Exhibit 13.1 2000 Annual Report to Stockholders
Ten-Year Financial Review
Dollars in thousands, except
common share data 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991
Summary of Operations
Operating revenue
Residential $171,234 $163,681 $150,491 $158,210 $148,313 $132,859 $127,228 $122,585 $111,353 $ 95,393
Business 44,211 41,246 38,854 40,520 37,605 35,873 33,712 31,360 29,208 25,490
Industrial 11,014 12,695 10,150 10,376 9,748 9,952 9,080 8,415 7,905 7,037
Public authorities 11,609 10,898 9,654 11,173 10,509 9,585 9,397 8,535 7,899 6,754
Other 6,738 6,417 5,777 4,886 4,083 4,833 3,767 4,985 7,104 12,799
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total operating revenue 244,806 234,937 214,926 225,165 210,258 193,102 183,184 175,880 163,469 147,473
Operating expenses 211,610 201,890 183,245 188,020 177,356 164,958 155,012 145,517 137,401 121,179
Interest expense, other
income and expenses, net 13,233 11,076 11,821 11,388 11,502 11,176 11,537 12,785 11,794 10,769
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income $ 19,963 $ 21,971 $ 19,860 $ 25,757 $ 21,400 $ 16,968 $ 16,635 $ 17,578 $ 14,274 $ 15,525
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Common Share Data
Earnings per share-diluted $ 1.31 $ 1.44 $ 1.31 $ 1.71 $ 1.42 $ 1.13 $ 1.17 $ 1.26 $ 1.02 $ 1.12
Dividend declared 1.100 1.085 1.070 1.055 1.040 1.020 0.990 0.960 0.930 0.900
Dividend payout ratio 84% 75% 82% 62% 73% 90% 85% 76% 91% 80%
Book value $ 13.13 $ 12.89 $ 12.49 $ 12.15 $ 11.47 $ 10.97 $ 10.72 $ 10.03 $ 9.65 $ 9.48
Market price at year-end 27.00 30.31 31.31 29.53 21.00 16.38 16.00 20.00 16.50 14.00
Common shares outstanding
at year-end (in thousands) 15,146 15,094 15,015 15,015 15,015 14,934 14,890 13,773 13,773 13,773
Return on average common
stockholders' equity 10.1% 11.5% 10.8% 14.5% 12.8% 10.6% 11.1% 12.6% 10.7% 11.8%
Long-term debt interest 3.58 3.73 3.64 4.37 3.81 3.41 3.49 3.34 3.21 3.33
coverage -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Balance Sheet Data
Net utility plant $582,008 $564,390 $538,741 $515,917 $495,985 $471,994 $455,769 $437,065 $419,194 $389,965
Utility plant expenditures 37,161 48,599 41,061 37,511 40,310 31,031 32,435 31,097 37,698 37,935
Total assets 666,605 645,507 613,143 594,444 569,745 553,027 516,507 497,717 451,754 440,294
Long-term debt including
current portion 189,979 171,613 152,674 153,271 151,725 154,416 138,628 138,863 130,971 108,572
Capitalization ratios:
Common stockholders' equity 51.1% 53.0% 54.6% 53.8% 52.7% 50.9% 52.9% 49.3% 49.7% 53.9%
Preferred stock 0.9% 0.9% 1.0% 1.0% 1.1% 1.1% 1.2% 1.2% 1.3% 1.4%
Long-term debt 48.0% 46.1% 44.4% 45.2% 46.2% 48.0% 45.9% 49.5% 49.0% 44.7%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Other Data
Water production (million gallons)
Wells 65,408 65,144 57,482 63,736 60,964 54,818 53,274 48,598 55,641 52,944
Purchased 62,237 58,618 54,661 59,646 56,769 57,560 59,850 59,103 49,303 44,457
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total water production 127,645 123,762 112,143 123,382 117,733 112,378 113,124 107,701 104,944 97,401
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Metered customers 366,242 361,235 354,832 350,139 345,307 335,238 332,146 326,564 322,457 318,275
Flat-rate customers 78,104 77,892 77,568 77,878 77,991 78,330 79,159 81,416 82,617 83,030
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Customers at year-end,
including Hawthorne 444,346 439,127 432,400 428,017 423,298 413,568 411,305 407,980 405,074 401,305
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
New customers added 5,219 6,727 4,383 4,719 9,730 2,263 3,325 2,906 3,769 6,301
Revenue per customer $ 551 $ 535 $ 497 $ 526 $ 497 $ 467 $ 445 $ 431 $ 404 $ 367
Utility plant per customer 1,916 1,851 1,768 1,694 1,632 1,580 1,520 1,459 1,400 1,327
Employees at year-end 797 790 759 752 740 738 729 717 706 689
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
34
Management's Discussion and Analysis of Results of Operations
and Financial Condition
California Water Service Group (Company) is a holding company with four
operating subsidiaries: California Water Service Company (Cal Water), CWS
Utility Services (Utility Services), New Mexico Water Service Company (New
Mexico Water) and Washington Water Service Company (Washington Water). Cal Water
and Washington Water are regulated public utilities. Their assets and operating
revenues currently comprise the majority of the Company's assets and revenues.
New Mexico Water is a new subsidiary formed in 2000 to provide regulated water
services. Utility Services provides non-regulated water operations and related
services to other private companies and municipalities. The following discussion
and analysis provides information regarding the Company, its assets, operations
and financial condition.
Forward-Looking Statements
This annual report, including the Letter to Stockholders and Management's
Discussion and Analysis, contains forward-looking statements within the meaning
of the federal securities laws. Such statements are based on currently available
information, expectations, estimates, assumptions and projections, and
management's judgment about the Company, the water utility industry and general
economic conditions. Such words as expects, intends, plans, believes, estimates,
anticipates or variations of such words or similar expressions are intended to
identify forward-looking statements. The forward-looking statements are not
guarantees of future performance. Actual results may vary materially from what
is contained in a forward-looking statement. Factors which may cause a result
different than expected or anticipated include governmental and regulatory
commissions' decisions, new legislation, increases in suppliers' prices and the
availability of supplies, changes in environmental compliance requirements,
acquisitions, the ability to successfully implement business plans, changes in
customer water use patterns and the impact of weather on operating results. The
Company assumes no obligation to provide public updates of forward-looking
statements.
Business
Cal Water is a public utility supplying water service to 431,900 customers in 75
California communities through 25 separate water systems or districts. Cal
Water's 24 regulated systems, which are subject to regulation by the California
Public Utilities Commission (CPUC) serve 425,800 customers. An additional 6,100
customers receive service through a long-term lease of the City of Hawthorne's
water system, which is not subject to CPUC regulation.
Washington Water's utility operations are regulated by the Washington
Utilities and Transportation Commission (WUTC). Washington Water provides
domestic water service to 12,500 customers in the Tacoma and Olympia areas. An
additional 2,400 customers are served under operating agreements with private
owners.
New Mexico Water was organized in 2000. It currently provides meter reading
services for 48,500 accounts in Santa Fe and Los Alamos. In November, the
Company entered an agreement to acquire the water and wastewater assets of Rio
Grande Utility Corporation. Rio Grande has annual revenue of $1.2 million and
serves 2,300 water and 1,600 wastewater customers south of Albuquerque. The
acquisition is contingent on approval of the state's Public Regulation
Commission, which is expected in the third quarter of 2001.
Utility Services derives non-regulated income from contracts with other
private companies and municipalities to operate water systems and provide meter
reading and billing services for 105,900 customers. It also leases communication
antenna sites, operates recycled water systems, provides meter reading and
customer services, and conducts real estate sales.
Rates and operations for regulated customers are subject to the jurisdiction
of the respective state's regulatory commission. The commissions require that
water rates for each regulated district be independently determined. Rates for
the City of Hawthorne system are established in accordance with an operating
agreement and are subject to ratification by the City Council. Fees for other
operating agreements are based on contracts negotiated among the parties.
Results of Operations
RESTATEMENT. During 2000, the Company issued 2,210,000 shares of common stock in
exchange for all of the outstanding shares of Dominguez Services Corporation.
The acquisition, which was accounted for as a pooling of
35
interests, was completed on May 25, 2000. The accompanying financial statements
have been restated to include the Dominguez accounts in the current and prior
periods.
EARNINGS AND DIVIDENDS. Net income in 2000 was $19,963,000 compared to
$21,971,000 in 1999 and $19,860,000 in 1998. Diluted earnings per common share
were $1.31 in 2000, $1.44 in 1999 and $1.31 in 1998. The weighted average number
of common shares outstanding was 15,173,000 in 2000, 15,142,000 in 1999 and
15,061,000 in 1998.
