Total Number of Pages - 160
UNITED STATES SECURITIES AND EXCHANGE
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
Commission file No. 1-13883
CALIFORNIA WATER SERVICE GROUP
(Exact name of registrant as specified in its charter)
Delaware 77-0448994
-------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of Incorporation)
1720 North First Street San Jose, California 95112
--------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(408) 367 8200
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: Name of Each Exchange on Which Registered:
Common Stock, $0.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Cumulative Preferred Stock, Par Value, $25
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant - $375,133,000 on February 18, 2000.
Common stock outstanding at February 18, 2000 -12,935,612 shares.
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EXHIBIT INDEX
The exhibit index to this Form 10-K is on page 27
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of Registrant's Annual Report to Stockholders for the
calendar year ended December 31, 1999 (1999 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 17, 2000, relating to the 2000
annual meeting of stockholders are incorporated by reference in Part III (Items
10, 11 and 12) as of the date the Proxy Statement was filed with the Securities
and Exchange Commission (SEC). The Proxy Statement was filed with the SEC via
EDGAR on March 14, 2000.
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TABLE OF CONTENTS
Page
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....................................... 7
c. Narrative Description of Business........................... 7
Geographical Service Areas and
Number of Customers at Year-end......................... 9
Water Supply................................................ 10
Nonregulated Operations..................................... 13
Utility Plant Construction Program
and Acquisitions........................................ 14
Quality of Water Supplies................................... 14
Competition and Condemnation................................ 15
Environmental Matters....................................... 15
Human Resources............................................. 16
d. Financial Information about Foreign and
Domestic Operations and Export Sales.................... 16
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 17
Item 4. Submission of Matters to a Vote of
Security Holders........................................ 17
Executive Officers of the Registrant.................................... 18
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters......................... 20
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................................. 20
Item 8. Financial Statements and Supplementary Data................. 20
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.................................... 20
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PART III
Item 10. Directors and Executive Officers
of the Registrant....................................... 20
Item 11. Executive Compensation...................................... 20
Item 12. Security Ownership of Certain
Beneficial Owners and Management........................ 21
Item 13. Certain Relationships and Related
Transactions............................................ 21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..................................... 22
Signatures................................................................... 23
Independent Auditors' Report................................................. 25
Schedules.................................................................... 26
Exhibit Index................................................................ 27
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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 (Company), 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 state
regulatory commissions' 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, natural
disasters such as earthquakes, and the impact of weather on
operating results. The Company assumes no obligation to provide
public updates of forward-looking statements.
a. General Development of Business
California Water Service Company (Cal Water) was formed in 1926.
On December 31, 1997, California Water Service Group was formed as
the parent company of Cal Water and a second subsidiary, CWS
Utility Services (Utility Services). In 1999, the Company acquired
Harbor Water Company and South Sound Utility. These two companies
were merged to form a third Company subsidiary, Washington Water
Service Company (Washington Water).
Cal Water continues to operate as a regulated utility subject to
the jurisdiction of the California Public Utilities Commission
(CPUC). Washington Water is a regulated utility, subject to the
jurisdiction of the Washington Utilities and Transportation
Commission (WUTC). It also provides nonregulated water service
under various operation and maintenance agreements. Jointly the
CPUC and WUTC are referred to as the Commissions.
Utility Services provides nonregulated water operations and
related utility services. Existing nonregulated contracts
currently performed by the Company are transferred to Utility
Services as the contracts are renewed or at such time as agreed
upon between the contracting parties. New nonregulated contracts
within California are executed by Utility Services.
In conjunction with formation of the holding company structure on
December 31, 1997, each share of Cal Water common stock was
exchanged on a two-for-one basis for the Company's common stock.
Per share data was restated where necessary to reflect the
effective two-for-one stock split. Each share of Cal Water
preferred stock was converted into one share of the Company's
preferred stock. To maintain relative voting strength, the number
of votes to which each preferred share is entitled was doubled
from eight to sixteen.
The Company's mailing address and principal executive offices are
located at 1720 North First Street, San Jose, California;
telephone number: 408-367-8200. The Company maintains a web site
that can be accessed via the Internet at http://www.calwater.com.
During the year ended December 31, 1999, there were no significant
changes in the kind of products produced or services rendered by
the Company or its operating subsidiaries, or in its markets or
methods of distribution.
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Cal Water is the largest investor-owned water company in
California and the fourth largest in the United States. It is a
public water utility providing water service to approximately
387,600 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
381,500 customers, rates and operations are subject to the
jurisdiction of the CPUC. An additional 6,100 customers receive
service through a long-term lease of the City of Hawthorne water
system, which is not subject to CPUC regulation. Nonregulated
operations are described in section Item 1.c., "Narrative
Description of Business - Nonregulated Operations."
Washington Water is the largest investor owned water utility in
the state. It was formed in December 1999 and is incorporated
under the laws of the state of Washington. Its two operating
districts provide water service to 12,000 customers subject to the
regulation of the WUTC. An additional 2,800 customers are served
under operating agreements with private system owners that are not
subject to WUTC regulation.
Rates and Regulation
Water utility rates and service for the regulated business are
subject to jurisdiction of the state regulatory Commissions. The
Commissions' decisions and the timing of those decisions can have
a significant impact on operations and earnings.
Since the Company's 23 operating districts are not physically
integrated, rates are set independent for each district. General
office expenses and plant investments are considered separately
and allocated ratably to the operating districts. The cost of debt
and equity capital for ratemaking purposes is determined on a
company-wide basis.
General rate applications in California consider all of a
district's operating costs and capital requirements for a
succeeding three-year period. The Commission's decision in these
applications typically authorize an immediate rate increase and
step rate increases for the following two years. Step rate
increases are intended to maintain the authorized return on equity
(ROE) in succeeding years. Subsequent general rate applications
can be filed in the third year after a district receives a general
rate case decision. Annually districts that are eligible for
general rate case filings are reviewed by the Company and where
appropriate applications are submitted. Applications are filed in
July with a decision expected about 10 months later. Offset rate
adjustments are allowed to recover the costs of purchased water,
purchased power and pump taxes.
In Washington, general rate applications are submitted as
necessary. Decisions are generally issued about four months after
filing.
Key factors considered in determining the need to file a rate
application include:
o current earnings of the district
o expected future rates of return
o cost of debt and equity capital
o capital structure
o future operating expectations
o additional capital expenditures
With districts on varying rate case cycles, general rate case
applications are normally filed annually for a portion of the
districts. The number of customers affected by each filing varies
from year to year. For example, the 1996 filings included 11
percent of regulated customers, the 1997 filings included 7
percent and the 1998 filings included 25 percent. There were no
general rate applications filed in 1999.
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2000 Rate Application Filings
During 2000, 16 districts, including the two Washington
state districts, are eligible for general rate application
filings. These districts represent over 70% of all regulated
customers. The Company will review each district and determine the
need and appropriateness of a general rate application filing.
Applications for the California districts will be filed in July in
accordance with the CPUC's rate processing schedule. Decisions in
these applications are anticipated late in the second quarter of
2001. Additionally, the Company expects to file general rate
applications for the two Washington districts during 2000. The
most recent general rate application filing with the WUTC was in
1998.
1999 Rate Application Filings
During 1999, no general rate applications were filed for
regulated customers. The Company's regulatory staff reviewed each
of the eligible districts and determined that no general rate
applications were warranted.
A rate increase was submitted for the City of Hawthorne
water system. The Hawthorne city council exercises rate authority
over the proceeding. A decision for this application which is
estimated to provide about $350,000 of new revenue in the first
twelve months after it becomes effective, is expected during the
second quarter of 2000.
1998 Rate Application Filings
In 1998, 14 Cal Water 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 with the CPUC in July
1998 for four districts and the Company's General Office. The
applications involved 25% of the regulated customers.
In January 1999, the Company reached agreement with the CPUC
staff regarding the applications. The commission's decision
approving the settlement was effective in May 1999 and is expected
to generate $4,095,000 in total additional revenue during the
first twelve months following its effective date. A 9.55% ROE
providing $1,916,000 in additional revenue was adopted in the
decision. In addition, the decision provides another $2,179,000 in
revenue for environmental compliance, specific capital
expenditures, and recovery of General Office expenses. This
additional revenue is not reflected in the 9.55% ROE calculation.
Second Amended Contract - Stockton East Water District
In January 1995, a consultant retained by the CPUC's
Organization of Ratepayer Advocates completed a report on the
reasonableness of the Second Amended Contract. The contract
pertains to the sale and delivery of water to Cal Water's Stockton
District by the Stockton-East Water District. Parties to the
contract are Cal Water, Stockton-East Water District, the City of
Stockton and San Joaquin County. The consultant's report alleged
that the Company was required to receive CPUC approval prior to
entering into the Second Amended Contract and furthermore
challenges the reasonableness of the Second Amended Contract for
ratemaking purposes. However, the report did not include specific
ratemaking recommendations. While no action is now in process or
pending, the issue may be revisited in the Company's next Stockton
district general rate application. Also refer to a discussion of
this issue under "Item 3. Legal Proceedings".
b. Financial Information about Industry Segments
The Company operates primarily in one business segment, the supply
and distribution of water, and the provision of related services.
c. Narrative Description of Business
The Company is the sole shareholder of its three operating
subsidiaries: California Water Service Company, Washington Water
Service Company and CWS Utility Services.
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The Company's business, which is carried on through its operating
subsidiaries, consists of the production, purchase, storage,
purification, distribution and sale of water for domestic,
industrial, public and irrigation uses, and for fire protection.
It also provides water related services, including contract
operation of water systems and utility related services to
municipalities and other private companies.
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 in the
Company's service territories.
The Company distributes water in accordance with accepted water
utility methods. Franchises and permits are held in the cities and
communities where the Company operates. The franchises and permits
allow the Company to operate and maintain facilities in public
streets 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, eight privately owned water
systems and two reclaimed water distribution systems are operated.
Billing services are also provided to a number of municipalities.
These operations are discussed in more detail in a following
section titled "Nonregulated Operations."
The Company intends to continue to explore opportunities to expand
its regulated and nonregulated businesses. The opportunities could
include system acquisitions, lease arrangements similar to the
City of Hawthorne contract, full service system operation and
maintenance agreements, billing contracts and other utility
related services. The Company believes that a holding company
structure, as discussed above, makes it more competitive in
providing nonregulated utility services, which would not be
subject to CPUC jurisdiction. The Company is investigating new
business opportunities in the western United States as evidenced
by its expansion into the state of Washington.
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Geographical Service Areas and Number of Customers at Year-end
The principal markets for the Company's products and services are users
of water within the Company's service areas. The Company's geographical
service areas or districts for both the regulated and nonregulated
operations and the approximate number of customers served in each area
at December 31, 1999, are listed below.
SAN FRANCISCO BAY AREA
Mid-Peninsula (serving San Mateo and
San Carlos) 35,700
South San Francisco (including Colma
and Broadmoor) 16,200
Bear Gulch (serving Menlo Park, Atherton,
Woodside and Portola Valley) 21,500
Los Altos (including portions of Cupertino,
Los Altos Hills, Mountain View
and Sunnyvale) 18,300
Livermore 16,900 108,600
------
SACRAMENTO VALLEY
Chico (including Hamilton City) 22,800
Oroville 3,500
Marysville 3,700
Dixon 2,800
Willows 2,300 35,100
------
SALINAS VALLEY
Salinas 25,900
King City 2,200 28,100
------
SAN JOAQUIN VALLEY
Bakersfield 81,600
Stockton 41,600
Visalia 29,700
Selma 5,100 158,000
------
LOS ANGELES AREA
East Los Angeles (including portions of
the cities of Commerce and Montebello) 29,100
Hermosa Redondo (serving Hermosa Beach,
Redondo Beach and a portion of Torrance) 25,400
Palos Verdes (including Palos Verdes
Estates, Rancho Palos Verdes, Rolling
Hills Estates and Rolling Hills) 23,700
Westlake (a portion of Thousand Oaks) 6,900
Hawthorne (leased municipal system) 6,100 91,200
------
WASHINGTON
Harbor 11,000
South Sound 3,800 14,800
------- -------
TOTAL 435,800
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Water Supply
The Company's water supply for the 23 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 experienced mandatory water rationing.
California's rainy season usually begins in November and continues
through March with December, January and February historically
recording the most rainfall. During winter months reservoirs and
underground aquifers are replenished by rainfall. Snow accumulated in
the mountains provides an additional water source when spring and
summer temperatures melt the snowpack producing runoff into streams and
reservoirs, and also replenishing underground aquifers.
Washington receives rain in all seasons with the majority falling
during winter months.
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 and were accompanied by cooler than
normal temperatures. Likewise, an early start to the rainy season
during the fall can cause a decline in customer usage and have a
negative impact on revenue.
The Company's water business is seasonal in nature and weather
conditions can have a pronounced effect on customer usage and thus
operating revenues and net income. Customer demand for water generally
is less during the normally cooler and rainy winter months. Demand
increases in the spring when warmer weather gradually returns 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 into the fall and winter. When
rainfall is below average for consecutive years, drought conditions can
result and certain customers may be required to reduce consumption to
preserve or match available supply. As an example, California
experienced a six-year period when rainfall was annually below historic
average. The drought period ended with the winter of 1992-93. During
that six-year period some districts had water rationing requirements
imposed on customers. In certain districts, penalties were collected
from customers who exceeded allotments. During past drought periods,
the CPUC has allowed modifications to consumer billings that provided
the Company a means to recover a portion of revenue that was deemed
lost due to conservation measures.
Historically, about half of the water supply is purchased from
wholesale suppliers with the balance pumped from wells. Well water is
generally less expensive and the Company strives to maximize use of its
well sources. A small portion of the supply is received from surface
runoff in the Company's Bear Gulch district. During 1999, 110 billion
gallons were delivered to customers. Approximately 53 percent of the
supply was obtained from wells and 47 percent was purchased from
wholesale suppliers. The following table shows the quantity of water
purchased in each operating district during 1999.
Supply
District Purchased Source of Purchased Supply
-------- --------- --------------------------
SAN FRANCISCO BAY AREA
Mid-Peninsula 100% San Francisco Water Department
South San Francisco 85% San Francisco Water Department
Bear Gulch 89% San Francisco Water Department
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Los Altos 83% Santa Clara Valley Water District
Livermore 69% Alameda County Flood Control
and Water Conservation District
SACRAMENTO VALLEY
Oroville 94% Pacific Gas and Electric Co.
3% County of Butte
SAN JOAQUIN VALLEY
Bakersfield 17% Kern County Water Agency
Stockton 70% Stockton-East Water District
LOS ANGELES AREA
East Los Angeles 69% Central Basin Municipal
Water District
Hawthorne 87% West Basin Municipal
Water District
Hermosa Redondo 95% West Basin Municipal
Water District
Palos Verdes 100% West Basin Municipal
Water District
Westlake 100% Russell Valley Municipal
Water District
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 surface water purchased from a wholesaler is processed
before delivery to the system.
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. A
second well was returned to service in 1999 and the third well is
expected online in early 2000.
The Chico, Marysville, Dixon and Willows districts in the Sacramento
Valley, the Salinas and King City districts in the Salinas Valley, and
the Selma and Visalia districts in the San Joaquin Valley obtain their
entire supply from wells. Harbor and South Sound districts in
Washington also obtain their entire supplies from wells.
Purchases for the Los Altos, Livermore, Oroville, Stockton and
Bakersfield districts are pursuant to long-term contracts expiring on
various dates after 2011.
The purchased supplies for the East Los Angeles, Hermosa-Redondo, Palos
Verdes and Westlake districts, and the City of Hawthorne system are
provided by public agencies pursuant to an obligation of continued
nonpreferential service to purveyors within the agencies' boundaries.
Purchases for the South San Francisco, Mid-Peninsula and Bear Gulch
districts are in accordance with long-term contracts with the San
Francisco Water Department expiring on 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 Company's control. Shown below
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<TABLE>
are wholesaler price rates and increases that became effective in 1999,
and estimated wholesaler price rates and estimated changes for 2000.
<CAPTION>
1999 2000
---- ----
Effective Percent Effective Percent
District Month Change Unit Cost Month Change Unit Cost
-------- ----- ------ --------- ----- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Bakersfield 0.0% $125/af 0.0% $125/af
Bear Gulch July 36.7% 0.82/ccf July 3.7% 0.85/ccf
East Los Angeles July 2.1% 478/af July 1.5% 485/af
Hermosa Redondo 0.0% 528/af 0.0% 528/af
Livermore Jan. 4.0% 1.212/ccf Jan. 2.1% 1.237/ccf
Los Altos July 7.6% 355/af July 7.0% 380/af
Oroville Jan. 3.4% 61,350/year Jan. 14.8% 70,400/year
Palos Verdes 0.0% 528/af 0.0% 528/af
Mid Peninsula July 36.7% 0.82/ccf July 3.7% 0.85/ccf
So. San Francisco July 36.7% 0.82/ccf July 3.7% 0.85/ccf
Stockton April (9.1)% 250,820/year April 7.0% 268,400/year
Westlake Jan. 1.1% 560/af Jan. 1.2% 570/af
</TABLE>
af = acre foot; ccf = hundred cubic feet; year = fixed annual cost
During 1997, two wholesale water suppliers refunded moneys which had
been overcollected from wholesale water customers. The Company received
a one-time refund of $2.5 million in May 1997 that was credited as a
reduction of purchased water expense.
Rainfall in the Company's service areas for the 1999-2000 season is
above normal as of February 29, 2000. The mountain snowpack is about
normal. Water levels in underground aquifers that provide supply to
districts served by well water improved in recent years due to above
average rainfall. Most regions have recorded positive changes in
groundwater levels the past two years. Regional groundwater management
planning continues as required. Existing laws provide a mechanism for
local agencies to maintain control of their groundwater supply. The
Company continually updates long range projections and works with local
wholesale suppliers to ensure an adequate future supply to meet
customer needs.
The water supply outlook for 2000 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 Commissions.
Progress has been made by Consolidated Irrigation District (Selma) and
Kaweah Delta Water Conservation District (Visalia) towards the
implementation of a water management plan. The Company continues to
participates in the formulation of these plans.
For a number of years, the Company has worked with the Salinas Valley
water users and the Monterey County Water Resources Agency (MCWRA) to
address seawater intrusion into the water supply for the Salinas
district. MCWRA completed construction of the Castroville Seawater
Intrusion Project in 1998. This project is designed to deliver up to
20,000 acre feet of recycled water annually to agricultural users in
the nearby Castroville area. It is intended to help mitigate seawater
intrusion into the region by reducing the need to pump groundwater.
With the City and County of San Francisco, and the cities of San Bruno
and Daly City, The Company 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, the
Company 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 (SFWD) is the wholesale water supplier.
The South San Francisco, Mid-Peninsula and Bear Gulch districts are
included in SFWD service area.
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Nonregulated Operations
Nonregulated operations include full service operation and maintenance
of water systems for cities and private owners, operation of recycled
water systems, utility billing services, laboratory services and leases
of antenna sites
Nonregulated revenue from water system operations is generally
determined on a fee per customer basis. With the exception of the City
of Hawthorne water system, revenue and expenses from nonregulated
operations are accounted for in other income on a pretax basis. Revenue
and expenses for the City of Hawthorne lease are included in operating
revenue and operating expenses because the Company is entitled to
retain all customer billings and is generally responsible for all
operating expenses.
Municipally owned water systems are operated under contract for the
cities of Bakersfield, Commerce and Montebello and for eight private
water company systems in the Bakersfield, Livermore, Salinas and
Visalia districts. Additionally, the Company's Washington districts
operate numerous systems under contract arrangements. The Company also
operates under contract wastewater collection systems in Bakersfield
and Livermore. Excluding Hawthorne, the total number of services
operated under the contracts is about 36,200. 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 existing 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.
Meter reading, billing and customer service are provided for the City
of Menlo Park's 4,000 water customers. Meter reading is also performed
under contract for the City of Manhattan Beach's 13,000 account system.
Additionally, sewer and/or refuse billing services are provided to six
municipalities.
Since February 1996, the City of Hawthorne's 6,100 account water system
has been operated under terms of a 15-year agreement. The system which
is located near the Hermosa-Redondo district serves about half of
Hawthorne's population. The lease required an up-front $6.5 million
lease payment to the City which is being amortized over the lease term.
Additionally, annual lease payments to the City of $100,000 indexed to
changes in water rates are required. The Company is responsible for all
aspects of system operation and capital improvements, although title to
the system and system improvements resides with the City. At the end of
the lease, the Company will be reimbursed for the unamortized value of
capital improvements. In exchange, the Company receives all system
revenues which amounted to $4.2 million in 1999.
During 1997, an agreement was signed with the Rural North Vacaville
Water District near the Dixon district to design and build a water
distribution system. The new system will initially provide water to
about 400 services. The Company has also negotiated an agreement to
operate the system once construction is complete.
The Company 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 Great Oaks Water Company.
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Utility Plant Construction Program and Acquisitions
The Company is continually extending, enlarging and replacing its
facilities as required to meet increasing demands and to maintain its
systems. Construction financing was provided by funds from operations
and short-term bank borrowings, advances for construction, and
contributions in aid of construction as set forth in the "Statement of
Cash Flows" on page 26 of the Company's 1999 Annual Report which is
incorporated herein by reference. Advances for construction are cash
deposits or facilities deeded from subdivision developers. The advances
are generally refundable without interest over a period of 40 years by
equal annual payments. Contributions in aid of construction consist of
nonrefundable cash deposits or facilities transferred from developers,
primarily for fire protection and relocation projects. The amount
received from developers varies from year to year as the level of
construction activity varies. It is impacted by the demand for housing,
commercial development and general business conditions, including
interest rates.
During 1998, the Company 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 $9.6 million; services and meters, $5.4; other equipment, $6.0
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.
During 1999, the Company funded expenditures were in the following
areas: land, water rights and structures, $2.9 million; wells, pumping
and storage facilities, $4.9 million; water treatment and purification
equipment, $2.9 million; distribution systems, $9.0 million; services
and meters, $6.1; other equipment, $5.7 million. Included in the
expenditures is acquisition of the Olcese Water District assets and
continued expenditures for computer technology system upgrades.
The 2000 construction budget is approximately $35.7 million, exclusive
of additions and improvements financed through advances for
construction and contributions in aid of construction. The approved
budget was for the following areas: land and structures, $3.9 million;
wells, pumping and storage facilities, $8.4 million; water treatment
and purification equipment, $1.9 million; distribution systems $11.1
million; services and meters, $5.1 million; other equipment, $5.3
million.
During 1996, Congress enacted legislation which exempted from taxable
income proceeds received from developers to fund advances for
construction and contributions in aid of construction, except payments
for installation of services. Services represent about 20% of deposits
received from developers. 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 payments 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 intends to issue regulations regarding the
taxability of developer financed services. The Company participated
actively 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. However, the new
regulations are expected to continue to treat the cost of services as
taxable income.
Quality of Water Supplies
Established operating practices are maintained to produce potable water
in accordance with normal water utility practices. Water entering the
distribution systems from surface sources is treated in compliance with
federal Safe Drinking Water Act (SWDA) standards. Most well supplies
are chlorinated. Water samples from each water system are analyzed on a
regular, scheduled basis in compliance with regulatory requirements.
The Company operates a state certified water quality laboratory at its
San Jose General Office that provides testing for most California
operations. Certain tests are contracted with independent labs. Local
independent labs provide water sample testing for the Washington
districts.
14
<PAGE>
In recent years, federal and state water quality regulations have
continued to increase. Recent changes in the SDWA, which are expected
to bring treatment costs more in line with the actual health threat
posed by contaminants, were enacted by Congress during 1996. Water
quality monitoring and upgrading treatment capabilities to maintain
compliance with the various regulations continues. These activities
include:
o monitoring of all sources for MTBE, a gasoline additive that is
widely used in California
o upgrading laboratory equipment and enhancing analytical testing
capabilities
o installation of dedicated sample sites to assure water samples
are drawn at a secure source
o maintaining a state approved compliance monitoring program
required by the Safe Drinking Water Act
o completion of mandatory Information Collection Rule monitoring
for specified water systems
o ongoing training of laboratory and operating personnel
o installation of disinfection treatment at all well sources
o 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
o construction of a new iron and manganese treatment plant in the
leased Hawthorne system
o installation and operation of several granular activated carbon
(GAC) filtration systems for removal of hydrogen sulfide or
volatile organic chemicals
Competition and Condemnation
Cal Water and Washington Water are regulated public utilities,
providing water service within filed service areas approved by the
Commissions. Under California laws, no privately owned public utility
may compete with the Company in any territory already served by the
Company without first obtaining a certificate of public convenience and
necessity from the CPUC. Such certificates will be issued only upon
finding that the Company's service is deficient.
California law provides that whenever a public agency constructs
facilities to extend a utility system into the service area of a
privately owned public utility, such an act constitutes the taking of
property and requires reimbursement to the utility for its loss.
Further, the state's constitution and statutes allows municipalities,
water districts and other public agencies to own and operate water
systems. These agencies are empowered to condemn properties already
operated by privately owned public utilities. The agencies are also
authorized to issue bonds, including revenue bonds, for the purpose of
acquiring or constructing water systems. However, if a public agency
were to acquire utility property by eminent domain action, the utility
would be entitled to just compensation for its loss. To the Company's
knowledge, no municipality, water district or other public agency is
contemplating or has any action pending to acquire or condemn any of
the Company's systems.
In recent years, consolidation within the water industry has
accelerated. A number of publicly traded water companies have been
acquired or merged into larger domestic companies. Several acquisitions
of publicly traded companies have also been completed by much larger
foreign companies. The Company has participated in the industry
consolidation by its pending acquisition of Dominguez Services
Corporation and by its expansion into Washington state, other smaller
acquisitions and pursuit of expanding nonregulated operations. The
Company intends to continue pursuing opportunities to expand its
business in the western United States.
Environmental Matters
The Company is subject to environmental regulation by various
governmental authorities. Issues related to water quality are discussed
separately within this report.
Compliance with federal, state and local provisions which have been
enacted or adopted regulating the discharge of materials into the
environment, or otherwise relating to the protection of the
environment, has not had, as of the date of filing of this Form 10-K,
any material effect on the
15
<PAGE>
Company's capital expenditures, earnings or competitive position. The
Company is unaware of any pending environmental matters that will have
a material effect on its operations. Refer to Item 3, Legal
Proceedings, for additional information.
The Company's environmental affairs program is designed to provide
compliance with underground 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, 1999, there were 708 employees, of whom 192 were
executive, administrative and supervisory employees, and 516 were
members of unions. In December 1999, a three-year collective bargaining
agreement, expiring December 31, 2002, was successfully negotiated with
the Utility Workers Union of America, AFL-CIO, representing the
majority of field and clerical union employees. Also in December 1999,
a new three-year collective bargaining agreement was negotiated with
the International Federation of Professional and Technical Engineers,
AFL-CIO, representing certain engineering department and water quality
laboratory employees. Both agreements were ratified by the unions'
membership. As in the past, the agreements were successfully negotiated
and ratified without a work interruption.
d. Financial Information about Foreign and Domestic Operations and Export Sales.
The Company makes no export sales.
Item 2. Properties.
The Company's physical properties consist of offices and water systems
to accomplish the production, storage, purification and distribution of
water. These properties are located in or near the Geographic Service
Areas listed above under section Item 1.c. entitled "Narrative
Description of the Business." The Company's general office, which
houses accounting, engineering, information systems, human resources,
purchasing, regulatory, water quality and executive staffs is located
in San Jose, California. All properties are maintained in good
operating condition.
All principal properties are held in fee simple title. Properties owned
by Cal Water are subject to the indenture securing the Company's first
mortgage bonds of which $116,345,000 remained outstanding at December
31, 1999. Washington Water has long-term bank loans totaling about $2.8
million that is secured primarily by utility plant.
The Company owns 783 wells and operates six leased wells. There were
390 storage tanks with a capacity of about 220 million gallons and one
reservoir located in the Bear Gulch district with a 210 million gallon
capacity. There are about 4,700 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 1999, the average daily water production was 271 million
gallons, while the maximum production on a single day was 528 million
gallons. By comparison, during 1998 the average daily water production
was 271 million gallons, while the maximum production on one day was
507 million gallons.
In the leased system or in systems that are operated under contract for
municipalities or private companies, title to the various properties is
held exclusively by the municipality or private company.
16
<PAGE>
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 plume in the Chico groundwater. The DTSC has
prepared a draft report titled "Preliminary Nonbinding Allocation of
Financial Responsibility" for the cleanup which asserts that the
Company's share should be 10 percent. 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 the Company's financial position or results of operations.
In December 1997, the Company along with the City of Stockton (the
Contractors) filed a lawsuit against the Stockton East Water District
(SEWD). The Contractors take 98% of SEWD's wholesale potable water
production. SEWD also serves treated water to agricultural customers.
Under a contract to enable SEWD to meet its financial obligations, the
Contractors are required to pay specific Base Monthly Payments that as
of June 30, 1997 had generated $5.4 million in surplus funds. The
Contractors contend that a portion of these funds have been or will be
used for purposes other than to meet SEWD's agreed financial
obligations. Presently, all parties to the lawsuit have entered into a
Stipulated Preliminary Injunction. A favorable settlement is
anticipated.
On March 15, 2000, the Company was served with a lawsuit naming it as
one of several defendants for damages alleged to have occurred in the
Marysville district due to MTBE contamination in the Company's water.
The suit did not specify a dollar amount. The Company believes it is
covered by insurance in such a matter and has tendered the claim to its
carrier.
The Company is not a party to any other legal matters, other than those
which are incidental to its business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders in the fourth
quarter of 1999.
17
<PAGE>
<TABLE>
Executive Officers of the Registrant
<CAPTION>
Name Positions and Offices with California Water Service Group Age
- ---- --------------------------------------------------------- ---
<S> <C> <C>
Robert W. Foy Chairman of the Board since January 1, 1996. A director since 63
(1) 1977. Formerly President and Chief Executive Officer of Pacific
Storage Company, Stockton, Modesto, Sacramento, San
Jose, Vallejo Marysville, and Merced California, a
diversified transportation and warehousing company,
where he had been employed for 32 years.
Peter C. Nelson President and Chief Executive Officer since February 1, 1996. 52
(1,2) Formerly Vice President, Division Operations (1994-1995) and
Region Vice President (1989-1994), Pacific Gas &
Electric Company, a gas and electric public utility.
Gerald F. Feeney Vice President, Chief Financial Officer and Treasurer since 55
(1) November 1994; Controller, Assistant Secretary and Assistant
Treasurer from 1976 to 1994. From 1970 to 1976, an audit
manager with Peat Marwick Mitchell & Co., certified public
accountants.
Calvin L. Breed Controller, Assistant Secretary and Assistant Treasurer since 44
(3) November 1994; previously Treasurer of TCI International, Inc.;
from 1980 to 1983, a certified public accountant with Arthur
Andersen & Co., certified public accountants.
Paul G. Ekstrom Corporate Secretary since August 1996; Operations Coordinator, 47
(1) 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, CWS Utility Services;
and Washington Water Service Company
(2) Chief Executive Officer of Washington Water Service Company
(3) holds the same position with California Water Service Company
Name Positions and Offices with the California Water Service Company Age
- ---- --------------------------------------------------------------- ---
Francis S. Ferraro Vice President, Regulatory Matters since August 1989. Employed 50
by the California Public Utilities Commission for 15 years, from
1985 through 1989 as an administrative law judge.
James L. Good Vice President, Corporate Communications and Marketing since 36
(1) January 1995. Previously Director of Congressional Relations for
the National Association of Water Companies from 1991 to 1994.
Robert R. Guzzetta Vice President, Engineering and Water Quality since August 1996; 46
Chief Engineer, 1990 to 1996; Assistant Chief Engineer, 1988 to
1990; various engineering department positions since 1977.
Christine L. McFarlane Vice President, Human Resources since August 1996; Director 53
of Human Resources, 1991 to 1996; Assistant Director of
Personnel, 1989 to 1991; an employee since 1969.
18
<PAGE>
Raymond H. Taylor Vice President, Operations since April 1995; Vice President and 54
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. Worrell Vice President, Chief Information Officer since August 1996; 60
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; Manager 55
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.
Name Positions and Offices with the Washington Water Service Company Age
- ---- --------------------------------------------------------------- ---
Michael P. Ireland President since December 1999; previously President of Harbor Water 46
Company, Gig Harbor, Washington
</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 the Company acting solely in their
authorized capacities.
19
<PAGE>
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 34
of the Company's 1999 Annual Report and is incorporated herein by
reference. The number of stockholders listed in such section includes
the Company's record stockholders and an estimate of stockholders
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 page 15 of the Company's 1999
Annual Report and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required by this item is contained in the section
captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations," on pages 16 through 22 of the Company's
1999 Annual Report and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is contained in the sections
captioned "Consolidated Balance Sheet", "Consolidated Statement of
Income", "Consolidated Statement of Common Stockholders' Equity",
"Consolidated Statement of Cash Flows", "Notes to Consolidated
Financial Statements" and "Independent Auditors' Report" on pages 23
through 35 of the Company's 1999 Annual Report and is incorporated
herein by reference. The 1999 Annual Report to stockholders is included
with this report as Exhibit 13.1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item as to directors of the Company is
contained in the section captioned "Board Committees" and is included
on page 8 of the 2000 Proxy Statement, and in the section captioned
"Proposal No. 1 - Election of Directors" on pages 10 and 11 of the 2000
Proxy Statement and is incorporated herein by reference. Information
regarding executive officers of the Company is included in a separate
item captioned "Executive Officers of the Registrant" contained in Part
I of this report.
Item 11. Executive Compensation.
The information required by this item as to directors of the Company is
included under the caption "Directors Compensation Arrangements" on
page 9 of the 2000 Proxy Statement and is incorporated herein by
reference. The information required by this item as to compensation of
20
<PAGE>
executive officers, including officers who are directors, is included
under the captions " Executive Compensation" and "Report of the
Compensation Committee of the Board of Directors on Executive
Compensation" on page 20 through 23 of the 2000 Proxy Statement and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is contained in the section
captioned "Stock Ownership of Management and Certain Beneficial Owners"
on page 18, respectively, of the 2000 Proxy Statement and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
None.
