup which asserts that the Company's share
should be 10 percent, although DTSC views the potentially responsible
parties as jointly and severally liable. The DTSC estimates the total
cleanup cost to be $8.69 million. 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 due to breaks in the
city's sewer pipes. The DTSC contends that the Company's responsibility
stems from its operation of wells in the surrounding vicinity that caused
the contamination plume to spread. While the Company intends to cooperate
with the cleanup effort, it denies any responsibility for the contamination
or the resulting cleanup and intends to vigorously resist any action that
may be brought against it. The Company has negotiated with DTSC regarding
dismissal of the Company from the claim in exchange for the Company's
cooperation in the cleanup effort. To date no agreement has been reached
with DTSC regarding dismissal of the Company from the DTSC action. The
Company believes that it has insurance coverage for this claim and that if
it were ultimately held responsible for a portion of the cleanup costs,
there would not be a material adverse effect on the Company's financial
position or results of operations.
In December 1997, the Company along with the City of Stockton (the
Contractors) filed a lawsuit against the Stockton East Water District
(SEWD). The Contractors take 98% of SEWD's wholesale potable water
production. SEWD also serves treated water to agricultural customers. Under
a contract to enable SEWD to meet its financial obligations, the
Contractors are required to pay specific Base Monthly Payments that as of
June 30, 1997 had generated $5.4 million in surplus funds. The Contractors
contend that a portion of these funds have been or will be used for
purposes other than to meet SEWD's agreed financial obligations.
18
In 2001, all parties to the lawsuit entered a stipulation agreement that
specifies how SEWD will spend it funds in the future. The stipulation
agreement in effect ended the Contractors' lawsuit against SEWD.
On March 15, 2000, the Company was served with a lawsuit naming it as one
of several defendants for damages alleged to have occurred in the
Marysville district due to MTBE contamination in the Company's water. The
suit did not specify a dollar amount. The plaintiff's claim was denied in
federal court, however, it may be pursued in state court. The Company
believes it is covered by insurance in such a matter and has tendered the
claim to its insurance carrier.
In 2001, an action was brought against the Company and numerous other
defendants by the estate and immediate family members of a deceased
employee of a pipeline construction contractor. The contractor's employee
had worked on various Company projects over a number of years. The
plaintiffs allege that the Company and other defendants are responsible for
an asbestos related disease that is claimed to have caused the death of the
contractor's employee. The complaint seeks damages in excess of $50,000, in
addition to punitive damages. The Company denies any responsibility in the
case and intends to vigorously defend itself. The Company has tendered the
claim to its insurance carriers, and also to the contractor pursuant to the
indemnity provisions of its contracts with the contractor.
The Company is not a party to any other legal matters, other than those
which are incidental to its business.
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 2001.
19
Executive Officers of the Registrant
Name Positions and Offices with California Water Service Group Age
- ---- --------------------------------------------------------- ---
Robert W. Foy Chairman of the Board since January 1, 1996. A director since 65
(1) 1977. Formerly President and Chief Executive Officer of Pacific
Storage Company, a diversified transportation and warehousing
company serving Stockton, Modesto, Sacramento, San Jose, Vallejo
Marysville, and Merced California, where he had been employed
for 32 years.
Peter C. Nelson President and Chief Executive Officer since February 1, 1996. 54
(2) Formerly Vice President, Division Operations (1994-1995) and
Region Vice President (1989-1994), Pacific Gas & Electric
Company, a gas and electric public utility.
Gerald F. Feeney Vice President, Chief Financial Officer and Treasurer since 57
(1) November 1994; Controller, Assistant Secretary and Assistant
Treasurer from 1976 to 1994. From 1970 to 1976, an audit
manager with Peat Marwick Mitchell & Co., certified public
accountants.
Paul G. Ekstrom Corporate Secretary since August 1996; Operations 49
(3) Coordinator, 1993 to 1996; District Manager, Livermore,
1988 to 1993; previously served in various field management
positions since 1979; an employee since 1972.
Calvin L. Breed Controller, Assistant Secretary and Assistant Treasurer since 46
(4) November 1994; previously Treasurer of TCI International, Inc.;
from 1980 to 1983, a certified public accountant with Arthur
Andersen & Co., certified public accountants.
(1) holds the same position with California Water Service Company, New Mexico
Water Service Company, Washington Water Service Company 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 and Washington Water Service Company
(3) Vice President, Customer Service with California Water Service Company, and
Corporate Secretary of California Water Service Company, New Mexico Water
Service Company, Washington Water Service Company and CWS Utility Services
(4) holds the same position with California Water Service Company
Name Positions and Offices with California Water Service Company Age
- ---- ----------------------------------------------------------- ---
Francis S. Ferraro Vice President, Regulatory Matters and Corporate Development 52
(1) since May 2001; Vice President, Regulatory Matters, August 1989
to May 2001. Employed by the California Public Utilities
Commission for 15 years, including 1985 through 1989 when he
was an administrative law judge.
Robert R. Guzzetta Vice President, Engineering and Water Quality since August 1996; 48
(2) Chief Engineer, 1990 to 1996; Assistant Chief Engineer, 1988 to
1990; various engineering department positions since 1977.
20
Christine L. McFarlane Vice President, Human Resources since August 1996; Director 55
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; prior to 2001 57
an employee of Great Oaks Water
Company.
Raymond H. Taylor Vice President, Operations since April 1995; Vice President and 56
Director of Water Quality, 1990 to 1995; Director of Water Quality,
1986 to 1990; an employee since 1982; prior to 1982 an employee of
the United States Environmental Protection Agency.
(1) Also, Vice President, Corporate Development with CWS Utility Services, and
Vice President, Regulatory Matters with New Mexico Water Service Company.
(2) Also, Vice President, Engineering with CWS Utility Services.
Name Positions and Offices with Washington Water Service Company Age
- ---- ----------------------------------------------------------- ---
Michael P. Ireland President since December 1999; previously President of Harbor Water 48
Company, Gig Harbor, Washington from 1985 to 1999.
No officer or director has any family relationship to any other executive
officer or director. No executive officer is appointed for any set term. There
are no agreements or understandings between any executive officer and any other
person pursuant to which he was selected as an executive officer.
21
PART II
Item 5. Market for Registrant's Common Equity and Related Matters
The information required by this item is contained in the section captioned
"Quarterly Financial Data" on page 42 of the Company's 2001 Annual Report
and is incorporated herein by reference.
Item 6. Selected Financial Data.
The information required by this item is contained in the section captioned
"Ten-Year Financial Review" on pages 14 and 15 of the Company's 2001 Annual
Report and is incorporated herein by reference.
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," on pages 16 through 25 of the Company's 2001 Annual Report and
is incorporated herein by reference.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is contained in the section captioned
"Financial Risk Management" on pages 24 and 25 of the Company's 2001 Annual
Report and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is contained in the sections
captioned "Consolidated Balance Sheet", "Consolidated Statement of Income",
"Consolidated Statement of Common Stockholders' Equity and Comprehensive
Income", Consolidated Statement of Cash Flows", "Notes to Consolidated
Financial Statements" and "Independent Auditors' Report" on pages 26
through 43 of the Company's 2001 Annual Report and is incorporated herein
by reference. The 2001 Annual Report to stockholders is included with this
report as Exhibit 13.1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
22
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 section captioned "Board Structure" and is included on
page 8 of the 2002 Proxy Statement, and in the section captioned "Proposals
of the Board; Proposal No. 1 - Election of Directors" on pages 10 and 11 of
the 2002 Proxy Statement and is incorporated herein by reference.
Information regarding executive officers of the Company is included in a
separate item 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" on page 9
of the 2002 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 captions
"Executive Compensation" and "Report of the Compensation Committee of the
Board of Directors on Executive Compensation" on page 15 through 19 of the
2002 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" on page 13 of
the 2002 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
None.
23
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) As part of this Form 10-K, the following documents are being filed:
1. Financial Statements:
Consolidated Balance Sheet as of December 31, 2001 and 2000.
Consolidated Statement of Income for the years ended December 31,
2001, 2000 and 1999.
Consolidated Statement of Common Stockholders' Equity and
Comprehensive Income for the years ended December 31, 2001, 2000
and 1999.
Consolidated Statement of Cash Flows for the years ended December
31, 2001, 2000 and 1999.
Notes to Consolidated Financial Statements, December 31, 2001,
2000 and 1999.
Independent Auditors' Report dated January 30, 2002.
The above financial statements are contained in sections bearing
the same captions on pages 26 through 43 of the Company's 2001
Annual Report to stockholders which is filed with this Form 10-K
and incorporated by reference. Refer to Exhibit 13.1 of this Form
10-K.
Report of Independent Accountants dated March 24, 2000; this
report is on page 25 of this Form 10-K.
2. Financial Statement Schedules:
Independent Auditors' Report dated January 30, 2002.
Schedule II - Valuation and Qualifying Accounts for the years
ending December 31, 2001, 2000 and 1999.
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial
statements or related notes to the financial statements.
3. Exhibits required to be filed by Item 601 of Regulation S-K:
The Exhibit Index on page 30 of this Form 10-K is incorporated
herein by reference.
The exhibits filed as part of this Form 10-K are attached, unless
otherwise indicated. The exhibits listed in the Exhibit Index
that are not filed with this Form 10-K were previously filed with
the Securities and Exchange Commission as indicated and are
hereby incorporated by reference.
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the quarter ended
December 31, 2001.
(c) Exhibits required to be filed by Item 601 of Regulation S-K.
Refer to item (a) 3 above and the Exhibit Index on page 30 of
this Form 10-K.
(d) Additional Financial Statement Schedules.
No filings are required under this item.
24
Report of Independent Public Accountants
To the Board of Directors of Dominguez Services Corporation:
We have audited the consolidated balance sheet of Dominguez Services Corporation
and subsidiaries as of December 31, 1999, and the related consolidated
statements of income, common shareholders' equity, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Dominguez Services
Corporation and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
March 24, 2000
25
Independent Auditors' Report
The Board of Directors
California Water Service Group:
Under date of January 30, 2002, we reported on the consolidated balance sheet of
California Water Service Group and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of income, common stockholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2001, as contained in the 2001 annual
report to stockholders. These consolidated financial statements and our report
thereon are incorporated by reference in the annual report on Form 10-K for the
year 2001. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule as listed in the index appearing under Item 14(a)(2). This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Mountain View, California
January 30, 2002
26
Schedule II
CALIFORNIA WATER SERVICE GROUP AND SUBSIDIARIES
Valuation and Qualifying Accounts
Additions
-----------------------------
Balance at Charged to Charged to Balance
beginning costs and other at end
Description of period expenses accounts Deductions of period
- ------------------------------------------------------------ ----------- ----------- ------------- -----------
For the year Ended December 31, 2001
Reserves deducted in the balance sheet
from assets to which they apply:
Allowance for doubtful accounts $ 180,658 $ 648,000 $ 169,471(3) $ 774,128(1) $ 224,000
Allowance for obsolete materials and
supplies 126,608 48,000 75,701 175,302(2) 75,008
=========== =========== =========== =========== ===========
Reserves classified as liabilities in the
balance sheet:
General Liability 1,000,720 170,000 422,257(2) 748,463
Employees' group health plan 398,079 5,007,930 16,085 5,013,851(2) 408,243
Retirees' group health plan 4,215,370 1,639,846 786,846(2) 5,068,370
Workers compensation 153,158 954,425 307,911 1,255,110(2) 160,384
----------- ----------- ----------- ----------- -----------
5,767,327 7,772,201 323,996 7,478,064 6,385,460
=========== =========== =========== =========== ===========
For the year Ended December 31, 2000
Reserves deducted in the balance sheet
from assets to which they apply:
Allowance for doubtful accounts 419,847 598,608 91,579(3) 929,376(1) 180,658
Allowance for obsolete materials and
supplies 100,297 68,939 42,628(2) 126,608
=========== =========== =========== =========== ===========
Reserves classified as liabilities in the
balance sheet:
General Liability 1,049,200 483,059 531,539(2) 1,000,720
Employees' group health plan 510,479 4,001,620 26,760 4,140,780(2) 398,079
Retirees' group health plan 3,402,370 1,493,558 680,558(2) 4,215,370
Workers compensation 502,205 637,767 209,287 1,196,101(2) 153,158
----------- ----------- ----------- ----------- -----------
5,464,254 6,616,004 236,047 6,548,978 5,767,327
=========== =========== =========== =========== ===========
For the year Ended December 31, 1999
Reserves deducted in the balance sheet
from assets to which they apply:
Allowance for doubtful accounts 506,969 338,351 41,517(3) 466,990(1) 419,847
Allowance for obsolete materials and
supplies 137,460 48,000 85,163(2) 100,297
=========== =========== =========== =========== ===========
Reserves classified as liabilities in the
balance sheet:
General Liability 1,300,752 125,000 376,552(2) 1,049,200
Employees' group health plan 643,383 3,745,000 31,065 3,908,969(2) 510,479
Retirees' group health plan 2,018,370 1,284,000 675,000 575,000(2) 3,402,370
Workers compensation 1,030,017 (5,890) 82,306 604,228(2) 502,205
----------- ----------- ----------- ----------- -----------
4,992,522 5,148,110 788,371 5,464,749 5,464,254
=========== =========== =========== =========== ===========
Notes:
(1) Accounts written off during the year.
