Exhibit 13.1
2003 Annual Report
Ten-Year Financial Review
California Water Service Group
(Dollars in thousands, except common share data) 2003 2002 2001 2000 1999
SUMMARY OF OPERATIONS
Operating revenue
Residential $194,903 $184,894 $173,823 $171,234 $163,681
Business 49,666 46,404 44,944 44,211 41,246
Industrial 11,255 11,043 9,907 11,014 12,695
Public authorities 12,789 12,706 11,860 11,609 10,898
Other 8,515 8,104 6,286 6,738 6,417
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Total operating revenue 277,128 263,151 246,820 244,806 234,937
Operating expenses 246,894 232,404 221,116 211,610 201,890
Interest expense, other income and expenses, net 10,817 11,674 10,739 13,233 11,076
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Net income $ 19,417 $ 19,073 $ 14,965 $ 19,963 $ 21,971
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COMMON SHARE DATA
Earnings per share - diluted $ 1.21 $ 1.25 $ 0.97 $ 1.31 $ 1.44
Dividend declared 1.125 1.120 1.115 1.100 1.085
Dividend payout ratio 93% 90% 115% 84% 75%
Book value $ 14.44 $ 13.12 $ 12.95 $ 13.13 $ 12.89
Market price at year-end 27.40 23.65 25.75 27.00 30.31
Common shares outstanding at year-end (in thousands) 16,932 15,182 15,182 15,146 15,094
Return on average common stockholders' equity 9.1% 9.7% 7.6% 10.1% 11.5%
Long-term debt interest coverage 2.78 2.73 2.64 3.31 3.79
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BALANCE SHEET DATA
Net utility plant $759,498 $696,988 $624,342 $582,782 $564,390
Utility plant expenditures 74,253 88,361 62,049 37,161 48,599
Total assets 873,035 798,478 710,214 666,605 645,507
Long-term debt including current portion 273,130 251,365 207,981 189,979 171,613
Capitalization ratios:
Common stockholders' equity 47.0% 44.0% 48.8% 51.1% 53.0%
Preferred stock 0.7% 0.7% 0.9% 0.9% 0.9%
Long-term debt 52.3% 55.3% 50.3% 48.0% 46.1%
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OTHER DATA
Water production (million gallons)
Wells and surface supply 68,416 67,488 65,283 65,408 65,144
Purchased 63,264 64,735 61,343 62,237 58,618
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Total water production 131,680 132,223 126,626 127,645 123,762
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Metered customers 387,579 380,087 371,281 366,242 361,235
Flat-rate customers 78,843 78,901 79,146 78,104 77,892
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Customers at year-end 466,422 458,988 450,427 444,346 439,127
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New customers added 7,434 8,561 6,081 5,219 6,727
Revenue per customer $ 594 $ 579 $ 552 $ 554 $ 539
Utility plant per customer $ 2,313 $ 2,182 $ 2,020 $ 1,916 $ 1,851
Employees at year-end 813 802 783 797 790
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18
1998 1997 1996 1995 1994
SUMMARY OF OPERATIONS
Operating revenue
Residential $150,491 $158,210 $148,313 $132,859 $127,228
Business 38,854 40,520 37,605 35,873 33,712
Industrial 10,150 10,376 9,748 9,952 9,080
Public authorities 9,654 11,173 10,509 9,585 9,397
Other 5,777 4,886 4,083 4,833 3,767
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Total operating revenue 214,926 225,165 210,258 193,102 183,184
Operating expenses 183,245 188,020 177,356 164,958 155,012
Interest expense, other income and expenses, net 11,821 11,388 11,502 11,176 11,537
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Net income $ 19,860 $ 25,757 $ 21,400 $ 16,968 $ 16,635
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COMMON SHARE DATA
Earnings per share - diluted $ 1.31 $ 1.71 $ 1.42 $ 1.13 $ 1.17
Dividend declared 1.070 1.055 1.040 1.020 0.990
Dividend payout ratio 82% 62% 73% 90% 85%
Book value $ 12.49 $ 12.15 $ 11.47 $ 10.97 $ 10.72
Market price at year-end 31.31 29.53 21.00 16.38 16.00
Common shares outstanding at year-end (in thousands) 15,015 15,015 15,015 14,934 14,890
Return on average common stockholders' equity 10.8% 14.5% 12.8% 10.6% 11.1%
Long-term debt interest coverage 3.64 4.37 3.81 3.41 3.49
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BALANCE SHEET DATA
Net utility plant $538,741 $515,917 $495,985 $471,994 $455,769
Utility plant expenditures 41,061 37,511 40,310 31,031 32,435
Total assets 613,143 594,444 569,745 553,027 516,507
Long-term debt including current portion 152,674 153,271 151,725 154,416 138,628
Capitalization ratios:
Common stockholders' equity 54.6% 53.8% 52.7% 50.9% 52.9%
Preferred stock 1.0% 1.0% 1.1% 1.1% 1.2%
Long-term debt 44.4% 45.2% 46.2% 48.0% 45.9%
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OTHER DATA
Water production (million gallons)
Wells and surface supply 57,482 63,736 60,964 54,818 53,274
Purchased 54,661 59,646 56,769 57,560 59,850
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Total water production 112,143 123,382 117,733 112,378 113,124
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Metered customers 354,832 350,139 345,307 335,238 332,146
Flat-rate customers 77,568 77,878 77,991 78,330 79,159
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Customers at year-end, including Hawthorne 432,400 428,017 423,298 413,568 411,305
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New customers added 4,383 4,719 9,730 2,263 3,325
Revenue per customer $ 500 $ 529 $ 502 $ 468 $ 447
Utility plant per customer $ 1,768 $ 1,694 $ 1,632 $ 1,580 $ 1,520
Employees at year-end 759 752 740 738 729
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19
Management's Discussion and Analysis of
Financial Condition and Results of Operations
California Water Service Group
FORWARD-LOOKING STATEMENTS
This annual report, including the Letter to Stockholders and
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, assumes,
anticipates, projects, predicts, forecasts or variations of such words or
similar expressions are intended to identify forward-looking statements. The
forward-looking statements are not guarantees of future performance. They are
subject to uncertainty and changes in circumstances. Actual results may vary
materially from what is contained in a forward-looking statement. Factors that
may cause a result different than expected or anticipated include: governmental
and regulatory commissions' decisions; changes in regulatory commissions'
policies and 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;
fluctuations in interest rates; changes in environmental compliance and water
quality requirements; acquisitions and the ability to successfully integrate
acquired companies; the ability to successfully implement business plans;
changes in customer water use patterns; the impact of weather on water sales and
operating results; access to sufficient capital on satisfactory terms; civil
disturbances or terrorist threats or acts, or apprehension about the possible
future occurrences of acts of this type; the involvement of the United States in
war or other hostilities; restrictive covenants in or changes to the credit
ratings on our current or future debt that could increase our financing costs or
affect our ability to borrow, make payments on debt or pay dividends; and other
risks and unforeseen events. When considering forward-looking statements, you
should keep in mind the cautionary statements included in this paragraph. We
assume no obligation to provide public updates of forward-looking statements.
OVERVIEW
California Water Service Group provides water utility services to
customers in California, Washington, New Mexico and Hawaii. The majority of the
business is regulated by the respective state's public utility commission. Our
California regulated water business comprises the majority of the business and
contributed 96% of our revenues and 84% of our net income in 2003. We also have
a regulated wastewater business in New Mexico. Non-regulated activities we
provide relate primarily to the water utility business and include operating,
maintenance, billing, meter reading and water testing services.
The regulatory entities governing our regulated operations are referred
to as "the Commissions" in this report. Revenues, income and cash flows are
earned primarily through delivering drinking water through pipes to homes and
businesses. Rates charged to customers for the regulated business are determined
by the Commissions. These rates are intended to allow us to recover operating
costs and earn a reasonable rate of return on capital.
Major factors relevant to the drinking water industry and our Company
are: the process and timing of setting rates charged to customers; weather;
water quality standards; other regulatory standards; water supply; water
quality; and level of capital expenditures.
The most significant risk and challenge to our business during the past
several years has been obtaining timely rate increases to cover increased costs
and investments. We are addressing this risk by having an experienced team
dedicated solely to pursuing rate increases and managing Commission issues. Our
business can also be impacted by weather, as it was in 2003. Weather risk is
partially mitigated by having operations in both northern and southern
California, as well as in three other states. Another risk in our industry is
obtaining adequate financing, as the capital expenditures needed for
infrastructure may significantly exceed the cash flow generated by operations.
Management believes that the Company has a strong balance sheet and is capable
of supporting the financing needs of the business through use of debt and
equity. Finally, the water industry is highly regulated, and must comply with a
multitude of standards related to water quality and service. To address
compliance issues, we have a highly trained, focused team that uses
state-of-the-art technology and works closely with government agencies to
monitor supplies and operations.
20
For 2003, net income was $19.4 million compared to $19.1 million in
2002. Diluted earnings per share for 2003 were $1.21 compared to $1.25 in 2002.
The decline in earnings per share was primarily due to delays in receiving rate
relief on our large general rate case filing, higher rainfall which lowered
sales and increased shares outstanding. Partially offsetting these factors were
higher gains from property sales additional revenue from other rate filings, and
increases in customers. We plan to continue to invest in the business, with
budgeted capital expenditures of $66 million for 2004, which we plan to fund
from operating cash flows, additional debt and issuance of common stock.
Overall, we expect our 2004 operational performance and operating cash flows to
improve due to the rate increases approved to date.
BUSINESS
California Water Service Group is a holding company incorporated in
Delaware with five operating subsidiaries: California Water Service Company (Cal
Water), CWS Utility Services (Utility Services), New Mexico Water Service
Company (New Mexico Water), Washington Water Service Company (Washington Water)
and Hawaii Water Service Company, Inc. (Hawaii Water). Cal Water, New Mexico
Water, Washington Water and Hawaii Water are regulated public utilities. The
regulated utility entities also provide some non-regulated services. Utility
Services provides non-regulated services to private companies and
municipalities.
Cal Water, which began operation in 1926, is a public utility supplying
water service to 446,000 customers in 75 California communities through 25
separate districts. Cal Water's 24 regulated systems, which are subject to
regulation by the California Public Utilities Commission (CPUC), serve 439,900
customers. An additional 6,100 customers receive service through a long-term
lease of the City of Hawthorne's system by Cal Water, which is not subject to
CPUC regulation. Cal Water accounts for 96% of the total customers and 96% of
the total operating revenue.
Washington Water started operations in 1999 through the acquisition of
two water companies. It provides domestic water service to 14,700 customers in
the Tacoma and Olympia areas. Washington Water's utility operations are
regulated by the Washington Utilities and Transportation Commission. Washington
Water accounts for 3% of the total customers and 2% of the total operating
revenue.
New Mexico Water began providing non-regulated meter reading services
in 2000, and assumed regulated operations in July 2002 with the purchase of the
assets of Rio Grande Utility Corporation. New Mexico Water provides service to
2,400 water and 1,700 wastewater customers south of Albuquerque, New Mexico. Its
regulated operations are subject to the jurisdiction of the New Mexico Public
Regulation Commission. New Mexico Water accounts for 1% of the total customers
and 1% of the total operating revenue.
Hawaii Water was formed in May 2003 with the acquisition of Kaanapali
Water Corporation. Hawaii Water provides water service to 500 customers on the
island of Maui, including several large resorts and condominium complexes. Its
regulated operations are subject to the jurisdiction of the Hawaii Public
Utilities Commission. Hawaii Water accounts for less than 1% of the total
customers and 1% of the total operating revenue.
Utility Services conducts only non-regulated activities. Included in
Utility Services' operations is a long-term lease agreement with the City of
Commerce, which serves approximately 1,100 customers. Non-regulated activities
are primarily contracted in Utility Services and include contracting with other
private companies and municipalities to operate water systems and provide meter
reading and billing services. Other non-regulated activities include leasing
communication antenna sites, operating recycled water systems, providing
brokerage services for water rights, providing lab services and selling
non-utility property. Due to the different mix of services we provide, customers
are not tracked for non-regulated activities. Excluding sales of non-operating
property, non-regulated activities comprised 6% of the total net income in 2003.
Rates and operations for regulated customers are subject to the
jurisdiction of the respective state's regulatory commission. The Commissions
require that water and wastewater rates for each regulated district be
independently determined. The Commissions are expected to authorize rates
sufficient to recover normal operating expenses and allow the utility to earn a
fair and reasonable return on capital. Rates for the City of Hawthorne and City
of
21
Commerce water systems are established in accordance with operating agreements
and are subject to ratification by the respective city councils. Fees for other
non-regulated activities are based on contracts negotiated between the parties.
RESULTS OF OPERATIONS
Earnings and Dividends. Net income in 2003 was $19.4 million compared
to $19.1 million in 2002 and $15.0 million in 2001. Diluted earnings per common
share were $1.21 in 2003, $1.25 in 2002 and $0.97 in 2001. The weighted average
number of common shares outstanding used in the diluted earnings per share
calculation was 15,893,000 in 2003, 15,185,000 in 2002, and 15,186,000 in 2001.
As explained below, the decline in 2003 earnings per share resulted from these
primary factors: delay in receiving rate relief on a general rate case filing,
lower water sales to existing customers due to weather conditions and increased
shares outstanding. The effects of these factors were almost entirely negated by
higher gains from property sales, additional revenue from other rate increases
and an increase in customers.
At the January 2003 meeting, the Board of Directors declared the
quarterly dividend, increasing it for the 36th consecutive year. Dividends have
been paid for 59 consecutive years. The annual dividend paid in 2003 was $1.125,
a 0.4% increase over the $1.12 paid in 2002, which was an increase of 0.4% over
the $1.115 paid in 2001. The dividend increases were based on projections that
the higher dividend could be sustained while still providing adequate financial
resources and flexibility. Earnings not paid as dividends are reinvested in the
business for the benefit of stockholders. The dividend payout ratio was 93% in
2003, 90% in 2002 and 115% in 2001, an average of 98% during the three-year
period.