At its January 2000 meeting, the Board of Directors increased the common
stock dividend for the 33rd consecutive year. 2000 also marked the 56th
consecutive year that a dividend had been paid on the Company's common stock.
The annual dividend paid in 2000 was $1.10, a 1.4% increase over the $1.085 paid
in 1999, which was an increase of 1.4% over the $1.07 paid in 1998. The dividend
increases were based on projections that the higher dividend could be sustained
while still providing the Company with adequate financial flexibility. Earnings
not paid as dividends are reinvested in the business for the benefit of
stockholders. The dividend payout ratio was 84% in 2000, 75% in 1999 and 82% in
1998, an average of 80% during the three-year period.
OPERATING REVENUE. Operating revenue, including revenue from the City of
Hawthorne lease, was $244.8 million, $9.9 million or 4% more than the $234.9
million recorded last year. Revenue in 1998 was $214.9 million. The source of
changes in operating revenue were:
Dollars in millions 2000 1999 1998
Customer water usage $ 4.8 $ 14.0 $ (14.4)
Rate increases 3.0 3.2 2.1
Usage by new customers 2.1 2.8 2.1
------------------------------
Net change $ 9.9 $ 20.0 $ (10.2)
----------------------------------
Average revenue per customer (in dollars) $ 551 $ 535 $ 497
Average metered customer usage (Ccf) 317 305 284
New customers added 5,200 6,700 4,400
Weather always has an important influence on water revenues. The first
quarter of 2000 was wetter than in the previous year, causing a reduction in
customer usage. Second and third quarter weather was normal; however, rains in
the early part of the fourth quarter negatively affected usage. The year-end
customer count was 444,000, an increase of 1.0%.
Weather in the first half of 1999 was normal, while in the prior year it was
cooler and wetter; as a result, customer usage and revenue were higher in 1999.
Third quarter weather in both years was normal. Fourth quarter 1999 weather was
mild and drier than 1998, causing an increase in customer usage and an increase
in revenue. The year-end customer count was 439,000, an increase of 1.6%.
During the first half of 1998, weather in our service areas was wet and
cool, very much the reverse of 1997's favorable weather pattern. Weather in the
second half of the year returned to a more normal pattern. However, the wet,
cool weather in the early part of the year resulted in an overall 9% decrease in
1998 water usage, negatively impacting revenue. The year-end customer count was
432,000, a 1.0% increase.
OPERATING AND INTEREST EXPENSES. Total operating expenses, including those for
the Hawthorne operation, were $211.6 million in 2000, $201.9 million in 1999 and
$183.2 million in 1998.
Wells provided 50.7% of water requirements in 2000 and purchased water
provided 48.7%, with 0.6% obtained from surface supplies. In 1999 the
corresponding percentages were 52.4%, 47.2% and 0.4%, and in 1998, 50.8%, 48.7%
and 0.5%. The table below provides information regarding water production costs
consisting of purchased water, purchased power and pump taxes:
Dollars in millions 2000 1999 1998
Purchased water $73.8 $69.4 $61.0
Purchased power 15.1 14.4 12.5
Pump taxes 6.3 6.9 5.2
----------------------------------------
36
Total water production costs $95.2 $90.7 $78.7
----------------------------------------
Change from prior year 5% 15% (5)%
--------------------------------------
Water production (billion gallons) 128 124 112
--------------------------------------
Change from prior year 3% 10% (9)%
--------------------------------------
The year-to-year water production cost changes are influenced by weather
patterns and sources of supply. In each of the three years, purchased water
expense, the largest component of annual operating expense, was affected by
wholesale suppliers' rate increases. During 2000, seven districts experienced
wholesale price increases ranging from 2% to 7%. Water production costs in 1999
reflect an increase in customer usage and significant purchased water price
increases for the San Francisco Peninsula districts where the wholesale
supplier's rates increased 37%. Despite some wholesale price increases in 1998,
overall water production expenses declined. Well production decreased due to the
decline in water sales and because several wells were out of service for
maintenance. With reduced well production, purchased power and pump tax expenses
declined.
During the last three years, the Company has not been subject to significant
energy rate increases. However, as has been widely publicized, California energy
costs are expected to rise significantly. In January 2001, the CPUC approved
temporary energy surcharges that the Company estimates may increase its power
costs by 10%. The Company believes that energy cost increases are recoverable
from consumers through established CPUC procedures, although on a short-term
basis the regulatory lag in recovering higher energy costs will negatively
impact earnings.
Employee payroll and benefits charged to operations and maintenance expense
was $43.9 million for 2000, $43.0 million in 1999 and $38.8 million in 1998. The
increases in payroll and related benefits are attributable to general wage
increases effective at the start of each year and additional hours worked. At
year-end 2000, 1999 and 1998, there were 797, 790 and 759 employees,
respectively.
During 2000, a curtailment of the Dominguez pension plan was recorded
resulting in a gain of $1.2 million which was offset against operating expenses.
The curtailment occurred because the Dominguez plan was frozen at the merger
date and its participants became participants in the Company pension plan.
Previous amounts expensed by Dominguez but not funded to the plan comprise the
curtailment amount. This amount is not included in the $43.9 million reported
for payroll and benefits charged to operations and maintenance expense.
Income tax expense was $11.6 million in 2000, $13.5 million in 1999 and
$11.4 million in 1998. The changes in taxes are generally due to variations in
taxable income. There is no state income tax in Washington.
In 2000, interest on long-term debt was unchanged from 1999. In October, $20
million, Series C, 8.15% senior notes were issued. The added interest expense
was offset by sinking fund reductions of outstanding bonds and interest
capitalized on constructed assets. Long-term debt interest expense increased $1
million in 1999 because of the issue of Series B, 6.77% senior notes in March.
Short-term bank borrowing interest expense increased in 2000 by $0.7 million
because of higher borrowings to meet operating and interim construction funding
needs. Bank borrowings were reduced when Series C senior notes were issued. In
1999, other interest expense decreased $0.4 million. Short-term borrowings were
reduced after the issue of Series B senior notes and by strong cash flow from
operations. Interest coverage of long-term debt before income taxes was 3.6
times in 2000, 3.7 times in 1999 and 3.6 times in 1998. There was $14.6 million
in short-term borrowings at the end of 2000, $14.0 million at the end of 1999
and $22.9 million at the end of 1998.
OTHER INCOME AND EXPENSES. Other income is derived from management contracts
whereby the Company operates private and municipally owned water systems,
agreements for operation of two recycled water systems, contracts for meter
reading and billing services to various cities, leases of communication antenna
sites, surplus property sales, other non-utility sources and interest on
short-term investments. Total other income was $1.8 million in 2000, $3.6
million in 1999 and $2.1 million in 1998. During 1999, $1.3 million in pre-tax
profits were recorded from properties sold as part of the Real Estate Program
that is described in more detail in the "Liquidity and Capital Resources"
section of this report. There were no property sales in 2000 or 1998.
37
Rates and Regulation
The Company's regulatory staff reviewed 15 Cal Water districts that were
eligible for general rate filings in 2000. Based on current earnings levels,
projected expense increases and expected capital expenditures, applications were
filed in July 2000 for three districts representing about 25% of Cal Water
customers. The applications request a 10.75% return on equity and would provide
$3.4 million in new revenue in 2001 and $7.2 million in 2002. A CPUC decision is
expected during the second quarter of 2001. There can be no assurance that the
increases will be granted as requested.
Step rate increases of $0.8 million for 2001 from prior general rate
decisions were effective in January.
New water rates for the City of Hawthorne water system, which the Company
operates under a long-term lease, became effective in early August 2000. The
rates are designed to add $0.3 million in annual revenue in their first full
year. Step rate increases of $0.2 million will be effective on July 1, 2001 and
2002. Additionally, there will be a surcharge added to customer bills for a
two-year period starting in August 2001 designed to produce $0.5 million in
annual revenue.
Effective in August 2000, offset rate increases to recover increases in
water production expenses became effective in four Cal Water districts. The
rates generated $1.6 million in additional 2000 revenue and are expected to add
$1.8 million in 2001.
Prior to and unrelated to the merger with the Company, Dominguez Services
Corporation filed a general rate increase application with the CPUC. A CPUC
decision was issued in October 2000 authorizing an increase in customer rates
and granting a return on equity of 9.95%. For 2000, $0.2 million in new revenue
was received from the rate increase and for the full year 2001, $1.7 million is
expected.
During 1999, the Company's regulatory staff completed a review of 14 Cal
Water districts that were eligible for general rate application filings. Based
on existing earnings levels, projected expense increases and expected capital
expenditures, a determination was made that no general rate increase
applications were necessary.
