<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE CPUC
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from
.............to....................
Commission file No. 1-13883
CALIFORNIA WATER SERVICE GROUP
(Exact name of registrant as specified in its charter)
California 77-0448994
---------- ----------
(State or other jurisdiction (IRS Employer
of Incorporation) Identification No.)
1720 North First Street San Jose, California 95112
- --------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
1-408-367-8200
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, No Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Cumulative Preferred Stock, Par Value, $25
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant - $300,493,000 on February 19 1999.
Common stock outstanding at February 19, 1999 - 12,619,140 shares.
<PAGE> 2
EXHIBIT INDEX
The exhibit index to this Form 10-K is on page 29
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of Registrant's Annual Report to Shareholders for the
calendar year ended December 31, 1998 ("1998 Annual Report") are incorporated by
reference in Part I (Item 1), Part II (Items 5, 6, 7 and 8) and in Part IV (Item
14(a)(1)).
Designated portions of the Registrant's Proxy Statement of California Water
Service Group ("Proxy Statement"), dated March 18 1999, relating to the 1999
annual meeting of shareholders are incorporated by reference in Part III (Items
10, 11 and 12) as of the date the Proxy Statement was filed with the Securities
and Exchange CPUC. The Proxy Statement was filed under EDGAR on March 1, 1999.
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I
Item 1. Business ........................... 5
Forward Looking Statements ......... 5
a. General Development of Business .... 5
Rates and Regulation ............... 6
b. Financial Information about
Industry Segments .................. 8
c. Narrative Description of Business .. 8
Geographical Service Areas and
Number of Customers at year-end .... 10
Water Supply ....................... 11
Nonregulated Operations ............ 14
Utility Plant Construction Program
and Acquisitions ................... 15
Quality of Water Supplies .......... 16
Competition and Condemnation ....... 16
Environmental Matters .............. 18
Human Resources .................... 18
d. Financial Information about Foreign
and Domestic Operations and Export
Sales .............................. 18
Item 2. Properties .......................... 18
Item 3. Legal Proceedings ................... 19
Item 4. Submission of Matters to a Vote of
Security Holders .................... 20
Executive Officers of the Registrant ........ 21
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters ..... 22
Item 6. Selected Financial Data ............. 22
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations ........... 23
Item 8. Financial Statements and
Supplementary Data .................. 23
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure ................ 23
</TABLE>
3
<PAGE> 4
<TABLE>
<S> <C>
PART III
Item 10. Directors and Executive Officers
of the Registrant .................. 23
Item 11. Executive Compensation ............. 23
Item 12. Security Ownership of Certain
Beneficial Owners and Management ... 24
Item 13. Certain Relationships and Related
Transactions ....................... 24
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on
Form 8-K ........................... 24
Signatures ....................................... 25
Independent Auditors' Report ..................... 27
Schedules ........................................ 28
Exhibit Index .................................... 29
</TABLE>
4
<PAGE> 5
PART I
ITEM 1 BUSINESS.
FORWARD LOOKING STATEMENTS
This report, including the sections incorporated by reference, 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 California Water Service Group ("Group"), the utility
industry and general economic conditions. Such words as expects, intends,
plans, believes, estimates, anticipates or variations of such words or
similar expressions are intended to identify forward looking statements.
The forward looking statements are not guarantees of future performance.
Actual results may vary materially from what is contained in a forward
looking statement. Factors which may cause a result different than expected
or anticipated include regulatory CPUC decisions, new legislation,
increases in suppliers' prices, particularly purchased water and purchased
power prices, changes in environmental compliance requirements,
acquisitions, changes in customer water use patterns and the impact of
weather on operating results. Group assumes no obligation to provide public
updates of forward looking statements.
a. GENERAL DEVELOPMENT OF BUSINESS.
California Water Service Company ("Company") was formed in 1926. In April
1997, shareholders of California Water Service Company voted to approve a
holding company structure. After receiving final regulatory approval, Group
was formed on December 31, 1997. As a result of the holding company
structure, the Company became one of Group's two wholly-owned, operating
subsidiaries. The Company will continue to operate as a regulated utility
subject to the jurisdiction of the California Public Utilities CPUC
("CPUC"). Its assets and operating revenues comprise virtually all of
Group's assets and operating revenues.
The second subsidiary, CWS Utility Services ("Utility Services"), provides
nonregulated water operations and related services. Existing nonregulated
contracts, currently performed by the Company, will be transferred to
Utility Services as the contracts are renewed or at such time as agreed
upon between the contracting parties. Utility Services will execute new
nonregulated contracts.
In conjunction with the formation of the holding company structure, on
December 31, 1997 each share of Company common stock was exchanged on a
two-for-one basis for Group common stock. Per share data has been restated
where necessary to reflect the effective two-for-one stock split. Each
share of Company preferred stock was converted into one share of Group
preferred stock. To maintain its relative voting strength,
5
<PAGE> 6
the number of votes to which each preferred share is entitled was doubled
from eight to sixteen.
Group's mailing address and principal executive offices are located at 1720
North First Street, San Jose, California; telephone number: 1-408-367-8200.
The Company maintains a web site which can be accessed via the Internet at
http://www.calwater.com.
During the year ended December 31, 1998, there were no significant changes
in the kind of products produced or services rendered by Group or its
operating subsidiaries, or in its markets or methods of distribution.
The Company is the largest investor-owned water company in California and
the fourth largest in the United States. It was incorporated under the laws
of the State of California on December 21, 1926. It is a public water
utility providing water service to approximately 383,000 residential,
commercial and industrial customers in 58 California cities and communities
through 21 separate water systems or districts. In the 20 regulated
systems, which serve 377,000 customers, rates and operations are subject to
the jurisdiction of the CPUC. An additional 6,000 customers receive service
through the long-term lease of the City of Hawthorne water system, which is
not subject to CPUC regulation. The Company also has contracts with various
municipalities and private entities to operate water systems and provide
billing services to 30,700 other customers. These operations are described
in more detail in section Item 1.c., "Narrative Description of Business -
Nonregulated Operations."
RATES AND REGULATION
Rates, service and other matters for the Company's regulated business of
the Company are subject to the jurisdiction of the CPUC. The CPUC's
decisions and the timing of those decisions can have an important impact on
operations and results of operations.
The Company operates a total of 21 districts, each of which is within the
State of California. The systems are not integrated with one another.
Except for allocation of general office plant investment and expenses, and
the determination of cost of capital, the rates of individual districts are
not affected by operations in other districts. Cost of capital (i.e. return
on debt and equity) is determined on a company-wide basis. Otherwise, the
CPUC considers each regulated district as separate and distinct entities
for ratemaking purposes. General Office plant and operations are also
considered separately, then spread ratably over the operating districts.
There are generally three types of CPUC rate case proceedings: general,
step and offset. General rate applications consider all of a district's
operating costs and capital requirements for a succeeding three-year
period. The CPUC's decision in
6
<PAGE> 7
general rate applications usually authorizes an immediate rate increase and
step rate increases for the following two years intended to maintain the
authorized return on common equity ("ROE"). Subsequent general applications
can be filed in the third year after a district receives a general rate
decision. Each year those districts that are eligible for general rate case
filings are reviewed and where appropriate applications are submitted to
the CPUC for processing. The applications are submitted in July with a CPUC
decision expected in about 10 months. Offset rate adjustments are allowed
to recover the costs of purchased water, purchased power and pump taxes
that vary from those authorized in a general rate decision.
Because the CPUC requires rates for each operating district to be
determined independently, the decision to file a general rate case
application for a particular district depends on various factors including:
- the time since the last general rate case was filed
- the rate of return being earned in the district
- expected future returns
- estimated future expenses
- the need for capital expenditures
With districts on varying rate case cycles, general rate case applications
are filed annually for a portion of the districts. The number of customers
affected by each filing varies from year to year. For example, the 1995
rate filings covered 47 percent of the customer base, while the 1996 filing
was for 11 percent, the 1997 filing for 7 percent and the 1998 filing for
25 percent.
1999 Rate Application Filings
During 1999, 10 districts representing 55% of all customers are
eligible for rate filings. The Company will review each district's revenue
requirements and determine what filings to make. The filings will occur in
July with decisions anticipated during the second quarter of 2000.
Additionally, a rate increase will be submitted for the City of Hawthorne
water system. The Hawthorne City council exercises rate authority over this
request.
1998 Rate Application Filings
In 1998, 14 districts plus General Office operations, were eligible
for general rate filings. Earnings levels in those districts were reviewed
and applications for additional rate consideration were filed in July 1998
for four districts and General Office. The applications involved 25% of the
regulated customers.
In January 1999, the Company reached agreement the CPUC staff
regarding the 1998 rate applications. The agreement must still be presented
to and approved by the Administrative Law Judge assigned to the proceedings
and by the CPUC commissioners .
1997 Rate Application Filings
In July 1997, general rate increase applications were filed for four
districts representing 27,900 customers or 7
7
<PAGE> 8
percent of regulated customers. The CPUC decision was effective in July
1998. It authorized continuation of the then effective ROE at 10.35%. Rate
increases of $299,000 for 1998, $267,000 for 1999, $121,000 for 2000 and
$121,000 for 2001 were authorized. Rate increases in two districts will be
tied to future changes in a price index during each of the next four years.
1996 Rate Application Filings
In July 1996, general rate cases were filed for two districts
representing 11 percent of the regulated customers. An ROE of 12.05 percent
was requested, while the CPUC staff recommended 10.1 percent. In January
1997, the Company and CPUC staff stipulated to an ROE of 10.35 percent. In
February 1997, hearings before the CPUC regarding the 1996 general rate
applications were completed. The CPUC's decision was issued in April. The
decision, which authorized a 10.35% return on common equity, was estimated
to increase 1997 revenue by about $1.2 million. Additionally, step rate
increases became effective in each of the following three years.
Second Amended Contract - Stockton East Water District
In January 1995, a consultant retained by the CPUC's Organization of
Ratepayer Advocates completed a report on the reasonableness of the Second
Amended Contract. Parties to the contract are the Company, Stockton-East
Water District, the City of Stockton and San Joaquin County. The contract
pertains to the sale and delivery of water to the Company's Stockton
District by the Stockton-East Water District. The report alleged that the
Company was required to receive CPUC approval prior to entering into the
Second Amended Contract and furthermore challenges the reasonableness of
the Second Amended Contract for ratemaking purposes. However, the report
did not include specific ratemaking recommendations. The issue has been
suspended. No action is now in process or pending, although the issue may
be revisited in the Company's next Stockton district general rate
application.
b. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Group primarily operates one business segment.
c. NARRATIVE DESCRIPTION OF BUSINESS.
Group is the sole shareholder of its two operating subsidiaries, California
Water Service Company and CWS Utility Services.
Group's business, which is carried on through its operating subsidiaries,
consists of the production, purchase, storage, purification, distribution
and sale of water for domestic, industrial, public and irrigation uses, and
for fire protection. It also provides water related service, including
operation of water systems, to other entities.
8
<PAGE> 9
The water business fluctuates according to the demand for water, which is
partially dictated by seasonal conditions, such as summer temperatures or
the amount and timing of precipitation during the year.
The Company distributes water in accordance with accepted water utility
methods. Franchises and permits are held in the cities and communities
where the Company operates. The franchises and permits allow the Company to
operate and maintain facilities in the public streets as necessary.
The City of Hawthorne water system is operated under a 15-year lease that
commenced in February 1996. Under other contracts, three municipally owned
water systems, four privately owned water systems and two reclaimed water
distribution systems are operated. Billing services are also provided to
other municipalities. These operations are discussed in more detail in a
following section titled "Nonregulated Operations."
Group intends to continue to explore opportunities to expand operating and
other revenue sources. The opportunities could include system acquisitions,
contracts similar to the City of Hawthorne arrangement, operating
contracts, billing contracts and other utility related services. Group
believes that a holding company structure, as discussed above, makes Group
more competitive in providing nonregulated utility services, which would
not be subject to CPUC jurisdiction. Group is investigating new business
opportunities in western states. During 1998, Group assessed the potential
risk and return from business opportunities in Central and South America.
The assessment concluded that the risks and potential returns do not
warrant Group pursuing business opportunities in Central or South America.
9
<PAGE> 10
GEOGRAPHICAL SERVICE AREAS AND NUMBER OF CUSTOMERS AT YEAR-END The
principal markets for Group's products are users of water within the
Company's service areas. Group's geographical service areas or districts
for both the regulated and nonregulated operations and the approximate
number of customers served in each district at December 31, 1998, are
listed below.
<TABLE>
<S> <C> <C>
SAN FRANCISCO BAY AREA
Mid-Peninsula (serving San Mateo and
San Carlos) ............................ 35,600
South San Francisco (including Colma
and Broadmoor) ......................... 15,900
Bear Gulch (serving Menlo Park, Atherton,
Woodside and Portola Valley) ........... 17,400
Los Altos (including portions of Cupertino,
Los Altos Hills, Mountain View
and Sunnyvale) ......................... 18,300
Livermore ................................. 16,300 103,500
-------
SACRAMENTO VALLEY
Chico (including Hamilton City) ........... 22,200
Oroville .................................. 3,500
Marysville ................................ 3,700
Dixon ..................................... 2,800
Willows ................................... 2,300 34,500
-------
SALINAS VALLEY
Salinas ................................... 25,000
King City ................................. 2,200 27,200
-------
SAN JOAQUIN VALLEY
Bakersfield ............................... 55,700
Stockton .................................. 41,300
Visalia ................................... 27,900
Selma ..................................... 5,000 129,900
-------
LOS ANGELES AREA
East Los Angeles (including portions of
the cities of Commerce and Montebello) .. 26,300
Hermosa Redondo (serving Hermosa Beach,
Redondo Beach and a portion of Torrance) 25,100
Palos Verdes (including Palos Verdes
Estates, Rancho Palos Verdes, Rolling
Hills Estates and Rolling Hills) ........ 23,600
Westlake (a portion of Thousand Oaks) ..... 6,900
Hawthorne (leased municipal system) ....... 6,000 87,900
------- -------
TOTAL ....................................... 383,000
</TABLE>
10
<PAGE> 11
WATER SUPPLY
The Company's water supply for the 21 operating districts is obtained from
wells, surface runoff or diversion, and by purchase from public agencies
and other wholesale suppliers. The Company's supply has been adequate to
meet consumption demands, however, during periods of drought some districts
have mandated water rationing.
California's rainy season usually begins in November and continues through
March with December, January and February historically recording the most
rainfall. During winter months reservoirs and underground aquifers are
replenished by rainfall. Snow accumulated in the mountains provides an
additional water source when spring and summer temperatures melt the
snowpack producing runoff into streams and reservoirs, and also
replenishing underground aquifers.
During years in which precipitation is especially heavy or extends beyond
the spring into the early summer, customer demand can decrease from
historic normal levels, generally due to reduced outdoor water usage. This
was the case during 1995 and 1998, when winter rains continued well into
the spring along with cooler than normal temperatures. Likewise, an early
start to the rainy season during the fall can cause a decline in customer
usage and have a negative impact on revenue.
The Company's water business is seasonal in nature and weather conditions
can have a pronounced effect on customer usage and thus operating revenues
and net income. Customer demand for water generally is less during the
normally cooler and rainy winter months. It increases in the spring when
warmer weather gradually returns to California and the rains end.
Temperatures are warm during the generally dry summer months, resulting in
increased demand. Water usage declines during the fall as temperatures
decrease and the rainy season approaches.
During years of less than normal rainfall, customer demand can increase as
outdoor water usage continues. When rainfall is below average for
consecutive years, drought conditions can result and certain customers may
be required to reduce consumption to preserve existing water reserves. As
an example, California experienced a six-year period when rainfall was
annually below historic average. The drought period ended with the winter
of 1992-93. During that six-year period some districts had water rationing
requirements imposed on customers. In certain districts, penalties were
collected from customers who exceeded allotments. During past drought
periods, the CPUC has allowed modifications to consumer billings which
provided the Company a means to recover a portion of revenue that was
deemed lost due to conservation measures.
Historically, about half of the water supply is purchased from wholesale
suppliers with the balance pumped from wells. A small portion of the supply
is received from surface runoff in the Bear Gulch district. During 1998, 99
billion gallons were delivered to customers. Approximately 50 percent of
the supply was
11
<PAGE> 12
obtained from wells and 50 percent was purchased from wholesale suppliers.
The following table shows amount of water purchased in each operating
district during 1998.
<TABLE>
<CAPTION>
Supply
District Purchased Source of Purchased Supply
-------- --------- --------------------------
<S> <C> <C>
SAN FRANCISCO BAY AREA
Mid-Peninsula 100% San Francisco Water Department
South San Francisco 83% San Francisco Water Department
Bear Gulch 86% San Francisco Water Department
Los Altos 78% Santa Clara Valley Water District
Livermore 62% Alameda County Flood Control
and Water Conservation District
SACRAMENTO VALLEY
Oroville 89% Pacific Gas and Electric Co.
3% County of Butte
SAN JOAQUIN VALLEY
Bakersfield 20% Kern County Water Agency
Stockton 72% Stockton-East Water District
LOS ANGELES AREA
East Los Angeles 69% Central Basin Municipal
Water District
Hawthorne 99% West Basin Municipal
Water District
Hermosa Redondo 98% West Basin Municipal
Water District
Palos Verdes 100% West Basin Municipal
Water District
Westlake 100% Russell Valley Municipal
Water District
</TABLE>
The balance of the required supply for the above districts was obtained
from wells, except for Bear Gulch where the balance is obtained from
surface runoff from the local watershed and processed through the Company's
treatment plant before being delivered to the distribution system. The
Company also operates a treatment plant in the Oroville district where a
portion of the water is received from a surface supply.
12
<PAGE> 13
Historically, groundwater has yielded 10 to 15 percent of the
Hermosa-Redondo district supply. During 1996, wells were taken out of
service while treatment facilities were being installed. One treatment
facility was completed during 1998 and the well returned to service.
The Chico, Marysville, Dixon and Willows districts in the Sacramento
Valley, the Salinas and King City districts in the Salinas Valley, and the
Selma and Visalia districts in the San Joaquin Valley obtain their entire
supply from wells.
Purchases for the Los Altos, Livermore, Oroville, Stockton and Bakersfield
districts are pursuant to long-term contracts expiring on various dates
after 2011.
The purchased supplies for the East Los Angeles, Hermosa-Redondo, Palos
Verdes, Westlake districts and the City of Hawthorne system are provided by
public agencies pursuant to an obligation of continued nonpreferential
service to persons within the agencies' boundaries.
Purchases for the South San Francisco, Mid-Peninsula and Bear Gulch
districts are in accordance with long-term contracts with the San Francisco
Water Department expiring June 30, 2009.
The price of wholesale water purchases is subject to pricing changes
imposed by the various wholesale suppliers. Price changes are generally
beyond the control of the Company. During 1997, two wholesale water
suppliers refunded moneys which had been overcollected from wholesale water
purchasers. The Company received a one time refund of $2.5 million in May
1997 which was credited as a reduction to purchased water expense.
California experienced above average rainfall in the 1997-98 measurement
year. The state's weather was influenced by what was termed "El Nino".
Rainfall in the Company's service areas for the 1998-99 season is about
normal as of February 26, 1998. However, the mountain snowpack is well
above normal. Groundwater levels in underground aquifers that provide
supply to districts served by well water improved in 1998 due to the above
average rainfall. Most regions have recorded positive changes in
groundwater levels the past two years. Regional groundwater management
planning continues throughout the state as required. Existing laws provide
a mechanism for local agencies to maintain control of their groundwater
supply. Group continually updates long range projections and works with
local wholesale suppliers to ensure an adequate future supply to meet
customer needs.
The water supply outlook for 1999 is good, however, California faces
long-term water supply challenges. The Company is actively working to meet
the challenges by continuing to educate customers on responsible water use
practices, particularly in the districts with conservation programs
approved by the CPUC.
Progress has been made by Consolidated Irrigation District (Selma) and
Kaweah Delta Water Conservation District (Visalia)
13
<PAGE> 14
towards the implementation of a water management plan. Group participates
in the formulation of these plans.