21
<PAGE>
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, 1999 and 1998.
Consolidated Statement of Income for the years ended December 31,
1999, 1998 and 1997.
Consolidated Statement of Common Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997.
Consolidated Statement of Cash Flows for the years ended December
31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements, December 31, 1999,
1998 and 1997.
Independent Auditors' Report dated January 21, 2000.
The above financial statements are contained in sections bearing
the same captions on pages 23 through 35 of the Company's 1999
Annual Report to stockholders which is filed with this Form 10K
and incorporated by reference. Refer to Exhibit 13.1 of this Form
10-K.
(2) Financial Statement Schedule:
Schedule
Number
- --------
Independent Auditors' Report dated January 21, 2000.
II Valuation and Qualifying Accounts and Reserves for the years
ending December 31, 1999, 1998, and 1997.
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial
statements or related notes to the financial statements.
(3) Exhibits required to be filed by Item 601 of Regulation S-K.
The Exhibit Index on page 27 of this Form 10-K is incorporated
herein by reference.
The exhibits filed as part of this Form 10-K are attached, unless
otherwise indicated. The exhibits listed in the Exhibit Index that
are not filed with this Form 10-K were previously filed with the
Securities and Exchange Commission as indicated; unless stated
otherwise, those exhibits are hereby incorporated by reference.
(b) Reports on Form 8-K.
(1) A Form 8-K was filed November 23, 1999 to report that on November
23, 1999 Registrant had completed all actions necessary to
reincorporate itself as a Delaware corporation. From November 23,
1999 forward, California Water Service Group will operate as a
Delaware corporation. The reincorporation had been approved by
shareholders at their annual meeting in April 1999.
22
<PAGE>
(2) February 3, 2000, a Form 8-K was filed to report an amendment
adopted by the Board of Directors of California Water Service
Group to add director conflict of interest qualification rules.
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: March 15, 2000 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: March 15, 2000 /s/ Robert W. Foy
ROBERT W. FOY, Chairman,
Board of Directors
Date: March 15, 2000 /s/ Edward D. Harris, Jr.
EDWARD D. HARRIS, JR., M.D., Member,
Board of Directors
ROBERT K. JAEDICKE, Member,
Board of Directors
Date: March 15, 2000 /s/ Richard P. Magnuson
RICHARD P. MAGNUSON, Member,
Board of Directors
Date: March 15, 2000 /s/ Linda R. Meier
LINDA R. MEIER, Member,
Board of Directors
Date: March 15, 2000 /s/ Peter C. Nelson
PETER C. NELSON
President and Chief Executive Officer,
Member, Board of Directors
Date: March 15, 2000 /s/ C. H. Stump
C. H. STUMP, Member,
Board of Directors
Date: March 15, 2000 /s/ George A. Vera
GEORGE A. VERA, Member
Board of Directors
23
<PAGE>
Date: March 15, 2000 /s/ J. W. Weinhardt
J. W. WEINHARDT, Member,
Board of Directors
Date: March 15, 2000 /s/ Gerald F. Feeney
GERALD F. FEENEY,
Vice President, Chief Financial
Officer and Treasurer;
Principal Financial Officer
Date: March 15, 2000 /s/ Calvin L. Breed
CALVIN L. BREED, Controller,
Assistant Secretary and Assistant
Treasurer;
Principal Accounting Officer
24
<PAGE>
Independent Auditors' Report
Stockholders and Board of Directors
California Water Service Group:
Under date of January 21, 2000, we reported on the consolidated balance sheet of
California Water Service Group as of December 31, 1999 and 1998, and the related
consolidated statements of income, common stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1999, as
contained in the 1999 annual report to stockholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year 1999. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule as listed in the index
appearing under Item 14(a)(2). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such basic consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
Mountain View, California /s/ KPMG LLP
January 21, 2000
25
<PAGE>
<TABLE>
CALIFORNIA WATER SERVICE GROUP Schedule II
Valuation and Qualifying Accounts
Years Ended December 31, 1999, 1998 and 1997
<CAPTION>
Additions
------------------------
Balance at Charged to Charged to Balance
beginning costs and other at end
Description of period expenses accounts Deductions of period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 (A)Reserves deducted in the balance sheet
from assets to which they apply:
Allowance for doubtful accounts $ 206,155 $ 335,282 $ 41,517 $ 466,990 $ 115,964
Allowance for obsolete materials and supplies 137,460 48,000 85,163 100,297
=========== ========== ============== ============== ===========
(B)Reserves classified as liabilities
in the balance sheet:
Miscellaneous reserves:
General Liability 1,270,752 125,000 376,552 $ 1,019,200
Employees' group health plan 643,383 3,745,000 31,065 3,908,969 510,479
Retirees' group health plan 2,018,373 1,284,000 675,000 575,000 3,402,373
Workers compensation 1,003,798 (5,890) 496,162 501,746
Deferred revenue - contributions
in aid of construction 2,117,632 0 275,170 323,620 2,069,182
Disability insurance 26,219 82,306 108,066 459
----------- ---------- -------------- -------------- -----------
$ 7,080,157 $5,148,110 $1,063,541 $5,788,369 $ 7,503,439
========================================================================
Contributions in aid of construction $50,576,486 $3,684,884 $1,644,233 $52,617,137
========================================================================
1998 (A)Reserves deducted in the balance sheet
from assets to which they apply:
Allowance for doubtful accounts $ 103,596 $ 549,344 $ 52,796 (3) $ 499,581 (1) $ 206,155
Allowance for obsolete materials and supplies $ 129,193 $ 48,000 $ 39,733 (2) 137,460
=========== ========== ============== ============== ===========
(B)Reserves classified as liabilities
in the balance sheet:
Miscellaneous reserves:
General Liability $ 900,425 $ 600,000 $ 229,673 (2) $ 1,270,752
Employees' group health plan 721,120 3,000,000 15,509 3,093,246 (2) 643,383
Retirees' group health plan 1,443,373 751,664 458,336 635,000 (2) 2,018,373
Workers compensation 661,829 878,423 536,454 (2) 1,003,798
Deferred revenue - contributions
in aid of construction 2,221,381 302,137 405,886 (6) 2,117,632
Disability insurance 23,811 107,110 104,702 (2) 26,219
---------- ---------- ------------- ------------- -----------
$ 5,971,939 $5,230,087 $ 883,092 $5,004,961 $ 7,080,157
=======================================================================
Contributions in aid of construction $49,297,196 $3,121,146 (4) $1,841,856 (5) $50,576,486
=======================================================================
1997 (A)Reserves deducted in the balance sheet
from assets to which they apply:
Allowance for doubtful accounts $ 100,544 $ 620,778 $ 70,850 (3) $ 688,576 (1) $ 103,596
Allowance for obsolete materials and supplies 101,077 48,000 19,884 (2) 129,193
=========== =========== ============== ============== ===========
(B)Reserves classified as liabilities
in the balance sheet:
Miscellaneous reserves:
General Liability $ 997,834 $ 668,496 $ 765,905 (2) $ 900,425
Employees' group health plan 467,986 3,140,000 14,539 2,901,405 (2) 721,120
Retirees' group health plan 911,998 581,000 531,375 581,000 (2) 1,443,373
Workers compensation 499,651 830,313 668,135 (2) 661,829
Deferred revenue - contributions
in aid of construction 2,413,531 0 194,784 386,934 (6) 2,221,381
Disability insurance 50,371 103,167 129,727 (2) 23,811
---------- ---------- -------------- ------------ -----------
$ 5,341,371 $5,219,809 $ 843,865 $5,433,106 $ 5,971,939
=======================================================================
Contributions in aid of construction $48,033,820 $2,808,969 (4) $1,545,593 (5) $49,297,196
========================================================================
<FN>
(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.
</FN>
26
</TABLE>
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Sequential
Exhibit Page Numbers
Number in this Report
- ------ --------------
<S> <C> <C>
Unless filed with this Form 10-K, the documents listed are incorporated by
reference.
3. Articles of Incorporation and By-laws:
3.1 Certificate of Incorporation of California Water Service Group 27
and (Filed as Exhibit A of the 1999 California Water Service
Group Proxy Statement)
3.2 Restated By-laws of California Water Service Group as amended on 27
January 26, 2000 (Exhibit E-2 to Form 8-K filed February 3, 2000)
3.3 Certificate of Determination of Preferences for Group's Series C 27
Preferred Stock (Exhibit 3.2 to Form 10-K for fiscal year 1987)
3.4 Certificate of Determination of Preferences for Group's Series D 27
Preferred Stock (Exhibit A to the Shareholder Rights Plan, an
agreement between California Water Service Group and BankBoston,
N.A., rights agent, dated January 28, 1998 filed as Exhibit 1 to
Form 8-A and Exhibit 1 to Form 8-K dated February 13, 1998)
4. Instruments Defining the Rights of Security Holders of California
Water Service Company, including Indentures:
4.1 Mortgage of Chattels and Trust Indenture dated April 1, 1928; 27
Eighth Supplemental Indenture dated November 1, 1945, covering
First Mortgage 3.25% Bonds, Series C; twenty-first Supplemental
Indenture dated October 1, 1972, covering First Mortgage 7.875%
Bonds, Series P; twenty-fourth Supplemental Indenture dated
November 1, 1973, covering First Mortgage 8.50% Bonds, Series S
(Exhibits 2(b), 2(c), 2(d), Registration Statement No. 2-53678,
of which certain exhibits are incorporated by reference to
Registration Statement Nos. 2-2187, 2-5923, 2-5923, 2-9681,
2-10517 and 2-11093.)
4.2 Thirty-third Supplemental Indenture dated as of May 1, 1988, 27
covering First Mortgage 9.48% Bonds, Series BB. (Exhibit 4 to
Form 10-Q dated September 30, 1988)
27
<PAGE>
4.3 Thirty-fourth Supplemental Indenture dated as of November 1, 28
1990, covering First Mortgage 9.86% Bonds, Series CC. (Exhibit 4
to Form 10-K for fiscal year 1990)
4.4 Thirty-fifth Supplemental Indenture dated as of November 1, 1992, 28
covering First Mortgage 8.63% Bonds, Series DD. (Exhibit 4 to
Form 10-Q dated September 30, 1992)
4.5 Thirty-sixth Supplemental Indenture dated as of May 1, 1993, 28
covering First Mortgage 7.90% Bonds Series EE (Exhibit 4 to Form
10-Q dated June 30, 1993)
4.6 Thirty-seventh Supplemental Indenture dated as of September 1, 28
1993, covering First Mortgage 6.95% Bonds, Series FF (Exhibit 4
to Form 10-Q dated September 30, 1993)
4.7 Thirty-eighth Supplemental Indenture dated as of October 15, 28
1993, covering First Mortgage 6.98% Bonds, Series GG (Exhibit 4
to Form 10-K for fiscal year 1994)
4.8 Note Agreement dated August 15, 1995, pertaining to issuance of 28
$20,000,000, 7.28% Series A Unsecured Senior Notes, due November
1, 2025 (Exhibit 4 to Form 10-Q dated September 30, 1995)
4.9 Note Agreement dated March 1, 1999, pertaining to issuance of 67
$20,000,000, 6.77% Series B Unsecured Senior Notes, due November
1, 2028 (Exhibit 4.1 to Form 10-K dated December 31, 1999)
10. Material Contracts.
10.1 Water Supply Contract between Cal Water and County of Butte 28
relating to Cal Water's Oroville District; Water Supply Contract
between Cal Water and the Kern County Water Agency relating to
Cal Water's Bakersfield District; Water Supply Contract between
Cal Water and Stockton East Water District relating to Cal
Water's Stockton District. (Exhibits 5(g), 5(h), 5(i), 5(j),
Registration Statement No. 2-53678, which incorporates said
exhibits by reference to Form 10-K for fiscal year 1974).
10.2 Settlement Agreement and Master Water Sales Contract between the 28
City and County of San Francisco and Certain Suburban Purchasers
dated August 8, 1984; Supplement to Settlement Agreement and
Master Water Sales Contract, dated
28
<PAGE>
August 8, 1984; Water Supply Contract between the Cal Water and
the City and County of San Francisco relating to Cal Water's Bear
Gulch District dated August 8, 1984; Water Supply Contract
between Cal Water and the City and County of San Francisco
relating to the Cal Water's San Carlos District dated August 8,
1984; Water Supply Contract between the Cal Water and the City
and County of San Francisco relating to the Cal Water's San Mateo
District dated August 8, 1984; Water Supply Contract between the
Cal Water and the City and County of San Francisco relating to
the Cal Water's South San Francisco District dated August 8,
1984. (Exhibit 10.2 to Form l0-K for fiscal year 1984).
10.3 Water Supply Contract dated January 27, 1981, between Cal Water 29
and the Santa Clara Valley Water District relating to the Cal
Water's Los Altos District (Exhibit 10.3 to Form 10-K for fiscal
year 1992)
10.4 Amendments No. 3, 6 and 7 and Amendment dated June 17, 1980, to 29
Water Supply Contract between Cal Water and the County of Butte
relating to the Cal Water's Oroville District. (Exhibit 10.5 to
Form 10-K for fiscal year 1992)
10.5 Amendment dated May 31, 1977 to Water Supply Contract between Cal 29
Water and Stockton-East Water District relating to Cal Water's
Stockton District. (Exhibit 10.6 to Form 10-K for fiscal year
1992)
10.6 Second Amended Contract dated September 25, 1987 among Stockton 29
East Water District, California Water Service Company, the City
of Stockton, the Lincoln Village Maintenance District, and the
Colonial Heights Maintenance District Providing for the Sale of
Treated Water. (Exhibit 10.7 to Form 10-K for fiscal year 1987).
10.7 Water Supply Contract dated April 19, 1927, and Supplemental 29
Agreement dated June 5, 1953, between Cal Water and Pacific Gas
and Electric Company relating to Cal Water's Oroville District.
(Exhibit 10.9 to Form 10-K for fiscal year 1992)
10.8 California Water Service Company Pension Plan (Exhibit 10.10 to 29
Form 10-K for fiscal year 1992)
10.9 California Water Service Company Supplemental Executive 30
Retirement Plan. (Exhibit 10.11 to Form 10-K for fiscal year
1992)
10.10 California Water Service Company Employees Savings Plan. (Exhibit 30
10.12 to Form 10-K for fiscal year 1992)
29
<PAGE>
10.11 Agreement between the City of Hawthorne and California Water 30
Service Company for the 15-year lease of the City's water system.
(Exhibit 10.17 to Form 10-Q dated March 31, 1996)
10.12 Water Supply Agreement dated September 25, 1996 between the City 30
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 30
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 California Water 30
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 February 17, 30
1998 (Filed on Form S-3 dated February 17, 1998)
10.16 California Water Service Group Directors Deferred Compensation 30
Plan (Exhibit 10.17 to Form 10-K for fiscal year 1997)
10.17 California Water Service Group Directors Retirement Plan (Exhibit 30
10.18 to Form 10-K for fiscal year 1997)
10.18 $50,000,000 Business Loan Agreements between California 1
California Water Service Group, California Water Service Company 133
and CWS Utility Services and Bank of America Bank of America
dated May 3, 1999, expiring April 30, 2001 (Exhibit 10.18 to Form
10-K for the year 1999)
30
<PAGE>
10.20 Certificate of Determination regarding Series D Participating 31
Preferred Shares. These shares are relative to the Shareholder
Rights Plan and would be issued if the rights plan were
triggered. This is a revised filing at the California Secretary
of State's request in a revised form (Exhibit 10.19 to Form 10Q
for the quarter ending September 30, 1998)
10.21 Amendment to the California Water Service Company Supplemental 31
Executive Retirement Plan (refer to Exhibit 10.9) to allow
benefits to be received by Plan participants at age 60 without a
reduction in the level of benefit
10.22 Amendment to the California Water Service Group Deferred Director 31
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 for the 31
fiscal year 1998)
10.25 Water Supply Contract dated November 16, 1994 between California 31
Water Service Company and Alameda County Flood Control and Water
Conservation District relating to Cal Water's Livermore District
(Exhibit 10.15 to Form 10-K for fiscal year 1994)
13. Annual Report to Security Holders, Form 10-Q or Quarterly Report to
Security Holders:
13.1 1999 Annual Report. Certain sections of the 1999 Annual Report to 32
stockholders are incorporated by reference in this 10-K filing
and filed with this Form 10-K as Exhibit 13. This includes those
sections referred to in Part II, Item 5, Market for Registrant's
Common Equity and Related Shareholder Matters; Part II, Item 6,
Selected Financial Data; Part II, Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations;
and Part II, Item 8, Financial Statement and Supplementary Data.
27. Financial Data Schedule as of December 31, 1999 66
31
</TABLE>
<TABLE>
Exhibit 13.1
<CAPTION>
Regulated and Non-Regulated Customers page 12
NON
DISTRICT NAME INCLUDING REGULATED REGULATED
<S> <C> <C>
CALIFORNIA
Bakersfield O&M contracts for the City of Bakersfield 56,700 24,900
and Spicer City and Rancho Verdugo MWC
Bear Gulch Atherton, Woodside, Portola Valley, portions
of Menlo Park and City of Menlo Park 17,500 4,000
service contract
Chico+ Hamilton City 22,800
Dixon 2,800
East Los Angeles O&M contracts for cities of Commerce and 26,400 2,700
Montebello
Hawthorne 15-year lease-- full service water operations 6,100
Hermosa-Redondo+ a portion of Torrance 25,400
King City+ 2,200
Livermore O&M contracts for Castlewood Country 16,500 400
Club and Crane Ridge MWC
Los Altos portions of Cupertino, Los Altos Hills, 18,300
Mountain View and Sunnyvale
Marysville+ 3,700
Mid-Peninsula San Mateo and San Carlos 35,700
Oroville 3,500
Palos Verdes+ Palos Verdes Estates, Rancho Palos Verdes, 23,700
Rolling Hills Estates and Rolling Hills
Salinas O&M contracts for Country Meadows 25,600 300
MWC and Spreckels Water Co.
Selma 5,100
South San Francisco Colma and Broadmoor 16,200
Stockton 41,600
Visalia+ four O&M contracts 28,600 1,100
Westlake a portion of Thousand Oaks 6,900
Willows+ 2,300
Subtotal 381,500 39,500
WASHINGTON
Harbor numerous O&M contracts 9,300 1,700
South Sound numerous O&M contracts 2,700 1,100
Subtotal 12,000 2,800
Current Total 393,500 42,300
32
<PAGE>
DOMINGUEZ*
Antelope Valley Fremont Valley, Lake Hughes, Lancaster 1,300 300
and Leona Valley
Dominguez Carson and portions of Compton, Harbor 32,500
City, Long Beach and Torrance
Kern River Valley Bodfish, Kernville, Lakeland, Mountain 4,100 700
Shadows, Onyx, Squirrel Valley, South
Lake and Wofford Heights
Redwood Valley Lucerne, Duncans Mills and Guerneville 1,900
Subtotal 39,800 1,000
Total with Dominguez 433,300 43,300
Page 13
MAP OF SERVICE TERRITORIES
This page is a map of the Western United States with Washington, California and New Mexico highlighted.
The California Water Service Company, Washington Water Service Company and Dominguez Services
Corporation service areas noted. In New Mexico, a contract operation is noted near Santa Fe.
Page 14
Financial Section (INDEX)
Ten-year Financial Review 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Consolidated Balance Sheet 23
Consolidated Statement of Income 24
Consolidated Statement of Common Stockholders' Equity 25
Consolidated Statement of Cash Flows 26
Notes to Consolidated Financial Statements 27
Independent Auditors' Report 35
Corporate Information 36
33
<PAGE>
Board of Directors inside back cover
Officers inside back cover
Ten-Year Financial Review Page 15
Dollars in thousands, except common share data
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
Summary of Operations:
Operating revenue
Residential $150,326 $139,018 $146,246 $136,747 $122,275 $117,032 $113,445 $103,644 $ 89,108 $ 91,595
Business 34,219 31,591 32,916 30,924 28,230 27,023 25,247 23,670 20,759 20,910
Industrial 6,947 6,239 6,282 6,150 5,836 5,478 5,123 4,925 4,490 5,145
Public authorities 9,501 8,368 9,636 9,023 8,149 7,995 7,397 6,892 5,734 6,412
Other 5,447 4,443 3,267 2,709 3,126 2,087 2,475 2,525 8,676 1,782
Total op. revenue 206,440 189,659 198,347 185,553 167,616 159,615 153,687 141,656 128,767 125,844
Operating expenses 175,830 159,120 163,431 154,849 141,950 133,821 125,729 117,646 104,372 102,350
Interest expense, other
income and expenses,
net 10,691 11,603 11,180 11,285 10,651 11,091 12,386 11,276 10,204 8,963
Net income $ 19,919 $ 18,936 $ 23,736 $ 19,419 $ 15,015 $ 14,703 $ 15,572 $ 12,734 $ 14,191 $ 14,531
Common Share Data*
Earnings per share $ 1.53 $ 1.45 $ 1.82 $ 1.49 $ 1.16 $ 1.21 $ 1.32 $ 1.08 $ 1.20 $ 1.23
Dividends declared $ 1.085 $ 1.07 $ 1.055 $ 1.04 $ 1.02 $ 0.99 $ 0.96 $ 0.93 $ 0.90 $ 0.87
Dividend payout ratio 71% 74% 58% 70% 88% 82% 73% 86% 75% 71%
Book value $ 13.70 $ 13.27 $ 12.84 $ 12.10 $ 11.58 $ 11.36 $ 10.68 $ 10.31 $ 10.16 $ 9.83
Market price at year-end 30.31 31.31 29.53 21.00 16.38 16.00 20.00 16.50 14.00 13.38
Common shares
outstanding at year-
end (in thousands) 12,936 12,936 12,936 12,936 12,855 12,811 11,694 11,694 11,694 11,694
Return on average common
stockholders' equity 11.4% 11.3% 14.7% 12.8% 10.3% 10.8% 12.3% 10.5% 11.8% 12.5%
Long-term debt
interest coverage 3.5 3.5 4.1 3.6 3.1 3.2 3.1 3.0 3.2 3.6
Balance Sheet Data
Net utility plant $515,354 $489,017 $469,897 $452,441 $430,636 $415,747 $399,088 $381,683 $356,172 $331,352
Utility plant
expenditures 44,493 35,878 33,931 36,820 28,409 29,117 29,445 36,275 34,994 27,402
Total assets 587,618 560,508 542,783 522,870 507,732 471,855 455,055 411,479 400,698 375,746
Long-term debt including
current portion 159,223 141,401 142,013 143,840 147,062 130,983 131,199 123,445 104,494 105,948
Capitalization ratios:
Common stockholders'
equity 52.1% 54.2% 53.3% 51.5% 49.7% 52.0% 48.1% 48.7% 52.4% 51.3%
Preferred stock 1.0% 1.1% 1.1% 1.1% 1.2% 1.2% 1.3% 1.4% 1.5% 1.5%
Long-term debt 46.9% 44.7% 45.6% 47.4% 49.1% 46.8% 50.6% 49.9% 46.1% 47.2%
Other Data
Water production (million gallons)
Wells 57,934 51,139 57,652 54,457 50,688 51,352 48,012 52,909 49,692 52,272
Purchased 52,340 49,436 53,190 51,700 49,068 49,300 48,089 40,426 36,686 45,431
Total water
production 110,274 100,575 110,842 106,157 99,756 100,652 96,101 93,335 86,378 97,703
Metered customers 322,478 317,178 312,732 308,455 298,730 295,831 290,513 286,465 282,377 278,639
Flat-rate customers 77,091 77,340 77,649 77,961 78,099 79,103 81,360 82,566 82,979 81,721
Customers at
year-end 399,569 394,518 390,381 386,416 376,829 374,934 371,873 369,031 365,356 360,360
New customers added 5,051 4,137 3,965 9,587 1,895 3,061 2,842 3,675 4,996 1,251
Revenue per customer $ 517 $ 481 $ 508 $ 480 $ 445 $ 426 $ 413 $ 384 $ 352 $ 349
34
<PAGE>
Utility plant per customer 1,845 1,764 1,694 1,633 1,582 1,520 1,460 1,399 1,320 1,247
Employees at year-end 708 689 679 663 660 653 642 637 618 605
<FN>
*Common share data is restated to reflect the effective two-for-one stock split on December 31, 1997.
</FN>
</TABLE>
Page 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations
California Water Service Group (Company) is a holding company with three
operating subsidiaries, California Water Service Company (Cal Water), CWS
Utility Services (Services) and Washington Water Service Company (Washington
Water). Cal Water and Washington Water are regulated public utilities. Their
assets and operating revenues currently make up the majority of the Company's
assets and revenues. Services provides non-regulated water operations and
related services to other private companies and municipalities. The following
discussion and analysis provides information regarding the Company and its
assets, operations and financial condition.
Forward-Looking Statements
This annual report, including the Letter to Stockholders, Management's
Discussion and Analysis and other sections, contains forward-looking statements
within the meaning of the federal securities laws. Such statements are based on
currently available information, expectations, estimates, assumptions and
projections, and management's judgment about the Company, the water utility
industry and general economic conditions. Such words as expects, intends, plans,
believes, estimates, anticipates or variations of such words or similar
expressions are intended to identify forward-looking statements. The
forward-looking statements are not guarantees of future performance. Actual
results may vary materially from what is contained in a forward-looking
statement. Factors which may cause a result different than expected or
anticipated include 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 Company assumes no obligation to provide public
updates on forward-looking statements.
Business
Cal Water is a public utility supplying water service to 387,600 customers in 60
California communities through 21 separate water systems or districts. Cal
Water's 20 regulated systems, which are subject to regulation by the California
Public Utilities Commission (CPUC), serve 381,500 customers as shown on the
enclosed map. An additional 6,100 customers receive service through a lease of
the City of Hawthorne's water system, which is not subject to CPUC regulation.
Cal Water derives non-regulated income from contracts with other private
companies and municipalities to operate water systems and provide billing
services to 33,400 customers. It also leases communication antenna sites and
operates two reclaimed water systems.
Washington Water's utility operations are regulated by the Washington
Utilities and Transportation Commission (WUTC). Washington Water provides
domestic water service to 12,000 customers through two operating districts near
Tacoma and Olympia. An additional 2,800 customers are served under operating
agreements with private
35
<PAGE>
owners. Refer to the separate section titled "Washington Acquisitions" for
further information concerning Washington Water.
Rates and operations for regulated customers are subject to the
jurisdiction of the respective state's regulatory commission. The commissions
require that water rates for each regulated district be independently
determined. Rates for the City of Hawthorne system are established in accordance
with an operating agreement and are subject to ratification by the City Council.
Fees for other operating agreements are based on contracts negotiated among the
parties.
Results of Operation
Restatement During 1999, the Company issued 316,472 shares of common stock in
exchange for all of the outstanding shares of Harbor Water Company and South
Sound Utility Company. Both acquisitions were accounted for as poolings of
interests. Financial statements for the current and prior periods have been
restated to include the accounts of both companies.
Earnings and Dividends Net income in 1999 was $19,919,000, compared to
$18,936,000 in 1998 and $23,736,000 in 1997. Earnings per common share were
$1.53 in 1999, $1.45 in 1998 and $1.82 in 1997. Net income and earnings per
share in 1997 were the highest levels ever achieved by the Company. The weighted
average number of common shares outstanding in each of the three years was
12,936,000.
At its January 1999 meeting, the Board of Directors increased the common
stock dividend rate for the 32nd consecutive year. 1999 also marked the
55th consecutive year that a dividend had been paid on the Company's common
stock. The annual dividend paid in 1999 was $1.085, an increase of 1.4%
over the 1998 rate of $1.07 per share, which in turn was an increase of
1.4% from the 1997 dividend of $1.055 per share. The dividend increases
were based on projections that the higher dividend could be sustained while
still providing the Company with adequate financial flexibility. Earnings
not paid as dividends are reinvested in the business. The dividend payout
ratio was 71% in 1999, 74% in 1998 and 58% in 1997, an average of 67% for
the three-year period.
Page 17
Operating Revenue Operating revenue, including revenue from City of Hawthorne
customers, was $206.4 million, $16.8 million or 9% more than the $189.7 million
recorded last year. Revenue in 1997 was $198.3 million. Operating revenue
exceeded $200 million for the first time in 1999. The source of changes in
operating revenue were:
dollars in millions 1999 1998 1997
Customer water usage $11.8 $(12.6) $ 3.9
General and step rate increases 3.0 1.9 6.4
Offset rate increases - water production costs 0.2 0.2 0.2
Usage by new customers 1.8 1.9 2.3
Net change $16.8 $ (8.6) $12.8
Average revenue per customer $ 517 $ 481 $ 508
36
<PAGE>
Average metered customer usage (ccf) 305 284 315
New customers added 5,000 4,100 4,000
Weather in the first half of 1999 was normal, while in the prior year it was
cool and wet; as a result, customer usage and revenue were higher this year.
Third-quarter weather in both years was normal. Fourth-quarter 1999 weather was
mild and drier than 1998, causing an increase in customer usage and an increase
in revenue. The year-end customer count was 399,600, an increase of 1.3%.
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 1998 returned to a more normal pattern. However, the wet, cool
weather in the early part of the year resulted in an overall 9% decrease in 1998
water usage, negatively impacting revenue. The year-end customer count in 1998
was 394,500, a 1.1% increase.
Rainfall for the 1996-97 season was concentrated in December 1996 and
January 1997, then virtually ceased. Average consumption per metered account
reached a record level due to dry and warm summer months. The customer count in
1997 increased 1.0% to 390,400.
Operating and Interest Expenses Operating expenses, including those for the
Hawthorne operation, were $175.8 million in 1999, $159.1 million in 1998 and
$163.4 million in 1997.
Wells provided 52.4% of water requirements in 1999 and purchased water
provided 47.2%, with 0.4% obtained from a surface supply. In 1998, the
corresponding percentages were 50.6%, 48.9% and 0.5%, and in 1997, 51.8%,
47.8% and 0.4%. The table below provides information regarding water
production costs, which includes purchased water, purchased power and pump
taxes:
dollars in millions 1999 1998 1997
Purchased water $58.1 $50.4 $52.2
Purchased power 13.0 11.4 12.7
Pump taxes 4.5 3.8 4.3
Total water production costs $75.6 $65.6 $69.2
Change from prior year 15% (5)% 2%
Water production (billion gallons) 110 101 111
Change from prior year 10% (9)% 5%
The year-to-year water production cost changes were influenced by each
year's predominant weather pattern. In each of the three years, purchased water
expense, the largest component of annual operating expense, was affected by
wholesale suppliers' rate increases. Water production costs in 1999 reflect an
increase in customer usage and significant purchased water price increases for
the San Francisco Peninsula districts, where the wholesale supplier's rates
increased 37%.
Page 18
Production levels in 1998 decreased from 1997 due to lower customer
usage in response to weather conditions. Despite some wholesaler price
increases, overall water
37
<PAGE>
production expenses declined. Well production decreased due to the decline in
water sales and because several wells were out of service for maintenance. With
reduced well production, purchased power and pump tax expenses declined.
In 1997, nonrecurring refunds totaling $2.5 million received from two
wholesale water suppliers reduced purchased water expense. Well production
increased 6% in 1997 because of increased demand, causing an increase in pump
taxes and purchased power costs.
Employee payroll and benefits charged to operations and maintenance
expense was $38.4 million in 1999, $34.9 million in 1998 and $34.1 million in
1997. The increases in payroll and related benefits are attributable to wage
increases effective at the start of each year and additional hours worked. At
year-end 1999, 1998 and 1997, there were 708, 689 and 679 employees.
Income tax expense was $12.2 million in 1999, $10.8 million in 1998 and
$14.1 million in 1997. The changes in taxes are generally due to variations in
taxable income. There is no state income tax in Washington.
Long-term debt interest expense increased $1.0 million in 1999 because
of the issuance of Series B, 6.77% senior notes in March. Long-term interest
costs decreased $0.4 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.
Interest expense from short-term bank borrowings in 1999 decreased $0.4
million. Short-term borrowings were reduced after the issue of the Series B
senior notes and by strong cash flow from operations. In 1998, short-term
interest expense was $0.7 million greater than in 1997. In 1997, short-term
interest expense was $0.3 million more than in the prior year. Interest coverage
of long-term debt before income taxes was 3.5 times in 1999 and 1998, and 4.1
times in 1997. There was $13.5 million in short-term borrowings at the end of
1999, and $22.5 million at the end of 1998.
Other Income Other income is derived from management contracts by which the
Company operates private and municipally-owned water systems, agreements for
operation of two reclaimed water systems, contracts for meter reading and
billing services to various cities, leases of communication antenna sites,
surplus property sales, other nonutility sources and interest on short-term
investments. Total other income was $2.7 million in 1999, $1.3 million in 1998
and $1.4 million in 1997. During 1999, $1.3 million in pretax revenues were
realized as part of the Real Estate Program that is described in more detail in
"Liquidity and Capital Resources." Income from the various operating and billing
contracts, excluding short-term interest income, was $2.5 million in 1999 and
$1.3 million in 1998 and 1997.
Rates and Regulation
The Company's regulatory staff completed a review of 14 Cal Water districts that
were eligible for general rate application filings in 1999. Based on current
earnings levels, projected expense increases and expected capital expenditures,
a determination was made that no general rate increase applications were
necessary. During 2000, eligible districts will again be reviewed. It is
anticipated that general rate application filings will be made in mid-year with
CPUC decisions expected in late spring 2001.
In May 1999, the CPUC authorized rate increases in four districts
serving about 25% of Cal Water's total customers. The applications were filed in
July 1998.
38
<PAGE>
Subsequently, the Company and CPUC staff agreed to a stipulated settlement. The
decision is estimated to generate $4,095,000 in new revenue during the twelve
months following its mid-June effective date. The decision authorized a 9.55%
return on equity, providing $1.9 million in additional revenue. In addition, the
decision provided another $2.2 million in revenue for environmental compliance,
specific capital budget expenditures and recovery of General Office expenses.