In May 1999, the CPUC authorized general rate increases for the rate
applications filed in July 1998 affecting four districts representing about 25%
of Cal Water's customers. The decision generated $4.1 million in new revenue
during the twelve months following the mid-June effective date. The decision's
9.55% authorized return on equity provided $1.9 million in new annual revenue.
In addition, the decision provided another $2.2 million in annual revenue for
environmental compliance, specific capital budget expenditures and recovery of
General Office expenses. The $2.2 million is not reflected in the 9.55% return
on equity calculation.
CPUC decisions were received in July 1998 for the general rate applications
filed in July 1997. Additional annual revenue from these decisions was $0.3
million in 1998, $0.3 million in 1999 and $0.1 million in 2000, with $0.1
million expected in 2001. In a variance from its past practice, future rate
increases for operating costs and capital requirements over the next five years
in the Oroville and Selma districts are tied to changes in a price index. The
decision maintained the Return on Equity (ROE) at 10.35%.
Water Supply
The Company's source of supply varies among its operating districts. Certain
districts obtain all of their supply from wells, some districts purchase all of
their supply from wholesale suppliers and other districts obtain their supply
from a combination of well and purchased sources. A small portion of the supply
is from surface sources. On average, approximately half of the water is provided
from wells and about half purchased.
California's normal weather pattern yields little precipitation between
mid-spring and mid-fall. The Washington service areas receive precipitation in
all seasons with the heaviest amounts during the winter. Water usage is highest
during the warm 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 2000-2001 water year has been less than
normal; however, the prior four years were at or exceeded normal levels. Water
storage in California's reservoirs at the end of 2000 was at 107% of historic
average, so the state will enter 2001 with ample storage. The Company believes
that its supply from underground aquifers and purchased sources should be
adequate to meet customer demand during 2001.
Environmental Matters
The Company is subject to regulations of the United States Environmental
Protection Agency (EPA), state health service departments and various local
health departments concerning water quality matters. It is also subject to the
jurisdiction of various state and local regulatory agencies relating to
environmental matters, including handling and
38
disposal of hazardous materials. The Company strives for complete compliance
with all requirements set forth by the various agencies.
The Safe Drinking Water Act (SDWA) was amended in 1996 to provide a new
process for the EPA to select and regulate waterborne contaminants. The EPA can
now regulate only contaminants that are known or likely to occur at levels
expected to pose a risk to public health when regulation would provide a
meaningful opportunity to reduce a health risk. New drinking water regulations
will be based primarily on risk assessment and measurement of cost/benefit
considerations for minimizing overall health risk. The amended SDWA allows EPA
to require monitoring of up to 30 contaminants in any five-year cycle. Also,
every five years the EPA must select at least five listed contaminants and
determine if they should be regulated.
The Company has an established water supply monitoring program to test for
contaminants in accordance with SDWA requirements. Water pumped from underground
sources is treated as necessary or required by regulations. The Company owns and
operates three surface water treatment plants. The cost of existing treatment is
being recovered in customer rates as authorized by the regulatory authorities.
Water purchased from wholesale suppliers is treated before delivery to the
Company's systems.
Enforcement of the EPA standards is the responsibility of individual states.
The states can impose more stringent regulation than mandated by EPA. In
addition to the EPA's requirements, various regulatory agencies could require
increased monitoring and possibly require additional treatment of water
supplies.
In January 2001, EPA released a new, lower regulatory limit for arsenic, a
naturally-occurring element, that is sometimes present in groundwater. It is
anticipated that EPA will issue other regulations that will require further
monitoring and possible treatment for specific contaminants. Depending on the
action levels contained in the regulations, the cost of compliance with the new
regulations could be significant in certain Company districts. The Company
intends to request recovery for capital investments and additional treatment
costs needed to remain in compliance with established health standards through
the ratemaking process.
Liquidity and Capital Resources
LIQUIDITY. The Company's liquidity is provided by bank lines of credit and
internally generated funds. The Company has a $50 million line of credit with a
bank, of which $20 million is designated for the parent and $30 million is
available to Cal Water. The $20 million portion may be drawn on for use by the
Company, including funding of its subsidiaries' operations. Cal Water's $30
million portion can be used solely for purposes of the regulated utility.
The Company has committed $7.6 million of the $20 million credit line to a
contractor who is constructing a combined customer/operation center to serve the
South Bay Los Angeles operations. When complete in the fall of 2001, the Company
will exchange real property on a tax-free basis with the contractor for the
customer/operation center. At December 31, 2000, $3.5 million had been drawn to
acquire land and commence construction.
Washington Water has loan commitments from two banks to meet its operating
and capital equipment purchase requirements. At December 31, 2000, the total
available under these commitments was $0.4 million. Generally, short-term
borrowings under the commitments are converted annually to long-term borrowings
with repayment terms tied to system and equipment acquisitions.
The water business is seasonal. Revenue is lower in the winter months when
water usage declines from the higher-use summer period. During the winter
period, the need for short-term borrowings under the bank lines of credit
increases. The larger summer cash flow allows short-term borrowings to be paid
down. Short-term borrowings that remain outstanding more than one year have
generally been converted to long-term debt. The Company believes that long-term
financing is available to it through debt and equity markets. Standard & Poor's
and Moody's have maintained their ratings of Cal Water's first mortgage bonds at
AA- and Aa3, respectively. These are the highest ratings for senior debt in the
water industry. Long-term financing, which includes common stock, first mortgage
bonds, senior notes and other debt securities has been used to replace
short-term borrowings and fund construction. Developer contributions in aid of
construction and refundable advances for construction are also sources of funds
for various construction projects. Internally generated funds come from
retention of earnings not paid out as dividends, depreciation and deferred
income taxes. Additional information regarding the bank borrowings and long-term
debt is presented in notes 7 and 8 to the financial statements.
In October 2000, Series C, 8.15%, 30-year senior notes were issued and in
March 1999, Series B, 6.77%, 30-year senior notes were issued. Each issue is for
$20 million. During the four years prior to the Series B issue, the
39
Company's operating and capital requirements were met by borrowings under the
bank short-term line of credit and internally generated funds.
The Company has a Dividend Reinvestment Plan and Stock Purchase Plan (Plan).
Under the Plan, stockholders may reinvest dividends to purchase additional
Company common stock. The Plan also allows existing stockholders and other
interested investors to purchase Company common stock through the transfer
agent. The Plan provides that shares required for the Plan may be purchased on
the open market or be newly issued shares. Therefore, the Plan provides the
Company with an alternative means of developing additional equity if new shares
were issued. During 2000 and 1999 shares were purchased on the open market. At
this time, the Company intends to continue purchasing shares required for the
Plan on the open market. However, if new shares were issued to satisfy future
Plan requirements, the impact on earnings per share could be dilutive because of
the additional shares outstanding. Also, stockholders may experience dilution of
their ownership percentage.
CAPITAL REQUIREMENTS. Capital requirements consist primarily of new construction
expenditures for expanding and replacing the Company's utility plant facilities
and the acquisition of new water properties. They also include refunds of
advances for construction and retirement of bonds.
The 2000 utility plant expenditures totaled $37.1 million. During 1999,
total utility plant expenditures were $48.6 compared to $41.1 million in 1998.
The 2000 expenditures included $33.5 million provided by Company funds and $3.6
million received from developers for contributions in aid of construction and
refundable advances for construction. Company projects were funded by internally
generated funds, borrowings under bank credit lines and commitments, and
issuance of the $20 million Series C senior notes.
Several major projects account for an increase in the 2001 construction
budget to $53.9 million. In 2001, construction will commence on a three-year
project to construct a treatment plant to accommodate growth and meet water
quality standards in the Bakersfield district. $10.8 million is budgeted for
this project in 2001. Over the three-year period, the plant and related pumping
and pipeline facilities are estimated to cost $45 million. Also in the 2001
budget is $4.6 million for construction of office/operation centers in the Chico
and Stockton districts. These facilities will replace existing office/operation
centers that have become inadequate due to age and district growth. The budget
will be funded by operations, bank borrowings and long-term debt and equity
financing. New subdivision construction will be financed by developers'
contributions and refundable advances for construction. The Company-funded
construction budgets over the next five years are projected to be about $275
million.
CAPITAL STRUCTURE. Common stockholders' equity increased by the amount of
earnings not paid out for dividends. New equity issued in 1999 and 1998 was to
acquire water systems. The long-term debt portion of the capital structure
increased due to the issuance of Series B and C senior notes. It was reduced by
first mortgage bond sinking fund payments.