Operating Revenue. Operating revenue, which includes revenue from the
City of Hawthorne and City of Commerce leases, was $277.1 million, an increase
of 5.3% over 2002. Operating revenue in 2002 was $263.2 million, an increase of
6.6% over 2001. The sources of changes in operating revenue were:
Dollars in millions 2003 2002
Customer usage $ (4.6) $ 6.9
Rate increases 12.6 6.6
Usage by new customers 6.0 2.8
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Net change $ 14.0 $ 16.3
Average revenue per customer (in dollars) $ 594 $ 579
New customers added 7,400 8,600
Overall, temperatures in our service areas for 2003 were comparable to
2002. Rainfall in our California service areas was higher than normal between
February and April. Partially offsetting higher rainfall in California was lower
rainfall in our Washington service area during the summer, which had a positive
impact on water usage. Higher rainfall in California was the primary factor for
the $4.6 million decrease in revenue from customer usage in 2003. In 2002, the
weather patterns were relatively normal. In 2001, the weather was cooler and
more rainy than normal.
Rate increases added $12.6 million to 2003 revenues. The estimated
impact of various rate increases were: step rate increases - $2.2 million;
Bakersfield treatment plant - $2.3 million; balancing accounts - $1.9 million;
2001 General Rate Case (GRC) - $3.7 million; 2001 GRC "catch-up" surcharges -
$1.3 million; purchased water rate increases - $0.9 million; and Washington
Water rate increases - $0.3 million.
For 2002, rate increases added $6.6 million to revenue. Revenue from
GRC decisions accounted for $2.7 million of the increase, $2.0 million came from
step rate increases and $1.9 million came from offset rate increases to recover
electric costs included in expense-balancing accounts for four California
districts. No new GRC decisions were authorized by the CPUC during 2002.
Washington Water received a GRC decision in 2002. The RATES AND REGULATION
section of this report provides a detailed discussion of regulatory activity.
The December 31, 2003, customer count, including the City of Hawthorne
and City of Commerce customers, was 466,400, an increase of 2% from the 459,000
customers at the end of 2002, which was an increase of
22
2% from the 450,400 customers at the end of 2001. The increase in customers is
due to normal growth within existing service areas and acquisitions of water
systems. The addition of Hawaii Water added 500 customers in 2003 and the
addition of New Mexico Water added 4,100 customers in 2002. These are included
in the customer count increases.
Water Production Expenses. Water production expenses, which consist of
purchased water, purchased power and pump taxes, comprise the largest segment of
total operating costs. Water production costs accounted for 44.2%, 45.6% and
45.3% of total operating costs in 2003, 2002 and 2001, respectively. The rates
charged for wholesale water supplies, electricity and pump taxes are established
by various public agencies. As such, these rates are beyond our control. The
table below provides the amount of increases (decreases) and percent changes in
water production costs during the past two years: Dollars in millions
2003 2002
------------------------- --------------------------
amount change % change amount change % change
Purchased Water $ 80.8 $ 4.1 5% $ 76.7 $ 3.5 5%
Purchased Power 21.9 (1.0) (4%) 22.9 1.8 8%
Pump Taxes 6.3 -- -- 6.3 0.4 7%
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Total Water Production $ 109.0 $ 3.1 3% $ 105.9 $ 5.7 6%
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Two of the principal factors affecting water production expenses are
the amount of water produced and the source of the water. Generally, water from
wells costs less than water purchased from wholesale suppliers. The table below
provides the amounts, percentage change and source mix for the respective years:
Millions of gallons (MG)
2003 2002 2001
--------------------- -------------------- ---------------------
MG % of total MG % of total MG % of total
Source:
Wells 66,009 50.0% 68,663 51.9% 64,646 51.1%
% change from prior year (4%) 6%
Purchased 63,264 48.2% 62,811 47.5% 61,344 48.4%
% change from prior year 1% 2%
Surface 2,407 1.8% 751 0.6% 638 0.5%
% change from prior year 221% 18%
Total 131,680 100.0% 132,225 100.0% 126,628 100.0%
% change from prior year (1%) 4%
Purchased water expenses are affected by quantity changes, supplier
prices and cost differentials between wholesale suppliers. For 2003, the $4.1
million increase in purchased water costs was primarily driven by increased
wholesale rates charged by wholesale suppliers in the Stockton and San Francisco
Bay area districts. Overall, wholesale water rates increased 5%. Purchased power
expenses are affected by water pumped from wells, water moved through the
distribution system, rates charged by electric utility companies and rate
structures applied for usage during peak and non-peak times of the day or
season. The majority of the change in purchased power expenses is attributable
to credits received from the electric utility companies (total of $0.9 million)
and lower quantities of water pumped from wells.
In 2002, four wholesale water suppliers increased their rates, which
increased purchased water costs. The increases ranged from 2% to 5%. One
wholesale supplier reduced its rate by 9%. The 2002 purchased power expense
increase was caused by higher electric rates paid through May 2002 as compared
to 2001's electric rates and a 6% increase in well production. In December 2001,
wholesale suppliers in the Los Angeles area refunded $1.4 million for
over-collection of prior period water purchases. The refunds were recorded as a
reduction of purchased water costs. There were no comparable refunds in 2002.
23
Administrative and General Expenses. The components of administrative
and general expenses include payroll related to administrative and general
functions, all company benefits charged to expense accounts, insurance expense,
legal fees, audit fees, regulatory utility commissions' expenses, board of
directors' fees and general corporate expenses.
During 2003, administrative and general expenses increased $3.8
million, or 10%, compared to 2002. Payroll expenses increased $0.6 million, or
9%, due to the addition of new employees and wage increases. Employee benefits
increased $3.0 million due primarily to increases in retirement plan expense of
$2.3 million (51%) and employee/retiree health expenses of $0.4 million (7%).
The retirement plan cost increase was due primarily to changes in the pension
plan effective January 1, 2003, which will improve benefits to employees. As
part of the negotiations with the unions, lower pay increases were offset by
increased pension benefits. Other expense elements contributed to the balance of
the change, but none were individually significant.
During 2002, administrative and general expenses increased $1.2
million, or 3%, compared to 2001. Payroll expenses increased $1.2 million with
the addition of new employees and wage increases that were effective in January
2002. However, the payroll increase was offset by the reduction of consultants
who worked primarily on information systems projects. Certain consultants were
replaced with permanent employees. As a result of these changes, consulting fees
decreased $2.1 million. Employee benefits increased $2.3 million due to
increases mainly in group health ($0.4 million), workers' compensation ($0.5
million) and retirement plan expenses ($1.3 million). The retirement plan cost
increase was based on an actuarial report that considered asset performance and
the cost of an improvement in the retirement benefit provided to employees.
Partially offsetting these increases was an increased allocation of costs
attributable to non-regulated operations of $0.3 million, which are reported in
a separate line on the Consolidated Statements of Income. These allocations
reduce administrative and general expenses.
Other Operations Expenses. The components of other operations expenses
include payroll, material and supplies, and contract services costs of operating
the regulated water systems, including the costs associated with water
transmission and distribution, pumping, water quality, meter reading, billing
and operations of district offices.
For 2003, other operating expenses increased $3.4 million or 10% from
2002. Payroll costs charged to other operating expenses increased $1.1 million,
or 6%, due to general wage increases, labor related to the Bakersfield Treatment
Plant and labor related to customer service in our district offices. Other major
cost increases were related to lab expenses of $0.5 million (56%), chemicals and
filters of $0.5 million (42%), uncollectible account expense of $0.4 million
(73%) and rent expense of $0.4 million (45%). Other expense elements contributed
to the balance of the change, but none were individually significant.
For 2002, other operating expenses were virtually unchanged compared to
2001. Payroll costs charged to other operating expenses declined approximately
$1.1 million due to synergies realized from combining four Los Angeles operating
districts at one location and by shifting of labor to support the increase in
capital construction projects. Offsetting the decline in labor costs were
increases in non-labor pumping and water quality expenses.
Maintenance. Maintenance expense increased $1.1 million (10%) in 2003
compared to 2002. For 2002, maintenance expense decreased $0.5 million (5%)
compared to 2001. The variance is impacted by a variety of factors. In 2003, we
completed more repairs related to leaks and breaks in mains and service lines.
We also incurred increased maintenance costs for pumps. Additionally, we
expended $0.2 million on a well and treatment plant in the City of Hawthorne.
Depreciation and Amortization. Depreciation and amortization expense
increased due to the level of company-funded capital expenditures. See LIQUIDITY
AND CAPITAL RESOURCES section for more information.
Non-Regulated Income, Net. The major components of non-regulated income
are revenue and expenses related to the following activities: operating and
maintenance services (O&M), meter reading and billing services, leases for
cellular phone antennas, water rights brokering, and design and construction
services. Overall, non-regulated income in 2003 was relatively flat compared to
2002, with increases primarily from O&M and cellular phone antennas offset by
decreases in water rights brokerage income. Water rights brokerage income is
sporadic and is affected by market opportunities and price volatility. See note
3 of the consolidated financial statements for additional information.
24
Gain on Sale of Non-Utility Property. Pretax gains from non-utility
property sales were $4.6 million, $3.0 million, and $3.9 million in 2003, 2002
and 2001, respectively. The 2003 gains were primarily from three properties sold
in the San Francisco Bay area. Earnings and cash flow from these transactions
are sporadic and may or may not continue in future periods depending upon market
conditions. We have other non-utility properties that may be marketed in the
future based on real estate market conditions.
Interest Expense. Interest expense increased by $0.7 million (4%) and
$0.8 million (5%) in 2003 and 2002, respectively. The increased expense was due
primarily to higher borrowing of long-term debt. Refinancing activities and
lower short-term interest rates partially offset the increase in interest
expense. See LIQUIDITY AND CAPITAL RESOURCES section for more information.
RATES AND REGULATION
Following are summaries of approved and pending rate filings. The
amounts reported are annual amounts; therefore, the impact to recorded revenue
will generally be recognized over a twelve-month period from the effective date
of the decision. Most increases are permanent in nature except for the increases
related to the 2001 GRC "catchup" and the offsetable expenses, which have
specific time frames for recovery.
2003 Regulatory Activity - Approved Filings. In January 2003, we
received approval for step rate increases totaling $2.2 million. Step increases
allow recovery of cost increases, primarily from inflation, between GRC filings.
GRC filings are normally made every three years for each district.
In April 2003, the CPUC authorized a second advice letter filing
related to the Bakersfield Treatment Plant. This advice letter allowed an
increase in rates of $1.8 million on an annual basis. The plant became
operational in the second quarter of 2003 and had a total project cost of
approximately $50 million.
In May 2003, the CPUC authorized the recovery of $5.4 million in
offsetable expenses (also known as balancing accounts), of which approximately
$3.6 million will be collected from May 2003 through May 2004 and approximately
$1.8 million will be collected from June 2004 through May 2005. Partially
offsetting this increase is a $0.8 million decrease for one district, effective
from June 2003 through June 2004.
In September 2003, the CPUC approved Cal Water's 2001 GRC applications.
These filings were submitted in July 2001 for 14 of our 24 California districts.
This GRC decision authorizes an 8.9% return on rate base and will add an
estimated $12.8 million to annual revenues. In addition, we received approval to
collect an additional $4.5 million in revenues over 12 months to reflect an
effective date of April 3, 2003. The 2001 GRC also authorized the filing of step
rate increases for $2.7 million annually for 2004 and 2005 that are effective in
January of each year pending approval by the CPUC.
In the September 2003 to December 2003 period, the CPUC approved
increases to recover higher purchased water costs for our districts in the San
Francisco Bay area. The total annual amount of these increases is $4.8 million.
In October 2003, the CPUC authorized a third advice letter filing
related to the Bakersfield Treatment Plant. This allowed an increase in rates of
$4.2 million on an annual basis. Due to depreciation expense for the new plant
beginning in January 2004, only $0.4 million was billed in the October 2003 to
December 2003 period. The full $4.2 million annual amount was effective in
January 2004.
No filings were approved during 2003 for Washington Water, New Mexico
Water or Hawaii Water.
2004 Regulatory Activity - Approved Filings (through February 2004). In
January 2004, we received approval for step rate increases totaling $4.2
million.
In February 2004, the CPUC authorized an advice letter for $0.7 million
for one district related to increased wholesale purchased water rates.
Pending Filings. Annual amounts provided below reflect our requested
increases; the CPUC has historically approved increases that are lower than
those requested.
Cal Water 2002 GRC Applications - Applications have been filed for rate
increases for several districts. As of this report date, the current proposed
settlement is $4.0 million. The amount of the proposed settlement may or
25
may not be adjusted when final decisions are issued by the CPUC. At this time,
we are unable to predict when the final decisions and rulings will be issued,
their composition or their financial impact on revenues for future periods.
Cal Water 2003 GRC Applications - Applications have been filed for rate
increases for two districts totaling approximately $5.7 million on an annual
basis. The amount of the filing may or may not be adjusted when final decisions
are issued by the CPUC. At this time, we are unable to predict when the final
decisions and rulings will be issued, their composition or their financial
impact on revenues for future periods.
Expense Balancing and Memorandum Accounts - Advice letters were filed
for recovery of approximately $5.5 million related to balancing-type memorandum
accounts. During the initial review process, the CPUC raised certain issues,
requiring us to refile our request, which we expect to do in the 1st quarter of
2004. At this time, we cannot predict if adjustments will be made during the
CPUC review process nor can we predict the timing of the decision on the filing.
No filings were pending as of this report date for Washington Water,
New Mexico Water or Hawaii Water. We plan on filing during 2004 for increased
rates for New Mexico Water's wastewater operations and for Hawaii Water. These
filings are not expected to impact 2004 revenues significantly.
2002 Regulatory Activity - Approved. In January 2002, step increases of
$2.0 million were approved by the CPUC.
In April 2002, Washington Water was granted by the Washington Utility
Trade Commission (WUTC) a $1.0 million increase in annual revenue to cover
higher operating costs and capital expenditures.
In June 2002, the CPUC authorized an increase in rates for our
Bakersfield District of $0.8 million on an annual basis related to the new
treatment plant being constructed at that time. This decision was based on an
advice letter filing to cover approximately $6 million of construction costs
incurred as of the filing date.