(2) Expenditures and other charges made during the year.
(3) Recovery of amounts previously charged to reserve.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CALIFORNIA WATER SERVICE GROUP
Date: February 27, 2002 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 27, 2002 /s/ Robert W. Foy
ROBERT W. FOY
Chairman, Board of Directors
Date: February 27, 2002 /s/ Douglas M. Brown
DOUGLAS M. BROWN
Member, Board of Directors
Date: February 27, 2002 /s/ Edward D. Harris, Jr.
EDWARD D. HARRIS, JR., M.D.
Member, Board of Directors
Date: February 27, 2002 /s/ Richard P. Magnuson
RICHARD P. MAGNUSON
Member, Board of Directors
Date: February 27, 2002 /s/ Linda R. Meier
LINDA R. MEIER
Member, Board of Directors
Date: February 27, 2002 /s/ Peter C. Nelson
PETER C. NELSON
President and Chief Executive Officer,
Principal Executive Officer
Member, Board of Directors
Date: February 27, 2002 /s/ Langdon W. Owen
LANGDON W. OWEN
Member, Board of Directors
Date: February 27, 2002 /s/ George A. Vera
GEORGE A. VERA
Member, Board of Directors
28
Date: February 27, 2002 /s/ Gerald F. Feeney
GERALD F. FEENEY,
Vice President, Chief Financial
Officer and Treasurer;
Principal Financial Officer
Date: February 27, 2002 /s/ Calvin L. Breed
CALVIN L. BREED, Controller,
Assistant Secretary and Assistant
Treasurer;
Principal Accounting Officer
29
EXHIBIT INDEX
Sequential
Exhibit Page Numbers
Number in this Report
- ------ --------------
Unless filed with this Form 10-K, the documents listed are incorporated by
reference.
2. Plan of Acquisition, Reorganization, Liquidation or Succession:
2.1 Agreement of Merger by and between California Water 30
Service Group and California Water Service Company
creating a holding company corporate structure (Filed as
Exhibit A of the 1999 California Water Service Company
Proxy Statement)
2.2 Agreement and Plan of Reorganization among California 30
Water Service Group, California Water Service Company and
Dominguez Services Corporation dated November 13, 1998,
and Amendment No. 1 to the Agreement and Plan of Reorganization
(Appendix A and Appendix B, respectively, to Amendment No. 1
to Form S-4 filed April 2, 1999)
3. Articles of Incorporation and By-laws:
3.1 Certificate of Incorporation of California Water Service Group 30
(Filed as Exhibit B of the 1999 California Water Service
Company Proxy Statement)
3.2 Restated By-laws of California Water Service Group as amended 30
on January 26, 2000 (Exhibit E-2 to Form 8-K filed February 3,
2000)
4. Instruments Defining the Rights of Security Holders of California
Water Service Company, including Indentures:
4.1 Certificate of Determination of Preferences for Group's 30
Series C Preferred Stock (Exhibit 3.2 to Form 10-K for
fiscal year 1987)
4.2 Shareholder Rights Plan; an agreement between California 30
Water Service Group and BankBoston, N.A., rights agent,
dated January 28, 1998 (Exhibit 1 to Form 8-A and Exhibit 1
to Form 8-K dated February 13, 1998)
30
4.3 Certificate of Determination of Preferences for Group's Series 31
D Preferred Stock (Exhibit A to the Shareholder Rights Plan,
an agreement between California Water Service Group and
BankBoston, N.A., rights agent, dated January 28, 1998 filed
as Exhibit 1 to Form 8-A and Exhibit 1 to Form 8-K dated
February 13, 1998)
4.4 Certificate of Determination regarding Series D Participating 31
Preferred Shares. These shares are relative to the Shareholder
Rights Plan and would be issued if the rights plan were triggered.
This is a revised filing at the California Secretary of State's request
in a revised form (Exhibit 10.19 to Form 10Q for the quarter ending
September 30, 1998)
4.5 Mortgage of Chattels and Trust Indenture dated April 1, 1928; 31
Eighth Supplemental Indenture dated November 1, 1945,
covering First Mortgage 3.25% Bonds, Series C; twenty-first
Supplemental Indenture dated October 1, 1972, covering First
Mortgage 7.875% Bonds, Series P; twenty-fourth Supplemental
Indenture dated November 1, 1973, covering First Mortgage 8.50%
Bonds, Series S (Exhibits 2(b), 2(c), 2(d), Registration Statement
No. 2-53678, of which certain exhibits are incorporated by reference
to Registration Statement Nos. 2-2187, 2-5923, 2-5923, 2-9681,
2-10517 and 2-11093.)
4.6 Thirty-third Supplemental Indenture dated as of May 1, 1988, 31
covering First Mortgage 9.48% Bonds, Series BB. (Exhibit 4 to
Form 10-Q dated September 30, 1988)
4.7 Thirty-fourth Supplemental Indenture dated as of November 1, 31
1990, covering First Mortgage 9.86% Bonds, Series CC.
(Exhibit 4 to Form 10-K for fiscal year 1990)
4.8 Thirty-fifth Supplemental Indenture dated as of November 1, 31
1992, covering First Mortgage 8.63% Bonds, Series DD.
(Exhibit 4 to Form 10-Q dated September 30, 1992)
4.9 Thirty-sixth Supplemental Indenture dated as of May 1, 1993, 31
covering First Mortgage 7.90% Bonds Series EE (Exhibit 4 to
Form 10-Q dated June 30, 1993)
4.10 Thirty-seventh Supplemental Indenture dated as of September 1, 31
1993, covering First Mortgage 6.95% Bonds, Series FF (Exhibit 4
to Form 10-Q dated September 30, 1993)
31
4.11 Thirty-eighth Supplemental Indenture dated as of October 15, 32
1993, covering First Mortgage 6.98% Bonds, Series GG
(Exhibit 4 to Form 10-K for fiscal year 1994)
4.12 Note Agreement dated August 15, 1995, pertaining to issuance 32
of $20,000,000, 7.28% Series A Unsecured Senior Notes, due
November 1, 2025 (Exhibit 4 to Form 10-Q dated September 30,
1995)
4.13 Note Agreement dated March 1, 1999, pertaining to issuance of 32
$20,000,000, 6.77% Series B Unsecured Senior Notes, due
November 1, 2028 (Exhibit 4.1 to Form 10-K dated December 31,
1999)
4.14 First Supplement dated October 1, 2000 to Note Agreement of 32
March 1, 1999 pertaining to issuance of $20,000,000, 8.15%
Series C Unsecured Senior Notes, due November 1, 2030
(Exhibit 4.10 to Form 10-K dated December 31, 2000)
4.15 Second Supplement dated September 1, 2001 to Note Agreement 32
of March 1, 1999 pertaining to issuance of $20,000,000, 7.13%
Series D Unsecured Senior Notes, due November 1, 2031 (Exhibit
4.1 to Form 10-Q dated September 31, 2001)
4.16 Thirteenth Supplemental Trust Indenture whereby California Water 32
Service Company became the successor to Dominguez Water
Corporation in the original trust indenture for Dominguez Water
Corporation dated August 1, 1954 (Exhibit 4.11 to Form 10-K dated
December 31, 2000)
4.17 Eleventh Supplemental Trust Indenture dated as of December 8, 32
1992 covering First Mortgage 8.86% Bonds, Series J (Exhibit 10.2
to Form 10-K as of December 31, 1997 and filed by Dominguez
Services Corporation on March 31, 1998)
4.18 Twelfth Supplemental Indenture dated as of December 1, 1997, 32
covering First Mortgage 6.94% Bonds, Series K due January 1,
2023 (Exhibit 10.2 to Form 10-K dated December 31, 1997 and
filed by Dominguez Services Corporation on March 31, 1998)
32
10. Material Contracts.
10.1 Water Supply Contract between Cal Water and County of 33
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
incorporates said exhibits by reference to Form 10-K for fiscal
year 1974).
10.2 Settlement Agreement and Master Water Sales Contract 33
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 Form l0-K for fiscal year 1984).
10.3 Water Supply Contract dated January 27, 1981, between Cal 33
Water and the Santa Clara Valley Water District relating to
Cal Water's Los Altos District (Exhibit 10.3 to Form 10-K for
fiscal year 1992)
10.4 Amendments No. 3, 6 and 7 and Amendment dated June 17, 1980, 33
to Water Supply Contract between Cal Water and the County of
Butte relating to Cal Water's Oroville District. (Exhibit 10.5 to
Form 10-K for fiscal year 1992)
10.5 Amendment dated May 31, 1977 to Water Supply Contract 33
between Cal Water and Stockton-East Water District relating to
Cal Water's Stockton District. (Exhibit 10.6 to Form 10-K for
fiscal year 1992)
33
10.6 Second Amended Contract dated September 25, 1987 among 34
Stockton East Water District, California Water Service Company,
the City of Stockton, the Lincoln Village Maintenance District,
and the Colonial Heights Maintenance District Providing for the
Sale of Treated Water. (Exhibit 10.7 to Form 10-K for fiscal
year 1987).
10.7 Water Supply Contract dated April 19, 1927, and Supplemental 34
Agreement dated June 5, 1953, between Cal Water and Pacific
Gas and Electric Company relating to Cal Water's Oroville District.
(Exhibit 10.9 to Form 10-K for fiscal year 1992)
10.8 California Water Service Company Pension Plan (Exhibit 10.10 34
to Form 10-K for fiscal year 1992)
10.10 California Water Service Company Employees Savings Plan. 34
(Exhibit 10.12 to Form 10-K for fiscal year 1992)
10.11 Agreement between the City of Hawthorne and California Water 34
Service Company for the 15-year lease of the City's water system.
(Exhibit 10.17 to Form 10-Q dated March 31, 1996)
10.12 Water Supply Agreement dated September 25, 1996 between the 34
City of Bakersfield and California Water Service Company.
(Exhibit 10.18 to Form 10-Q dated September 30, 1996)
10.13 Water Supply Contract dated November 16, 1994 between 34
California Water Service Company and Alameda County Flood
Control and Water Conservation District relating to Cal Water's
Livermore District (Exhibit 10.15 to Form 10-K for 1994)
10.14 Agreement of Merger dated March 6, 1997 by and among 34
California Water Service Company, CWSG Merger Company
and California Water Service Group. (Filed as Exhibit A of the
1997 California Water Service Company Proxy Statement/
Prospectus which was incorporated by reference in the Form
10-K for 1997)
10.15 Dividend Reinvestment and Stock Purchase Plan dated 34
February 17, 1998 (Filed on Form S-3 dated February 17, 1998)
10.16 California Water Service Group Directors Retirement Plan 34
(Exhibit 10.18 to Form 10-K for fiscal year 1997) *
34
10.17 $60,000,000 Business Loan Agreements between 35
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,
expiring April 30, 2003, (Exhibit 10.1 to Form 10-Q dated
September 30, 2001)
10.18 Executive Severance Plan (Exhibit 10.24 to Form 10K for the 35
fiscal year 1998) *
10.19 California Water Service Group Long-Term Incentive Plan (filed 35
as Appendix A of the 2000 California Water Service Group Proxy) *
10.20 California Water Service Group Deferred Compensation Plan 35
effective January 1, 2001; this plan replaces the former Directors
Deferred Compensation Plan (Exhibit 10.22 to Form 10-K for 2000) *
10.21 California Water Service Company Supplemental Executive 35
Retirement Plan effective January 1, 2001; this plan replaces
a prior plan, see Exhibit 10.9 (Exhibit 10.23 to Form 10-K for 2000) *
13. Annual Report to Security Holders, Form 10-Q or Quarterly Report to
Security Holders:
13.1 2001 Annual Report. Certain sections of the 2001 Annual Report 37
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 II, Item 5, Market for Registrant's Common Equity
and Related Shareholder Matters; Part II, Item 6, Selected Financial
Data; Part II, Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations; Part II, Item 7A,
Quantitative and Qualitative Disclosures About Market Risk; and
Part II, Item 8, Financial Statement and Supplementary Data.