The Company is working with the Salinas Valley water users and the Monterey
County Water Resources Agency (MCWRA) to address seawater intrusion into
the water supply for the Salinas district. MCWRA completed construction of
the Castroville Seawater Intrusion Project in 1998. This project is
designed to deliver up to 20,000 acre feet of recycled water annually to
agricultural users in the nearby Castroville area. It is intended to help
mitigate seawater intrusion into the region by reducing the need to pump
groundwater.
With the City and County of San Francisco, and the cities of San Bruno and
Daly City,Group is working to prepare a groundwater management plan for the
Westside Basin from which the South San Francisco district pumps a portion
of its supply. Additionally, Group is working with the City of San
Francisco in its development of a long-range water supply master plan for
the entire area to which the San Francisco Water Department is the
wholesale water supplier. In addition to the South San Francisco district,
the Mid-Peninsula and Bear Gulch districts are included in this service
area.
NONREGULATED OPERATIONS
Nonregulated operations include operation of water systems for cities,
operation of privately owned water systems, operation of recycled water
systems, lease of antenna sites, utility billing services and laboratory
services.
Nonregulated revenue from water system operations is generally determined
on a fee per customer basis. With the exception of the City of Hawthorne
water system, revenue and expenses from nonregulated operations are
accounted for in other income on a pretax basis. Revenue and expenses for
the City of Hawthorne lease are included in operating revenue and operating
expenses because Group is entitled to retain all customer billings and is
generally responsible for all operating expenses.
Municipally owned water systems are operated under contract for the cities
of Bakersfield, Commerce and Montebello and for four private water company
systems in the Bakersfield, Livermore and Salinas districts. The Company
also operates under contract a wastewater collection system in Livermore.
The total number of services operated under the contracts is about 30,700.
With the exception of the 15-year Hawthorne lease discussed below, the
terms of the operating agreements range from one-year to three- year
periods with provisions for renewals. The first operating agreement was
signed with the City of Bakersfield in 1977. Upon expiration, each
agreement has been renewed.
Recycled water distribution systems located in the Los Angeles Basin are
operated for the West Basin and Central Basin municipal water districts.
Some engineering department services are also provided for these two
recycled water systems.
14
<PAGE> 15
Meter reading, billing and customer service are provided for the City of
Menlo Park's 4,000 water customers. Additionally, sewer and/or refuse
billing services are provided to six municipalities.
Since February 1996, the City of Hawthorne's 6,000 account water system has
been operated under terms of a 15-year agreement. The system which is near
the Hermosa-Redondo district serves about half of Hawthorne's population.
The lease requires an up-front $6.5 million lease payment to the City which
is being amortized over the lease term. Additionally, annual lease payments
to the City of $100,000 indexed to changes in water rates are required.
Group is responsible for all aspects of system operation and capital
improvements, although title to the system and system improvements resides
with the City. At the end of the lease, Group will be reimbursed for the
unamortized value of capital improvements. In exchange, Group receives all
system revenues which are about $4 million annually.
During 1997, an agreement was signed with the Rural North Vacaville Water
District in Solano County to design and build a water distribution system.
The new system will initially provide water to about 400 services. Group
also expects to enter an agreement for future operation and maintenance of
the system.
Group leases 35 antenna sites to telecommunication companies. Individual
lease payments range from $750 to $2,200 per month. The antennas are used
in cellular phone and personal communication applications. Other leases are
being negotiated for similar uses.
Laboratory services are also provided to San Jose Water Company and Great
Oaks Water Company.
UTILITY PLANT CONSTRUCTION PROGRAM AND ACQUISITIONS
Group is continually extending, enlarging and replacing its facilities as
required to meet increasing demands and to maintain its systems. Capital
expenditures, including developer financed projects, for additional
facilities and for the replacement of existing facilities amounted to
approximately $34.6 million in 1998. Financing was provided by funds from
operations and short-term bank borrowings, advances for construction and
contributions in aid of construction as set forth in the "Statement of Cash
Flows" on pages 20 Group's 1998 Annual Report which is incorporated herein
by reference. Group funded expenditures were $30.1 million. Developer
payments accounted for $4.5 million. Advances for construction of main
extensions are payments or facilities received from subdivision developers
under the CPUC's rules. These advances are refundable without interest over
a period of 40 years. Contributions in aid of construction consist of
nonrefundable cash deposits or facilities received from developers,
primarily for fire protection. The amount received from developers varies
from year to year as the level of development activity varies. It is
impacted by the demand for housing and commercial development and general
business conditions, including interest rates.
15
<PAGE> 16
During 1998, Group funded expenditures were in the following areas: wells,
pumping and storage facilities, $6.7 million; water treatment and
purification equipment, $3.1 million; distribution systems $9.1 million;
services and meters, $5.3; other equipment, $5.9 million. The increased
expenditure for treatment and purification equipment related to the
Hawthorne treatment plant. The other equipment expenditures included
computer equipment for installation of a new Local Area Network (LAN)
system.
The 1999 construction budget for additions and improvements to facilities
is approximately $30.7 million, exclusive of additions and improvements
financed through advances for construction and contributions in aid of
construction. Financing is expected to be from internally generated funds,
short-term borrowings and long-term debt in the form of senior notes. The
approved budget was for the following areas: wells, pumping and storage
facilities, $8.8 million; water treatment and purification equipment, $1.1
million; distribution systems $9.8 million; services and meters, $5.2;
other equipment, $5.8 million.
During 1996, Congress enacted legislation which exempted from taxable
income the majority of proceeds received from developers to fund advances
for construction and contributions in aid of construction. Because of the
legislation, future water utility plant additions will generally be
depreciated for federal tax purposes on a straight-line 25 year life basis.
The federal tax exemption of developer funds will reduce cash flow
requirements for income taxes. In 1997, California adopted similar
legislation regarding the taxability of payments received from developers.
The Department of Treasury is planning to issue regulations regarding the
taxability of developer financed services. Treasury has given indications
that it will continue to treat the cost of services as taxable income. The
Company has been active along with other private water companies in
presenting evidence to Treasury that would result in services being
classified as nontaxable contributions in aid of construction. The services
represent about 20 percent of developer funded construction.
QUALITY OF WATER SUPPLIES
Procedures are maintained to produce potable water in accordance with
accepted water utility practices. Water entering the distribution systems
from surface sources is treated in compliance with Safe Drinking Water Act
standards. Samples of water from each water system are analyzed regularly
by our state certified water quality laboratory.
In recent years, federal and state water quality regulations have continued
to increase. Changes in the federal Safe Drinking Water Act, which we
believes will bring treatment costs more in line with the actual health
threat posed by contaminants, were enacted by Congress during 1996. Work
continues to monitor water quality and upgrade treatment capabilities to
maintain compliance with the various regulations. These activities include:
16
<PAGE> 17
- installation of dedicated sample sites to assure water samples are
drawn at a secure source
- maintaining a state approved compliance monitoring program required by
the Safe Drinking Water Act
- upgrading laboratory equipment and enhancing analytical testing
capabilities
- ongoing training of laboratory and operating personnel
- installation of disinfection treatment at all well sources
- installation and operation of several granular activated carbon (GAC)
filtration systems for removal of hydrogen sulfide or volatile organic
chemicals
- treatment systems at two Los Angeles Basin wells and wells at the
South San Francisco well field which have elevated levels of iron and
manganese; the treatment allowed the wells to be returned to
production during 1997 and 1998; thus, less costly well water, rather
than purchased water supplies became available
- construction of a new iron and manganese treatment plant in the leased
Hawthorne system; completion of this project is scheduled for early
1999
- monitoring of all sources for MTBE, the gasoline additive widely used
throughout the state
- completion of mandatory Information Collection Rule monitoring for
specified water systems
COMPETITION AND CONDEMNATION
The Company is a public utility regulated by the CPUC. The Company provides
service within filed service areas approved by the CPUC. Under the laws of
the State of California, no privately owned public utility may compete with
the Company in any territory already served by the Company without first
obtaining a certificate of public convenience and necessity from the CPUC.
Under CPUC practices, such certificate will be issued only if the CPUC
finds that the Company's service is deficient.
California law also provides that whenever a public agency constructs
facilities to extend a utility system into the service area of a privately
owned public utility, such an act constitutes the taking of property. For
such taking the public utility is to be paid just compensation. Under the
constitution and statutes of the State of California, municipalities, water
districts and other public agencies have been authorized to engage in the
ownership and operation of water systems. Such agencies are empowered to
condemn properties already operated by privately owned public utilities
upon payment of just compensation and are further authorized to issue
bonds, including revenue bonds, for the purpose of acquiring or
constructing water systems. To Group's knowledge, no municipality, water
district or other public agency has any pending action to acquire or
condemn any of Group's systems.
The water industry is experiencing competitive changes and the potential
exists for new growth. Group has in the past participated in public/private
partnerships, such as the lease of a water system, system operation
agreements, or billing service contracts, and anticipates future
opportunities for further
17
<PAGE> 18
participation and development. The formation of the holding company
structure is expected to enhance financing, accounting and operation of the
nonregulated business activities.
ENVIRONMENTAL MATTERS
Group is subject to environmental regulation by various governmental
authorities. Compliance with federal, state and local provisions which have
been enacted or adopted regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment,
has not had, as of the date of filing of this Form 10-K, any material
effect on Group's capital expenditures, earnings or competitive position.
Group is unaware of any pending environmental matters which will have a
material effect on its operations. Refer to Item 3, Legal Proceedings, for
additional information.
The environmental affairs program is designed to provide compliance with
underground storage tank regulations, hazardous materials management plans,
air quality permitting requirements, local and toxic discharge limitations,
and employee safety issues related to hazardous materials. The Company has
been actively involved in the formulation of air quality standards related
to water utilities. Also, the Company is proactive in looking to
alternative technologies in meeting environmental regulations and
continuing the traditional practices of water quality.
HUMAN RESOURCES
At December 31, 1998, Group had 658 employees, of whom 185 were executive,
administrative and supervisory employees, and 473 were members of unions.
In December 1997, two-year collective bargaining agreements, expiring
December 31, 1999, were successfully negotiated with the Utility Workers
Union of America, AFL-CIO, representing the majority of field and clerical
union employees. In January 1998, a new two-year collective bargaining
agreement was negotiated with the International Federation of Professional
and Technical Engineers, AFL-CIO, representing certain engineering
department and water quality laboratory employees. Both agreements were
ratified by the union members in January 1998. As in the past, both
agreements were successfully negotiated and ratified without a work
interruption.
d. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.
Group makes no export sales.
ITEM 2. PROPERTIES.
Group's physical properties consist of offices and water systems to
accomplish the production, storage, purification and distribution of water.
These properties are located in or near the Geographic Service Areas listed
above under section Item 1.c. entitled "Narrative Description of the
Business." Group's general office, which houses accounting, engineering,
information systems, human resources, purchasing, rate making, water
quality
18
<PAGE> 19
and executive staffs are located in San Jose, California. All properties
are maintained in good operating condition.
All principal properties are held in fee simple title, subject to the lien
of the indenture securing the Company's first mortgage bonds of which
$118,585,000 remained outstanding at December 31, 1998.
Group owns 522 wells and operates six leased wells. There were 291 storage
tanks with a capacity of 216 million gallons and one reservoir located in
the Bear Gulch district with a 210 million gallon capacity. There are about
4,650 miles of supply and distribution mains in the various systems. There
are two treatment plants, one in the Bear Gulch district, the other in
Oroville. Both treatment plants are designed to process six million gallons
per day. During 1998, the average daily water production was 271 million
gallons, while the maximum production on a single day was 507 million
gallons. By comparison, during 1997 the average daily water production was
301 million gallons, while the maximum production on one day was 513
million gallons. In 1996, the average daily water production was 283
million gallons and the maximum production on one day was 497 million
gallons.
In the leased systems or in systems which are operated under contract for
municipalities or private companies, title to the various properties is
held exclusively by the municipality or private company.
ITEM 3. LEGAL PROCEEDINGS.
The State of California's Department of Toxic Substances Control ("DTSC")
alleges that the Company is a potential responsible party for cleanup of a
toxic contamination in the Chico groundwater. The DTSC has prepared a draft
report titled "Preliminary Nonbinding Allocation of Financial
Responsibility" for the cleanup which asserts that the Company's share
should be 10 percent. The DTSC estimates the total cleanup cost to be $8.69
million. The toxic spill occurred when cleaning solvents, which were
discharged into the city's sewer system by local dry cleaners, leaked into
the underground water supply due to breaks in the sewer pipes. The DTSC
contends that the Company's responsibility stems from its operation of
wells in the surrounding vicinity that caused the contamination plume to
spread. The Company 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 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 Group's
financial position or results of operations. Legal costs to date have been
borne by the insurance carrier.
In December 1997, Group along with the City of Stockton and San Joaquin
County ("the Contractors") filed a lawsuit against the Stockton East Water
District ("SEWD"). The Contractors are
19
<PAGE> 20
SEWD's sole customers for wholesale potable water. SEWD also serves raw
water to agricultural customers. To enable SEWD to meet its financial
obligations, the Contractors agreed to specific Base Monthly Payments which
as of June 30, 1997 had generated $5.4 million in surplus funds. The
Contractors contend that a portion of the funds paid by the Contractors
have been or will be used for purposes other than to meet SEWD's agreed
financial obligations. Presently, all parties to the lawsuit have entered
into a Stipulated Preliminary Injunction. A favorable settlement is
anticipated.
Group is not a party to any other legal matters, other than those which are
incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders in the fourth
quarter of year 1998.
20
<PAGE> 21
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Positions and Offices with Group Age
- ---- -------------------------------- ---
<S> <C> <C>
Robert W. Foy Chairman of the Board since January 1, 1996. 62
(1) A Director since 1977. Formerly President
and Chief Executive Officer of Pacific Storage Company,
Stockton, Modesto, Sacramento and San Jose, California, a
diversified transportation and warehousing company, where
he had been employed for 32 years.
Peter C. Nelson President and Chief Executive Officer since 51
(1) February 1, 1996. Formerly Vice President,
Division Operations (1994-1995) and Region Vice President
(1989-1994), Pacific Gas & Electric Company, a gas and
electric public utility.
Gerald F. Feeney Vice President, Chief Financial Officer and 54
(1) Treasurer since November 1994; Controller,
Assistant Secretary and Assistant Treasurer
from 1976 to 1994. From 1970 to 1976, an audit manager
with Peat Marwick Mitchell & Co.
Calvin L. Breed Controller, Assistant Secretary and Assistant 43
(2) Treasurer since November 1994. Previously
Treasurer of TCI International, Inc.; from 1980
to 1983, a certified public accountant with
Arthur Andersen & Co.
Paul G. Ekstrom Corporate Secretary since August 1996; 46
(1) Operations Coordinator, 1993 to 1996;
District Manager, Livermore, 1988 to 1993;
previously served in various field management positions
since 1979; an employee since 1972.
(1) holds the same position with California Water Service
Company and CWS Utility Services
(2) holds the same position with California Water Service
Company
</TABLE>
<TABLE>
<CAPTION>
Name Positions and Offices with the Company Age
- ---- -------------------------------------- ---
<S> <C> <C>
Francis S. Vice President, Regulatory Matters since August 49
Ferraro 1989. Employed by the California Public
Utilities CPUC for 15 years, from 1985 through 1989, as
an administrative law judge.
James L. Good Vice President, Corporate Communications 35
(1) and Marketing since January 1995. Previously Director of
Congressional Relations for the National Association of
Water Companies from 1991 to 1994.
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C>
Robert R. Vice President, Engineering and Water Quality 45
Guzzetta since August 1996; Chief Engineer, 1990 to 1996;
Assistant Chief Engineer, 1988 to 1990; various
engineering department positions since 1977.
Christine L. Vice President, Human Resources since August 52
McFarlane 1996; Director of Human Resources, 1991 to 1996;
Assistant Director of Personnel, 1989 to 1991; an
employee since 1969.
Raymond H. Taylor Vice President, Operations since April 1995; 53
Vice President and Director of Water Quality, 1990 to
1995; Director of Water Quality, 1986
to 1990; prior to 1982 an employee of the United States
Environmental Protection Agency.
Raymond L. Vice President, Chief Information Officer since 59
Worrell August 1996; Director of Information Systems,
1991 to 1996; Assistant Manager of Data Processing, 1970
to 1991; Data Processing Supervisor, 1967 to 1970.
John S. Simpson Assistant Secretary, Manager of New Business since 1991; 54
Manager of New Business development for the past thirteen
years; served in various management positions since 1967.
(1) Also, Vice President, Marketing with CWS Utility Services.
</TABLE>
No officer or director has any family relationship to any other executive
officer or director. No executive officer is appointed for any set term. There
are no agreements or understandings between any executive officer and any other
person pursuant to which he was selected as an executive officer, other than
those with directors or officers of Group acting solely in their capacities as
such.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this item is contained in the Section captioned
"Quarterly Financial and Common Stock Market Data" on page 28 of Group's
1998 Annual Report and is incorporated herein by reference. The number of
shareholders listed in such section includes Group's record shareholders
and an estimate of shareholders holding stock in street name.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is contained in the section captioned
"Ten Year Financial Review" on pages 8 and 9 of Group's 1998 Annual Report
and is incorporated herein by reference.
22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this item is contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," on pages 10 through 16 of the Group's 1998 Annual Report and
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is contained in the sections
captioned "Consolidated Balance Sheet", "Consolidated Statement of Income",
"Consolidated Statement of Common Shareholders' Equity", "Consolidated
Statement of Cash Flows", "Notes to Consolidated Financial Statements" and
"Independent Auditors' Report" on pages 17 through 29 of Group's 1998
Annual Report and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item as to directors of the Group is
contained in the sections captioned "Election of Directors", "Nominees for
Directors" and "Board Committees" on pages 10 through 12 of the 1999 Proxy
Statement and is incorporated herein by reference. Information regarding
executive officers of Group is included in a separate item captioned
"Executive Officers of the Registrant" contained in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item as to directors of Group is included
under the caption "Compensation of Non-employee Directors" on page 13 of
the 1999 Proxy Statement and is incorporated herein by reference. The
information required by this item as to compensation of executive officers,
including officers who are directors, is included under the caption
"Compensation of Executive Officers" on page 16 through 19 of the 1999
Proxy Statement and is incorporated herein by reference.
23
<PAGE> 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is contained in the sections
captioned "Beneficial Ownership of Director-Nominees" and "Security
Ownership of Management" on pages 14 and 20, respectively, of the 1999
Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1)Financial Statements:
Consolidated Balance Sheet as of December 31, 1998 and 1997.
Consolidated Statement of Income for the years ended December 31, 1998,
1997, and 1996.
Consolidated Statement of Common Shareholders' Equity for the years ended
December 31, 1998, 1997, and 1996.
Consolidated Statement of Cash Flows for the years ended December 31, 1998,
1997, and 1996.
Notes to Consolidated Financial Statements, December 31, 1998, 1997, and
1996.
Independent Auditors' Report dated January 22, 1999.
The above financial statements are contained in sections bearing the same
captions on pages 17 through 29 of Group's 1998 Annual Report and are
incorporated herein by reference.
(2) Financial Statement Schedule:
Schedule
Number
Independent Auditors' Report dated January 22, 1999.
II Valuation and Qualifying Accounts and Reserves--years ending December 31,
1998, 1997, and 1996.
All other schedules are omitted as the required information is inapplicable
or the information is presented in the financial statements or related
notes.
24
<PAGE> 25
(3) Exhibits required to be filed by Item 601 of Regulation S-K.
See Exhibit Index on page 29 of this document which is incorporated herein
by reference.
The exhibits filed herewith are attached hereto (except as noted). Those
exhibits indicated on the Exhibit Index which are not filed herewith were
previously filed with the Securities and Exchange CPUC as indicated. Except
where stated otherwise, such exhibits are hereby incorporated by reference.
(B) Report on Form 8-K.
Form 8-K was filed November 19, 1998 to report that on November 13, 1998
Registrant and its wholly-owned subsidiary, California Water Service
Company, had entered into an agreement to merge with Dominguez Services
Corporation. The agreed terms and conditions provide that each common share
of Dominguez Services Corporation will be exchanged for 1.18 shares of
Registrant's common stock. The consummation of the merger is conditioned
upon the satisfaction of certain conditions, including the approval of the
CPUC and other regulatory approvals.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CALIFORNIA WATER SERVICE GROUP
Date: February 25, 1999 By /s/ Peter C Nelson
PETER C. NELSON,
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Date: February 25, 1999 /s/ Robert W. Foy
ROBERT W. FOY, Chairman,
Board of Directors
25
<PAGE> 26
Date: February 25, 1999 /s/ Edward D. Harris, Jr.