The $2.2 million is not reflected in the 9.55% return on equity calculation.
CPUC decisions were received in July 1998 for the general rate
applications filed in July 1997. Additional annual revenue from these decisions
is expected to total $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%.
In 1997, the CPUC's general rate application decisions granted an ROE
of 10.35% and additional revenue of $2.4 million.
No rate applications were filed for the Washington operations during
1999. The most recent authorized rate of return was 11.1%, granted in a 1998
decision. General rate application filings for both districts are expected in
2000.
Water Supply Page 19
The Company's source of supply varies among its operating districts. Certain
districts obtain all of their supply from wells, some districts purchase all of
their supply from wholesale suppliers and other districts obtain their supply
from a combination of wells and purchased sources. Historically, about half of
the water is provided from wells and about half is purchased.
Generally, between mid-spring and mid-fall, little precipitation falls
in the California service areas. The Washington service areas receive
precipitation in all seasons. Water demand is highest during the warm summers
and lowest in the cool winters. 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 1999-2000 water year has been less than normal, but the prior four years
exceeded normal levels. Water storage in state reservoirs at the end of 1999
exceeds historic amounts. The Company believes that its supply from both
underground aquifers and purchased sources should be adequate to meet customer
demand during 2000.
Environmental Matters
The Company is subject to regulations of the United States Environmental
Protection Agency (EPA), state health service departments and various local
health departments concerning water quality matters. It is also subject to the
jurisdiction of various state and local regulatory agencies relating to
environmental matters, including handling and disposal of hazardous materials.
The Company believes it is in compliance with all requirements set forth by the
various agencies.
The Safe Drinking Water Act was amended in 1996 to provide a new
process for the EPA to select and regulate waterborne contaminants. The EPA can
now regulate only contaminants that are known or likely to occur at levels that
would pose a risk to public
39
<PAGE>
health when such regulation would provide a meaningful opportunity to reduce a
health risk. New drinking water regulations will be based primarily on risk
assessment and measurement of cost/benefit considerations for minimizing overall
health risk. Over 90 contaminants for possible regulation have been listed by
the EPA and the list must be updated every five years. Also, every five years
the EPA must select at least five listed contaminants and determine if they
should be regulated.
The Company has an established water supply monitoring program to test
for contaminants as mandated by the EPA. As necessary or required, water
treatment is added to provide disinfection for water extracted from underground
sources. The Company also owns and operates three surface water treatment
plants. The cost of treatment is being recovered in customer rates as authorized
by the regulatory authorities. Water purchased from wholesale suppliers is
treated before delivery to the Company's systems.
Enforcement of the EPA standards is the responsibility of individual
states, which could impose more stringent regulation. In addition to the EPA's
requirements, 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 Company's liquidity is provided by bank lines of credit and
internally generated funds. The Company and Cal Water have a $50 million bank
line of credit. The Company's portion is $20 million and Cal Water's portion is
$30 million. The Company's $20 million portion may be drawn on for use by the
Company, including funding operations of either of its two California
subsidiaries. Cal Water's $30 million portion can be used solely for purposes of
the regulated utility. Washington Water has loan commitments from two banks to
meet its operating and capital equipment purchase requirements. Generally,
short-term borrowings under the commitments are converted annually to long-term
borrowings with repayment terms tied to system and equipment acquisitions.
Additional information regarding the bank borrowings is presented in Note 6 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 lower. With greater summer
usage and increased billings comes increased cash flow from operations, allowing
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 Cal Water's first mortgage bonds at AA- and Aa3. Long-term
financing, which includes common stock, first mortgage bonds, senior notes and
other debt securities, has been used to replace short-term borrowings and fund
construction. Developer contributions in aid of construction and refundable
advances for construction are also sources of funds for various construction
projects.
Page 20
In March 1999, Cal Water completed its first long-term financing in
four years when Series B, 6.77%, 30-year senior notes were issued. Prior to the
Series B issue,
40
<PAGE>
operating and capital requirements were met by borrowings under the bank
short-term line of credit and by internally generated funds.
In 1998, the Company introduced a Dividend Reinvestment and Stock
Purchase Plan (Plan), replacing the existing plan. Under the Plan, stockholders
may reinvest dividends to purchase additional Company common stock. The Plan
also allows existing stockholders and other interested investors to purchase
Company common stock through the transfer agent. Shares required for the Plan
may be purchased on the open market or newly issued shares. Therefore, the Plan
will provide the Company with an alternative means of developing additional
equity if new shares are issued. During 1999 and 1998, shares required by the
Plan were purchased on the open market. At this time, the Company intends to
continue purchasing shares required for the Plan on the open market. However, if
new shares were issued to satisfy future Plan requirements, the impact on
earnings per share could be dilutive because of the added shares outstanding.
Also, stockholders not participating in the Plan 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 1999, total utility plant expenditures were $44.5 million. For
1998, utility plant expenditures totaled $35.9 million, compared to $33.9
million in 1997. Expenditures in 1999 included $31.5 million provided by Company
funds and $13.0 million received from developers through contributions in aid of
construction and refundable advances for construction. Company projects were
funded by internally generated funds, borrowings under bank credit lines and
commitments, and issuance of the $20 million Series B senior notes.
The Company's 2000 construction program is authorized for $35.7
million. 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 $175 million.
Capital Structure Common stockholders' equity increased by the amount of
earnings not paid out for dividends. No new equity was issued in the past three
years. The long-term debt portion of the capital structure increased due to the
issuance of Series B senior notes. It was reduced by first mortgage bond sinking
fund payments.
The Company's total capitalization at December 31, 1999 was $337.2
million, compared to $313.9 million at the end of 1998.
Capital ratios were: 1999 1998
Common equity 52.1% 54.2%
Preferred stock 1.0% 1.1%
Long-term debt 46.9% 44.7%
41
<PAGE>
The 1999 return on average common equity was 11.4%, compared with 11.3%
in 1998 and 14.7% in 1997. Refer to the discussion of authorized return on
equity in the "Rates and Regulation" section.
Real Estate Program The Company's subsidiaries own more than 900 real estate
parcels. Certain parcels are not necessary for or used in water utility
operations. A program has been developed to realize the value of certain surplus
properties through sale or lease of those properties. Most surplus properties
have a low cost basis. The program, which commenced in 1999, will be ongoing for
a period of several years. During the next four years, the Company estimates
that gross property transactions totaling over six million dollars could be
completed.
Stockholder Rights Plan As explained in Note 5 to the Consolidated Financial
Statements, in January 1998, the Board of Directors adopted a Stockholder Rights
Plan (Plan). In connection with the Plan, a dividend distribution of one right
for each common share to purchase preferred stock under certain circumstances
was also authorized. The Plan is designed to protect stockholders and maximize
stockholder value in the event of an unsolicited takeover proposal by
encouraging a prospective acquirer to negotiate with the Board.
Dominguez Merger Page 21
On November 13, 1998, the boards of the Company and Dominguez Services
Corporation (Dominguez) agreed to the merger of the two companies. The agreement
was subsequently amended on March 22, 1999.
Dominguez is a utility holding company whose subsidiaries provide water
service to about 40,000 customers in 20 California communities. Its primary
subsidiary, Dominguez Water Company, is a regulated water utility with its
largest operation serving over 32,000 accounts in the South Bay area of Los
Angeles County adjacent to Cal Water's Hermosa Redondo and Palos Verdes
districts. Dominguez also has operations in Kern County east of Cal Water's
Bakersfield district serving over 4,100 accounts, in the Antelope Valley area
serving about 1,300 accounts and in an area north of San Francisco serving about
1,900 customers.
Dominguez' 1998 operating revenue was $25.3 million. Its net utility
plant was $44.8 million and it had total assets of $52.6 million.
The amended agreement provides that each outstanding Dominguez common
share will be exchanged for between 1.25 and 1.49 shares of Company common
stock. The precise conversion ratio will depend upon the average closing price
of Company common stock for a twenty-day period preceding the transaction's
closing date. The conversion ratio is designed to yield Dominguez shareholders a
$33.75 value for each Dominguez share. At December 31, 1998, there were
1,561,000 shares of Dominguez common stock outstanding. The Company also expects
to assume approximately $12 million of outstanding Dominguez debt.
Dominguez shareholders approved the merger at a meeting in May 1999.
Necessary approvals from federal agencies, including the Securities and Exchange
Commission and Federal Trade Commission, have been received. Final approval of
the CPUC is now anticipated in March 2000.
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<PAGE>
Washington Acquisitions
During the fourth quarter of 1999, the Company completed the acquisitions of
Harbor Water Company near Tacoma and South Sound Utility Company near Olympia.
The two companies, which serve 14,800 customers, were merged into a new
subsidiary, Washington Water Service Company. The transactions were completed
through tax-free exchanges of 316,472 Company common shares, valued at $8.5
million for all of the shares of the two companies. The Company also assumed $3
million in outstanding debt. Both transactions were accounted for on a pooling
of interest basis.
New Accounting Standard
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The statement establishes new accounting and reporting
standards for derivative financial instruments and hedging activities. The
Company expects to adopt the standard in 2000. Its adoption is not anticipated
to have a material impact on the Company's results of operations or financial
position.
Year 2000 Update
Readiness The Company successfully transitioned from 1999 to 2000 without
technology or customer service disruptions as a result of preparation efforts by
our employees in the districts and at the corporate office. A Year 2000 (Y2K)
Transition Team was assembled to ensure the Company's Y2K preparedness. Computer
applications are currently processed on a mainframe-based system and a local
area network (LAN) computer system. Most billing applications are processed on
the mainframe computer. The information systems department (IS) inventoried
software programs and modified them to be Y2K ready. A Y2K compatible
accounting, purchasing and human resources software package was installed and
operated on the LAN during 1999 as scheduled. The Company identified
non-computer equipment and operating systems that potentially contained embedded
date-sensitive chips. Steps were taken to make the equipment and systems Y2K
ready. The Company continues to monitor its computer-based systems for possible
Y2K disruptions and is ready to respond in the event of a Y2K related problem.
Suppliers and vendors with whom the Company has material business
relationships were contacted throughout 1998 and 1999 to assess their Y2K
preparedness. Those contacted included water wholesalers, power supply
companies, chemical vendors, fuel suppliers, banks and the stock registrar.
Operating units continue in 2000 to work with suppliers and vendors to assure
availability of necessary products and supplies.
The Company's water systems operate independent of each other. Each
system is unique as to its operating requirements. Each operating district
prepared a Y2K readiness and response plan. The plans were continually reviewed
and updated as testing was completed and new information received that could
affect the Y2K transition.
Page 22
Costs The estimated remediation cost for Y2K preparedness was about $500,000.
This includes the cost of an outside consultant, vendors and computer
programming time. The costs of a new computer system and software package are
not included since their
43
<PAGE>
selection and installation were not Y2K driven. No IS projects were deferred as
a result of the Y2K efforts. The Company did accelerate the acquisition of
several portable boosters for use in moving water in the event of a power
outage, with a capitalized cost of about $400,000.
Risks In a worst case scenario, the Company could have been unable to deliver
water to some or all of its customers if wholesale suppliers had not provided
water or power supplies. Additionally, it could have been impossible to produce
customer bills or maintain accounting functions if power sources were not
available or computer billing programs did not properly function. Insurance
coverage was reviewed and the Company and its broker believed that the policies
afforded Y2K coverage.
Contingency Plans Each district maintains an emergency response plan that is
reviewed and updated on a regular basis. These plans are designed to provide for
alternative operating plans and procedures in the event normal operations are
interrupted. The emergency plans were the basis for developing separate Y2K
service interruption preparedness and response 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
power companies experience outages. Emergency water connections are maintained
between the Company's water systems and those of adjacent purveyors to provide
an emergency 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 service disruption. Detailed Y2K plans included the following: establishing a
timeline to ascertain vendors' ability to provide crucial products and services;
informing employees of Y2K efforts and responsibilities; scheduling maintenance
so that water delivery facilities were on line at year-end; arranging for
alternate water and power supplies; conducting "what if" exercises to develop
responses to loss of water or power outages from normal sources and preparing
for manual water system operations if necessary; identifying plans to provide
water service to critical vendors, such as hospitals; assuring that measures
were in place to maintain water quality and that water testing alternatives were
available; arranging for equipment needs and supplies should Y2K problems
develop; and scheduling employees to be on duty or available for duty as needed.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET Page 23
December 31, 1999 and 1998
In thousands
1999 1998
<S> <C> <C>
ASSETS
Utility plant:
Land $ 9,424 $ 8,221
Depreciable plant and equipment 704,009 667,902
Construction work in progress 13,740 10,829
Intangible assets 10,179 8,807
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<PAGE>
Total utility plant 737,352 695,759
Less depreciation and amortization 221,998 206,742
Net utility plant 515,354 489,017
Current assets:
Cash and cash equivalents 1,437 1,051
Receivables:
Customers 12,533 10,700
Other 3,041 3,436
Unbilled revenue 7,145 5,958
Materials and supplies at average cost 2,229 2,235
Taxes and other prepaid expenses 4,437 4,512
Total current assets 30,822 27,892
Other assets:
Regulatory assets 36,458 39,538
Unamortized debt premium and expense 3,503 3,556
Other 1,481 505
Total other assets 41,442 43,599
$587,618 $560,508
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $.01 par value; 25,000
share authorized, 12,936 shares outstanding $ 129 $ 129
Additional paid-in capital 44,881 44,881
Retained earnings 132,689 126,687
Accumulated other comprehensive loss (517) --
Total common stockholders' equity 177,182 171,697
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 156,572 138,758
Total capitalization 337,229 313,930
Current liabilities:
Current maturities of long-term debt 2,651 2,643
Short-term borrowings 13,599 22,500
Accounts payable 23,707 16,010
Accrued taxes 3,556 4,726
Accrued interest 2,092 1,944
Other accrued liabilities 9,906 9,428
Total current liabilities 55,511 57,251
Unamortized investment tax credits 2,842 2,937
Deferred income taxes 21,427 27,200
45
<PAGE>
Regulatory and other liabilities 18,001 12,697
Advances for construction 99,991 95,917
Contributions in aid of construction 52,617 50,576
$587,618 $560,508
<FN>
See accompanying notes to consolidated financial statements.
</FN>
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</TABLE>
<PAGE>
<TABLE>
Consolidated Statement of Income Page 24
For the years ended December 31, 1999, 1998 and 1997
<CAPTION>
In thousands, except per share data
1999 1998 1997
<S> <C> <C> <C>
Operating revenue $206,440 $189,659 $198,347
Operating expenses:
Operations:
Purchased water 58,132 50,378 52,155
Purchased power 13,033 11,389 12,679
Pump taxes 4,537 3,850 4,302
Administrative and general 27,987 25,418 24,566
Other 26,425 25,065 24,505
Maintenance 9,183 9,164 9,445
Depreciation and amortization 15,802 14,870 13,959
Income taxes 12,176 10,808 14,057
Property and other taxes 8,555 8,178 7,763
Total operating expenses 175,830 159,120 163,431
Net operating income 30,610 30,539 34,916
Other income and expenses, net 2,510 1,094 949
Income before interest expense 33,120 31,633 35,865
Interest expense:
Long-term debt interest 12,144 11,259 11,405
Other interest 1,057 1,438 724
Total interest expense 13,201 12,697 12,129
Net income $ 19,919 $ 18,936 $ 23,736
Basic earnings per share of common stock $ 1.53 $ 1.45 $ 1.82
Average number of common shares outstanding 12,936 12,936 12,936
<FN>
See accompanying notes to consolidated financial statements.
</FN>
47
</TABLE>
<PAGE>
<TABLE>
Consolidated Statement of Common Stockholders' Equity Page 25
For the years ended December 31, 1999, 1998 and 1997
<CAPTION>
In thousands
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Loss Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $129 $44,881 $111,137 $ -- $156,147
Net income 23,736 23,736
Dividends paid:
Preferred stock 153 153
Common 13,313 13,313
Total dividends paid 13,466 13,466
Income reinvested in business 10,270 10,270
Balance at December 31, 1997 129 44,881 121,407 -- 166,417
Net income 18,936 18,936
Dividends paid:
Preferred stock 153 153
Common stock 13,503 13,503
Total dividends paid 13,656 13,656
Income reinvested in business 5,280 5,280
Balance at December 31, 1998 129 44,881 126,687 -- 171,697
Net income 19,919 19,919
Dividends paid:
Preferred stock 153 153
Common stock 13,764 13,764
Total dividends paid 13,917 13,917
Income reinvested in business 6,002 6,002
Comprehensive lo (517) (517)
Balance at December 31, 1999 $129 $44,881 $132,689 $ (517) $177,182
<FN>
See accompanying notes to consolidated financial statements.
</FN>
48
</TABLE>
<PAGE>
<TABLE>
Page 26
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
In thousands
1999 1998 1997
<S> <C> <C> <C>
Operating activities
Net income $19,919 $18,936 $23,736
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 15,802 14,870 13,959
Deferred income taxes, investment tax credits,
and regulatory assets and liabilities, net 1,056 273 1,072
Changes in operating assets and liabilities:
Receivables (1,438) 1,013 (1,855)
Unbilled revenue (1,187) (780) 399
Accounts payable 7,697 374 739
Other current liabilities (544) 2,726 365
Other changes, net 1,352 805 1,507
Net adjustments 22,738 19,281 16,186
Net cash provided by operating activities 42,657 38,217 39,922
Investing activities:
Utility plant expenditures:
Company funded (31,509) (30,780) (26,153)
Developer advances and contributions
in aid of construction (12,984) (5,098) (7,778)
Net cash used in investing activities (44,493) (35,878) (33,931)
Financing activities:
Net short-term borrowings (8,901) 8,000 6,900
Issuance of long-term debt 20,062 -- --
Advances for construction 7,435 3,737 4,559
Refunds of advances for construction (3,902) (3,760) (3,701)
Contributions in aid of construction 3,685 2,746 2,770
Retirement of long-term debt (2,240) (733) (2,324)
Dividends paid (13,917) (13,656) (13,466)
Net cash provided (used) in financing activities 2,222 (3,666) (5,262)
Change in cash and cash equivalents 386 (1,327) 729
Cash and cash equivalents at beginning of year 1,051 2,378 1,649
Cash and cash equivalents at end of year $ 1,437 $ 1,051 $2,378
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $12,900 $11,319 $11,976
Income taxes 10,849 8,851 14,666
49
<PAGE>
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
Notes To Consolidated Financial Statements Page 27
December 31, 1999, 1998, and 1997
Note 1. Organization And Operations
California Water Service Group (Company) is a holding company and through its
wholly owned subsidiaries provides water utility and other related services in
California and Washington. During 1999, the Company reincorporated as a Delaware
corporation. California Water Service Company and Washington Water Service
Company provide regulated utility services under the rules and regulations of
their respective regulatory commissions (jointly referred to as Commissions).
CWS Utility Services provides non-regulated water utility and related utility
services.
The Company operates primarily in one business segment, providing water
and related utility services.
Note 2. Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. The financial statements give retroactive effect
to acquisitions, which were accounted for as poolings of interests. Intercompany
transactions and balances have been eliminated.
The accounting records of the Company are maintained in accordance with
the uniform system of accounts prescribed by the Commissions. Certain prior
years' amounts have been reclassified, where necessary, to conform to the
current presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Revenue consists of monthly cycle customer billings for regulated water
service at rates authorized by the Commissions and billings to certain
non-regulated customers. Revenue from metered accounts includes unbilled amounts
based on the estimated usage from the latest meter reading to the end of the
accounting period. Flat-rate accounts, which are billed at the beginning of the
service period, are included in revenue on a pro rata basis for the portion
applicable to the current accounting period.
Utility Plant Utility plant is carried at original cost when first constructed
or purchased, except for certain minor units of property recorded at estimated
fair values at dates of acquisition. Cost of depreciable plant retired is
eliminated from utility plant accounts and such costs are charged against
accumulated depreciation. Maintenance of utility plant is charged primarily to
operation expenses. Interest is capitalized on plant expenditures during the
construction period and amounted to $324,000 in 1999, $224,000 in 1998, and
$267,000 in 1997.
Intangible assets acquired as part of water systems purchased are
stated at amounts as prescribed by the Commissions. All other intangibles have
been recorded at
50
<PAGE>
cost. Included in intangible assets is $6,500,000 paid to the City of Hawthorne
to lease the city's water system and associated water rights. The lease payment
is being amortized on a straight-line basis over the 15-year life of the lease.
The Company continually evaluates the recoverability of utility plant by
assessing whether the amortization of the balance over the remaining life can be
recovered through the expected and undiscounted future cash flows.
Depreciation Depreciation of utility plant for financial statement purposes is
computed on the straight-line remaining life method at rates based on the
estimated useful lives of the assets, ranging from 5 to 65 years. The provision
for depreciation expressed as a percentage of the aggregate depreciable asset
balances was 2.6% in 1999, 1998, and 1997. 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.
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 28
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.
Accumulated Other Comprehensive Loss The Company has an unfunded Supplemental
Executive Retirement Plan. The unfunded accumulated benefit obligation of the
plan exceeds the accrued benefit cost. This amount exceeds the unrecognized
prior service cost, therefore accumulated other comprehensive loss has been
recorded as a separate component of Stockholders' Equity.
Advances for Construction Advances for Construction consist of payments received
from developers for installation of water production and distribution facilities
to serve new developments. Advances are excluded from rate base. 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, 1999, the amounts refundable under the 20-year
contracts were $7,664,000 and under 40-year contracts $92,327,000. Estimated
refunds for 2000 for all water main extension contracts are $4,100,000.
Contributions in Aid of Construction Contributions in Aid of Construction
represent payments received from developers, primarily for fire protection
purposes, which are not
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<PAGE>
subject to refunds. Facilities funded by contributions are included in utility
plant, but excluded from rate base. Depreciation related to contributions is
charged to Contributions in Aid of Construction.
Income Taxes The Company accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Measurement of the deferred tax assets and liabilities is at enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
It is anticipated that future rate action by the Commissions will
reflect revenue requirements for the tax effects of temporary differences
recognized, which have previously been flowed through to customers.
The Commissions have granted the Company customer rate increases to reflect the
normalization of the tax benefits of the federal accelerated methods and
available investment tax credits (ITC) for all assets placed in service after
1980. ITC are deferred and amortized over the lives of the related properties
for book purposes. Advances for Construction and Contributions in Aid of
Construction received from developers subsequent to 1986 were taxable for
federal income tax purposes and subsequent to 1991 were subject to California
income tax. In 1996 the federal tax law, and in 1997 the California tax law,
changed and 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 stockholders divided by the weighted average shares
outstanding during the year. The Company has no dilutive securities;
accordingly, diluted EPS is not shown.
Note 3. Acquisitions
The Company acquired all of the outstanding stock of Harbor Water Company and
South Sound Utility Company, which form the operations of Washington Water
Service Company, serving 14,800 regulated and non-regulated customers. The
acquisitions, which were completed in 1999, were accounted for as poolings of
interests in exchange for 316,472 shares of Company stock and assumption of
long-term debt of $2,959,000. The results of operations previously reported by
the separate entities and included in the accompanying financial statements are
not significant.
Note 4. Preferred Stock Page 29
As of December 31, 1999 and 1998, 380,000 shares of preferred stock were
authorized. Dividends on outstanding shares are payable quarterly at a fixed
rate before any dividends can be paid on common stock. Preferred shares are
entitled to sixteen votes, each with the right to cumulative votes at any
election of directors.
The outstanding 139,000 shares of $25 par value cumulative, 4.4% Series
C preferred shares are not convertible to common stock. A premium of $243,250
would be
52
<PAGE>
due upon voluntary liquidation of Series C. There is no premium in the event of
an involuntary liquidation.
Note 5. Common Stockholders' Equity
The Company is authorized to issue 25,000,000 shares of $.01 par value common
stock. As of December 31, 1999 and 1998, 12,935,612 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 stockholders
participate in the plan.
Stockholder Rights Plan In January 1998, the Board of Directors adopted a
Stockholder 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 stockholders
protection and to maximize stockholder 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 stockholder election. The Rights become exercisable upon occurrence of a
Distribution Date. A Distribution Date event occurs if (a) any person
accumulates 15% of the then outstanding Common Stock, (b) any person presents a
tender offer which causes the person's ownership level to exceed 15% and the
Board determines the tender offer not to be fair to the Company's stockholders,
or (c) the Board determines that a stockholder maintaining a 10% interest in the
Common Stock could have an adverse impact on the Company or could attempt to
pressure the Company to repurchase the holder's shares at a premium.
Until the occurrence of a Distribution Date, each Right trades with the
Common Stock and is not separately transferable. When a Distribution Date
occurs: (a) the Company would distribute separate Rights Certificates to Common
Stockholders and the Rights would subsequently trade separate from the Common
Stock; and (b) each holder of a Right, other than the Acquiring Person (whose
Rights 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 the Company merges
into the acquiring person or enters into any transaction that unfairly favors
the acquiring person or disfavors the Company's other stockholders, the Right
becomes a right to purchase Common Stock of the acquiring person having a market
value of two times the Purchase Price.
The Board may determine that in certain circumstances a proposal that
would cause a distribution date is in the Company stockholders' best interest.
Therefore, the Board may, at its option, redeem the Rights at a redemption price
of $.001 per Right.
Note 6. Short-Term Borrowings
As of December 31, 1999, the Company maintained a bank line of credit providing
unsecured borrowings of up to $20,000,000 at the prime lending rate or lower
rates as quoted by the bank. Cal Water maintained a bank line of credit for an
additional $30,000,000 on the same terms as the Company. The line of credit
agreements, which
53
<PAGE>
<TABLE>
expire April 2001, do not require minimum or specific compensating balances. The
following table represents borrowings under these bank lines of credit.
<CAPTION>
Dollars in Thousands
1999 1998 1997
<S> <C> <C> <C> <C> <C>
Maximum short-term borrowings $24,000 $24,000 $14,500
Average amount outstanding 9,084 15,750 5,164
Weighted average interest rate 6.52% 7.09% 7.22%
Interest rate at December 31 7.11% 6.97% 7.29%
Note 7. Long-Term Debt Page 30
As of December 31, 1999 and 1998, long-term debt outstanding was:
In Thousands
1999 1998
First Mortgage Bonds: Series P 7.875% due 2002 $ 2,595 $ 2,610
Series S 8.50% due 2003 2,610 2,625
Series BB 9.48% due 2008 14,940 16,650
Series CC 9.86% due 2020 18,700 18,800
Series DD 8.63% due 2022 19,300 19,400
Series EE 7.90% due 2023 19,400 19,500
Series FF 6.95% due 2023 19,400 19,500
Series GG 6.98% due 2023 19,400 19,500
116,345 118,585
Senior Notes: Series A 7.28% due 2025 20,000 20,000
Series B 6.77% due 2028 20,000 --
Other long-term debt 2,878 2,816
Total long-term debt 159,223 141,401
Less current maturities 2,651 2,643
$156,572 $138,758
</TABLE>
The first mortgage bonds are held by institutional investors and
secured by substantially all of Cal Water's utility plant. The senior notes are
held by institutional investors and are unsecured and require interest-only
payments until maturity. Other long-term debt is primarily equipment financing
arrangements with other financial institutions. Aggregate maturities and sinking
fund requirements for each of the succeeding five years (2000 through 2004) are
$2,651,000, $2,613,000, $5,072,000, $5,265,000, and $2,373,000.
54
<PAGE>
<TABLE>
Note 8. Income Taxes
Income tax expense consists of the following:
<CAPTION>
In Thousands
Federal State Total
<S> <C> <C> <C> <C>
1999 Current $ 7,476 $ 2,351 $ 9,827
Deferred 2,524 (175) 2,349
Total $10,000 $ 2,176 $12,176
1998 Current $ 6,368 $ 2,281 $ 8,649
Deferred 2,515 (356) 2,159
Total $ 8,883 $ 1,925 $10,808
1997 Current $ 9,118 $ 2,894 $12,012
Deferred 2,239 (194) 2,045
Total $11,357 $ 2,700 $14,057
Page 31
Income tax expense computed by applying the current federal tax rate of
35% tax rate to pretax book income differs from the amount shown in the
Consolidated Statement of Income. The difference is reconciled in the table
below:
In Thousands
1999 1998 1997
Computed "expected" tax expense $11,233 $10,410 $13,228
Increase (reduction) in taxes due to:
State income taxes net of federal tax benefit 1,414 1,251 1,755
Investment tax credits (173) (156) (152)
Other (298) (697) (774)
Total income tax $12,176 $10,808 $14,057
The components of deferred income tax expense were:
In Thousands
1999 1998 1997
Depreciation $ 2,629 $ 2,691 $ 2,457
Developer advances and contributions (749) (798) (334)
Bond redemption premiums (62) (62) (62)
Investment tax credits (94) (93) (93)
Other 625 421 77
Total deferred income tax expense $ 2,349 $ 2,159 $ 2,045
The tax effects of differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998
are presented in the following table:
55
<PAGE>
In Thousands
1999 1998
Deferred tax assets:
Developer deposits for extension agreements
and contributions in aid of construction $ 40,595 $42,251
Federal benefit of state tax deductions 6,040 2,524
Book plant cost reduction for future deferred
ITC amortization 1,679 1,727
Insurance loss provisions 821 271
Other 2,856 1,365
Total deferred tax assets 51,991 48,138
Deferred tax liabilities:
Utility plant, principally due to depreciation differences 72,327 74,186
Premium on early retirement of bonds 1,091 1,152
Total deferred tax liabilities 73,418 75,338
Net deferred tax liabilities $(21,427) $(27,200)
</TABLE>
A valuation allowance was not required during 1999 and 1998. Based on
historic taxable income and future taxable income projections over the period in
which the deferred assets are deductible, management believes it is more likely
than not that the Company will realize the benefits of the deductible
differences.
Note 9. Employee Benefit Plans Page 32
Pension Plan The Company provides a qualified defined benefit, non-contributory
pension plan for substantially all employees. The cost of the plan was charged
to expense and utility plant. The Company makes annual contributions to fund the
amounts accrued for pension cost. Plan assets are invested in mutual funds,
pooled equity, bonds and short-term investment accounts. The data below includes
the unfunded, non-qualified, supplemental executive retirement plan.
Savings Plan The Company sponsors a 401(k) qualified, defined contribution
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%. Company contributions were
$1,126,000, $1,078,000, and $1,045,000, for the years 1999, 1998 and 1997.
Other Postretirement Plans The Company provides substantially all active
employees with medical, dental and vision benefits through a self-insured plan.
Employees retiring at or after age 58 with 10 or more years of service are
offered, along with their spouses and dependents, continued participation in the
plan by payment of a premium. Retired employees are also provided with a $5,000
life insurance benefit. Plan assets are invested in a mutual fund, short-term
money market instruments and commercial paper.
The Company records the costs of postretirement benefits during the
employees' years of active service. The Commissions have issued decisions that
authorize rate recovery of tax deductible funding of postretirement benefits and
permit recording of a regulatory asset for the portion of costs that will be
recoverable in future rates.
56
<PAGE>
<TABLE>
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, 1999 and 1998:
<CAPTION>
In Thousands
Pension Benefits Other Benefits
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Change in benefit obligation:
Beginning of year $ 49,934 $ 44,576 $ 9,221 $ 8,230
Service cost 2,339 1,899 456 370
Interest cost 3,149 3,011 646 577
Assumption change (6,669) 2,313 (929) 303
Plan amendment 744 -- -- 1,101
Experience (gain) or loss (2,378) 220 507 (872)
Benefits paid (2,204) (2,085) (368) (488)
End of year $ 44,915 $ 49,934 $ 9,533 $ 9,221
Change in plan assets:
Fair value of plan assets at beginning of year $ 44,946 $ 42,390 $ 1,214 $ 936
Actual return on plan assets 5,110 2,433 136 131
Employer contributions 177 2,208 -- 635
Retiree contributions -- -- 343 357
Benefits paid (2,204) (2,085) (711) (845)
Fair value of plan assets at end of year $ 48,029 $ 44,946 $ 982 $ 1,214
Funded status $ 3,114 $(4,988) $ (8,551) $ (8,007)
Unrecognized actuarial (gain) or loss (12,332) (1,708) 964 1,485
Unrecognized prior service cost 4,828 4,758 959 1,030
Unrecognized transition obligation -- -- 3,228 3,476
Unrecognized net initial asset 572 858 -- --
Net amount recognized $ (3,818) $ (1,080) $ (3,400) $ (2,016)
Page 33
Amounts recognized on the balance sheet consist of:
In Thousands
Pension Benefits Other Benefits
1999 1998 1999 1998
Accrued benefit costs $ (3,818) $ (1,080) $ (3,400) $ (2,016)
Additional minimum liability (1,460) -- -- --
Intangible asset 943 -- -- --
Accumulated other comprehensive loss 517 -- -- --
Net amount recognized $ (3,818) $ (1,080) $ (3,400) $ (2,016)
Pension Benefits Other Benefits
1999 1998 1999 1998
Weighted-average assumptions as
of December 31:
Discount rate 7.50% 6.75% 7.50% 6.75%
57
<PAGE>
Long-term rate of return on plan assets 8.0% 8.0% 8.0% 8.0%
Rate of compensation increases 4.5% 4.5% -- --
</TABLE>
<TABLE>
Net periodic benefit costs for the pension and other postretirement plans for
the years ending December 31, 1999, 1998 and 1997 included the following
components:
<CAPTION>
In Thousands
Pension Plan Other Benefits
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Service cost $2,339 $1,899 $1,545 $ 456 $ 370 $ 280
Interest cost 3,149 3,011 2,805 646 577 549
Expected return on
plan assets (3,542) (3,320) (2,876) (107) (83) (52)
Net amortization and
deferral 969 823 768 389 346 338
Net periodic benefit cost $2,915 $2,413 $2,242 $1,384 $1,210 $1,115
</TABLE>
Postretirement benefit expense recorded in 1999, 1998, and 1997 was
$680,000, $635,000, and $581,000. $3,400,000, 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 1999 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:
In Thousands
1-percentage 1-percentage
Point Increase Point Decrease
Effect on total service and interest costs $250 $(166)
Effect on accumulated postretirement
benefit obligation $1,378 $(1,121)
Page 34
Note 10. Agreement Of Merger With Dominguez Services Corporation
On November 13, 1998, the Boards of Directors of the Company and Dominguez
Services Corporation (Dominguez) agreed to a merger of the two companies.