13.2 Regulated and Non-Regulated Customers
21. Subsidiaries of the Registrant 63
35
23. Consents of Experts and Counsel.
23.1 Consent of KPMG LLP 64
23.2 Consent of Arthur Andersen LLP 65
* Management Contract or Compensatory Plan or Arrangement
36
Exhibit 13.1 2001 Annual Report to Stockholders
Ten-Year Financial Review
Dollars in thousands, except common share data
2001 2000 1999 1998 1997 1996 1995
Summary of Operations
Operating revenue
Residential $173,823 $171,234 $163,681 $150,491 $158,210 $148,313 $132,859
Business 44,944 44,211 41,246 38,854 40,520 37,605 35,873
Industrial 9,907 11,014 12,695 10,150 10,376 9,748 9,952
Public authorities 11,860 11,609 10,898 9,654 11,173 10,509 9,585
Other 6,286 6,738 6,417 5,777 4,886 4,083 4,833
---------------------------------------------------------------------------------
Total operating revenue 246,820 244,806 234,937 214,926 225,165 210,258 193,102
Operating expenses 221,669 211,610 201,890 183,245 188,020 177,356 164,958
Interest expense, other income
and expenses, net 10,186 13,233 11,076 11,821 11,388 11,502 11,176
---------------------------------------------------------------------------------
Net income $ 14,965 $ 19,963 $ 21,971 $ 19,860 $ 25,757 $ 21,400 $ 16,968
---------------------------------------------------------------------------------
Common Share Data*
Earnings per share - diluted $ 0.97 $ 1.31 $ 1.44 $ 1.31 $ 1.71 $ 1.42 $ 1.13
Dividend declared 1.115 1.100 1.085 1.070 1.055 1.040 1.020
Dividend payout ratio 115% 84% 75% 82% 62% 73% 90%
Book value $ 12.95 $ 13.13 $ 12.89 $ 12.49 $ 12.15 $ 11.47 $ 10.97
Market price at year-end 25.75 27.00 30.31 31.31 29.53 21.00 16.38
Common shares outstanding
at year-end (in thousands) 15,182 15,146 15,094 15,015 15,015 15,015 14,934
Return on average common
stockholders' equity 7.6% 10.1% 11.5% 10.8% 14.5% 12.8% 10.6%
Long-term debt interest coverage 2.87 3.58 3.79 3.64 4.37 3.81 3.41
Balance Sheet Data
Net utility plant $624,342 $582,782 $564,390 $538,741 $515,917 $495,985 $471,994
Utility plant expenditures 62,049 37,161 48,519 41,061 37,511 40,310 31,031
Total assets 710,214 666,605 645,507 613,143 594,444 569,745 553,027
Long-term debt including
current portion 207,981 189,979 171,613 152,674 153,271 151,725 154,416
Capitalization ratios:
Common stockholders' equity 48.8% 51.1% 53.0% 54.6% 53.8% 52.7% 50.9%
Preferred stock 0.9% 0.9% 0.9% 1.0% 1.0% 1.1% 1.1%
Long-term debt 50.3% 48.0% 46.1% 44.4% 45.2% 46.2% 48.0%
Other Data
Water production (million gallons)
Wells and surface supply 65,283 65,408 65,144 57,482 63,736 60,964 54,818
Purchased 61,343 62,237 58,618 54,661 59,646 56,769 57,560
---------------------------------------------------------------------------------
Total water production 126,626 127,645 123,762 112,143 123,382 117,733 112,378
---------------------------------------------------------------------------------
Metered customers 371,281 366,242 361,235 354,832 350,139 345,307 335,238
Flat-rate customers 79,146 78,104 77,892 77,568 77,878 77,991 78,330
---------------------------------------------------------------------------------
Customers at year-end,
including Hawthorne 450,427 444,346 439,127 432,400 428,017 423,298 413,568
---------------------------------------------------------------------------------
New customers added 6,081 5,219 6,727 4,383 4,719 9,730 2,263
Average revenue per customer $ 552 $ 554 $ 539 $ 500 $ 529 $ 502 $ 468
Utility plant per customer at year-end 2,020 1,916 1,851 1,768 1,694 1,632 1,580
Employees at year-end 783 797 790 759 752 740 738
1994 1993 1992
Summary of Operations
Operating revenue
Residential $127,228 $122,585 $111,353
Business 33,712 31,360 29,208
Industrial 9,080 8,415 7,905
Public authorities 9,397 8,535 7,899
Other 3,767 4,985 7,104
--------------------------------
Total operating revenue 183,184 175,880 163,469
Operating expenses 155,012 145,517 137,401
Interest expense, other income
and expenses, net 11,537 12,785 11,794
--------------------------------
Net income $ 16,635 $ 17,578 $ 14,274
--------------------------------
Common Share Data*
Earnings per share - diluted $ 1.17 $ 1.26 $ 1.02
Dividend declared 0.990 0.960 0.930
Dividend payout ratio 85% 76% 91%
Book value $ 10.72 $ 10.03 $ 9.65
Market price at year-end 16.00 20.00 16.50
Common shares outstanding
at year-end (in thousands) 14,890 13,773 13,773
Return on average common
stockholders' equity 11.1% 12.6% 10.7%
Long-term debt interest coverage 3.49 3.34 3.21
Balance Sheet Data
Net utility plant $455,769 $437,065 $419,194
Utility plant expenditures 32,435 31,097 37,698
Total assets 516,507 497,717 451,754
Long-term debt including
current portion 138,628 138,863 130,971
Capitalization ratios:
Common stockholders' equity 52.9% 49.3% 49.7%
Preferred stock 1.2% 1.2% 1.3%
Long-term debt 45.9% 49.5% 49.0%
Other Data
Water production (million gallons)
Wells and surface supply 53,274 48,598 55,641
Purchased 59,850 59,103 49,303
--------------------------------
Total water production 113,124 107,701 104,944
--------------------------------
Metered customers 332,146 326,564 322,457
Flat-rate customers 79,159 81,416 82,617
--------------------------------
Customers at year-end,
including Hawthorne 411,305 407,980 405,074
--------------------------------
New customers added 3,325 2,906 3,769
Average revenue per customer $ 447 $ 433 $ 404
Utility plant per customer at year-end 1,520 1,459 1,400
Employees at year-end 729 717 706
* Common share data is restated to reflect the effective two-for-one stock split
on December 31, 1997
37
Management's Discussion and Analysis of Results of
Operations and Financial Condition
California Water Service Group (Company) is a holding company with four
operating subsidiaries: California Water Service Company (Cal Water), CWS
Utility Services (Utility Services), New Mexico Water Service Company (New
Mexico Water) and Washington Water Service Company (Washington Water). Cal Water
and Washington Water are regulated public utilities. Their assets and operating
revenues currently comprise the majority of the Company's assets and revenues.
New Mexico Water was formed in 2000 to provide regulated water services. Utility
Services provides non-regulated water operations and related services to other
private companies and municipalities. The following discussion and analysis
provides information regarding the Company, its assets, operations and financial
condition.
FORWARD-LOOKING STATEMENTS
This annual report, including the Letter to Stockholders and Management's
Discussion and Analysis, contains forward-looking statements within the meaning
established by the Private Securities Litigation Reform Act of 1995 (Act). The
forward-looking statements are intended to qualify under provisions of the
federal securities laws for "safe harbor" treatment established by the Act.
Forward-looking statements are based on currently available information,
expectations, estimates, assumptions and projections, and management's judgment
about the Company, the water utility industry and general economic conditions.
Such words as expects, intends, plans, believes, estimates, anticipates,
projects 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: governmental and regulatory
commissions' decisions, changes in regulatory commissions' policies or
procedures, the timeliness of regulatory commissions' actions concerning rate
relief, new legislation, electric power interruptions, increases in suppliers'
prices and the availability of supplies including water and power, changes in
environmental compliance requirements, acquisitions, the ability to successfully
implement business plans, changes in customer water use patterns and the impact
of weather on operating results, especially as it impacts water sales. The
Company assumes no obligation to provide public updates of forward-looking
statements.
BUSINESS
Cal Water is a public utility supplying water service to 436,700 customers in 75
California communities through 25 separate water systems or districts. Cal
Water's 24 regulated systems, which are subject to regulation by the California
Public Utilities Commission (CPUC) serve 430,600 customers. An additional 6,100
customers receive service through a long-term lease of the City of Hawthorne's
water system, which is not subject to CPUC regulation.
Washington Water's utility operations are regulated by the Washington
Utilities and Transportation Commission (WUTC). Washington Water provides
domestic water service to 13,700 customers in the Tacoma and Olympia areas. An
additional 2,300 customers are served under operating agreements with private
owners.
In November 2000, New Mexico Water signed an agreement to acquire the water
and wastewater assets of Rio Grande Utility Corporation. Rio Grande has annual
revenue of $1.2 million and serves 2,300 water and 1,600 wastewater customers
south of Albuquerque. The acquisition is contingent on approval by the state's
Public Regulation Commission, which is now expected in the second quarter of
2002.
Utility Services derives non-regulated income from contracts with other
private companies and municipalities to operate water systems and provide meter
reading and billing services for customers. It also leases communication antenna
sites, operates recycled water systems, provides meter reading and customer
services, and periodically sells surplus real estate. The Company expects the
meter reading service it provides in Santa Fe, New Mexico to be assumed by the
City of Santa Fe during the first quarter of 2002.
Rates and operations for regulated customers are subject to the
jurisdiction of the respective state's regulatory commission. The commissions
require that water rates for each regulated district be independently
determined. 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.
CRITICAL ACCOUNTING POLICIES
The Company maintains its accounting records in accordance with generally
accepted accounting principles and as directed by the Commissions. This section
addresses two areas that the Company believes are most important among its
accounting policies.
Revenue Recognition. Revenue from metered customers includes billings to
customers based on monthly meter readings plus an estimate of water used since
the customer's last meter reading and the end of the accounting period. The
unbilled revenue amount is recorded as a current asset on the balance sheet
under the caption "Unbilled Revenue." At December 31, 2001, the unbilled amount
was $7.3 million and at December 31, 2000 the amount was $8.0 million. The
amount recorded as unbilled revenue
38
varies depending on water usage, the number of days between meter reads for each
billing cycle, and the number of days between each cycle's meter reading and the
end of the accounting cycle.
Flat rate customers are billed in advance at the beginning of the service
period. The revenue is prorated so that the portion of revenue applicable to the
current accounting period is included in that period's revenue. The portion
related to a subsequent accounting period is recorded as unearned revenue on the
balance sheet and recognized as revenue in the subsequent accounting period. At
December 31, 2001 and 2000, the unearned revenue liability was $1.7 million and
$1.5 million, respectively.
Expense Balancing Accounts. The Company does not record expense balancing
accounts in revenue until the CPUC has authorized a change in customer rates and
the customer has been billed. Expense balancing accounts include the amount of
suppliers' rate increases charged to the Company for purchased water, purchased
power and pump tax expenses that are not included in customer water rates. The
cost increases are referred to as "Offsetable Expenses" because under certain
circumstances they are recoverable from customers in future rate increases
designed to offset the higher costs.
The Company tracks the cost increases in expense balancing accounts as
allowed by the CPUC. At December 31, 2001, the amount included in these accounts
was $6.5 million and relates primarily to higher electric costs incurred by the
Company during 2001 that have not been billed to customers. At December 31,
2000, the amount in the expense balancing accounts was $0.6 million. For the
years 1996 through 2000, the average year-end balance was $1.2 million. To the
extent the Company meets the criteria set forth by the CPUC in its interim
balancing account recovery procedures, the Company expects to collect the
balancing account amounts in future customer billings. The CPUC's procedures are
discussed in detail under the "Rates and Regulation" section of this report. The
Company is uncertain if it will meet the CPUC's criteria or what portion of the
balancing accounts will be recoverable in offset rate increases. Therefore, the
Company's accounting policy is not to record the balancing account amounts until
they are included in customer billings.
RESULTS OF OPERATIONS
Earnings and Dividends. Net Income in 2001 was $14,965,000 compared to
$19,963,000 in 2000 and $21,971,000 in 1999. Diluted earnings per common share
were $0.97 in 2001, $1.31 in 2000 and $1.44 in 1999. The weighted average number
of common shares outstanding was 15,285,000 in 2001, 15,173,000 in 2000 and
15,142,000 in 1999. As explained below, the decline in 2001 net income resulted
from three primary factors: lower water sales to existing customers due to
weather conditions, significantly higher purchased power costs and delays in
regulatory rate relief.
At its January 2001 meeting, the Board of Directors increased the common
stock dividend for the 34th consecutive year. 2001 also marked the 57th
consecutive year that a dividend had been paid on the Company's common stock.
The annual dividend paid in 2001 was $1.115, a 1.4% increase over the $1.10 paid
in 2000, which is an increase of 1.4% over the $1.085 paid in 1999. The dividend
increases were based on projections that the higher dividend could be sustained
while still providing the Company with adequate financial resources and
flexibility. Earnings not paid as dividends are reinvested in the business for
the benefit of stockholders. The dividend payout ratio was 115% in 2001, 84% in
2000 and 75% in 1999, an average of 91% during the three-year period.
Operating Revenue. Operating revenue, including revenue from the City of
Hawthorne lease, was $246.8 million, 0.8% more than the $244.8 million recorded
in 2000. Revenue in 1999 was $234.9 million. The source of changes in operating
revenue were:
Dollars in millions 2001 2000 1999
Customer water usage $ (5.7) $ 4.8 $ 14.0
Rate increases 5.4 3.0 3.2
Usage by new customers 2.3 2.1 2.8
-------------------------------
Net change $ 2.0 $ 9.9 $ 20.0
-------------------------------
Average revenue per customer (in dollars) $ 552 $ 554 $ 539
Average metered customer usage (Ccf) 363 371 349
New customers added 6,100 5,200 6,700
During 2001, revenue from usage by existing customers declined $5.7
million. A cool, wet spring, mild summer and early fall rains throughout the
Company's service territories resulted in a weather pattern that caused water
usage by existing customers to decline by 2%. Rainfall was near normal in the
northern part of California, but well above normal in the south. The unusually
heavy rains in southern California reduced water sales, a trend that continued
all year because of the year's weather pattern. Washington Water experienced dry
conditions during the winter and spring months; however, summer rains reduced
water sales in the normally high usage summer months.