EDWARD D. HARRIS, JR., M.D., Member,
Board of Directors
Date: February 25, 1999 /s/ Robert K. Jaedicke
ROBERT K. JAEDICKE, Member,
Board of Directors
Date: February 25, 1999 /s/ Richard P. Magnuson
RICHARD P. MAGNUSON, Member,
Board of Directors
Date: February 25, 1999 /s/ Linda R. Meier
LINDA R. MEIER, Member,
Board of Directors
Date: February 25, 1999 /s/ Peter C. Nelson
PETER C. NELSON
President and Chief Executive Officer,
Member, Board of Directors
Date: February 25, 1999 /s/ C. H. Stump
C. H. STUMP, Member,
Board of Directors
Date: February 25, 1999 /s/ George A. Vera
GEORGE A. VERA, Member
Board of Directors
Date: February 25, 1999 /s/ J. W. Weinhardt
J. W. WEINHARDT, Member,
Board of Directors
Date: February 25, 1999 /s/ Gerald F. Feeney
GERALD F. FEENEY,
Vice President, Chief Financial
Officer and Treasurer;
Principal Financial Officer
Date: February 25, 1999 /s/ Calvin L. Breed
CALVIN L. BREED, Controller,
Assistant Secretary and Assistant
Treasurer;
Principal Accounting Officer
26
<PAGE> 27
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
California Water Service Group:
Under date of January 22, 1999, we reported on the consolidated balance sheet of
California Water Service Group as of December 31, 1998 and 1997, and the related
consolidated statements of income, common shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1998, as
contained in the 1998 annual report to shareholders. These financial statements
and our report thereon are incorporated by reference in the annual report on
Form 10-K for the year 1998. In connection with our audits of the aforementioned
financial statements, we also audited the related consolidated financial
statement schedule as listed in the index appearing under Item 14(a)(2). This
financial statement schedule is the responsibility of Group's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Mountain View, California /s/ KPMG LLP
January 22, 1999
27
<PAGE> 28
Schedule II
CALIFORNIA WATER SERVICE GROUP
Valuation and Qualifying Accounts
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged to Charged to
beginning costs and other
Description of period expenses accounts
- ----------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
1998 (A)Reserves deducted in the balance sheet from assets
to which they apply:
Allowance for doubtful accounts $ 100,096 $ 536,388 $ 52,796(3)
Allowance for obsolete materials and supplies $ 129,193 48,000
=========== =========== ===========
(B)Reserves classified as liabilities in the balance sheet:
Miscellaneous reserves:
General Liability $ 900,425 $ 600,000
Employees' group health plan $ 721,120 3,000,000 15,509
Retirees' group health plan $ 1,443,373 751,664 458,336
Workers compensation $ 661,829 878,423
Deferred revenue - contributions in aid of construction $ 1,584,342 229,162
Disability insurance $ 23,811 107,110
----------- ----------- -------------
$ 5,334,900 $ 5,230,087 $ 810,117
=========== =========== ===========
Contributions in aid of construction $44,270,083 $ 2,524,406(4)
=========== =========== ===========
1997 (A)Reserves deducted in the balance sheet from assets to which
they apply:
Allowance for doubtful accounts $ 99,550 $ 610,951 $ 70,850(3)
Allowance for obsolete materials and supplies 101,077 48,000
=========== =========== ===========
(B)Reserves classified as liabilities in the balance sheet:
Miscellaneous reserves:
General Liability $ 997,834 $ 668,496
Employees' group health plan 467,986 3,140,000 14,539
Retirees' group health plan 911,998 581,000 531,375
Workers compensation 499,651 830,313
Deferred revenue - contributions in aid of construction 1,799,573 126,547
Disability insurance 50,371 103,167
----------- ----------- -----------
$ 4,727,413 $ 5,219,809 $ 775,628
=========== =========== ===========
Contributions in aid of construction $43,066,585 $ 2,447,231(4)
=========== =========== ===========
1996 (A)Reserves deducted in the balance sheet from assets to
which they apply:
Allowance for doubtful accounts $ 76,197 $ 530,691 $ 65,445(3)
Allowance for obsolete materials and supplies $ 74,675 48,000
=========== =========== ===========
(B)Reserves classified as liabilities in the balance sheet:
Miscellaneous reserves:
General Liability $ 826,965 $ 740,000
Employees' group health plan $ 400,004 2,880,000 14,348
Retirees' group health plan $ 670,998 523,000 241,000
Workers compensation $ 260,170 835,430
Deferred revenue - contributions in aid of construction $ 1,930,336 276,525
Disability insurance $ 47,453 199,097
----------- ----------- -----------
$ 4,135,926 $ 4,978,430 $ 730,970
=========== =========== ===========
Contributions in aid of construction $40,113,707 $ 4,062,087(4)
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Balance
at end
Description Deductions of period
------------- -----------
<S> <C> <C>
1998 (A)Reserves deducted in the balance sheet from assets
to which they apply:
Allowance for doubtful accounts $ 489,025(1) $ 200,255
Allowance for obsolete materials and supplies 39,733(2) 137,460
=========== ===========
(B)Reserves classified as liabilities in the balance sheet:
Miscellaneous reserves:
General Liability $ 229,673(2) $ 1,270,752
Employees' group health plan 3,093,246(2) 643,383
Retirees' group health plan 635,000(2) 2,018,373
Workers compensation 536,454(2) 1,003,798
Deferred revenue - contributions in aid of construction 336,988(6) 1,476,516
Disability insurance 104,702(2) 26,219
----------- -----------
$ 4,936,063 $ 6,439,041
=========== ===========
Contributions in aid of construction $ 1,694,085(5) $45,100,404
=========== ===========
1997 (A)Reserves deducted in the balance sheet from assets to which
they apply:
Allowance for doubtful accounts $ 681,255(1) $ 100,096
Allowance for obsolete materials and supplies 19,884(2) 129,193
=========== ===========
(B)Reserves classified as liabilities in the balance sheet:
Miscellaneous reserves:
General Liability $ 765,905(2) $ 900,425
Employees' group health plan 2,901,405(2) 721,120
Retirees' group health plan 581,000(2) 1,443,373
Workers compensation 668,135(2) 661,829
Deferred revenue - contributions in aid of construction 341,778(6) 1,584,342
Disability insurance 129,727(2) 23,811
----------- -----------
$ 5,387,950 $ 5,334,900
=========== ===========
Contributions in aid of construction $ 1,243,733(5) $44,270,083
=========== ===========
1996 (A)Reserves deducted in the balance sheet from assets to
which they apply:
Allowance for doubtful accounts $ 572,783(1) $ 99,550
Allowance for obsolete materials and supplies 21,598(2) 101,077
=========== ===========
(B)Reserves classified as liabilities in the balance sheet:
Miscellaneous reserves:
General Liability $ 569,131(2) $ 997,834
Employees' group health plan 2,826,366(2) 467,986
Retirees' group health plan 523,000(2) 911,998
Workers compensation 595,949(2) 499,651
Deferred revenue - contributions in aid of construction 407,288(6) 1,799,573
Disability insurance 196,179(2) 50,371
----------- -----------
$ 5,117,913 $ 4,727,413
=========== ===========
Contributions in aid of construction $ 1,109,209(5) $43,066,585
=========== ===========
</TABLE>
Notes:
(1) Accounts written off during the year.
(2) Expenditures and other charges made during the year.
(3) Recovery of amounts previously charged to reserve.
(4) Properties acquired at no cost, cash contributions and net transfer on
non-refundable balances from advances to contributions.
(5) Depreciation of utility plant acquired by contributions charged to a
balance sheet account.
(6) Amortized to revenue.
Page 1
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Page Numbers
Exhibit Number in this Report
<S> <C>
Unless filed with this Form 10-K, the documents listed are
incorporated by reference.
3. Articles of Incorporation and by-laws:
3.1 Restated Articles of Incorporation of California 29
Water Service Group and By-laws of California Water
Service Group (Filed as Exhibits B and C, respectively,
of the 1997 California Water Service Company Proxy
Statement/Prospectus) (Form S-4 filed March 6, 1997)
3.2 Certificate of Determination of Preferences 29
for the Company's Series C Preferred Stock
(Exhibit 3.2 to Form 10-K for fiscal year 1987,
File No. 0-464)
3.3 Certificate of Determination of Preferences for 29
Group's Series D Preferred Stock (Exhibit A
to the Shareholder Rights Plan, an agreement between
California Water Service
Group and BankBoston, N.A.,
rights agent, dated January 28, 1998 file as Exhibit
1 to Form 8-A and Exhibit 1 to Form 8-K dated
February 13, 1998)
4. Instruments Defining the Rights of Security 29
Holders of California Water Service Company,
including Indentures:
Mortgage of Chattels and Trust Indenture 29
dated April 1, 1928; Eighth Supplemental Indenture
dated November 1, 1945, covering First Mortgage
3.25% Bonds, Series C; twenty-first
Supplemental Indenture dated October 1, 1972, covering First
Mortgage 7.875% Bonds, Series P; twenty-fourth Supplemental
Indenture dated November 1, 1973, covering First Mortgage 8.50%
Bonds, Series S (Exhibits 2(b), 2(c), 2(d), Registration Statement
No. 2-53678, of which certain exhibits are incorporated by reference
to Registration Statement Nos. 2-2187, 2-5923, 2-5923, 2-9681,
2-10517 and 2-11093.)
Thirty-third Supplemental Indenture dated as 29
of May 1, 1988, covering First Mortgage
9.48% Bonds, Series BB. (Exhibit 4 to Form 10-Q
dated September 30, 1988, File No. 0-464)
Thirty-fourth Supplemental Indenture dated as 29
of November 1, 1990, covering First Mortgage
9.86% Bonds, Series CC. (Exhibit 4 to Form 10-K
</TABLE>
29
<PAGE> 30
<TABLE>
<S> <C>
for fiscal year 1990, File No. 0-464)
Thirty-fifth Supplemental Indenture dated as of 30
November 1, 1992, covering First Mortgage 8.63%
Bonds, Series DD. (Exhibit 4 to Form 10-Q
dated September 30, 1992, File No. 0-464)
Thirty-sixth Supplemental Indenture dated as of 30
May 1, 1993, covering First Mortgage 7.90% Bonds
Series EE (Exhibit 4 to Form 10-Q dated
June 30, 1993, File No. 0-464)
Thirty-seventh Supplemental Indenture dated as 30
of September 1, 1993, covering First Mortgage
6.95% Bonds, Series FF (Exhibit 4 to Form 10-Q
dated September 30, 1993, File No. 0-464)
Thirty-eighth Supplemental Indenture dated as 30
of October 15, 1993, covering First Mortgage 6.98%
Bonds, Series GG (Exhibit 4 to Form 10-K for fiscal
year 1994, File No. 0-464)
Note Agreement dated August 15, 1995, pertaining 30
to issuance of $20,000,000, 7.28% Series A
Unsecured Senior Notes, due November 1, 2025
(Exhibit 4 to Form 10-Q dated September 30, 1995
File No. 0-464)
10. Material Contracts.
10.1 Water Supply Contract between the Company 30
and the County of Butte relating to the Company's Oroville
District; Water Supply Contract between the Company and the Kern
County Water Agency relating to the Company's Bakersfield
District; Water Supply Contract between the Company and Stockton
East Water District relating to the Company's Stockton District.
(Exhibits 5(g), 5(h), 5(i), 5(j), Registration Statement No.
2-53678, which incorporates said exhibits by reference to Form
1O-K for fiscal year 1974, File No. 0-464).
10.2 Settlement Agreement and Master Water Sales 30
Contract between the City and County of San Francisco and Certain
Suburban Purchasers dated August 8, 1984; Supplement to
Settlement Agreement and Master Water Sales Contract, dated
August 8, 1984; Water Supply Contract between the Company and the
City and County
</TABLE>
30
<PAGE> 31
<TABLE>
<S> <C>
of San Francisco relating to the Company's Bear
Gulch District dated August 8, 1984; Water Supply Contract
between the Company and the City and County of San Francisco
relating to the Company's San Carlos District dated August 8,
1984; Water Supply Contract between the Company and the City and
County of San Francisco relating to the Company's San Mateo
District dated August 8, 1984; Water Supply Contract between the
Company and the City and County of San Francisco relating to the
Company's South San Francisco District dated August 8, 1984.
(Exhibit 10.2 to Form l0-K for fiscal year 1984, File No. 0-464).
10.3 Water Supply Contract dated January 27, 31
1981, between the Company and the Santa
Clara Valley Water District relating to
the Company's Los Altos District
(Exhibit 10.3 to Form 10-K for fiscal
year 1992, File No. 0-464)
10.4 Amendments No. 3, 6 and 7 and Amendment 31
dated June 17, 1980, to Water Supply
Contract between the Company and the
County of Butte relating to the Company's
Oroville District. (Exhibit 10.5 to Form
10-K for fiscal year 1992, File No. 0-464)
10.5 Amendment dated May 31, 1977, to Water 31
Supply Contract between the Company and
Stockton-East Water District relating to
the Company's Stockton District.
(Exhibit 10.6 to Form 10-K for fiscal
year 1992, File No. 0-464)
10.6 Second Amended Contract dated September 25, 31
1987 among the Stockton East Water District,
the California Water Service Company, the
City of Stockton, the Lincoln Village
Maintenance District, and the Colonial Heights
Maintenance District Providing for the Sale of
Treated Water. (Exhibit 10.7 to Form 10-K for
fiscal year 1987, File No. 0-464).
10.7 Water Supply Contract dated April 19, 1927, 31
and Supplemental Agreement dated June 5,
1953, between the Company and Pacific Gas
and Electric Company relating to the
Company's Oroville District. (Exhibit 10.9
to Form 10-K for fiscal year 1992, File No.
0-464)
10.8 California Water Service Company Pension Plan 31
(Exhibit 10.10 to Form 10-K for fiscal year
1992, File No. 0-464)
10.9 California Water Service Company Supplemental 31
Executive Retirement Plan. (Exhibit 10.11 to
Form 10-K for fiscal year 1992, File No. 0-464)
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C>
10.10 California Water Service Company Employees 32
Savings Plan. (Exhibit 10.12 to Form 10-K for
fiscal year 1992, File No. 0-464)
10.11 Agreement between the City of Hawthorne and 32
California Water Service Company for the 15-
year lease of the City's water system.
(Exhibit 10.17 to Form 10-Q dated March 31, 1996)
10.12 Water Supply Agreement dated September 25, 1996 32
between the City of Bakersfield and California
Water Service Company. (Exhibit 10.18 to Form 10-Q
dated September 30, 1996)
10.13 Agreement of Merger dated March 6, 1997 by and among California 32
Water Service Company, CWSG Merger Company and California
Water Service Group. (Filed as Exhibit A of the 1997
California Water Service Company Proxy Statement/Prospectus
which was incorporated by reference in the Form 10-K for
1997)
10.14 Shareholder Rights Plan; an agreement between 32
California Water Service Group and BankBoston, N.A.,
rights agent, dated January 28, 1998 (Exhibit 1
to Form 8-A and Exhibit 1 to Form 8-K dated
February 13, 1998)
10.15 Dividend Reinvestment and Stock Purchase Plan dated 32
February 17, 1998 (Filed on Form S-3 dated
February 17, 1998)
10.16 California Water Service Group Directors Deferred 32
Compensation Plan (Exhibit 10.17 to Form 10-K for
fiscal year 1997)
10.17 California Water Service Group Directors 32
Retirement Plan (Exhibit 10.18 to Form 10-K
for fiscal year 1997)
10.18 $50,000,000 Business Loan Agreements between 32
California Water Service Group, California Water
Service Company and CWS Utility Services and
Bank of America dated March 16, 1998, expiring
April 30, 1999 (Exhibit 10.20 to Form 10-K for
the year 1997)
10.19 Amendment to the bylaws regarding the timing for 32
submission of shareholder proposals for consideration
at annual shareholder meetings and shareholder
nomination of directors (Exhibit 10.18 to Form 10Q
for the quarter ending September 30, 1998)
</TABLE>
32
<PAGE> 33
<TABLE>
<S> <C>
10.20 Certificate of Determination filed with the state of 33
California regarding Series D Participating Preferred Shares.
These shares are relative to Shareholder Rights Plan and would be
issued if the rights plan was triggered. This is a revised filing
at the Secretary of State's request in a revised form (Exhibit
10.19 to Form 10Q for the quarter ending September 30, 1998)
10.21 Amendment to the Business Loan Agreement between 33
California Water Service Company and Bank of America
(refer to Exhibit 10.18) whereby the bank has
extended the period during which the Company is
required to have repaid any advances under the
Agreement for 30 consecutive days to April 30, 1999
10.22 Amendment to the California Water Service Company 33
Supplemental Executive Retirement Plan (refer to
Exhibit 10.18) to allow benefits to be received by
Plan participants at age 60 without a reduction in
the benefit level
10.23 Amendment to the California Water Service Group 33
Deferred Director Compensation Plan (refer to
Exhibit 10.16) regarding the timing for electing
Plan benefits
10.24 Executive Severance Plan (Exhibit 10.24 to Form 10K 33
For fiscal year 1998)
10.25 Water Supply Contract dated November 16, 1994, between the 33
Company and Alameda County Flood Control and Water Conservation
District relating to the Company's Livermore District Exhibit
10.15 to Form 10-K for fiscal year 1994
13. Annual Report to Security Holders, Form 10-Q or
Quarterly Report to Security Holders:
1998 Annual Report. Certain sections of the 1998 Annual Report
are incorporated by reference in this 10-K filing. This includes
those sections referred to in Part II, Item 5, Market for
Registrant's Common Equity and Related Shareholder Matters; Part
II, Item 6, Selected Financial Data; Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and
Results of Operations; and Part II, Item 8, Financial Statement
and Supplementary Data.
27. Financial Data Schedule as of December 31, 1998 33
</TABLE>
33
<PAGE> 1
EXHIBIT 10.21
BANK OF AMERICA
================================================================================
AMENDMENT TO DOCUMENTS
AMENDMENT NO. 5 TO BUSINESS LOAN AGREEMENT
This Amendment No. 5 (the "Amendment") dated as of March 12, 1999, is
between Bank of America National Trust and Savings Association (the "Bank") and
California Water Service Company (the "Borrower").
RECITALS
A. The Bank and the Borrower entered into a certain Business Loan Agreement
dated as of April 4, 1997, as previously amended (the "Agreement").
B. The Bank and Borrower desire to further amend the Agreement.
AGREEMENT
1. DEFINITIONS. Capitalized terms used but not defined in this Amendment
shall have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
2.1 Paragraph 6.6 is amended to read in its entirety as follows:
6.6 OUT OF DEBT PERIOD. To repay any advances in full, and not
to draw any additional advances on its revolving line of
credit, for a period of at least 30 consecutive days between
January 1, 1998 and April 30, 1999.
3. REPRESENTATIONS AND WARRANTIES. When the Borrower signs this Amendment,
the Borrower represents and warrants to the Bank that: (a) there is no event
which is, or with notice or lapse of time or both would be, a default under the
Agreement except those events, if any, that have been disclosed in writing to
the Bank or waived in writing by the Bank, (b) the representations and
warranties in the Agreement are true as of the date of this Amendment as if made
on the date of this Amendment, ( c) this Amendment is within the Borrower's
powers, has been duly authorized, and does not conflict with any of the
Borrower's organizational papers, and (d) this Amendment does not conflict with
any law, agreement, or obligation by which the Borrower is bound.
4. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the
terms and conditions of the Agreement shall remain in full force and effect.