Dominguez is a utility holding company whose wholly owned subsidiaries provide
water service to about 40,000 accounts in 20 California communities. Dominguez'
1998 operating revenue was $25.3 million, net income was $0.9 million and basic
earnings per share was $0.61. At December 31, 1998, its net utility plant was
$44.8 million and its total assets were $52.6 million.
The merger agreement provides that each outstanding Dominguez common
share will be exchanged on a tax-free basis for Company common shares yielding
an equivalent value of $33.75 per Dominguez share. At December 31, 1999, there
were
58
<PAGE>
1,506,512 shares of Dominguez common stock outstanding. The Company also expects
to assume approximately $12.0 million of Dominguez' long-term debt. The
transaction is expected to be accounted for as a pooling of interests.
The only approval the Company has yet to receive is that of the CPUC.
The CPUC's approval of the merger is expected in March of 2000.
Note 11. Fair Value Of Financial Instruments
For those financial instruments for which it is practicable to estimate a fair
value the following methods and assumptions were used. For cash equivalents, the
carrying amount approximates fair value because of the short-term maturity of
the instruments. The fair value of the Company's long-term debt is estimated at
$175,700,000 as of December 31, 1999, and $153,900,000 as of December 31, 1998,
using a discounted cash flow analysis, based on the current rates available to
the Company for debt of similar maturities. The fair value of advances for
construction contracts is estimated at $31,000,000 as of December 31, 1999, and
$30,000,000 as of December 31, 1998, based on data provided by brokers.
Note 12. Quarterly Financial And Common Stock Market Data (Unaudited)
The Company'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, 1999. Quarterly dividends have been paid on common stock for 220
consecutive quarters and the quarterly rate has been increased each year since
1968.
1999 - in thousands except per share amounts
first second third fourth
Operating revenue $39,853 $52,112 $64,021 $50,454
Net operating income 4,862 8,062 11,051 6,635
Net income 2,621 5,649 8,020 3,629
Basic earnings per share .20 .43 .62 .28
Common stock market price range:
High 31.25 27.63 31.88 32.00
Low 23.38 22.69 25.88 24.13
Dividends paid .27125 .27125 .27125 .27125
1998 - in thousands except per share amounts
first second third fourth
Operating revenue $35,920 $45,275 $63,380 $45,084
Net operating income 4,598 6,660 12,273 7,008
Net income 1,709 3,638 9,662 3,927
Basic earnings per share .13 .28 .74 .30
Common stock market price range:
High 33.75 30.19 27.69 33.13
Low 24.31 21.50 20.75 21.25
Dividends paid .2675 .2675 .2675 .2675
59
<PAGE>
Page 35
Independent Auditors' Report
The Stockholders 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, 1999 and
1998, and the related consolidated statements of income, common stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG (signature)
Mountain View, California
January 21, 2000
60
<PAGE>
Corporate Information Page 36
Stock Transfer, Dividend Disbursing and Reinvestment Agent
The First National Bank of Boston
(Boston EquiServe)
P.O. Box 644
Boston, MA 02102-0644
800.736.3001
To Transfer Stock
A change of ownership of shares (such as when stock is sold or gifted or when
owners are deleted from or added to stock certificates) requires a transfer of
stock. To transfer stock, the owner must complete the assignment on the back of
the certificate and sign it exactly as his or her name appears on the front.
This signature must be guaranteed by an eligible guarantor institution (banks,
stock brokers, savings and loan associations and credit unions with membership
in approved signature medallion programs) pursuant to SEC Rule 17AD-15. A
notary's acknowledgement is not acceptable. This certificate should then be sent
to Boston EquiServe, Stockholder Services, by registered or certified mail with
complete transfer instructions.
Bond Registrar
US Bank Trust, N.A.
One California Street
San Francisco, CA 94111-5402
415.273.4580
Executive Office
California Water Service Group
1720 North First Street
San Jose, CA 95112-4598
408.367.8200
Annual Meeting
The Annual Meeting of Stockholders will be held on Wednesday, April 19, 2000 at
10 a.m. at the Company's Executive Office, located at 1720 North First Street in
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
stockholders on or about March 17, 2000.
Annual Report for1999 on Form 10-K
A copy of the Company's report for 1999 filed with the Securities and Exchange
Commission on Form 10-K will be available in April 2000 and can be obtained by
any stockholder at no charge upon written request to the address below.
Stockholder Information
California Water Service Group
Attn: Stockholder Relations
1720 North First Street
San Jose, CA 95112-4598
61
<PAGE>
408.367.8200 or 800.750.8200
http://www.calwater.com
- -----------------------
62
<PAGE>
Inside Back Cover
Board Of Directors
California Water Service Group, California Water Service Company, CWS Utility
Services (PHOTOGRAPHS: a picture of each director appears above the caption)
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 of the Board of
Directors, Comerica Bank-California
George A. Vera+
Chief Financial Officer,
the David & Lucile Packard Foundation
J.W. Weinhardt+*
Chairman 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
Richard P. Magnuson++
Private Venture Capital Investor
Robert K. Jaedicke+++
Professor Emeritus of Accounting and former
Dean, Stanford Graduate School of Business
Officers
California Water Service Company
Robert W. Foy (1,2,3)
Chairman of the Board
Peter C. Nelson (1,2,3)
President and Chief Executive Officer
63
<PAGE>
Gerald F. Feeney (1,2,3)
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 (1,2,3)
Corporate Secretary
John S. Simpson
Assistant Secretary, Manager of New Business
Washington Water Service Company
Michael P. Ireland
President
+ Member of the Audit Committee
++ Member of the Compensation Committee
o Member of the Executive Committee
o 1 Holds the same position with California Water Service Group
o 2 Holds the same position with CWS Utility Services
o 3 Also an officer of Washington Water Service Company
64
<PAGE>
California Water Service Group (back cover)
1720 North First Street
San Jose, California 95112-4598
408.367.8200
www.calwater.com
Four company logos appear on the back cover:
California Water Service Group
California Water Service Company
CWS Utility Services
Washington Water Service Company
65
Exhibit 4.1
CALIFORNIA WATER SERVICE COMPANY
NOTE AGREEMENT
Dated as of March 1, 1999
Re: $20,000,000 6.77% Series B Senior Notes
Due November 1, 2028
================================================================================
66
<PAGE>
<TABLE>
TABLE OF CONTENTS
(Not a part of the Agreement)
<CAPTION>
SECTION HEADING PAGE
<S> <C> <C>
Parties...........................................................................................................1
SECTION 1. DESCRIPTION OF NOTES AND COMMITMENT....................................................1
Section 1.1. Description of Notes...................................................................1
Section 1.2. Commitment, Closing Date for Series B Notes............................................1
Section 1.3. Several Commitments....................................................................2
Section 1.4. Additional Series of Notes.............................................................2
SECTION 2. PREPAYMENT OF NOTES....................................................................3
Section 2.1. No Required Prepayments................................................................3
Section 2.2. Optional Prepayment with Premium.......................................................3
Section 2.3. Optional Prepayment at Par in the Event of Condemnation................................3
Section 2.4. Notice of Optional Prepayments.........................................................3
Section 2.5. Application of Prepayments.............................................................4
Section 2.6. Direct Payment.........................................................................4
SECTION 3. REPRESENTATIONS........................................................................4
Section 3.1. Representations of the Company.........................................................4
Section 3.2. Representations of the Purchasers......................................................4
SECTION 4. CLOSING CONDITIONS.....................................................................6
Section 4.1. Conditions.............................................................................6
Section 4.2. Waiver of Conditions...................................................................8
Section 4.3. Conditions to Issuance of Additional Notes.............................................8
SECTION 5. COMPANY COVENANTS......................................................................8
Section 5.1. Corporate Existence, Etc...............................................................9
Section 5.2. Insurance..............................................................................9
Section 5.3. Taxes, Claims for Labor and Materials, Compliance with Laws............................9
Section 5.4. Maintenance............................................................................9
Section 5.5. Nature of Business....................................................................10
Section 5.6. Limitations on Current Debt and Funded Debt...........................................10
Section 5.7. Limitation on Liens...................................................................11
Section 5.8. Mergers, Consolidations and Sales of Assets...........................................12
Section 5.9. Guaranties............................................................................14
Section 5.10. Repurchase of Notes...................................................................14
i
<PAGE>
Section 5.11. Transactions with Affiliates..........................................................15
Section 5.13. Reports and Rights of Inspection......................................................15
Section 5.14. Note Exchange Upon Issuance of First Mortgage Bonds...................................18
SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR...............................................19
Section 6.1. Events of Default.....................................................................19
Section 6.2. Notice to Holders.....................................................................20
Section 6.3. Acceleration of Maturities............................................................20
Section 6.4. Rescission of Acceleration............................................................21
SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS......................................................22
Section 7.1. Consent Required......................................................................22
Section 7.2. Solicitation of Holders...............................................................22
Section 7.3. Effect of Amendment or Waiver.........................................................22
Section 7.4. Supplements...........................................................................22
SECTION 8. INTERPRETATION OF AGREEMENT; DEFINITIONS..............................................22
Section 8.1. Definitions...........................................................................22
Section 8.2. Accounting Principles.................................................................31
Section 8.3. Directly or Indirectly................................................................31
SECTION 9. MISCELLANEOUS.........................................................................31
Section 9.1. Registered Notes......................................................................31
Section 9.2. Exchange of Notes.....................................................................32
Section 9.3. Loss, Theft, Etc. of Notes............................................................32
Section 9.4. Expenses, Stamp Tax Indemnity.........................................................32
Section 9.5. Powers and Rights Not Waived; Remedies Cumulative.....................................33
Section 9.6. Notices...............................................................................33
Section 9.7. Successors and Assigns................................................................33
Section 9.8. Survival of Covenants and Representations.............................................33
Section 9.9. Severability..........................................................................33
Section 9.10. Governing Law.........................................................................33
Section 9.11. Captions..............................................................................33
Signature Page...................................................................................................34
</TABLE>
ii
<PAGE>
ATTACHMENTS TO NOTE AGREEMENT:
Schedule I - Information Relating to Purchasers
Schedule II - Liens Securing Funded Debt
Exhibit A - Form of Series B Notes
Exhibit B - Representations and Warranties of the Company
Exhibit C - Form of Opinion of Special Counsel
for the Purchasers
Exhibit D - Form of Opinion of Counsel to the Company
Exhibit E - Form of Supplement to Note Agreement
iii
<PAGE>
CALIFORNIA WATER SERVICE COMPANY
1720 North First Street
San Jose, California 95112
NOTE AGREEMENT
Re: $20,000,000 6.77% Series B Senior Notes
Due November 1, 2028
Dated as of
March 1, 1999
To the Purchasers named on Schedule I
to this Agreement
The undersigned, CALIFORNIA WATER SERVICE COMPANY, a California
corporation (the "Company"), agrees with the Purchasers named on Schedule I to
this Agreement (the "Purchasers") as follows:
SECTION 1. DESCRIPTION OF NOTES AND COMMITMENT.
Section 1.1. Description of Notes. The Company will authorize the issue
and sale of $20,000,000 aggregate principal amount of its 6.77% Series B Senior
Notes (the "Series B Notes") to be dated the date of issue, to bear interest
from such date at the rate of 6.77% per annum, payable semiannually on the first
day of each May and November in each year (commencing May 1, 1999) and at
maturity and to bear interest on overdue principal (including any overdue
required or optional prepayment of principal) and premium, if any, and (to the
extent legally enforceable) on any overdue installment of interest at the rate
of 8.77% per annum after the date due, whether by acceleration or otherwise,
until paid, to be expressed to mature on November 1, 2028, and to be
substantially in the form attached hereto as Exhibit A. Interest on the Series B
Notes shall be computed on the basis of a 360-day year of twelve 30-day months.
The Series B Notes are not subject to prepayment or redemption at the option of
the Company prior to their expressed maturity dates except on the terms and
conditions and in the amounts and with the premium, if any, set forth in ss.2 of
this Agreement. The Series B Notes together with each Series of Additional Notes
which may from time to time be issued pursuant to the provisions of ss.1.4 of
this Agreement are collectively referred to as the "Notes."
Section 1.2. Commitment, Closing Date for Series B Notes. Subject to
the terms and conditions hereof and on the basis of the representations and
warranties hereinafter set forth, the
-1-
<PAGE>
Company agrees to issue and sell to each Purchaser, and such Purchaser agrees to
purchase from the Company, Series B Notes in the principal amount set forth
opposite such Purchaser's name on Schedule I hereto at a price of 100% of the
principal amount thereof on the Closing Date hereinafter mentioned.
Delivery of the Series B Notes will be made at the offices of Chapman
and Cutler, 111 West Monroe Street, Chicago, Illinois 60603-4080, against
payment therefor in Federal Reserve or other funds current and immediately
available at the principal office of Bank of America National Trust and Savings
Association, San Jose Commercial Banking Group #1487, ABA No. 1210-00358, for
credit to the Company's Security Sales Account No. 14879-00161, in the amount of
the purchase price at 10:00 A.M. San Francisco time, on March 23, 1999 or such
later date (not later than March 31, 1999) as shall mutually be agreed upon by
the Company and the Purchasers (the "Closing Date"). The Series B Notes
delivered to each Purchaser on the Closing Date will be delivered to such
Purchaser in the form of a single registered Note in the form attached hereto as
Exhibit A for the full amount of such Purchaser's purchase (unless different
denominations are specified by such Purchaser), registered in such Purchaser's
name or in the name of such Purchaser's nominee, all as such Purchaser may
specify at any time prior to the date fixed for delivery.
Section 1.3. Several Commitments. The obligations of Purchasers shall
be several and not joint and no Purchaser shall be liable or responsible for the
acts or defaults of any other Purchaser. The Purchasers shall have no
obligations under any Supplement and no liability to any Person for the
performance or non-performance by any Additional Purchaser thereunder.
Section 1.4. Additional Series of Notes. The Company may, from time to
time, in its sole discretion but subject to the terms hereof, issue and sell one
or more additional series of its unsecured promissory notes under the provisions
of this Agreement (each series being a "Series") pursuant to a supplement (a
"Supplement") substantially in the form of Exhibit E. Each additional Series of
Notes (the "Additional Notes") issued pursuant to a Supplement shall be subject
to the following terms and conditions:
(i) each Series of Additional Notes, when so issued, shall be
differentiated from all previous series by sequential designation
inscribed thereon;
(ii) each Series of Additional Notes shall be dated the date
of issue, bear interest at such rate, mature on such date, be subject
to such mandatory and optional prepayment on the dates and at the
premiums, if any, have such additional or different conditions
precedent to closing, such representations and warranties and such
additional covenants as shall be specified in the Supplement under
which such Additional Notes are issued, provided, that any such
additional covenants shall inure to the benefit of all holders of Notes
so long as any Additional Notes issued pursuant to such Supplement
remain outstanding;
(iii) each Series of Additional Notes issued under this
Agreement shall be in substantially the form of Exhibit 1 to Exhibit E
hereto with such variations, omissions and insertions as are necessary
or permitted hereunder;
2
<PAGE>
(iv) the minimum principal amount of any Note issued under a
Supplement shall be $100,000, except as may be necessary to evidence
the outstanding amount of any Note originally issued in a denomination
of $100,000 or more which has been paid down to less than $100,000;
(v) all Additional Notes shall constitute Indebtedness of the
Company and shall rank pari passu with all other outstanding Notes; and
(vi) no Additional Notes shall be issued hereunder if at the
time of issuance thereof and after giving effect to the application of
the proceeds thereof, any Default or Event of Default shall have
occurred and be continuing.
SECTION 2. PREPAYMENT OF NOTES.
Section 2.1. Required Prepayments. No prepayments are required to be
made with respect to the Series B Notes prior to the expressed maturity date
thereof other than prepayments made in connection with an acceleration of the
Series B Notes pursuant to the provisions of ss.6.3 hereof. Prepayments required
to be made with respect to any other Series of Notes shall be specified in the
Supplement pursuant to which such Series is issued.
Section 2.2. Optional Prepayment with Premium. Upon compliance with
ss.2.4 the Company shall have the privilege, at any time and from time to time,
of prepaying the outstanding Notes of any Series, either in whole or in part
(but if in part then in a minimum principal amount of $100,000) by payment of
the principal amount of the Notes of such Series, or portion thereof to be
prepaid, and accrued interest thereon to the date of such prepayment, together
with a premium equal to the Make-Whole Amount, determined as of five Business
Days prior to the date of such prepayment pursuant to this ss.2.2.
Section 2.3. Optional Prepayment at Par in the Event of Condemnation.
In the event a Material Condemnation shall have occurred with respect to any
property of the Company or a Restricted Subsidiary, then upon compliance with
ss.2.4 the Company shall have the privilege of applying the proceeds of any
condemnation award received in connection with such Material Condemnation to the
prepayment of the principal amount of the Notes of any Series then outstanding,
or any portion thereof to the extent of such proceeds, together with accrued
interest thereon to the date of such prepayment. Any optional prepayment made
pursuant to this ss.2.3 shall be without premium.
Section 2.4. Notice of Optional Prepayments. The Company will give
notice of any prepayment of the Notes pursuant to ss.2.2 or ss.2.3 to each
Holder of Notes to be prepaid not less than 30 days nor more than 60 days before
the date fixed for such optional prepayment specifying (a) such date, (b) the
Section of this Agreement under which the prepayment is to be made, (c) the
principal amount of the Holder's Notes to be prepaid on such date, (d) whether a
premium may be payable, (e) the date when the premium, if any, will be
calculated, (f) the estimated premium, together with a reasonably detailed
computation of such estimated premium, and (g) the accrued interest applicable
to the prepayment. Such notice of prepayment shall also certify all facts, if
any, which are conditions precedent to any such prepayment. Notice of
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prepayment having been so given, the aggregate principal amount of the Notes to
be prepaid specified in such notice, together with accrued interest thereon and
the premium, if any, payable with respect thereto shall become due and payable
on the prepayment date specified in said notice. Not later than two Business
Days prior to the prepayment date specified in such notice, the Company shall
provide each Holder of a Note to be prepaid written notice of the premium, if
any, payable in connection with such prepayment and, whether or not any premium
is payable, a reasonably detailed computation of the Make-Whole Amount.
Section 2.5. Application of Prepayments. In the case of each partial
prepayment of the Notes pursuant to the provisions of ss.2.2 or 2.3, the
principal amount of the Notes of the Series to be prepaid shall be allocated
among all of the Notes of such Series at the time outstanding in proportion, as
nearly as practicable, to the respective unpaid principal amounts thereof.
Section 2.6. Direct Payment. Notwithstanding anything to the contrary
contained in this Agreement, a Supplement or the Notes, in the case of any Note
owned by any Holder that is a Purchaser, Additional Purchaser or any other
Institutional Holder which has given written notice to the Company requesting
that the provisions of this ss.2.6 shall apply, the Company will punctually pay
when due the principal thereof, interest thereon and premium, if any, due with
respect to said principal, without any presentment thereof, directly to such
Holder at its address set forth herein or such other address as such Holder may
from time to time designate in writing to the Company or, if a bank account with
a United States bank is so designated for such Holder, the Company will make
such payments in immediately available funds to such bank account, marked for
attention as indicated, or in such other manner or to such other account in any
United States bank as such Holder may from time to time direct in writing.
SECTION 3. REPRESENTATIONS.
Section 3.1. Representations of the Company. The Company represents and
warrants that all representations and warranties set forth in Exhibit B are true
and correct as of the date hereof and are incorporated herein by reference with
the same force and effect as though herein set forth in full.
Section 3.2. Representations of the Purchasers. (a) Each Purchaser
represents that such Purchaser is acquiring the Series B Notes for the purpose
of investment and not with a view to the distribution thereof, and that such
Purchaser has no present intention of selling, negotiating or otherwise
disposing of the Series B Notes; it being understood, however, that the
disposition of such Purchaser's property shall at all times be and remain within
its control. Each Purchaser further represents that (i) such Purchaser is an
"Accredited Investor" as defined in Regulation D under the Securities Act of
1933, as amended (the "Act"), (ii) such Purchaser understands that the Series B
Notes will be issued by the Company without registration under the Act and
without qualification and/or registration under applicable state securities laws
pursuant to specific exemptions from registration and/or qualification contained
in the Act and in applicable state securities laws, and that the foregoing
exemptions depend upon, among other things, the bona fide nature of such
Purchaser's investment interests as expressed herein, (iii) such Purchaser has
been advised by counsel concerning, and is otherwise familiar with, the
restrictions imposed by the Act on resales of securities acquired in a
transaction exempt from registration under
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Section 4(2) of the Act, (iv) such Purchaser has been afforded access to the
Company's financial statements and other documents concerning the Company, has
been afforded an opportunity to ask such questions of the Company's officers and
employees as such Purchaser deemed necessary or desirable and has been given all
information requested in order to evaluate the merits and risks of purchasing
the Series B Notes, (v) such Purchaser is experienced in evaluating and
investing in companies such as the Company and has the capacity to protect its
interests in connection with the purchase of the Series B Notes and (vi) such
Purchaser has the ability to bear the economic risks connected with the purchase
of the Series B Notes. Each Purchaser covenants and agrees to conduct any resale
of the Series B Notes solely in accordance with the restrictions contained in
the legend appearing on the Series B Notes.
(b) Each Purchaser represents that at least one of the
following statements is an accurate representation as to each source of funds (a
"Source") to be used by such Purchaser to pay the purchase price of the Series B
Notes to be purchased by such Purchaser hereunder:
(i) if such Purchaser is an insurance company, the Source is
an "insurance company general account" within the meaning of Department
of Labor Prohibited Transaction Exemption 95-60 (issued July 12, 1995)
and there is no "employee benefit plan" (within the meaning of Section
3(3) of ERISA or Section 4975(e)(1) of the Code), treating as a single
plan, all plans maintained by the same employer or employee
organization, with respect to which the amount of the general account
reserves and liabilities for all contracts held by or on behalf of such
plan, exceed ten percent (10%) of the total reserves and liabilities of
such general account (exclusive of separate account liabilities) plus
surplus, as set forth in the NAIC Annual Statement filed with your such
Purchaser's state of domicile; or
(ii) the Source is either (a) an insurance company pooled
separate account, within the meaning of Prohibited Transaction
Exemption ("PTE") 90-1 (issued January 29, 1990), or (b) a bank
collective investment fund, within the meaning of the PTE 91-38 (issued
July 12, 1991) and, except as such Purchaser has disclosed to the
Company in writing pursuant to this paragraph (ii), no employee benefit
plan or group of plans maintained by the same employer or employee
organization beneficially owns more than 10% of all assets allocated to
such pooled separate account or collective investment fund; or
(iii) the Source constitutes assets of an "investment fund"
(within the meaning of Part V of the QPAM Exemption) managed by a
"qualified professional asset manager" or "QPAM" (within the meaning of
Part V of the QPAM Exemption), no employee benefit plan's assets that
are included in such investment fund, when combined with the assets of
all other employee benefit plans established or maintained by the same
employer or by an affiliate (within the meaning of Section V(c)(1) of
the QPAM Exemption) of such employer or by the same employee
organization and managed by such QPAM, exceed 20% of the total client
assets managed by such QPAM, the conditions of Part l(c) and (g) of the
QPAM Exemption are satisfied, neither the QPAM nor a person controlling
or controlled by the QPAM (applying the definition of "control" in
Section V(e) of the QPAM Exemption) owns a 5% or more interest in the
Company
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and (a) the identity of such QPAM and (b) the names of all employee
benefit plans whose assets are included in such investment fund have
been disclosed to the Company in writing pursuant to this paragraph
(iii); or
(iv) the Source is a governmental plan; or
(v) the Source is one or more employee benefit plans, or a
separate account or trust fund comprised of one or more employee
benefit plans, each of which has been identified to the Company in
writing pursuant to this paragraph (v); or
(vi) the Source does not include assets of any employee
benefit plan, other than a plan exempt from the coverage of ERISA.
The Company shall deliver a certificate on the date of the Closing,
with respect to any Purchaser, on the date of the issuance of any Additional
Notes, with respect to any Additional Purchasers and on or prior to the date of
any transfer of any Notes, with respect to any subsequent holder of such Notes,
which certificate shall either state that (A) it is neither a "party in
interest" (as defined in Title I, Section 3(14) of ERISA) nor a "disqualified
person" (as defined in Section 4975(e)(2) of the Code), with respect to any plan
identified pursuant to paragraphs (ii) or (v) above, or (B) with respect to any
plan, identified pursuant to paragraph (iii) above, neither it nor any
"affiliate" (as defined in Section V(c) of the QPAM Exemption) has at this time,
and during the immediately preceding one year has exercised the authority to
appoint or terminate said QPAM as manager of the assets of any plan identified
in writing pursuant to paragraph (iii) above or to negotiate the terms of said
QPAM's management agreement on behalf of any such identified plans.
As used in this ss.3.2, the terms "employee benefit plan",
"governmental plan", "party in interest" and "separate account" shall have the
respective meanings assigned to such terms in Section 3 of ERISA.
SECTION 4. CLOSING CONDITIONS.
Section 4.1. Conditions. (a) The obligation of each Purchaser to
purchase the Series B Notes on the Closing Date shall be subject to the
performance by the Company of its agreements hereunder which by the terms hereof
are to be performed at or prior to the time of delivery of the Series B Notes
and to the following further conditions precedent:
(i) Closing Certificate. Such Purchaser shall have received a
certificate dated the Closing Date, signed by the President or a Vice
President of the Company, the truth and accuracy of which shall be a
condition to such Purchaser's obligation to purchase the Series B Notes
proposed to be sold to such Purchaser and to the effect that (1) the
representations and warranties of the Company set forth in Exhibit B
hereto are true and correct on and with respect to the Closing Date,
(2) the Company has performed all of its obligations hereunder which
are to be performed on or prior to the Closing Date, and (3) no Default
or Event of Default has occurred and is continuing.
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(ii) Legal Opinions. Such Purchaser shall have received from
Chapman and Cutler, special counsel to the Purchasers in this
transaction, and from McCutchen, Doyle, Brown & Enersen LLP, counsel
for the Company, their respective opinions dated the Closing Date, in
form and substance satisfactory to such Purchaser, and covering the
matters set forth in Exhibits C and D, respectively, hereto.
(iii) Regulatory Approval. Prior to the Closing Date, the
issue and sale of the Series B Notes shall have been duly authorized or
approved by appropriate order of the Public Utilities Commission of the
State of California (the "Commission"). Such order shall be final and
in full force and effect and not subject to any appeal, hearing,
rehearing or contest. All conditions contained in any such order which
are to be fulfilled on or prior to the issuance of the Series B Notes
shall have been fulfilled. The Company shall have delivered to the
Purchasers and their special counsel a certified copy of such order and
the application therefor.
(iv) Related Transactions. The Company shall have consummated
the sale of the entire principal amount of the Series B Notes scheduled
to be sold on the Closing Date pursuant to this Agreement.
(v) Satisfactory Proceedings. All proceedings taken in
connection with the transactions contemplated by this Agreement, and
all documents necessary to the consummation thereof, shall be
satisfactory in form and substance to such Purchaser and such
Purchaser's special counsel, and such Purchaser shall have received a
copy (executed or certified as may be appropriate) of all legal
documents or proceedings taken in connection with the consummation of
said transactions.
(vi) Purchase Permitted By Applicable Law. On the date of the
Closing, the purchase of Series B Notes shall (a) be permitted by the
laws and regulations of each jurisdiction to which any Purchaser is
subject, without recourse to provisions (such as Section 1405(a)(8) of
the New York Insurance Law) permitting limited investments by insurance
companies without restriction as to the character of the particular
investment, (b) not violate any applicable law or regulation
(including, without limitation, Regulation U, T or X of the Board of
Governors of the Federal Reserve System) and (c) not subject any
Purchaser to any tax, penalty or liability under or pursuant to any
applicable law or regulation, which law or regulation was not in effect
on the date hereof. If requested by any Purchaser, such Purchaser shall
have received an Officer's Certificate certifying as to such matters of
fact as such Purchaser may reasonably specify to enable such Purchaser
to determine whether such purchase is so permitted.
(vii) Payment of Special Counsel Fees. The Company shall have
paid, on or before the Closing Date, the fees, charges and
disbursements of the Purchasers' special counsel referred to in this
ss.4.1 to the extent reflected in a statement of such counsel rendered
to the Company at least one Business Day prior to the Closing Date.
(viii) Private Placement Number. A Private Placement Number
issued by Standard & Poor's CUSIP Service Bureau (in cooperation with
the Securities Valuation
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Office of the National Association of Insurance Commissioners) shall
have been obtained for the Series B Notes.
(b) The obligation of the Company to deliver the Series B Notes
hereunder is subject to the conditions that (i) the Commission shall have
authorized the issuance and sale by the Company of the Series B Notes at the
price herein provided and said authorization shall be in full force and effect
and (ii) the entire principal amount of the Series B Notes scheduled to be sold
on the Closing Date pursuant to this Agreement shall have been tendered by the
Purchasers. If the condition specified in this ss.4.1(b) shall not have been
fulfilled prior to or on the Closing Date, this Agreement and all the
obligations of the Company hereunder, except as provided in ss.9.4 hereof, may
be cancelled by the Company.
Section 4.2. Waiver of Conditions. If on the Closing Date the Company
fails to tender to any Purchaser the Series B Notes to be issued to any
Purchaser on such date or if the conditions specified in ss.4.1 have not been
fulfilled, such Purchaser may thereupon elect to be relieved of all further
obligations under this Agreement. Without limiting the foregoing, if the
conditions specified in ss.4.1 have not been fulfilled, such Purchaser may waive
compliance by the Company with any such condition to such extent as such
Purchaser may in its sole discretion determine. Nothing in this ss.4.2 shall
operate to relieve the Company of any of its obligations hereunder or to waive
any Purchaser's rights against the Company.
Section 4.3. Conditions to Issuance of Additional Notes. The
obligations of the Additional Purchasers to purchase such Additional Notes shall
be subject to the following conditions precedent, in addition to the conditions
specified in the Supplement pursuant to which such Additional Notes may be
issued:
(a) Compliance Certificate. A duly authorized Senior
Financial Officer shall execute and deliver to each Additional
Purchaser an Officer's Certificate dated the date of issue of such
Series of Additional Notes stating that such officer has reviewed the
provisions of this Agreement (including any Supplements hereto) and
setting forth the information and computations (in sufficient detail)
required in order to establish whether the Company is in compliance
with the requirements of ss.5.6 on such date.
(b) Execution and Delivery of Supplement. The Company and
each such Additional Purchaser shall execute and deliver a Supplement
substantially in the form of Exhibit E hereto.
(c) Representations of Additional Purchasers. Each Additional
Purchaser shall have confirmed in the Supplement that the
representations set forth in ss.3.2(b) are true with respect to such
Additional Purchaser on and as of the date of issue of the Additional
Notes.
SECTION 5. COMPANY COVENANTS.
From and after the Closing Date and continuing so long as any amount
remains unpaid on any Note:
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Section 5.1. Corporate Existence, Etc. The Company will preserve and
keep in full force and effect, and will cause each Subsidiary to preserve and
keep in full force and effect, its corporate existence and all licenses and
permits necessary to the proper conduct of its business, except where the
failure to so keep and preserve any such existence, license or permit would not,
individually or in the aggregate, materially and adversely affect the
properties, business, profits or financial condition of the Company and its
Subsidiaries, taken as a whole; provided, however, that the foregoing shall not
prevent any transaction permitted by ss.5.8.
Section 5.2. Insurance. The Company will maintain, and will cause each
Subsidiary to maintain, insurance coverage by financially sound and reputable
insurers in such forms and amounts (including self-insurance if adequate
reserves are maintained with respect thereto) and against such risks as are
customary for corporations of established reputation engaged in the same or a
similar business and owning and operating similar properties.
Section 5.3. Taxes, Claims for Labor and Materials, Compliance with
Laws. (a) The Company will promptly pay and discharge, and will cause each
Subsidiary promptly to pay and discharge, prior to delinquency, all lawful
taxes, assessments and governmental charges or levies imposed upon the Company
or such Subsidiary, respectively, or upon or in respect of all or any part of
the property or business of the Company or such Subsidiary, all trade accounts
payable, and all claims for work, labor or materials, which if unpaid might
become a Lien upon any property of the Company or such Subsidiary; provided,
however, that the Company or such Subsidiary shall not be required to pay any
such tax, assessment, charge, levy, account payable or claim if (i) the
validity, applicability or amount thereof is being contested in good faith by
appropriate actions or proceedings which will prevent the forfeiture or sale of
any material property of the Company or such Subsidiary or any material
interference with the use thereof by the Company or such Subsidiary, and (ii)
the Company or such Subsidiary shall set aside on its books, reserves deemed by
it to be adequate with respect thereto.
(b) The Company will promptly comply and will cause each Subsidiary to
comply with all laws, ordinances or governmental rules and regulations to which
it is subject including, without limitation, the Occupational Safety and Health
Act of 1970, as amended, ERISA and all laws, ordinances, governmental rules and
regulations relating to environmental protection in all applicable
jurisdictions, the violation of which could materially and adversely affect the
properties, business, profits or financial condition of the Company and its
Subsidiaries, taken as a whole, or would result in any Lien not permitted under
ss.5.7.
Section 5.4. Maintenance. The Company will maintain, preserve and keep,
and will cause each Subsidiary to maintain, preserve and keep, its properties
which are used or useful in the conduct of its business (whether owned in fee or
a leasehold interest) in good repair and working order and from time to time
will make all necessary repairs, replacements, renewals and additions so that at
all times the efficiency thereof shall be maintained, provided that nothing in
thisss.5.4 shall prohibit the Company from abandoning or discontinuing the
maintenance of properties which the Chief Engineer or Assistant Chief Engineer
of the Company determines in good faith to be no longer necessary for the
conduct of the business of the Company and its Subsidiaries, taken as a whole.