Rate increases in 2001 added $5.4 million in new revenue, offsetting the
decline in revenue from usage by existing customers. The Company received CPUC
decisions in 2001 for General Rate Case (GRC) increases in three districts
providing $1.3 million in new revenue. Step rate increases of $2.6 million that
had been authorized in prior GRCs and $0.8 million in offset
39
increases to recover higher power costs in four districts were also granted. New
water rates for the City of Hawthorne water system added $0.5 million to
revenue, and a GRC decision for Washington Water added $0.2 million.
During 2000, the first quarter was wetter than in the prior year, causing a
reduction in customer usage. Second and third quarter weather was normal;
however, rains in the early part of the fourth quarter negatively affected usage
and consequently reduced revenue.
Effective in August 2000, offset rate increases to recover increases in
water production expenses became effective in four Cal Water districts. The
rates generated $1.6 million in additional 2000 revenue. Step rate increases
that were effective at the start of the year and new water rates in the City of
Hawthorne system accounted for the remainder of the new revenue from rate
increases.
The December 31, 2001 customer count, including the Hawthorne customers,
was 450,400, an increase of 1.4% from the 444,300 customers at the end of 2000,
which was an increase of 1.1% from the 439,100 customers at the end of 1999. The
growth in customers was due to normal growth within existing service areas and
several small system acquisitions.
Operating and Interest Expenses. Total operating expenses were $221.7 million in
2001, $211.6 million in 2000, and $201.9 million in 1999.
Wells provided 50.6% of water requirements in 2001 and purchased water
provided 48.9%, with 0.5% obtained from surface supplies. For 2000, the
corresponding percentages were 50.7%, 48.7% and 0.6%, and in 1999 the
percentages were 52.4%, 47.2% and 0.4%.
As a group, water production costs, which are purchased water, purchased
power and pump taxes, comprise the largest segment of total operating costs.
Together, water production costs accounted for 45% of total operating costs in
2001, 2000 and 1999. Rates charged for purchased water and pump taxes are set by
various public agencies; the electric rates charged by power companies are
authorized by the CPUC. As such, these rates are beyond the Company's control.
The table below provides comparative information regarding water production
costs during the past three years:
Dollars in millions 2001 2000 1999
Purchased water $ 73.2 $ 73.8 $ 69.4
Purchased power 21.1 15.1 14.4
Pump taxes 5.9 6.3 6.9
-----------------------------
Total water production costs $100.2 $ 95.2 $ 90.7
-----------------------------
Change from prior year 5% 5% 15%
-----------------------------
Water production (billion gallons) 127 128 124
-----------------------------
Change from prior year (1)% 3% 10%
-----------------------------
Water production expenses vary with wholesale suppliers' prices, the
quantity of water produced to supply customer water usage, and the sources of
supply. In 2001 and 2000, seven wholesale water suppliers increased rates from
2% to 7%. In December 2001, wholesale suppliers in the Los Angeles area refunded
$1.4 million for over collecting on water purchases in prior periods. The
refunds were recorded as a reduction of purchased water costs. For 2002,
wholesale rate increases are expected in seven districts ranging from 1% to 11%.
One supplier plans to reduce rates 9%.
Purchased power is required to operate wells and pumps. Its cost increased
$6.0 million in 2001 and $0.7 million in 2000. Through much of 2001, the Company
paid substantially higher energy costs that were not recovered in customer
rates. The CPUC's authorizations allowing the Company to recover a portion of
the higher power costs were not effective until September and November, well
after the high usage summer months. The purchased power cost increase in 2000
was due mainly to a 3% increase in water production.
Prior to 2001, the Company had not been subjected to significant electric
power cost increases. However, as has been widely publicized, California energy
costs rose significantly in 2001. In January, the CPUC approved an energy
surcharge that increased the Company's cost of purchased electric power by 10%.
A second, more significant 38% increase in electric power costs became effective
in May, bringing the total increase to 48%. When the CPUC proposed electric cost
increases, the Company believed the higher costs were recoverable from consumers
on a pass-through basis under established CPUC procedures. However, as explained
in the Rates and Regulation section of this report, the CPUC revised its rules
regarding recovery of the higher costs, resulting in delays in recovering the
higher costs. No new power rate increases are proposed at this time.
Employee payroll and benefits charged to operations and maintenance were
$47.8 million for 2001, $44.5 million for 2000 and $43.0 in 1999. 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
2001, 2000 and 1999, there were 783, 797 and 790 employees, respectively.
During 2000, a curtailment of the Dominguez pension plan was recorded
resulting in a non-taxable gain of $1.2 million that was offset against
operating expenses. The curtailment occurred because the Dominguez
40
pension plan was frozen at the merger date and its participants became
participants in the Company pension plan. Previous amounts expensed by Dominguez
but not funded to the plan comprise the curtailment amount. This amount is
included in the $44.5 million reported for payroll and benefits charged to
operations and maintenance expense.
Income tax expense was $9.7 million in 2001, $11.6 million in 2000 and
$13.5 million in 1999. The changes in taxes are generally due to variations in
taxable income. There is no state income tax in Washington.
Interest on long-term debt increased $1.3 million over 2000. The issuance
of $20 million of Series D senior notes in September 2001 and $20 million of
Series C senior notes in October 2000, net of sinking fund payments on first
mortgage bonds, resulted in a larger principal amount of long-term debt
outstanding and thus increased interest expense. In 2000, long-term interest
cost was unchanged from 1999. The added interest expense due to the Series C
senior note issue was offset by lower interest due to sinking fund payments on
first mortgage bonds. Capitalized interest was $0.9 million on construction
projects in 2001 and $0.7 million in 2000. A larger amount is expected to be
capitalized during 2002 because of the increase in the capital project
expenditures. Interest coverage of long-term debt before income taxes was 2.9
times in 2001, 3.6 times in 2000 and 3.8 times in 1999. The reduction in
interest coverage for 2001 resulted from lower earnings and the new senior note
issues outstanding.
Short-term bank borrowings to meet operating and interim construction
funding needs increased other interest expense in 2001 by $0.1 million. The
amount borrowed during the year was larger because of reduced cash flow from
operations and an increase in capital project expenditures, but lower short-term
rates reduced interest cost on the outstanding balances. There was $22.0 million
in short-term borrowings at the end of 2001 and $14.6 million at the end of
2000.
Other Income and Expenses. Other income is derived from management contracts
whereby the Company operates private and municipally owned water systems,
agreements for operation of two recycled water systems, contracts for meter
reading and billing services to various cities, leases of communication antenna
sites, surplus property sales, other non-utility sources and interest on
short-term investments. Other income, net of expenses, was $5.8 million in 2001,
$1.4 million in 2000 and $3.1 million in 1999. During 2001, $3.9 million in
pre-tax profits were realized from surplus properties sold as part of the Real
Estate Program that is described in more detail in the "Liquidity and Capital
Resources" section of this report. There were no property sales in 2000 and $1.3
million in 1999.
RATES AND REGULATION
After analyzing 17 Cal Water districts that were eligible for general rate
filings in 2001, and based on current earnings levels, projected expense
increases, including higher electric power costs, and expected capital
expenditures, applications were filed in July 2001 for 15 districts covering
about 65% of Cal Water customers. The applications request an 11.5% return on
equity including 75 basis points to reflect the increased risk associated with
the CPUC's changes in recovery of water production expense increases. An
application to increase customer rates to cover higher General Office expenses
is also being processed by the CPUC. Combined the applications request $19
million in additional annual revenue. A decision from the CPUC on the General
Office application is expected in the second quarter of 2002, and a decision on
the district GRC applications is expected in 2002's third quarter. There can be
no assurance that the increases will be granted as requested. The CPUC has
lengthened the time required to process the 2001 series of GRC applications. The
schedule had required approximately 10 months, but for this series, it is
expected to exceed one year. The regulatory delays are detrimental to the
Company because rate relief to cover increased costs are not issued on a timely
basis, and revenue is effectively lost.
In October 2001, the CPUC adopted a resolution implementing its staff's
interim recommendation concerning practices and policies that enable water
utilities to recover increases in purchased water, purchased power and pump
taxes. These expenses are referred to as "offsetable expenses." The CPUC also
directed its staff to open a proceeding to evaluate offsetable expense recovery
practices and policies, and recommend permanent revisions. Historically, offset
rate increases have enabled water utilities to recover increases in offsetable
expenses that were not anticipated when customer rates were established and are
beyond the utility's control. Future Company requests to recover offsetable
expenses will be processed only if a district has filed a GRC application within
its three-year rate case cycle and the district is not earning more than its
authorized rate of return on a forward-looking, pro-forma basis. Neither of
these requirements applied to offset rate increases prior to adoption of the
resolution. The Company can continue to track offsetable expenses in regulatory
memorandum accounts for potential recovery subject to the CPUC's future
determination of appropriate practices and policies.
During 2001, the rates charged to the Company by electric power suppliers
increased almost 50%. In May 2001, immediately after the CPUC authorized
substantial electric rate increases for the state's two largest power companies,
the Company requested authorization to recover $5.9 million in higher power
costs for 23 of its 24 regulated California districts. Late in 2001, the Company
was authorized rate increases in four districts totaling $2.7 million in
additional annual revenue. The Company's requests to recover power cost
increases in the other districts will be processed in accordance with the
interim policies adopted by the CPUC. Although the Company is hopeful that it
will be authorized to recover the additional offsetable expenses, it is unable
to predict the timing or amount of such recoveries.
During 2002, the Company expects to file GRCs for six of its California
operating districts. Those filings will be made in July 2002 with a decision
expected from the CPUC about mid-year in 2003. A GRC was filed for Washington
Water in February 2002 with a decision expected in April 2002.
41
WATER SUPPLY
The Company's source of supply varies among its operating districts. Certain
districts obtain all of their supply from wells, some districts purchase all of
the supply from wholesale suppliers and other districts obtain the supply from a
combination of well and purchased sources. A small portion of the supply is from
surface sources and processed through three Company-owned treatment plants. On
average, slightly more than half of the water produced is provided from wells
and surface supply with the remainder purchased from wholesale suppliers.
California's normal weather pattern yields little precipitation between
mid-spring and mid-fall. The Washington service areas receive precipitation in
all seasons with the heaviest amounts during the winter. Water usage is highest
during the warm and dry summers and declines in the cool winter months. Rain and
snow during the winter months replenish underground water basins and fill
reservoirs providing the water supply for subsequent delivery to customers. To
date, snow and rainfall accumulation during the 2001-2002 water year has been
above average. Precipitation in the prior five years has been near normal
levels. Water storage in California's reservoirs at the end of 2001 was at
historic average. The Company believes that its supply from underground aquifers
and purchased sources will be adequate to meet customer demand during 2002. The
Company also develops long-term water supply plans for each of its districts to
help assure an adequate water source under various operating and supply
conditions.
ENVIRONMENTAL MATTERS
The Company is subject to regulations of the United States Environmental
Protection Agency (EPA), state health service departments and various local
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 strives for complete compliance with all requirements set forth by
the various agencies.
The Safe Drinking Water Act (SDWA) was amended in 1996 to provide a new
process for the EPA to select and regulate waterborne contaminants. The EPA can
now regulate only contaminants that are known or likely to occur at levels
expected to pose a risk to public health when regulation would provide a
meaningful opportunity to reduce a health risk. New drinking water regulations
will be based primarily on risk assessment and measurement of cost/benefit
considerations for minimizing overall health risk. The amended SDWA allows EPA
to require monitoring of up to 30 contaminants in any five-year cycle. Also,
every five years the EPA must select at least five listed contaminants and
determine if they should be regulated.
The Company has an established water supply monitoring program to test for
contaminants in accordance with SDWA requirements. Water pumped from underground
sources is treated as necessary or required by regulations. The Company owns and
operates three surface water treatment plants. The cost of existing treatment is
being recovered in customer rates as authorized by the regulatory authorities.
Water purchased from wholesale suppliers is treated before delivery to the
Company's systems.
Enforcement of the EPA standards is the responsibility of individual
states. The states can impose more stringent regulation than mandated by EPA. In
addition to the EPA's requirements, various regulatory agencies could require
increased monitoring and possibly require additional treatment of water
supplies.
During 2001, EPA released a new, lower Maximum Contaminant Level (MCL) of
10 parts per billion for arsenic, a naturally-occurring element, that is
sometimes present in groundwater. Compliance with the new standard is required
by January 2006. Of the Company's almost 900 wells, 75 will require treatment to
comply with the new MCL. The Company estimates the compliance cost at $125
million in capital expenditures over the next five years and $10 million in
additional annual operating costs. The State of California could establish a
lower arsenic MCL standard. If the state were to set the standard at five parts
per billion, the estimated capital expenditures necessary for compliance would
be $250 million. At this time, the Company is unable to predict if the state
will adopt the EPA standard or require a lower MCL. The Company is participating
in testing alternate arsenic treatment technologies in order to meet the
standard in the most cost efficient manner.
It is anticipated that EPA will issue other regulations that will require
further monitoring and possible treatment for specific contaminants. Depending
on the action levels contained in the regulations, the cost of compliance with
the new regulations could be significant in certain Company districts. The
Company intends to request recovery for capital investments and additional
treatment costs needed to remain in compliance with established health standards
through the ratemaking process.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The Company's liquidity is provided by bank lines of credit and
internally generated funds. The Company has a $60 million bank line of credit
that expires on April 30, 2003. The Company expects the bank lines of credit
will be renewed upon expiration. It replaced a previous $50 million credit line.