5. COUNTERPARTS. This Amendment may be executed in counterparts, each of
which when so executed shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
BANK OF AMERICA CALIFORNIA WATER SERVICE COMPANY
NATIONAL TRUST AND SAVINGS ASSOCIATION
/s/ JEFFREY PERKINS /s/ GERALD F. FEENEY
- ------------------------------------ ------------------------------------
By: Jeffrey Perkins, Vice President By: Gerald F. Feeney, Vice President,
C.F.O. and Treasurer
<PAGE> 1
EXHIBIT 10.22
AMENDMENT NUMBER TWO
TO THE
CALIFORNIA WATER SERVICE COMPANY
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
EFFECTIVE JANUARY 1, 1999
-----------------------------------------
THE CALIFORNIA WATER SERVICE COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN IS
HEREBY AMENDED ON JANUARY 1, 1999 AS FOLLOWS:
1. Paragraph 5.2 of the Plan is deleted and replaced with the following new
Paragraph 5.2:
Early Retirement Benefit. If a Participant retires early on or after age 55
and prior to age 65, the monthly benefit shall be calculated in accordance
with Section 5.1 and reduced to the following amounts:
<TABLE>
<CAPTION>
Age at Percentage of
Retirement Monthly Benefit
<S> <C>
60 and over 100%
59 95
58 90
57 85
56 80
55 74
</TABLE>
Reductions according to the above table shall be prorated for full months
of age.
IN WITNESS WHEREOF, this amendment is executed by a duly authorized officer
on the 27th day of January, 1999.
CALIFORNIA WATER SERVICE COMPANY
By /s/ Gerald F. Feeney
---------------------------------
Gerald F. Feeney
35
<PAGE> 2
Vice President, Chief Financial
Officer and Treasurer
By /s/ Christine L. McFarlane
------------------------------------
Christine L. McFarlane
Vice President, Human Resources
36
<PAGE> 1
EXHIBIT 10.23
Amendment No. 2
TO THE
CALIFORNIA WATER SERVICE GROUP
(a)Directors Deferred Compensation Plan
EFFECTIVE AS OF JANUARY 1, 1999
-------------------------------
The California Water Service Group Director Deferred Compensation Plan (the
"Plan") is hereby amended as follows, effective January 1, 1999 for all Accounts
under the Plan, in order to change the time of payment (and thereby revoke all
prior payment elections made by Participants) and to modify the time for
electing the method of payment:
1. Paragraph E-2.a of the Plan is deleted and replace with the following
new Paragraph E2.a:
"Payment from a Participant's Account shall begin on the first
day of the month (the `Scheduled Payment Date') following the
later of (I) the month during which he ceases to be an Eligible
Director or (ii) if an Eligible Director become an employee of
the Company thus is no longer an Eligible Director, the month
during which employment with the Company terminates. However, a
Participant may elect for such payment to begin after the
Scheduled Payment Date if such election is made during the month
before the Scheduled Payment Date."
2. Paragraph E-2.c of the Plan shall be, and hereby is, renumbered as
Paragraph E-2.b.
3. The second and third sentences of Paragraph E-3 of the Plan shall be,
and hereby are, amended to read as follows:
"The Participant may change the method of payment no later than
the date payments begin under Paragraph E-2.a of the Plan.
Payment of the amount credited to the Participant's Account shall
be made in one to five equal annual installments beginning on the
Scheduled Payment Date or any such later dated elected by the
Participant under E-2.a."
IN WITNESS WHEREOF, this amendment is executed by a duly
authorized officer on the 27th day of January, 1999.
2. CALIFORNIA WATER SERVICE GROUP
37
<PAGE> 2
3. BY /S/ GERALD F. FEENEY
4. VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER
38
<PAGE> 1
EXHIBIT 10.24
California Water Service Group
EXECUTIVE SEVERANCE PLAN
The California Water Service Group Executive Severance Plan (the "Plan") is
hereby adopted as of this 16th day, of December, 1998, by California Water
Service Group ("Group") for the benefit of the Officers (as defined below) of
Group and/or its Affiliates and Associates (as defined below).
W I T N E S S E T H
WHEREAS, the Officers are currently employed by Group and/or its Affiliates or
Associates (collectively referred to as the "Employer"); and
WHEREAS, the Employer wishes to retain the services of the Officers and to
encourage the Officers to remain with the Employer; and
WHEREAS, Group desires to establish the Plan to provide security for the
Officers in connection with the Officers' employment with Employer in the event
of a Change in Control (as defined below) affecting Employer;
NOW, THEREFORE, Employer hereby establishes the Plan as set forth below.
5. DEFINITIONS. For purposes of this Plan:
(a) "Affiliate" or "Associate" shall have the meaning set forth in Rule
12b-2 under the Securities Exchange Act of 1934.
"Beneficiary" shall mean the person or persons whom the Officer shall
designate in writing (on the form attached hereto as Exhibit A) to receive the
benefits provided hereunder in the event of his or her death. Such designation
shall be valid only if it is made on said form, and the Employer receives said
form prior to the Officer's death.
"Change in Control" shall be deemed to take place on the occurrence of any
of the following events:
(1) Any merger or consolidation of the Employer in which the Employer
is not the surviving organization, a majority of the capital
stock of which is not owned by the shareholders of the Employer
immediately prior to such merger or consolidation;
(2) A transfer of all or substantially all of the assets of the
Employer;
(3) Any other corporate reorganization in which there is a change in
ownership of the outstanding shares of the Employer wherein
39
<PAGE> 2
thirty percent (30%) or more of the outstanding shares of the
Employer are transferred to any Person;
(4) The acquisition by or transfer to a Person (including all
Affiliates or Associates of such Person) of "beneficial ownership" (as
that term is defined in Rule 13d-3 under the Securities Exchange Act
of 1934) of capital stock of Employer if after such acquisition or
transfer such Person (and their Affiliates or Associates) is entitled
to exercise thirty percent (30%) or more of the outstanding voting
power of all capital stock of Employer entitled to vote in elections
of directors; or
(5) The election to the Board of Directors of Employer of
candidates who were not recommended for election by the Board of
Directors of Employer in office immediately prior to the election, if
such candidates constitute a majority of those elected in that
particular election.
"Good Cause" shall be deemed to exist with respect to an Officer if,
and only if:
(6) The Officer engages in acts or omissions that result in
substantial harm to the business or property of Employer and that
constitute dishonesty, intentional breach of fiduciary obligation or
intentional wrongdoing; or
(7) The Officer is convicted of a criminal violation involving
fraud or dishonesty.
"Good Reason" shall exist with respect to an Officer if and only if,
without the Officer's express written consent:
(8) there is a significant change in the nature or the scope of
the Officer's authority or in his or her overall working environment;
(9) the Officer is assigned duties materially inconsistent with
his or her present duties, responsibilities and status;
(10) there is a reduction in the Officer's rate of base salary or
bonus; or
(11) Employer changes by 100 miles or more the principal location
in which the Officer is required to perform services.
"Officer" shall mean any officer of Employer who has been elected as
such by the Board of Directors of said Employer and was serving as such
upon a Change in Control.
"Person" shall have the meaning as such term is used in Sections 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934.
40
<PAGE> 3
"Salary" shall mean the Officer's annual base salary rate at the greater of
(1) the date of the Change in Control, or (2) the date the Officer's employment
with the Employer terminates.
6. BENEFITS UPON TERMINATION OF EMPLOYMENT.
(a) If, at any time within twenty-four (24) months after a Change in
Control occurs (i) the employment of an Officer with his or her
Employer terminates for any reason other than Good Cause, or (ii) the
Officer terminates his or her employment with Employer for Good
Reason, Employer shall pay Officer a benefit equal to three (3) years'
Salary (less any customary taxes and withholdings) (the "Change in
Control Benefit"). The Change in Control Benefit shall be paid in
three (3) equal annual installments beginning on the first of the
month following the month in which the Officer's employment terminates
and payable thereafter on the anniversary of said payment date. The
Officer shall be entitled to only one Change in Control Benefit under
the Plan. The Change in Control Benefit will be made only if Officer
executes the Release Agreement (attached hereto as Exhibit B) and will
begin following the expiration of the seven (7) day revocation period
under said Release. No payments will be made under the Plan to Officer
if Officer revokes the Release. In the event that the Officer dies
before receiving the full Change in Control Benefit, his or her
Beneficiary shall be paid the remaining payments as they become due.
(b) If the employment of an Officer with Employer is
terminated by Employer or Officer, other than under circumstances
set forth in subsection 2(a), the Employer shall have no further
obligation with respect to the Officer under this Plan.
(c) This Plan shall have no effect, and Employer shall have
no obligations hereunder, with respect to an Officer whose
employment terminates for any reason at any time other than
within twenty-four (24) months after a Change in Control.
7. NO SOLICITATION OF REPRESENTATIVES AND OFFICERS.
No Officer shall, directly or indirectly, in his or her individual capacity or
otherwise, induce, cause, persuade, or attempt to induce, cause or, persuade,
any representative, agent or employee of Group or any of its Affiliates and
Associates to terminate such person's employment relationship with Group or any
of its Affiliates and Associates, or to violate the terms of any agreement
between said representative, agent or employee and Group or any of its
Affiliates or Associates.
8. CONFIDENTIALITY.
Preservation of a continuing business relationship between Group or its
Affiliates and Associates and their respective customers, representatives, and
employees is of critical
41
<PAGE> 4
importance to the continued business success of Group, its Affiliates and
Associates and it is the active policy of Group and its Affiliates and
Associates to guard as confidential certain information not available to the
public relating to the business affairs of Group and its Affiliates and
Associates. In view of the foregoing, no Officer shall, without the prior
written consent of Group disclose to any person or entity any such confidential
information that was obtained by the Officer in the course of his or her
employment by Employer. This section shall not be applicable if and to the
extent the Officer is required to testify in a legislative, judicial or
regulatory proceeding pursuant to an order of Congress, any state or local
legislature, a judge or an administrative law judge or is otherwise required by
law to disclose such information.
9. FORFEITURE.
If an Officer shall at any time violate any obligation under Section 3 or 4 in a
manner that results in material damage to Group or its Affiliates or Associates,
or its business , he or she shall immediately forfeit his or her right to any
benefits under this Plan, and Employer shall thereafter have no further
obligation hereunder to the Officer or his or her Beneficiary or any other
person.
10.OFFICER ASSIGNMENT.
Neither the Officer nor his or her Beneficiary shall have any power or right to
transfer, assign, anticipate, hypothecate, mortgage, commute, modify, or
otherwise encumber in advance any of the benefits payable hereunder, nor shall
any of said benefits be subject to seizure for the payment of any debts,
judgments, alimony, or separate maintenance owed by the Officer or his or her
Beneficiary, or be transferable by operation of law in the event of bankruptcy,
insolvency, or otherwise.
11.BENEFITS UNFUNDED.
The Plan is intended to be unfunded for purposes of Employee Retirement Income
Security Act of 1974 and the Internal Revenue Code. The Employer's obligation
under this Plan shall be that of an unfunded and unsecured promise by the
Employer to pay money in the future. All distributions under this Plan shall be
paid from the general assets of the Employer. The right of the Officer or any
Beneficiary to receive a distribution under this Plan shall be an unsecured
claim against the general assets of the Employer, and neither the Officer nor
any Beneficiary shall have any rights in or against any assets of the Employer
or Group and its Affiliates and Associates.
12.APPLICABLE LAW.
The Plan and all matters arising under it shall be governed by the laws of the
State of California except to the extent preempted by federal law.
13.NO EMPLOYMENT CONTRACT.
This Plan shall not be deemed to constitute a contract of employment between an
Officer and his or her Employer, nor shall any provision hereof restrict the
right of the Employer to discharge the Officer, or restrict the right of the
Officer to terminate his or her employment.
42
<PAGE> 5
14.SEVERABILITY.
In the event any provision of this Plan is held illegal or invalid, the
remaining provisions of this Plan shall not be affected thereby.
15.SUCCESSORS.
The Plan shall be binding upon and inure to the benefit of Group and its
Affiliates and Associates, the Officers and their respective heirs,
representatives and successors. As a condition to any Change in Control, the new
controlling organization or any other person described in Section 1(c) must
agree to assume and to discharge the obligations of the Employer under this
Plan. Upon the occurrence of such event, the term "Employer" as used in Plan
shall be deemed to refer to such new controlling organization or other person.
16.CLAIMS PROCEDURE.
The Employer or its delegatee shall have the power, in its discretion, to
interpret and make all determinations as to rights to benefits under this Plan,
its interpretation or determinations thereof in good faith to be final and
conclusive on the Officer and his or her Beneficiary and shall be subject to
review only to the extent a court concludes that such interpretation or
determinations are arbitrary and capricious.
If a claim for benefits under the Plan is denied in whole or in part, the
claimant will be notified by the Employer or its delegatee within 90 days of the
date the claim is delivered to the Employer, or 180 days if the claimant is told
that additional time is needed. The notification will be written in
understandable language and will state (i) specific reasons for denial of the
claim, (ii) specific references to Plan provisions on which the denial is based,
(iii) a description (if appropriate) of any additional material or information
necessary for the claimant to perfect the claim and why such material or
information is necessary, and (iv) an explanation of the procedure for reviewing
the denied claim. A claim that is not acted upon within 90 days (or 180 days in
the case of an extension) may be deemed by the claimant to have been denied.
Within 60 days after a claim has been denied, or deemed denied, the
claimant or his or her authorized representative may make a request for a review
by submitting to the Employer a written statement (a) requesting a review of the
denial of the claim; (b) setting forth all of the grounds upon which the request
for review is based and any facts in support thereof; and (c) setting forth any
issues or comments which the claimant deems relevant to the claim. The claimant
may review pertinent documents relating to the denial.
The Employer or its delegatee shall make a decision on review within 60 days
after the receipt of the claimant's request for review or receipt of all
additional materials reasonably requested by the Administrator from the
claimant, unless an extension of time for processing a review is required, in
which case the claimant will be notified and a decision will be made within 120
days of receipt of the request for review. The decision will be in writing, and
in understandable language. It will give specific references to the Plan
provisions on which the decision is based. The decision of the Employer or its
43
<PAGE> 6
delegatee on review shall be final and conclusive upon all persons except to the
extent it is found by a court to be arbitrary or capricious.
17.AMENDMENT AND TERMINATION.
Group shall have the right to amend this Plan from time to time and may
terminate this Plan at any time; provided that within twenty-four (24) months
following a Change in Control (i) no amendment may be made that diminishes any
Officer's right in the event of a termination of employment, following such
Change in Control, and (ii) the Plan may not be terminated.
This Section 13 may not be amended.
18.TAXES.
It is intended that this Plan shall be a non-qualified deferred compensation
plan and that any right to payments hereunder shall not be treated as taxable
income to the Officer or any Beneficiary prior to distribution thereof. Any
payments made under this Plan shall be made net of any customary employment and
withholding taxes.
In the event that any payment or benefit received or to be received by Officer
in connection with a Change in Control (the Change in Control Payments) would,
in whole or part, be subject to excise tax under Section 4999 of the Internal
Revenue Code (the Excise Tax), the Employer shall pay to Officer an additional
amount (the Gross-Up Payment) such that the net amount retained by Officer,
after deduction of any Excise Tax on the payments under the Plan (without taking
into account the Excise Tax attributable to the other Change in Control
Payments) and any federal, state and local income tax and Excise Tax upon the
payment provided for by this Section 14 shall be equal to the payments under the
Plan; provided that the Gross-Up Payment shall be made to Officer only in the
event that Employer's tax counsel concludes that the Excise Tax would be owed.
For purposes of determining whether any of the Change in Control Payments will
be subject to the Excise Tax, (i) any other payments or benefits received or to
be received by Officer in connection with a Change in Control of the Employer or
the Officer's termination of employment (whether pursuant to the terms of the
Plan or any other plan, arrangement or agreement with the Employer) shall be
treated as parachute payments within the meaning of Section 280G(b)(2) of the
Internal Revenue Code (the Code), and all excess parachute payments within the
meaning of Section 280G(b)(1) shall be treated as subject to the Excise Tax,
unless in the opinion of Employer's tax counsel such other payments or benefits
(in whole or in part) do not constitute parachute payments, or such excess
parachute payments (in whole or in part) represent reasonable compensation for
services actually rendered within the meaning of Section 280G(b)(4) of the Code;
(ii) the amount of the Change in Control Payments which shall be treated as
subject to the Excise Tax shall be equal to the lesser of (A) the total amount
of the Change in Control Payments, or (B) the amount of excess parachute
payments within the meaning of Sections 280G(b)(1) and (4) (after applying
clause (i), above); and (iii) the value of any non-cash benefits or any deferred
payment or benefit shall be determined by the Employer"" independent auditors in
accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For
purposes of determining the amount of the Gross-Up Payment, Officer shall be
deemed to pay federal income taxes at the highest marginal rate of federal
income taxation in the calendar year in which the Gross-Up Payment is to be made
and state and local income taxes at the highest marginal rates of
44
<PAGE> 7
taxation in the state and locality of the Officer's residence on the Termination
Date, net of the maximum reduction in federal income taxes which could be
obtained from deduction of such state and local taxes. In the event that the
Excise Tax is subsequently determined to be less than the amount taken into
account hereunder at the time of termination of the Officer's employment,
Officer shall repay to the Employer at the time that the amount of such
reduction in Excise Tax is finally determined the portion of the Gross-Up
Payment attributable to such reduction plus interest on the amount of such
repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the
event that the Excise Tax is determined to exceed the amount taken into account
hereunder at the Termination Date (including by reason of any payment the
existence or amount of which cannot be determined at the time of the Gross-Up
Payment), the Employer shall make an additional gross-up payment in respect of
such excess (plus any interest payable with respect to such excess) at the time
that the amount of such excess is finally determined.
IN WITNESS WHEREOF, Group has caused this instrument to be executed in its name
by its duly authorized officer, all as of the day and year first above written.
CALIFORNIA WATER SERVICE GROUP
By: _______________________________
Its: _____________________________
45
<PAGE> 8
EXHIBIT A
DESIGNATION OF BENEFICIARIES
I, ______________________________, hereby designate the following person(s)
as my Beneficiary(ies) under the California Water Service Group Executive
Severance Plan (the "Plan") to receive any amounts that might be payable as of
the date of my death:
Name: _________________________________________________ Percentage: _____%
Address: ____________________________________________________________________
Name: _________________________________________________ Percentage: _____%
Address: ____________________________________________________________________
This designation supersedes all prior Beneficiary designations I have made under
the Plan.
DATED: __________ ___, 19___ _____________________________________________
46
<PAGE> 9
EXHIBIT B
RELEASE AGREEMENT
This Release Agreement ("Release") was given to me,
______________________________ ("Officer"), this _____ day of _________, _____,
by ___________________________ (the "Employer"). At such time as this Release
becomes effective and enforceable (i.e., the revocation period discussed below
has expired), and assuming Officer is otherwise eligible for payments under the
terms of the California Water Service Group Executive Severance Plan (the
"Plan"), Employer agrees to pay Officer pursuant to the terms of the Plan an
amount equal to $_____________ payable in three (3) equal annual installments
(minus customary payroll taxes and withholdings).
In consideration of the receipt of the promise to pay such amount, Officer
hereby agrees, for himself or herself, his or her heirs, executors,
administrators, successors and assigns (hereinafter referred to as the
"Releasors"), to fully release and discharge the Employer and its officers,
directors, employees, agents, insurers, underwriters, subsidiaries, parents,
affiliates, associates, successors and assigns (hereinafter referred to as the
"Releasees") from any and all actions, causes of action, claims, obligations,
costs, losses, liabilities, damages and demands under any federal, state or
local law or laws, or common law, whether or not known, suspected or claimed,
which the Releasors have, or hereafter may have, against the Releasees arising
out of or in any way related to Officer's employment or termination of
employment with the Employer.
It is understood and agreed that this Release extends to all such claims
and/or potential claims, and that Officer, on behalf of the Releasors, hereby
expressly waives all rights with respect to all such claims under California
Civil Code Section 1542, which provides as follows:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his or her favor at the time of executing the
release, which if known by him or her must have materially affected his or
her settlement with the debtor.
It is further understood and agreed that this Release includes claims and
rights Officer might have under the Age Discrimination in Employment Act
("ADEA"). The Officer's waiver of rights under the ADEA does not extend to
claims or rights that might arise after the date this Release is executed. The
monies to be paid to the Officer in this Release are in addition to any sums to
which he or she would be entitled without signing this Release. For a period of
seven (7) days following execution of this Release, Officer may revoke the terms
of this Release by a written document received by the Employer on or before the
end of the seven (7) day period. The Release will not be final until said
revocation period has expired. No payments will be made under the Plan if the
Officer revokes this Release.