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Section 5.5. Nature of Business. Neither the Company nor any Subsidiary
will engage in any business if, as a result, the general nature of the business,
taken on a consolidated basis, which would then be engaged in by the Company and
its Subsidiaries would be substantially changed from the general nature of the
business engaged in by the Company on the Closing Date.
Section 5.6. Limitations on Current Debt and Funded Debt. (a) The
Company will not, and will not permit any Restricted Subsidiary to, create,
assume or incur or in any manner be or become liable in respect of any Current
Debt or Funded Debt, except:
(1) Funded Debt evidenced by the Series B Notes;
(2) Current Debt and Funded Debt of the Company outstanding
as of the date of this Agreement and reflected on Annex A to Exhibit B
hereto;
(3) Additional Funded Debt of the Company, provided that at
the time of issuance thereof and after giving effect thereto and to the
application of the proceeds thereof:
(i) Consolidated Funded Debt shall not exceed
66-2/3% of Consolidated Total Capitalization, and,
(ii) Net Income Available for Interest Charges for
any period of 12 consecutive calendar months during the
immediately preceding 14 consecutive calendar months prior to
the issuance of such Funded Debt shall have been at least
175% of Pro Forma Interest Charges for such 12-month period;
(4) Additional unsecured Current Debt of the Company;
(5) Current Debt or Funded Debt of a Restricted Subsidiary
owed to the Company or to a Wholly-owned Restricted Subsidiary; and
(6) Funded Debt of the Company issued after the Closing Date
evidenced by First Mortgage Bonds, provided that the Company shall have
complied with the requirements of ss.5.14 hereof.
(b) Indebtedness described in or issued or incurred in accordance with
the limitations of ss.5.6(a) (1) through (3) may be renewed, extended or
refunded without regard to ss.5.6(a)(3), provided that the principal amount
thereof remaining unpaid at the time of such renewal, extension or refunding
shall not be increased.
(c) Any corporation which becomes a Restricted Subsidiary after the
date hereof shall for all purposes of this ss.5.6 be deemed to have created,
assumed or incurred at the time it becomes a Restricted Subsidiary all Funded
Debt of such corporation existing immediately after it becomes a Restricted
Subsidiary.
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Section 5.7. Limitation on Liens. The Company will not, and will not
permit any Restricted Subsidiary to, create or incur, or suffer to be incurred
or to exist, any Lien on its or their property or assets, whether now owned or
hereafter acquired, or upon any income or profits therefrom, or transfer any
property for the purpose of subjecting the same to the payment of obligations in
priority to the payment of its or their general creditors, or acquire or agree
to acquire, or permit any Restricted Subsidiary to acquire, any property or
assets upon conditional sales agreements or other title retention devices,
except:
(a) Liens for property taxes and assessments or governmental
charges or levies and Liens securing claims or demands of mechanics and
materialmen, provided that payment thereof is not at the time required
by ss.5.3;
(b) Liens of or resulting from any litigation or legal
proceeding which are currently being contested in good faith by
appropriate proceedings and for which the Company or the relevant
Restricted Subsidiary shall have set aside on its books, reserves
deemed by it to be adequate with respect thereto, unless the judgment
they secure shall not have been stayed, bonded or discharged within 60
days of its entry;
(c) Liens incidental to the conduct of the Company's business
or the ownership of properties and assets (including Liens in
connection with worker's compensation, unemployment insurance and other
like laws, warehousemen's and attorneys' liens and statutory landlords'
liens) and Liens to secure the performance of bids, tenders or trade
contracts, or to secure statutory obligations, surety or appeal bonds
or other Liens of like general nature incurred in the ordinary course
of business and not in connection with the borrowing of money; provided
in each case, the obligation secured is not overdue or, if overdue, is
being contested in good faith by appropriate actions or proceedings;
(d) minor survey exceptions or minor encumbrances, easements,
licenses or reservations, or rights of others for rights-of-way,
utilities and other similar purposes, or zoning or other restrictions
as to the use of real properties, which are necessary for the conduct
of the activities of the Company and its Restricted Subsidiaries or
which customarily exist on properties of corporations engaged in
similar activities and similarly situated and which do not in any event
materially impair their use in the operation of the business of the
Company and its Restricted Subsidiaries;
(e) Liens securing Indebtedness of a Restricted Subsidiary to
the Company or to another Restricted Subsidiary;
(f) Leases on property owned by the Company or a Restricted
Subsidiary wherein the Company or such Restricted Subsidiary is the
lessor thereunder, provided that (i) the Rentals payable under any
lease are for fair rental value and otherwise contain appropriate
provisions to protect and preserve the Company's or such Restricted
Subsidiary's interest in such property and (ii) any such lease will not
interfere with the ordinary course of business of the Company or such
Restricted Subsidiary;
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(g) Liens existing as of the Closing Date and reflected in
Schedule II hereto;
(h) Liens created or incurred after the Closing Date given
pursuant to pollution control, industrial revenue or other similar tax
exempt financings of the Company to secure the payment of the purchase
price incurred in connection with the acquisition of fixed assets
useful and intended to be used in carrying on the business of the
Company or its Restricted Subsidiaries, provided that (i) the Liens
shall attach solely to the fixed assets acquired or purchased, (ii) at
the time of acquisition of such fixed assets, the Indebtedness secured
by Liens thereon shall not exceed the total purchase price of such
fixed assets, (iii) such Indebtedness shall have been incurred within
the applicable limitations provided in ss.5.6(a), and (iv) the
aggregate principal amount of all Indebtedness secured by Liens
described in this clause (h) shall not at any time exceed an amount
equal to 10% of Consolidated Total Assets;
(i) Liens created or incurred after the Closing Date given to
secure Indebtedness of the Company and its Restricted Subsidiaries in
addition to the Liens permitted by the preceding clauses (a) through
(h) hereof, provided that all Indebtedness secured by such Liens shall
have been incurred within the limitations provided in ss.5.6(a)(6);
(j) Liens created or incurred after the Closing Date in
addition to the Liens permitted by the preceding clauses (a) through
(i) hereof, provided that (i) the aggregate principal amount of all
Indebtedness secured by such Liens shall not at any time exceed an
amount equal to 10% of Consolidated Total Capitalization and (ii) all
such Indebtedness shall have been incurred within the applicable
limitations provided in ss.5.6; and
(k) any extension, renewal or refunding of any Lien permitted
by the preceding clauses (a) through (i) hereof in respect of the same
property theretofore subject to such Lien in connection with the
extension, renewal or refunding of the Indebtedness secured thereby;
provided that (i) such extension, renewal or refunding of Indebtedness
shall be without increase in the principal amount remaining unpaid as
of the date of such extension, renewal or refunding, and (ii) such Lien
shall attach solely to the same such property.
Section 5.8. Mergers, Consolidations and Sales of Assets. (a) The
Company will not, and will not permit any Restricted Subsidiary to, (i)
consolidate with or be a party to a merger with any other corporation or (ii)
sell, lease or otherwise dispose of all or any substantial part (as defined in
paragraph (d) of this ss.5.8) of the assets of the Company and its Restricted
Subsidiaries (other than sales in the ordinary course of business or sales of
properties sold pursuant to any Condemnation); provided, however, that:
(1) any Restricted Subsidiary may merge or consolidate with
or into the Company or any Wholly-owned Restricted Subsidiary so long
as in any merger or consolidation involving the Company, the Company
shall be the surviving or continuing corporation;
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(2) the Company may consolidate or merge with or into, and
may sell all or substantially all of its assets in a single transaction
to, any other corporation if (i) the corporation which results from
such consolidation, merger or sale (the "surviving entity") is
organized under the laws of any state of the United States or the
District of Columbia, (ii) the due and punctual payment of the
principal of and premium, if any, and interest on all of the Notes,
according to their tenor, and the due and punctual performance and
observation of all of the covenants in the Notes and this Agreement to
be performed or observed by the Company are expressly assumed in
writing by the surviving entity and the surviving entity shall furnish
to the holders of the Notes an opinion of counsel reasonably
satisfactory to such holders to the effect that the instrument of
assumption has been duly authorized, executed and delivered and
constitutes the legal, valid and binding contract and agreement of the
surviving entity enforceable in accordance with its terms, except as
enforcement of such terms may be limited by bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting the enforcement
of creditors' rights generally and by general equitable principles, and
(iii) at the time of such consolidation, merger or sale and immediately
after giving effect thereto, (A) no Default or Event of Default would
exist and (B) the surviving entity would be permitted by the provisions
of ss.5.6(a)(3) to incur at least $1.00 of additional Funded Debt;
(3) any Restricted Subsidiary may sell, lease or otherwise
dispose of all or any substantial part of its assets to the Company or
any Wholly-owned Restricted Subsidiary.
(b) The Company will not permit any Restricted Subsidiary to issue any
shares of stock of any class (including as "stock" for the purposes of this
ss.5.8, any warrants, rights or options to purchase or otherwise acquire stock
or other Securities exchangeable for or convertible into stock) of such
Restricted Subsidiary to any Person other than the Company or a Restricted
Subsidiary, unless immediately after the consummation of such transaction and
after giving effect thereto, such Restricted Subsidiary shall remain a
Restricted Subsidiary of the Company.
(c) The Company will not sell, transfer or otherwise dispose of any
shares of stock of any Restricted Subsidiary or any Indebtedness of any
Restricted Subsidiary, and will not permit any Restricted Subsidiary to sell,
transfer or otherwise dispose of (except to the Company or a Restricted
Subsidiary) any shares of stock or any Indebtedness of any other Restricted
Subsidiary, unless:
(1) the Board of Directors of the Company shall have
determined, as evidenced by a resolution thereof, that the proposed
sale, transfer or disposition of said shares of stock and Indebtedness
is in the best interests of the Company;
(2) said shares of stock and Indebtedness are sold,
transferred or otherwise disposed of to a Person, for cash or other
property and on terms reasonably deemed by the Board of Directors to be
adequate and satisfactory;
(3) in the case of the sale, transfer, or disposition of all
shares of stock and Indebtedness of a Restricted Subsidiary, such
Restricted Subsidiary shall not have any
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continuing investment in the Company or any other Restricted Subsidiary
not being simultaneously disposed of;
(4) in the case of the sale, transfer, or disposition of less
than all of the shares of stock of a Restricted Subsidiary, immediately
after the consummation of the transaction and after giving effect
thereto, such Restricted Subsidiary shall remain a Restricted
Subsidiary of the Company; and
(5) such sale or other disposition does not involve a
substantial part (as hereinafter defined) of the consolidated assets of
the Company and its Restricted Subsidiaries.
(d) As used in this ss.5.8, a sale, lease or other disposition of
assets shall be deemed to be a "substantial part" of the assets of the Company
and its Restricted Subsidiaries if the book value of such assets, when added to
the book value of all other assets sold, leased or otherwise disposed of by the
Company and its Restricted Subsidiaries (other than in the ordinary course of
business including without limitation property sold pursuant to any
Condemnation) during the immediately preceding 12 months, exceeds 10% of
Consolidated Total Assets, determined as of the end of the immediately preceding
fiscal year, provided, however, that for purposes of the foregoing calculation,
there shall not be included the book value attributable to assets the proceeds
from the disposition of which were or are applied within 180 days of the date of
sale of such assets to either (1) the acquisition of assets useful and intended
to be used in the operation of the business of the Company and its Restricted
Subsidiaries as described in ss.5.5 and having a fair market value (as
determined in good faith by the Board of Directors of the Company) at least
equal to the assets so disposed of, or (2) the prepayment at any applicable
prepayment premium, on a pro rata basis, of Funded Debt of the Company, provided
that in the event the assets which are the subject of any such sale or
disposition are subject to the Lien of the Mortgage Indenture, such proceeds
shall be applied first to the prepayment of the First Mortgage Bonds as and to
the extent required by the terms of the Mortgage Indenture. It is understood and
agreed by the Company that any such proceeds paid and applied to the prepayment
of the Notes as hereinabove provided shall be prepaid as and to the extent
provided in ss.2.2.
Section 5.9. Guaranties. The Company will not, and will not permit any
Restricted Subsidiary to, become or be liable in respect of any Guaranty except
Guaranties by the Company which are limited in amount to a stated maximum dollar
exposure or which constitute Guaranties of obligations incurred by any
Restricted Subsidiary and otherwise permitted by the provisions of this
Agreement.
Section 5.10. Repurchase of Notes. Neither the Company nor any
Restricted Subsidiary or Affiliate, directly or indirectly, may repurchase or
make any offer to repurchase any Notes unless an offer has been made to
repurchase Notes, pro rata, from all Holders at the same time and upon the same
terms. In case the Company repurchases or otherwise acquires any Notes, such
Notes shall immediately thereafter be canceled and no Notes shall be issued in
substitution therefor. Without limiting the foregoing, upon the repurchase or
other acquisition of any Notes by the Company, any Restricted Subsidiary or any
Affiliate (or upon the agreement of Company, any Restricted Subsidiary or any
Affiliate to purchase or otherwise acquire any Notes), such Notes
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shall no longer be outstanding for purposes of any section of this Agreement
relating to the taking by the Holders of any actions with respect hereto,
including, without limitation, ss.6.3, ss.6.4 and ss.7.1.
Section 5.11. Transactions with Affiliates. Except for water quality
testing and analysis services performed for San Jose Water Company, the Company
will not, and will not permit any Restricted Subsidiary to, enter into or be a
party to any transaction or arrangement with any Affiliate (including, without
limitation, the purchase from, sale to or exchange of property with, or the
rendering of any service by or for, any Affiliate), except in the ordinary
course of and pursuant to the reasonable requirements of the Company's or such
Restricted Subsidiary's business and upon fair and reasonable terms no less
favorable to the Company or such Restricted Subsidiary than would obtain in a
comparable arm's-length transaction with a Person other than an Affiliate.
Section 5.12. Withdrawal from Multiemployer Plans and Termination of
Pension Plans. The Company will not, and will not permit any Subsidiary to,
withdraw from any Multiemployer Plan if such withdrawal could result in
withdrawal liability (as described in Part I of Subtitle E of Title IV of
ERISA). The Company will not and will not permit any Subsidiary to terminate any
Plan if such termination could result in the imposition of a Lien on any
property of the Company or any Subsidiary pursuant to Section 4068 of ERISA.
Section 5.13. Reports and Rights of Inspection. The Company will keep,
and will cause each Restricted Subsidiary to keep, proper books of record and
account in which full and correct entries will be made of all dealings or
transactions of, or in relation to, the business and affairs of the Company or
such Restricted Subsidiary, in accordance with GAAP consistently applied (except
for changes disclosed in the financial statements furnished to the Holders
pursuant to this ss.5.13 and concurred in by the independent public accountants
referred to in ss.5.13(b) hereof), and will furnish to each Institutional Holder
(in duplicate if so specified below or otherwise requested):
(a) Company Quarterly Statements. As soon as available and in
any event within 60 days after the end of each quarterly fiscal period
(except the last) of each fiscal year, copies of:
(1) a consolidated balance sheet of the Company and
its Restricted Subsidiaries as of the close of such quarterly
fiscal period, setting forth in comparative form the
consolidated figures for the fiscal year then most recently
ended,
(2) a consolidated statement of income of the
Company and its Restricted Subsidiaries for such quarterly
fiscal period and for the portion of the fiscal year ending
with such quarterly fiscal period, in each case setting forth
in comparative form the consolidated figures for the
corresponding periods of the preceding fiscal year, and
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(3) a consolidated statement of cash flows of the
Company and its Restricted Subsidiaries for the portion of the
fiscal year ending with such quarterly fiscal period, setting
forth in comparative form the consolidated figures for the
corresponding period of the preceding fiscal year,
all in reasonable detail and certified as complete and correct by an
authorized financial officer of the Company;
(b) Company Annual Statements. As soon as available and in
any event within 90 days after the close of each fiscal year of the
Company, copies of:
(1) a consolidated balance sheet of the Company and
its Restricted Subsidiaries as of the close of such fiscal
year, and
(2) consolidated statements of income, common
shareholders' equity and cash flows of the Company and its
Restricted Subsidiaries for such fiscal year,
in each case setting forth in comparative form the consolidated figures
for the preceding fiscal year, all in reasonable detail and accompanied
by a report thereon of a firm of independent public accountants of
recognized national standing selected by the Company to the effect that
the consolidated financial statements present fairly, in all material
respects, the consolidated financial position of the Company and its
Restricted Subsidiaries as of the end of the fiscal year being reported
on and the consolidated results of the operations and cash flows for
said year in conformity with GAAP and that the examination of such
accountants in connection with such financial statements has been
conducted in accordance with generally accepted auditing standards and
included such tests of the accounting records and such other auditing
procedures as said accountants deemed necessary in the circumstances;
(c) CWSG Quarterly Statements. As soon as available but in
any event within ninety (90) days after the end of each of the first
three quarterly fiscal periods in each year of CWSG, a balance sheet of
CWSG at the end of such period, and a statement of earnings and
retained earnings of CWSG for such period and for the portion of the
fiscal year ending with such period, together with a statement of cash
flows for the portion of the fiscal year ending with such period, in
each case setting forth in comparative form figures for the
corresponding period of the previous year, all in reasonable detail and
certified, subject to changes resulting from year-end and audit
adjustments, by an authorized financial officer of CWSG, it being
understood that this requirement may be satisfied by delivering a copy
of CWSG's Quarterly Report to the SEC on Form 10-Q for such fiscal
quarter (or such successor form as may be prescribed by the SEC);
(d) CWSG Annual Statements. As soon as available but in any
event within one hundred twenty (120) days after the end of the fiscal
year of CWSG, a balance sheet of CWSG as at the end of such year, and a
consolidated statement of earnings and retained earnings and cash flows
of CWSG, in each case setting forth in comparative
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form the figures for the previous fiscal year, all in reasonable detail
and accompanied by a report thereon of independent public accountants
of recognized national standing selected by CWSG to the effect that
such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a basis consistent
with the prior fiscal year (except for such changes, if any, as may be
specified in such opinion) and fairly present, in all material
respects, the financial position of CWSG as of the end of such year and
the results of operations for such year, and that the examination by
such accountants in connection with such financial statements has been
made in accordance with generally accepted auditing standards, it being
understood that this requirement may be satisfied by delivering a copy
of CWSG's Annual Report to the SEC on Form 10-K for such fiscal year
(or such successor form as may be prescribed by the SEC);
(e) Audit Reports. Promptly upon receipt thereof, one copy of
each report submitted by independent public accountants selected by the
Company of interim examinations, if any, by such accountants of the
financial statements of the Company or any Restricted Subsidiary, and
one copy of any report as to material inadequacies in accounting
controls (including reports as to the absence of any such inadequacies)
submitted by such accountants in connection with any audit of the
Company or any Restricted Subsidiary;
(f) SEC and Other Reports. Promptly upon their becoming
available, one copy of each financial statement, report, notice or
proxy statement sent by the Company to stockholders generally and,
within 15 Business Days of their filing with the SEC, copies of each
regular or periodic report, and any registration statement or
prospectus so filed by the Company, CWSG or any Subsidiary;
(g) ERISA Reports. Promptly upon the occurrence thereof,
written notice of (i) a Reportable Event with respect to any Plan; (ii)
the institution of any steps by the Company, any ERISA Affiliate, the
PBGC or any other person to terminate any Plan; (iii) the institution
of any steps by the Company or any ERISA Affiliate to withdraw from any
Plan; (iv) a non-exempt "prohibited transaction" within the meaning of
Section 406 of ERISA in connection with any Plan; (v) any material
increase in the contingent liability of the Company or any Restricted
Subsidiary with respect to any post-retirement welfare liability; or
(vi) the taking of any action by, or the threatening of the taking of
any action by, the Internal Revenue Service, the Department of Labor or
the PBGC with respect to any of the foregoing;
(h) Officer's Certificates. Within the periods provided in
paragraphs (a) and (b) above, a certificate of an authorized financial
officer of the Company stating that such officer has reviewed the
provisions of this Agreement and setting forth: (i) the information and
computations (in sufficient detail) required in order to establish
whether the Company was in compliance with the requirements of ss.5.6
through ss.5.12 at the end of the period covered by the financial
statements then being furnished, and (ii) whether there existed as of
the date of such financial statements and whether, to the best of such
officer's knowledge, there exists on the date of the certificate or
existed at any time
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during the period covered by such financial statements any Default or
Event of Default and, if any such condition or event exists on the date
of the certificate, specifying the nature and period of existence
thereof and the action the Company is taking and proposes to take with
respect thereto;
(i) Accountant's Certificates. Within the period provided in
paragraph (b) above, a certificate of the accountants who render an
opinion with respect to such financial statements, stating that they
have reviewed this Agreement and stating further whether, in making
their audit, such accountants have become aware of any Default or Event
of Default under any of the terms or provisions of this Agreement
insofar as any such terms or provisions pertain to or involve
accounting matters or determinations, and if any such condition or
event then exists, specifying the nature and period of existence
thereof;
(j) Supplements. Promptly and in any event within 10 Business
Days after the execution and delivery of any Supplement, a copy
thereof; and
(k) Requested Information. With reasonable promptness, such
other data and information as such Institutional Holder may reasonably
request.
Without limiting the foregoing, the Company will permit each
Institutional Holder (or such Persons as such Institutional Holder may
designate), to visit and inspect, under the Company's guidance, any of the
properties of the Company or any Restricted Subsidiary, to examine all of their
books of account, records, reports and other papers, and to discuss their
respective affairs, finances and accounts with their respective officers,
employees, and independent public accountants (and by this provision the Company
authorizes said accountants to discuss with any Institutional Holder the
finances and affairs of the Company and its Restricted Subsidiaries) all at such
reasonable times, with reasonable prior notice, and as often as may be
reasonably requested. The Company shall not be required to pay or reimburse any
Holder for expenses which such Holder may incur in connection with any such
visitation or inspection, except that if such visitation or inspection is made
during any period when a Default or an Event of Default shall have occurred and
be continuing, the Company agrees to reimburse such Holder for all such expenses
promptly upon demand.
Section 5.14. Note Exchange Upon Issuance of First Mortgage Bonds. (a)
In the event that the Company shall issue additional First Mortgage Bonds under
and pursuant to the Mortgage Indenture, then the Company shall, concurrently
with the issuance of such additional First Mortgage Bonds, exchange all of the
outstanding Notes of each Series for First Mortgage Bonds of a new series (the
"Exchange Bonds"). The Exchange Bonds of each new series shall be issued under
and secured by the Mortgage Indenture, shall rank pari passu with all other
First Mortgage Bonds issued and outstanding under the Mortgage Indenture, shall
have payment and maturity terms identical to the Series of Notes for which they
were exchanged, shall have required and optional prepayment provisions and
provisions relating to amounts payable upon acceleration of maturity identical
to those applicable to the Series of Notes for which they were exchanged and
shall otherwise be in the form required by the Mortgage Indenture.
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(b) The Company covenants and agrees to take all actions necessary for
the due authorization, execution and delivery of such Exchange Bonds including,
without limitation, (i) the filing of applications with the Commission in order
to obtain the requisite approvals, authorizations and orders necessary for the
issuance of the Exchange Bonds, (ii) compliance with all requirements of the
Mortgage Indenture, (iii) the taking of all other actions the holders of the
Notes may reasonable request in connection with the delivery of the Exchange
Bonds, including the delivery of legal opinions and an exchange agreement
between the Company and the Holders in form and substance reasonably
satisfactory to the Holders of 66-2/3% of the Notes of each Series then
outstanding.
SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR.
Section 6.1. Events of Default. Any one or more of the following shall
constitute an "Event of Default" as such term is used herein:
(a) Default shall occur in the payment of interest on any
Note when the same shall have become due and such default shall
continue for more than five Business Days; or
(b) Default shall occur in the payment of the principal of
any Note or premium, if any, thereon at the expressed or any
accelerated maturity date or at any date fixed for prepayment; or
(c) Default shall be made in the payment when due (whether by
lapse of time, by declaration, by call for redemption or otherwise) of
the principal of or interest on any Funded Debt or Current Debt (other
than the Notes) of the Company or any Restricted Subsidiary aggregating
in excess of $5,000,000 in principal amount outstanding and such
default shall continue beyond the period of grace, if any, allowed with
respect thereto; or
(d) Default or the happening of any event shall occur under
any indenture (including, without limitation, the Mortgage Indenture),
agreement or other instrument under which any Funded Debt or Current
Debt (other than the Notes) of the Company or any Restricted Subsidiary
aggregating in excess of $5,000,000 in principal amount outstanding may
be issued and such default or event shall continue for a period of time
sufficient to permit the acceleration of the maturity of any Funded
Debt or Current Debt of the Company or any Restricted Subsidiary
outstanding thereunder; or
(e) Default shall occur in the observance or performance of
any covenant or agreement contained inss.5.5 throughss.5.8,ss.5.11
orss.5.14; or
(f) Default shall occur in the performance of or compliance
with any other provision contained herein or in any Supplement (other
than those referred to in paragraphs (a) and (b) of this ss.6.1) and
such default is not remedied within 30 days after the earlier of (i) a
Responsible Officer obtaining actual knowledge of such default and (ii)
the Company receiving written notice of such default from any Holder
(any such
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written notice to be identified as a "notice of default" and to refer
specifically to this paragraph (f) of ss.6.1); or
(g) Any representation or warranty made by the Company herein
or in any Supplement, or made by the Company in any statement or
certificate furnished by the Company in connection with the
consummation of the issuance and delivery of the Notes or furnished by
the Company pursuant hereto, is untrue in any material respect as of
the date of the issuance or making thereof; or
(h) Final judgment or judgments for the payment of money
aggregating in excess of $5,000,000 (net of (i) insurance proceeds to
the extent the insurer has acknowledged liability with respect thereto
or which insurer's liability is being contested in good faith by
appropriate proceedings by the Company or the relevant Restricted
Subsidiary and (ii) reserves established by the Company or the relevant
Restricted Subsidiary on its books with respect to such judgment) is or
are outstanding against the Company or any Restricted Subsidiary or
against any property or assets of either and any one of such judgments
has remained unpaid, unvacated, unbonded or unstayed by appeal or
otherwise for a period of 45 days from the date of its entry; or
(i) A custodian, liquidator, trustee or receiver is appointed
for the Company or any Material Restricted Subsidiary or for the major
part of the property of either and is not discharged within 60 days
after such appointment; or
(j) The Company or any Material Restricted Subsidiary becomes
insolvent or bankrupt, is generally not paying its debts as they become
due or makes an assignment for the benefit of creditors, or the Company
or any Material Restricted Subsidiary applies for or consents to the
appointment of a custodian, liquidator, trustee or receiver for the
Company or such Material Restricted Subsidiary or for the major part of
the property of either; or
(k) Bankruptcy, reorganization, arrangement or insolvency
proceedings, or other proceedings for relief under any bankruptcy or
similar law or laws for the relief of debtors, are instituted by or
against the Company or any Material Restricted Subsidiary and, if
instituted against the Company or any Material Restricted Subsidiary,
are consented to or are not dismissed within 60 days after such
institution.
Section 6.2. Notice to Holders. When any Event of Default described in
the foregoing ss.6.1 has occurred, or if any Holder or the holder of any other
evidence of Funded Debt or Current Debt of the Company gives any notice or takes
any other action with respect to a claimed default, the Company agrees to give
notice within three Business Days of such event to all Holders.
Section 6.3. Acceleration of Maturities. (a) If an Event of Default
with respect to the Company described in paragraph (i), (j) or (k) ofss.6.1 has
occurred, all the Notes of every Series then outstanding shall automatically
become immediately due and payable.
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(b) If any other Event of Default has occurred and is continuing, any
holder or holders of more than 50% in aggregate principal amount of the Notes at
the time outstanding of each Series may at any time at its or their option, by
notice or notices to the Company, declare all the Notes then outstanding of such
Series to be immediately due and payable.
(c) If any Event of Default described in paragraph (a) or (b) of ss.6.1
has occurred and is continuing any holder or holders of Notes at the time
outstanding affected by such Event of Default may at any time, at its or their
option, by notice or notices to the Company, declare all the Notes held by it or
them to be immediately due and payable.
Upon any Note becoming due and payable under this ss.6.3, whether
automatically or by declaration, such Note will forthwith mature and the entire
unpaid principal amount of such Note, plus (x) all accrued and unpaid interest
thereon and (y) the Make-Whole Amount determined in respect of such principal
amount (to the full extent permitted by applicable law), shall all be
immediately due and payable, in each and every case without presentment, demand,
protest or further notice, all of which are hereby waived. The Company
acknowledges, and the parties hereto agree, that each holder of a Note has the
right to maintain its investment in the Notes free from repayment by the Company
(except as herein specifically provided for), and that the provision for payment
of a Make-Whole Amount by the Company in the event that the Notes are prepaid or
are accelerated as a result of an Event of Default, is intended to provide
compensation for the deprivation of such right under such circumstances.
No course of dealing on the part of the Holder or Holders nor any delay
or failure on the part of any Holder to exercise any right shall operate as a
waiver of such right or otherwise prejudice such Holder's rights, powers and
remedies. The Company further agrees, to the extent permitted by law, to pay to
the Holder or Holders all reasonable costs and expenses incurred by them in the
collection of any Notes upon any default hereunder or thereon, including
reasonable compensation to such Holder's or Holders' attorneys for all services
rendered in connection therewith.
Section 6.4. Rescission of Acceleration. At any time after any Notes of
any Series have been declared due and payable pursuant to clause (b) or (c) of
ss.6.3, the holders of more than 50% in aggregate principal amount of the Notes
then outstanding of such Series, by written notice to the Company, may rescind
and annul any such declaration and its consequences if (a) the Company has paid
all overdue interest on the Notes of such Series, all principal of and
Make-Whole Amount, if any, on any Notes of such Series that are due and payable
and are unpaid other than by reason of such declaration, and all interest on
such overdue principal and Make-Whole Amount, if any, and (to the extent
permitted by applicable law) any overdue interest in respect of the Notes of
such Series, (b) all Events of Default and Defaults, other than non-payment of
amounts that have become due solely by reason of such declaration, have been
cured or have been waived pursuant to ss.7, and (c) no judgment or decree has
been entered for the payment of any monies due pursuant hereto or to any Note of
such Series. No rescission and annulment under this ss.6.4 will extend to or
affect any subsequent Event of Default or Default or impair any right consequent
thereon.
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SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS.
Section 7.1. Consent Required. Any term, covenant, agreement or
condition of this Agreement or any Supplement may, with the consent of the
Company, be amended or compliance therewith may be waived (either generally or
in a particular instance and either retroactively or prospectively), if the
Company shall have obtained the consent in writing of the Holders holding more
than 50% in aggregate principal amount of outstanding Notes of each Series;
provided, however, that no such amendment or waiver shall be effective as to the
Notes of a Series without the unanimous written consent of the Holders of all
Notes of such Series (i) which will change the time of payment (including any
modifications regarding required prepayments as provided in ss.2.1 or a
Supplement) of the principal of or the interest on any Note of such Series or
change the principal amount thereof or change the rate of interest thereon, or
(ii) which will change any of the provisions with respect to optional
prepayments of any Note of such Series, or (iii) which will change the
percentage of Holders of Notes of such Series required to consent to any such
amendment or waiver of any of the provisions of ss.6 or this ss.7.
Section 7.2. Solicitation of Holders. So long as there are any Notes
outstanding, the Company will not solicit, request or negotiate for or with
respect to any proposed waiver or amendment of any of the provisions of this
Agreement or the Notes of a Series unless each Holder of the Notes of such
Series (irrespective of the amount of Notes then owned by it) shall be informed
thereof by the Company and shall be afforded the opportunity of considering the
same and shall be supplied by the Company with sufficient information to enable
it to make an informed decision with respect thereto. The Company will not,
directly or indirectly, pay or cause to be paid any remuneration, whether by way
of supplemental or additional interest, fee or otherwise, to any Holder of a
Series as consideration for or as an inducement to entering into by any Holder
of any waiver or amendment of any of the terms and provisions of this Agreement,
a Supplement or the Notes of such Series unless such remuneration is
concurrently offered, on the same terms, ratably to all Holders of such Series.
Section 7.3. Effect of Amendment or Waiver. Any such amendment or
waiver shall apply equally to all of the Holders of the Notes of the Series to
which the amendment or waiver applies and shall be binding upon them, upon each
future Holder of the Notes of such Series and upon the Company, whether or not
any Note of such Series shall have been marked to indicate such amendment or
waiver. No such amendment or waiver shall extend to or affect any obligation not
expressly amended or waived or impair any right consequent thereon.
Section 7.4. Supplements. Notwithstanding anything to the contrary
contained herein, the Company may enter into any Supplement providing for the
issuance of one or more Series of Additional Notes consistent with ss.1.4
andss.4.3 without obtaining the consent of any holder of any other Series of
Notes.
SECTION 8. INTERPRETATION OF AGREEMENT; DEFINITIONS.
Section 8.1. Definitions. Unless the context otherwise requires, the
terms hereinafter set forth when used herein shall have the following meanings
and the following definitions shall be equally applicable to both the singular
and plural forms of any of the terms herein defined:
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"Additional Notes" shall have the meaning set forth in ss.1.4.
"Additional Purchasers" shall mean purchasers of Additional Notes.
"Affiliate" shall mean any Person (other than a Restricted Subsidiary)
(i) which directly or indirectly through one or more intermediaries controls, or
is controlled by, or is under common control with, the Company, (ii) which
beneficially owns or holds 5% or more of any class of the Voting Stock of the
Company or (iii) 5% or more of the Voting Stock (or in the case of a Person
which is not a corporation, 5% or more of the equity interest) of which is
beneficially owned or held by the Company or a Subsidiary. The term "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, whether through the
ownership of Voting Stock, by contract or otherwise.
"Agreement" shall mean this Note Agreement.
"Business Day" shall mean any day other than a Saturday, Sunday or
other day on which banks in San Francisco, California or Chicago, Illinois are
required by law to close or are customarily closed.
"CWSG" shall mean California Water Service Group, which is the parent
of the Company.
"Capitalized Lease" shall mean any lease the obligation for Rentals
with respect to which is required to be capitalized on a consolidated balance
sheet of the lessee and its subsidiaries in accordance with GAAP.