Regulatory Tardiness and Legislative Initiative. Regulatory delays in
obtaining CPUC decisions regarding GRC filings have been costly to California
regulated water utilities. In recent years, we have experienced significant
revenue losses due to regulatory delays. We normally file GRC applications in
July, but filed later in 2002 and 2003 due to the delays in the 2001 GRC. The
CPUC's rate processing timeline provides for a decision within 12 months of
accepting a GRC application. When decisions are not issued in a timely manner,
customer rates are not increased in line with cost increases. As a result, we
lose revenue and do not fully recover costs during the period the decisions are
delayed.
We have experienced significant revenue losses due to delays in
obtaining GRC filing approvals in California. The estimated loss from CPUC
delays was $9.3 million in revenue and $5.6 million in net income. This estimate
covers the July 2002 through March 2003 period and was due to the delays
concerning the 2001 GRC application. These figures represent the revenue and net
income that would have been collected if the CPUC had issued its decision on the
2001 GRC in July 2002, which is when a decision would normally have been
rendered on a September 2001 filing. The estimated impact of approval delays on
our balancing accounts filings was not permanent and the loss of the time value
of money is not deemed to be material.
California State Assembly Bill 2838 became effective on January 1,
2003, and applies to filings made in January 2003 and thereafter. It is designed
to preserve the cash flow of regulated water utilities by providing interim rate
relief if the CPUC has not issued a decision for a requested GRC rate increase
in a timely manner. While the CPUC has not issued formal procedures for
implementing the provisions of this bill, we believe interim rate increases will
be authorized if the CPUC does not issue a final rate decision in a timely
manner. In our initial application of this bill, we did receive approval to
charge interim rates to cover inflation costs and we received approval for
establishment of an effective date. While the impact to 2003 revenue was very
minor, we view the approval of interim rate and establishment of an effective
date as positive indications that the basic provisions of this law will be
applied as intended.
Review of Property Sales by CPUC. In September 2003, the CPUC issued
decision D. 03-09-021. In this decision, the CPUC ordered Cal Water to maintain
and track sales records for each property that was at any time included in rate
base and subsequently sold and to share these records with the CPUC. The CPUC's
staff is reviewing our recording of proceeds and recognition of gain on sales of
these non-utility, surplus properties. We believe the sales of surplus
properties were properly recorded in accordance with the Water Utility
Infrastructure Act of 1995 and the
26
CPUC's decision authorizing the holding company structure for California Water
Service Group. Gains have been recognized outside of regulated operations, as
the properties sold were not being used in the regulated operations and were
excluded from rate base for rate-setting purposes. Also, proceeds from these
sales have been reinvested in the regulated business of Cal Water. The CPUC has
requested documentation to determine whether we appropriately removed these
non-utility, surplus properties from rate base in a timely manner, and has
requested documentation on the determination that they were no longer used and
useful. If the CPUC finds that any surplus property sale or transfer was
recorded inappropriately, then this could result in a reduction to rate base
used to determine future rates charged to regulated customers. This could reduce
future revenues, net income and cash flows. We are not able to provide estimates
of the timing or what the ultimate resolution may be.
In Washington Water, New Mexico Water and Hawaii Water, we have not
experienced regulatory tardiness or variations to established processes on rate
filings.
WATER SUPPLY
Our source of supply varies among our operating districts. Certain
districts obtain all of the supply from wells; some districts purchase all of
the supply from wholesale suppliers; and other districts obtain supply from a
combination of wells and wholesale suppliers. A small portion of the supply
comes from surface sources and is processed through company-owned water
treatment plants. We are currently meeting water quality, environmental and
other regulatory standards.
California's normal weather pattern yields little precipitation between
mid-spring and mid-fall. The Washington service areas receive precipitation in
all seasons with the heaviest amounts during the winter. New Mexico's rainfall
is heaviest in the summer monsoon season. Hawaii receives precipitation
throughout the year with the largest amounts in the winter months. Water usage
in all service areas is highest during the warm and dry summers and declines in
the cool winter months. Rain and snow during the winter months replenish
underground water basins and fill reservoirs, providing the water supply for
subsequent delivery to customers. To date, snow and rainfall accumulation during
the 2003-2004 water year has been above average. Water storage in California's
reservoirs at the end of 2003 was at average levels. We believe that supply
pumped from underground aquifers and purchased from wholesale suppliers should
be adequate to meet customer demand during 2004 and beyond. We develop long-term
water supply plans for each of our districts to help assure an adequate water
supply under various operating and supply conditions. Some of our districts have
unique challenges in meeting water quality standards; but we believe our
supplies will meet current standards using current treatment processes. We are
executing a plan to meet more stringent EPA standards related to arsenic, which
will become effective in January 2006. Additional information on water supply is
reported in our Form 10-K filing.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity.
Short-Term Financing. Our short-term liquidity is provided by bank
lines of credit and internally generated funds. On a long-term basis, we obtain
financing through access to debt and equity markets. Short-term bank borrowings
were $6.5 million at December 31, 2003, and $36.4 million at December 31, 2002.
Cash and cash equivalents were $2.9 million at December 31, 2003, and $1.1
million at December 31, 2002. Given our ability to access these lines of credit
on a daily basis, we keep cash balances down to levels required for daily cash
needs and use surplus cash to pay down lines of credit when available. Minimal
operating levels of cash are maintained for Washington Water, New Mexico Water
and Hawaii Water.
The water business is seasonal. Revenue is lower in the cool, wet
winter months when less water is used compared to the warm, dry summer months
when water use is higher. During the winter period, the need for short-term
borrowings under the bank lines of credit increases. The increase in cash flow
during the summer allows short-term borrowings to be paid down. Short-term
borrowings that remain outstanding more than one year have generally been
27
converted to long-term debt. In 2003, we used both long-term debt and the
issuance of common stock to provide funding to pay down short-term borrowings.
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
borrowings.
During the first seven months of 2003, short-term borrowings were used
as an initial funding source for capital expenditures. This caused short-term
borrowings to increase through July 2003. In August 2003, we issued a secondary
offering of common stock under a shelf registration. These proceeds were used to
pay down the short-term borrowings and provide long-term funding for capital
expenditures. During 2002, the need for short-term borrowings was high due to
capital expenditures primarily related to construction of the Bakersfield
Treatment Plant. Cash generated by operations was not sufficient to meet cash
needs of the business, primarily due to company-funded capital expenditures.
Capital was obtained through short-term borrowings and long-term borrowings.
Cal Water has a $45 million credit facility. The term of the agreement
expires in April 2005. This agreement has a requirement for balances to be below
certain thresholds for 30 consecutive days each calendar year. We met this
requirement in 2003 and have already met this requirement in 2004. No other
financial covenants apply, such as interest expense coverage or capitalization
ratios. The agreement terms include a provision that allows the bank to call the
loan and cancel the facility if Cal Water's debt ratings fall below investment
grade (Moody's Baa3 or S&P BBB-). Cal Water's current debt ratings are A2 from
Moody's and A+ from S&P. In addition to borrowings, the facility allows for
letters of credit up to $10 million. We had one letter of credit outstanding for
$0.5 million related to an insurance policy, which reduces the amount available
to borrow. Interest is charged on a variable basis and fees are charged for
unused amounts. As of December 31, 2003, we had borrowed $4.0 million against
the facility.
A $10 million credit facility exists for California Water Service
Group, Utility Services, Washington Water, New Mexico Water and Hawaii Water.
Until recently modified, the agreement covered only California Water Service
Group, Utility Services and New Mexico Water. The term of the agreement expires
in April 2005. This agreement has a requirement for balances to be below certain
thresholds for 30 consecutive days each calendar year. We met this requirement
in 2003 and have already met this requirement in 2004. No other financial
covenants apply, such as interest expense coverage or capitalization ratios. The
agreement terms include a provision that allows the bank to call the loan and
cancel the facility if Cal Water's debt ratings fall below investment grade. In
addition to borrowings, the facility allows for letters of credit up to $5
million. We had no letters of credit outstanding at December 31, 2003. Interest
is charged on a variable basis and fees are charged for unused amounts. As of
December 31, 2003, we had no borrowings against the facility.
New Mexico Water has $2.5 million in loans that expire in May 2004.
These loans do not have an out-of-debt compliance period. An additional $0.1
million is available for borrowing under the current arrangement. At this time,
we believe these loans can be renewed at market rates. Washington Water has a
$0.1 million credit facility that is currently unused. Hawaii Water does not
have a credit facility or other third party loans as of December 31, 2003.
Generally, short-term borrowings under the commitments are converted
annually to long-term borrowings.
Credit Ratings. Cal Water's first mortgage bonds are rated by Moody's
Investors Service (Moody's) and Standard & Poor's (S&P). The bank credit
facility agreements contain a provision that if Cal Water's Moody's or S&P's
senior debt rating falls below investment grade, the credit line may be
terminated by the bank and the loan accelerated. During the fourth quarter of
2003, management met separately with the two credit rating agencies during their
annual rating reviews. In February 2004, Moody's issued a report lowering Cal
Water's senior secured debt from A1 to A2 and noted the rating as stable. In
November 2003, S&P issued a report keeping its rating of A+, but changing its
outlook from stable to negative. Both cited concerns about the lack of timely
rate relief from the CPUC and the projected capital expenditure requirements for
water infrastructure and environmental compliance needs. Moody's also issued a
report about the water industry, citing the difficulties small operators face in
financing needed capital expenditures and delays in commission rulings as two
main concerns. We believe that the rate increases received and pending will
increase revenues, income and cash flows in 2004, which will increase our
financial strength. The rating agencies may or may not agree with this
assessment and may further change their ratings in the future. We would expect
to be
28
able to meet financing needs even if our ratings were further downgraded, but a
rating change may result in a higher interest rate on new debt.
Long-Term Financing. Long-term financing, which includes senior notes,
other debt securities and common stock, has been used to replace short-term
borrowings and fund capital expenditures. Internally-generated funds, after
making dividend payments, provide positive cash flow, but have not been at a
level to meet all of our capital expenditure needs. We expect this trend to
continue given our plan for capital expenditures for the next 5 years. We
believe that long-term financing is available to us through debt and equity
markets.
In March 2002, the CPUC issued a decision granting Cal Water authority
to complete up to $250 million of equity and debt financing through 2005,
subject to certain restrictions. We currently have raised $206 million through
additional debt, refinanced debt and a common stock offering. We plan to request
an additional authorization for $250 million covering the next five years to
address future capital needs. In addition to Company funds, construction
projects are funded by developers' contributions in aid of construction, which
are not refundable, and advances for construction, which are refundable.
During 2002, we initiated a program to refinance a portion of Cal
Water's outstanding first mortgage bonds. The refinancing was intended to take
advantage of the available lower interest rates. The total program was completed
in three phases. The first phase of the program was completed in 2002 and
included refinancing of Series S, BB and DD first mortgage bonds, and Series P
that matured on November 1, 2002. Including Series P, the total first mortgage
bond principal balance refinanced was $33.9 million. In addition, call premiums
and transaction costs were incurred in the transactions. The refinancing was
accomplished with funds from the issuance by Cal Water of two lower interest,
unsecured senior notes. Series G Senior Notes for $20 million were issued in
November 2002 and Series H Senior Notes for $20 million were issued in December
2002. The interest rate on both series is 5.29% and both mature in 2022. Each
series requires annual sinking fund payments of $1.8 million commencing in 2012.
The second phase of the refinancing was completed in May 2003. Cal
Water issued $10 million, 5.54%, 20-year Series I Senior Notes and $10 million,
5.44%, 15-year Series J Senior Notes. Both notes were unsecured. The proceeds
from these borrowings were used to prepay the Series EE first mortgage bond that
had an interest rate of 7.9%. The principal, call premiums and transaction costs
were approximately $20 million.
The third phase was completed in November 2003. In October 2003, Cal
Water issued a $20 million, 5.55%, Series N Senior Note. The note is unsecured
and matures on December 1, 2013. Payment of principal is due at maturity. Funds
received were used to prepay first mortgage bond Series FF, which accrued
interest at a rate of 6.95% and had a principal balance of $19.1 million. In
addition to the prepayment of the principal balance, funds were used to pay a
call premium related to Series FF, transaction costs and for general corporate
purposes. In November 2003, Cal Water issued a $20 million, 5.52%, Series M
Senior Note. The note is unsecured and matures on November 1, 2013. Payment of
principal is due at maturity. Funds received were used to prepay first mortgage
bond Series GG, which accrued interest at a rate of 6.98% and had a principal
balance of $19.1 million. In addition to the prepayment of the principal
balance, funds were used to pay a call premium related to Series GG, transaction
costs and for general corporate purposes.
The transactions described above concluded our refinancing program.
Based on terms currently available in the marketplace, we have determined that
additional refinancing at this time would be cost prohibitive. The refinanc-ing
program encompassed approximately $100 million of long-term debt and we estimate
it will save approximately $2.0 million in interest expense on an annual basis
through the year 2013.
In 2002, long-term financing was provided by issuance of senior notes
by Cal Water. In May 2002, Cal Water completed the issuance of $20 million,
7.11%, 30-year Series E Senior Notes. In August 2002, Cal Water completed the
issuance of $20 million, 5.90%, 15-year Series F Senior Notes. These senior note
issues do not require sinking fund payments.
In 2003, long-term financing was provided by issuance of senior notes
by Cal Water and issuance of common stock by the Company.
In February 2003, Cal Water completed the issuance of $10 million,
4.58%, 7-year Series K Senior Notes and $10 million, 5.48%, 15-year Series L
Senior Notes. Both notes were unsecured. The proceeds were used to pay down
short-term borrowings and to fund capital expenditures.
29
On July 11, 2003, a shelf registration became effective, which provides
for the issuance from time to time of up to $120 million in common stock,
preferred stock and/or debt securities. We may issue any of these types of
securities until the amount registered is exhausted, and will add the net
proceeds from the sale of the securities to our general funds to be used for
general corporate purposes, which may include investment in subsidiaries,
working capital, capital expenditures, repayment of short-term borrowings,
refinancing of existing long-term debt, acquisitions and other business
opportunities.