47
<PAGE> 10
Officer executes this Release without reliance on any representation by any
Releasee. Officer acknowledges that he or she has read and does understand the
provisions of the Release set forth in the preceding paragraph, that he or she
has had an opportunity to consult with an attorney prior to executing this
Release, that he or she was given twenty-one (21) days in which to consider
entering into this Release, that he or she affixes his or her signature hereto
voluntarily and without coercion, and that no promise or inducement has been
made other than those set out in this Release. This document does not
constitute, and shall not be admissible as evidence of, an admission by any
Releasee as to any fact or matter.
In case any part of this Release is later deemed to be invalid, illegal or
otherwise unenforceable, Officer agrees that the legality and enforceability of
the remaining provisions of this Release will not be affected in any way.
Dated: ____________, ______ ______________________________
("Officer")
48
<PAGE> 1
EXHIBIT 13
(annual report cover)
CALIFORNIA WATER SERVICE GROUP
H2O (accompanied by a photo of water in a testing glass)
1998 Annual Report
<PAGE> 2
(inside front cover)
We are dedicated to being the leader in providing communities and customers with
traditional and innovative utility services.
step 1: contract
Arrangements under which water quality services are provided to customers.
step 2: site
The place within a specific service area where treatment facilities are located.
step 3: contaminant
The substance the treatment facility is designed to remove.
step 4: benefit
What this process provides to our customers.
<PAGE> 3
CALIFORNIA WATER SERVICE GROUP Page 1
Photo of Chairman and Chief Executive Officer:
Robert W. Foy, Chairman of the Board (right)
Peter C. Nelson, President and Chief Executive Officer (left)
LETTER TO OUR SHAREHOLDERS
1998 was a memorable business year for the California Water Service Group.
In fact, 1998 was the first full-year of operation for the California Water
Service Group (the Group), the holding company for the California Water Service
Company (Cal Water) and CWS Utility Services. At year's start, we knew the
unusually wet El Nino weather would make it unlikely to top the all-time
financial records set in 1997. While this forecast was correct, we did produce
strong financial results, business growth and process improvements that
increased the level of customer service.
One of our proudest accomplishments of 1998, and indeed in our 72-year history,
was the agreement to merge with Dominguez Services Corporation. It is the
largest merger in our history and the largest ever of two investor-owned water
utilities in California.
DOMINGUEZ MERGER
On November 13, 1998, the Boards of the California Water Service Group and
Dominguez Services Corporation (DSC) of Long Beach, California, announced an
agreement to merge. Incorporated in 1911, DSC has nearly 40,000 service
connections, almost all held by its main subsidiary, the Dominguez Water
Company, in the South Bay region of Los Angeles. This system is adjacent to our
Hermosa-Redondo and Palos Verdes districts and together will serve almost 90,000
customers. The synergies that result should produce long-term cost savings for
our customers and position us as a much stronger competitor for future growth
opportunities in Los Angeles. In addition, DSC has operations in fast-growing
northeast Los Angeles County, near our Bakersfield district and in Northern
California. DSC also brings experience in the growing area of water rights
trading, enabling us to maximize the value and usefulness of our combined water
rights.
The merger must be approved by DSC shareholders and the California Public
Utilities Commission. Another water company has submitted a competing offer to
merge with Dominguez. The offer will be evaluated by Dominguez. In the event
Dominguez completes a merger with another company, it must pay the Group $2.7
million in settlement fees.
1998 FINANCIAL RESULTS
1998 was a very good year for the Group. Operating revenues totaled
$186,273,000, net income was $18,395,000, earnings per share equaled $1.45,
while the price-per-share and market capitalization at the end of the year
reached $31-5/16 and $395,000,000, respectively. Although we expected 1998's
results to be lower than the record highs set in 1997 - and for all but share
price and market capitalization, we were correct - we were pleased by the small
differences between 1998's and 1997's results. For example, operating revenues
were less than five percent below the $195 million reached in 1997.
In 1998, it was common practice to blame virtually any misfortune on abnormal
weather patterns caused by El Nino, the periodic warming of the Pacific Ocean's
<PAGE> 4
CALIFORNIA WATER SERVICE GROUP Page 2
surface waters. In fact customer demand dropped dramatically in response to
precipitation levels that were twice normal in January, three times normal in
February, four times normal in May - with statewide precipitation reaching 170
percent of normal by the end of that month. When normal weather patterns
returned in the summer, growth in revenues outpaced those in expenses. The third
quarter turned out to be the single most profitable quarter in our 72-year
history.
We don't expect the weather to have as great an impact in 1999. Weather patterns
will be influenced by La Nina, a cooling of the Pacific's surface waters,
typified by short, heavy rainfalls and colder-than-normal temperatures. Though
we cannot predict 1999's precipitation, carryover storage from last year is
excellent and that alone should ensure sufficient supply well into 1999.
In January 1999, the Board of Directors voted to raise the dividend on common
stock from $1.07 to $1.085 per share, the 32nd consecutive annual dividend
increase. In 1999, we anticipate issuing new long-term debt to meet our capital
construction budget after meeting long-term financing needs with internally
generated funds for three years in a row. This transaction is expected to be
completed in the first quarter of 1999. And, as already discussed, 1999 will see
the culmination of the most significant business transaction the Group has
undertaken since the formation of its predecessor in 1926: the merger of the
Group and Dominguez Services Corporation.
CUSTOMER SERVICE AND WATER QUALITY
Our vision statement says it all: "We are dedicated to being the leader in
providing communities and customers with traditional and innovative utility
services." To continue this leadership into the next century, we are vigorously
pursuing improvements in the excellent service we provide customers. Every
employee in our 21 operating districts and General Office is continuously
focusing on improving business processes that serve customers. An area that
receives special attention is water quality. Not surprisingly, our customers
identified safe, fresh and good-tasting water as their number one need in a
recent survey.
The new treatment facilities underway in Bakersfield and Torrance featured on
pages 4-7, are tangible evidence of our commitment to meeting this key customer
need. To support these facilities, Cal Water has a state-certified in-house
water quality laboratory focused on improving water quality. And as the table on
the reverse of the attached map shows, water quality has always been a top
priority of the Group and Cal Water sometimes anticipating both regulatory and
technological requirements.
BOARD DEVELOPMENTS
We are very pleased that George A. Vera was elected to the Board of Directors in
March to fill the vacancy left with the retirement of Edwin E. van Bronkhorst.
Like Mr. van Bronkhorst, George has ties to the founders of Silicon Valley:
Messrs. Packard and Hewlett. He serves as director of finance and administration
<PAGE> 5
CALIFORNIA WATER SERVICE GROUP Page 3
for the Packard Foundation - the nation's third largest private foundation, with
an endowment of $9 billion, distributing annual grants in excess of $400
million.
Y2K
Group has been taking steps for over a year to address potential Year 2000 (Y2K)
computer problems. These include: an internal assessment in both 1998 and 1999
of our readiness; transferring most non-billing computer functions to a
Y2K-compliant computer by mid-1999; converting our mainframe billing computer to
handle Y2K dates; working with critical suppliers and customers - like power
companies and hospitals - to ensure readiness; and developing contingency plans
for water delivery should, despite all these preparations, a problem arise that
threatens our ability to supply customers. An outside, independent consultant
reviewed our preparations and gave us a positive review. Additional information
about Y2K efforts is found on page 15 of this report.
CONCLUSION
The changes that the California Water Service Group and its subsidiaries saw in
1998 were some of the most dramatic in its history. At the same time that we are
creating unparalleled growth opportunities, the marketplace is becoming more
crowded. Financial market expectations of strong growth and dividend increases
remain unchanged, meaning our people must improve customer service and business
processes and contribute to profitable growth. A tall order, but one well within
the reach of our 658 employees, particularly now that we have all been trained
in the Continuous Improvement Process, an approach to business that focuses on
customer service, operating efficiency and developing the potential and
contribution of every employee.
In 1998, the California Water Service Group was buffeted by rainstorms of nearly
unprecedented magnitude. Our people met these challenges and produced a very
successful year. We are working hard to ensure that 1999 is equally successful
and are confident unprecedented results await us in the next century. Just look
at the map of California at the back of this annual report. It shows how
geographically diverse the Group is, and how we are positioned to take advantage
of a projected 25 percent increase in California's population over the next 20
years in an economy that is already the world's seventh largest. 1998 has indeed
set the tone for a very promising future.
/S/ Robert W. Foy
Robert W. Foy
Chairman of the Board
February 12, 1999
/S/ Peter C. Nelson
Peter C. Nelson
President and Chief Executive Officer
February 12, 1999
<PAGE> 6
CALIFORNIA WATER SERVICE GROUP Page 4
NORTHEAST BAKERSFIELD
SURFACE WATER TREATMENT PLANT
(a small map outlining the state of California appears with the general location
of Bakersfield depicted)
Kern County is one of the State's most productive agricultural regions. The
California Department of Finance projects the population of Kern County to more
than double from 648,000 today, to over 1.6 million by 2040. Where will all
these people live? Bakersfield, by far the largest city in Kern County, is
taking steps to channel development to the northeast, away from the westside's
prime agricultural land. To serve this area, the California Water Service
Company is working with Bakersfield to make high-quality Kern River water
available by building a 10 million gallon per day (MGD) treatment plant. This
plant will be expandable to 60 MGD and may ultimately supply a population of
180,000. Cal Water will design, build, finance, own and operate this facility.
<PAGE> 7
Unnumbered Page
Principles of Agreement between Cal Water and the City of Bakersfield
establishes us as the owner/operator.
It will be built on an 80-acre site near the Kern River.
Sediment and microbes often found in surface water will be removed.
Safe, healthful drinking water will enable families and communities to flourish.
(four boxes appear horizontally across the page with graphics that depict the
Northeast Bakersfield agreement, the future treatment plant, removal of microbes
from the water and delivery of water through a faucet)
<PAGE> 8
CALIFORNIA WATER SERVICE GROUP Page 5
(A photograph of the area in Northeast Bakersfield where the new treatment plant
will be built appears on the page; it is accompanied by the word "microbes")
<PAGE> 9
CALIFORNIA WATER SERVICE GROUP Page 6
TORRANCE DESALINATION FACILITY
(a small map outlining the state of California appears with the general location
of Torrance desalination facility)
The West Coast Groundwater Basin lies under one of the most heavily populated
areas of the country and is bordered to the west by the Pacific Ocean. In the
50s, the California Department of Water Resources proclaimed this basin "one of
the most critically overdrawn ground water sources in southern California,"
resulting in seawater intrusion. To combat the further inland spread of
seawater, the Water Replenishment District (WRD) was formed in 1955 to halt it,
a job that has been accomplished through injecting treated surface water into
the underground basin.
Now the mission is to clean up and reuse seawater trapped inland. In cooperation
with WRD, CWS Utility Services is making surplus land in Torrance available for
the desalination facility that will help achieve this new goal.
<PAGE> 10
Unnumbered Page
CWS Utility Services will operate the facility under a 20-year O&M contract.
Facility will be housed at our retired well sites.
By removing chlorides, the reverse osmosis process will produce potable water.
Safe drinking water will be produced at a discount to alternative supplies.
(four boxes appear horizontally across the page with graphics that depict the
Torrance agreement, the future desalination facility, removal of chlorides from
the water and delivery of water in a glass)
<PAGE> 11
CALIFORNIA WATER SERVICE GROUP Page 7
(A photograph of a desalination facility appears on the page; it is accompanied
by the word "chlorides")
<PAGE> 12
CALIFORNIA WATER SERVICE GROUP Page 8
TEN YEAR FINANCIAL REVIEW
<TABLE>
<CAPTION>
(Dollars in thousands, except common share data)
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
OPERATING REVENUE
Residential $135,733 $143,327 $134,035 $119,814 $114,751 $111,526 $101,842 $ 87,560 $ 90,178 $ 84,295
Business 31,591 32,916 30,924 28,230 27,023 25,247 23,670 20,759 20,910 19,870
Industrial 6,238 6,282 6,150 5,836 5,478 5,123 4,925 4,490 5,146 5,166
Public authorities 8,368 9,636 9,023 8,149 7,995 7,396 6,892 5,734 6,412 6,225
Other 4,343 3,163 2,632 3,057 2,024 2,424 2,476 8,633 1,741 1,932
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total operating
revenue 186,273 195,324 182,764 165,086 157,271 151,716 139,805 127,176 124,387 117,488
Operating expense 156,199 160,975 152,397 139,694 131,766 123,861 116,031 102,855 101,017 95,150
Interest expense,
other income and
expenses, net 11,679 11,044 11,300 10,694 11,097 12,354 11,245 10,393 9,004 8,566
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income $ 18,395 $ 23,305 $ 19,067 $ 14,698 $ 14,408 $ 15,501 $ 12,529 $ 13,928 $ 14,366 $ 13,772
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
COMMON SHARE DATA*
Earnings per share $ 1.45 $ 1.83 $ 1.50 $ 1.16 $ 1.22 $ 1.35 $ 1.09 $ 1.21 $ 1.25 $ 1.20
Dividends declared $ 1.070 $ 1.055 $ 1.040 $ 1.020 $ 0.990 $ 0.960 $ 0.930 $ 0.900 $ 0.870 $ 0.840
Dividend payout
ratio 74% 58% 69% 88% 81% 71% 85% 74% 70% 70%
Book value $ 13.38 $ 13.00 $ 12.22 $ 11.72 $ 11.56 $ 10.90 $ 10.51 $ 10.35 $ 10.04 $ 9.66
Market price
at year-end 31.31 29.53 21.00 16.38 16.00 20.00 16.50 14.00 13.38 14.00
Common shares
outstanding in
thousands) 12,619 12,619 12,619 12,538 12,494 11,378 11,378 11,378 11,378 11,378
Return on average
commonshareholders'
equity 11.1% 14.6% 12.7% 10.2% 10.6% 12.4% 10.4% 11.7% 12.4% 12.4%
Long-term debt
interest
coverage 3.5 4.2 3.6 3.2 3.2 3.2 2.9 3.2 3.6 3.4
</TABLE>
* Common share data is restated to reflect the effective two-for-one stock
split on December 31, 1997.
<PAGE> 13
CALIFORNIA WATER SERVICE GROUP Page 9
(Dollars in thousands, except other data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Net utility
plant $478,305 $460,407 $443,588 $422,175 $407,895 $391,703 $374,613 $349,937 $325,409 $307,802
Utility plant
expenditures 34,553 32,907 35,683 27,250 28,275 28,829 35,188 34,459 26,861 27,277
Total assets 548,499 531,297 512,390 497,626 462,794 446,619 403,448 393,609 369,055 339,348
Long-term debt
including current
portion 138,585 139,205 142,153 145,540 128,944 129,608 122,069 103,505 104,905 86,012
Capitalization ratios:
Common shareholders'
equity 54.3% 53.5% 51.4% 49.7% 52.2% 48.2% 48.8% 52.4% 51.3% 55.1%
Preferred stock 1.1% 1.1% 1.2% 1.2% 1.3% 1.4% 1.4% 1.5% 1.6% 1.8%
Long-term debt 44.6% 45.4% 47.4% 49.1% 46.5% 50.4% 49.8% 46.1% 47.1% 43.1%
OTHER DATA
Water production
(million gallons)
Wells 49,955 56,612 53,372 49,755 50,325 47,205 52,000 48,930 51,329 51,350
Purchased 49,436 53,190 51,700 49,068 49,300 48,089 40,426 36,686 45,595 45,978
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total water
production 99,391 109,802 105,072 98,823 99,625 95,294 92,426 85,616 96,924 97,328
Metered customers 305,900 302,100 298,400 289,200 286,700 282,100 278,700 275,200 272,100 269,200
Flat rate
customers 77,100 77,400 77,700 77,900 78,800 80,800 82,000 82,400 81,200 79,400
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Customers at
year-end 383,000 379,500 376,100 367,100 365,500 362,900 360,700 357,600 353,300 348,600
New customers
added 3,500 3,400 9,000 1,600 2,600 2,200 3,100 4,300 4,700 3,800
Revenue per
customer $ 486 $ 515 $ 486 $ 450 $ 430 $ 418 $ 388 $ 356 $ 352 $ 337
Utility plant
per customer $ 1,777 $ 1,707 $ 1,644 $ 1,592 $ 1,530 $ 1,469 $ 1,406 $ 1,327 $ 1,251 $ 1,198
Employees at
year-end 658 649 633 630 624 614 610 593 581 565
</TABLE>
<PAGE> 14
CALIFORNIA WATER SERVICE GROUP Page 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
California Water Service Group ("Group") was formed on December 31, 1997 as a
holding company with two operating subsidiaries, California Water Service
Company ("Company") and CWS Utility Services ("Services"). The Company is a
regulated public utility. Its assets and operating revenues currently comprise
virtually all of the Group's assets and revenues. Services provides
non-regulated water operations and related services. The following discussion
and analysis provides information regarding the Group, its assets, operations
and financial condition.
FORWARD LOOKING STATEMENTS
This annual report, including the Letter to Shareholders, Management's
Discussion and Analysis and other sections of this report contain forward
looking statements within the meaning of federal securities laws. Such
statements are based on currently available information, expectations,
estimates, assumptions and projections, and management's judgment about the
Group, the water utility industry and general economic conditions. Such words as
expects, intends, plans, believes, estimates, anticipates or variations of such
words or similar expressions are intended to identify forward looking
statements. The forward looking statements are not guarantees of future
performance. Actual results may vary materially from what is contained in a
forward looking statement. Factors which may cause a result different than
expected or anticipated include regulatory commission decisions, new
legislation, increases in suppliers' prices, changes in environmental compliance
requirements, acquisitions, changes in customer water use patterns and the
impact of weather on operating results. The Group assumes no obligation to
provide public updates of forward looking statements.
BUSINESS
The Company is a public utility supplying water service to 383,000 customers in
58 California communities through 21 separate water systems or districts. In the
Company's 20 regulated systems, serving 377,000 customers as shown on the
enclosed map, rates and operations are subject to the jurisdiction of the
California Public Utilities Commission ("CPUC"). An additional 6,000 customers
receive service through a long-term lease of the City of Hawthorne water system,
which is not subject to CPUC regulations. Group's subsidiaries also have
contracts with various municipalities to operate water systems and provide
billing services for an additional 30,700 customers, and operate two reclaimed
water systems and lease communication antenna sites.
The CPUC requires that water rates for each regulated district be determined
independently. Rates for the City of Hawthorne system are established in
accordance with an operating agreement and are subject to ratification by the
City council. Fees for other operating agreements are based on contracts
negotiated among the parties.
RESULTS OF OPERATIONS
EARNINGS AND DIVIDENDS. 1998 net income was $18,395,000 compared to $23,305,000
in 1997 and $19,067,000 in 1996. Earnings per common share were $1.45 in 1998,
$1.83 in 1997 and $1.50 in 1996. 1997 revenue, net income and earnings per share
represent the highest levels ever achieved by the Group. The weighted average
<PAGE> 15
number of common shares outstanding in each of the three years was 12,619,000,
12,619,000 and 12,580,000, respectively.
At its January 1998 meeting, the Board of Directors increased the common stock
dividend rate for the 31st consecutive year. 1998 also marked the 54th
consecutive year that a dividend had been paid on the Company's common stock.
The annual dividend rate paid in 1998 was $1.07, an increase of 1.4% over the
1997 rate of $1.055 per share which was an increase of 1.4% compared with the
1996 dividend of $1.04 per share. The dividend increases were based on
projections that the higher dividend could be sustained while still providing
the Group with adequate financial flexibility. Earnings not paid as dividends
are reinvested in the business. The dividend payout ratio was 74% in 1998, 58%
in 1997 and 69% in 1996, an average of 67% for the three-year period. The
variation in payout ratios among the three years is primarily attributable to
earnings per share fluctuations.
<PAGE> 16
CALIFORNIA WATER SERVICE GROUP Page 11
OPERATING REVENUE. Operating revenue, including revenue from City of Hawthorne
customers, was $186.3 million, $9.1 million or 5% less than the record
established the previous year of $195.3 million. 1996 revenue was $182.8
million. The sources of change in operating revenue are set forth in the
following table:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Customer water usage $(12.6) $3.9 $3.1
General and step rate increases 1.9 6.4 7.8
Water production costs-offset rate increases 0.2 0.2 2.2
Usage by new customers 1.4 2.1 4.6
----- ----- -----
Net change $(9.1) $12.6 $17.7
Average revenue per customer (dollars) $486 $515 $486
Average metered customer usage (ccf) 285 315 303
New customers added 3,500 3,400 9,000
</TABLE>
During the first half of 1998, weather in our service areas was wet and cool,
very much the reverse of 1997's favorable weather pattern. Weather in the second
half of the year returned to a more normal pattern. However, the wet, cool
weather in the early part of the year resulted in an overall 9% decrease in 1998
water usage, negatively impacting revenue. The impact of rate changes is
discussed in a following separate section. The year-end customer count was
383,000, a 0.9% increase.