"Capitalized Rentals" of any Person shall mean as of the date of any
determination thereof the amount at which the aggregate Rentals due and to
become due under all Capitalized Leases under which such Person is a lessee
would be reflected as a liability on a consolidated balance sheet of such
Person.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall mean California Water Service Company, a California
corporation, and any Person who succeeds to all, or substantially all, of the
assets and business of California Water Service Company.
"Company Information" shall mean financial statements and other
information concerning the Company delivered to any Purchaser or Additional
Purchaser by or on behalf of the Company in connection with its purchase of any
Notes.
"Commission" shall have the meaning set forth in ss.4.1(a)(iii).
"Condemnation" with respect to any property shall have occurred if all
or any portion of such property shall have been condemned or taken for any
public or quasi-public use under any governmental law, order, or regulation or
by right of eminent domain or sold to a municipality or
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other public body or agency or any other entity having the power of eminent
domain or the right to purchase or order the sale of such property (a
"Condemning Authority"), or any third-party designated by any such Condemning
Authority, under threat of condemnation.
"Consolidated Funded Debt" shall mean all Funded Debt of the Company
and its Restricted Subsidiaries, determined on a consolidated basis eliminating
intercompany items.
"Consolidated Net Income" for any period shall mean the gross revenues
of the Company and its Restricted Subsidiaries for such period less all expenses
and other proper charges (including taxes on income), determined on a
consolidated basis after eliminating earnings or losses attributable to
outstanding Minority Interests, but excluding in any event:
(a) any gains or losses on the sale or other disposition of
Investments or fixed or capital assets, and any taxes on such excluded
gains and any tax deductions or credits on account of any such excluded
losses;
(b) the proceeds of any life insurance policy;
(c) net earnings and losses of any Restricted Subsidiary
accrued prior to the date it became a Restricted Subsidiary;
(d) net earnings and losses of any corporation (other than a
Restricted Subsidiary), substantially all the assets of which have been
acquired in any manner by the Company or any Restricted Subsidiary,
realized by such corporation prior to the date of such acquisition;
(e) net earnings and losses of any corporation (other than a
Restricted Subsidiary) with which the Company or a Restricted
Subsidiary shall have consolidated or which shall have merged into or
with the Company or a Restricted Subsidiary prior to the date of such
consolidation or merger;
(f) net earnings of any business entity (other than a
Restricted Subsidiary) in which the Company or any Restricted
Subsidiary has an ownership interest unless such net earnings shall
have actually been received by the Company or such Restricted
Subsidiary in the form of cash distributions;
(g) any portion of the net earnings of any Restricted
Subsidiary which for any reason is unavailable for payment of dividends
to the Company or any other Restricted Subsidiary;
(h) earnings resulting from any reappraisal, revaluation or
write-up of assets;
(i) any deferred or other credit representing any excess of
the equity in any Subsidiary at the date of acquisition thereof over
the amount invested in such Subsidiary;
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<PAGE>
(j) any gain arising from the acquisition of any Securities
of the Company or any Restricted Subsidiary;
(k) any reversal of any contingency reserve, except to the
extent that provision for such contingency reserve shall have been made
from income arising during such period; and
(l) any other extraordinary, or nonrecurring gain or loss.
"Consolidated Net Worth" shall mean, as of the date of any
determination thereof the amount of the capital stock accounts (net of treasury
stock, at cost) plus (or minus in the case of a deficit) the surplus in retained
earnings of the Company and its Restricted Subsidiaries as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Total Assets" shall mean, as the date of any
determination thereof, total assets of the Company and its Restricted
Subsidiaries determined on a consolidated basis in accordance with GAAP.
"Consolidated Total Capitalization" shall mean the sum of (i)
Consolidated Funded Debt, and (ii) Consolidated Net Worth.
"Current Debt" of any Person shall mean as of the date of any
determination thereof (i) all Indebtedness of such Person for borrowed money
other than Funded Debt of such Person and (ii) Guaranties by such Person of
Current Debt of others.
"Default" shall mean any event or condition the occurrence of which
would, with the lapse of time or the giving of notice, or both, constitute an
Event of Default.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA shall be construed to also refer to any successor sections.
"ERISA Affiliate" shall mean any corporation, trade or business that
is, along with the Company, a member of a controlled group of corporations or a
controlled group of trades or businesses, as described in section 414(b) and
414(c), respectively, of the Code or Section 4001 of ERISA.
"Event of Default" shall have the meaning set forth in ss.6.1.
"First Mortgage Bonds" shall mean and include all secured mortgage
bonds issued by the Company under and pursuant to the Mortgage Indenture.
"Funded Debt" of any Person shall mean (i) all Indebtedness of such
Person for borrowed money or which has been incurred in connection with the
acquisition of assets in each case having a final maturity of one or more than
one year from the date of origin thereof (or
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which is renewable or extendible at the option of the obligor for a period or
periods more than one year from the date of origin), including all payments in
respect thereof that are required to be made within one year from the date of
any determination of Funded Debt, whether or not the obligation to make such
payments shall constitute a current liability of the obligor under GAAP, (ii)
all Capitalized Rentals of such Person, and (iii) all Guaranties by such Person
of Funded Debt of others.
"GAAP" shall mean generally accepted accounting principles at the time
in the United States.
"Guaranties" by any Person shall mean all obligations (other than
endorsements in the ordinary course of business of negotiable instruments for
deposit or collection) of such Person guaranteeing, or otherwise creating
contingent liability with respect to, any Indebtedness, dividend or other
obligation of any other Person (the "primary obligor") in any manner, whether
directly or indirectly, including, without limitation, all obligations incurred
through an agreement, contingent or otherwise, by such Person: (i) to purchase
such Indebtedness or obligation or any property or assets constituting security
therefor, (ii) to advance or supply funds (x) for the purchase or payment of
such Indebtedness or obligation, (y) to maintain working capital or other
balance sheet condition or otherwise to advance or make available funds for the
purchase or payment of such Indebtedness or obligation, (iii) to lease property
or to purchase Securities or other property or services primarily for the
purpose of assuring the owner of such Indebtedness or obligation of the ability
of the primary obligor to make payment of the Indebtedness or obligation, or
(iv) otherwise to assure the owner of the Indebtedness or obligation of the
primary obligor against loss in respect thereof. Notwithstanding the foregoing,
the Company's obligations in respect of long term water supply contracts shall
not be treated as Guaranties under this Agreement. For the purposes of all
computations made under this Agreement, a Guaranty in respect of any
Indebtedness for borrowed money shall be deemed to be Indebtedness equal to the
principal amount of such Indebtedness for borrowed money which has been
guaranteed, and a Guaranty in respect of any other obligation or liability or
any dividend shall be deemed to be Indebtedness equal to the maximum aggregate
amount of such obligation, liability or dividend.
"Holder" shall mean any Person which is, at the time of reference, the
registered Holder of any Note.
"Indebtedness" of any Person shall mean and include all obligations of
such Person which in accordance with GAAP shall be classified upon a balance
sheet of such Person as liabilities of such Person, and in any event shall
include all (i) obligations of such Person for borrowed money or which has been
incurred in connection with the acquisition of property or assets, (ii)
obligations secured by any Lien upon property or assets owned by such Person,
even though such Person has not assumed or become liable for the payment of such
obligations, (iii) obligations created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such
Person, notwithstanding the fact that the rights and remedies of the seller,
lender or lessor under such agreement in the event of default are limited to
repossession or sale of property, (iv) Capitalized Rentals and (v) Guaranties of
obligations of others of the character referred to in this definition.
Notwithstanding the foregoing, the term
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<PAGE>
"Indebtedness" as it relates to the Company shall not include obligations of the
Company with respect to advances for construction from third parties.
"Institutional Holder" shall mean any Holder which is a Purchaser or an
insurance company, bank, savings and loan association, trust company, investment
company, charitable foundation, employee benefit plan (as defined in ERISA) or
other institutional investor or financial institution and, for purposes of the
direct payment provisions of this Agreement, shall include any nominee of any
such Holder.
"Interest Charges" of any Person for any period shall mean all interest
and all amortization of debt discount and expense on any particular Indebtedness
of such Person for which such calculations are being made. Computations of
Interest Charges on a pro forma basis for (a) Indebtedness having a variable
interest rate, (b) Indebtedness bearing interest at different fixed rates, (c)
Indebtedness with respect to which interest has not begun to accrue as of the
date of any determination of Interest Charges or (d) Indebtedness with respect
to which interest shall not become payable until a specified date which is more
than one year after the date of any such determination, shall, in all such
cases, be calculated at the rate equal to the greater of (i) the rate in effect
on the date of any determination and (ii) the average interest rate payable on
all Funded Debt of such Person during the three-month period immediately
preceding the date of any determination.
"Lien" shall mean any interest in property securing an obligation owed
to, or a claim by, a Person other than the owner of the property, whether such
interest is based on the common law, statute or contract, and including but not
limited to the security interest lien arising from a mortgage, encumbrance,
pledge, conditional sale or trust receipt or a lease, consignment or bailment
for security purposes. The term "Lien" shall include reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances (including, with respect to
stock, stockholder agreements, voting trust agreements, buy-back agreements and
all similar arrangements) affecting property of such Person. For the purposes of
this Agreement, the Company or a Restricted Subsidiary shall be deemed to be the
owner of any property which it has acquired or holds subject to a conditional
sale agreement, Capitalized Lease or other arrangement, in any such case,
pursuant to which title to the property has been retained by or vested in some
other Person for security purposes and such retention or vesting shall
constitute a Lien.
"Make-Whole Amount" shall mean (i) with respect to any Series of Notes
other than the Series B Notes, that which is set forth in the applicable
Supplement and (ii) with respect to the Series B Notes in connection with any
prepayment or acceleration, the following: the excess, if any, of (a) the
aggregate present value as of the date of such prepayment of each dollar of
principal being prepaid and the amount of interest (exclusive of interest
accrued to the date of prepayment) that would have been payable in respect of
such dollar if such prepayment had not been made, determined by discounting such
amounts at the Reinvestment Rate from the respective dates on which they would
have been payable, over (b) 100% of the principal amount of the outstanding
Series B Notes being prepaid. If the Reinvestment Rate is equal to or higher
than 6.77%, the Make-Whole Amount shall be zero. For purposes of any
determination of the Make-Whole Amount for the Series B Notes, the following
terms have the following meanings:
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"Reinvestment Rate" shall mean (1) the sum of 0.50%, plus the
yield reported on page "USD" of the Bloomberg Financial Markets
Services Screen (or, if not available, any other nationally recognized
trading screen reporting on-line intraday trading in the United States
government Securities) at 10:00 A.M. (Chicago, Illinois time) for the
United States government Securities have a maturity (rounded to the
nearest month) corresponding to the Remaining Life to Maturity of the
principal of the Notes being prepaid or (2) in the event that no
nationally recognized trading screen reporting on-line intraday trading
in the United States government Securities is available, Reinvestment
Rate shall mean 0.50%, plus the arithmetic mean of the yields for the
two columns under the heading "Week Ending" published in the
Statistical Release under the caption "Treasury Constant Maturities"
for the maturity (rounded to the nearest month) corresponding to the
Remaining Life to Maturity of the principal being prepaid. If no
maturity exactly corresponds to such Remaining Life to Maturity, yields
for the published maturity next longer than the Remaining Life to
Maturity and for the published maturity next shorter than the Remaining
Life to Maturity shall be calculated pursuant to the immediately
preceding sentence and the Reinvestment Rate shall be interpolated from
such yields on a straight-line basis, rounding in each of such relevant
periods to the nearest month. For the purposes of calculating the
Reinvestment Rate, the most recent Statistical Release published prior
to the date of determination of the Make-Whole Amount shall be used.
"Statistical Release" shall mean the then most recently
published statistical release designated "H.15(519)" or any successor
publication which is published weekly by the Federal Reserve System and
which establishes yields on actively traded U.S. Government Securities
adjusted to constant maturities or, if such statistical release is not
published at the time of any determination hereunder, then such other
reasonably comparable index which shall be designated by the Holders
holding 66-2/3% in aggregate principal amount of the outstanding Series
B Notes, subject to approval of the Company which approval will not be
unreasonably withheld.
"Remaining Life to Maturity" of the principal amount of the
Series B Notes being prepaid shall mean, as of the time of any
determination thereof, the number of years (calculated to the nearest
one-twelfth) which will elapse between the date of determination and
the final maturity of the Series B Notes being prepaid.
"Material Condemnation" shall mean any Condemnation of any property of
the Company or a Restricted Subsidiary pursuant to which a condemnation award in
excess of $100,000 shall have been received by the Company.
"Material Restricted Subsidiary" shall mean any Restricted Subsidiary
if:
(a) the aggregate sum of all assets (valued at the greater of
book or fair market value) of such Restricted Subsidiary, when combined
with the assets of all other Restricted Subsidiaries to which
subclauses (i), (j) or (k) of ss.6.1 hereof would have applied, if not
for the fact that such Restricted Subsidiaries did not constitute
Material Restricted Subsidiaries during the twelve-month period
immediately preceding the date
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<PAGE>
of such determination, exceeds 5% of Consolidated Total Assets
determined as of the end of the immediately preceding fiscal year; or
(b) the portion of Consolidated Net Income which was
contributed by such Restricted Subsidiary during the immediately
preceding fiscal year, when combined with the portions of Consolidated
Net Income so contributed by all other Restricted Subsidiaries to which
subclauses (i), (j) or (k) of ss.6.1 hereof would have applied, if not
for the fact that such Restricted Subsidiaries did not constitute
Material Restricted Subsidiaries during the twelve-month period
immediately preceding the date of such determination, exceeds 5% of
Consolidated Net Income.
"Minority Interests" shall mean any shares of stock of any class of a
Restricted Subsidiary (other than directors' qualifying shares as required by
law) that are not owned by the Company and/or one or more of its Restricted
Subsidiaries. Minority Interests shall be valued by valuing Minority Interests
constituting preferred stock at the voluntary or involuntary liquidating value
of such preferred stock, whichever is greater, and by valuing Minority Interests
constituting common stock at the book value of capital and surplus applicable
thereto adjusted, if necessary, to reflect any changes from the book value of
such common stock required by the foregoing method of valuing Minority Interests
in preferred stock.
"Mortgage Indenture" shall mean the Company's Mortgage of Chattels and
Trust Indenture, dated April 1, 1928, as such Trust Indenture may be amended,
supplemented or modified from time to time.
"Multiemployer Plan" shall have the same meaning as in ERISA.
"Net Income Available for Interest Charges" for any period shall mean
the sum of (i) Consolidated Net Income during such period plus (to the extent
deducted in determining Consolidated Net Income), (ii) all provisions for any
Federal, state or other income taxes made by the Company and its Restricted
Subsidiaries in a manner consistent with GAAP during such period and (iii)
Interest Charges of the Company and its Restricted Subsidiaries during such
period.
"Notes" have the meaning, set forth in ss.1.1.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Person" shall mean an individual, partnership, corporation, trust or
unincorporated organization, and a government or agency or political subdivision
thereof.
"Plan" means a "pension plan," as such term is defined in ERISA,
established or maintained by the Company or any ERISA Affiliate or as to which
the Company or any ERISA Affiliate contributed or is a member or otherwise may
have any liability.
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"Pro Forma Interest Charges" for any period shall mean, as of the date
of any determination thereof, the maximum aggregate amount of Interest Charges
which would have become payable by the Company and its Restricted Subsidiaries
in such period determined on a pro forma basis giving effect as of the beginning
of such period to the incurrence of any Funded Debt thereof (including
Capitalized Rentals) and the concurrent retirement of outstanding Funded Debt or
Current Debt or termination of any Capitalized Leases thereof.
"Purchasers" shall have the meaning set forth in ss.1.1.
"Rentals" shall mean and include as of the date of any determination
thereof all fixed payments (including as such all payments which the lessee is
obligated to make to the lessor on termination of the lease or surrender of the
property) payable by the Company or a Restricted Subsidiary, as lessee or
sublessee under a lease of real or personal property, but shall be exclusive of
any amounts required to be paid by the Company or a Restricted Subsidiary
(whether or not designated as rents or additional rents) on account of
maintenance, repairs, insurance, taxes and similar charges. Fixed rents under
any so-called "percentage leases" shall be computed solely on the basis of the
minimum rents, if any, required to be paid by the lessee regardless of sales
volume or gross revenues.
"Reportable Event" shall have the same meaning as in ERISA.
"Responsible Officer" shall mean any Senior Financial Officer or any
other officer of the Company with responsibility for the administration of the
relevant portion of the Agreement.
"Restricted Subsidiary" shall mean any Subsidiary (i) which is
organized under the laws of the United States or any State thereof; (ii) which
conducts substantially all of its business and has substantially all of its
assets within the United States; (iii) of which at least 80% (by number of
votes) of the Voting Stock is beneficially owned, directly or indirectly, by the
Company and/or one or more Restricted Subsidiaries; and (iv) which is hereafter
designated by the Board of Directors of the Company, or any Director or
committee of Directors duly designated by such Board of Directors, to be
included in the definition of Restricted Subsidiary for all purposes of this
Agreement, provided that, at the time of such designation and after giving
effect thereto, no Default or Event of Default shall have occurred hereunder.
"SEC" shall mean the Securities and Exchange Commission or any
successor agency.
"Security" shall have the same meaning as in Section 2(1) of the
Securities Act of 1933, as amended.
"Senior Financial Officer" shall mean chief financial officer or
assistant treasurer of the Company.
"Series" shall have the meaning set forth in ss.1.4.
"Series B Notes" shall have the meaning set forth in ss.1.1.
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<PAGE>
The term "subsidiary" shall mean as to any particular parent
corporation any corporation of which more than 50% (by number of votes) of the
Voting Stock shall be beneficially owned, directly or indirectly, by such parent
corporation. The term "Subsidiary" shall mean a subsidiary of the Company.
"Supplement" shall have the meaning set forth in ss.1.4.
"Unrestricted Subsidiary" shall mean any Subsidiary which is not a
Restricted Subsidiary.
"Voting Stock" shall mean Securities of any class or classes, the
holders of which are ordinarily, in the absence of contingencies, entitled to
elect a majority of the corporate directors (or Persons performing similar
functions).
"Wholly-owned" when used in connection with any Subsidiary shall mean a
Subsidiary of which all of the issued and outstanding shares of stock (except
shares required as directors' qualifying shares) and all Funded Debt and Current
Debt shall be owned by the Company and/or one or more of its Wholly-owned
Subsidiaries.
Section 8.2. Accounting Principles. Where the character or amount of
any asset or liability or item of income or expense is required to be determined
or any consolidation or other accounting computation is required to be made for
the purposes of this Agreement, the same shall be done in accordance with GAAP,
to the extent applicable, except where such principles are inconsistent with the
requirements of this Agreement.
Section 8.3. Directly or Indirectly. Where any provision in this
Agreement refers to action to be taken by any Person, or which such Person is
prohibited from taking, such provision shall be applicable whether the action in
question is taken directly or indirectly by such Person.
SECTION 9. MISCELLANEOUS.
Section 9.1. Registered Notes. The Company shall cause to be kept at
its principal office a register for the registration and transfer of the Notes
(hereinafter called the "Note Register"), and the Company will register or
transfer or cause to be registered or transferred as hereinafter provided any
Note issued pursuant to this Agreement or any Supplement.
At any time and from time to time any Holder of a Note which has been
duly registered as hereinabove provided may transfer such Note upon surrender
thereof at the principal office of the Company duly endorsed or accompanied by a
written instrument of transfer duly executed by the Holder or its attorney duly
authorized in writing.
The Person in whose name any registered Note shall be registered shall
be deemed and treated as the owner and holder thereof and a Holder for all
purposes of this Agreement or any Supplement. Payment of or on account of the
principal, premium, if any, and interest on any registered Note shall be made to
or upon the written order of such Holder.
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Section 9.2. Exchange of Notes. At any time and from time to time, upon
not less than ten days' notice to that effect given by the Holder of any Note
initially delivered or of any Note substituted therefor pursuant to ss.9.1, this
ss.9.2 or ss.9.3, and, upon surrender of such Note at its office, the Company
will deliver in exchange therefor, without expense to such Holder, except as set
forth below, a Note of an identical Series for the same aggregate principal
amount as the then unpaid principal amount of the Note so surrendered, or Notes
in the denomination of $250,000 or any amount in excess thereof as such Holder
shall specify, dated as of the date to which interest has been paid on the Note
so surrendered or, if such surrender is prior to the payment of any interest
thereon, then dated as of the date of issue, registered in the name of such
Person or Persons as may be designated by such Holder, and otherwise of the same
form and tenor as the Notes so surrendered for exchange. The Company may require
the payment of a sum sufficient to cover any stamp tax or governmental charge
imposed upon such exchange or transfer.
Section 9.3. Loss, Theft, Etc. of Notes. Upon receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of any
Note, and in the case of any such loss, theft or destruction upon delivery of a
bond of indemnity in such form and amount as shall be reasonably satisfactory to
the Company, or in the event of such mutilation upon surrender and cancellation
of the Note, the Company will make and deliver without expense to the Holder
thereof, a new Note, of like tenor, in lieu of such lost, stolen, destroyed or
mutilated Note. If an Institutional Holder is the owner of any such lost, stolen
or destroyed Note, then the affidavit of an authorized officer of such owner,
setting forth the fact of loss, theft or destruction and of its ownership of
such Note at the time of such loss, theft or destruction shall be accepted as
satisfactory evidence thereof and no further indemnity shall be required as a
condition to the execution and delivery of a new Note of the same Series other
than the written agreement of such owner to indemnify the Company.
Section 9.4. Expenses, Stamp Tax Indemnity. Whether or not the
transactions herein contemplated shall be consummated, the Company agrees to pay
directly all of the Purchasers' out-of-pocket expenses in connection with the
preparation, execution and delivery of this Agreement and the transactions
contemplated hereby (including all expenses relating to any exchange of the
Notes for First Mortgage Bonds as contemplated by ss.5.14 hereof), including but
not limited to the reasonable charges and disbursements of Chapman and Cutler,
special counsel to the Purchasers, duplicating and printing costs and charges
for shipping the Notes, adequately insured to each Purchaser's home office or at
such other place as such Purchaser may designate, and all such expenses of the
Holders relating to any amendment, waivers or consents pursuant to the
provisions hereof, including, without limitation, any amendments, waivers, or
consents resulting from any work-out, renegotiation or restructuring relating to
the performance by the Company of its obligations under this Agreement, a
Supplement and the Notes. The Company also agrees that it will pay and save each
Purchaser and Additional Purchaser harmless against any and all liability with
respect to stamp and other taxes, if any, which may be payable or which may be
determined to be payable in connection with the execution and delivery of this
Agreement, a Supplement or the Notes, whether or not any Notes are then
outstanding. The Company agrees to protect and indemnify each Purchaser and
Additional Purchaser against any liability for any and all brokerage fees and
commissions payable or claimed to be payable to any Person in connection with
the original issuance of the Notes as contemplated by this Agreement.
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Section 9.5. Powers and Rights Not Waived; Remedies Cumulative. No
delay or failure on the part of any Holder in the exercise of any power or right
shall operate as a waiver thereof; nor shall any single or partial exercise of
the same preclude any other or further exercise thereof, or the exercise of any
other power or right, and the rights and remedies of each Holder are cumulative
to, and are not exclusive of, any rights or remedies any such Holder would
otherwise have.
Section 9.6. Notices. All communications provided for hereunder shall
be in writing and, if to a Holder, delivered or mailed prepaid by registered or
certified mail or overnight air courier, or by facsimile communication, in each
case addressed to such Holder at its address appearing on Schedule I or in a
Supplement, as the case may be, or such other address as any Holder may
designate to the Company in writing, and if to the Company, delivered or mailed
by registered or certified mail or overnight air courier, or by facsimile
communication, to the Company at the address beneath its signature at the foot
of this Agreement or to such other address as the Company may in writing
designate to the Holders; provided, however, that a notice to a Holder by
overnight air courier shall only be effective if delivered to such Holder at a
street address designated for such purpose in accordance with thisss.9.6, and a
notice to such Holder by facsimile communication shall only be effective if made
by confirmed transmission to such Holder at a telephone number designated for
such purpose in accordance with thisss.9.6 and promptly followed by the delivery
of such notice by registered or certified mail or overnight air courier, as set
forth above.
Section 9.7. Successors and Assigns. This Agreement shall be binding
upon the Company and its successors and assigns and shall inure to the benefit
of each Purchaser and its successor and assigns, including each successive
Holder.
Section 9.8. Survival of Covenants and Representations. All covenants,
representations and warranties made by the Company herein and in any
certificates delivered pursuant hereto, whether or not in connection with the
Closing Date, shall survive the closing and the delivery of this Agreement, any
Supplement and the Notes.
Section 9.9. Severability. Should any part of this Agreement for any
reason be declared invalid or unenforceable, such decision shall not affect the
validity or enforceability of any remaining portion, which remaining portion
shall remain in force and effect as if this Agreement had been executed with the
invalid or unenforceable portion thereof eliminated and it is hereby declared
the intention of the parties hereto that they would have executed the remaining
portion of this Agreement without including therein any such part, parts or
portion which may, for any reason, be hereafter declared invalid or
unenforceable.
Section 9.10. Governing Law. This Agreement and the Notes issued and
sold hereunder shall be governed by and construed in accordance with California
law.
Section 9.11. Captions. The descriptive headings of the various
Sections or parts of this Agreement are for convenience only and shall not
affect the meaning or construction of any of the provisions hereof.
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The execution hereof by the Purchasers shall constitute a contract
among the Company and the Purchasers for the uses and purposes hereinabove set
forth. This Agreement may be executed in any number of counterparts, each
executed counterpart constituting an original but all together only one
agreement.
CALIFORNIA WATER SERVICE COMPANY
By
Name: _________________________________________
Title: ________________________________________
CALIFORNIA WATER SERVICE COMPANY
1720 North First Street
San Jose, California 95112-4598
Attention: Chief Financial Officer
Telefacsimile: (408) 367-8430
Confirmation: (408) 367-8200
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<PAGE>
Accepted, separately for each of the respective institutions named below, as of
March 23, 1999:
AMERICAN GENERAL LIFE AND ACCIDENT
INSURANCE COMPANY
THE VARIABLE ANNUITY LIFE INSURANCE
COMPANY
AMERICAN GENERAL LIFE INSURANCE
COMPANY OF NEW YORK
By
Name:
Title
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INFORMATION RELATING TO PURCHASERS
NAME OF PURCHASER TO BE PURCHASED
AMERICAN GENERAL LIFE AND ACCIDENT
INSURANCE COMPANY $10,000,000
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as:
"California Water Service Company, 6.77% Series B Senior Notes due 2028, PPN
130789 L*9 principal or interest") to:
ABA #011000028
State Street Bank and Trust Company
Boston, Massachusetts 02101
Re: American General Life and Accident Insurance Company
AC-0125-934-0
Fund Number PA 10
Notices
All notices of payment on or in respect of the Notes and written confirmation of
each such payment to:
American General Life and Accident Insurance Company and PA 10
c/o State Street Bank and Trust Company
Insurance Services, WES2S
105 Rosemont Road
Westwood, Massachusetts 02090
Facsimile Number: (781) 302-8005
Duplicate payment notices and all other correspondences to:
American General Life and Accident Insurance Company
c/o American General Corporation
P. O. Box 3247
Houston, Texas 77253-3247
Attention: Investment Research Department, A37-01
Facsimile Number: (713) 831-1366
Overnight Mailing Address:
2929 Allen Parkway, A37-01
Houston, Texas 77019-2155
Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 62-0306330
SCHEDULE I
(to Note Agreement)
<PAGE>
NAME OF PURCHASER TO BE PURCHASED
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY $8,000,000
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"California Water Service Company, 6.77% Series B Senior Notes due 2028, PPN
130789 L*9, principal or interest") to:
ABA #011000028
State Street Bank and Trust Company
Boston, Massachusetts 02101
Re: The Variable Annuity Life Insurance Company
AC-0125-821-9
Fund Number PA 54
Notices
All notices of payment on or in respect of the Notes and written confirmation of
each such payment to:
The Variable Annuity Life Insurance Company and PA 54
c/o State Street Bank and Trust Company
Insurance Services WES2S
105 Rosemont Road
Westwood, Massachusetts 02090
Facsimile Number: (781) 302-8005
Duplicate payment notices and all other correspondences to:
The Variable Annuity Life Insurance Company
c/o American General Corporation
P. O. Box 3247
Houston, Texas 77253-3247
Attention: Investment Research Department, A37-01
Facsimile Number: (713) 831-1366
Overnight Mailing Address:
2929 Allen Parkway, A37-01
Houston, Texas 77019-2155
Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 74-1625348
2
<PAGE>
NAME OF PURCHASER TO BE PURCHASED
AMERICAN GENERAL LIFE INSURANCE
COMPANY OF NEW YORK $2,000,000
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"California Water Service Company, 6.77% Series B Senior Notes due 2028, PPN
130789 L*9, principal or interest") to:
ABA #0110 0002 8
State Street Bank and Trust Company
Boston, Massachusetts 02101
Re: American General Life Insurance Company of New York
AC-0125-942-3
Fund Number PA 45
Notices
All notices of payment on or in respect of the Notes and written confirmation of
each such payment to:
American General Life Insurance Company of New York and PA 45
c/o State Street Bank and Trust Company
Insurance Services Custody (AH2)
1776 Heritage Drive
North Quincy, Massachusetts 02171
Facsimile Number: (617) 985-4923
Duplicate payment notices and all other correspondences to :
American General Life Insurance Company
of New York
c/o American General Corporation
P. O. BOX 3247
Houston, Texas 77253-3247
Attention: Investment Research Department, A37-01
Facsimile Number: (713) 831-1366
Overnight Mailing Address:
2929 Allen Parkway
Houston, Texas 77019-2155
Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 13-1853201
-3-
<PAGE>
LIENS SECURING FUNDED DEBT
Funded Debt of the Company, consisting of various of series of First
Mortgage Bonds issued under terms of the Trust Indenture dated April 1, 1928 and
its supplemental indentures, is secured by substantially all of the Company's
utility plant. As of the Closing Date, an aggregate of $118,585,000 is
outstanding under the First Mortgage Bonds as represented by series P, S, BB,
CC, DD, EE, FF and GG. As of December 31, 1998 gross utility plant was
$680,690,000.
SCHEDULE II
(to Note Agreement)
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY SALE, TRANSFER, PLEDGE OR
OTHER DISPOSITION THEREOF MAY BE MADE ONLY (1) IN A TRANSACTION REGISTERED UNDER
SAID ACT OR (2) IF AN EXEMPTION FROM REGISTRATION UNDER SAID ACT IS AVAILABLE.
CALIFORNIA WATER SERVICE COMPANY
6.77% Series B Senior Note
Due November 1, 2028
PPN: 130789 L*9
No. _________, 19__
$
California Water Service Company, a California corporation (the
"Company"), for value received, hereby promises to pay to
or registered assigns
on the first day of November, 2028
the principal amount of
DOLLARS ($____________)
and to pay interest (computed on the basis of a 360-day year of twelve 30-day
months) on the principal amount from time to time remaining unpaid hereon at the
rate of 6.77% per annum from the date hereof until maturity, payable
semiannually on the first day of each May and November in each year (commencing
on the first of such dates after the date hereof) and at maturity. The Company
agrees to pay interest on overdue principal (including any overdue required or
optional prepayment of principal) and premium, if any, and (to the extent
legally enforceable) on any overdue installment of interest, at the rate of
8.77% per annum after the due date, whether by acceleration or otherwise, until
paid. Both the principal hereof and interest hereon are payable at the principal
office of the Company in San Jose, California in coin or currency of the United
States of America which at the time of payment shall be legal tender for the
payment of public and private debts.
This Note is one of a series of Notes (the "Notes") of the Company
issued or to be issued under and pursuant to the terms and provisions of the
Note Agreement dated as of March 1, 1999 (as from time to time amended and
supplemented, the "Note Agreement"), entered into by the Company, the Purchasers
named therein and the Additional Purchasers of Notes from time to
EXHIBIT A
(to Note Agreement)
<PAGE>
time issued pursuant to any Supplement to the Note Agreement. This Note and the
holder hereof are entitled equally and ratably with the holders of all other
Notes of all Series from time to time outstanding under the Note Agreement to
all the benefits provided for thereby or referred to therein. Reference is
hereby made to the Note Agreement for a statement of such rights and benefits.
Each holder of this Note will be deemed, by its acceptance hereof, to have made
the representations contained in Section 3.2 of the Note Agreement, provided
that such holder may (in reliance upon information provided by the Company,
which shall not be unreasonably withheld) make a representation to the effect
that the purchase by such holder of any Note will not constitute a non-exempt
prohibited transaction under Section 406(a) of ERISA.
This Note and the other Notes outstanding under the Note Agreement may
be declared due prior to their expressed maturity dates, all in the events, on
the terms and in the manner and amounts as provided in the Note Agreement.
The Notes are not subject to prepayment or redemption at the option of
the Company prior to their expressed maturity dates except on the terms and
conditions and in the amounts and with the premium, if any, set forth in the
Note Agreement.
This Note is registered on the books of the Company and is transferable
only by surrender thereof at the principal office of the Company duly endorsed
or accompanied by a written instrument of transfer duly executed by the
registered holder of this Note or its attorney duly authorized in writing.
Payment of or on account of principal, premium, if any, and interest on this
Note shall be made only to or upon the order in writing of the registered
holder.
This Note shall be construed and enforced in accordance with, and the
rights of the parties shall be governed by, the law of the State of California,
excluding choice-of-law principles of the law of such State that would require
the application of the laws of a jurisdiction other than such State.
CALIFORNIA WATER SERVICE COMPANY
By
Name: _______________________________
Title: ______________________________
2
<PAGE>
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to each Purchaser that:
1. Corporate Organization, Subsidiaries. The Company is duly organized
and existing and in good standing under and by virtue of the laws of the State
of California and is duly authorized and empowered to own and operate its
properties and to carry on its business, all as and in the places where such
properties are now owned and operated and such business is conducted. The
Company has no Subsidiaries.