The Company's total capitalization at December 31, 2000, was $389.4 million
and at the end of 1999 was $366.9 million.
Capital ratios were:
2000 1999
Common equity 51.1% 53.0%
Preferred stock 0.9% 0.9%
Long-term debt 48.0% 46.1%
The 2000 return on average common equity was 10.1% compared to 11.5% in 1999
and 10.8% in 1998.
OTHER ACQUISITIONS. On January 25, 2001, the CPUC approved the Company's
acquisition of the Nish water systems in Visalia. The four systems serve 1,100
customers and have annual revenue of $1.2 million. The Company will issue common
stock valued at $0.8 million and assume debt of $0.2 million to complete the
transaction.
On April 12, 2000, Washington Water received approval from the WUTC to
purchase the assets of Mirrormount Water Services and Lacamas Farmsteads Water
Company. The acquisitions were completed in April 2000. Together the companies
serve almost 800 customers and produce annual revenue of about $250,000.
Washington Water also purchased the assets of Robischon Engineers, Inc. in April
2000. This acquisition added in-house
40
engineering capabilities to the Washington operation, enabling Washington Water
to provide water system design services to other water providers.
During 1999 the Company invested in a firm that provides meter-reading
services in Santa Fe, New Mexico and assumed responsibility for this contract in
April 2000. The Company's agreement is with Avistar, a subsidiary of Public
Service of New Mexico, which operates the 26,000-account water system for the
city. The acquisition of the Rio Grande Utility Corporation, which serves 2,300
water and 1,600 wastewater customers, for $2.3 million in cash and assumed debt
of $3.1 million is expected to be completed in the third quarter of 2001.
REAL ESTATE PROGRAM. The Company's subsidiaries own more than 900 real estate
parcels. Certain parcels are not necessary for or used in water utility
operations. Most surplus properties have a low cost basis. A program has been
developed to realize the value of certain surplus properties through sale or
lease of those properties. The program will be ongoing for a period of several
years. During the next four years, the Company estimates that gross property
transactions totaling over $10 million dollars could be completed. In 1999, $1.3
million in pretax sales were completed. No transactions were completed during
2000; however, $4 million in pretax property sales are anticipated to close
during 2001.
STOCKHOLDER RIGHTS PLAN. As explained in Note 6 to the Consolidated Financial
Statements, in January 1998, the Board of Directors adopted a Stockholder Rights
Plan (Plan). In connection with the Plan, a dividend distribution of one right
for each common share to purchase preferred stock under certain circumstances
was also authorized. The Plan is designed to protect stockholders and maximize
stockholder value in the event of an unsolicited takeover proposal by
encouraging a prospective acquirer to negotiate with the Board.
Financial Risk Management
The Company does not participate in hedge arrangements, such as forward
contracts, swap agreements, options or other contractual agreements relative to
the impact of market fluctuations on its assets, liabilities, production or
contractual commitments. The Company operates only in the United States, and
therefore, is not subject to foreign currency exchange rate risks.
INTEREST RATE RISK. The Company does have exposure to market risk that includes
changes in interest rates. Interest rate risk exists because the Company's
financing includes the use of long-term debt obligations with maturity dates up
to 30 years from the date of issue and during the outstanding period interest
rates are subject to fluctuation. The Company's long-term obligations are first
mortgage bonds and senior note obligations that are generally placed with
insurance companies. Washington Water's long-term obligations are for periods of
up to 10 years and are placed with two banks. During 2000, the Company issued a
single series of $20 million, 30-year senior notes at 8.15%. To expand access to
capital debt markets, the Company may investigate the use of private and public
markets for future debt issues. It may also consider financing on a company-wide
basis, rather than on a subsidiary-by-subsidiary basis.
The Company's short-term financing is provided by bank lines of credit that
are discussed under the "Liquidity and Capital Resources" section of this
report. Short-term borrowings that are not repaid from operating cash or funded
by retained earnings are generally converted to long-term debt issues. The
Company plans to continue the financing of its construction program in this
manner. Financing of acquisitions have been done using Company common stock or
through the debt financing vehicles available to the subsidiary companies.
VALUE RISK. Because the Company operates primarily in a regulated industry, its
value risk is somewhat lessened; however, regulated parameters also can be
recognized as limitations to operations and earnings, and the ability to respond
to certain business condition changes. Non-regulated operations are subject to
risk of contract constraints and performance by the Company in achieving its
objectives. Value risk management is accomplished using various financial models
that consider changing business parameters. It is also supplemented by
considering various risk control processes that may be available as
circumstances warrant.
EQUITY RISK. The Company does not have equity investments, therefore, it does
not have equity risks.
41
New Accounting Standard
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The statement as amended, establishes new accounting
and reporting standards for derivative financial instruments and hedging
activities. The Company adopted the standard on January 1, 2001. Its adoption is
not anticipated to have a material impact on the Company's results of operations
or financial position.
42
Consolidated Balance Sheet
In thousands, except per share data
December 31, 2000 and 1999 2000 1999
Assets
Utility plant
Land $ 10,641 $ 10,440
Depreciable plant and equipment 797,403 776,795
Construction work in progress 31,400 14,661
Intangible assets 11,837 10,790
------------------------
Total utility plant 851,281 812,686
Less accumulated depreciation and amortization 269,273 248,296
-------------------------
Net utility plant 582,008 564,390
-------------------------
Current assets:
Cash and cash equivalents 3,241 1,655
Receivables:
Customers 15,163 14,333
Other 5,450 4,777
Unbilled revenue 7,964 8,199
Materials and supplies at average cost 2,718 2,247
Taxes and other prepaid expenses 6,257 7,140
-----------------------
Total current assets 40,793 38,351
------------------------
Other assets:
Regulatory assets 38,133 37,441
Unamortized debt premium and expense 3,817 3,503
Other 1,854 1,822
-----------------------
Total other assets 43,804 42,766
------------------------
$666,605 $645,507
--------------------------
43
Consolidated Balance Sheet (continued)
In thousands, except per share data
December 31, 2000 and 1999 2000 1999
Capitalization and Liabilities
Capitalization:
Common stock, $.01 par value; 25,000 shares authorized,
15,146 and 15,094 shares outstanding in 2000 and 1999, respectively $ 151 $ 151
Additional paid-in capital 49,984 49,340
Retained earnings 149,185 145,610
Accumulated other comprehensive loss (486) (517)
-----------------------
Total common stockholders' equity 198,834 194,584
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 187,098 168,866
-------------------------
Total capitalization 389,407 366,925
-------------------------
Current liabilities:
Current maturities of long-term debt 2,881 2,747
Short-term borrowings 14,598 13,999
Accounts payable 26,493 26,748
Accrued taxes 3,976 3,556
Accrued interest 2,579 2,092
Other accrued liabilities 13,209 13,569
------------------------
Total current liabilities 63,736 62,711
------------------------
Unamortized investment tax credits 2,989 3,096
Deferred income taxes 25,620 25,796
Regulatory and other liabilities 20,316 22,544
Advances for construction 105,562 105,556
Contributions in aid of construction 58,975 58,879
------------------------
$666,605 $645,507
--------------------------
See accompanying notes to consolidated financial statements.
44
Consolidated Statement of Income
In thousands, except per share data
For the years ended December 31, 2000, 1999 and 1998 2000 1999 1998
Operating revenue $244,806 $234,937 $214,926
-------------------------------------------
Operating expenses:
Operations:
Purchased water 73,768 69,351 60,958
Purchased power 15,136 14,355 12,541
Pump taxes 6,275 6,856 5,162
Administrative and general 32,974 32,266 29,784
Other 32,308 28,963 28,131
Maintenance 11,592 10,200 10,191
Depreciation and amortization 18,368 17,246 16,309
Income taxes 11,571 13,515 11,425
Property and other taxes 9,618 9,138 8,744
----------------------------------------
Total operating expenses 211,610 201,890 183,245
------------------------------------------
Net operating income 33,196 33,047 31,681
Other income and expenses, net 1,413 3,089 1,746
-----------------------------------------
Income before interest expense 34,609 36,136 33,427
-----------------------------------------
Interest expense:
Long-term debt interest 12,901 13,084 12,125
Other interest 1,745 1,081 1,442
-----------------------------------------
Total interest expense 14,646 14,165 13,567
-----------------------------------------
Net income $ 19,963 $ 21,971 $ 19,860
-------------------------------------------
Earnings per share:
Basic $ 1.31 $ 1.45 $ 1.31
-------------------------------------------
Diluted $ 1.31 $ 1.44 $ 1.31
-------------------------------------------
Weighted average number of common shares outstanding:
Basic 15,126 15,090 15,014
------------------------------------------
Diluted 15,173 15,142 15,061
------------------------------------------
See accompanying notes to consolidated financial statements.