Rainfall for the 1996-97 season was concentrated in December 1996 and January
1997, then virtually ceased. Average consumption per metered account was at a
record level due to summer months that were dry and warm. The customer count
increased 0.9% to 379,500. The City of Hawthorne system was operated for the
full year, while in 1996 operation was for a ten-month period.
OPERATING AND INTEREST EXPENSES. Operating expenses, including those for the
Hawthorne operation, were $156.2 million in 1998, $161.0 million in 1997 and
$152.4 million in 1996. These amounts reflect a decrease in 1998 of $4.8 million
and an increase in 1997 of $8.6 million.
Well production and water purchases from wholesale suppliers each supplied 49.7%
of the required water deliveries in 1998. The remaining 0.6% was obtained from
the Company's Bear Gulch district watershed. For 1997, wells produced 51.2 % of
the supply, 48.4% was purchased and 0.4% came from the watershed. Information
regarding water production costs which includes purchased water, purchased power
and pump taxes is tabulated in the following table:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Purchased water $50.4 $52.2 $51.5
Purchased power 11.1 12.5 12.1
Pump taxes 3.9 4.3 3.8
----- ----- -----
Total water production costs $65.4 $69.0 $67.4
----- ----- -----
Change from prior year (5%) 2% 8%
----- ----- -----
Water production (billion gallons) 99 110 105
----- ----- -----
Change from prior year (10%) 5% 6%
----- ----- -----
</TABLE>
Water production in 1998 reflects a decline in customer usage, while production
levels in 1997 and 1996 reflect increased customer usage. The changes were
influenced by each year's predominant weather pattern as discussed above in the
operating revenue section. In each of the three years, purchased water expense,
the largest component of operating expense, was affected by wholesale supplier
rate increases. Well production decreased in 1998 due to a decline in water
<PAGE> 17
sales and because several wells were out of service for maintenance. With less
well production, purchased power and pump tax expenses also declined. In 1997,
<PAGE> 18
CALIFORNIA WATER SERVICE GROUP Page 12
purchased water expense was reduced by two nonrecurring refunds totaling $2.5
million received from two wholesale water suppliers. Well production increased
6% in 1997 because of increased demand causing a $0.9 million increase in pump
taxes and purchased power costs.
Employee payroll and benefits charged to operations and maintenance expense was
$33.7 million this past year, $32.9 million in 1997 and $31.2 million in 1996.
The increases in payroll and related benefits are attributable to general wage
increases effective at the start of each year and additional hours worked. At
year-end 1998, 1997 and 1996, there were 658, 649 and 633 employees,
respectively.
Income taxes were $10.6 million in 1998, $14.0 million in 1997 and $12.2 million
in 1996. The changes in taxes are generally due to variations in taxable income.
Long-term debt interest expense decreased $0.2 million in 1998 and $0.3 million
in 1997 due to the retirement of Series K bonds in November 1996 and Series L
bonds in November 1997, annual sinking fund payments each year and the absence
of new long-term financing since 1995.
Interest expense from short-term bank borrowings in 1998 was $0.7 million
greater than in 1997. In 1997, short-term interest expense was $0.3 million more
than in 1996. The additional interest expense in the past two years reflects a
higher level of short-term bank borrowings. Interest coverage of long-term debt
before interest and income taxes was 3.5 times in 1998, 4.2 times in 1997 and
3.6 times in 1996. There was $22.5 million in temporary borrowings at the end of
1998 and $14.5 million at the end of 1997.
OTHER INCOME. Other income is derived from management contracts under which the
Company operates three municipally owned water systems, contracts for operation
of five privately owned water systems, agreements for operation of two reclaimed
water systems, meter reading and billing services to various cities, leasing
certain facilities, other nonutility sources and interest on short-term
investments. Total other income was $1.1 million in 1998 and 1997, and $0.8
million in 1996. Income from the various operating and billing contracts
excluding short-term interest income was $1.1 million in 1998, $1.0 million in
1997 and $0.7 million in 1996.
RATES AND REGULATION
The 1998 rate case applications were filed with the CPUC in July. The
applications request rate increases in four districts representing 25% of total
accounts. An application covering General Office operations was also submitted.
Based on the CPUC's processing schedule, a decision regarding the applications
is expected in the second quarter of 1999. It is estimated that the decision
will provide the Company with between $1.5 and $2.0 million of additional
revenue in the first twelve months following the decision.
CPUC decisions were received in July 1998 for the general rate applications
filed in July 1997. Additional annual revenue from these decisions is expected
to be $299,000 in 1998, $267,000 in 1999 and $121,000 in the years 2000 and
2001. In a variance from its past practice, future rate increases for operating
costs and capital requirements over the next five years in the Oroville and
Selma districts are tied to changes in a price index.
The decision maintained the ROE at 10.35%.
During 1996, general rate case applications were filed with the CPUC for two
districts. The CPUC granted an ROE of 10.35%. Additional 1997 revenue, including
memorandum and balancing account adjustments, was $2.4 million. The decision
<PAGE> 19
included provisions for future step rate increases to become effective in the
next three years of $1.7 million in 1998 and $0.1 million in 1999 and 2000. The
CPUC also authorized step rate increases for 1997 in various districts totaling
$1.5 million and $1.4 million for undercollection of expense balancing accounts.
During 1999, 10 districts, representing about 55% of all customers, are eligible
for rate increase filings. The Company will review earnings levels in those
districts and file for additional rate consideration as it deems appropriate.
The Company expects to file any rate applications in July with decisions
received from the CPUC in the second quarter of 2000.
WATER SUPPLY
The Company's source of supply varies among its 21 operating districts. Certain
districts obtain all of their supply from wells, some districts purchase all of
<PAGE> 20
CALIFORNIA WATER SERVICE GROUP Page 13
their supply from wholesale suppliers and other districts obtain their supply
from both sources. As a general rule, about half of the water is provided from
wells and about half purchased. Total water production for 1998, 1997 and 1996
was 99.4, 109.8 and 105.1 million gallons, respectively.
Generally, between mid-spring and mid-fall little precipitation falls in the
Company's service areas. Water demand is highest during the normally warm, dry
summer period and less in the cool, wet winter. Rain and snow during the winter
months replenish underground water basins and fill reservoirs providing the
water supply for subsequent delivery to customers. To date, snow and rainfall
accumulation during the 1998-99 water year has been less than normal; however,
the prior three years exceeded normal levels. Water storage in state reservoirs
at the end of 1998 exceeded historic levels. The Company believes that its water
sources from both underground aquifers and purchased sources should be adequate
to meet customer demand during 1999.
ENVIRONMENTAL MATTERS
The Company is subject to regulations of the United States Environmental
Protection Agency (EPA), the California Department of Health Services and
various county health departments concerning water quality matters. It is also
subject to the jurisdiction of various state and local regulatory agencies
relating to environmental matters, including handling and disposal of hazardous
materials.
The Company believes it is in compliance with all monitoring and treatment
requirements set forth by the various agencies. In the past several years,
substantially all of the Company's wells have been equipped with chlorinators,
providing disinfection of water extracted from underground sources. The cost of
the new treatment is being recovered in customer rates as authorized by the
CPUC. Water purchased from wholesale suppliers is treated before delivery to the
Company.
Various regulatory agencies could require increased monitoring and possibly
additional treatment of water supplies. The Company intends to request recovery
for any additional treatment costs through the ratemaking process.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. The Group's liquidity is provided by utilization of a $50 million
short-term bank line of credit and internally generated funds. Under the bank
line, Group has available $20 million and Company $30 million. Prior to 1997,
the line of credit was $30 million. The Group's $20 million portion of the bank
credit line may be drawn upon for use by the Group, including funding operations
of either of its two operating subsidiaries. The Company's $30 million portion
of the credit line may be used solely for purposes of regulated water
operations. Additional information regarding the bank line of credit is
presented in Note 4 to the Consolidated Financial Statements. Internally
generated funds come from retention of earnings not paid out as dividends,
depreciation and deferred income taxes.
Because of the seasonal nature of the water business, the need for short-term
borrowings under the line of credit generally increases during the first six
months of the year when water sales are lowest. Greater summer usage and larger
customer bills increase cash flow and allow bank borrowings to be repaid.
The Company believes that long-term financing is available to it through equity
and debt markets. Standard & Poor's and Moody's have maintained their ratings of
the Company's first mortgage bonds at AA- and Aa3, respectively. Long-term
financing, which includes issuance of common stock, first mortgage bonds, senior
<PAGE> 21
notes and other debt securities is used to replace short-term borrowings and
fund construction. Developer contributions in aid of construction and refundable
advances for construction are also sources of funds for various construction
projects.
Additional long-term financing was not necessary in 1998 or 1997. Operating and
capital requirements were met by borrowings under the short-term bank line of
credit and by internally generated funds. The most recent financing was Series
A, 7.28%, 30-year senior notes issued in 1995. A new $20 million long-term debt
financing is expected to be completed in the first quarter of 1999. The funds
will be used to repay short-term borrowings.
During the first quarter of 1998, the Group implemented a new Dividend
Reinvestment and Stock Purchase Plan (DRSP). About 10% of outstanding
<PAGE> 22
CALIFORNIA WATER SERVICE GROUP Page 14
shares participate in the DRSP which replaced the Company's former Dividend
Reinvestment Plan. Under the DRSP, shareholders may reinvest dividends to
purchase additional Group common stock. Another feature of the DRSP allows
existing shareholders and other interested investors to purchase Group common
shares. Shares required for the DRSP may be purchased on the open market or from
newly issued shares. Therefore, the DRSP will provide the Group with an
alternative means of developing additional equity if new shares were to be
issued. During 1998 and 1997 shares required by the new and former plans were
purchased on the open market. At this time, Group intends to continue purchasing
shares required for the DRSP on the open market. However, if new shares were
issued to satisfy future DRSP requirements, the impact on earnings per share
could be dilutive because of the added shares outstanding. Also, shareholders
not participating in the DRSP may experience dilution of their ownership
percentage.
CAPITAL REQUIREMENTS. Capital requirements consist primarily of new construction
expenditures for expanding and replacing the Company's utility plant facilities,
and the acquisition of new water properties. They also include refunds of
advances for construction and retirement of bonds.
During 1998, utility plant expenditures totaled $34.6 million compared to $32.9
million in 1997. This year's expenditures included $30.1 million provided by
Company funding and $4.5 million received from developers through contributions
in aid of construction and refundable advances for construction. Company
projects were funded by internally generated funds and borrowings under the
short-term bank line of credit.
The Board of Directors authorized a $30.7 million 1999 construction budget for
the Company. The funds for this program are expected to be provided by cash from
operations, bank borrowings and long-term debt financing. New subdivision
construction generally will be financed by developers' contributions and
refundable advances. Company funded construction budgets over the next five
years are projected to be about $170 million.
CAPITAL STRUCTURE. The Group's total capitalization at December 31, 1998 and
1997 was $310.9 million and $306.7 million, respectively. Capital ratios were:
<TABLE>
<CAPTION>
1998 1997
------ -----
<S> <C> <C>
Common equity 54.3% 53.5%
Preferred stock 1.1% 1.1%
Long-term debt including current maturities 44.6% 45.4%
</TABLE>
During the year, no new debt was sold or equity issued. The common equity
percentage increase from 1997 to 1998 and the corresponding decrease in the
long-term debt percentage were caused by several factors. Shareholders' equity
increased by the amount of earnings not paid out for dividends, while the amount
of outstanding debt decreased due to annual November bond sinking fund payments.
The 1998 return on average common equity was 11.1% compared with 14.6% in 1997
and 12.7% in 1996. The most recent CPUC authorized rate of return on common
equity is 10.35%.
REAL ESTATE PROGRAM. The Group's subsidiaries own more than 850 real estate
parcels. Certain parcels are not necessary for or used in water utility
operations. A program has been developed to realize the value of certain surplus
properties through the sale or lease of those properties. The program will be
ongoing over a period of several years. Over the next four years, Group
estimates that gross property transactions totaling six million dollars could be
completed.
<PAGE> 23
SHAREHOLDER RIGHTS PLAN. As explained in Note 3 to the Consolidated Financial
Statements, in January 1998, the Board of Directors adopted a Shareholder Rights
Plan (Plan). The Plan is designed to protect shareholders and maximize
shareholder value in the event of an unsolicited takeover proposal by
encouraging a prospective acquirer to negotiate with the Board.
<PAGE> 24
CALIFORNIA WATER SERVICE GROUP Page 15
DOMINGUEZ MERGER
On November 13, 1998, the boards of Group and Dominguez Services Corporation
(Dominguez) agreed to the merger of the two companies. Dominguez is a utility
holding company. Its largest subsidiary, Dominguez Water Company, is a regulated
water utility providing water service to about 40,000 customers in 21 California
communities. Its other subsidiary conducts water brokering and has an equity
investment in a manufacturer of chlorine generators used by the water and
wastewater industries. Dominguez' 1997 operating revenue was $26.8 million. At
December 31, 1997, net utility plant was $41.4 million and total assets $51.7
million.
The merger agreement provides that each outstanding Dominguez common
share will be exchanged on a tax-free basis for 1.18 Group common shares. At
December 31, 1998, there were 1,561,000 shares of Dominguez common stock
outstanding. Group also expects to assume approximately $10.5 million of
outstanding Dominguez debt. The transaction is expected to be accounted for as a
pooling of interests.
The merger is subject to review by various state and federal agencies including
the CPUC. Final regulatory approval is expected in 1999's fourth quarter. The
transaction is also subject to approval by Dominguez shareholders. Several
inquiries indicating interest in submitting a competing proposal have been
received by Dominguez from another water company. Subsequently, that company
submitted a formal proposal that will be evaluated by Dominguez. In the event
Dominguez completes a merger with another company, it must pay Group $2.7
million in settlement fees.
REINCORPORATION IN DELAWARE
The Board of Directors has approved a resolution to reincorporate Group in the
State of Delaware. Among the advantages considered by the Board in adopting the
resolution of incorporating in Delaware were: the legislature is responsive to
business needs and acts quickly to enact relevant new laws; Delaware has the
most extensive case law on corporate issues of any state, thereby providing
corporations with more certainty about the application of laws in particular
circumstances; courts that specialize in corporate law have developed an
expertise in dealing with corporate issues; and the state has developed a
sharper definition of director responsibilities so that boards may act with
greater certainty on issues affecting shareholders.
The reincorporation is subject to shareholder approval. Shareholders will vote
on the proposal at their annual meeting in April 1999. If shareholders approve
the proposal, the reincorporation is expected to be effective in the second or
third quarter of 1999. Only Group will be reincorporated in Delaware, Company
and Services will remain California corporations.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The statement establishes new accounting and reporting
standards for derivative financial instruments and hedging activities. In 1998,
the American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities." This SOP
provides guidance on the financial reporting of start-up costs and organization
costs. The Group, which will adopt SFAS No. 133 and SOP 98-5 during 1999, does
not anticipate that either statement will have material impact on its financial
position or operating results.
<PAGE> 25
YEAR 2000
READINESS. The Group has assembled a team to address Year 2000 preparedness
issues and the team has developed a Year 2000 readiness plan. The Group retained
an outside independent consultant who reviewed and evaluated the Year 2000
readiness plan. The consultant's report was positive. Recommendations from the
consultant are being addressed.
<PAGE> 26
CALIFORNIA WATER SERVICE GROUP Page 16
Generally, computer operations are centralized at a single location. The
information technology (IT) group has inventoried its various software programs
and identified modifications required to make the programs Year 2000 ready. Most
computer applications are currently processed on a mainframe-based system.
However, as part of a technology upgrade, a local area network (LAN) computer
system that includes Year 2000 ready servers and personal computers, was
installed during 1998. A new Year 2000 compatible accounting, purchasing and
human resources software package is being installed on the LAN system. Certain
accounting applications have already been migrated to the LAN system and others
are in the process of being converted. It is anticipated that most non-customer
billing applications will be migrated to the LAN system by mid-1999 and the
process continues on schedule. The mainframe customer billing system has been
converted to handle Year 2000 dates. The customer billing system will not be
switched to the LAN system until sometime after 2000.
Group has also identified non-computer equipment and operating systems that may
contain embedded date-sensitive chips. Steps have been taken to make the
equipment and systems Year 2000 ready.
Suppliers and vendors with whom the Group has a material business relationship
were contacted during 1998 to assess their Year 2000 preparedness. The intent of
these contacts is to determine that suppliers and vendors will not encounter
Year 2000 problems that might disrupt the Group's business processes. Those
contacted include water wholesalers, power supply companies, chemical vendors,
fuel suppliers, banks and stock registrar. This process is being repeated in
1999 as operating units continue to work with suppliers and vendors to assure
availability of necessary products and supplies. A survey of each of the Group's
district water operations has also been completed to assess specific needs
within each district.
COSTS. The total estimated remediation cost for Year 2000 preparedness is about
$300,000. Included in the estimate is the cost of the outside consultant and
computer programming time. The costs of the new LAN system and software package
were not included in the estimate since their implementation and installation
date were not Year 2000 driven. No IT projects have been deferred as a result of
the Year 2000 efforts.
RISKS. In a worst-case scenario, the Group may be unable to deliver water to its
customers because wholesale suppliers cannot provide water to the Group or power
supplies are not available to operate pumping equipment. Additionally, it may be
impossible to produce customer bills or maintain accounting functions if power
sources are not available or computer billing programs do not function due to
Year 2000 failures. The Group is not able to estimate the potential financial
impact of these scenarios.
Because there is an increased threat of litigation due to potential Year 2000
problems, the Group is evaluating its insurance policies to determine if they
afford coverage of Year 2000 issues.
CONTINGENCY PLANS. Group maintains emergency response plans that are reviewed
and updated on a regular basis. These plans are designed to provide for
alternative operating plans and procedures in the event normal procedures are
interrupted. The emergency plans are the basis for developing Year 2000 service
interruption plans.
Fixed site and portable auxiliary power generators are located throughout the
service territories. These generators are designed to produce electric power for
wells and pumps to supply water to customers in the event of power company
outages. If a power supplier is unable to deliver electricity, the auxiliary
generators would be used as a substitute source.
<PAGE> 27
Emergency water connections are maintained between certain of the Group's water
systems and those of adjacent purveyors. In the event of loss of a wholesale
water supply or a power outage, the emergency connections could be operated to
provide a water supply.
Each district has identified high-profile water users, such as hospitals, and
developed contingency plans for continued service in the event of a Year 2000
disruption.