Of the $60 million total, $10 million is designated for the parent and $50
million is available to Cal Water. The $10 million portion may be drawn on for
use by the Company, including funding of its subsidiaries' operations. Cal
Water's $50 million portion can be used solely for purposes of the regulated
utility.
The Company has committed $7.6 million of the $10 million credit line to a
contractor for construction of a customer/operation center where the Company
will consolidate its South Bay Los Angeles operations, including the former
Dominguez Water Company operations. At December 31, 2001, $6.3 million had been
drawn to acquire land and construct the facility. The amount drawn on the credit
line is an obligation of the contractor, but guaranteed by the Company. The new
facility is pledged to the Company as security for the guarantee. The Company
occupied the new facility in January 2002 on a month-to-
42
month rent basis. The transaction is structured so that the Company will
exchange on a tax-free basis surplus real property to the contractor for the new
facility. The exchange is expected to occur after mid-year 2002 at which time
the contractor will repay the construction loan and the Company's commitment
will be extinguished.
Washington Water has a line of credit totaling $0.1 million from a bank to
meet its operating and capital equipment purchase requirements. At December 31,
2001, nothing was outstanding under the commitment. Generally, short-term
borrowings under the commitment are converted annually to long-term borrowings
with repayment terms tied to system and equipment acquisitions.
The water business is seasonal. Revenue is lower in the cool, wet winter
months when less water is used compared to the warm, dry summer months when
water use is higher and more revenue is generated. During the winter period, the
need for short-term borrowings under the bank lines of credit increases. The
increase in cash flow during the summer allows short-term borrowings to be paid
down. Short-term borrowings that remain outstanding more than one year have
generally been converted to long-term debt. In years when more than normal
precipitation falls in the Company's service areas or temperatures are lower
than normal, especially in the summer months, customer water usage can be lower
than normal. The reduction in water usage reduces cash flow from operations and
increases the need for short-term bank borrowings. Regulatory lag, the delay in
receiving authorization to increase customer rates to cover capital expenditures
and higher operating costs, can also result in the need for increased short-term
bank borrowings. The Company believes that long-term financing is available to
it through debt and equity markets.
Standard & Poor's and Moody's have maintained their ratings of Cal Water's
first mortgage bonds at AA- and Aa3, respectively. These are the highest ratings
for senior debt in the water industry. The Company's bank line of credit
agreement contains a provision that if the Company's Standard & Poor's or
Moody's senior debt ratings fall below investment grade, the credit line may be
terminated by the banks. The senior note covenants include cross default
provisions that would be triggered if the bank line of credit provisions are not
met. The Company believes the credit rating agencies will maintain investment
grade ratings for the Company's first mortgage bonds.
Long-term financing, which includes common stock, first mortgage bonds,
senior notes and other debt securities, has been used to replace short-term
borrowings and fund construction. Developer contributions in aid of construction
which are not refundable and refundable advances for construction are sources of
funds for various contractor funded construction projects. Internally generated
funds come from retention of earnings not paid out as dividends, depreciation
and deferred income taxes. Additional information regarding the bank borrowings
and long-term debt is presented in Notes 7 and 8 to the financial statements.
In both 2001 and 2000, long-term financing was provided by issuance of $20
million, 30-year senior notes for a total of $40 million. The Series D, 7.13%
senior notes were issued in September 2001, and in October 2000, the Series C,
8.15% notes were issued. The senior notes do not require sinking fund payments.
Cash flow during 2001 was lower than expected because of reduced water
usage by existing customers, regulatory lag in receiving rate relief and
increased operating costs, especially for purchased power. As a result, funds
required to pay 2001 dividends exceeded net income by $2.1 million, resulting in
a reduction of stockholders' equity. The reduced cash flow also required the
Company to borrow additional funds under the bank line of credit agreement. In
2000 and 1999, $3.6 million and $6.6 million of net income had been reinvested
in the business after payment of dividends.
The Company has a Dividend Reinvestment and Stock Purchase Plan (Plan).
Under the Plan, stockholders may reinvest dividends to purchase additional
Company common stock. The Plan also allows existing stockholders and other
interested investors to purchase Company common stock through the transfer
agent. The Plan provides that shares required for the Plan may be purchased on
the open market or be newly issued shares. Therefore, the Plan presents the
Company with an alternative means of developing additional equity if new shares
were issued. During 2001 and 2000, shares were purchased on the open market. At
this time, the Company intends to continue purchasing shares required for the
Plan on the open market. However, if new shares were issued to satisfy future
Plan requirements, the impact on earnings per share could be dilutive because of
the additional shares outstanding. Also, stockholders may experience dilution of
their ownership percentage.
Contractual Obligations. The Company's contractual obligations as of December
31, 2001 are summarized in the table below. Long-term debt payments include
annual sinking fund payments on first mortgage bonds, maturities of first
mortgage bonds and annual payments on other long-term obligations. Advances for
construction represent annual contract refunds to developers for the cost of
water systems paid for by the developers. The contracts are non-interest bearing
with refunds generally on a straight-line basis over a 40-year period. Operating
leases are generally rents for office space. The total amount presented for
operating leases is for a 20-year period.
Less Than After
Contractual Obligations (In thousands) Total 1 Year 2-3 Years 4-5 Years 5 Years
Long-term debt $207,981 $5,381 $7,783 $ 5,184 $189,633
Advances for construction 106,657 4,475 9,630 10,621 81,931
Operating leases 21,000 750 1,610 1,778 16,862
The Company has water supply contracts with wholesale suppliers in 16 of
its operating districts. For each contract, the cost of water is established by
the wholesale supplier and is generally beyond the Company's control. In the
past two years,
43
wholesaler price increases have averaged 2.5%. The amount paid annually to the
wholesale suppliers is charged to purchased water expense on the Company's
statement of income. Three contracts noted below require minimum payments. The
other contracts do not require minimum annual payments. The amount paid under
the contracts, except for the contract with Stockton East Water District (SEWD),
varies with the volume of water purchased from the wholesalers. The contract
with SEWD requires an annual payment of $3,198,000. The amount paid under this
contract is fixed annually and does not vary with the quantity of water
delivered by the district. Because of the fixed price arrangement, the Company
operates to receive as much water as possible from SEWD in order to minimize the
cost of operating wells to supplement SEWD deliveries. Two contracts require the
Company to purchase minimum quantities of water at the contractors' current
wholesale rate for purchased water. Under both contracts, the Company operates
so that purchases exceed the contractual minimum amount. The Company plans to
continue to purchase at least the minimum water requirement under both contracts
in the future.
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 first mortgage bonds.
Utility plant expenditures in 2001 totaled $62.0 million compared to $37.2
million in 2000 and $48.6 million in 1999. The 2001 construction program
included $53.4 million of Company-funded projects and $8.6 million of projects
funded by funds received from developers for non-refundable contributions in aid
of construction and refundable advances for construction. The Company's 2001
projects were funded by internally generated funds, borrowings under bank credit
lines, and issuance of the $20 million Series D senior notes. The 2000
expenditures included $33.5 million provided by Company funds and $3.6 million
received from developers. The Company's 2000 projects were funded by internally
generated funds, short-term bank borrowings, and issuance of the $20 million
Series C senior notes.
The 2002 Company-funded construction budget was authorized at $76.8
million. It includes $32.0 million for the fourth year of a five-year program to
construct a water treatment plant to accommodate growth and meet water quality
standards in the Bakersfield district. Over the five-year period, the plant and
related pumping and pipeline facilities are estimated to cost $49.0 million.
Also in the 2002 budget is $12.0 million for new and replacement water mains and
$5.0 million for new wells and storage facilities. The budget will be funded by
funds from operations, bank borrowings and long-term debt and equity financing.
New subdivision construction will be financed by developers' contributions and
advances for construction.
Company-funded construction budgets over the next five years are projected
to be about $350 million. Included in the estimated amount is $125 million for
compliance with arsenic water quality regulations, completion of the Bakersfield
treatment plant and expansion and replacement of water plant infrastructure. An
application was filed in January 2002 requesting authorization from the CPUC for
$250 million of debt and equity financing through 2005.
Capital Structure. Common stockholders' equity was reduced in 2001 by the $2.1
million that dividends paid exceeded net income. In 2000 and 1999, common
stockholders' equity increased by annual retained earnings of $3.6 million and
$6.6 million. New equity was issued in 2001 to acquire a water system. The
long-term debt portion of the capital structure increased in 2001 and 2000 due
to the issuance of Series C and Series D, $20 million senior notes. It was
reduced by first mortgage bond sinking fund payments.
The Company's total capitalization at December 31, 2001, was $402.7 million
and at the end of 2000 was $389.4 million. Capital ratios were:
2001 2000
Common equity 48.8% 51.1%
Preferred stock 0.9% 0.9%
Long-term debt 50.3% 48.0%
The return on average common equity was 7.6% in 2001 compared to 10.1% in
2000. The decline in 2001 was caused by the lower net income.
Other Acquisitions. On January 25, 2001, the CPUC approved the Company's
acquisition of the Nish water systems in Visalia. The four systems serve 1,100
customers and had annual revenue of $1.2 million. The Company issued 36,180
shares of its common stock valued at $0.9 million and assumed debt of $0.3
million to complete the transaction, which was accounted for as a pooling of
interests. The effect of pooling was deemed not to be material; therefore, prior
year financial statements have not been restated and pro-forma disclosures were
not considered significant. The net equity of Nish was recorded as an adjustment
to retained earnings as of January 1, 2001.
In 2001, Washington Water purchased the assets of seven water companies
that serve 681 customers and generate about $0.3 million in annual revenue. The
combined purchase price was $0.7 million.
In 2000, Washington Water purchased the assets of two water companies that
together serve almost 800 customers and produce annual revenue of about $0.3
million. Washington Water also purchased the assets of Robischon Engineers, Inc.
in April 2000. This acquisition added in-house engineering capabilities to the
Washington operation, enabling Washington Water to provide water system design
services to other water providers.
44
The Company agreed to acquire the Rio Grande Utility Corporation that
serves 2,300 water and 1,600 wastewater customers near Albuquerque in November
2000. The acquisition, which will be made for $2.3 million in cash and assumed
debt of $3.1 million, is pending approval of the New Mexico Public Regulation
Commission. Approval is expected in the second quarter 2002.
Real Estate Program. The Company's subsidiaries own more than 900 real estate
parcels. Certain parcels are not necessary for or used in water utility
operations. Most surplus properties have a low cost basis. A program has been
developed to realize the value of certain surplus properties through sale or
lease of those properties. The program will be ongoing for a period of several
years. During the next four years, the Company estimates that gross property
transactions totaling over $10 million could be completed. In 2001, $3.9 million
in pretax sales were completed. No transactions were completed during 2000.
During 2002, the Company expects to complete sales in excess of $3 million.
Stockholder Rights Plan. As explained in Note 6 to the Consolidated Financial
Statements, in January 1998, the Board of Directors adopted a Stockholder Rights
Plan (Plan). In connection with the Plan, a dividend distribution of one right
for each common share to purchase preferred stock under certain circumstances
was also authorized. The Plan is designed to protect stockholders and maximize
stockholder value in the event of an unsolicited takeover proposal by
encouraging a prospective acquirer to negotiate with the Board.
FINANCIAL RISK MANAGEMENT
The Company does not participate in hedge arrangements, such as forward
contracts, swap agreements, options or other contractual agreements relative to
the impact of market fluctuations on its assets, liabilities, production or
contractual commitments. The Company operates only in the United States, and
therefore, is not subject to foreign currency exchange rate risks.
Interest Rate Risk. The Company does have exposure to market risk that includes
changes in interest rates. Interest rate risk exists because the Company's
financing includes the use of long-term debt obligations with maturity dates up
to 30 years from the date of issue and during the outstanding period interest
rates are subject to fluctuation. The Company's long-term obligations are first
mortgage bonds and senior note obligations that are generally placed with
insurance companies. Washington Water's long-term obligations are for periods of
up to 10 years and are placed with two banks. During 2001, the Company issued a
single series of $20 million, 30-year senior notes at 7.13%. To expand access to
capital debt markets, the Company may investigate the use of private and public
markets for future debt issues. It may also consider financing on a parent
company basis, rather than on a subsidiary-by-subsidiary basis.
The Company's short-term financing is provided by bank lines of credit that
are discussed under the "Liquidity and Capital Resources" section of this
report. Short-term borrowings that are not repaid from operating cash or funded
by retained earnings are generally converted to long-term debt issues. The
Company plans to continue the financing of its construction program in this
manner. Financing of acquisitions has been done using Company common stock or
through the debt financing vehicles available to the subsidiary companies.
Value Risk. Because the Company operates primarily in a regulated industry, its
value risk is somewhat lessened; however, regulated parameters also can be
recognized as limitations to operations and earnings, and the ability to respond
to certain business condition changes. Also, changes in regulatory practices can
impact the Company's operations as was experienced during 2001 when the CPUC
adopted a new policy for recovery of offsetable expenses. Non-regulated
operations are subject to risk of contract constraints and performance by the
Company in achieving its objectives. Value risk management is accomplished using
various financial models that consider changing business parameters. It is also
supplemented by considering various risk control processes that may be available
as circumstances warrant.
Equity Risk. The Company does not have equity investments; therefore, it does
not have equity risks.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations," and Statement No. 142, "Goodwill and Other Intangible
Assets." Statement No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001 as well as for
all purchase method business combinations completed after June 30, 2001.