45
Consolidated Statement of Common Stockholders' Equity
and Comprehensive Income
In thousands Accumulated
Additional Other Total Total
For the years ended Common Paid-in Retained Comprehensive Stockholders' Comprehensive
December 31, 2000, 1999 and 1998 Stock Capital Earnings Income (Loss) Equity Income
Balance at December 31, 1997 $150 $48,372 $134,236 $ -- $182,758 $ --
-----------------------------------------------------------------------------------
Net income -- -- 19,860 -- 19,860 19,860
-----------------------------------------------------------------------------------
Dividends paid:
Preferred stock -- -- 153 -- 153 --
Common stock -- -- 14,889 -- 14,889 --
-----------------------------------------------------------------------------------
Total dividends paid -- -- 15,042 -- 15,042 --
-----------------------------------------------------------------------------------
Income reinvested in business -- -- 4,818 -- 4,818 --
-----------------------------------------------------------------------------------
Balance at December 31, 1998 150 48,372 139,054 -- 187,576 19,860
-----------------------------------------------------------------------------------
Issuance of common stock 1 968 -- -- 969 --
-----------------------------------------------------------------------------------
Net income -- -- 21,971 -- 21,971 21,971
-----------------------------------------------------------------------------------
Dividends paid:
Preferred stock -- -- 153 -- 153 --
Common stock -- -- 15,262 -- 15,262 --
-----------------------------------------------------------------------------------
Total dividends paid -- -- 15,415 -- 15,415 --
-----------------------------------------------------------------------------------
Income reinvested in business -- -- 6,556 -- 6,556 --
-----------------------------------------------------------------------------------
Other comprehensive loss -- -- -- (517) (517) (517)
-----------------------------------------------------------------------------------
Balance at December 31, 1999 151 49,340 145,610 (517) 194,584 21,454
-----------------------------------------------------------------------------------
Issuance of common stock -- 644 -- -- 644 --
-----------------------------------------------------------------------------------
Net income -- -- 19,963 -- 19,963 19,963
-----------------------------------------------------------------------------------
Dividends paid:
Preferred stock -- -- 152 -- 152 --
Common stock -- -- 16,236 -- 16,236 --
-----------------------------------------------------------------------------------
Total dividends paid -- -- 16,388 -- 16,388 --
-----------------------------------------------------------------------------------
Income reinvested in business -- -- 3,575 -- 3,575 --
-----------------------------------------------------------------------------------
Other comprehensive income -- -- -- 31 31 31
-----------------------------------------------------------------------------------
Balance at December 31, 2000 $151 $49,984 $149,185 $(486) $198,834 $19,994
-----------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
46
Consolidated Statement of Cash Flows
In thousands
For the years ended December 31, 2000, 1999 and 1998 2000 1999 1998
Operating activities:
Net income $ 19,963 $ 21,971 $ 19,860
------------------------------------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 18,368 17,246 16,309
Deferred income taxes, investment tax credits,
and regulatory assets and liabilities, net (3,203) 1,360 503
Changes in operating assets and liabilities
Receivables (1,503) (2,324) 2,224
Unbilled revenue 235 (1,187) (780)
Accounts payable (255) 7,623 332
Other current assets and liabilities 1,093 (649) 2,272
Other changes, net (71) 3,334 892
---------------------------------------
Net adjustments 14,664 25,403 21,752
-----------------------------------------
Net cash provided by operating activities 34,627 47,374 41,612
-----------------------------------------
Investing activities:
Utility plant expenditures
Company funded (33,540) (35,535) (35,963)
Developer advances and contributions in aid of construction (3,621) (12,984) (5,098)
Other investments -- (80) --
---------------------------------------
Net cash used in investing activities (37,161) (48,599) (41,061)
-------------------------------------------
Financing activities:
Net short-term borrowings 599 (8,951) 8,450
Issuance of common stock 644 46 --
Issuance of long-term debt 20,326 20,062 --
Advances for construction 3,846 7,480 3,972
Refunds of advances for construction (3,870) (4,056) (3,939)
Contributions in aid of construction 1,883 4,814 3,982
Retirement of long-term debt (2,920) (2,318) (785)
Dividends paid (16,388) (15,415) (15,042)
-------------------------------------------
Net cash provided (used) in financing activities 4,120 1,662 (3,362)
----------------------------------------
Change in cash and cash equivalents 1,586 437 (2,811)
Cash and cash equivalents at beginning of year 1,655 1,218 4,029
----------------------------------------
Cash and cash equivalents at end of year $ 3,241 $ 1,655 $ 1,218
--------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 14,785 $ 13,796 $ 11,922
Income taxes 11,775 11,499 9,501
Non-cash financing activity-common stock issued in acquisitions -- 923 --
See accompanying notes to consolidated financial statements.
47
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
Note 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 and New Mexico. During 1999, the Company reincorporated
as a Delaware corporation. California Water Service Company (Cal Water) and
Washington Water Service Company (Washington Water) provide regulated utility
services under the rules and regulations of their respective regulatory
commissions (jointly referred to as Commissions). CWS Utility Services provides
non-regulated water utility and utility-related services in all three states.
New Mexico Water Service Company was formed in 2000 to provide regulated utility
services.
The Company operates primarily in one business segment, providing water and
related utility services.
Note 2.
Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. The financial statements give retroactive effect
to acquisitions, which were accounted for as pooling of interests. Accordingly,
the Company's consolidated financial statements and footnotes have been restated
to include Dominguez Services Corporation and subsidiaries (Dominguez) as if the
merger had been completed as of the beginning of the earliest period presented.
Intercompany transactions and balances have been eliminated.
The accounting records of the Company are maintained in accordance with the
uniform system of accounts prescribed by the Commissions. Certain prior years'
amounts have been reclassified, where necessary, to conform to the current
presentation.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE Revenue consists of monthly cycle customer billings for regulated water
service at rates authorized by the Commissions and billings to certain
non-regulated customers. Revenue from metered accounts includes unbilled amounts
based on the estimated usage from the latest meter reading to the end of the
accounting period. Flat-rate accounts, which are billed at the beginning of the
service period, are included in revenue on a pro rata basis for the portion
applicable to the current accounting period.
UTILITY PLANT Utility plant is carried at original cost when first constructed
or purchased, except for certain minor units of property recorded at estimated
fair values at dates of acquisition. Cost of depreciable plant retired is
eliminated from utility plant accounts and such costs are charged against
accumulated depreciation. Maintenance of utility plant is charged primarily to
operation expenses. Interest is capitalized on plant expenditures during the
construction period and amounted to $703,000 in 2000, $324,000 in 1999 and
$224,000 in 1998.
Intangible assets acquired as part of water systems purchased are stated at
amounts as prescribed by the Commissions. All other intangibles have been
recorded at cost. Included in intangible assets is $6,500,000 paid to the City
of Hawthorne to lease the city's water system and associated water rights. The
lease payment is being amortized on a straight-line basis over the 15-year life
of the lease. The Company continually evaluates the recoverability of utility
plant by assessing whether the amortization of the balance over the remaining
life can be recovered through the expected and undiscounted future cash flows.
DEPRECIATION Depreciation of utility plant for financial statement purposes is
computed on the straight-line remaining life method at rates based on the
estimated useful lives of the assets, ranging from 5 to 65 years. The provision
for depreciation expressed as a percentage of the aggregate depreciable asset
balances was 2.4% in 2000 and 2.5% in 1999 and 1998. For income tax purposes, as
applicable, the Company computes depreciation using the
48
accelerated methods allowed by the respective taxing authorities. Plant
additions since June 1996 are depreciated on a straight-line basis for tax
purposes in accordance with tax regulations.
CASH EQUIVALENTS Cash equivalents include highly liquid investments, primarily
U.S. Treasury and U.S. Government agency interest bearing securities, stated at
cost with original maturities of three months or less.
RESTRICTED CASH Restricted cash represents proceeds collected through a
surcharge on certain customers' bills plus interest earned on the proceeds. The
restricted cash is to service California Safe Drinking Water Bond obligations
and is classified in other prepaid expenses. At December 31, 2000 and 1999, the
amounts restricted were $755,000 and $724,000, respectively.
LONG-TERM DEBT PREMIUM, DISCOUNT AND EXPENSE The discount and issuance expense
on long-term debt is amortized over the original lives of the related debt
issues. Premiums paid on the early redemption of certain debt issues and
unamortized original issue discount and expense of such issues are amortized
over the life of new debt issued in conjunction with the early redemption.