<PAGE> 28
CALIFORNIA WATER SERVICE GROUP Page 17
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
(In thousands) 1998 1997
-------- --------
<S> <C> <C>
ASSETS
UTILITY PLANT:
Land $ 8,139 $ 7,860
Depreciable plant and equipment 653,524 627,584
Construction work in progress 10,613 4,026
Intangible assets 8,414 8,178
-------- --------
Total utility plant 680,690 647,648
Less depreciation and amortization 202,385 187,241
-------- --------
Net utility plant 478,305 460,407
-------- --------
CURRENT ASSETS:
Cash and cash equivalents 591 1,742
Receivables:
Customers 10,439 10,890
Other 3,071 3,972
Unbilled revenue 5,896 5,136
Materials and supplies at average cost 2,107 2,105
Taxes and other prepaid expenses 4,491 4,423
-------- --------
Total current assets 26,595 28,268
-------- --------
OTHER ASSETS:
Regulatory assets 39,538 38,345
Unamortized debt premium and expense 3,556 3,748
Other 505 529
-------- --------
Total other assets 43,599 42,622
-------- --------
$548,499 $531,297
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 29
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stock, no par value; 25,000 shares
authorized, 12,619 shares outstanding $ 44,941 $ 44,941
Retained earnings 123,863 119,124
-------- --------
Total common shareholders' equity 168,804 164,065
Preferred stock without mandatory
redemption provision, $25 par value;
380 shares authorized, 139 shares outstanding 3,475 3,475
Long-term debt, less current maturities 136,345 138,585
-------- --------
Total capitalization 308,624 306,125
-------- --------
CURRENT LIABILITIES:
Current maturities of long-term debt 2,240 620
Short-term borrowings 22,500 14,500
Accounts payable 15,881 15,499
Accrued taxes 3,484 2,985
Accrued interest 1,933 1,919
Other accrued liabilities 9,490 8,241
-------- --------
Total current liabilities 55,528 43,764
UNAMORTIZED INVESTMENT TAX CREDITS 2,924 3,006
DEFERRED INCOME TAXES 27,925 25,761
REGULATORY LIABILITIES 12,697 12,493
ADVANCES FOR CONSTRUCTION 95,701 95,878
CONTRIBUTIONS IN AID OF CONSTRUCTION 45,100 44,270
-------- --------
$548,499 $531,297
-------- --------
</TABLE>
<PAGE> 30
CALIFORNIA WATER SERVICE GROUP Page 18
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the years ended December 31,
(In thousands, except per share data) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING REVENUE $186,273 $195,324 $182,764
-------- -------- --------
OPERATING EXPENSES:
Operations:
Purchased water 50,377 52,155 51,514
Purchased power 11,145 12,462 12,075
Pump taxes 3,850 4,302 3,753
Administrative and general 24,384 23,521 21,664
Other 24,498 24,019 23,000
Maintenance 9,030 9,319 8,317
Depreciation and amortization 14,563 13,670 12,665
Income taxes 10,550 13,950 12,150
Property and other taxes 7,802 7,577 7,259
-------- -------- --------
Total operating expenses 156,199 160,975 152,397
-------- -------- --------
Net operating income 30,074 34,349 30,367
OTHER INCOME AND EXPENSES, NET 767 858 607
-------- -------- --------
Income before interest expense 30,841 35,207 30,974
-------- -------- --------
INTEREST EXPENSE:
Long-term debt interest 11,259 11,405 11,663
Other interest 1,187 497 244
-------- -------- --------
Total interest expense 12,446 11,902 11,907
-------- -------- --------
NET INCOME $ 18,395 $ 23,305 $ 19,067
-------- -------- --------
BASIC EARNINGS PER SHARE OF COMMON STOCK $ 1.45 $ 1.83 $ 1.50
-------- -------- --------
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 12,619 12,619 12,580
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 31
CALIFORNIA WATER SERVICE GROUP Page 19
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Shares Common Retained
Outstanding Stock Earnings Total
---------- ------ ------- -------
(In thousands, except shares)
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 12,538,702 $43,507 $103,442 $146,949
Net income 19,067 19,067
---------- ------ ------- -------
Dividends paid:
Preferred stock 153 153
Common stock 13,071 13,071
---------- ------ ------- -------
Total dividends paid 13,224 13,224
---------- ------ ------- -------
Income reinvested in business 5,843 5,843
Dividend reinvestment 80,438 1,434 - 1,434
---------- ------ ------- -------
BALANCE AT DECEMBER 31, 1996 12,619,140 44,941 109,285 154,226
Net income 23,305 23,305
Dividends paid:
Preferred stock 153 153
Common stock 13,313 13,313
---------- ------ ------- -------
Total dividends paid 13,466 13,466
---------- ------ ------- -------
Income reinvested in business 9,839 9,839
---------- ------ ------- -------
BALANCE AT DECEMBER 31, 1997 12,619,140 44,941 119,124 164,065
Net income 18,395 18,395
Dividends paid:
Preferred stock 153 153
Common stock 13,503 13,503
---------- ------ ------- -------
Total dividends paid 13,656 13,656
---------- ------ ------- -------
Income reinvested in business 4,739 4,739
---------- ------ ------- -------
BALANCE AT DECEMBER 31, 1998 12,619,140 $44,941 $123,863 $168,804
---------- ------ ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 32
CALIFORNIA WATER SERVICE GROUP Page 20
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
(In thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $18,395 $23,305 $19,067
-------- -------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,563 13,670 12,665
Deferred income taxes and investment
tax credits, net 2,082 1,945 (2,169)
Regulatory assets and liabilities, net (989) (923) 503
Changes in operating assets and liabilities:
Receivables 1,352 (1,897) 698
Unbilled revenue (760) 441 729
Accounts payable 382 807 (115)
Other current liabilities 1,762 543 1,579
Other changes, net 734 1,510 235
-------- -------- --------
Net adjustments 19,126 16,096 14,125
-------- -------- --------
Net cash provided by operating activities 37,521 39,401 33,192
-------- -------- --------
INVESTING ACTIVITIES:
Utility plant expenditures:
Company funded (30,051) (25,491) (27,631)
Developer advances and contributions
in aid of construction (4,502) (7,416) (8,052)
-------- -------- --------
Net cash used in investing activities (34,553) (32,907) (35,683)
-------- -------- --------
FINANCING ACTIVITIES:
Net short-term borrowings 8,000 7,000 7,500
Proceeds from issuance of common stock -- -- 1,434
Advances for construction 3,744 4,536 4,998
Refunds of advances for construction (3,757) (3,685) (3,631)
Contributions in aid of construction 2,170 2,443 3,896
Retirements of first mortgage bonds (620) (2,948) (3,387)
Dividends paid (13,656) (13,466) (13,224)
-------- -------- --------
Net cash used in financing activities (4,119) (6,120) (2,414)
-------- -------- --------
CHANGE IN CASH AND CASH EQUIVALENTS (1,151) 374 (4,905)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 1,742 1,368 6,273
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 591 $ 1,742 $ 1,368
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 11,053 $ 11,734 $ 11,721
Income taxes $ 8,725 $ 14,525 $ 12,775
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 33
CALIFORNIA WATER SERVICE GROUP Page 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of California Water
Service Group (Group) and its wholly-owned subsidiaries, California Water
Service Company (Company) and CWS Utility Services (Services), collectively
referred to as the Group. The Company is a utility, regulated by the California
Public Utilities Commission (CPUC). Services provides non-regulated water
operations and related services. Intercompany transactions and balances have
been eliminated.
The accounting records of the Group are maintained in accordance with the
uniform system of accounts prescribed by the CPUC. Certain prior years' amounts
have been reclassified, where necessary, to conform to the current presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." It establishes disclosure requirements
concerning operating business segments, products and services, geographic areas
and major customers. The Group adopted this pronouncement in 1998. The Group
operates primarily in one business segment, providing water utility services.
The non-utility segment is not material to the Group's revenues, net income or
assets.
REVENUE. Revenue consists of monthly cycle customer billings for regulated water
service at rates authorized by the CPUC and billings to the City of Hawthorne
customers. Revenue from metered accounts includes unbilled amounts based on the
estimated usage from the latest meter reading to the end of the accounting
period. Flat rate accounts which are billed at the beginning of the service
period are included in revenue on a pro rata basis for the portion applicable to
the current accounting period.
UTILITY PLANT. Utility plant is carried at original cost when first constructed
or purchased, except for certain minor units of property recorded at estimated
fair values at dates of acquisition. Cost of depreciable plant retired is
eliminated from utility plant accounts and such costs are charged against
accumulated depreciation. Maintenance of utility plant, other than
transportation equipment, is charged to operating expenses. Maintenance and
depreciation of transportation equipment are charged to a clearing account and
subsequently distributed primarily to operations. Interest is capitalized on
plant expenditures during the construction period and amounted to $224,000 in
1998, $267,000 in 1997, and $261,000 in 1996.
Intangible assets acquired as part of water systems purchased are stated at
amounts as prescribed by the CPUC. All other intangibles have been recorded at
cost. Included in intangible assets is $6,500,000 paid to the City of Hawthorne
to lease the city's water system and associated water rights. The lease payment
is being amortized on a straight-line basis over the 15-year life of the lease.
The Group continually evaluates the recoverability of utility plant by assessing
<PAGE> 34
whether the amortization of the balance over the remaining life can be recovered
through the expected and undiscounted future cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for Costs of Computer Software Developed
or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides guidance on
accounting for the cost of computer software developed or obtained for internal
use. The Group's adoption of this SOP 98-1 in 1998 did not have a material
effect on the financial position or results from operations.
LONG-TERM DEBT, PREMIUM, DISCOUNT AND EXPENSE. The discount and expense on
long-term debt is being amortized over the original lives of the related debt
issues. Premiums paid on the early redemption of certain debt issues and
unamortized original issue discount and expense of such issues are amortized
over the life of new debt issued in conjunction with the early redemption.
CASH EQUIVALENTS. Cash equivalents include highly liquid investments, primarily
U.S. Treasury and U.S. Government agency interest bearing securities, stated at
cost with original maturities of three months or less.
<PAGE> 35
CALIFORNIA WATER SERVICE GROUP Page 22
DEPRECIATION. Depreciation of utility plant for financial statement purposes is
computed on the straight-line remaining life method at rates based on the
estimated useful lives of the assets, ranging from 5 to 65 years. The provision
for depreciation expressed as a percentage of the aggregate depreciable asset
balances was 2.6% in 1998, and 2.5% in 1997 and 1996. For income tax purposes,
as applicable, the Company computes depreciation using the accelerated methods
allowed by the respective taxing authorities. Plant additions since June 1996
are depreciated on a straight-line basis for tax purposes.
ADVANCES FOR CONSTRUCTION. Advances for Construction consist of payments
received from developers for installation of water production and distribution
facilities to serve new developments. Advances are excluded from rate base. Such
payments are refundable to the developer without interest over a 20-year or
40-year period. Refund amounts under the 20-year contracts are based on annual
revenues from the extensions. Unrefunded balances at the end of the contract
period are credited to Contributions in Aid of Construction and are no longer
refundable. Refunds on contracts entered into since 1982 are made in equal
annual amounts over 40 years. At December 31, 1998, the amounts refundable under
the 20-year contracts were $8,328,000 and under 40-year contracts $87,373,000.
Estimated refunds for 1999 for all water main extension contracts are
$4,000,000.
CONTRIBUTIONS IN AID OF CONSTRUCTION. Contributions in Aid of Construction
represent payments received from developers, primarily for fire protection
purposes, which are not subject to refunds. Facilities funded by contributions
are included in utility plant, but excluded from rate base. Depreciation related
to contributions is charged to Contributions in Aid of Construction.
INCOME TAXES. The Group accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Measurement of the deferred tax assets and liabilities is at enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
It is anticipated that future rate action by the CPUC will reflect revenue
requirements for the tax effects of temporary differences recognized which have
previously been flowed through to customers.
The CPUC has granted the Company customer rate increases to reflect the
normalization of the tax benefits of the federal accelerated methods and
available investment tax credits (ITC) for all assets placed in service after
1980. ITC are deferred and amortized over the lives of the related properties.
Advances for Construction and Contributions in Aid of Construction received from
developers subsequent to 1986 are taxable for federal income tax purposes and
subsequent to 1991 subject to state income tax. In 1996 the federal tax law, and
in 1997 the state tax law, changed and the major portion of future advances and
contributions are nontaxable.
EARNINGS PER SHARE. Basic earnings per share (EPS) is calculated using income
available to common shareholders divided by the weighted average shares
outstanding during the year. The Group has no dilutive securities, accordingly,
diluted EPS is not shown.
NOTE 2. PREFERRED STOCK
<PAGE> 36
As of December 31, 1998 and 1997, 380,000 shares of preferred stock were
authorized. Dividends on outstanding shares are payable quarterly at a fixed
rate before any dividends can be paid on common stock. Preferred shares are
entitled to sixteen votes each with the right to cumulative votes at any
elections of directors.
The outstanding 139,000 shares of $25 par value cumulative, 4.4% Series C
preferred shares are not convertible to common stock. A premium of $243,250
would be due upon voluntary liquidation of Series C. There is no premium in the
event of an involuntary liquidation.
<PAGE> 37
CALIFORNIA WATER SERVICE GROUP Page 23
NOTE 3. COMMON SHAREHOLDERS' EQUITY
The Company is authorized to issue 25,000,000 shares of no par value common
stock. All share data has been restated to reflect the 2-for-1 stock split
effective December 31, 1997. As of December 31, 1998 and 1997, 12,619,140 shares
of common stock were issued and outstanding. All shares of common stock are
eligible to participate in the Company's dividend reinvestment plan.
Approximately 10% of shareholders participate in the plan.
SHAREHOLDER RIGHTS PLAN. In January 1998, the Board of Directors adopted a
Shareholder Rights Plan (the Plan) and authorized a dividend distribution of one
right (Right) to purchase 1/100th share of Series D Preferred Stock for each
outstanding share of Common Stock. The Rights became effective in February 1998
and expire in February 2008. The Plan is designed to provide shareholders
protection and to maximize shareholder value by encouraging a prospective
acquirer to negotiate with the Board.
Each Right represents a right to purchase 1/100th share of Series D Preferred
Stock at the price of $120, subject to adjustment (the Purchase Price). Each
share of Series D Preferred Stock is entitled to receive a dividend equal to 100
times any dividend paid on common stock and 100 votes per share in any
shareholder election. The Rights become exercisable upon occurrence of a
Distribution Date. A Distribution Date event occurs if (a) any person
accumulates 15% of the then outstanding Common Stock, (b) any person presents a
tender offer which caused the person's ownership level to exceed 15% and the
Board determined the tender offer not to be fair to Group's shareholders, or (c)
the Board determines that a shareholder maintaining a 10% interest in the Common
Stock could have an adverse impact on the Group or could attempt to pressure
Group to repurchase the holder's shares at a premium.
Until the occurrence of a Distribution Date, each Right trades with the Common
Stock and is not separately transferable. When a Distribution Date occurs: (a)
Group would distribute separate Rights Certificates to Common Stockholders and
the Rights would subsequently trade separately from the Common Stock; and (b)
each holder of a Right, other than the acquiring person (whose Rights will
thereafter be void), will have the right to receive upon exercise at its then
current Purchase Price that number of shares of Common Stock having a market
value of two times the Purchase Price of the Right. If Group merges into the
acquiring person or enters into any transaction that unfairly favors the
acquiring person or disfavors Group's other shareholders, the Right becomes a
right to purchase Common Stock of the acquiring person having a market value of
two times the Purchase Price.
The Board may determine that in certain circumstances a proposal which would
cause a Distribution Date is in the Group shareholders' best interest.
Therefore, the Board may, at its option, redeem the Rights at a redemption price
of $.001 per Right.
NOTE 4. SHORT-TERM BORROWINGS
As of December 31, 1998, the Group maintained a bank line of credit providing
unsecured borrowings of up to $20,000,000 at the prime lending rate or lower
rates as quoted by the bank. The Company maintained a bank line of credit for an
additional $30,000,000 on the same terms as the Group. The line of credit
agreements, which expire April 1999, do not require minimum or specific
compensating balances. The following table represents borrowings under the bank
line of credit.
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Maximum short-term borrowings $24,000 $14,500 $9,500
Average amount outstanding 15,740 5,164 1,662
</TABLE>
<PAGE> 38
<TABLE>
<S> <C> <C> <C>
Weighted average interest rate 7.09% 7.22% 6.94%
Interest rate at December 31 6.97% 7.29% 6.98%
</TABLE>
<PAGE> 39
CALIFORNIA WATER SERVICE GROUP Page 24
NOTE 5. LONG-TERM DEBT
As of December 31, 1998 and 1997, long-term debt outstanding was:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
-------- --------
<S> <C> <C> <C> <C>
First Mortgage Bonds:
Series P 7.875% due 2002 $2,610 $2,625
Series S 8.50% due 2003 2,625 2,640
Series BB 9.48% due 2008 16,650 16,740
Series CC 9.86% due 2020 18,800 18,900
Series DD 8.63% due 2022 19,400 19,500
Series EE 7.90% due 2023 19,500 19,600
Series FF 6.95% due 2023 19,500 19,600
Series GG 6.98% due 2023 19,500 19,600
----- -------- -------- --------
$118,585 $119,205
Senior Notes:
Series A 7.28% due 2025 20,000 20,000
----- -------- -------- --------
Total long-term debt $138,585 $139,205
Less current maturities 2,240 620
-------- --------
$136,345 $138,585
-------- --------
</TABLE>
The first mortgage bonds are held by institutional investors and secured by
substantially all of the Company's utility plant. Aggregate maturities and
sinking fund requirements for each of the succeeding five years 1999 through
2003 are $2,240,000, $2,240,000, $2,240,000, $4,790,000 and $4,775,000,
respectively. The senior notes are held by institutional investors and are
unsecured and require interest-only payments until maturity.
NOTE 6. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
(In thousands) Federal State Total
-------- -------- --------
<S> <C> <C> <C>
1998
Current $ 6,105 $ 2,281 $ 8,386
Deferred 2,520 (356) 2,164
-------- -------- --------
Total $ 8,625 $ 1,925 $ 10,550
-------- -------- --------
1997
Current $ 8,970 $ 2,894 $ 11,864
Deferred 2,280 (194) 2,086
-------- -------- --------
Total $ 11,250 $ 2,700 $ 13,950
-------- -------- --------
1996
Current $ 9,356 $ 3,274 $ 12,630
Deferred 444 (924) (480)
-------- -------- --------
Total $ 9,800 $ 2,350 $ 12,150
-------- -------- --------
</TABLE>
<PAGE> 40
CALIFORNIA WATER SERVICE GROUP Page 25
Income tax expense computed by applying the current federal tax rate of 35% to
pretax book income differs from the amount shown in the Consolidated Statement
of Income. The difference is reconciled in the table below:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense $ 10,131 $ 13,039 $ 10,926
Increase (reduction) in taxes due to:
State income taxes net of
federal tax benefit 1,251 1,755 1,528
Investment tax credits (156) (152) (119)
Other (676) (692) (185)
-------- -------- --------
Total income tax $ 10,550 $ 13,950 $ 12,150
-------- -------- --------
</TABLE>
The components of deferred income tax expense in 1998, 1997 and 1996 were:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Depreciation $ 2,691 $ 2,457 $ 3,544
Developer advances and contributions (798) (334) (3,749)
Bond redemption premiums (62) (62) (73)
Investment tax credits (93) (93) (93)
Other 426 118 (109)
------- ------- -------
Total deferred income tax expense $ 2,164 $ 2,086 $ (480)
------- ------- -------
</TABLE>
The tax effects of differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997
are presented in the following table:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Developer deposits for extension agreements
and contributions in aid of construction $ 42,251 $ 43,980
Federal benefit of state tax deductions 2,524 2,998
Book plant cost reduction for future deferred
ITC amortization 1,727 1,776
Insurance loss provisions 271 334
-------- --------
Total deferred tax assets $ 46,773 $ 49,088
-------- --------
Deferred tax liabilities:
Utility plant, principally due to
depreciation differences $ 74,186 $ 74,029
Premium on early retirement of bonds 1,152 1,215
Other (640) (395)
-------- --------
Total deferred tax liabilities $ 74,698 $ 74,849
-------- --------
Net deferred tax liabilities $ 27,925 $ 25,761
-------- --------
</TABLE>
A valuation allowance was not required during 1998 and 1997. Based on historical
taxable income and future taxable income projections over the periods in which
the deferred assets are deductible, management believes it is more likely than
not the Group will realize the benefits of the deductible differences.
<PAGE> 41
CALIFORNIA WATER SERVICE GROUP Page 26
NOTE 7. EMPLOYEE BENEFIT PLANS
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" was released in 1998 and revises employers' disclosure requirements
about pension and other postretirement benefit plans. This SFAS was implemented
by the Group in 1998 and prior years' amounts have been restated to conform to
the current year presentation.
PENSION PLAN. The Company provides a qualified defined benefit,
non-contributory, pension plan for substantially all employees. The cost of the
plan was charged to expense and utility plant. The Company makes annual
contributions to fund the amounts accrued for pension cost. Plan assets are
invested in mutual funds, pooled equity, and bond and short-term investment
accounts. The data below includes the unfunded, non-qualified, supplemental
executive retirement plan.
SAVINGS PLAN. The Company sponsors a 401(k) qualified, defined contribu-tion
savings plan that allows participants to contribute up to 15% of pre-tax
compensation. The Company matched fifty cents for each dollar contributed by the
employee up to a maximum Company match of 4.0% of the employee's compensation in
1998 and 1997, and 3.5% of the employee's compensation in 1996. Company
contributions were $1,078,000, $1,045,000, and $858,000, for the years 1998,
1997 and 1996, respectively.