Statement No. 141 also specifies conditions that intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. Statement No. 142 specifies that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
Statement No. 142. The statement also requires that intangible assets with
determinable useful lives be amortized over their useful lives to their
estimated residual values and reviewed for impairment. Statement No. 142 is
effective for the Company on January 1, 2002. Its adoption is not expected to
have a material impact on the Company's financial position or results of
operations.
45
In June 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" of long-lived assets was issued.
The statement is effective for fiscal years beginning after June 15, 2002. The
Company has not yet completed a full review of the impact that adopting the
statement will have on its financial position or results of operations, and
therefore is unable to state the impact that adopting the statement will have on
its financial position or results of operations.
In August 2001, Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," was issued. The statement sets forth
requirements for measuring impairment of a long-lived asset that is defined as
the condition that exists when the carrying amount of a long-lived asset exceeds
its fair value. The statement also establishes criteria in which an impairment
loss must be recognized. The Company has not yet completed a full assessment of
the impact of adopting this statement, and therefore is uncertain as to the
impact that adopting the statement will have on its financial position or
results of operations. The statement is effective for the Company on January 1,
2002.
46
Consolidated Balance Sheet
In thousands, except per share data
December 31, 2001 and 2000 2001 2000
ASSETS
Utility plant:
Land $ 10,709 $ 10,641
Depreciable plant and equipment 859,846 797,403
Construction work in progress 26,826 31,400
Intangible assets 12,277 11,837
--------------------
Total utility plant 909,658 851,281
Less accumulated depreciation and amortization 285,316 268,499
--------------------
Net utility plant 624,342 582,782
--------------------
Current assets:
Cash and cash equivalents 953 3,241
Receivables:
Customers 14,572 15,163
Other 8,228 5,450
Unbilled revenue 7,291 7,964
Materials and supplies at average cost 2,147 2,718
Taxes and other prepaid expenses 7,224 5,483
--------------------
Total current assets 40,415 40,019
--------------------
Other assets:
Regulatory assets 38,893 38,133
Unamortized debt premium and expense 3,800 3,817
Other 2,764 1,854
--------------------
Total other assets 45,457 43,804
--------------------
$710,214 $666,605
--------------------
47
2001 2000
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $.01 par value; 25,000 shares authorized, 15,182 and $ 152 $ 151
15,146 shares outstanding in 2001 and 2000, respectively
Additional paid-in capital 49,984 49,984
Retained earnings 147,299 149,185
Accumulated other comprehensive loss (816) (486)
---------------------
Total common stockholders' equity 196,619 198,834
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 202,600 187,098
---------------------
Total capitalization 402,694 389,407
---------------------
Current liabilities:
Current maturities of long-term debt 5,381 2,881
Short-term borrowings 22,000 14,598
Accounts payable 24,032 26,493
Accrued taxes 3,813 3,976
Accrued interest 2,535 2,579
Other accrued liabilities 21,228 13,209
---------------------
Total current liabilities 78,989 63,736
---------------------
Unamortized investment tax credits 2,882 2,989
Deferred income taxes 28,816 25,620
Regulatory and other liabilities 20,680 20,316
Advances for construction 106,657 105,562
Contributions in aid of construction 69,496 58,975
Commitments
---------------------
$710,214 $666,605
---------------------
See accompanying notes to consolidated financial statements.
48
Consolidated Statement of Income
In thousands, except per share data
For the years ended December 31, 2001, 2000 and 1999
2001 2000 1999
Operating revenue $246,820 $244,806 $234,937
------------------------------
Operating expenses:
Operations:
Purchased water 73,174 73,768 69,351
Purchased power 21,130 15,136 14,355
Pump taxes 5,910 6,275 6,856
Administrative and general 36,521 32,974 32,266
Other 34,109 32,308 28,963
Maintenance 12,131 11,592 10,200
Depreciation and amortization 19,226 18,368 17,246
Income taxes 9,728 11,571 13,515
Property and other taxes 9,740 9,618 9,138
------------------------------
Total operating expenses 221,669 211,610 201,890
------------------------------
Net operating income 25,151 33,196 33,047
Other income and expenses, net 5,843 1,413 3,089
------------------------------
Income before interest expense 30,994 34,609 36,136
------------------------------
Interest expense:
Long-term debt interest 14,187 12,901 13,084
Other interest 1,842 1,745 1,081
------------------------------
Total interest expense 16,029 14,646 14,165
------------------------------
Net income $ 14,965 $ 19,963 $ 21,971
------------------------------
Earnings per share:
Basic $ 0.98 $ 1.31 $ 1.45
------------------------------
Diluted $ 0.97 $ 1.31 $ 1.44
------------------------------
Weighted average number of common shares outstanding:
Basic 15,182 15,126 15,090
------------------------------
Diluted 15,285 15,173 15,142
------------------------------
See accompanying notes to consolidated financial statements.
49
Consolidated Statement of Common Stockholders' Equity
and Comprehensive Income
For the years ended December 31, 2001, 2000 and 1999
In thousands Accumulated
Additional Other Total Total
Common Paid-in Retained Comprehensive Stockholders' Comprehensive
Stock Capital Earnings Income (Loss) Equity Income
Balance at December 31, 1998 $ 150 $ 48,372 $ 139,054 $ -- $ 187,576 $ --
--------------------------------------------------------------------------------------
Issuance of common stock 1 968 -- -- 969 --
Net income -- -- 21,971 -- 21,971 21,971
Dividends paid:
Preferred stock -- -- 153 -- 153 --
Common stock -- -- 15,262 -- 15,262 --
--------------------------------------------------------------------------------------
Total dividends paid -- -- 15,415 -- 15,415 --
Other comprehensive loss -- -- -- (517) (517) (517)
--------------------------------------------------------------------------------------
Balance at December 31, 1999 151 49,340 145,610 (517) 194,584 21,454
--------------------------------------------------------------------------------------
Issuance of common stock -- 644 -- -- 644 --
Net income -- -- 19,963 -- 19,963 19,963
Dividends paid:
Preferred stock -- -- 152 -- 152 --
Common stock -- -- 16,236 -- 16,236 --
--------------------------------------------------------------------------------------
Total dividends paid -- -- 16,388 -- 16,388 --
Other comprehensive income -- -- -- 31 31 31
--------------------------------------------------------------------------------------
Balance at December 31, 2000 151 49,984 149,185 (486) 198,834 19,994
--------------------------------------------------------------------------------------
Acquisition 1 -- 220 -- 221 --
Net income -- -- 14,965 -- 14,965 14,965
Dividends paid:
Preferred stock -- -- 153 -- 153 --
Common stock -- -- 16,918 -- 16,918 --
--------------------------------------------------------------------------------------
Total dividends paid -- -- 17,071 -- 17,071 --
Other comprehensive loss -- -- -- (330) (330) (330)
--------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 152 $ 49,984 $ 147,299 $ (816) $ 196,619 $ 14,635
--------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
50
Consolidated Statement of Cash Flows
In thousands
For the years ended December 31, 2001, 2000, 1999 2001 2000 1999
Operating activities:
Net income $ 14,965 $ 19,963 $ 21,971
--------------------------------------
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 19,226 18,368 17,246
Deferred income taxes, investment tax credits, and
regulatory assets and liabilities, net 2,919 (3,203) 1,360
Changes in operating assets and liabilities
Receivables (2,186) (1,503) (2,324)
Unbilled revenue 673 235 (1,187)
Accounts payable (2,461) (255) 7,623
Other current assets and liabilities 6,642 1,093 (649)
Other changes, net (1,191) (71) 3,334
--------------------------------------
Net adjustments 23,622 14,664 25,403
--------------------------------------
Net cash provided by operating activities 38,587 34,627 47,374
--------------------------------------
Investing activities:
Utility plant expenditures
Company funded (53,379) (33,540) (35,535)
Developer advances and contributions in aid of construction (8,670) (3,621) (12,984)
Other investments -- -- (80)
--------------------------------------
Net cash used in investing activities (62,049) (37,161) (48,599)
--------------------------------------
Financing activities:
Net short-term borrowings 7,402 599 (8,951)
Issuance of common stock -- 644 46
Issuance of long-term debt 20,524 20,326 20,062
Advances for construction 6,498 3,846 7,480
Refunds of advances for construction (4,166) (3,870) (4,056)
Contributions in aid of construction 10,868 1,883 4,814
Retirement of long-term debt (2,881) (2,920) (2,318)
Dividends paid (17,071) (16,388) (15,415)
--------------------------------------
Net cash provided by financing activities 21,174 4,120 1,662
--------------------------------------
Change in cash and cash equivalents (2,288) 1,586 437
Cash and cash equivalents at beginning of year 3,241 1,655 1,218
--------------------------------------
Cash and cash equivalents at end of year $ 953 $ 3,241 $ 1,655
--------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 14,378 $ 14,785 $ 13,796
Income taxes 6,238 11,775 11,499
Non-cash financing activity - common stock issued in acquisitions 899 -- 922
See accompanying notes to consolidated financial statements.
51
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
NOTE 1. ORGANIZATION AND OPERATIONS
California Water Service Group (Company) is a holding company incorporated in
Delaware that through its wholly owned subsidiaries provides water utility and
other related services in California, Washington and New Mexico. California
Water Service Company (Cal Water) and Washington Water Service Company
(Washington Water) provide regulated utility services under the rules and
regulations of their respective regulatory commissions (jointly referred to as
Commissions). CWS Utility Services provides non-regulated water utility and
utility-related services in all three states. New Mexico Water Service Company
was formed in 2000 to provide regulated utility services.
The Company operates primarily in one business segment, providing water and
related utility services.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. The financial statements give retroactive effect
to acquisitions, accounted for as pooling of interests. Accordingly, the
Company's consolidated financial statements and footnotes have been restated to
include Dominguez Services Corporation and subsidiaries (Dominguez), which was
merged into the Company on May 25, 2000, as if the merger had been completed as
of the beginning of the earliest period presented. Intercompany transactions and
balances have been eliminated.
The accounting records of the Company are maintained in accordance with the
uniform system of accounts prescribed by the Commissions. Certain prior years'
amounts have been reclassified, where necessary, to conform to the current
presentation.
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue: Revenue consists of monthly cycle customer billings for regulated water
service at rates authorized by the Commissions and billings to certain
non-regulated customers. Revenue from metered accounts includes unbilled amounts
based on the estimated usage from the latest meter reading to the end of the
accounting period. Flat-rate accounts, which are billed at the beginning of the
service period, are included in revenue on a pro rata basis for the portion
applicable to the current accounting period. The unearned portion is deferred
into the following accounting period.
Expense balancing accounts are used to track suppliers' rate increases for
purchased water, purchased power and pump taxes that are not included in
customer water rates. The cost increases are referred to as "Offsetable
Expenses" because under certain circumstances they are recoverable from
customers in future rate increases designed to offset the higher costs. The
Company does not record the balancing accounts until the CPUC has authorized a
change in customer rates and the customer has been billed.
Utility Plant: Utility plant is carried at original cost when first constructed
or purchased, except for certain minor units of property recorded at estimated
fair values at 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 is charged primarily to
operation expenses. Interest is capitalized on plant expenditures during the
construction period and amounted to $858,000 in 2001, $703,000 in 2000 and
$324,000 in 1999.
Intangible assets acquired as part of water systems purchased are stated at
amounts as prescribed by the Commissions. All other intangibles have been
recorded at cost. 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 Company continually evaluates the recoverability of utility
plant by assessing whether the amortization of the balance over the remaining
life can be recovered through the expected and undiscounted future cash flows.
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 2.4% in 2001 and 2000, and 2.5% in 1999. For income tax purposes,
as applicable, the Company computes depreciation using the accelerated methods
allowed by the respective taxing authorities. Plant additions since June 1996
are depreciated on a straight-line basis for tax purposes in accordance with tax
regulations.
Cash Equivalents: Cash equivalents include highly liquid investments, primarily
U.S. Treasury and U.S. Government agency interest-bearing securities, stated at
cost with original maturities of three months or less.
52
Restricted Cash: Restricted cash represents proceeds collected through a
surcharge on certain customers' bills plus interest earned on the proceeds. The
restricted cash is to service California Safe Drinking Water Bond obligations
and is classified in other prepaid expenses. At December 31, 2001 and 2000, the
amounts restricted were $887,000 and $755,000, respectively.
Regulatory Assets: The Company records regulatory assets for future revenues
expected to be realized as the tax effects of certain temporary differences
previously passed through to customers reverse. The temporary differences relate
primarily to the difference between book and income tax depreciation on utility
plant that was placed in service before the regulatory Commissions adopted
normalization for ratemaking purposes. The regulatory assets are net of revenue
related to deferred income taxes that were provided at prior tax rates and the
amount that would be provided at current tax rates. The differences will reverse
over the remaining book lives of the related assets.
Long-term Debt Premium, Discount and Expense: The discount and issuance expense
on long-term debt is amortized over the original lives of the related debt
issues. Premiums paid on the early redemption of certain debt issues and
unamortized original issue discount and expense of such issues are amortized
over the life of new debt issued in conjunction with the early redemption.