ACCUMULATED OTHER COMPREHENSIVE LOSS The Company has an unfunded Supplemental
Executive Retirement Plan. The unfunded accumulated benefit obligation of the
plan exceeds the accrued benefit cost. This amount exceeds the unrecognized
prior service cost; therefore accumulated other comprehensive loss has been
recorded as a separate component of Stockholders' Equity.
ADVANCES FOR CONSTRUCTION Advances for Construction consist of payments received
from developers for installation of water production and distribution facilities
to serve new developments. Advances are excluded from rate base for rate setting
purposes. Annual refunds are made to developers without interest over a 20-year
or 40-year period. Refund amounts under the 20-year contracts are based on
annual revenues from the extensions. Unrefunded balances at the end of the
contract period are credited to Contributions in Aid of Construction and are no
longer refundable. Refunds on contracts entered into since 1982 are made in
equal annual amounts over 40 years. At December 31, 2000, the amounts refundable
under the 20-year contracts were $8,688,000 and under 40-year contracts were
$96,874,000. Estimated refunds for 2001 for all water main extension contracts
are $4,100,000.
CONTRIBUTIONS IN AID OF CONSTRUCTION Contributions in Aid of Construction
represent payments received from developers, primarily for fire protection
purposes, which are not subject to refunds. Facilities funded by contributions
are included in utility plant, but excluded from rate base. Depreciation related
to contributions is charged to Contributions in Aid of Construction.
INCOME TAXES The Company accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Measurement of the deferred tax assets and liabilities is at enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
It is anticipated that future rate action by the Commissions will reflect
revenue requirements for the tax effects of temporary differences recognized,
which have previously been flowed through to customers.
The Commissions have granted the Company customer rate increases to reflect
the normalization of the tax benefits of the federal accelerated methods and
available Investment Tax Credits (ITC) for all assets placed in service after
1980. ITC are deferred and amortized over the lives of the related properties
for book purposes.
Advances for Construction and Contributions in Aid of Construction received
from developers subsequent to 1986 were taxable for federal income tax purposes
and subsequent to 1991 were subject to California income tax. In 1996 the
federal tax law, and in 1997 the California tax law, changed and only deposits
for new services were taxable. In late 2000, federal regulations were further
modified to exclude fire services from tax.
EARNINGS PER SHARE Basic earnings per share (EPS) is calculated by dividing
income available to common stockholders by the weighted average shares
outstanding during the year. Diluted EPS is calculated by dividing
49
income available to common stockholders by the weighted average shares
outstanding and potentially dilutive shares.
STOCK-BASED COMPENSATION The Company adopted Statement on Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation." The Company elected
to adopt the provision of the statement that allows the continuing practice of
not recognizing compensation expense related to the granting of employee stock
options to the extent that the option price of the underlying stock was equal to
or greater than the market price on the date of the option grant.
Note 3.
Merger with Dominguez Services Corporation
The Merger between the Company and Dominguez was completed on May 25, 2000. On
the merger date, each outstanding Dominguez common share was exchanged for 1.38
shares of Company common stock. The Company issued 2,210,254 new common shares
in exchange for the 1,601,679 outstanding Dominguez shares. Dominguez provided
water service to about 40,000 customers in 21 California communities. The former
Dominguez operations became districts within Cal Water.
The Merger was accounted for as a pooling of interests. There were no
intercompany transactions as a result of the Merger. Certain reclassifications
were made to the historic financial statements of the companies to conform
presentation.
For the periods indicated below, the Company and Dominguez reported the
following items:
6 Months Year Year
Ended Ended Ended
Unaudited - In thousands 6-30-00 12-31-99 12-31-98
Revenue:
Company $ 98,428 $206,440 $189,659
Dominguez 14,232 28,497 25,267
-----------------------------------------
$112,660 $234,937 $214,926
-------------------------------------------
Net income:
Company $ 6,139 $ 19,919 $ 18,936
Dominguez 1,147 2,052 924
----------------------------------------
$ 7,286 $ 21,971 $ 19,860
---------------------------------------------
Dominguez previously reported net of tax extraordinary items related to
merger transaction expenses. The Company reclassified the extraordinary items
into "Operating expenses" in the income statement. The reclassified amounts were
for the six months ended June 30, 2000, $167,000; for the year ended December
31, 1999, $190,000; and for the year ended December 31, 1998, $499,000.
No adjustments were made to the Dominguez net assets in applying the
accounting practices of the Company. Dominguez previously reported common stock
of $1,542,000 that was reclassified by the Company to "Paid-in-Capital" in
accordance with the Company's financial statement presentation. The Company and
Dominguez each had December 31 year-ends; therefore no adjustment was required
to retained earnings due to a change in fiscal year-ends.
Note 4.
Other Acquisitions
In 1999, the Company acquired all of the outstanding stock of Harbor Water
Company and South Sound Utility Company, which form the operations of Washington
Water, serving 14,900 regulated and non-regulated customers. The acquisitions
were accounted for as pooling of interests in exchange for 316,472 shares of
Company stock and assumption of long-term debt of $2,959,000. The results of
operations previously reported by the separate entities are included in the
accompanying consolidated financial statements.
During 1998, the Company purchased the assets of Lucerne Water Company,
Rancho del Paradiso Water Company and Armstrong Valley Water Company. These
investor-owned systems serve 1,624 accounts.
50
The acquisitions were completed effective January 1, 1999, in exchange for the
equivalent of 75,164 shares of Company common stock. The acquisitions were
accounted for under purchase accounting. The purchases were completed on a
non-cash basis in which the Company issued common stock valued at $922,000 and
assumed debt obligations of $1,108,000.
Two other water company asset acquisitions were completed in 1999. The
acquired companies served 288 customers. The acquisitions were accounted for
under purchase accounting.
On April 12, 2000, Washington Water received approval from the Washington
Utilities and Transportation Commission to purchase the assets of Mirrormount
Water Services and Lacamas Farmsteads Water Company. The acquisitions were
completed in April 2000 for $639,000 in cash and assumed debt. Together the
companies serve almost 800 customers and produce annual revenue of about
$250,000. To provide in-house engineering, Washington Water also purchased the
assets of Robischon Engineers, Inc. in April 2000 for $70,000 in cash. The
acquisitions were accounted for by purchase accounting.
During 1999 the Company invested in a firm that provides meter-reading
services in Santa Fe, New Mexico. In April 2000, the Company assumed
responsibility for this contract. The Company's agreement is with Avistar, a
subsidiary of Public Service of New Mexico, which operates the 26,000-account
water system for the city. New Mexico Water has agreed to acquire the Rio Grande
Utility Corporation, which serves 2,300 water and 1,600 wastewater customers,
for $2.3 million in cash and assumed debt of $3.1 million. The acquistion is
expected to be completed in the third quarter of 2001 after approval of the
state's regulatory authority is received.
Note 5.
Preferred Stock
As of December 31, 2000 and 1999, 380,000 shares of preferred stock were
authorized. Dividends on outstanding shares are payable quarterly at a fixed
rate before any dividends can be paid on common stock. Preferred shares are
entitled to sixteen votes, each with the right to cumulative votes at any
election of directors.
The outstanding 139,000 shares of $25 par value cumulative, 4.4% Series C
preferred shares are not convertible to common stock. A premium of $243,250
would be due upon voluntary liquidation of Series C. There is no premium in the
event of an involuntary liquidation.
Note 6.
Common Stockholders' Equity
The Company is authorized to issue 25,000,000 shares of $.01 par value common
stock. As of December 31, 2000 and 1999, 15,145,866 and 15,093,627 shares of
common stock were issued and outstanding, respectively. All shares of common
stock are eligible to participate in the Company's dividend reinvestment plan.
Approximately 10% of the outstanding shares participate in the plan.
STOCKHOLDER RIGHTS PLAN The Company's Stockholder Rights Plan (the Plan) is
designed to provide stockholders protection and to maximize stockholder value by
encouraging a prospective acquirer to negotiate with the Board. The Plan was
adopted in 1998 and authorized a dividend distribution of one right (Right) to
purchase 1/100th share of Series D Preferred Stock for each outstanding share of
Common Stock in certain circumstances. The Rights are for a ten-year period that
expires in February 2008.
Each Right represents a right to purchase 1/100th share of Series D
Preferred Stock at the price of $120, subject to adjustment (the Purchase
Price). Each share of Series D Preferred Stock is entitled to receive a dividend
equal to 100 times any dividend paid on common stock and 100 votes per share in
any stockholder election. The Rights become exercisable upon occurrence of a
Distribution Date. A Distribution Date event occurs if (a) any person
accumulates 15% of the then outstanding Common Stock, (b) any person presents a
tender offer which causes the person's ownership level to exceed 15% and the
Board determines the tender offer not to be fair to the Company's stockholders,
or (c) the Board determines that a stockholder maintaining a 10% interest in the
Common Stock could have an adverse impact on the Company or could attempt to
pressure the Company to repurchase the holder's shares at a premium.