On August 4, 2003, we announced the issuance of 1,750,000 additional
shares of common stock from the shelf registration statement. A prospectus
supplement and prospectus were filed with the SEC under Rule 424 (b) (2) on
August 5, 2003. The shares were sold at $26.25 per share. The net proceeds to us
were $43.8 million and the transaction was closed on August 7, 2003. The funds
were used to pay down short-term borrowings and to invest in short-term money
market instruments pending their use for general corporate purposes. After
issuance of the 1,750,000 shares, there remains $74.1 million in securities
under the shelf registration, which are available for future issuance.
Washington Water has long-term debt primarily from two banks to meet
its operating and capital equipment purchase requirements at interest rates
negotiated with the banks.
We do not utilize off-balance sheet financing or utilize special
purpose entity arrangements. We do not have equity ownership through joint
ventures or partnership arrangements.
Additional information regarding the bank borrowings and long-term debt
is presented in notes 8 and 9 in the consolidated financial statements.
Dividend Reinvestment and Stock Purchase Plan. We have a Dividend
Reinvestment and Stock Purchase Plan (Plan). Under the Plan, stockholders may
reinvest dividends to purchase additional common stock without commission fees.
The Plan also allows existing stockholders and other interested investors to
purchase common stock through the transfer agent up to certain limits. Our
transfer agent operates the Plan and purchases shares on the open market to
provide shares for the Plan.
2004 Financing Plan. Our 2004 financing plan includes raising
approximately $40-$50 million of new capital. The plan includes issuance of
$20-$30 million in senior notes to institutional investors and issuance of
$20-$30 million of common stock. As currently contemplated, the common stock
offering will be accomplished with one issuance in 2004 pursuant to the shelf
registration. The timing of the issuance has not been established. Beyond 2004,
we intend to fund capital needs through a relatively balanced approach between
long-term debt and equity.
Contractual Obligations. We have contractual obligations which are
summarized in the table below. Long-term debt payments include annual sinking
fund payments on first mortgage bonds, maturities of long-term debt and annual
payments on other long-term obligations. Advances for construction represent
annual contract refunds to developers for the cost of water systems paid for by
the developers. The contracts are non-interest bearing and refunds are generally
on a straight-line basis over a 40-year period. The total amount presented for
operating leases is for a 20-year period.
Less Than After
Contractual Obligations (In thousands) Total 1 Year 1-3 Years 3-5 Years 5 Years
Long-Term Debt $273,130 $ 904 $ 1,688 $ 1,623 $268,915
Advances for Construction 121,952 4,728 8,714 8,279 100,231
Operating Leases 15,324 1,417 2,656 2,464 8,787
Take or Pay Purchase Agreements 53,978 8,138 17,265 18,674 9,901
Cal Water has water supply contracts with wholesale suppliers in 16 of
its operating districts. For each contract, the cost of water is established by
the wholesale supplier and is generally beyond our control. The amount paid
annually to the wholesale suppliers is charged to purchased water expense on our
statements of income. Most contracts do not require minimum annual payments and
vary with the volume of water purchased.
The wholesale water contract with Stockton East Water District (SEWD)
is a fixed fee contract. The SEWD payments totaled $3.8 million in 2003. We
estimate the annual price to increase $0.8-$1.5 million for the
30
SEWD contract effective April 2004. SEWD rates include incorporating current
year estimated costs and adjustments related to prior years costs and
allocations with other customers. We are unable to estimate price changes beyond
a one-year period.
We currently have two contracts, one in Los Altos and one in
Bakersfield, that contain minimal purchase provisions (take or pay). These
contract payments vary with the volume of water purchased. We plan to continue
to purchase and use at least the minimum water requirement under these contracts
in the future. Both contracts renew annually. Obligations were estimated
assuming a five-year horizon beyond 2004.
Capital Requirements. Capital requirements consist primarily of new
construction expenditures for expanding and replacing utility plant facilities
and the acquisition of water systems. They also include refunds of advances for
construction.
Company-funded utility plant expenditures were $53.9 million, $71.6
million and $53.4 million in 2003, 2002 and 2001, respectively. A major project
during this time frame was the $50 million water treatment plant and related
water transmission and distribution pipelines in Bakersfield, California.
Expenditures to construct the plant were incurred over a five-year period, with
the largest portion, $27.1 million, incurred in 2002. The plant became
operational in 2003. Other major components of capital expenditures were mains
and water treatment equipment.
For 2004, company-funded capital expenditures are budgeted at $65.8
million. For years beyond 2004, capital expenditures are estimated at $70-$80
million per year for the next 5 years and will primarily be for mains, related
water distribution equipment, pumping and water treatment equipment.
Other capital expenditures are funded through developer advances and
contributions in aid of construction (non-company funded). The expenditure
amounts were $20.4 million, $16.8 million and $8.7 million in 2003, 2002 and
2001, respectively. The changes from year to year reflect expansion projects by
developers in our service areas. Funds are received in advance of incurring
costs for these projects. Advances are normally refunded over a 40-year period
without interest. Future payments for advances received are listed under
Contractual Obligations above.
We expect to incur non-company-funded expenditures in 2004. These
expenditures will be financed by developers through refundable advances for
construction and non-refundable contributions in aid of construction. Developers
are required to deposit the cost of a water construction project with us prior
to our commencing construction work, or the developers may construct the
facilities themselves and deed the completed facilities to us. Because
non-company-funded construction activity is solely at the discretion of
developers, we cannot predict the level of future activity. The cash flow impact
is expected to be minor due to the structure of the arrangements.
Capital Structure. In 2003, common stockholders' equity increased $45.3
million (22.7%), primarily due to the issuance of common stock in August 2003.
The long-term debt portion of the capital structure increased in 2003 by $21.9
million, primarily due to issuance of Series K and Series L Senior Notes, which
were $10 million each. See Long-Term Financing section above for additional
information.
Total capitalization at December 31, 2003, was $520.2 million and
$453.1 million at the end of 2002. We expect that our plan for using a balanced
approach of common equity and long-term debt, coupled with increased earnings
above dividend growth, will increase the equity portion of capitalization in
future years. At December 31, capitalization ratios were:
2003 2002
Common Equity 47.0% 44.0%
Preferred Stock 0.7% 0.7%
Long-term Debt 52.3% 55.3%
The return (from both regulated and non-regulated operations) on
average common stockholders' equity was 9.1% in 2003 compared to 9.7% in 2002.
Acquisitions. Although there were no significant acquisitions in the
periods presented, the following acquisitions are reported since they expanded
operations into new states.
31
In July, 2002, we acquired certain assets of Rio Grande Utility
Corporation (Rio Grande) through New Mexico Water. The purchase included the
water and wastewater assets of Rio Grande, which serves 2,400 water and 1,700
wastewater customers about 30 miles south of Albuquerque, New Mexico. The
purchase price was $2.3 million in cash, plus assumption of $3.1 million in
outstanding debt. Rate base for the system is approximately $5.4 million. The
results of operations include the operating results of Rio Grande since the
acquisition date. Revenue for 2003 was $1.6 million and net income was $0.1
million.
In April 2003, we acquired the Kaanapali Water Corporation for $6.1
million in cash. After completing the acquisition, the entity's name was changed
to Hawaii Water Service Company, Inc. (Hawaii Water). Hawaii Water provides
water utility services to 500 customers in Maui, Hawaii. The final purchase
price will be determined after certain events have occurred, principally the
resolution of determining rate base after filing for a general rate case with
the Hawaii Public Utilities Commission (HPUC). A filing is planned for 2004. At
that time, the purchase price could be adjusted, which could result in
additional refunds estimated between 0% and 5% of the purchase price. For 2003,
revenue was $2.1 million and net income was $0.3 million. These amounts were for
an eight-month period.
In June 2002, New Mexico Water signed an agreement to purchase National
Utilities Corporation (National Utilities) and related assets for approximately
$1.1 million. National Utilities serves 700 water customers located adjacent to
the Rio Grande water system and another 900 water customers located 150 miles
south of Albuquerque. The acquisition will entitle New Mexico Water to purchase
up to 2,000 acre-feet of water annually as required for its operations. The
purchase is not expected to have a material impact on revenues, net income, or
cash flows. The purchase is subject to the approval of the New Mexico Public
Regulation Commission. We estimate regulatory approval to be received prior to
June 2004.
Real Estate Program. We own more than 900 real estate parcels. From
time to time, certain parcels are deemed not necessary for or used in water
utility operations. Most surplus properties have a low cost basis. A program was
developed to realize the value of certain surplus properties through sale or
lease of those properties. The program will be ongoing for a period of several
years. Property sales produced pretax gains of $4.6 million, $3.0 million and
$3.9 million in 2003, 2002 and 2001, respectively. As sales are dependent on
real estate market conditions, future sales may or may not be at prior year
levels.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We maintain our accounting records in accordance with accounting
principles generally accepted in the United States of America and as directed by
the regulatory commissions to which our operations are subject. The process of
preparing financial statements requires the use of estimates on the part of
management. The estimates used by management are based on historic experience
and an understanding of current facts and circumstances. A summary of our
significant accounting policies are listed in note 2 of the consolidated
financial statements and other notes provide additional information. The
following sections describe the level of subjectivity, judgment and variability
of estimates that could have a material impact on the financial condition,
operating performance and cash flows of the business.
Regulated Utility Accounting. Because we operate extensively in a
regulated business, it is subject to the provisions of Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of Regulation." Application of SFAS No. 71 requires accounting for certain
transactions in accordance with regulations defined by the respective regulatory
commission of that state. In the event that a portion of our operations were no
longer subject to the provisions of SFAS No. 71, we would be required to write
off related regulatory assets and liabilities that are not specifically
recoverable and determine if other assets might be impaired. If a regulatory
commission determined that a portion of our assets were not recoverable in
customer rates, we would be required to determine if it had suffered an asset
impairment that would require a write-down in the assets' valuation. There has
been no such asset impairment as of December 31, 2003. Additional information
relating to regulatory assets and liabilities are listed in note 2 of the
consolidated financial statements.
Revenue Recognition. Revenue is estimated for metered customers for
water used between the last reading of the customer's meter and the end of the
accounting period. This estimate is based on the usage from the last bill to the
customer, which normally covers a 30-day period, and is prorated from the last
meter read date to the end of the
32
accounting period. The amount of variability is low at December 31, as this is
one of the lowest usage months of the year and usage for the previous 30-day
period is relatively consistent during this time of the year. Actual usage may
vary from this estimate.
Flat-rate customers are billed in advance at the beginning of the
service period. Since these are constant amounts, appropriate adjustments can be
calculated to determine the revenue related to the applicable period.
Estimated Expenses. Some expenses are recorded using estimates, as
actual payments are not known or processed by the accounting deadline. Estimates
are made for unbilled purchased water, unbilled purchased power, unbilled pump
taxes, payroll and other types of similar expenses. While management believes
its estimates are reasonable, actual results could vary. Differences between
actual results and estimates are recorded in the period when the information is
known.
Expense-Balancing and Memorandum Accounts. Expense-balancing accounts
and memorandum accounts (offsetable expenses) represent recoverable costs
incurred, but not billed to our customers. The amounts included in these
accounts relate to rate increases charged to us by suppliers of purchased water
and purchased power, and increases in pump taxes. We do not record
expense-balancing or memorandum accounts in our financial statements as revenue,
nor as a receivable, until the CPUC and other regulators have authorized
recovery of the higher costs and customers have been billed. Therefore, a timing
difference may occur between when costs are recognized and the recognition of
associated revenues. The balancing and memorandum accounts are only used to
track the higher costs outside of the financial statements. The cost increases,
which are beyond our control, are referred to as "offsetable expenses" because
under certain circumstances they are recoverable from customers in future offset
rate increases. In May 2003, the CPUC gave approval to charge customers for a
portion of our offsetable expenses (See Rates and Regulations). Additionally, we
have pending filings with the CPUC for offsetable expenses. The amounts
requested may not be ultimately collected through rates, as amounts may be
disallowed during the review process or subject to an earnings test. While the
adjustments would not impact previously recorded amounts, the adjustments may
impact future earnings and cash flows. We are not able to provide estimates of
what the ultimate collection will be from these accounts.
Washington Water, New Mexico Water and Hawaii Water did not have
material amounts in expense-balancing or memorandum accounts.
Income Taxes. Significant judgment is required in determining the
provision for income taxes. The process involves estimating current tax exposure
and assessing temporary differences resulting from treatment of certain items,
such as depreciation, for tax and financial statement reporting. These
differences result in deferred tax assets and liabilities, which are reported in
the consolidated balance sheets. We must also assess the likelihood that
deferred tax assets will be recovered in future taxable income. To the extent
recovery is unlikely, a valuation allowance would be required. If a valuation
allowance were required, it could significantly increase income tax expense. In
management's view, a valuation allowance was not required at December 31, 2003.
Detailed schedules relating to income taxes are provided in note 11 of the
consolidated financial statements.
Employee Benefit Plans. We incur costs associated with our pension and
postretirement benefit plans. To measure the expense of these benefits,
management must estimate compensation increases, mortality rates, future health
cost increases and discount rates used to value related liabilities and to
determine appropriate funding. We work with independent actuaries to measure
these benefits. Different estimates and/or actual amounts could result in
significant variances in the costs and liabilities recognized for these benefit
plans. The estimates used are based on historical experience, current facts,
future expectations and recommendations from independent advisors and actuaries.
We use an investment advisor to provide expert advice for managing
investments in these plans. To diversify investment risk, the plans' goal is to
invest 60% of the assets in various equity mutual funds and 40% in bond funds.
At December 31, 2003, 57% of the assets were invested in equity mutual funds and
43% in bond funds. Based on the market values of the investment funds for the
year ended December 31, 2003, the total return on the pension plan assets was
19%. For 2002 and 2001, returns were a negative 3.3% and a positive 2.2%,
respectively. Future returns on investments could vary significantly from
estimates and could impact our earnings and cash flows. We would expect changes
to these costs to be recovered in future rate filings, mitigating the financial
impact.
33
For our measurement in 2003, we estimated the discount rate at 6.25%,
which approximates the rate of Moody's AA rated bonds at December 2003. The
discount rate used for 2002 was 6.7% using the same methodology. We assumed the
rate of compensation to increase 1.5% in 2004, 2.0% in 2005 and 4.25%
thereafter. Any change in these assumptions would have an effect on the service
costs, interest costs and accumulated benefit obligations. Additional
information related to employee benefit plans are listed in note 12 of the
consolidated financial statements.