Accumulated Other Comprehensive Loss: The Company has an unfunded Supplemental
Executive Retirement Plan. The unfunded accumulated benefit obligation of the
plan exceeds the accrued benefit cost. This amount exceeds the unrecognized
prior service cost; therefore accumulated other comprehensive loss has been
recorded (net of income tax) as a separate component of Stockholders' Equity.
Advances for Construction: Advances for construction consist of payments
received from developers for installation of water production and distribution
facilities to serve new developments. Advances are excluded from rate base for
rate setting purposes. Annual refunds are made to developers without interest
over a 20-year or 40-year period. Refund amounts under the 20-year contracts are
based on annual revenues from the extensions. Unrefunded balances at the end of
the contract period are credited to Contributions in Aid of Construction and are
no longer refundable. Refunds on contracts entered into since 1982 are made in
equal annual amounts over 40 years. At December 31, 2001, the amounts refundable
under the 20-year contracts were $4,320,000 and under 40-year contracts were
$102,337,000. Estimated refunds for 2002 for all water main extension contracts
are $4,475,000.
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 Company accounts for income taxes using the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Measurement of the deferred tax assets and liabilities is
at enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date.
It is anticipated that future rate action by the Commissions will reflect
revenue requirements for the tax effects of temporary differences recognized,
which have previously been flowed through to customers. The Commissions have
granted the Company 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 for book purposes.
Advances for construction and contributions in aid of construction received
from developers subsequent to 1986 were taxable for federal income tax purposes
and subsequent to 1991 were subject to California income tax. In 1996 the
federal tax law, and in 1997 the California tax law, changed and only deposits
for new services were taxable. In late 2000, federal regulations were further
modified to exclude fire services from tax.
Earnings Per Share: Basic earnings per share (EPS) is calculated by dividing
income available to common stockholders by the weighted average shares
outstanding during the year. Diluted EPS is calculated by dividing income
available to common stockholders by the weighted average shares outstanding and
potentially dilutive shares.
Stock-based Compensation: The Company adopted Statement on Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation." The Company elected
to adopt the provision of the statement that allows the continuing practice of
not recognizing compensation expense related to the granting of employee stock
options to the extent that the option price of the underlying stock was equal to
or greater than the market price on the date of the option grant.
Business Combinations: In July 2001, the Financial Accounting Standards Board
issued Statement No. 141, "Business Combinations." Statement No. 141 requires
that the purchase method of accounting be used for all business combinations
after June 30, 2001. Statement No. 141 also specifies conditions that intangible
assets acquired in a purchase method of business
53
combinations must meet to be recognized and reported apart from goodwill. The
Company adopted Statement No. 141 immediately. The Company is not involved in a
business combination initiated prior to July 1, 2001 that would be accounted for
using the pooling-of-interest method.
NOTE 3. MERGER WITH DOMINGUEZ SERVICES CORPORATION
The Merger between the Company and Dominguez was completed on May 25, 2000. On
the merger date, each outstanding Dominguez common share was exchanged for 1.38
shares of Company common stock. The Company issued 2,210,254 new common shares
in exchange for the 1,601,679 outstanding Dominguez shares. Dominguez provided
water service to about 40,000 customers in 21 California communities. The former
Dominguez operations became districts within Cal Water.
The Merger was accounted for as a pooling of interests. There were no
intercompany transactions as a result of the Merger. Certain reclassifications
were made to the historic financial statements of the companies to conform
presentation.
For the periods indicated below, the Company and Dominguez reported the
following items:
6 Months Year
Ended Ended
Unaudited - In thousands 6-30-00 12-31-99
Revenue:
Company $ 98,428 $206,440
Dominguez 14,232 28,497
--------------------------
$112,660 $234,937
Net income:
Company $ 6,139 $ 19,919
Dominguez 1,147 2,052
--------------------------
$ 7,286 $ 21,971
--------------------------
No adjustments were made to the Dominguez net assets in applying the
accounting practices of the Company. Dominguez previously reported common stock
of $1,542,000 that was reclassified by the Company to "Paid-in-Capital" in
accordance with the Company's financial statement presentation. The Company and
Dominguez each had December 31 year-ends; therefore no adjustment was required
to retained earnings due to a change in fiscal year-ends.
NOTE 4. OTHER ACQUISITIONS
In 2001, the Company acquired four companies operating in the Company's Visalia
district. The companies serve 1,100 customers. The acquisitions were completed
in February 2001, in exchange for 36,180 shares of Company common stock worth
$899,000 and assumed debt of $218,000. The acquisitions were accounted for under
the pooling of interests method; however, due to the results from operations not
being material to the Company's consolidated results from operations, prior
periods were not restated. The net equity acquired was recorded as an increase
to retained earnings at the beginning of the year. In addition, the Company
purchased the assets of seven Washington water systems for cash of $701,000. The
acquired companies serve approximately 700 customers and produce annual revenue
of about $270,000. The acquisitions were accounted for under purchase
accounting.
During 2000, the Company purchased the assets of Mirrormount Water Services
and Lacamas Farmsteads Water Company for $639,000 in cash and assumed debt.
Together the companies serve almost 800 customers and produce annual revenue of
about $250,000. To provide in-house engineering, Washington Water also purchased
the assets of Robischon Engineers, Inc. in April 2000 for $70,000 in cash. The
acquisitions were accounted for under purchase accounting.
During 1999, the Company acquired all of the outstanding stock of Harbor
Water Company and South Sound Utility Company, which form the operations of
Washington Water, serving 14,900 regulated and non-regulated customers. The
acquisitions were accounted for under the pooling of interests method in
exchange for 316,472 shares of Company stock and assumption of long-term debt of
$2,959,000. The results of operations previously reported by the separate
entities are included in the accompanying consolidated financial statements. Two
other water company asset acquisitions were completed in 1999. The acquired
companies served 288 customers. The acquisitions were accounted for under
purchase accounting.
During 1998, the Company agreed to purchase the assets of Lucerne Water
Company, Rancho del Paradiso Water Company and Armstrong Valley Water Company.
These investor-owned systems serve 1,624 accounts. The acquisitions were
completed effective January 1, 1999, in exchange for the equivalent of 75,164
shares of Company common stock. The acquisitions were accounted for under
purchase accounting. The purchases were completed on a non-cash basis in which
the Company issued common stock valued at $922,000 and assumed debt obligations
of $1,108,000.
New Mexico Water has agreed to acquire the Rio Grande Utility Corporation,
which serves 2,300 water and 1,600 wastewater customers, for $2.3 million in
cash and assumed debt of $3.1 million. The acquisition is expected to be
completed in the second quarter of 2002 after approval of the state's regulatory
authority is received.
54
NOTE 5. PREFERRED STOCK
As of December 31, 2001 and 2000, 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
election 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.
NOTE 6. COMMON STOCKHOLDERS' EQUITY
The Company is authorized to issue 25,000,000 shares of $.01 par value common
stock. As of December 31, 2001 and 2000, 15,182,046 and 15,145,866 shares of
common stock were issued and outstanding, respectively. All shares of common
stock are eligible to participate in the Company's dividend reinvestment plan.
Approximately 10% of the outstanding shares participate in the plan.
Stockholder Rights Plan: The Company's Stockholder Rights Plan (Plan) is
designed to provide stockholders protection and to maximize stockholder value by
encouraging a prospective acquirer to negotiate with the Board. The Plan was
adopted in 1998 and authorized a dividend distribution of one right (Right) to
purchase 1/100th share of Series D Preferred Stock for each outstanding share of
Common Stock in certain circumstances. The Rights are for a ten-year period that
expires in February 2008.
Each Right represents a right to purchase 1/100th share of Series D
Preferred Stock at the price of $120, subject to adjustment (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 stockholder election. The Rights become exercisable upon occurrence of a
Distribution Date. A Distribution Date event occurs if (a) any person
accumulates 15% of the then outstanding Common Stock, (b) any person presents a
tender offer which causes the person's ownership level to exceed 15% and the
Board determines the tender offer not to be fair to the Company's stockholders,
or (c) the Board determines that a stockholder maintaining a 10% interest in the
Common Stock could have an adverse impact on the Company or could attempt to
pressure the Company to repurchase the 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) the Company would distribute separate Rights Certificates to Common
Stockholders and the Rights would subsequently trade separate from the Common
Stock; and (b) each holder of a Right, other than the acquiring person (whose
Rights would thereafter be void), would have the right to receive upon exercise
at its then current Purchase Price that number of shares of Common Stock having
a market value of two times the Purchase Price of the Right. If the Company
merges into the acquiring person or enters into any transaction that unfairly
favors the acquiring person or disfavors the Company's other stockholders, the
Right becomes a right to purchase Common Stock of the acquiring person having a
market value of two times the Purchase Price.
The Board may determine that in certain circumstances a proposal that would
cause a Distribution Date is in the Company stockholders' best interest.
Therefore, the Board may, at its option, redeem the Rights at a redemption price
of $.001 per Right.
NOTE 7. SHORT-TERM BORROWINGS
As of December 31, 2001, the Company maintained a bank line of credit providing
unsecured borrowings of up to $10,000,000 at the prime lending rate or lower
rates as quoted by the bank. Approximately $7,562,000 of the line is committed
to a contractor for construction of an office complex for combined Los Angeles
South Bay operations. When completed, the office complex will be exchanged with
the contractor for surplus Company-owned land on a tax-free basis. Cal Water
maintained a bank line of credit for an additional $50,000,000 on the same terms
as the Company. The line of credit agreements, which expire in April 2003 and
which the Company expects to renew, do not require minimum or specific
compensating balances. Washington Water has a $0.1 million bank line of credit
with nothing outstanding at December 31, 2001.
The following table represents borrowings under the bank lines of credit:
Dollars in thousands 2001 2000 1999
Maximum short-term borrowings $36,800 $26,750 $25,500
Average amount outstanding 24,453 16,810 9,093
Weighted average interest rate 5.29% 7.77% 6.52%
Interest rate at December 31 3.16% 7.88% 7.11%
55
NOTE 8. LONG-TERM DEBT
As of December 31, 2001 and 2000, long-term debt outstanding was:
Interest Maturity
In thousands Series Rate Date 2001 2000
First Mortgage Bonds: J 8.86% 2023 $ 4,000 $ 4,000
K 6.94% 2012 5,000 5,000
P 7.875% 2002 2,565 2,580
S 8.50% 2003 2,580 2,595
BB 9.48% 2008 11,520 13,230
CC 9.86% 2020 18,500 18,600
DD 8.63% 2022 19,100 19,200
EE 7.90% 2023 19,200 19,300
FF 6.95% 2023 19,200 19,300
GG 6.98% 2023 19,200 19,300
---------------------
120,865 123,105
Senior Notes: A 7.28% 2025 20,000 20,000
B 6.77% 2028 20,000 20,000
C 8.15% 2030 20,000 20,000
D 7.13% 2031 20,000 --
California Department of 3.0% to
Water Resources loans 8.1% 2011-32 2,886 3,176
Other long-term debt 4,230 3,698
---------------------
Total long-term debt 207,981 189,979
Less current maturities 5,381 2,881
---------------------
Long-term debt excluding current maturities $202,600 $187,098
---------------------
The first mortgage bonds are obligations of Cal Water. All bonds are held
by institutional investors and secured by substantially all of Cal Water's
utility plant. The unsecured senior notes are also obligations of Cal Water.
They are held by institutional investors and require interest-only payments
until maturity. The Department of Water Resources (DWR) loans were financed
under the California Safe Drinking Water Bond Act. Repayment of principal and
interest on the DWR loans is through a surcharge on customer bills. Other
long-term debt is primarily equipment and system acquisition financing
arrangements with financial institutions. Aggregate maturities and sinking fund
requirements for each of the succeeding five years (2002 through 2006) are
$5,381,000, $5,204,000, $2,579,000 $2,579,000, and $2,605,000.
NOTE 9. INCOME TAXES
Income tax expense consists of the following:
In thousands Federal State Total
2001 Current $ 6,472 $2,136 $ 8,608
Deferred 1,456 (336) 1,120
----------------------------------
Total $ 7,928 $1,800 $ 9,728
---------------------------------
2000 Current $ 7,961 $2,519 $10,480
Deferred 1,554 (463) 1,091
----------------------------------
Total $ 9,515 $2,056 $11,571
---------------------------------
1999 Current $ 8,291 $2,560 $10,851
Deferred 2,769 (105) 2,664
---------------------------------
Total $11,060 $2,455 $13,515
---------------------------------
Income tax expense computed by applying the current federal 35% tax rate to
pretax book income differs from the amount shown in the Consolidated Statement
of Income. The difference is reconciled in the table below:
56
In thousands 2001 2000 1999
Computed "expected" tax expense $8,643 $11,037 $12,420
Increase (reduction) in taxes due to:
State income taxes net of federal tax benefit 1,170 1,336 1,624
Investment tax credits (156) (155) (184)
Other 71 (647) (345)
--------------------------------
Total income tax $9,728 $11,571 $13,515
--------------------------------
The components of deferred income tax expense were:
In thousands 2001 2000 1999
Depreciation $2,337 $2,031 $2,974
Developer advances and contributions (783) (814) (749)
Bond redemption premiums (42) (61) (62)
Investment tax credits (94) (61) (94)
Other (298) (4) 595
--------------------------------
Total deferred income tax expense $1,120 $1,091 $2,664
--------------------------------
The tax effects of differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 2001 and
2000 are presented in the following table:
In thousands 2001 2000
Deferred tax assets:
Developer deposits for extension agreements and contributions
in aid of construction $41,531 $40,458
Federal benefit of state tax deductions 5,744 5,648
Book plant cost reduction for future deferred ITC amortization 1,703 1,765
Insurance loss provisions 537 632
Pension plan 938 736
Other 868 4,860
--------------------
Total deferred tax assets 51,321 54,099
--------------------
Deferred tax liabilities:
Utility plant, principally due to depreciation differences 79,348 78,894
Premium on early retirement of bonds 789 825
--------------------
Total deferred tax liabilities 80,137 79,719
--------------------
Net deferred tax liabilities $28,816 $25,620
--------------------
A valuation allowance was not required during 2001 and 2000. Based on
historic taxable income and future taxable income projections over the period in
which the deferred assets are deductible, management believes it is more likely
than not that the Company will realize the benefits of the deductible
differences.