Until the occurrence of a Distribution Date, each Right trades with the
Common Stock and is not separately transferable. When a Distribution Date
occurs: (a) the Company would distribute separate Rights Certificates to Common
Stockholders and the Rights would subsequently trade separate from the Common
Stock; and (b) each holder of a Right, other than the acquiring person (whose
Rights would thereafter be void), would have the right to receive upon exercise
at its then current Purchase Price that number of shares of Common Stock having
a market
51
value of two times the Purchase Price of the Right. If the Company merges into
the acquiring person or enters into any transaction that unfairly favors the
acquiring person or disfavors the Company's other stockholders, the Right
becomes a right to purchase Common Stock of the acquiring person having a market
value of two times the Purchase Price.
The Board may determine that in certain circumstances a proposal that would
cause a Distribution Date is in the Company stockholders' best interest.
Therefore, the Board may, at its option, redeem the Rights at a redemption price
of $.001 per Right.
Note 7.
Short-term Borrowings
As of December 31, 2000, the Company maintained a bank line of credit providing
unsecured borrowings of up to $20,000,000 at the prime lending rate or lower
rates as quoted by the bank. $7,562,000 of the line is committed to a contractor
for construction of an office complex for combined Los Angeles South Bay
operations. When completed, the office complex will be exchanged with the
contractor for surplus company land on a tax-free basis. Cal Water maintained a
bank line of credit for an additional $30,000,000 on the same terms as the
Company. The line of credit agreements, which expire April 2001 and which the
Company expects to renew, do not require minimum or specific compensating
balances.
The following table represents borrowings under the bank lines of credit:
Dollars in thousands 2000 1999 1998
Maximum short-term borrowings $26,750 $25,500 $25,700
Average amount outstanding 16,810 9,093 15,755
Weighted average interest rate 7.77% 6.52% 7.09%
Interest rate at December 31 7.88% 7.11% 6.97%
Note 8.
Long-term Debt
As of December 31, 2000 and 1999, long-term debt outstanding was:
Interest Maturity
In thousands Series Rate Date 2000 1999
First Mortgage Bonds: J 8.86% 2023 $ 4,000 $ 4,000
K 6.94% 2012 5,000 5,000
P 7.875% 2002 2,580 2,595
S 8.50% 2003 2,595 2,610
BB 9.48% 2008 13,230 14,940
CC 9.86% 2020 18,600 18,700
DD 8.63% 2022 19,200 19,300
EE 7.90% 2023 19,300 19,400
FF 6.95% 2023 19,300 19,400
GG 6.98% 2023 19,300 19,400
--------------------
123,105 125,345
Senior Notes: A 7.28% 2025 20,000 20,000
B 6.77% 2028 20,000 20,000
C 8.15% 2030 20,000 --
California Department of 3.0% to
Water Resources loans 7.4% 2011-32 3,176 3,236
Other long-term debt 3,698 3,032
-------------------
52
Total long-term debt 189,979 171,613
Less current maturities 2,881 2,747
-------------------
Long-term debt excluding current maturities $187,098 $168,866
----------------------
The first mortgage bonds are obligations of Cal Water. All bonds are held by
institutional investors and secured by substantially all of Cal Water's utility
plant. The unsecured senior notes are also obligations of Cal Water. They are
held by institutional investors and require interest-only payments until
maturity. The Department of Water Resources (DWR) loans were financed under the
California Safe Drinking Water Bond Act. Repayment of principal and interest on
the DWR loans is through a surcharge on customer bills. Other long-term debt is
primarily equipment and system acquisition financing arrangements with other
financial institutions. Aggregate maturities and sinking fund requirements for
each of the succeeding five years (2001 through 2005) are $2,881,000,
$5,381,000, $5,283,000, $2,663,000, and $2,669,000.
Note 9.
Income Taxes
Income tax expense consists of the following:
In thousands Federal State Total
2000 Current $ 7,961 $2,519 $10,480
Deferred 1,554 (463) 1,091
----------------------------------------
Total $ 9,515 $2,056 $11,571
------------------------------------------
1999 Current $ 8,291 $2,560 $10,851
Deferred 2,769 (105) 2,664
----------------------------------------
Total $11,060 $2,455 $13,515
------------------------------------------
1998 Current $ 6,667 $2,388 $ 9,055
Deferred 2,679 (309) 2,370
----------------------------------------
Total $ 9,346 $2,079 $11,425
------------------------------------------
Income tax expense computed by applying the current federal 35% tax rate to
pretax book income differs from the amount shown in the Consolidated Statement
of Income. The difference is reconciled in the table below:
In thousands 2000 1999 1998
Computed "expected" tax expense $11,037 $12,420 $10,950
Increase (reduction) in taxes due to:
State income taxes net of federal tax benefit 1,336 1,624 1,442
Investment tax credits (155) (184) (167)
Other (647) (345) (800)
----------------------------------------
Total income tax $11,571 $13,515 $11,425
------------------------------------------
The components of deferred income tax expense were:
In thousands 2000 1999 1998
Depreciation $2,031 $2,974 $3,007
Developer advances and contributions (814) (749) (798)
Bond redemption premiums (61) (62) (62)
Investment tax credits (61) (94) (93)
Other (4) 595 316
--------------------------------------
Total deferred income tax expense $1,091 $2,664 $2,370
-----------------------------------------
53
The tax effects of differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999
are presented in the following table:
In thousands 2000 1999
Deferred tax assets:
Developer deposits for extension agreements and contributions
in aid of construction $40,458 $40,595
Federal benefit of state tax deductions 5,648 6,040
Book plant cost reduction for future deferred ITC amortization 1,765 1,679
Insurance loss provisions 632 821
Pension plan 736 794
Other 4,860 2,886
-----------------------
Total deferred tax assets 54,099 52,815
------------------------
Deferred tax liabilities:
Utility plant, principally due to depreciation differences 78,894 77,520
Premium on early retirement of bonds 825 1,091
---------------------
Total deferred tax liabilities 79,719 78,611
------------------------
Net deferred tax liabilities $25,620 $25,796
-------------------------
A valuation allowance was not required during 2000 and 1999. Based on
historic taxable income and future taxable income projections over the period in
which the deferred assets are deductible, management believes it is more likely
than not that the Company will realize the benefits of the deductible
differences.
Note 10.
Employee Benefit Plans
PENSION PLAN The Company provides a qualified defined benefit, non-contributory
pension plan for substantially all employees. The cost of the plan was charged
to expense and utility plant. The Company makes annual contributions to fund the
amounts accrued for pension cost. Plan assets are invested in mutual funds,
pooled equity, bonds and short-term investment accounts. The data below includes
the unfunded, non-qualified, supplemental executive retirement plan.
Benefits earned by Dominguez employees under the Dominguez pension plan were
frozen as of the merger date and future pension benefits to those employees will
be provided under the Company pension plan. The Dominguez plan was curtailed.
The Dominguez plan was fully funded and additional contributions to the plan
could not be funded, although plan annual expense was recorded. As a result of
the curtailment, accrued pension liability of $1,218,000 that had been expensed
by Dominguez in prior years was reversed by the Company in 2000. The amount was
offset against other operations expense.
SAVINGS PLAN The Company sponsors a 401(k) qualified, defined contribution
savings plan that allowed participants to contribute up to 15% of pre-tax
compensation in 1999, increasing to 18% in 2000. The Company matches fifty cents
for each dollar contributed by the employee up to a maximum Company match of
4.0%. Company contributions were $1,298,000, $1,126,000, and $1,078,000 for the
years 2000, 1999 and 1998.
OTHER POSTRETIREMENT PLANS The Company provides substantially all active
employees with medical, dental and vision benefits through a self-insured plan.
Employees retiring at or after age 58 with 10 or more years of ser-vice are
offered, along with their spouses and dependents, continued participation in the
plan by payment of a premium. Retired employees are also provided with a $5,000
life insurance benefit. Plan assets are invested in a mutual fund, short-term
money market instruments and commercial paper.
The Company records the costs of postretirement benefits during the
employees' years of active service. The Commissions have issued decisions that
authorize rate recovery of tax deductible funding of postretirement benefits and
permit recording of a regulatory asset for the portion of costs that will be
recoverable in future rates.