2. Corporate Authority. The Company has full corporate power and
corporate authority to sell and issue the Series B Notes. The issuance and sale
of the Series B Notes and the execution and delivery of the Agreement will have
been duly authorized by the Board of Directors of the Company and by the Public
Utilities Commission of the State of California (the "Commission") prior to the
Closing Date, and no other action is required to be taken by, and no consents or
approvals are required to be obtained from, the shareholders of the Company or
any public body or bodies, and no other corporate action of the Company is
requisite to such issue and sale.
3. Business and Property. Each Purchaser has heretofore been furnished
with a copy of the Company Information which generally sets forth the principal
properties of the Company and the business conducted and proposed to be
conducted by the Company.
4. Indebtedness. Annex A attached hereto correctly describes all
Current Debt, Funded Debt and Capitalized Leases of the Company outstanding on
March 1, 1999.
5. Financial Statements and Reports. The Company has furnished each
Purchaser with a copy of its Annual Reports and Forms 10-K filed with the
Securities and Exchange Commission for 1994, 1995, 1996 and 1997 hereinafter
called the "Company Reports," and a copy of the Form 10-K filed by CWSG with the
Securities and Exchange Commission for the fiscal year ended December 31, 1998,
together with all reports or documents required to be filed by CWSG pursuant to
Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended,
since the filing of such Form 10-K. The financial statements contained in the
foregoing Company Reports and the CWSG Form 10-K and such other reports and
documents were prepared in accordance with generally accepted accounting
principles upon a consistent basis and are complete and correct and the balance
sheets included therein fairly present the financial condition of the Company or
CWSG, as the case may be, as at the respective dates thereof and the Statements
of Income, Common Shareholders' Equity and Cash Flows included therein fairly
present the results of the operations of the Company for the periods covered
thereby, subject in the case of unaudited statements to normal year-end
adjustments.
6. Material Contracts. The Company has no contracts or commitments,
whether contingent or other, which are material to the Company and which were
not made in the ordinary course of business. Certain material contracts related
to water supply are listed in Annex B hereto. The Company has no contracts or
commitments, contingent or other, which materially
EXHIBIT B
(to Note Agreement)
<PAGE>
and adversely affect or in the future may (so far as the Company can foresee)
materially and adversely affect the Company or its business, property, assets,
operations or condition, financial or other. As at December 31, 1998, there were
no material liabilities of the Company (other than those under contracts entered
into in the normal and ordinary course of business), actual, contingent or
accrued, which were not reflected in the Annual Reports except for (i) liability
in respect of uncompleted construction work under open contracts in connection
with the Company's construction program and (ii) the obligations of the Company
to contribute to a pension plan, an employees' savings plan and a health and
welfare plan.
7. No Material Adverse Change. (a) There has been no change in the
condition of the Company, financial or other, from that set forth or reflected
in the 1998 Annual Report, other than changes which may have occurred in the
ordinary course of business or by reason of ordinary dividends paid or declared
or outstanding First Mortgage Bonds redeemed by the Company in accordance with
their terms, and no such changes in the ordinary course of business have been
material adverse changes.
(b) Since December 31, 1998, neither the business, operations,
properties nor assets of the Company have been adversely affected in any
material way by any casualties such as fire, windstorm, riot, strike, explosion,
accident, flood, earthquake, lockout, sabotage, activities of armed forces, act
of God or the public enemy or condemnation of properties by the United States
government or any municipal governmental agency, authority or body.
8. Title to Properties. The Company is engaged in the business of a
public utility water company serving all or a portion of the California cities
and communities listed in the 1998 Annual Report. The Company has good and
merchantable title, subject only to the lien of the Mortgage Indenture and to
current tax and assessment liens, rights-of-way, easements and certain minor
liens, encumbrances, clouds or defects in title which do not materially affect
the use thereof, to all the material water distribution facilities (including,
without limitation, transmission and distribution mains, pump stations, wells,
storage tanks and reservoirs) and other material units of property used in its
business except as follows:
(a) most of the offices, except its principal office, are in
leased premises and some wells, well sites and other minor distribution
facilities are rented; and
(b) several wells are located on property which the Company
does not own but in which it has an easement for the location of such
wells;
and except as to easements and rights-of-way and certain parcels of land (not
exceeding for said parcels of land an aggregate book value of $250,000) with
respect to which there is a possibility of reverter if the property ceases to be
used for public utility purposes, and, except that the greater portion of its
transmission and distribution systems is located in public highways and streets
and in rights-of-way owned by the Company over lands of others, the Company's
title thereto is fee simple. Except for parcels of land having an aggregate book
value of not more than $250,000, the Company has good and merchantable title to
all its other property and assets subject only to the lien of the Mortgage
Indenture and to current tax and assessment liens and minor liens and
encumbrances which do not materially affect the use thereof. All of the
2
<PAGE>
properties of the Company are located in the State of California and
substantially all of the properties of the Company used or useful in its public
utility business are subject to the Mortgage Indenture.
9. Franchises. The Company has, in its judgment, adequate franchises
and permits without burdensome restrictions (other than those typically
contained in franchises and permits of this type) to allow the Company to
conduct the business in which it is engaged.
The Company has two classes of franchises to install and operate water
pipes and mains under public streets and highways:
(a) so-called "constitutional" franchises obtained by virtue
of the provisions of Article XI, Section 19, of the California
Constitution, as in effect prior to 1911; and
(b) franchises granted pursuant to statutory authority.
The Company believes, based on the advice of counsel (which is itself
based upon the assumption of the accuracy of information obtained by the Company
from sources believed to be reliable that the following cities served by the
Company were all incorporated prior to 1911:
Bakersfield Marysville South San Francisco
Chico Oroville Stockton
Dixon Redondo Beach Visalia
Hermosa Beach Salinas Willows
King City San Mateo
Livermore Selma
that water distribution systems were constructed and service furnished to the
inhabitants of each by various predecessors of the Company prior to 1911, and
that there were no public water works owned or controlled by the municipality in
any of them prior to 1911), that the Company has a "constitutional" franchise in
each of the above cities and under such constitutional franchise has a perpetual
right which was not repealed by the repeal of Article XI, Section 19, of the
California Constitution to continue to occupy public streets of each of said
cities with its pipes and mains and to lay down additional pipes and mains in
said streets for the supplying of water, subject to reasonable regulation by the
respective municipalities. The Company also believes, based on the advice of
counsel, that this right is not limited to streets in which pipes or mains were
laid prior to 1911 but extends at least to all streets in the said
municipalities as they existed at the date of repeal of the constitutional
provision in 1911 and probably also extends to territory incorporated into each
respective city after such repeal, although this latter question remains
somewhat in doubt in the absence of a final decision of the courts thereon. The
Company holds either by assignment or as original grantee franchises granted
under statutory authority by the Counties of Kern, Los Angeles, San Joaquin,
Santa Clara and Monterey, the Cities of Montebello, Torrance, Cupertino,
Sunnyvale, Los Altos, Mountain View, Bakersfield, Commerce, San Carlos, Rolling
Hills Estates and Thousand Oaks, and the Towns of Los Altos Hills and Atherton.
Following incorporation of the City of Rancho Palos Verdes in 1973, the Company
made franchise payments to the City and the City accepted the same as successor
in
B-3
<PAGE>
interest to the grantor's rights under the Company's former franchise from the
County of Los Angeles; the City has agreed that the Company may exercise its
rights in the City under its current County franchise until the expiration of
that franchise in 2012. The Company's franchises from the Cities of Palos Verdes
Estates, Menlo Park and Woodside terminated in 1977, 1993 and 1994,
respectively. While none of the Cities and the Company have executed a new
franchise agreement, the Company has made and will continue to make franchise
payments to each of the Cities in accordance with the provisions of the prior
franchise. In other areas where the Company has no franchise, the Company or its
predecessors have distributed water for many years and, to the Company's
knowledge, no question has ever been raised as to the right to make such
distribution and to maintain all pipes and mains necessary therefor.
10. Condition of Assets. The physical assets of the Company are in
sound operating condition, there are no material arrears in the maintenance of
any such physical assets and the Company believes that its sources of water are
adequate to meet its requirements for the foreseeable future.
11. Pending Litigation, Proceedings. (a) There are no actions, suits or
proceedings pending at law or in equity or before or by any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, or, to the knowledge of the Company,
threatened against or affecting the Company not adequately covered by insurance
or for which reserves adequate in the Company's judgment have not been
established which involve, in the opinion of the Company, a reasonable
possibility of judgments or liabilities exceeding $500,000 in the aggregate net
of insurance, or which may, in the opinion of the Company result in any material
adverse change in the business or properties or in the condition, financial or
other, of the Company, or the ability of the Company to perform its obligations
under the Agreement or the Series B Notes.
(b) There are no proceedings pending or, to the knowledge of the
Company, threatened against the Company before or by any federal, state or
municipal commission, board or other administrative agency, which materially and
adversely affect the water rates of the Company presently in effect.
(c) The Company is not in default with respect to any order, writ,
injunction or decree of any court, or any federal, state or municipal
commission, board or other administrative agency and the Company has complied
with all applicable statutes and regulations of the United States of America and
of any state, municipality or agency of any thereof, in respect of the conduct
of its business known or believed by the Company to be applicable thereto, the
failure to comply with which could reasonably be expected to have a material
adverse effect on the Company or its properties.
12. No Condemnation Proceedings. Since January 1, 1995, no elections
have been held or other actions taken authorizing the commencement of
proceedings for condemnation of any of the properties of the Company. However,
from time to time there are expressions of interest made by public bodies,
elected or appointed municipal officials, persons seeking political position or
citizens groups urging acquisition of the Company's facilities in one or more of
the communities served by the Company. The Company does not believe that any
acquisition by a
4
<PAGE>
city or municipality of its properties by condemnation or threat thereof would
be adverse to the holders of the Series B Notes.
13. No Burdensome Restrictions. The Company is not subject to any
burdensome corporate restrictions in its Articles of Incorporation, By-Laws or
otherwise, which materially and adversely affect or in the future may (so far as
the Company can foresee) materially and adversely affect the Company or its
business, property, assets, operations or condition, financial or other.
14. Regulatory Status, Approval. (a) The Company is not a registered
holding company or a subsidiary of a registered holding company and the Company
is not required to register under the Public Utility Holding Company Act of
1935, as amended. The Company is subject to the jurisdiction of the Commission.
(b) No consent of, approval or authorization by, filing or registration
with, or notice to any governmental or public authority or agency is required
for the issuance, sale or delivery of the Series B Notes or the execution,
delivery or performance of the Agreement, other than the authorization of the
Commission, which authorization has been duly obtained, is in full force and
effect and is not subject to any appeal, hearing, rehearing or contest. All
conditions contained in any such authorization which were to be fulfilled on or
prior to the issuance of the Series B Notes have been fulfilled. The Company has
furnished to your special counsel true, correct and complete copies of said
authorization and all applications heretofore filed with or submitted to the
Commission in connection with its action to obtain said authorization.
15. No Defaults, Compliance with Other Instruments. The Company is not
in default under any outstanding indentures, contracts or agreements which are
material to the Company including, without limitation, the Mortgage Indenture;
and on the Closing Date there will not exist any condition which would be a
default under any such indenture, contract or agreement. The execution and
delivery of the Agreement, the consummation of the transactions therein provided
for and compliance with the provisions of the Agreement and the Series B Notes
by the Company will not violate or result in any breach of the terms, conditions
or provisions of, or constitute a default under, its Articles of Incorporation,
By-Laws or any indenture, mortgage, deed of trust, bank loan or credit
agreement, or other material agreement or instrument to which the Company is a
party or by which the Company may be bound, nor will such acts result in the
violation of any applicable law, rule, regulation or order applicable to the
Company of any court or governmental authority having jurisdiction in the
premises or in the creation or imposition of any lien, charge or encumbrance of
any nature whatsoever, upon any property or assets of the Company.
16. Leases. The Company has the right to, and does, enjoy peaceful and
undisturbed possession under all material leases to which it is a party or under
which it is operating. All such leases are valid, subsisting and in full force
and effect, and the Company is not in default under any thereof and no event has
occurred and is continuing, and no condition exists that, after notice or
passage of time or both could become a material default under any such Lease.
B-5
<PAGE>
17. Use of Proceeds. The Company will use the gross proceeds derived
from the sale of the Series B Notes under the Agreement to refinance existing
Indebtedness and to finance a portion of the Company's general construction
program. None of the transactions contemplated in the Agreement (including,
without limitation thereof, the use of the proceeds from the sale of the Series
B Notes) will violate or result in a violation of Section 7 of the Securities
Exchange Act of 1934, as amended, or any regulations issued pursuant thereto,
including without limitation, Regulations U, T and X of the Board of Governors
of the Federal Reserve System, 12 C.F.R., Chapter II. The Company does not own
or intend to carry or purchase any "margin stock" within the meaning of said
Regulation U, including margin stock originally issued by it. None of the
proceeds from the sale of the Series B Notes will be used to purchase or carry
(or refinance any borrowing the proceeds of which were used to purchase or
carry) any margin stock.
18. ERISA. (a) The fair market value of all assets under all "employee
pension benefit plans" (as such term is defined in Section 3(2) of ERISA),
maintained by the Company, as from time to time in effect, exceeded as of
December 31, 1998, the last annual valuation date, the actuarial present value
of all benefits vested under the Plans by more than $8,990,000.
(b) Neither any of the Plans nor any of the trusts created thereunder,
nor any trustee or administrator thereof, has engaged in a "prohibited
transaction," as such term is defined in Section 4975 of the Code which could
subject the Plans or any of them, any such trust, or any trustee or
administrator thereof, or any disqualified person with respect to the Plans to
the tax or penalty on prohibited transactions imposed by said Section 4975,
except that, with respect to any actions or omissions of administrators,
trustees, other fiduciaries, parties in interest or disqualified persons of or
in respect to the Plans (other than employees of the Company), the Company has
no knowledge that any of such persons has committed a prohibited transaction,
nor has the Company participated knowingly in or knowingly undertaken to conceal
a prohibited transaction with or by any of such persons nor enabled any of them
to commit a prohibited transaction.
(c) Neither any of the Plans subject to Title IV of ERISA nor any
trusts related to such plans have been terminated, nor have there been any
Reportable Events, as that term is defined in Section 4043 of ERISA (as modified
by the regulations thereunder), in respect of those plans since the effective
date of ERISA.
(d) Neither any of the Plans which are subject to Section 302 of ERISA
nor any trusts related to such plans have incurred any "accumulated funding
deficiency," as such term is defined in said Section 302 (whether or not
waived), since the effective date of ERISA.
(e) The consummation of the transactions provided for in the Agreement
and compliance by the Company with the provisions thereof and the Series B Notes
issued thereunder will not involve any prohibited transaction within the meaning
of ERISA or Section 4975 of the Code.
19. Taxes. All Federal, state and local taxes and assessments due from
the Company have been (a) fully paid or adequately provided for on the books of
the Company in accordance
6
<PAGE>
with generally accepted accounting principles or (b) are being contested in good
faith by the Company. There has been no examination of the Federal income tax
returns of the Company by the Internal Revenue Service subsequent to the
examinations of the returns for tax years 1984-1991.
20. Compliance with Laws. To the best of the Company's knowledge, the
Company is in compliance with all applicable Federal, state, or local laws,
statutes, rules, regulations or ordinances relating to public heath, safety or
the environment, including, without limitation, relating to releases,
discharges, emissions or disposals to air, water, land or ground water, to the
withdrawal or use of ground water, to the use, handling or disposal of
polychlorinated biphenyls (PCB's), asbestos or urea formaldehyde, to the
treatment, storage, disposal or management of hazardous substances (including,
without limitation, petroleum, its derivatives, by-products or other
hydrocarbons), and to exposure to hazardous substances, the failure to comply
with which could reasonably be expected to have a material adverse effect on the
Company or its properties. The Company does not know of any liability of the
Company under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986 (42 U.S.C. Section 9601 et seq.) with respect to any
property now or heretofore owned or leased by the Company.
21. Full Disclosure. The financial statements referred to in the
Agreement do not, nor does the Agreement, the Company Information or any written
statement (including without limitation the 1998 Annual Report) furnished by the
Company to you in connection with the negotiation of the sale of the Series B
Notes, contain any untrue statement of a material fact or, taken together, omit
a material fact necessary to make the statements contained therein or herein not
misleading. There is no fact which the Company has not disclosed to you in
writing which materially affects adversely nor, so far as the Company can now
foresee, will materially affect adversely the properties, business, prospects,
profits or condition (financial or otherwise) of the Company or the ability of
the Company to perform its obligations under the Agreement or the Series B
Notes.
22. Private Offering. Neither the Company, directly or indirectly, nor
any agent on its behalf has offered or will offer the Series B Notes or any
similar Security or has solicited or will solicit an offer to acquire the Series
B Notes or any similar Security from or has otherwise approached or negotiated
or will approach or negotiate in respect of the Series B Notes or any similar
Security with any Person other than the Purchasers and not more than twelve
other institutional investors, each of whom was offered a portion of the Series
B Notes at private sale for investment. Neither the Company, directly or
indirectly, nor any agent on its behalf has offered or will offer the Series B
Notes or any similar Security or has solicited or will solicit an offer to
acquire the Series B Notes or any similar Security from any Person so as to
cause the issuance and sale of the Series B Notes not to be exempt from the
provisions of Section 5 of the Securities Act of 1933, as amended.
B-7
<PAGE>
DESCRIPTION OF DEBT AND LEASES
1. Current Debt of the Company outstanding on March 1, 1999 as follows:
$23,500,000 borrowed under the Company's bank line of credit with Bank
of America.
2. Funded Debt (other than Capitalized Rentals) of the Company outstanding
on March 1, 1999 was as follows:
$118,585,000 was outstanding under the Company's various series of
First Mortgage Bonds.
$298,000 due to the City of Los Altos for the purchase of the North Los
Altos Water System.
$20,000,000 Series A Senior Notes due November 1, 2025.
3. Capitalized Leases of the Company outstanding on March 1, 1999 were as
follows:
None.
ANNEX A
(to Exhibit B)
<PAGE>
MATERIAL WATER SUPPLY CONTRACTS
1. Water Supply Contract between the Company and the County of Butte
relating to the Company's Oroville District.
2. Water Supply Contract between the Company and Kern County Water Agency
relating to the Company's Bakersfield District.
3. Water Supply Contract between the Company and Stockton East Water
District relating to the Company's Stockton District.
4. Second Amended Contract between the Company and Stockton East Water
District relating to the Company's Stockton District.
5. Settlement Agreement and Master Water Sales Contract between the City
and County of San Francisco and Certain Suburban Purchasers.
6. Supplement to Settlement Agreement and Master Water Sales Contract
between the Company and the City and County of San Francisco relating
to the Company's Bear Gulch District.
7. Supplement to Settlement Agreement and Master Water Sales Contract
between the Company and the City and County of San Francisco relating
to the Company's San Carlos District.
8. Supplement to Settlement Agreement and Master Water Sales Contract
between the Company and the City and County of San Francisco relating
to the Company's San Mateo District.
9. Supplement to Settlement Agreement and Master Water Sales Contract
between the Company and the City and County of San Francisco relating
to the Company's South San Francisco District.
10. Water Supply Contract between the Company and Santa Clara Valley Water
District relating to the Company's Los Altos District.
11. Water Supply Contract between the Company and Pacific Gas and Electric
Company related to the Company's Oroville District.
12. Water Supply Contract between the Company and Alameda County Flood
Control and Water Conservation District related to the Company's
Livermore District.
13. Water Supply Contract between the Company and Russell Valley Municipal
Water District regarding the Company's Westlake District.
ANNEX B
(to Exhibit B)
<PAGE>
DESCRIPTION OF SPECIAL COUNSEL'S CLOSING OPINION
The closing opinion of Chapman and Cutler, special counsel to the
Purchasers, called for by ss.4.1 of the Note Agreement, shall be dated the
Closing Date and addressed to the Purchasers, shall be satisfactory in form and
substance to the Purchasers and shall be to the effect that:
1. The Company is a corporation, validly existing and in
good standing under the laws of the State of California and has the
corporate power and the corporate authority to execute and deliver the
Note Agreement and to issue the Series B Notes.
2. The Note Agreement has been duly authorized by all
necessary corporate action on the part of the Company, has been duly
executed and delivered by the Company and constitutes the legal, valid
and binding contract of the Company enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent conveyance and
similar laws affecting creditors' rights generally, and general
principles of equity (regardless of whether the application of such
principles is considered in a proceeding in equity or at law).
3. The Series B Notes have been duly authorized by all
necessary corporate action on the part of the Company, have been duly
executed and delivered by the Company and constitute the legal, valid
and binding obligations of the Company enforceable in accordance with
their terms, subject to bankruptcy, insolvency, fraudulent conveyance
and similar laws affecting creditors' rights generally, and general
principles of equity (regardless of whether the application of such
principles is considered in a proceeding in equity or at law).
4. The issuance, sale and delivery of the Series B Notes
under the circumstances contemplated by the Note Agreement do not,
under existing law, require the registration of the Series B Notes
under the Securities Act of 1933, as amended, or the qualification of
an indenture under the Trust Indenture Act of 1939, as amended.
The opinion of Chapman and Cutler may rely upon the opinion of
McCutchen, Doyle, Brown & Enersen LLP, as to matters of California law. The
opinion of Chapman and Cutler shall also state that the opinion of McCutchen,
Doyle, Brown & Enersen LLP, is satisfactory in scope and form to Chapman and
Cutler and that, in their opinion, the Purchasers are justified in relying
thereon.
In rendering the opinion set forth in paragraph 1 above, Chapman and
Cutler may rely, as to matters referred to in paragraph 1, solely upon an
examination of the Articles of Incorporation certified by, and a certificate of
good standing of the Company from, the Secretary of State of the State of
California, the By-laws of the Company and the general business corporation law
of the State of California.
With respect to matters of fact upon which such opinion is based,
Chapman and Cutler may rely on appropriate certificates of public officials and
officers of the Company and upon
EXHIBIT C
(to Note Agreement)
<PAGE>
representations of the Company and the Purchasers delivered in connection with
the issuance and sale of the Series B Notes.
2
<PAGE>
DESCRIPTION OF CLOSING OPINION
OF COUNSEL TO THE COMPANY
The closing opinion of McCutchen, Doyle, Brown & Enersen LLP, counsel
for the Company, which is called for by ss.4.1 of the Note Agreement, shall be
dated the Closing Date and addressed to the Purchasers, shall be satisfactory in
scope and form to the Purchasers and shall be to the effect that:
1. The Company is a corporation, duly incorporated, validly
existing and in good standing under the laws of the State of
California, has the corporate power and the corporate authority to
execute and perform the Note Agreement and to issue the Series B Notes
and has the full corporate power and the corporate authority to conduct
the activities in which it is now engaged.
2. The Note Agreement has been duly authorized by all
necessary corporate action on the part of the Company, has been duly
executed and delivered by the Company and constitutes the legal, valid
and binding contract of the Company enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent conveyance and
similar laws affecting creditors' rights generally, and general
principles of equity (regardless of whether the application of such
principles is considered in a proceeding in equity or at law).
3. The Series B Notes have been duly authorized by all
necessary corporate action on the part of the Company, have been duly
executed and delivered by the Company and constitute the legal, valid
and binding obligations of the Company enforceable in accordance with
their terms, subject to bankruptcy, insolvency, fraudulent conveyance
and similar laws affecting creditors' rights generally, and general
principles of equity (regardless of whether the application of such
principles is considered in a proceeding in equity or at law).
4. No approval, consent or withholding of objection on the
part of, or filing, registration or qualification with, any
governmental body, Federal or state, is necessary in connection with
the execution and delivery of the Note Agreement or the Series B Notes
other than the authorization of the Commission, which authorization has
been duly obtained, is in full force and effect.
5. The issuance and sale of the Series B Notes and the
execution, delivery and performance by the Company of the Note
Agreement do not violate or result in any breach of any of the
provisions of or constitute a default under or result in the creation
or imposition of any Lien upon any of the property of the Company
pursuant to the provisions of the Articles of Incorporation or By-laws
of the Company or any agreement or other instrument listed as a
material contract in the Company's most recent Annual Report.
6. Based upon the representations set forth in Section 3.2
of the Note Agreement, the issuance, sale and delivery of the Series B
Notes under the circumstances
EXHIBIT D
(to Note Agreement)
<PAGE>
contemplated by the Note Agreement do not, under existing law, require
the registration of the Series B Notes under the Securities Act of
1933, as amended, or the qualification of the Note Agreement or an
indenture under the Trust Indenture Act of 1939, as amended.
7. Based upon the assumption of the accuracy of information
obtained by the Company from sources believed to be reliable that the
following cities served by the Company were all incorporated prior to
1911:
Bakersfield Marysville South San Francisco
Chico Oroville Stockton
Dixon Redondo Beach Visalia
Hermosa Beach Salinas Willows
King City San Mateo
Livermore Selma
that water distribution systems were constructed and service furnished
to the inhabitants of each by various predecessors of the Company prior
to 1911, and that there were no public water works owned or controlled
by the municipality in any of them prior to 1911, in the opinion of
such counsel, the Company has a "constitutional" franchise in each of
the above cities and under such constitutional franchise has a
perpetual right which was not repealed by the repeal of Article XI,
Section 19, of the California Constitution to continue to occupy public
streets of each of said cities with its pipes and mains and to lay down
additional pipes and mains in said streets for the supplying of water,
subject to reasonable regulation by the respective municipalities as
they existed at the date of repeal of the constitutional provision in
1911 and probably also extends to territory incorporated into each
respective city after such repeal, although this latter question
remains somewhat in doubt in the absence of a final decision of the
courts thereon.
The opinion of McCutchen, Doyle, Brown & Enersen LLP shall cover such
other matters relating to the sale of the Series B Notes as the Purchasers may
reasonably request. With respect to matters of fact on which such opinion is
based, such counsel shall be entitled to rely on appropriate certificates of
public officials and officers of the Company.
2
Exhibit 10.18
Amendment to Business Loan Agreements
(a) Bank of America
================================================================================
Business
Loan Agreement
This Agreement dated as of May 3, 1999 is among Bank of America National Trust
and Savings Association (the "Bank"), California Water Service Group ("Borrower
1") and CWS Utility Services ("Borrower 2") (Borrower 1 and Borrower 2 are
sometimes referred to collectively as the "Borrowers" and individually as the
"Borrower").
1. LINE OF CREDIT AMOUNT AND TERMS
1.1 Line of Credit Amount.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrowers. The amount of the line of credit (the
"Commitment") is Twenty Million and 00/1 00 Dollars ($20,000,000.00).
(b) This is a revolving line of credit providing for cash advances and
letters of credit. During the availability period, the Borrowers may
repay principal amounts and reborrow them.
(c) The Borrowers agree not to permit the outstanding principal balance of
advances under the line of credit plus the outstanding amounts of any
letters of credit, including amounts drawn on letters of credit and not
yet reimbursed, to exceed the Commitment.
1.2 Availability Period. The line of credit is available between the date
of this Agreement and April 30, 2001 (the "Expiration Date") unless any
Borrower is in default.
1.3 Interest Rate.
(a) The interest rate is the Bank's Reference Rate minus 0.5 percentage
points.
(b) The Reference Rate is the rate of interest publicly announced from time
to time by the Bank in San Francisco, California, as its Reference
Rate. The Reference Rate is set by the Bank based on various factors,
including the Bank's costs and desired return, general economic
conditions and other factors, and is used as a reference point for
pricing some loans. The Bank may price loans to its customers at,
above, or below the Reference Rate. Any change in the Reference Rate
shall take effect at the opening of business on the day specified in
the public announcement of a change in the Bank's Reference Rate.
1.4 Repayment Terms.
(a) The Borrowers will pay interest on June 1, 1999, and then monthly
thereafter until payment in full of any principal outstanding under
this line of credit.
(b) The Borrowers will repay in full all principal and any unpaid interest
or other charges outstanding under this line of credit no later than
the Expiration Date. Any interest period for an optional interest rate
(as described below) shall expire no later than the Expiration Date.
1.5 Optional Interest Rates. Instead of the interest rate based on the Bank's
Reference Rate, the Borrowers may elect the optional interest rates listed below
during interest periods agreed to by the Bank and the Borrowers. The optional
interest rates shall be subject to the terms and conditions described
3
<PAGE>
later in this Agreement. Any principal amount bearing interest at an optional
rate under this Agreement is referred to as a "Portion." The following optional
interest rates are available:
(a) Fixed Rates.
(b) the LIBOR Rate plus 1.25 percentage points.
1.6 Letters of Credit.
(a) This line of credit may be used for financing:
(i) standby letters of credit with a maximum maturity of 365 days
but not to extend beyond December 31, 2001. The standby
letters of credit may include a provision providing that the
maturity date will be automatically extended each year for an
additional year unless the Bank gives written notice to the
contrary; provided, however, that each letter of credit must
include a final maturity date which will not be subject to
automatic extension.
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(ii) The amount of letters of credit outstanding at any one time
(including amounts drawn on letters of credit and not yet
reimbursed) may not exceed Ten Million and 00/1 00 Dollars ($1
0,000,000.00).
(b) Each Borrower agrees:
(i) any sum drawn under a letter of credit may, at the option of the
Bank, be added to the principal amount outstanding under this
Agreement. The amount will bear interest and be due as described
elsewhere in this Agreement.
(ii) if there is a default under this Agreement, to immediately
prepay and make the Bank whole for any outstanding letters of
credit.
(iii) the issuance of any letter of credit and any amendment to a
letter of credit is subject to the Bank's written approval and
must be in form and content satisfactory to the Bank and in
favor of a beneficiary acceptable to the Bank.
(iv) to sign the Bank's form Application and Agreement for Standby
Letter of Credit.
(v) to pay any issuance and/or other fees that the Bank notifies the
Borrowers will be charged for issuing and processing letters of
credit for the Borrowers.
(vi) to allow the Bank to automatically charge its checking account
for applicable fees, discounts, and other charges.
2. OPTIONAL INTEREST RATES
2.1 Optional Rates. Each optional interest rate is a rate per year.
Interest will be paid on the last day of each interest period, and on the first
day of each month during the interest period. At the end of any interest period,
the interest rate will revert to the rate based on the Reference Rate, unless
the Borrowers have designated another optional interest rate for the Portion. No
Portion will be converted to a different interest rate during the applicable
interest period. Upon the occurrence of an event of default under this
Agreement, the Bank may terminate the availability of optional interest rates
for interest periods commencing after the default occurs.
2.2 Fixed Rate. The election of Fixed Rates shall be subject to the
following terms and requirements:
(a) The "Fixed Rate" means the fixed interest rate the Bank and the
Borrowers agree will apply to the Portion during the applicable
interest period.
(b) The interest period during which the Fixed Rate will be in effect will
be one year or less.
(c) Each Fixed Rate Portion will be for an amount not less than the
following:
4
<PAGE>
(i) for interest periods of 91 days or longer, Five Hundred
Thousand Dollars ($500,000).
(ii) for interest periods of between 30 days and 90 days, One
Million Dollars ($1,000,000).
(iii) for interest periods of between 2 days and 29 days, an amount
which, when multiplied by the number of days in the applicable
interest period, is not less than thirty million (30,000,000)
dollar-days.
(iv) for interest periods of 1 day, Fifteen Million Dollars
($15,000,000).
(d) Each prepayment of a Fixed Rate Portion, whether voluntary, by reason
of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee as
described below. A "prepayment" is a payment of an amount on a date
earlier than the scheduled payment date for such amount as required by
this Agreement. The prepayment fee shall be equal to the amount (if
any) by which:
(i) the additional interest which would have been payable during
the interest period on the amount prepaid had it not been
prepaid, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the domestic
certificate of deposit market, the eurodollar deposit market,
or other appropriate money market selected by the Bank for a
period starting on the date on which it was prepaid and ending
on the last day of the interest period for such Portion (or
the scheduled payment date for the amount prepaid, if
earlier).
5
<PAGE>
2.3 LIBOR Rate. The election of LIBOR Rates shall be subject to the
following terms and requirements:
(a) The interest period during which the LIBOR Rate will be in effect will
be one, two or three weeks, or one, two, three, four, five, six, seven,
eight, nine, ten, eleven, or twelve months. The first day of the
interest period must be a day other than a Saturday or a Sunday on
which the Bank is open for business in California, New York and London
and dealing in offshore dollars (a "LIBOR Banking Day"). The last day
of the interest period and the actual number of days during the
interest period will be determined by the Bank using the practices of
the London inter-bank market.
(b) Each LIBOR Rate Portion will be for an amount not less than the
following:
(i) for interest periods of four months or longer, Five Hundred
Thousand Dollars ($500,000).
(ii) for interest periods of one, two or three months, One Million
Dollars ($1,000,000).
(iii) for interest periods of one, two or three weeks, an amount
which, when multiplied by the number of days in the applicable
interest period, is not less than thirty million (30,000,000)
dollar-days.
(c) The "LIBOR Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1 /1 00 of one percent. (All
amounts in the calculation will be determined by the Bank as of the
first day of the interest period.)
LIBOR Rate = London Inter-Bank Offered Rate
-----------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Inter-Bank Offered Rate" means the interest rate at
which the Bank's London Branch, London, Great Britain, would
offer U.S. dollar deposits for the applicable interest period
to other major banks in the London inter-bank market at
approximately 1 1:00 a.m. London time two (2) London Banking
Days before the commencement of the interest period. A "London
Banking Day" is a day on which the Bank's London Branch is
open for business and dealing in offshore dollars.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by
member banks of the Federal Reserve System for Eurocurrency
Liabilities, as defined in Federal Reserve Board Regulation D,
rounded upward to the nearest 1 /1 00 of one percent. The
percentage will be expressed as a decimal, and will include,
but not be limited to, marginal, emergency, supplemental,
special, and other reserve percentages.
(d) The Borrowers shall irrevocably request a LIBOR Rate Portion no later
than 12:00 noon San Francisco time on the LIBOR Banking Day preceding
the day on which the London Inter-Bank Offered Rate will be set, as
specified above. For example, if there are no intervening holidays or
weekend days in any of the relevant locations, the request must be made
at least three days before the LIBOR Rate takes effect.