NOTE 10. EMPLOYEE BENEFIT PLANS
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,
bonds and short-term investment accounts. The data below includes the unfunded,
non-qualified, supplemental executive retirement plan.
Benefits earned by Dominguez employees under the Dominguez pension plan
were frozen as of the merger date and future pension benefits to those employees
will be provided under the Company pension plan. The Dominguez plan was fully
funded and additional contributions to the plan could not be funded, although
plan annual expense was recorded. At the merger date, the Dominguez plan was
curtailed. As a result of the curtailment, accrued pension liability of
$1,218,000 that had been expensed by Dominguez in prior years was reversed by
the Company in 2000. The amount was offset against other operations expense.
Savings Plan: The Company sponsors a 401(k) qualified, defined contribution
savings plan that allowed participants to contribute up to 18% of pre-tax
compensation in 2001 and 2000, and 15% in 1999. The Company matches fifty cents
for each dollar
57
contributed by the employee up to a maximum Company match of 4%. Company
contributions were $1,425,000, $1,298,000, and $1,126,000, for the years 2001,
2000 and 1999.
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 payment of a premium. Retired employees are also provided with a $5,000
life insurance benefit. Plan assets are invested in mutual funds, short-term
money market instruments and commercial paper.
The Company records the costs of postretirement benefits during the
employees' years of active service. The Commissions have issued decisions that
authorize rate recovery of tax deductible funding of postretirement benefits and
permit recording of a regulatory asset for the portion of costs that will be
recoverable in future rates.
The following table reconciles the funded status of the plans with the
accrued pension liability and the net postretirement benefit liability as of
December 31, 2001 and 2000:
Pension Benefits Other Benefits
---------------- --------------
In thousands 2001 2000 2001 2000
Change in benefit obligation:
Beginning of year $ 59,098 $ 55,692 $ 12,052 $ 10,195
Service cost 2,786 2,846 625 544
Interest cost 4,333 4,079 858 790
Assumption change 1,326 825 1,943 394
Plan amendment 11 1,215 -- --
Experience (gain) or loss 2,289 (34) 15 558
Curtailment gain -- (1,347) -- --
Benefits paid (9,484) (4,178) (785) (429)
--------------------------------------------------------
End of year $ 60,359 $ 59,098 $ 14,708 $ 12,052
--------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 63,648 $ 61,008 $ 2,067 $ 1,561
Actual return on plan assets 1,356 3,140 237 228
Employer contributions 1,820 3,678 781 707
Retiree contributions -- -- 415 370
Benefits paid (9,484) (4,178) (1,201) (799)
--------------------------------------------------------
Fair value of plan assets at end of year $ 57,340 $ 63,648 $ 2,299 $ 2,067
--------------------------------------------------------
Funded status $ (3,019) $ 4,550 $(12,408) $ (9,985)
Unrecognized actuarial (gain) or loss (6,191) (13,534) 3,339 1,422
Unrecognized prior service cost 4,525 5,279 817 888
Unrecognized transition obligation -- -- 3,321 3,597
Unrecognized net initial asset -- 228 (276) (276)
--------------------------------------------------------
Net amount recognized $ (4,685) $ (3,477) $ (5,207) $ (4,354)
--------------------------------------------------------
Amounts recognized on the balance sheet consist of:
Pension Benefits Other Benefits
---------------- --------------
2001 2000 2001 2000
Accrued benefit costs $ (4,685) $ (3,477) $ (5,207) $ (4,354)
Additional minimum liability (1,396) (1,363) -- --
Intangible asset 580 877 -- --
Accumulated other comprehensive loss 816 486 -- --
--------------------------------------------------------
Net amount recognized $ (4,685) $ (3,477) $ (5,207) $ (4,354)
--------------------------------------------------------
Pension Benefits Other Benefits
---------------- --------------
2001 2000 2001 2000
Weighted average assumptions as of December 31:
Discount rate 7.00% 7.25% 7.00% 7.25%
Long-term rate of return on plan assets 8.00% 8.00% 8.00% 8.00%
Rate of compensation increases 4.25% 4.50% -- --
58
Net periodic benefit costs for the pension and other postretirement plans
for the years ending December 31, 2001, 2000 and 1999 included the following
components:
Pension Benefits Other Benefits
-----------------------------------------------------------------------------
In thousands 2001 2000 1999 2001 2000 1999
Service cost $ 2,786 $ 2,846 $ 2,899 $ 625 $ 544 $ 498
Interest cost 4,333 4,079 3,894 858 790 689
Expected return on plan assets (4,946) (4,498) (4,450) (212) (152) (144)
Net amortization and deferral 855 486 871 363 357 401
-----------------------------------------------------------------------------
Net periodic benefit cost $ 3,028 $ 2,913 $ 3,214 $ 1,634 $ 1,539 $ 1,444
-----------------------------------------------------------------------------
Postretirement benefit expense recorded in 2001, 2000, and 1999 was
$885,000, $781,000, and $1,064,000, respectively. $4,186,000, 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 2001 measurement purposes, the Company assumed an 8% annual rate of
increase in the per capita cost of covered benefits with the rate decreasing 1%
per year to a long-term annual rate of 5% per year after three years. The health
care cost trend rate assumption has a significant effect on the amounts
reported. A one-percentage point change in assumed health care cost trends is
estimated to have the following effect:
In thousands Increase Decrease
Effect on total service and interest costs $ 278 $ (220)
Effect on accumulated postretirement benefit obligation 2,350 (1,904)
NOTE 11. STOCK-BASED COMPENSATION PLANS
At the Company's 2000 annual meeting, stockholders approved a Long-Term
Incentive Plan that allows granting of nonqualified stock options, performance
shares and dividend units. Under the plan, a total of 1,500,000 common shares
are authorized for option grants. Options are granted at an exercise price that
is not less than the per share common stock market price on the date of grant.
The options vest at a 25% rate on their anniversary date over their first four
years and are exercisable over a ten-year period. At December 31, 2001, 11,875
options were vested.
Certain key Dominguez executives participated in the Dominguez 1997 Stock
Incentive Plan that was terminated at the time Dominguez merged with the
Company. The plan provided that in the event of a merger of Dominguez into
another entity, granted but unexercised stock options issued became exercisable.
Prior to the Merger, all outstanding Dominguez options were exercised and
converted into Dominguez shares, and subsequently converted to 52,357 shares of
Company common stock.
Under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company
elected to apply the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, no compensation cost has been recognized in
the consolidated financial statements for stock options that have been granted.
If the Company had elected to adopt the optional recognition provisions of SFAS
No. 123 for its stock option plans, basic and diluted earnings per share would
be unchanged from the amounts reported, except for 2000 diluted earnings per
share which was reported as $1.31, but on a pro forma basis would be $1.30. Net
income for the years ended December 31, 2001, 2000 and 1999 would be as
presented in the following table:
In thousands 2001 2000 1999
As reported $14,965 $19,963 $21,971
Pro forma 14,898 19,939 21,937
The fair value of stock options used to compute pro forma net income and
earnings per share disclosures is the estimated fair value at grant date using
the Black-Scholes option-pricing model with the following assumptions:
2001 2000 1999
Expected dividend 4.3% 4.3% 4.3%
Expected volatility 30.4% 22.0% 22.6%
Risk-free interest rate 4.6% 4.9% 6.2%
Expected holding period in years 5.0 5.0 10.0
59
The following table summarizes the activity for the stock option plans:
Weighted Weighted Weighted
Average Average Average
Exercise Remaining Options Fair
Shares Price Contractual Life Exercisable Value
Outstanding at December 31, 1998 56,221 $23.38 -- 8,901 --
Exercised (3,864) 22.54
-------
Outstanding at December 31, 1999 52,357 23.45 -- 19,092 --
Granted 53,500 23.06 $3.74
Exercised (52,357) 23.45
--------
Outstanding at December 31, 2000 53,500 23.06 9.5 -- --
Granted 58,000 25.94 5.65
Cancelled (12,000) 24.50
--------
Outstanding at December 31, 2001 99,500 24.57 8.8 11,875 --
--------
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
For those financial instruments for which it is practicable to estimate a fair
value, the following methods and assumptions were used. For cash equivalents,
the carrying amount approximates fair value because of the short-term maturity
of the instruments. The fair value of the Company's long-term debt including
current installments is estimated at $214,046,000 as of December 31, 2001, and
$199,890,000 as of December 31, 2000, using a discounted cash flow analysis,
based on the current rates available to the Company for debt of similar
maturities. The fair value of advances for construction contracts is estimated
at $32,000,000 as of December 31, 2001 and $27,000,000 as of December 31, 2000,
based on data provided by brokers.
NOTE 13. COMMITMENTS
The Company leases office facilities in many of its operating districts. The
total paid and charged to operations for such leases was $720,000 in 2001,
$760,000 in 2000, and $663,000 in 1999. Payments under the lease commitments
over the succeeding five years 2002 through 2006 are estimated to be $750,000,
$780,000, $830,000, $867,000 and $911,000. Over the 20-year period through 2022,
payments under lease commitments, assuming renewal of existing or replacement
leases, is estimated to be $21,000,000.
The Company has long-term contracts with two wholesale water suppliers that
require the Company to purchase minimum annual water quantities. Purchases are
priced at the suppliers' then current wholesale water rate. The Company operates
to purchase sufficient water to equal or exceed the minimum quantities under
both contracts. The total paid under the contracts was $6,208,000 in 2001,
$5,400,000 in 2000 and $4,766,000 in 1999. The estimated payments under the
contracts for the five years 2002 through 2006 are estimated to be $7,000,000,
$7,280,000, $7,571,000, $7,874,000 and $8,190,000.
The water supply contract with Stockton East Water District (SEWD) requires
a fixed, annual payment and does not vary with the quantity of water delivered
by the district. Because of the fixed price arrangement, the Company operates to
receive as much water as possible from SEWD in order to minimize the cost of
operating wells to supplement SEWD deliveries. The total paid under the contract
was $3,496,000 in 2001, $3,269,000 in 2000 and $3,086,000 in 1999. Pricing under
the contract varies annually. For 2002, the estimated payment is $3,198,000.
The Company has committed $7.6 million of its $10 million bank credit line
to a contractor for construction of a new operation facility. At December 31,
2001, $6.3 million had been drawn to acquire land and construct the facility.
The amount drawn on the credit line is an obligation of the contractor, but
guaranteed by the Company. The new facility is pledged to the Company as
security for the guarantee. The Company occupied the new facility in January
2002 on a month-to-month rent basis. The Company expects to exchange surplus
real property for the new facility on a tax-free basis after mid-year 2002 at
which time the contractor will repay the construction loan and the Company's
commitment would be extinguished.
60
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's common stock is traded on the New York Stock Exchange under the
symbol "CWT." Quarterly dividends have been paid on common stock for 228
consecutive quarters and the quarterly rate has been increased each year since
1968.
2001 - in thousands except per share amounts First Second Third Fourth
Operating revenue $47,008 $66,958 $76,310 $56,544
Net operating income 3,792 8,050 9,517 3,792
Net income 221 5,764 5,920 3,060
Diluted earnings per share .01 .37 .39 .20
Common stock market price range:
High 28.60 27.70 27.00 27.50
Low 23.38 24.10 23.77 24.00
Dividends paid .27875 .27875 .27875 .27875
2000 - in thousands except per share amounts First Second Third Fourth
Operating revenue $46,694 $65,966 $76,580 $55,566
Net operating income 4,902 8,977 12,782 6,535
Net income 1,533 5,753 9,205 3,472
Diluted earnings per share .10 .38 .60 .23
Common stock market price range:
High 31.38 26.75 26.88 27.81
Low 22.25 21.50 22.50 24.88
Dividends paid .275 .275 .275 .275
61
Independent Auditors' Report
THE 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, 2001 and 2000, and the related
consolidated statements of income, common stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2001. 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.
The consolidated financial statements of California Water Service Group for
the year ended December 31, 1999, have been restated to reflect the
pooling-of-interests transaction with Dominguez Services Corporation and
subsidiaries as described in Note 3 to the consolidated financial statements. We
did not audit the consolidated financial statements of Dominguez Services
Corporation and subsidiaries, which financial statements reflect total revenue
constituting 12.1 percent of the related consolidated total as of December 31,
1999. Those financial statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Dominguez Services Corporation and subsidiaries for the year ended
December 31, 1999, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
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, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Mountain View, California
January 30, 2002
62