Workers' Compensation, General Liability and Other Claims. For workers'
compensation, we utilize an actuary firm to estimate the discounted liability
associated with claims submitted and claims not yet submitted based on
historical data. These estimates could vary significantly from actual claims
paid, which could impact our earnings and cash flows. For general liability
claims and other claims, we estimate the cost incurred but not yet paid using
historical information. Actual costs could vary from these estimates. We believe
actual costs incurred would be allowed in future rates, mitigating the financial
impact.
Contingencies. We did not record any provisions relating to the
contingencies reported in note 15 of the consolidated financial statements, as
these did not qualify for recording under SFAS No. 5 or other accounting
standards. If our assessment is incorrect, these items could have a material
impact on the financial condition, results of operations and cash flows of the
business.
FINANCIAL RISK MANAGEMENT
We do not participate in hedge arrangements, such as forward contracts,
swap agreements, options or other contractual agreements relative to the impact
of market fluctuations on our assets, liabilities, production or contractual
commitments. We operate only in the United States, and therefore, are not
subject to foreign currency exchange rate risks.
Terrorism Risk. Since the September 11, 2001, terrorist attacks, we
have heightened security at our facilities and have taken added precautions to
protect our employees and the water we deliver to our customers. We have
complied with EPA regulations concerning vulnerability assessments and have made
filings to the EPA as required. In addition, communication plans have been
developed as a component of our procedures related to this risk. While we do not
make public comments on our security programs, we have been in contact with
federal, state and local law enforcement agencies to coordinate and improve
water delivery systems' security.
Interest Rate Risk. We are subject to interest rate risk, although this
risk is lessened because we are regulated. If interest costs were to increase,
we believe our rates would increase accordingly. The majority of debt is
long-term, fixed-rate. Interest rate risk does exist on short-term borrowings
within our credit facilities, as these interest rates are variable. We also have
interest rate risk with new financing, as we may incur higher interest rates on
new debt if interest rates increase.
Stock Price Risk. Because we operate primarily in a regulated industry,
our stock price 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. In the past, we experienced stock
price risk because of the impact on earnings caused by the delay of certain CPUC
decisions. The adverse change in our stock price could make use of common stock
financing more expensive in the future.
Stock Market Performance Risk. Although our stock price did not reflect
the volatility of the general market over the past few years, we could be
impacted by changes in the general market that may influence our stock price. In
addition, we could be impacted by changes in the general stock and bond markets
in other areas. We provide our employees a defined benefit pension plan and
postretirement benefit plan. We are responsible for funding both of these plans
and a portion of the plans' assets are invested in stock market equities
(excluding our stock) and in corporate bonds. Poor performance of the equity and
bond investments could result in a need for additional future funding and costs
to make up for a loss of value in the equity investments. We believe we would be
able to recover these costs associated with the benefit plans in customer rates.
Equity Risk. We do not have equity investments and, therefore, do not
have equity risks.
34
RECENT ACCOUNTING PRONOUNCEMENTS AND RECENT LAW CHANGES
The description and impact of recent accounting pronouncements that are
effective for the period reported are described in note 2 of the consolidated
financial statements.
As of the filing date, there were no accounting pronouncements
affecting future periods that would have a material impact on our financial
condition, results of operations or cash flows.
The change in the law concerning Medicare for prescription drugs may
have a positive impact on our business. We elected to defer incorporating the
law change into the measurement of our postretirement plans. At this time, we
are unable to estimate the impact and have not made any decisions on whether the
plan will be amended due to this change in the law.
35
Consolidated Balance Sheets
California Water Service Group
In thousands, except per share data
December 31, 2003 2002
ASSETS
Utility plant:
Land $ 12,318 $ 11,513
Depreciable plant and equipment 1,038,058 927,244
Construction work in progress 13,770 48,624
Intangible assets 14,829 13,929
- ----------------------------------------------------------------------------------------------------
Total utility plant 1,078,975 1,001,310
Less accumulated depreciation and amortization 319,477 304,322
- ----------------------------------------------------------------------------------------------------
Net utility plant 759,498 696,988
- ----------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents 2,856 1,063
Receivables, net of allowance for uncollectible accounts:
Customers 18,434 14,831
Other 5,125 9,130
Unbilled revenue 8,522 7,969
Materials and supplies at weighted average cost 2,957 2,760
Taxes and other prepaid expenses 5,609 5,130
- ----------------------------------------------------------------------------------------------------
Total current assets 43,503 40,883
- ----------------------------------------------------------------------------------------------------
Other assets:
Regulatory assets 53,326 46,089
Unamortized debt premium and expense 9,071 6,798
Other 7,637 7,720
- ----------------------------------------------------------------------------------------------------
Total other assets 70,034 60,607
- ----------------------------------------------------------------------------------------------------
$ 873,035 $ 798,478
- ----------------------------------------------------------------------------------------------------
36
2003 2002
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $0.01 par value; 25,000 shares authorized,
16,932 and 15,182 outstanding in 2003 and 2002, respectively $ 169 $ 152
Additional paid-in capital 93,748 49,984
Retained earnings 150,908 149,215
Accumulated other comprehensive loss (301) (134)
- ----------------------------------------------------------------------------------------------------
Total common stockholders' equity 244,524 199,217
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 272,226 250,365
- ----------------------------------------------------------------------------------------------------
Total capitalization 520,225 453,057
- ----------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt 904 1,000
Short-term borrowings 6,454 36,379
Accounts payable 23,776 23,706
Accrued taxes 2,074 1,365
Accrued interest 2,896 2,873
Other accrued liabilities 27,460 24,114
- ----------------------------------------------------------------------------------------------------
Total current liabilities 63,564 89,437
- ----------------------------------------------------------------------------------------------------
Unamortized investment tax credits 2,925 2,774
Deferred income taxes 38,005 31,371
Regulatory liabilities 16,676 17,201
Advances for construction 121,952 115,459
Contributions in aid of construction 90,529 77,576
Other long-term liabilities 19,159 11,603
Commitments and contingencies -- --
- ----------------------------------------------------------------------------------------------------
$ 873,035 $ 798,478
- ----------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
37
Consolidated Statements of Income
California Water Service Group
In thousands, except per share data
For the years ended December 31, 2003 2002 2001
Operating revenue $277,128 $263,151 $246,820
- ----------------------------------------------------------------------------------------------------
Operating expenses:
Operations:
Purchased water 80,831 76,672 73,174
Purchased power 21,921 22,897 21,130
Pump taxes 6,272 6,344 5,910
Administrative and general 40,969 37,196 35,968
Other 37,476 34,073 34,109
Maintenance 12,717 11,587 12,131
Depreciation and amortization 23,256 21,238 19,226
Income taxes 12,898 12,568 9,728
Property and other taxes 10,554 9,829 9,740
- ----------------------------------------------------------------------------------------------------
Total operating expenses 246,894 232,404 221,116
- ----------------------------------------------------------------------------------------------------
Net operating income 30,234 30,747 25,704
- ----------------------------------------------------------------------------------------------------
Other income and expenses:
Non-regulated income, net 2,097 2,187 1,426
Gain on sale of non-utility property 4,603 2,980 3,864
- ----------------------------------------------------------------------------------------------------
Total other income and expenses 6,700 5,167 5,290
- ----------------------------------------------------------------------------------------------------
Interest expense:
Interest expense 19,512 18,314 16,887
Less capitalized interest 1,995 1,473 858
- ----------------------------------------------------------------------------------------------------
Net interest expense 17,517 16,841 16,029
- ----------------------------------------------------------------------------------------------------
Net income $ 19,417 $ 19,073 $ 14,965
- ----------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 1.21 $ 1.25 $ 0.98
- ----------------------------------------------------------------------------------------------------
Diluted $ 1.21 $ 1.25 $ 0.97
- ----------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding:
Basic 15,882 15,182 15,182
- ----------------------------------------------------------------------------------------------------
Diluted 15,893 15,185 15,186
- ----------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
38
Consolidated Statements of Common Stockholders' Equity
and Comprehensive Income
California Water Service Group
In thousands Accumulated
Additional Other Total
For the years ended Common Paid-in Retained Comprehensive Stockholders'
December 31, 2003, 2002 and 2001 Stock Capital Earnings Loss Equity
Balance at December 31, 2000 $ 151 $ 49,984 $ 149,185 $ (486) $ 198,834
- ------------------------------------------------------------------------------------------------------------------------------------
Net income -- -- 14,965 -- 14,965
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss -- -- -- (330) (330)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- -- 14,635
- ------------------------------------------------------------------------------------------------------------------------------------
Acquisition 1 -- 220 -- 221
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends paid:
Preferred stock -- -- 153 -- 153
Common stock -- -- 16,918 -- 16,918
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends paid -- -- 17,071 -- 17,071
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 152 49,984 147,299 (816) 196,619
- ------------------------------------------------------------------------------------------------------------------------------------
Net income -- -- 19,073 -- 19,073
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income -- -- -- 682 682
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- -- 19,755
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends paid:
Preferred stock -- -- 153 -- 153
Common stock -- -- 17,004 -- 17,004
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends paid -- -- 17,157 -- 17,157
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 152 49,984 149,215 (816) 199,217
- ------------------------------------------------------------------------------------------------------------------------------------
Net income -- -- 19,417 -- 19,417
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss -- -- -- (167) (167)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- -- 19,250
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 17 43,764 -- -- 43,781
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends paid:
Preferred stock -- -- 153 -- 153
Common stock -- -- 17,571 -- 17,571
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends paid -- -- 17,724 -- 17,724
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 169 $ 93,748 $ 150,908 $ (301) $ 244,524
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
39
Consolidated Statements of Cash Flows
California Water Service Group
In thousands
For the years ended December 31, 2003 2002 2001
Operating activities:
Net income $ 19,417 $ 19,073 $ 14,965
- -------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 23,256 21,238 19,226
Deferred income taxes, investment tax credits
and regulatory assets and liabilities, net 2,834 786 2,919
Gain on sale of non-utility property (4,603) (2,980) (3,864)
Changes in operating assets and liabilities:
Receivables 1,292 (1,088) (2,186)
Unbilled revenue (554) (561) 673
Taxes and other prepaid expenses (2,876) (86) (1,913)
Accounts payable (301) (431) (2,461)
Other current assets (197) (613) 571
Other current liabilities 7,537 1,911 7,812
Other changes, net (1,374) (696) (436)
- -------------------------------------------------------------------------------------------------------------
Net adjustments 25,014 17,480 20,341
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 44,431 36,553 35,306
- -------------------------------------------------------------------------------------------------------------
Investing activities:
Utility plant expenditures:
Company-funded (53,884) (71,553) (53,379)
Developer advances and contributions in aid of construction (20,369) (16,808) (8,670)
Proceeds from sale of non-utility assets 4,803 3,006 3,999
Acquisitions (6,094) (2,300) (701)
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (75,544) (87,655) (58,751)
- -------------------------------------------------------------------------------------------------------------
Financing activities:
Net changes in short-term borrowings (29,925) 12,435 7,402
Issuance of common stock, net of expenses 43,781 -- --
Issuance of long-term debt, net of expenses 80,114 79,718 20,507
Advances for construction 13,248 12,545 6,498
Refunds of advances for construction (4,838) (4,597) (4,166)
Contributions in aid of construction 9,311 7,740 10,868
Retirement of long-term debt (61,061) (39,472) (2,881)
Dividends paid (17,724) (17,157) (17,071)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 32,906 51,212 21,157
- -------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 1,793 110 (2,288)
Cash and cash equivalents at beginning of year 1,063 953 3,241
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,856 $ 1,063 $ 953
- -------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 17,672 $ 16,527 $ 14,785
Income taxes 6,188 10,205 11,775
Non-cash financing activity - common stock issued in acquisitions -- -- 899
See accompanying Notes to Consolidated Financial Statements
40
Notes to Consolidated Financial Statements
California Water Service Group
December 31, 2003, 2002 and 2001
Amounts in thousands, except per share data and share data
1
ORGANIZATION AND OPERATIONS
California Water Service Group (Company) is a holding company that
through its wholly-owned subsidiaries provides water utility and other related
services in California, Washington, New Mexico and Hawaii. California Water
Service Company (Cal Water), Washington Water Service Company (Washington
Water), New Mexico Water Service Company (New Mexico Water) and Hawaii Water
Service Company, Inc. (Hawaii Water) provide regulated utility services under
the rules and regulations of their respective state's regulatory commission
(jointly referred to as the Commissions). CWS Utility Services provides
non-regulated water utility and utility-related services. The Company operates
primarily in one business segment, providing water and related utility services.
2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Accounting Records. The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. 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.
Reclassifications. Certain prior years' amounts have been reclassified,
where necessary, to conform to the current presentation.
Use of Estimates. The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue. Revenue consists of monthly cycle customer billings for
regulated water and wastewater 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 Company provides an allowance for doubtful accounts. The balance of
customer receivables is net of the allowance for doubtful accounts at December
31, 2003 and 2002 of $289 and $181, respectively. The activity in the reserve
account is as follows:
2003 2002
Beginning balance $ 181 $ 224
Provision for uncollectible accounts 833 480
Net write off of uncollectible accounts (725) (523)
- -----------------------------------------------------------------------------
Ending balance $ 289 $ 181
- -----------------------------------------------------------------------------
Non-regulated Revenue. Revenue from non-regulated operations and
maintenance agreements is recognized when services have been rendered to
companies or municipalities under such agreements. Expenses are netted against
the revenue billed and are reported in Other Income and Expenses on the
Consolidated Statements of Income. Other non-regulated revenue is recognized
when title has transferred to the buyer, or ratably over the term of the lease.
For construction and design services, revenue is generally recognized on the
completed contract method, as most projects are completed in less than three
months. One construction and design project spanned multiple years and revenue
was recognized using the percentage-of-completion method based on a zero profit
margin until project completion. See Note 3, Other Income and Expenses.