OTHER POSTRETIREMENT PLANS. The Company provides substantially all active
employees with medical, dental and vision benefits through a self-insured plan.
Employees retiring at or after age 58 with 10 or more years of service are
offered, along with their spouses and dependents, continued participation in the
plan by a payment of a premium. Retired employees are also provided with a
$5,000 life insurance benefit. Plan assets are invested in a mutual fund,
short-term money market instruments and commercial paper.
The Company records the costs of postretirement benefits during the employees'
years of active service. The CPUC has issued a decision which authorizes rate
recovery of tax deductible funding of postretirement benefits and permits
recording of a regulatory asset for the portion of costs that will be
recoverable in future rates.
The following table reconciles the funded status of the plans with the accrued
pension liability and the net postretirement benefit liability as of December
31, 1998 and 1997:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
(In thousands) 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Beginning of year $ 44,576 $ 39,296 $ 8,230 $ 5,873
Service cost 1,899 1,545 370 280
Interest cost 3,011 2,805 577 549
Assumption change 2,313 3,190 303 415
Plan amendment -- 991 1,101 --
Experience (gain) or loss 220 744 (872) 1,424
Benefits paid (2,085) (3,995) (488) (311)
-------- -------- -------- --------
End of year $ 49,934 $ 44,576 $ 9,221 $ 8,230
-------- -------- -------- --------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at
beginning of year 42,390 38,293 936 582
Actual return on plan assets 2,433 6,023 131 84
Employer contribution 2,208 2,069 635 581
</TABLE>
<PAGE> 42
<TABLE>
<S> <C> <C> <C> <C>
Retiree contributions -- -- 357 340
Benefits paid (2,085) (3,995) (845) (651)
-------- -------- -------- --------
Fair value of plan assets at
end of year $ 44,946 $ 42,390 $ 1,214 $ 936
-------- -------- -------- --------
</TABLE>
<PAGE> 43
CALIFORNIA WATER SERVICE GROUP Page 27
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
(In thousands) 1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Funded status $(4,988) $(2,186) $(8,007) $(7,294)
Unrecognized actuarial
(gain) or loss (1,708) (5,203) 1,485 2,129
Unrecognized prior service cost 4,758 5,370 1,030 --
Unrecognized transition
obligation -- -- 3,476 3,724
Unrecognized net initial asset 858 1,144 -- --
------- ------- ------- -------
Net amount recognized $(1,080) $ (875) $(2,016) $(1,441)
------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
<S> <C> <C> <C> <C>
Discount rate 6.75% 7.0% 6.75% 7.0%
Long-term rate of return on
Plan assets 8.0% 8.0% 8.0% 8.0%
Rate of compensation increase 4.5% 4.5% -- --
</TABLE>
Net periodic benefit costs for the pension and other postretirement plans for
the years ending December 31, 1998, 1997 and 1996 included the following
components:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------------------- --------------------------------
(In thousands) 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost $1,899 $1,545 $1,543 $ 370 $ 280 $ 166
Interest cost 3,011 2,805 2,583 577 549 383
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
--------------------------------------- ---------------------------------------
(In thousands) 1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Expected return on
Plan assets (3,320) (2,876) (2,696) (83) (52) (33)
Net amortization
and deferral 823 768 701 346 338 248
------- ------- ------- ------- ------- -------
Net periodic
benefit cost $ 2,413 $ 2,242 $ 2,131 $ 1,210 $ 1,115 $ 764
------- ------- ------- ------- ------- -------
</TABLE>
Postretirement benefit expense recorded in 1998, 1997, and 1996 was $635,000,
$581,000, and $523,000, respectively. $2,016,000, which is recoverable through
future customer rates, is recorded as a regulatory asset. The Company intends to
make annual contributions to the plan up to the amount deductible for tax
purposes.
For 1998 measurement purposes, a 5.5% annual rate of increase in the per capita
cost of covered benefits was assumed; the rate was assumed to decrease gradually
to 5% in the year 2000 and remain at that level thereafter. The health care cost
trend rate assumption has a significant effect on the amounts reported. A
one-percentage point change in assumed health care cost trends would have the
following effect:
<TABLE>
<CAPTION>
1-percentage 1-percentage
Point Increase Point Decrease
Effect on total service and
<S> <C> <C>
interest costs $175 $(153)
Effect on accumulated postretirement
benefit obligation $1,402 $(1,133)
</TABLE>
<PAGE> 44
CALIFORNIA WATER SERVICE GROUP Page 28
NOTE 8. AGREEMENT OF MERGER WITH DOMINGUEZ
SERVICES CORPORATION
On November 13, 1998, the Boards of Directors of Group and Dominguez Services
Corporation (Dominguez) agreed to a merger of the two companies. Dominguez' 1997
operating revenue was $26.8 million, net income was $2.0 million and basic
earnings per share was $1.34. At December 31, 1997, its net utility plant was
$41.4 million and its total assets were $51.7 million.
The merger agreement provides that each outstanding Dominguez common share will
be exchanged on a tax-free basis for 1.18 Group common shares. At December 31,
1998, there were 1,561,000 shares of Dominguez common stock outstanding. Group
also expects to assume approximately $10.5 million of outstanding Dominguez
debt. The transaction is expected to be accounted for as a pooling of interests.
The merger is subject to review by various state and federal agencies including
the CPUC. The transaction is also subject to approval by Dominguez shareholders.
Several inquiries indicating interest in submitting a competing proposal have
been received by Dominguez from another water company. Subsequently, that
company submitted a formal proposal that will be evaluated by Dominguez. In the
event Dominguez completes a merger with another company, it must pay Group $2.7
million in settlement fees.
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
For those financial instruments for which it is practicable to estimate a fair
value the following methods and assumptions were used:
CASH EQUIVALENTS. The carrying amount of cash equivalents approximates fair
value because of the short-term maturity of the instruments.
LONG-TERM DEBT. The fair value of the Company's long-term debt is estimated at
$153,900,000 as of December 31, 1998 and $155,000,000 as of December 31, 1997,
using a discounted cash flow analysis, based on the current rates available to
the Company for debt of similar maturities.
ADVANCES FOR CONSTRUCTION. The fair value of advances for construction contracts
is estimated at $30,000,000 as of December 31, 1998 and $22,000,000 as of
December 31, 1997, based on data provided by brokers.
NOTE 10. QUARTERLY FINANCIAL AND COMMON STOCK
MARKET DATA (UNAUDITED)
The Group's common stock is traded on the New York Stock Exchange under the
symbol "CWT". There were approximately 11,000 holders of common stock at
December 31, 1998. Quarterly dividends have been paid on common stock for 216
consecutive quarters and the quarterly rate has been increased during each year
since 1968.
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1998
----------
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Operating revenue $ 35,225 $ 44,455 $ 62,263 $ 44,330
Net operating income 4,501 6,574 12,003 6,996
Net income 1,590 3,561 9,141 4,103
Earnings per share .12 .28 .72 .33
Common stock market
price range:
High 33.75 30.19 27.69 33.13
</TABLE>
<PAGE> 45
<TABLE>
<S> <C> <C> <C> <C>
Low 24.31 21.50 20.75 21.25
Dividends paid .2675 .2675 .2675 .2675
1997
--------
Operating revenue $ 37,558 $ 55,083 $ 59,551 $ 43,132
Net operating income 5,712 11,788 10,540 6,309
Net income 2,921 8,878 7,860 3,646
Earnings per share .23 .70 .62 .28
Common stock market
price range:
High 22.63 23.88 25.22 29.59
Low 19.50 18.63 21.13 23.44
Dividends paid .264 .264 .264 .264
</TABLE>
<PAGE> 46
CALIFORNIA WATER SERVICE GROUP Page 29
INDEPENDENT AUDITORS' REPORT
SHAREHOLDERS AND BOARD OF DIRECTORS
CALIFORNIA WATER SERVICE GROUP:
We have audited the accompanying consolidated balance sheet of California Water
Service Group and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, common shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of California Water
Service Group and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Mountain View, California
January 22, 1999
<PAGE> 47
CALIFORNIA WATER SERVICE GROUP Page 30
CORPORATE INFORMATION
STOCK TRANSFER, DIVIDEND DISBURSING AND REINVESTMENT AGENT
The First National Bank of Boston
(Boston EquiServe)
P.O. Box 644,
Boston, MA 02102-0644
1-800-736-3001
HOW TO TRANSFER STOCK
A change of ownership of shares requires a transfer of stock. This can happen
when you sell stock, make a gift of stock or add or delete owners of stock
certificates. You should complete the assignment on the back of the certificate
and sign it exactly as your name appears on the front. Your signature must be
guaranteed by an eligible guarantor institution (banks, stock brokers, savings
and loan associations and credit unions with membership in an approved signature
medallion program) pursuant to SEC Rule 17Ad-15.
A notary's acknowledgement is not acceptable. This certificate should then be
sent to Boston EquiServe, Shareholder Services, by registered or certified mail
with complete transfer instructions.
STOCK CERTIFICATES
As a result of the merger of California Water Service Company into California
Water Service Group and the related stock split, Company stock certificates now
represent the same number of Group shares as they did Company shares. Stock
certificates issued since formation of the holding company are Group stock
certificates.
BOND REGISTRAR
US Bank Trust, N.A.
One California Street
Suite 400
San Francisco, CA 94111-5402
1-415-273-4580
EXECUTIVE OFFICE
California Water Service Group
1720 North First Street,
San Jose, CA 95112-4598
1-408-367-8200
ANNUAL MEETING
The Annual Meeting of Shareholders of the Group will be held on Wednesday, April
21, 1999 at 10 A.M. at the Executive Office of the Group, 1720 North First
Street, San Jose, California. Details of the business to be transacted during
the meeting will be contained in the proxy material, which will be mailed to
shareholders on or about March 11, 1999.
ANNUAL REPORT FOR 1998 ON FORM 10-K
A copy of the Group's report for 1998 filed with the Securities and Exchange
Commission on Form 10-K will be available in April 1999 and can be obtained by
any shareholder without charge upon written request to Shareholders Relations at
the address below:
SHAREHOLDER INFORMATION
California Water Service Group
Attn: Shareholders Relations
<PAGE> 48
1720 North First Street
San Jose, CA 95112-4598
1-408-367-8200 or 1-800-750-8200
http://www.calwater.com
<PAGE> 49
A TEAROUT SECTION
(a tearout section which opens to a four section map of the state of California
is inserted)
The map is titled CALIFORNIA WATER SERVICE GROUP
On the map are the locations of the Company's operating districts. A drawing of
redwood trees is printed in the northwest part of the state; a skier is depicted
in the region of Lake Tahoe; an electronic chip is shown in the area south of
San Francisco which is known as the Silicon Valley; a head of lettuce is shown
in the are of the San Joaquin Valley; and a movie camera is drawn in the area of
Hollywood.
Along the right margin of the map are various California Zip Codes. A large "CA"
is printed in the upper right hand corner of the map.
The following text is printed on the map regarding California and its economy:
"California has a land area of 156,000 square miles, big enough to hold the
states of New York, New Jersey, Pennsylvania and Connecticut - with room left
over to hold another New York!"
"California's 1997 population was 32,268,000. It is projected to reach 40
million by 2011 and almost 59 million by 2040, or twice its population in 1990."
"By comparison, New York, New Jersey and Pennsylvania have a combined population
of about 38 million."
"A DIVERSIFIED ECONOMY"
"California added 484,000 people in 1997; more than any other state in absolute
terms.*"
"California's population is growing at an annual rate of 1.5 percent compared to
a national average of 1 percent.*"
"The Central Valley, home to 45 percent of our customers, is growing at a rate
of 2.25 percent per year.*"
"Gross State Product (GSP) in 1996 was $963 billion, more than 50 percent
greater than New York, the number two state."
"In 1997, for the first time, California's GSP exceeded $1 tillion.**"
"California has the world's seventh largest economy.**"
Data Source: California Department of Finance unless otherwise indicated.
* Kiplinger California Letter, Vol. 35, No. 1, January 6, 1999.
** CA Trade and Commerce Agency.
Four graphs appear on the map with the following data:
FIRST GRAPH
BOOK VALUE AND MARKET VALUE PER SHARE OF COMMON STOCK FOR 1994 THROUGH 1998
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Book Value $11.56 $11.72 $12.22 $13.00 $13.38
Market Value 16.00 16.38 21.00 29.53 31.31
</TABLE>
<PAGE> 50
SECOND GRAPH
DIVIDENDS AND EARNINGS PER SHARE FOR 1994 THROUGH 1998
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Dividends $0.990 $1.020 $1.040 $1.055 $1.070
Earnings per Share 1.22 1.16 1.50 1.83 1.45
</TABLE>
THIRD GRAPH
TOTAL CUSTOMERS AND INCREASE IN CUSTOMERS FOR 1994 THROUGH 1998
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total customers 365,500 367,100 376,100 379,500 383,000
Increase in customers 2,600 1,600 9,000 3,400 3,500
</TABLE>
FOURTH GRAPH
REVENUE AND NET INCOME FOR 1994 THROUGH 1998 (in thousands)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue $157,271 $165,086 $182,764 $195,324 $186,273
Net Income 14,408 14,698 19,067 23,305 18,395
</TABLE>
<PAGE> 51
REVERSE SIDE OF TEAROUT MAP
(Four sections are printed on the reverse side of the tearout map)
FIRST SECTION
A photograph of mass of people with the number 32,286,000 printed under the
photograph. The number represents California's 1997 population.
SECOND SECTION
A summary of 1994 through 1998 FINANCIAL HIGHLIGHTS displayed in a table.
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 Change
---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Book Value $11.56 $11.72 $12.22 $13.00 $13.38 2.9%
Market price 16.00 16.38 21.00 29.53 31.31 6.0%
Earnings per Share 1.22 1.16 1.50 1.83 1.45 20.8%
Dividends per share 0.99 1.02 1.04 1.055 1.07 1.4%
Revenue (000) 157,300 165,100 182,800 195,300 186,300 4.6%
Net Income (000) 14,400 14,700 19,100 23,300 18,400 21.0%
</TABLE>
THIRD SECTION
CUSTOMERS
<TABLE>
<CAPTION>
District Name Regulated Non-Regulated
------------- --------- -------------
<S> <C> <C>
Bakersfield 55,700 23,300
Bear Gulch 17,400 4,000
Chico 22,200
Dixon 2,800
East Los Angeles 26,300 2,700
Hawthorne 6,000
Hermosa Redondo 25,100
King City 2,200
Livermore 16,300 400
Los Altos 18,300
Marysville 3,700
Oroville 3,500
Salinas 25,000 300
Mid-Peninsula 35,600
Selma 5,000
South San Francisco 15,900
Stockton 41,300
Visalia 27,900
Willows 2,300
Palos Verdes 23,600
Westlake 6,900
---------------------------------------------------------
Subtotal 377,000 36,700
---------------------------------------------------------
TOTAL 413,700
=========================================================
</TABLE>
<PAGE> 52
FOURTH SECTION
WELL TREATMENT SUMMARY
<TABLE>
<CAPTION>
Treatment
Capacity
District Location Method (million gallons/day) Comments
-------- -------- ------ --------------------- --------
<S> <C> <C> <C> <C>
Bakersfield Five sites Carbon contactor 7.0 Catalytic removal*
City of
Bakersfield Four sites Carbon contactor 4.0 Catalytic removal*
Chico One site Air stripper 1.3
Three sites Carbon contactor 2.6 Adsorbtive removal
East Los One site Proprietary mixed media 0.1 Oxidation/Filter
Angeles One site Carbon contactor 0.8 Adsorbtive removal
Hawthorne One site Proprietary mixed media 3.6 Oxidation/Filter
Hermosa Three sites Proprietary mixed media 4.1 Oxidation/Filter
Redondo One site Reverse osmosis 5.0 Ultrafiltration
Salinas One site Carbon contactor 2.9 Adsorbtive removal
One site Proprietary mixed media 1.2 Oxidation/Filter
Selma One site Carbon contactor 1.4 Adsorbtive removal*
South San
Francisco One site Proprietary mixed media 1.6 Oxidation/Filter
Visalia Two sites Carbon contactor 2.4 Adsorbtive removal
One site Carbon contactor 1.3 Adsorbtive removal
</TABLE>
* First use of this technology in California.
<PAGE> 53
(INSIDE BACK COVER)
OFFICERS OF CALIFORNIA WATER SERVICE COMPANY
Robert W. Foy (1,2)
Chairman of the Board
Peter C. Nelson (1,2)
President and Chief Executive Officer
Gerald F. Feeney (1,2)
Vice President, Chief Financial Officer and Treasurer
Francis S. Ferraro
Vice President, Regulatory Matters
James L. Good (2)
Vice President, Corporate Communications and Marketing
Robert R. Guzzetta (2)
Vice President, Engineering and Water Quality
Christine L. McFarlane
Vice President, Human Resources
Raymond H. Taylor
Vice President, Operations
Raymond L. Worrell
Vice President, Chief Information Officer
Calvin L. Breed (1)
Controller, Assistant Secretary and Assistant Treasurer
Paul G. Ekstrom (1,2)
Corporate Secretary
John Simpson
Assistant Secretary, Manager of New Business
BOARD OF DIRECTORS
California Water Service Group
California Water Service Company
CWS Utility Services
Peter C. Nelson *
President and Chief Executive Officer
Robert W. Foy *
Chairman of the Board
C.H. Stump ++*
Former Chairman of the Board
and former CEO of California
Water Service Company
Linda R. Meier +++
Member, National Advisory Board, Haas Public Service Center; Member, Board of
Directors, Comerica Bank - California
J.W. Weinhardt +*
<PAGE> 54
Chairman and CEO of SJW Corp. and Chairman of its subsidiary, San Jose Water
Company
Edward D. Harris, Jr., M.D. +*
George DeForest Barnett Professor of Medicine, Stanford University Medical
Center
George A. Vera +
Director of Finance and Administration, David and Lucile Packard Foundation
Richard P. Magnuson ++
Private Venture Capital Investor
Robert K. Jaedicke +++
Professor Emeritus of Accounting and former Dean, Stanford Graduate School of
Business
(A photograph of the members of the Board of Directors appears on the page with
the following identifying caption)
Board of Directors (from left to right) Front row: Robert W. Foy, Peter C.
Nelson, Robert K. Jaedicke, Linda R. Meier. Back row: George A. Vera, Richard P.
Magnuson, Edward D. Harris, Jr., M.D., J.W. Weinhardt, C.H. Stump.
1 Holds the same position with California Water Service Group
2 Holds the same position with CWS Utility Services
+ Member of the Audit Committee
++ Member of the Compensation Committee
* Member of the Executive Committee
<PAGE> 55
BACK COVER
CALIFORNIA WATER SERVICE GROUP
1720 North First Street
San Jose, California 95112-4598
408-367-8200
(the logos for California Water Service Group, California Water Service Co. and
CWS Utility Services are printed under the address)
<TABLE> <S> <C>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 478305000
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 26595000
<TOTAL-DEFERRED-CHARGES> 4061000
<OTHER-ASSETS> 39538000
<TOTAL-ASSETS> 548499000
<COMMON> 44941000
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 123863000
<TOTAL-COMMON-STOCKHOLDERS-EQ> 168804000
0
3475000
<LONG-TERM-DEBT-NET> 136345000
<SHORT-TERM-NOTES> 22500000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 2240000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 0
<TOT-CAPITALIZATION-AND-LIAB> 548499000
<GROSS-OPERATING-REVENUE> 186273000
<INCOME-TAX-EXPENSE> 10550000
<OTHER-OPERATING-EXPENSES> 145649000
<TOTAL-OPERATING-EXPENSES> 156199000
<OPERATING-INCOME-LOSS> 30074000
<OTHER-INCOME-NET> 767000
<INCOME-BEFORE-INTEREST-EXPEN> 30841000
<TOTAL-INTEREST-EXPENSE> 12446000
<NET-INCOME> 18395000
153000
<EARNINGS-AVAILABLE-FOR-COMM> 18242000
<COMMON-STOCK-DIVIDENDS> 13502000
<TOTAL-INTEREST-ON-BONDS> 11259000
<CASH-FLOW-OPERATIONS> 37521000
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 0
</TABLE>