The following table reconciles the funded status of the plans with the
accrued pension liability and the net postretirement benefit liability as of
December 31, 2000 and 1999:
54
Pension Benefits Other Benefits
In thousands 2000 1999 2000 1999
Change in benefit obligation:
Beginning of year $ 55,692 $ 61,396 $10,195 $ 9,900
Service cost 2,846 2,899 544 498
Interest cost 4,079 3,894 790 689
Assumption change 825 (6,669) 394 (929)
Plan amendment 1,215 744 -- --
Experience (gain) or loss (34) (3,900) 558 433
Curtailment gain (1,347) -- -- --
Benefits paid (4,178) (2,672) (429) (396)
------------------------------------------------------------
End of year $ 59,098 $ 55,692 $ 12,052 $ 10,195
--------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 61,008 $ 57,050 $ 1,561 $ 1,723
Actual return on plan assets 3,140 6,453 228 206
Employer contributions 3,678 177 707 28
Retiree contributions -- -- 370 343
Benefits paid (4,178) (2,672) (799) (739)
-------------------------------------------------------------
Fair value of plan assets at end of year $ 63,648 $ 61,008 $ 2,067 $ 1,561
--------------------------------------------------------------
Funded status $ 4,550 $ 5,317 $ (9,985) $ (8,634)
Unrecognized actuarial (gain) or loss (13,534) (16,204) 1,422 556
Unrecognized prior service cost 5,279 4,971 888 959
Unrecognized transition obligation -- -- 3,597 3,228
Unrecognized net initial asset 228 455 (276) 369
------------------------------------------------------------
Net amount recognized $ (3,477) $ (5,461) $ (4,354) $ (3,522)
--------------------------------------------------------------
Amounts recognized on the balance sheet consist of:
Pension Benefits Other Benefits
---------------- --------------
In thousands 2000 1999 2000 1999
Accrued benefit costs $ (3,477) $ (5,461) $ (4,354) $ (3,522)
Additional minimum liability (1,363) (1,460) -- --
Intangible asset 877 943 -- --
Accumulated other comprehensive loss 486 517 -- --
-------------------------------------------------------
Net amount recognized $ (3,477) $ (5,461) $ (4,354) $ (3,522)
--------------------------------------------------------------
Pension Benefits Other Benefits
---------------- --------------
2000 1999 2000 1999
Weighted average assumptions as of December 31:
Discount rate 7.25% 7.50% 7.25% 7.50%
Long-term rate of return on plan assets 8.00% 8.00% 8.00% 8.00%
Rate of compensation increases 4.50% 4.50% -- --
Net periodic benefit costs for the pension and other postretirement plans for
the years ending December 31, 2000, 1999 and 1998 included the following
components:
55
Pension Plan Other Benefits
------------ --------------
In thousands 2000 1999 1998 2000 1999 1998
Service cost $2,846 $2,899 $2,399 $ 544 $ 498 $ 405
Interest cost 4,079 3,894 3,747 790 689 623
Expected return on plan assets (4,498) (4,450) (4,199) (152) (144) (117)
Net amortization and deferral 486 871 683 357 401 360
------------------------------------------------------------------------
Net periodic benefit cost $2,913 $3,214 $2,630 $1,539 $1,444 $1,271
------------------------------------------------------------------------
Postretirement benefit expense recorded in 2000, 1999, and 1998 was
$781,000, $1,064,000, and $666,000 respectively. $3,437,000, which is
recoverable through future customer rates, is recorded as a regulatory asset.
The Company intends to make annual contributions to the plan up to the amount
deductible for tax purposes.
For 2000 measurement purposes, the Company assumed a 5% annual rate of
increase in the per capita cost of covered benefits with the rate remaining at
that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. A one-percentage point change in
assumed health care cost trends is estimated to have the following effect:
1-percentage 1-percentage
In thousands Point Increase Point Decrease
Effect on total service and interest costs $ 269 $ (166)
Effect on accumulated postretirement
benefit obligation $ 1,815 $ (1,471)
Note 11.
Stock-Based Compensation Plans
At the Company's 2000 annual meeting, stockholders approved a Long-Term
Incentive Plan that allows for the granting of nonqualified stock options,
performance shares and dividend units. Under the plan, a total of 1,500,000
common shares are authorized for option grants. Options are granted at an
exercise price that is not less than the per share common stock market price on
the date of grant. The options vest at a 25% rate on their anniversary date over
their first four years and are exercisable over a ten-year period. No options
were vested at December 31, 2000.
Certain key Dominguez executives participated in the Dominguez 1997 Stock
Incentive Plan which was terminated at the time Dominguez merged with the
Company. The plan provided that in the event of a merger of Dominguez into
another entity, granted but unexercised stock options issued became exercisable.
Prior to the Merger, all outstanding Dominguez options were exercised and
converted into Dominguez shares and subsequently converted to 52,357 shares of
Company common stock.
Under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company
elected to apply the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, no compensation cost has been recognized in
the consolidated financial statements for stock options that have been granted.
If the Company had elected to adopt the optional recognition provisions of SFAS
123 for its stock option plans, basic and diluted earnings per share would be
unchanged from the amounts reported, except for 2000 diluted earnings per share
which was reported as $1.31, but on a pro forma basis would be $1.30. Net income
for the years ended December 31, 2000, 1999 and 1998 would be as presented in
the following table:
In thousands 2000 1999 1998
As reported $19,963 $21,971 $19,860
Pro forma 19,939 21,937 19,825
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:
2000 1999 1998
Expected dividend 4.3% 4.3% 4.3%
Expected volatility 22.0% 22.6% 22.6%
Risk-free interest rate 4.9% 6.2% 5.7%
Expected holding period in years 5.0 10.0 10.0
56
The following table summarizes the activity for the stock option plans:
Weighted Weighted Weighted
Average Average Average
Exercise Remaining Options Fair
Shares Price Contractual Life Exercisable Value
Outstanding at January 1, 1998 35,604 $22.54 -- -- --
Granted 20,617 24.84 $5.15
------
Outstanding at December 31, 1998 56,221 23.38 -- 8,901 --
Exercised (3,864) 22.54
-------
Outstanding at December 31, 1999 52,357 23.45 -- 19,092 --
Granted 53,500 23.06 3.74
Exercised (52,357) 23.45
--------
Outstanding at December 31, 2000 53,500 23.06 9.5 -- --
Note 12.
Fair Value of Financial Instruments
For those financial instruments for which it is practicable to estimate a fair
value, the following methods and assumptions were used. For cash equivalents,
the carrying amount approximates fair value because of the short-term maturity
of the instruments. The fair value of the Company's long-term debt is estimated
at $199,890,000 as of December 31, 2000, and $189,400,000 as of December 31,
1999, 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 $27,000,000 as of December
31, 2000, and $33,000,000 as of December 31, 1999, based on data provided by
brokers.
Note 13.
Quarterly Financial Data (Unaudited)
The Company's common stock is traded on the New York Stock Exchange under the
symbol "CWT." Quarterly dividends have been paid on common stock for 224
consecutive quarters and the quarterly rate has been increased each year since
1968.
2000 - in thousands except per share amounts First Second Third Fourth
Operating revenue $46,694 $65,966 $76,580 $55,566
Net operating income 4,902 8,977 12,782 6,535
Net income 1,533 5,753 9,205 3,472
Diluted earnings per share .10 .38 .60 .23
1999 - in thousands except per share amounts First Second Third Fourth
Operating revenue $45,628 $59,232 $72,280 $57,797
Net operating income 4,777 8,440 11,922 7,908
Net income 2,868 6,089 8,706 4,308
Diluted earnings per share .19 .40 .57 .28
57
Independent Auditors' Report
The Board of Directors
California Water Service Group:
We have audited the accompanying consolidated balance sheet of California Water
Service Group and subsidiaries as of December 31, 2000 and 1999, 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, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
The consolidated financial statements of California Water Service Group as
of and for each of the years ended December 31, 1999 and 1998, have been
restated to reflect the pooling-of-interests transaction with Dominguez Services
Corporation and subsidiaries as described in Note 3 to the consolidated
financial statements. We did not audit the consolidated financial statements of
Dominguez Services Corporation and subsidiaries, which financial statements
reflect total assets constituting 9.0 percent as of December 31, 1999 and total
revenue constituting 12.1 percent and 11.8 percent, in 1999 and 1998
respectively, of the related consolidated totals. Those financial statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Dominguez Services
Corporation and subsidiaries as of December 31, 1999, and for the years ended
December 31, 1999 and 1998, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes, examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to in the first paragraph present
fairly, in all material respects, the financial position of California Water
Service Group and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Mountain View, California
January 22, 2001
58