41
Expense Balancing and Memorandum Accounts. Expense balancing and
memorandum 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 and memorandum accounts until the Commission has authorized a change
in customer rates and the customer has been billed.
Utility Plant. Utility plant is carried at original cost when first
constructed or purchased, except for certain minor units of property recorded at
estimated fair values at dates of acquisition. When depreciable plant is
retired, the cost is eliminated from utility plant accounts and such costs are
charged against accumulated depreciation. Maintenance of utility plant is
charged to operating expenses as incurred. Maintenance projects are not accrued
for in advance. Interest is capitalized on plant expenditures during the
construction period and amounted to $1,995 in 2003, $1,473 in 2002 and $858 in
2001.
Intangible assets acquired as part of water systems purchased are
stated at amounts as prescribed by the Commissions. All other intangibles have
been recorded at cost and are amortized over their useful life. Included in
intangible assets is $6,515 paid to the City of Hawthorne in 1996 to lease the
City's water system and associated water rights. The asset is being amortized on
a straight-line basis over the 15-year life of the lease.
The following table represents depreciable plant and equipment as of
December 31:
2003 2002
Equipment $ 199,157 $ 163,946
Transmission and distribution plant 772,641 718,251
Office buildings and other structures 66,260 45,047
- --------------------------------------------------------------------------------
Total $1,038,058 $ 927,244
- --------------------------------------------------------------------------------
Depreciation of utility plant for financial statement purposes is
computed on a straight-line basis over the assets' estimated useful lives as
follows:
Useful Lives
Equipment 5 to 50 years
Transmission and distribution plant 40 to 65 years
Office buildings and other structures 40 to 50 years
The provision for depreciation expressed as a percentage of the
aggregate depreciable asset balances was 2.5% in 2003, and 2.4% in 2002 and
2001. 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 money market funds.
Restricted Cash. Restricted cash primarily represents proceeds
collected through a surcharge on certain customers' bills plus interest earned
on the proceeds and is used to service California Safe Drinking Water Bond
obligations. In addition, there are compensating balances at a bank in support
of borrowings. All restricted cash is classified in other prepaid expenses. At
December 31, 2003 and 2002, the amounts of restricted cash were $1,154 and
$1,131, respectively.
Regulatory Assets and Liabilities. The Company records regulatory
assets for future revenues expected to be realized in customers' rates when
certain items are recognized as expenses for rate making purposes. The income
tax temporary differences relate primarily to the difference between book and
income tax depreciation on utility plant that was placed in service before the
Commissions adopted normalization for rate making purposes. Previously the tax
effect was passed onto customers. In the future, when such timing differences
reverse, the Company will be able to include the impact in customer rates. The
regulatory assets are net of adjustments 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.
42
In addition, regulatory assets include items that are recognized as
liabilities for financial statement purposes, which will be recovered in future
customer rates. The liabilities relate to postretirement benefits, vacation,
self-insured workers' compensation and asset retirement obligations.
Regulatory liabilities represent future benefit to rate payers for tax
deductions that will be allowed in the future for funds received as Advances for
Construction and Contributions in Aid of Construction. Regulatory liabilities
also reflect timing differences provided at higher than the current tax rate,
which will flow through to future rate payers.
Regulatory assets and liabilities are comprised of the following as of
December 31:
2003 2002
REGULATORY ASSETS
Income tax temporary differences $30,157 $31,341
Asset retirement obligations 4,985 --
Postretirement benefits other than pensions 6,846 5,165
Accrued vacation and workers' compensation 11,338 9,583
- --------------------------------------------------------------------------------
Total regulatory assets $53,326 $46,089
- --------------------------------------------------------------------------------
REGULATORY LIABILITIES
Future tax benefits to ratepayers $16,676 $17,201
- --------------------------------------------------------------------------------
Long-lived Assets. The Company regularly reviews its long-lived assets
for impairment annually or when events or changes in business circumstances have
occurred, which indicate the carrying amount of such assets may not be fully
realizable. Potential impairment of assets held for use is determined by
comparing the carrying amount of an asset to the future undiscounted cash flows
expected to be generated by that asset. If assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
value of the assets exceeds the fair value of the assets. There have been no
such impairments as of December 31, 2003 or 2002.
Long-term Debt Premium, Discount and Expense. The discount and issuance
expense on long-term debt is amortized over the original lives of the related
debt issues. Premiums paid on the early redemption of certain debt issues and
unamortized original issue discount and expense of such issues are amortized
over the life of new debt issued in conjunction with the early redemption. These
amounts were $3,154, $2,449 and $0 in 2003, 2002 and 2001, respectively.
Amortization expense included in interest expense was $415, $183 and $188 for
2003, 2002 and 2001, respectively.
Accumulated Other Comprehensive Loss. The Company has an unfunded
Supplemental Executive Retirement Plan. The unfunded accumulated benefit
obligation of the plan, less the accrued benefit, exceeds the unrecognized prior
service cost resulting in an accumulated other comprehensive loss which has been
recorded as a separate component of Stockholders' Equity. Advances for
Construction.
Advances for Construction consist of payments received from developers
for installation of water production and distribution facilities to serve new
developments. Advances are excluded from rate base for rate-setting purposes.
Annual refunds are made to developers without interest over a 20-year or 40-year
period. Refund amounts under the 20-year contracts are based on annual revenues
from the extensions. Unrefunded balances at the end of the contract period are
credited to Contributions in Aid of Construction when they are no longer
refundable in accordance with the contracts. Reclassifications were $1,813 in
2003 and $214 in 2002. Refunds on contracts entered into since 1982 are made in
equal annual amounts over 40 years. At December 31, 2003 and 2002, the amounts
refundable under the 20-year contracts were $1,350 and $3,248, respectively, and
under 40-year contracts were $119,699 and $111,136, respectively. In addition,
other Advances for Construction totaling $903 and $1,075 at December 31, 2003
and 2002, respectively, are refundable based upon customer connections.
Estimated refunds of advances for each succeeding year (2004-2008) are $4,728,
$4,492, $4,221, $4,221 and $4,058, and $100,231 thereafter.
Contributions in Aid of Construction. Contributions in Aid of
Construction represent payments received from developers, primarily for fire
protection purposes, which are not subject to refunds. Facilities funded by
contributions are included in utility plant, but excluded from rate base.
Depreciation related to assets acquired from contributions is charged to
Contributions in Aid of Construction.
43
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 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.
Workers Compensation, General Liability and Other Claims. For workers
compensation, the Company utilizes an actuary firm to estimate the discounted
liability associated with claims submitted and claims not yet submitted based on
historical data. For general liability claims and other claims, the Company
estimates the costs incurred but not yet paid using historical information.
Earnings Per Share. Basic earnings per share (EPS) is calculated by
dividing income available to common stockholders (net income less preferred
stock dividends of $153) by the weighted average shares outstanding during the
year. Diluted EPS is calculated by dividing income available to common
stockholders by the weighted average shares outstanding including potentially
dilutive shares as determined by application of the treasury stock method. The
difference between basic and diluted weighted average number of common stock
outstanding is the effect of dilutive common stock options outstanding.
Stock-based Compensation. The Company has a stockholder-approved
Long-Term Incentive Plan that allows granting of nonqualified stock options. The
Company has adopted the disclosure requirements of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
as amended by SFAS No.148, "Accounting for Stock-Based Compensation - Transition
Disclosure - An Amendment to SFAS No. 123," and as permitted by the statement,
applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," for its plan. All of the Company's outstanding options have an
exercise price equal to the market price on the date they were granted. No
compensation expense was recorded for the years ended December 31, 2003, 2002 or
2001.
The table below illustrates the effect on net income and earnings per
share as if the Company had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation:
2003 2002 2001
Net income, as reported $ 19,417 $ 19,073 $ 14,965
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effects 68 70 57
- ---------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 19,349 $ 19,003 $ 14,908
- ---------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic - as reported $ 1.21 $ 1.25 $ 0.98
Basic - pro forma $ 1.21 $ 1.24 $ 0.98
Diluted - as reported $ 1.21 $ 1.25 $ 0.97
Diluted - pro forma $ 1.21 $ 1.24 $ 0.97
Recent Accounting Pronouncements. In June 2001, the Financial
Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which applies to legal obligations associated with the
retirement of long-lived assets and the associated asset retirement costs. The
Statement was effective for the
44
Company in the first quarter of 2003. The Company recorded a long-term liability
associated with its obligation to retire wells in accordance with the Department
of Health Services' regulations when wells are abandoned and are no longer
useful for utility operations. The balance of the obligation was $7,707 as of
December 31, 2003. A portion of the cost ($2,722) has been previously recognized
as a component of depreciation expense. The remaining future obligation has been
recorded as a regulatory asset, as it will be recovered in the customers' future
rates. As the Company incurs the expense of asset retirements, the cost is
offset against accumulated depreciation. The accretion element recognized each
period is recorded as an increase in the regulatory asset.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This Statement
requires that a liability for costs associated with an exit or disposal activity
be recognized and measured initially at fair value only when the liability is
incurred. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of SFAS No.
146 did not impact the Company's financial position, results of operations or
cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 requires that a
liability be recognized at the time a company issues a guarantee for the fair
value of the obligations assumed under certain guarantee agreements.
Interpretation No. 45 is effective for guarantees issued or modified after
December 31, 2002. The disclosure requirements of the Interpretation expand
existing disclosures required by a guarantor about its obligations under a
guarantee. The adoption of Interpretation No. 45 did not impact the Company's
financial position, results of operations or cash flows.
In December 2003, the FASB issued Interpretation No. 46R,
"Consolidation of Variable Interest Entities," which amends Interpretation No.
46, "Consolidation of Variable Interest Entities." The revision exempted certain
entities and modified the effective dates. The original guidance issued under
Interpretation No. 46 in January 2003 is still applicable. Interpretation No. 46
and Interpretation No. 46R provide guidance for determining when a primary
beneficiary should consolidate a variable interest entity or equivalent
structure that functions to support the activities of the primary beneficiary.
Interpretation No. 46R is effective for public entities for periods ending after
March 15, 2004. The adoption of Interpretation No. 46R will not impact the
Company's financial position, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
No. 133 on Derivative Instruments and Hedging Activities." The Statement impacts
the accounting for certain derivative contracts entered into after June 30,
2003. This Statement is effective for quarters beginning after June 15, 2003.
The Company currently does not enter into derivative or hedging contracts. The
adoption of SFAS No. 149 did not have an impact on the Company's financial
position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." The
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The Statement is effective for financial instruments entered into after
May 31, 2003, and is otherwise effective for quarters beginning after June 15,
2003. In November 2003, the FASB issued a staff position, which deferred the
application of several provisions of SFAS No. 150. The Company has not issued
financial instruments that have characteristics of both liabilities and equity.
The adoption of SFAS No. 150 did not have nor is expected to have an impact on
the Company's financial position, results of operations or cash flows.
In December 2003, federal legislation was passed reforming Medicare and
introducing the Medicare Part D prescription drug program. The Company has not
yet determined the effects, if any, the new legislation will have on its
postretirement benefit plan or calculations that are required under SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other than Pensions,"
which are disclosed in Note 12. The legislation may provide a special subsidy to
the Company that may affect the actuarial assumptions used in determining the
utilization rates and medical cost trends. In addition, the FASB may take future
action in response to the legislation.
45
3
OTHER INCOME AND EXPENSES
The Company conducts various non-regulated activities as reflected in
the table below. Income reflects revenue less direct and allocated costs. Income
taxes are not included.
2003 2002 2001
Revenue Income Revenue Income Revenue Income
Operating and maintenance $ 4,137 $ 939 $ 4,007 $ 800 $ 3,724 $ 619
Meter reading and billing 1,337 473 1,179 464 1,130 204
Leases 1,190 781 1,050 661 818 469
Water rights brokering 196 112 1,382 515 483 309
Design and construction 1,305 204 6,267 206 7,185 400
Other and non-regulated expenses 320 (412) 262 (459) 411 (575)
- ----------------------------------------------------------------------------------------------------------
Total $ 8,485 $ 2,097 $14,147 $ 2,187 $13,751 $ 1,426
- ----------------------------------------------------------------------------------------------------------
Operating and maintenance services and meter reading and billing
services are provided for water and wastewater systems owned by private
companies and municipalities. The agreements call for a fee per service or a
flat-rate amount per month due from companies and municipalities. Leases have
been entered into with telecommunications companies for cellular phone antennas
placed on the Company's property. Water right brokering activity involves
purchasing water rights from third parties and reselling those rights to other
third parties. Design and construction services are for the design and
installation of water mains and other water infrastructure for others outside
our regulated service areas.
4
ACQUISITIONS
In 2003, after receiving regulatory approval, the Company acquired the
Kaanapali Water Corporation and renamed the corporation Hawaii Water Service
Company, Inc. The purchase was for $6,094 in cash for the approximate amount of
rate base. If the rate base is adjusted by the Commission in the next rate
proceeding, the purchase price will be adjusted accordingly.
During 2002, after receiving regulatory approval, the Company acquired
the assets of Rio Grande Utility Corporation (Rio Grande) through its
wholly-owned subsidiary, New Mexico Water. The purchase includes the water and
wastewater assets of Rio Grande, which serves water and wastewater customers in
unincorporated areas of Valencia County, New Mexico. The purchase price was
$2,300 in cash, plus assumption of $3,100 in outstanding debt. Rate base for the
system is $5,400, including intangible water rights valued at $732.
In 2001, the Company acquired four companies operating in Cal Water's
Visalia District. The acquisitions were completed in February 2001, in exchange
for 36,180 shares of Company common stock worth $899 and assumed debt of $218.
The acquisitions were accounted for under the pooling of interests method of
accounting; 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, Washington Water purchased
the assets of eight water companies for cash of $701.
Condensed balance sheets and pro forma results of operations for these
acquisitions have not been presented since the effect of these purchases are not
material. Acquisitions that involved purchase of assets were accounted for under
the purchase method of accounting.
46
5
INTANGIBLE ASSETS
As of December 31, 2003 and 2002, intangible assets that will continue
to be amortized and those not amortized were:
2003 2002
------------------------------- -------------------------------
Weighted
Average Gross Net Gross Net
Amortization Carrying Accumulated Carrying Carrying Accumulated Carrying
Period (yrs.) Value Amortization Value Value Amortization Value
Amortized intangible assets:
Hawthorne lease 15 $ 6,515 $ 3,402 $ 3,113 $ 6,515 $ 2,968 $ 3,547
Water pumping rights usage 1,046 8 1,038 1,046 2 1,044
Water planning studies 14 2,234 386 1,848 1,783 238 1,545
Leasehold improvements
and other 15 2,338 952 1,386 2,160 1,027 1,133
- ------------------------------------------------------------------------------------------------------------------------------------
Total 15 $12,133 $ 4,748 $ 7,385 $11,504 $ 4,235 $ 7,269
- ------------------------------------------------------------------------------------------------------------------------------------
Unamortized intangible assets:
Perpetual water rights -- $ 2,696 -- $ 2,696 $ 2,425 -- $ 2,425
For the years ending December 31, 2003, 2002 and 2001, amortization of
intangible assets was $713, $670 and $630, respectively. Estimated future
amortization expense related to intangible assets for the succeeding five years
is $788, $786, $770, $641 and $612 for 2004 to 2008, and $3,788 thereafter.
6
PREFERRED STOCK
As of December 31, 2003 and 2002, 380,000 shares of preferred stock
were authorized. Dividends on outstanding shares are payable quarterly at a
fixed rate before any dividends can be paid on common stock.
The outstanding 139,000 shares of $25 par value cumulative, 4.4% Series
C preferred shares are not convertible to common stock. A premium of $243 would
be due to preferred stock shareholders upon voluntary liquidation of Series C.
There is no premium in the event of an involuntary liquidation. Each Series C
preferred share is entitled to sixteen votes, with the right to cumulative votes
at any election of directors.
7
COMMON STOCKHOLDERS' EQUITY
The Company is authorized to issue 25 million shares of $0.01 par value
common stock. As of December 31, 2003 and 2002, 16,932,046 shares and 15,182,046
shares, respectively, of common stock were issued and outstanding.
Dividend Reinvestment and Stock Repurchase Plan. Under the Plan,
stockholders may reinvest dividends to purchase additional common stock without
commission fees. The Plan also allows existing stockholders and other interested
investors to purchase common stock through the transfer agent up to certain
limits. The Company's transfer agent operates the Plan and purchases shares on
the open market to provide shares for the Plan.
47
Stockholder Rights Plan. The Company's Stockholder Rights Plan (SRP) is
designed to provide stockholders protection and to maximize stockholder value by
encouraging a prospective acquirer to negotiate with the Board. The SRP 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 (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 that would cause 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 $0.001 per Right.
8
SHORT-TERM BORROWINGS
At December 31, 2003, the Company maintained a bank line of credit
providing unsecured borrowings of up to $10 million at the prime lending rate or
lower rates as quoted by the bank. Cal Water maintained a separate bank line of
credit for an additional $45 million on the same terms as the Company's line of
credit. Both agreements required a 30-day out-of-debt period for 2003, which was
met. For 2004, the $10 million line has a requirement where the outstanding
balance must be below $5 million for a 30-day consecutive period. The $45
million Cal Water line has a requirement that the outstanding balance must be
below $10 million for a 30-day consecutive period. Both agreements include a
provision that allows the bank to call the loan and cancel the facility if Cal
Water's debt ratings fall below investment grade (Moody's Baa3 or S&P's BBB-).
The Company and Cal Water were in compliance with all covenants as of December
31, 2003. At December 31, 2003, $4 million was outstanding on the Cal Water line
and there were no borrowings on the Company line.
Washington Water has a loan commitment for $0.1 million from a bank to
meet its operating and capital equipment purchase requirements at interest rates
negotiated with the bank. At December 31, 2003, nothing was outstanding under
the short-term commitment.
New Mexico Water has a $2.6 million credit agreement with a New Mexico
bank that expires in May 2004. The interest rate for the agreement is based on
prime rate plus 75 basis points. At December 31, 2003, the amount borrowed was
$2.5 million.
48
The following table represents borrowings under the bank lines of
credit:
2003 2002 2001
Maximum short-term borrowings $ 58,633 $ 52,285 $ 36,800
Average amount outstanding $ 30,388 $ 25,495 $ 24,453
Weighted average interest rate 2.96% 3.44% 5.29%
Interest rate at December 31 4.08% 3.61% 3.16%
9
LONG-TERM DEBT
As of December 31, 2003 and 2002, long-term debt outstanding was:
Interest Maturity
Series Rate Date 2003 2002
First Mortgage Bonds: J 8.86% 2023 $ 3,800 $ 4,000
K 6.94% 2012 5,000 5,000
CC 9.86% 2020 18,300 18,400
EE 7.90% 2023 -- 19,100
FF 6.95% 2023 -- 19,100
GG 6.98% 2023 -- 19,100
- -----------------------------------------------------------------------------
27,100 84,700
- -----------------------------------------------------------------------------
Senior Notes: A 7.28% 2025 20,000 20,000
B 6.77% 2028 20,000 20,000
C 8.15% 2030 20,000 20,000
D 7.13% 2031 20,000 20,000
E 7.11% 2032 20,000 20,000
F 5.90% 2017 20,000 20,000
G 5.29% 2022 20,000 20,000
H 5.29% 2022 20,000 20,000
I 5.54% 2023 10,000 --
J 5.44% 2018 10,000 --
K 4.58% 2010 10,000 --
L 5.48% 2018 10,000 --
M 5.52% 2013 20,000 --
N 5.55% 2013 20,000 --
- -----------------------------------------------------------------------------
240,000 160,000
- -----------------------------------------------------------------------------
California Department of
Water Resources loans 3.0% to 7.4% 2003-33 2,747 2,797
Other long-term debt 3,283 3,868
- -----------------------------------------------------------------------------
Total long-term debt 273,130 251,365
Less current maturities 904 1,000
- -----------------------------------------------------------------------------
Long-term debt, less current maturities $272,226 $250,365
- -----------------------------------------------------------------------------
The first mortgage bonds and unsecured senior notes are obligations of
Cal Water. All bonds are held by institutional investors and are secured by
substantially all of Cal Water's utility plant. The senior notes are held by
institutional investors and require interest-only payments until maturity,
except Series G and H Senior Notes, which have an
49
annual sinking fund requirement of $1.8 million starting in 2012. The Department
of Water Resources (DWR) loans were financed under the California Safe Drinking
Water Bond Act. Repayment of principal and interest on the DWR loans is through
a surcharge on customer bills. Other long-term debt is primarily equipment and
system acquisition financing arrangements with financial institutions.
Compensating balances of $228 as of December 31, 2003, are required by these
institutions. Aggregate maturities and sinking fund requirements for each of the
succeeding five years (2004 through 2008) are $904, $880, $808, $819 and $804,
and $268,915 thereafter.
10
OTHER ACCRUED LIABILITIES
As of December 31, 2003 and 2002, other accrued liabilities were:
2003 2002
Accrued pension and postretirement benefits $11,828 $ 9,635
Accrued and deferred compensation 7,192 6,041
Accrued insurance 2,894 2,914
Other 5,546 5,524
- --------------------------------------------------------------------------------
$27,460 $24,114
- --------------------------------------------------------------------------------
11
INCOME TAXES
Income tax expense (benefit) consists of the following:
Federal State Total
2003 Current $ 8,506 $ 2,604 $ 11,110
Deferred 1,697 91 1,788
- --------------------------------------------------------------------
Total $ 10,203 $ 2,695 $ 12,898
- --------------------------------------------------------------------
2002 Current $ 8,797 $ 2,406 $ 11,203
Deferred 1,039 326 1,365
- --------------------------------------------------------------------
Total $ 9,836 $ 2,732 $ 12,568
- --------------------------------------------------------------------
2001 Current $ 6,472 $ 2,136 $ 8,608
Deferred 1,456 (336) 1,120
- --------------------------------------------------------------------
Total $ 7,928 $ 1,800 $ 9,728
- --------------------------------------------------------------------
50
Income tax expense computed by applying the current federal 35% tax
rate to pretax book income differs from the amount shown in the Consolidated
Statements of Income. The difference is reconciled in the table below:
2003 2002 2001
Computed "expected" tax expense $ 11,310 $ 11,074 $ 8,643
Increase (reduction) in taxes due to:
State income taxes, net of federal tax benefit 1,846 1,818 1,170
Investment tax credits (91) (191) (156)
Other (167) (133) 71
- -----------------------------------------------------------------------------------------
Total income tax expense $ 12,898 $ 12,568 $ 9,728
- -----------------------------------------------------------------------------------------
The components of deferred income tax expense were:
2003 2002 2001
Depreciation $ 3,110 $ 2,405 $ 2,337
Developer advances and contributions (1,136) (789) (783)
Bond redemption premiums 911 806 (42)
Investment tax credits (110) (95) (94)
Other (987) (962) (298)
- -------------------------------------------------------------------------------
Total deferred income tax expense $ 1,788 $ 1,365 $ 1,120
- -------------------------------------------------------------------------------
The tax effects of differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2003 and
2002 are presented in the following table:
2003 2002
Deferred tax assets:
Developer deposits for extension agreements and contributions in aid of construction $42,517 $41,776
Federal benefit of state tax deductions 6,439 6,325
Book plant cost reduction for future deferred ITC amortization 1,728 1,639
Insurance loss provisions 1,179 876
Pension plan 1,359 1,136
Other 945 850
- --------------------------------------------------------------------------------------------------------------
Total deferred tax assets 54,167 52,602
- --------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Utility plant, principally due to depreciation differences 89,464 82,130
Premium on early retirement of bonds 2,708 1,843
- --------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 92,172 83,973
- --------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities $38,005 $31,371
- --------------------------------------------------------------------------------------------------------------
A valuation allowance was not required at December 31, 2003 and 2002.
Based on historical taxable income and future taxable income projections over
the period in which the deferred assets are deductible, management believes it
is more likely than not that the Company will realize the benefits of the
deductible differences.
51
12
EMPLOYEE BENEFIT PLANS
Pension Plan. The Company provides a qualified defined benefit,
non-contributory pension plan for substantially all employees. The Company also
maintains an unfunded, non-qualified, supplemental executive retirement plan.
The costs of the plans are charged to expense and utility plant. The Company
makes annual contributions to fund the amounts accrued for pension cost. The
Company estimates that the annual contribution to the pension plan will be
$8,235 in 2004. Plan assets in the pension plan as of December 31, 2003 and 2002
(the measurement dates for the plan) were as follows:
Asset Category Target 2003 2002
Bond Funds 40.0% 42.9% 52.6%
Equity Accounts 60.0% 57.1% 47.4%
The investment objective of the fund is to maximize the return on
assets, commensurate with the risk the Company Trustees deem appropriate to meet
the obligations of the Plan, minimize the volatility of the pension expense and
account for contingencies. The Trustees utilize the services of an outside
investment advisor and periodically measure fund performance against specific
indexes, in an effort to generate a rate of return for the total portfolio that
equals or exceeds the actuarial investment rate assumptions.
Pension benefit payments are generally done in the form of purchasing
an annuity from a life insurance company. Benefit payments under the
supplemental executive retirement plan are paid currently. Benefits expected to
be paid in each year 2004 to 2008 are $3,711, $4,078, $4,817, $5,028 and $6,746,
respectively. The aggregate benefit expected to be paid in the five years 2009
to 2013 is $44,861. The expected benefit payments are based upon the same
assumption used to measure the Company's benefit obligation at December 31,
2003, and include estimated future employee service.
The accumulated benefit obligations of the pension plan are $62,368 and
$58,318 as of December 31, 2003 and 2002, respectively. The fair value of
pension plan assets was $63,216 and $56,303 as of December 31, 2003 and 2002,
respectively. The unfunded supplemental executive retirement plan accumulated
benefit obligations were $6,480 and $5,972 as of December 31, 2003 and 2002,
respectively.
The data in the tables below includes the unfunded, non-qualified,
supplemental executive retirement plan. In addition, the tables reflect a plan
amendment effective January 1, 2003, which increased the annual minimum benefit,
which is recognized over the estimated working lives of the employees.
Savings Plan. The Company sponsors a 401(k) qualified, defined
contribution savings plan that allows participants to contribute up to 20% of
pretax compensation. The Company matches fifty cents for each dollar contributed
by the employee up to a maximum Company match of 4.0%. Company contributions
were $1,433, $1,422 and $1,425, for the years 2003, 2002 and 2001, respectively.
Other Postretirement Plans. The Company provides substantially all
active, permanent employees with medical, dental and vision benefits through a
self-insured plan. Employees retiring at or after age 58 are offered, along with
their spouses and dependents, continued participation in the plan by payment of
a premium. Plan assets are invested in mutual funds and short-term money market
funds. Retired employees are also provided with a life insurance benefit.
The Company records the costs of postretirement benefits during the
employees' years of active service. The Commissions have issued decisions that
authorize rate recovery of tax deductible funding of postretirement benefits and
permit recording of a regulatory asset for the portion of costs that will be
recoverable in future rates.
52
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, 2003 and 2002:
Pension Benefits Other Benefits
------------------------ ------------------------
2003 2002 2003 2002
Change in projected benefit obligation:
Beginning of year $ 79,569 $ 60,359 $ 17,503 $ 14,708
Service cost 3,879 2,968 1,033 815
Interest cost 5,374 4,404 1,224 1,037
Assumption change 6,662 30 1,462 699
Plan amendment -- 15,424 -- 40
Experience loss 2,058 660 1,106 845
Benefits paid (9,186) (4,276) (109) (641)
- -----------------------------------------------------------------------------------------------------------------------
End of year $ 88,356 $ 79,569 $ 22,219 $ 17,503
- -----------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 56,303 $ 57,340 $ 2,465 $ 2,300
Actual return on plan assets 10,667 (2,377) 364 (79)
Employer contributions 5,432 5,616 977 885
Retiree contributions -- -- 580 470
Benefits paid (9,186) (4,276) (689) (1,111)
- -----------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 63,216 $ 56,303 $ 3,697 $ 2,465
- -----------------------------------------------------------------------------------------------------------------------
Funded status $(25,140) $(23,266) $(18,522) $(15,038)
Unrecognized actuarial loss 4,031 1,281 7,175 5,025
Unrecognized prior service cost 17,074 18,875 712 786
Unrecognized transition obligation -- -- 2,769 3,045
Unrecognized net initial asset -- -- (276) (276)
- -----------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (4,035) $ (3,110) $ (8,142) $ (6,458)
- -----------------------------------------------------------------------------------------------------------------------
Amounts recognized on the balance sheets consist of:
Pension Benefits Other Benefits
-------------------- --------------------
2003 2002 2003 2002
Accrued benefit costs $(4,035) $(3,110) $(8,142) $(6,458)
Additional minimum liability (2,992) (4,784) -- --
Intangible asset 2,691 4,650 -- --
Accumulated other comprehensive loss 301 134 -- --
- ---------------------------------------------------------------------------------------
Net amount recognized $(4,035) $(3,110) $(8,142) $(6,458)
- ---------------------------------------------------------------------------------------
Below are the actuarial assumptions used for the benefit plans:
Pension Benefits Other Benefits
-------------------- --------------
2003 2002 2003 2002
Weighted average assumptions as of December 31:
Discount rate 6.25% 6.70% 6.25% 6.70%
Long-term rate of return on plan assets 8.00% 8.00% 8.00% 8.00%
Rate of compensation increases 1.50 to 4.25% 1.00 to 4.25% -- --
53
The long-term rate of return assumption is the expected rate of return
on a balanced portfolio invested roughly 60% in equities and 40% in fixed income
securities. The average return for the plan for the last five and ten years was
6.2% and 8.6%, respectively.
Net periodic benefit costs for the pension and other postretirement
plans for the years ending December 31, 2003, 2002 and 2001 included the
following components:
Pension Plan Other Benefits
--------------------------------- ---------------------------------
2003 2002 2001 2003 2002 2001
Service cost $ 3,879 $ 2,968 $ 2,786 $ 1,033 $ 815 $ 625
Interest cost 5,374 4,404 4,333 1,224 1,037 858
Expected return on plan assets (4,757) (4,497) (4,946) (233) (216) (212)
Net amortization and deferral 1,861 1,166 855 637 500 363
- -----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 6,357 $ 4,041 $ 3,028 $ 2,661 $ 2,136 $ 1,634
- -----------------------------------------------------------------------------------------------------------
Postretirement benefit expense recorded in 2003, 2002 and 2001 was
$1,160, $1,157 and $885, respectively. A regulatory asset of $6,846 was recorded
and is expected to be recoverable through future customer rates. The Company
intends to make annual contributions to the plan up to the amount deductible for
tax purposes.
For 2003 measurement purposes, the Company assumed a 6% annual rate of
increase in the per capita cost of covered benefits for 2004. Thereafter, the
Company assumed a 5% annual rate. The health care cost trend rate assumption has
a significant effect on the amounts reported. A one-percentage point change in
assumed health care cost trends is estimated to have the following effect:
1-percentage 1-percentage
Point Increase Point Decrease
Effect on total service and interest costs $ 487 $ (378)
Effect on accumulated postretirement benefit obligation $ 3,926 $ (3,119)
13
STOCK-BASED COMPENSATION PLAN
The Company has a stockholder-approved Long-Term Incentive Plan that
allows granting of non-qualified stock options, performance shares and dividend
units. Under the plan, a total of 1,500,000 common shares are authorized for
option grants. Options are granted at an exercise price that is not less than
the per share common stock market price on the date of grant. The options vest
at a 25% rate on their anniversary date over their first four years and are
exercisable over a ten-year period. At December 31, 2003, 74,625 options were
exercisable at a weighted average price of $24.45. No options were granted in
2003.
The fair value of stock options used to compute pro forma net income
and earnings per share disclosures is the estimated fair value at grant date
using the Black-Scholes option-pricing model with the following assumptions:
2003 2002 2001
Expected dividend n/a 4.5% 4.3%
Expected volatility n/a 14.4% 30.4%
Risk-free interest rate n/a 3.25% 4.6%
Expected holding period in years n/a 5.0 5.0
54
The following table summarizes the activity for the stock option plan:
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Contractual Options Fair
Shares Price Life Exercisable Value
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 --
Granted 55,000 25.15 2.05
- ------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 154,500 24.77 8.2 36,750 --
Cancelled (5,250) 24.78
- ------------------------------------------------------------------------------------------------
Outstanding at December 31, 2003 149,250 $ 24.77 7.2 74,625 --
- ------------------------------------------------------------------------------------------------
14
FAIR VALUE OF FINANCIAL INSTRUMENTS
For those financial instruments for which it is practicable to estimate
a fair value, the following methods and assumptions were used. For cash
equivalents, accounts receivables, accounts payables and short-term borrowings,
the carrying amount approximates fair value because of the short-term maturity
of the instruments. The fair value of the Company's long-term debt is estimated
at $272 million as of December 31, 2003, and $306 million as of December 31,
2002, 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 $48 million as of December
31, 2003 and $34 million as of December 31, 2002, based on data provided by
brokers who purchase and sell these contracts.
15
COMMITMENTS AND CONTINGENCIES
Commitments. The Company leases office facilities in many of its
operating districts. The total paid and charged to operations for such leases
was $577 in 2003, $700 in 2002 and $620 in 2001.
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 $8,557 in 2003,
$6,816 in 2002 and $6,208 in 2001.
The Company leases the City of Hawthorne water system, which in
addition to the upfront lease payment, includes an annual payment. The 15-year
lease expires in 2011. The annual payments in 2003, 2002 and 2001 were $111,
$100 and $100, respectively. In July 2003 the Company entered into a 15-year
lease of the City of Commerce water system. The lease includes an annual lease
payment of $845 per year plus a cost savings sharing arrangement.
Payments for these contracts are summarized below:
Office Leases Water Contracts System Leases
2004 $ 456 $ 8,138 $ 961
2005 379 8,463 961
2006 355 8,802 961
2007 285 9,154 961
2008 257 9,520 961
thereafter 441 9,901 8,346
55
The water supply contract with Stockton East Water District (SEWD)
requires a fixed, annual payment and does not vary during the year with the
quantity of water delivered by the district. Because of the fixed price
arrangement, the Company operates to receive as much water as possible from SEWD
in order to minimize the cost of operating Company-owned wells used to
supplement SEWD deliveries. The total paid under the contract was $3,779 in
2003, $2,967 in 2002 and $3,496 in 2001. Pricing under the contract varies
annually.
In 2002, New Mexico Water signed an agreement to purchase National
Utilities Corporation and land for approximately $1.1 million in cash. The
purchase of National Utilities is subject to the approval of the New Mexico
Public Regulation Commission, which is expected in the first half of 2004.
Contingencies. 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 toxic spill
occurred when cleaning solvents, which were discharged into the city's sewer
system by local dry cleaners, leaked into the underground water supply. The DTSC
contends that the Company's responsibility stems from its operation of wells in
the surrounding vicinity that caused the contamination plume to spread. While
the Company is cooperating 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. However, no agreement has been reached with
DTSC regarding dismissal of the Company from the DTSC action. In December 2002,
the Company was named along with eight other defendants in a lawsuit filed by
DTSC for the cleanup of the plume. The suit asserts that the defendants are
jointly and severally liable for the estimated cleanup of $8.7 million. 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. The Company's insurance carrier is currently paying the cost of
legal representation in this matter.
In 2003, the Company was served with a lawsuit in state court naming it
as one of several defendants for damages alleged to have resulted from waste oil
contamination in the groundwater in the Marysville District. The suit did not
specify a dollar amount. The Company does not believe that the complaint alleges
any facts under which it may be held liable. The Court has twice dismissed the
complaint on various grounds raised by the Company, but the Court has continued
to grant the plaintiff leave to amend the complaint. If necessary, the Company
intends to vigorously defend the suit. In 2002, the plaintiff in this action
brought a suit against the Company in federal court with similar allegations
concerning groundwater contamination. The suit was dismissed; however, the Court
did not bar the plaintiff from filing a state claim. If an assessment is
determined by a court, the Company believes that its insurance policy will cover
costs related to this matter under the terms of the policy.
In December 2001, the Company and several other defendants were served
with a lawsuit 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 $0.1 million, in addition to unspecified
punitive damages. The Company denies responsibility in the case and intends to
vigorously defend itself against the claim. Pursuant to an indemnity provision
in the contracts between the contractor and the Company, the contractor has
accepted liability for the claim against the Company and is reimbursing the
Company for its defense costs.
The Company and City of Stockton (City) purchase water from Stockton
East Water District (SEWD). The City believes that SEWD's meter, which recorded
water deliveries to the City's system, malfunctioned for some period of time,
and as a result the City overpaid for water deliveries from SEWD. If the City's
assertion is correct, SEWD would owe the City a credit which may be recovered
from its other customers, which is primarily the Company. SEWD has initially
agreed with the City's assertion and has recommended a reimbursement to the City
and a billing adjustment to the Company of $1.9 million over a 24-month period.
At this time, the Company has not agreed with the assertion or the method in
which the overcharging to the City was determined. The Company has not been
formally notified by SEWD of a liability to the Company. The Company has been
billed $0.7 million, and has paid in 2003 higher costs associated with this
claim. These amounts were recorded as an expense in 2003. The Company has ceased
further payments of this adjustment and has hired a consultant to perform a
study on the situation. After completion of the study, the Company will
negotiate with SEWD and the City. Given the assertion of the City, the estimated
settlement is between $0.7 and $1.9 million. The Company believes that any
additional expense associated with settlement would be recoverable in customers'
rates.
56
In February 2003, the California Public Utilities Commission (CPUC)
Office of Ratepayer Advocates recommended that Cal Water be fined up to $9.6
million and refund $0.5 million in revenue for failing to report two
acquisitions as required by the CPUC. One acquisition was completed prior to
adoption of the reporting requirement by the CPUC; the other was inadvertently
not reported. Cal Water acquired the two water systems, which serve 283
customers, for approximately $0.1 million. The staff's recommendation does not
challenge the level of service provided or amounts charged for water service to
the customers; it is based solely on the fact that Cal Water failed to report
the acquisitions to the CPUC. On July 10, 2003 the CPUC issued Resolution
W-4390. In this resolution, the CPUC's staff challenged whether Cal Water was
properly authorized to make these two acquisitions, as a result of the failure
to report. The resolution grants Cal Water's request to consult and work with
the CPUC's Water Division to resolve the matters. Since the CPUC's policy is to
encourage large water utilities to acquire small water systems, Cal Water
believes that a reasonable resolution will be reached. At this time, Cal Water
cannot estimate the costs or the timing of the resolution of these issues. Cal
Water does not believe that the staff's recommendation will be upheld when this
matter is considered by the CPUC. Accordingly, no liability was accrued in the
financial statements.
In September 2003, the CPUC issued decision D. 03-09-021. In this
decision, the CPUC ordered Cal Water to maintain and track sales records for
each property that was at any time included in rate base and subsequently sold
and to share these records with the CPUC. The CPUC's staff is reviewing Cal
Water's recording of proceeds and recognition of gain on sales of these
non-utility, surplus properties. Cal Water believes the sales of surplus
properties were properly recorded in accordance with the Water Utility
Infrastructure Act of 1995 and the CPUC's decision authorizing the holding
company structure for California Water Service Group. Gains have been recognized
outside of regulated operations, as the properties sold were not being used in
the regulated operations and were excluded from rate base for rate setting
purposes. Also, proceeds from these sales have been reinvested in the regulated
business of Cal Water. The CPUC has requested documentation to determine whether
Cal Water appropriately removed these non-utility, surplus properties from rate
base in a timely manner, and has requested documentation on the determination
that these properties were no longer used and useful. If the CPUC finds any
surplus property sale or transfer was recorded inappropriately, then this could
result in a reduction to rate base used to determine future rates charged to
regulated customers. This could reduce future revenues, net income and cash
flows. The Company is not able to provide estimates of the timing or what the
ultimate resolution may be.
The Company is involved in other proceedings or litigation arising in
the ordinary course of operations. The Company believes the ultimate resolution
of such matters will not materially affect its financial position, results of
operations or cash flows.
57
16
QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's common stock is traded on the New York Stock Exchange
under the symbol "CWT." Through 2003, dividends have been paid on common stock
for 59 consecutive years and the rate has been increased each year since 1968.
2003 - in thousands except per share amounts First Second Third Fourth
------------- ------------- ------------- -------------
Operating revenue $ 51,311 $ 67,994 $ 88,197 $ 69,626
Net operating income 2,625 7,548 12,519 7,542
Net income (loss) (768) 4,585 8,587 7,013
Diluted earnings (loss) per share (0.05) 0.30 0.53 0.41
Common stock market price range:
High 26.27 30.97 29.98 27.99
Low 23.92 25.79 25.20 25.51
Dividends paid .28125 .2812 .2812 .28125
2002 - in thousands except per share amounts
Operating revenue $ 51,611 $ 69,183 $ 81,440 $ 60,917
Net operating income 5,353 8,405 11,597 5,392
Net income 1,928 6,619 7,675 2,851
Diluted earnings per share 0.12 0.43 0.50 0.19
Common stock market price range:
High 26.25 26.69 26.45 25.95
Low 23.20 23.40 21.60 23.65
Dividends paid .2800 .2800 .2800 .2800
58
Independent Auditors' Report
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CALIFORNIA WATER SERVICE GROUP:
We have audited the accompanying consolidated balance sheets of
California Water Service Group and subsidiaries as of December 31, 2003 and
2002, 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, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with 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 provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of California
Water Service Group and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Mountain View, California
January 27, 2004
Certifications
As provided in the rules of the New York Stock Exchange (NYSE), the
Company's Chief Executive Officer has certified to the NYSE in writing that, as
of March 4, 2004, he was not aware of any violation by the Company of the NYSE's
Corporate Governance listing standards. The Company has included as Exhibits
31.1 and 31.2 to its Annual Report on Form 10-K for the year ended December 31,
2003, certifications from its Chief Executive Officer and Chief Financial
Officer regarding the quality of the Company's public disclosure.
59