(e) The Borrowers may not elect a LIBOR Rate with respect to any principal
amount which is scheduled to be repaid before the last day of the
applicable interest period.
Each prepayment of a LIBOR Rate Portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued interest
on the amount prepaid and a prepayment fee as described below. A "prepayment" is
a payment of an amount on a date earlier than the scheduled payment date for
such amount as required by this Agreement. The prepayment fee shall be equal to
the amount (if any) by which:
(i) the additional interest which would have been payable during
the interest period on the amount prepaid had it not been
prepaid, exceeds
6
<PAGE>
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the domestic certificate
of deposit market, the eurodollar deposit market, or other
appropriate money market selected by the Bank, for a period
starting on the date on which it was prepaid and ending on the
last day of the interest period for such Portion (or the
scheduled payment date for the amount prepaid, if earlier).
(g) The Bank will have no obligation to accept an election for a LIBOR Rate
Portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal to
the interest period, of a LIBOR Rate Portion are not available in
the London inter-bank market; or
3. EXPENSES
3.1 Expenses. The Borrowers agree to immediately repay the Bank for expenses
that include, but are not limited to, filing, recording and search fees,
appraisal fees, title report fees and documentation fees.
3.2 Reimbursement Costs.
(a) The Borrowers agree to reimburse the Bank for any expenses it incurs in
the preparation of this Agreement and any agreement or instrument
required by this Agreement. Expenses include, but are not limited to,
reasonable aftorneys'fees, including any allocated costs of the Bank's
in-house counsel.
4. DISBURSEMENTS, PAYMENTS AND COSTS
4.1 Requests for Credit; Equal Access by all Borrowers. Any Borrower (or a
person or persons authorized by any one of the Borrowers), acting alone, can
borrow up to the full amount of credit provided under this Agreement. Each
Borrower will be liable for all extensions of credit made under this Agreement
to any other Borrower. Each request for an extension of credit will be made in
writing in a manner acceptable to the Bank, or by another means acceptable to
the Bank.
4.2 Disbursements and Payments. Each disbursement by the Bank and each
payment by the Borrowers will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
(b) made for the account of the Bank's branch selected by the Bank from time
to time;
(c) made in immediately available funds, or such other type of funds
selected by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at its
discretion, require the Borrowers to sign one or more promissory notes.
4.3 Telephone and Telefax Authorization.
(a) The Bank may honor telephone or telefax instructions for advances or
repayments given by any one of the individuals authorized to sign loan
agreements on behalf of each Borrower, or any other individual
designated by any one of such authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from
Borrower l's account number 14878-03863, or such other accounts with the
Bank as designated in writing by the Borrowers.
(c) The Borrowers indemnify and excuse the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in connection
with any act resulting from telephone or telefax instructions the Bank
reasonably believes are made by any individual authorized by the
Borrowers to give such instructions. This indemnity and excuse will
survive this Agreement's termination.
7
<PAGE>
4.4 Direct Debit.
(a) The Borrowers agree that interest and any fees will be deducted
automatically on the due date from Borrower `s account number
14878-03863, or such other of the Borrowers' accounts with the Bank as
designated in writing by the Borrowers.
(b) The Bank will debit the account on the dates the payments become due.
If a due date does not fall on a banking day, the Bank will debit the
account on the first banking day following the due date.
(c) The Borrowers will maintain sufficient funds in the account on the
dates the Bank enters debits authorized by this Agreement. If there are
insufficient funds in the account on the date the Bank enters any debit
authorized by this Agreement, the debit will be reversed.
4.5 Banking Days. Unless otherwise provided in this Agreement, a banking
day is a day other than a Saturday or a Sunday on which the Bank is open for
business in California. All payments and disbursements which would be due on a
day which is not a banking day will be due on the next banking day. All payments
received on a day which is not a banking day will be applied to the credit on
the next banking day.
- --------------------------------------------------------------------------------
4.6 Taxes. If any payments to the Bank under this Agreement are made from
outside the United States, the Borrowers will not deduct any foreign taxes from
any payments they make to the Bank. If any such taxes are imposed on any
payments made by the Borrowers (including payments under this paragraph), the
Borrowers will pay the taxes and will also pay to the Bank, at the time interest
is paid, any additional amount which the Bank specifies as necessary to preserve
the after-tax yield the Bank would have received if such taxes had not been
imposed. The Borrowers will confirm that they have paid the taxes by giving the
Bank official tax receipts (or notarized copies) within 30 days after the due
date.
4.7 Additional Costs. The Borrowers will pay the Bank, on demand, for the
Bank's costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitments
for credit.
4.8 Interest Calculation. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher fee
than if a 365-day year is used. Installments of principal which are not paid
when due under this Agreement shall continue to bear interest until paid.
4.9 Default Rate. Upon the occurrence and during the continuation of any
default under this Agreement, principal amounts outstanding under this Agreement
will at the option of the Bank bear interest at a rate which is 2 percentage
point(s) higher than the rate of interest otherwise provided under this
Agreement. This will not constitute a waiver of any default.
4.10 Interest Compounding. At the Bank's sole option in each instance, any
interest, fees or costs which are not paid when due under this Agreement shall
bear interest from the due date at the Bank's Reference Rate minus 0.05
percentage points. This may result in compounding of interest.
5. CONDITIONS
The Bank must receive the following items, in form and content acceptable to the
Bank, before it is required to extend any credit to the Borrowers under this
Agreement:
5.1 Authorizations. Evidence that the execution, delivery and performance
by each Borrower and each guarantor of this Agreement and any instrument or
agreement required under this Agreement have been duly authorized.
5.2 Governing Documents. A copy of each Borrower's articles of
incorporation.
8
<PAGE>
5.3 Other Items. Any other items that the Bank reasonably requires.
6. REPRESENTATIONS AND WARRANTIES
When the Borrowers sign this Agreement, and until the Bank is repaid in full,
each Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation:
6.1 Organization of Borrowers. Each Borrower is a corporation duly formed
and existing under the laws of the state where organized.
6.2 Authorization. This Agreement, and any instrument or agreement required
hereunder, are within each Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
6.3 Enforceable Agreement. This Agreement is a legal, valid and binding
agreement of each Borrower, enforceable against each Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
6.4 Good Standing. In each state in which each Borrower does business, it
is properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
6.5 No Conflicts. This Agreement does not conflict with any law, agreement,
or obligation by which any Borrower is bound.
- --------------------------------------------------------------------------------
6.6 Financial Information. All financial and other information that has
been or will be supplied to the Bank is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrowers' (and any guarantor's) financial condition, including all
material contingent liabilities.
(b) in compliance with all government regulations that apply.
6.7 Lawsuits. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrowers or any one of them which, if lost,
would impair the Borrowers' or any Borrower's financial condition or
ability to repay the loan, except as have been disclosed in writing to
the Bank.
6.8 Permits, Franchises. Each Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
6.9 Other Obligations. No Borrower is in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
6.10 Income Tax Matters. No Borrower has any knowledge of any pending
assessments or adjustments of its income tax for any year.
6.11 No Event of Default. There is no event which is, or with notice or
lapse of time or both would be, a default under this Agreement.
6.12 Location of Borrowers. Each Borrower's place of business (or, if any
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrowers' signature on this Agreement.
9
<PAGE>
6.13 Year 2000 Compliance. Each Borrower has conducted a comprehensive
review and assessment of its systems and equipment applications and made inquiry
of such Borrower's key suppliers, vendors and customers with respect to the
loyear 2000 problem" (that is, the inability of computers, as well as embedded
microchips in non-computing devices, to properly perform date-sensitive
functions with respect to certain dates prior to and after December 31, 1999).
Based on that review and inquiry, none of the Borrowers believes the year 2000
problem, including costs of remediation, will result in a material adverse
change in its business condition (financial or otherwise), operations,
properties or prospects, or ability to repay the credit. Each Borrower has
developed adequate contingency plans to ensure uninterrupted and unimpaired
business operation in the event of a failure of its own or a third party's
systems or equipment due to the year 2000 problem, including those of vendors,
customers, and suppliers, as well as a general failure of or interruption in its
communications and delivery infrastructure.
7. COVENANTS
The Borrowers agree, so long as credit is available under this Agreement and
until the Bank is repaid in full:
7.1 Use of Proceeds. To use the proceeds of the credit only for short term
operating capital, bridge financing for capital expenditures and issuing standby
letters of credit.
7.2 Financial Information. To provide the following financial information
and statements in form and content acceptable to the Bank, and such additional
information as requested by the Bank from time to time:
(a) Within 90 days of Borrower 1's fiscal year end, Borrower 1's annual
financial statements. These financial statements must be audited (with
an unqualified opinion) by a Certified Public Accountant ("CPA")
acceptable to the Bank. The statements shall be prepared on a
consolidated basis.
(b) Within 60 days of the period's end, Borrower 1's quarterly financial
statements including supplemental schedules. These financial statements
may be Borrower prepared. The statements shall be prepared on a
consolidated and consolidating basis.
(c) Within 90 days of its fiscal year end, copies of Borrower 1's Form 1O-K
Annual Report and Form 8-K Current Report (if applicable).
(d) Within 60 days of the period's end, copies of Borrower 1's Form 10-Q
Quarterly Report and Form 8-K Current Report.
(e) Within 90 days of its fiscal year end, Borrower 2's annual financial
statements. These financial statements may be company prepared.
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(f) Within 60 days of the period's end, Borrower 2's quarterly financial
statements. These financial statements may be company prepared.
(g) By April 30 of each year, Borrower 2's narrative business plan.
(h) Within 90 days of the Borrower's fiscal year end, California Water
Company's annual financial statements. These financial statements must
be audited (with an unqualified opinion) by a Certified Public
Accountant ("CPA") acceptable to the Bank.
(i) Within 60 days of the period's end, California Water Company's
quarterly financial statements. These financial statements may be
Borrower prepared.
7.3 Other Debts. Not to have outstanding or incur any direct or contingent
liabilities (other than those to the Bank), or become liable for the liabilities
of others, without the Bank's written consent, which will not be unreasonably
withheld, This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
10
<PAGE>
(d) Liabilities in existence on the date of this Agreement disclosed in
writing to the Bank.
(e) First mortgage bonds and/or unsecured senior notes currently
outstanding or subsequently issued.
7.4 Other Liens. Not to create, assume, or allow any security interest or
lien (including judicial liens) on property any Borrower now or later owns,
except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing to
the Bank.
(d) Liens securing first mortgage bonds currently outstanding or
subsequently issued.
7.5 Out of Debt Period. To repay any advances in full, and not to draw any
additional advances on the Borrowers' revolving line of credit, for a period of
at least 30 consecutive days in each line-year. "Line-year" means the period
between the date of this Agreement and December 31, 1999, and each subsequent
one-year period (if any). For the purposes of this paragraph, "advances" does
not include undrawn amounts of outstanding letters of credit.
7.6 Notices to Bank. To promptly notify the Bank in writing of:
(a) any lawsuit over One Million Dollars ($1,000,000) against any one or
more of the Borrowers (or any guarantor).
(b) any substantial dispute between any Borrower (or any guarantor) and any
government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in any Borrower's (or any guarantor's)
business condition (financial or otherwise), operations, properties or
prospects, or ability to repay the credit.
(e) any change in any Borrower's name, legal structure, place of business,
or chief executive office if such Borrower has more than one place of
business.
7.7 Books and Records. To maintain adequate books and records.
7.8 Audits. To allow the Bank and its agents to inspect the Borrowers'
properties and examine, audit, and make copies of books and records at any
reasonable time. If any of the Borrowers' properties, books or records are in
the possession of a third party, the Borrowers authorize that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.
7.9 Compliance with Laws. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over each Borrower's business.
- --------------------------------------------------------------------------------
7.10 Preservation of Rights. To maintain and preserve all rights,
privileges, and franchises each Borrower now has.
7.11 Maintenance of Properties. To make any repairs, renewals, or
replacements to keep each Borrower's properties in good working condition.
7.12 Cooperation. To take any action reasonably requested by the Bank to
carry out the intent of this Agreement.
7.13 General Business Insurance. To maintain insurance as is usual for the
business the Borrowers are in.
7.14 Additional Negative Covenants. Not to, without the Bank's written
consent, which will not be unreasonably withheld:
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<PAGE>
(a) engage in any business activities substantially different from the
Borrowers' or any Borrower's present business.
(b) liquidate or dissolve the Borrowers' or any Borrower's business.
(c) enter into any consolidation, merger, or other combination, or become a
partner in a partnership, a member of a joint venture, or a member of a
limited liability company where any single transaction exceeds Two
Million Five Hundred Thousand Dollars ($2,500,000).
(d) sell, assign, lease, transfer or otherwise dispose of any assets for
less than fair market value, or enter into any agreement to do so.
(e) sell, assign, lease, transfer or otherwise dispose of all or a
substantial part of the Borrower's business or the Borrower's assets.
(f) enter into any sale and leaseback agreement covering the Borrowers' or
any Borrower's fixed assets.
(g) acquire or purchase a business or its assets for a consideration,
including assumption of direct or contingent debt, where any single
transaction exceeds Two Million Five Hundred Thousand Dollars
($2,500,000).
(h) with respect to Borrower 1, not to enter into any agreement that would
restrict California Water Service Company's ability to declare and pay
dividends to Borrower 1.
8. DEFAULT
If any of the following events occurs, the Bank may do one or more of the
following: declare the Borrowers in default, stop making any additional credit
available to the Borrowers, and require the Borrowers to repay their entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to any Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.
8.1 Failure to Pay. Any Borrower fails to make a payment under this
Agreement when due.
8.2 False Information. Any Borrower (or any guarantor) has given the Bank
false or misleading information or representations.
8.3 Bankruptcy. Any Borrower (or any guarantor) files a bankruptcy
petition, a bankruptcy petition is filed against any Borrower (or any guarantor)
or any Borrower (or any guarantor) makes a general assignment for the benefit of
creditors.
8.4 Receivers. A receiver or similar official is appointed for any
Borrower's (or any guarantor's) business, or the business is terminated.
8.5 Lawsuits. Any lawsuit or lawsuits are filed against any one or more of
the Borrowers (or any guarantor) in an aggregate amount of One Million Dollars
($1,000,000) or more in excess of any insurance coverage.
8.6 Judgments. Any judgments or arbitration awards are entered against any
one or more of the Borrowers (or any guarantor), or any one or more of the
Borrowers (or any guarantor) enters into any settlement agreements with respect
to any litigation or arbitration, in an aggregate amount of One Million Dollars
($1,000,000) or more in excess of any insurance coverage.
8.7 Government Action. Any government authority takes action that the Bank
believes materially adversely affects any Borrower's (or any guarantor's)
financial condition or ability to repay.
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8.8 Material Adverse Change. A material adverse change occurs, or is
reasonably likely to occur, in any Borrower's (or any guarantor's) business
condition (financial or otherwise), operations, properties or prospects, or
ability to repay the credit.
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<PAGE>
8.9 Cross-default. Any default occurs under any agreement in connection
with any credit any Borrower (or any guarantor) or any of the Borrower's related
entities or affiliates has obtained from anyone else or which the Borrower (or
any guarantor) or any of the Borrower's related entities or affiliates has
guaranteed, if the default consists of failing to make a payment when due or
gives the other lender the right to accelerate the obligation.
8.10 Default under Related Documents. Any guaranty, subordination agreement,
security agreement, deed of trust, or other document required by this Agreement
is violated or no longer in effect.
8.11 Other Bank Agreements. Any Borrower (or any guarantor) fails to meet
the conditions of, or fails to perform any obligation under any other agreement
any Borrower (or any guarantor) has with the Bank or any affiliate of the Bank.
8.12 Other Breach Under Agreement. Any Borrower fails to meet the conditions
of, or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article. This includes any failure or
anticipated failure by any Borrower to comply with any financial covenants set
forth in this Agreement, whether such failure is evidenced by financial
statements delivered to the Bank or is otherwise known to any Borrower or the
Bank.
9. ENFORCING THIS AGREEMENT; MISCELLANEOUS
9.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
9.2 California Law. This Agreement is governed by California law.
9.3 Successors and Assigns. This Agreement is binding on the Borrowers'and
the Bank's successors and assignees. The Borrowers agree that they may not
assign this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrowers with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the right
of set-off against the Borrowers.
9.4 Arbitration.
(a) This paragraph concerns the resolution of any controversies or claims
between any one or more of the Borrowers and the Bank, including but
not limited to those that arise from:
(i) This Agreement (including any renewals, extensions or modifications of
this Agreement);
(ii) Any document, agreement or procedure related to or delivered in
connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted between
any one or more of the Borrowers and the Bank, including claims for
injury to persons, property or business interests (torts).
(b) At the request of any Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United
States Arbitration Act. The United States Arbitration Act will apply
even though this Agreement provides that it is governed by California
law.
(c) Arbitration proceedings will be administered by the American
Arbitration Association and will be subject to its commercial rules of
arbitration.
(d) For purposes of the application of the statute of limitations, the
filing of an arbitration pursuant to this paragraph is the equivalent
of the filing of a lawsuit, and any claim or controversy which may be
arbitrated under this paragraph is subject to any applicable statute of
limitations. The arbitrators
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<PAGE>
will have the authority to decide whether any such claim or controversy
is barred by the statute of limitations and, if so, to dismiss the
arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the
arbitrators will have the authority to resolve any such dispute. The
decision that results from an arbitration proceeding may be submitted
to any authorized court of law to be confirmed and enforced.
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(g) The procedure described above will not apply if the controversy or
claim, at the time of the proposed submission to arbitration, arises
from or relates to an obligation to the Bank secured by real property
located in California. In this case, both the Borrowers and the Bank
must consent to submission of the claim or controversy to arbitration.
If all parties do not consent to arbitration, the controversy or claim
will be settled as follows:
(i) The Borrowers and the Bank will designate a referee (or a panel of
referees) selected under the auspices of the American Arbitration
Association in the same manner as arbitrators are selected in
Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be appointed by
a court as provided in California Code of Civil Procedure Section 638
and the following related sections;
(iii) The referee (or the presiding referee of the panel) will be an active
attorney or a retired judge; and
(iv) The award that results from the decision of the referee (or the panel)
will be entered as a judgment in the court that appointed the referee,
in accordance with the provisions of California Code of Civil Procedure
Sections 644 and 645.
(h) This provision does not limit the right of the Borrowers or the Bank
to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property
collateral; or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrowers or the Bank,
including the suing party, to submit the controversy or claim to
arbitration if the other party contests the lawsuit. However, if the
controversy or claim arises from or relates to an obligation to the
Bank which is secured by real property located in California at the
time of the proposed submission to arbitration, this right is limited
according to the provision above requiring the consent of both the
Borrowers and the Bank to seek resolution through arbitration.
(o) If the Bank forecloses against any real property securing this
Agreement, the Bank has the option to exercise the power of sale under
the deed of trust or mortgage, or to proceed by judicial foreclosure.
9.5 Severability; Waivers. If any part of this Agreement is not
enforceable, the rest of the Agreement may be enforced. The Bank retains all
rights, even if it makes a loan after default. If the Bank waives a default, it
may enforce a later default. Any consent or waiver under this Agreement must be
in writing.
9.6 Administration Costs. The Borrowers shall pay the Bank for all
reasonable costs incurred by the Bank in connection with administering this
Agreement.
9.7 Attorneys' Fees. The Borrowers shall reimburse the Bank for any
reasonable costs and attorneys'fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and in
connection with any amendment, waiver, "workout" or restructuring under this
Agreement. In the event of
14
<PAGE>
a lawsuit or arbitration proceeding, the prevailing party is entitled to recover
costs and reasonable attorneys' fees incurred in connection with the lawsuit or
arbitration proceeding, as determined by the court or arbitrator. In the event
that any case is commenced by or against any of the Borrowers under the
Bankruptcy Code (Title 1 1, United States Code) or any similar or successor
statute, the Bank is entitled to recover costs and reasonable attorneys' fees
incurred by the Bank related to the preservation, protection, or enforcement of
any rights of the Bank in such a case. As used in this paragraph, "attorneys'
fees" includes the allocated costs of the Bank's in-house counsel.
9.8 Joint and Several Liability.
(a) Each Borrower agrees that it is jointly and severally liable to the Bank
for the payment of all obligations arising under this Agreement, and
that such liability is independent of the obligations of the other
Borrower(s). The Bank may bring an action against any Borrower, whether
an action is brought against the other Borrower(s).
(b) Each Borrower agrees that any release which may be given by the Bank to
the other Borrower(s) or any guarantor will not release such Borrower
from its obligations under this Agreement.
- --------------------------------------------------------------------------------
(c) Each Borrower waives any right to assert against the Bank any defense,
setoff, counterclaim, or claims which such Borrower may have against the
other Borrower(s) or any other party liable to the Bank for the
obligations of the Borrowers under this Agreement.
(d) Each Borrower agrees that it is solely responsible for keeping itself
informed as to the financial condition of the other Borrower(s) and of
all circumstances which bear upon the risk of nonpayment. Each Borrower
waives any right it may have to require the Bank to disclose to such
Borrower any information which the Bank may now or hereafter acquire
concerning the financial condition of the other Borrower(s).
(e) Each Borrower waives all rights to notices of default or nonperformance
by any other Borrower under this Agreement. Each Borrower further waives
all rights to notices of the existence or the creation of new
indebtedness by any other Borrower.
The Borrowers represent and warrant to the Bank that each will derive
benefit, directly and indirectly, from the collective administration and
availability of credit under this Agreement. The Borrowers agree that
the Bank will not be required to inquire as to the disposition by any
Borrower of funds disbursed in accordance with the terms of this
Agreement.
(g) Until all obligations of the Borrowers to the Bank under this Agreement
have been paid in full, each Borrower waives any right of subrogation,
reimbursement, indemnification and contribution (contractual, statutory
or otherwise), including without limitation, any claim or right of
subrogation under the Bankruptcy Code (Title 1 1, United States Code) or
any successor statute, which such Borrower may now or hereafter have
against any other Borrower with respect to the indebtedness incurred
under this Agreement. Each Borrower waives any right to enforce any
remedy which the Bank now has or may hereafter have against any other
Borrower, and waives any benefit of, and any right to participate in,
any security now or hereafter held by the Bank.
9.9 One Agreement. This Agreement and any related security or other
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank
and the Borrowers concerning this credit;
(b) replace any prior oral or written agreements between the Bank and the
Borrowers concerning this credit; and
(c) are intended by the Bank and the Borrowers as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
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9.10 Notices. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrowers may specify from time to time in writing.
9.11 Headings. Article and paragraph headings are for reference only and
shall not affect the interpretation or meaning of any provisions of this
Agreement.
9.12 Counterparts. This Agreement may be executed in as many counterparts as
necessary or convenient, and bythe different parties on separate counterparts
each of which, when so executed, shall be deemed an original but all such
counterparts shall constitute but one and the same agreement.
9.13 Prior Agreement Superseded. This Agreement supersedes the Business Loan
Agreement entered into as of March 16, 1998 between the Bank and the Borrowers,
and any credit outstanding thereunder shall be deemed to be outstanding under
this Agreement.
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<TABLE>
This Agreement is executed as of the date stated at the top of the first page.
<CAPTION>
<S> <C>
Bank of America California Water Service Group
National Trust and Savings Association
By: Gerald F. Feeney, Vice President,
By: Jeffrey Perkins, Vice President C.F.O. and Treasurer
Address where notices to the Bank are to be sent: Address for Notices:
San Jose Commercial Banking Office #01487 1720 North First Street
1 01 Park Center Plaza San Jose, CA 95112
San Jose, CA 95113
CWS Utility Services
By: Gerald F. Feeney, Vice President,
C.F.O. and Treasurer
Address for Notices:
1720 North First Street
San Jose, CA 95112
</TABLE>
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<PAGE>
Bank of America
================================================================================
Business Loan Agreement
This Agreement dated as of May 3, 1999 is between Bank of America National Trust
and Savings Association (the "Bank") and California Water Service Company (the
"Borrower").
1. LINE OF CREDIT AMOUNT AND TERMS
1.1 Line of Credit Amount.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrower. The amount of the line of credit (the
"Commitment") is Thirty Million and 00/1 00 Dollars ($30,000,000.00).
(b) This is a revolving line of credit providing for cash advances and
letters of credit. During the availability period, the Borrower may
repay principal amounts and reborrow them.
(c) The Borrower agrees not to permit the outstanding principal balance of
advances under the line of credit plus the outstanding amounts of any
letters of credit, including amounts drawn on letters of credit and not
yet reimbursed, to exceed the Commitment.
1.2 Availability Period. The line of credit is available between the date
of this Agreement and April 30, 2001 (the "Expiration Date") unless the Borrower
is in default.
1.3 Interest Rate.
(a) Unless the Borrower elects an optional interest rate as described
below, the interest rate is the Bank's Reference Rate minus 0.5
percentage points.
(b) The Reference Rate is the rate of interest publicly announced from time
to time by the Bank in San Francisco, California, as its Reference
Rate. The Reference Rate is set by the Bank based on various factors,
including the Bank's costs and desired return, general economic
conditions and other factors, and is used as a reference point for
pricing some loans. The Bank may price loans to its customers at,
above, or below the Reference Rate. Any change in the Reference Rate
shall take effect at the opening of business on the day specified in
the public announcement of a change in the Bank's Reference Rate.
1.4 Repayment Terms.
(a) The Borrower will pay interest on June 1, 1999, and then monthly
thereafter until payment in full of any principal outstanding under
this line of credit.
(b) The Borrower will repay in full all principal and any unpaid interest
or other charges outstanding under this line of credit no later than
the Expiration Date. Any interest period for an optional interest rate
(as described below) shall expire no later than the Expiration Date.
1.5 Optional Interest Rates. Instead of the interest rate based on the
Bank's Reference Rate, the Borrower may elect the optional interest rates listed
below during interest periods agreed to by the Bank and the Borrower. The
optional interest rates shall be subject to the terms and conditions described
later in this Agreement. Any principal amount bearing interest at an optional
rate under this Agreement is referred to as a "Portion." The following optional
interest rates are available:
(a) Fixed Rates.
(b) the LIBOR Rate plus 1.25 percentage points.
1.6 Letters of Credit.
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(a) This line of credit may be used for financing:
(i) standby letters of credit with a maximum maturity of 365 days
but not to extend beyond December 31, 2001. The standby
letters of credit may include a provision providing that the
maturity date will be automatically extended each year for an
additional year unless the Bank gives written notice to the
contrary; provided, however, that each letter of credit must
include a final maturity date which will not be subject to
automatic extension.
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(ii) The amount of letters of credit outstanding at any one time
(including amounts drawn on letters of credit and not yet
reimbursed) may not exceed Ten Million and 00/1 00 Dollars ($1
0,000,000.00).
(iii) The following letters of credit are outstanding from the Bank
for the account of the
Borrower:
Letter of Credit Number Amount 124609 $1,785,486.00
As of the date of this Agreement, these letters of credit shall be
deemed to be outstanding under this Agreement, and shall be subject to
all the terms and conditions stated in this Agreement.
(b) The Borrower agrees:
(i) any sum drawn under a letter of credit may, at the option of
the Bank, be added to the principal amount outstanding under
this Agreement. The amount will bear interest and be due as
described elsewhere in this Agreement.
(ii) if there is a default under this Agreement, to immediately
prepay and make the Bank whole for any outstanding letters of
credit.
(iii) the issuance of any letter of credit and any amendment to a
letter of credit is subject to the Bank's written approval and
must be in form and content satisfactory to the Bank and in
favor of a beneficiary acceptable to the Bank.
(iv) to sign the Bank's form Application and Agreement for Standby
Letter of Credit.
(v) to pay any issuance and/or other fees that the Bank notifies
the Borrower will be charged for issuing and processing
letters of credit for the Borrower.
(vi) to allow the Bank to automatically charge its checking account
for applicable fees, discounts, and other charges.
2. OPTIONAL INTEREST RATES
2.1 Optional Rates. Each optional interest rate is a rate per year.
Interest will be paid on the last day of each interest period, and on the first
day of each month during the interest period. At the end of any interest period,
the interest rate will revert to the rate based on the Reference Rate, unless
the Borrower has designated another optional interest rate for the Portion. No
Portion will be converted to a different interest rate during the applicable
interest period. Upon the occurrence of an event of default under this
Agreement, the Bank may terminate the availability of optional interest rates
for interest periods commencing after the default occurs.
2.2 Fixed Rate. The election of Fixed Rates shall be subject to the
following terms and requirements:
(a) The "Fixed Rate" means the fixed interest rate the Bank and the
Borrower agree will apply during the applicable interest period.
(b) The interest period during which the Fixed Rate will be in effect will
be one year or less.
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<PAGE>
(c) Each Fixed Rate Portion will be for an amount not less than the
following:
(i) for interest periods of 91 days or longer, Five Hundred
Thousand Dollars ($500,000).
(ii) for interest periods of between 30 days and 90 days, One
Million Dollars ($1,000,000).
(iii) for interest periods of between 2 days and 29 days, an amount
which, when multiplied by the number of days in the applicable
interest period, is not less than thirty million (30,000,000)
dollar-days.
(iv) for interest periods of 1 day, Fifteen Million Dollars
($15,000,000).
(d) Each prepayment of a Fixed Rate Portion, whether voluntary, by reason
of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee as
described below. A "prepayment" is a payment of an amount on a date
earlier than the scheduled payment date for such amount as required by
this Agreement. The prepayment fee shall be equal to the amount (if
any) by which:
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(i) the additional interest which would have been payable during
the interest period on the amount prepaid had it not been
prepaid, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the domestic
certificate of deposit market, the eurodollar deposit market,
or other appropriate money market selected by the Bank for a
period starting on the date on which it was prepaid and ending
on the last day of' the interest period for such Portion (or
the scheduled payment date for the amount prepaid, if
earlier).
2.3 LIBOR Rate. The election of LIBOR Rates shall be subject to the
following terms and requirements:
(a) The interest period during which the LIBOR Rate will be in effect will
be one, two or three weeks, or one, two, three, four, five, six, seven,
eight, nine, ten, eleven, or twelve months. The first day of the
interest period must be a day other than a Saturday or a Sunday on
which the Bank is open for business in California, New York and London
and dealing in offshore dollars (a "LIBOR Banking Day"). The last day
of the interest period and the actual number of days during the
interest period will be determined by the Bank using the practices of
the London inter-bank market.
(b) Each LIBOR Rate Portion will be for an amount not less than the
following:
(i) for interest periods of four months or longer, Five Hundred
Thousand Dollars ($500,000).
(ii) for interest periods of one, two or three months, One Million
Dollars ($1,000,000).
(iii) for interest periods of one, two or three weeks, an amount
which, when multiplied by the number of days in the applicable
interest period, is not less than thirty million (30,000,000)
dollar-days.
The "LIBOR Rate" means the interest rate determined by the
following formula, rounded upward to the nearest 1/100 of one
percent. (All amounts in the calculation will be determined by
the Bank as of the first day of the interest' period.)
LIBOR Rate = London Inter-Bank Offered Rate
------------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Inter-Bank Offered Rate" means the interest rate at
which the Bank's London Branch, London, Great Britain, would
offer U.S. dollar deposits for the applicable interest period
to other major banks in the London inter-bank market at
approximately 11:00 a.m. London time two (2) London Banking
Days before the commencement of the interest
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<PAGE>
period. A "London Banking Day" is a day on which the Bank's
London Branch is open for business and dealing in offshore
dollars.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by
member banks of the Federal Reserve System for Eurocurrency
Liabilities, as defined in Federal Reserve Board Regulation D,
rounded upward to the nearest 1 /1 00 of one percent. The
percentage will be expressed as a decimal, and will include,
but not be limited to, marginal, emergency, supplemental,
special, and other reserve percentages.
(d) The Borrower shall irrevocably request a LIBOR Rate Portion no later
than 12:00 noon San Francisco time on the LIBOR Banking Day preceding
the day on which the London Inter-Bank Offered Rate will be set, as
specified above. For example, if there are no intervening holidays or
weekend days in any of the relevant locations, the request must be made
at least three days before the LIBOR Rate takes effect.
(e) The Borrower may not elect a LIBOR Rate with respect to any principal
amount which is scheduled to be repaid before the last day of the
applicable interest period.
Each prepayment of a LIBOR Rate Portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued interest
on the amount prepaid and a prepayment fee as described below. A "prepayment" is
a payment of an amount on a date earlier than the scheduled payment date for
such amount as required by this Agreement. The prepayment fee shall be equal to
the amount (if any) by which:
(i) the additional interest which would have been payable during the
interest period on the amount prepaid had it not been prepaid,
exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the domestic
certificate of deposit market, the eurodollar deposit market, or
other appropriate money market selected by the Bank, for a
period starting on the date on which it was prepaid and ending
on the last day of the interest period for such Portion (or the
scheduled payment date for the amount prepaid, if earlier).
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(g) The Bank will have no obligation to accept an election for a LIBOR Rate
Portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal
to the interest period, of a LIBOR Rate Portion are not
available in the London inter-bank market; or
(ii) the LIBOR Rate does not accurately reflect the cost of a LIBOR
Rate Portion.
3. EXPENSES
3.1 Expenses. The Borrower agrees to immediately repay the Bank for
expenses that include, but are not limited to, filing, recording and search
fees, appraisal fees, title report fees and documentation fees.
3.2 Reimbursement Costs.
(a) The Borrower agrees to reimburse the Bank for any expenses it incurs in
the preparation of this Agreement and any agreement or instrument
required by this Agreement. Expenses include, but are not limited to,
reasonable attorneys' fees, including any allocated costs of the Bank's
in-house counsel.
4. DISBURSEMENTS, PAYMENTS AND COSTS
4.1 Requests for Credit. Each request for an extension of credit will be
made in writing in a manner acceptable to the Bank, or by another means
acceptable to the Bank.
20
<PAGE>
4.2 Disbursements and Payments. Each disbursement by the Bank and each
payment by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
(b) made for the account of the Bank's branch selected by the Bank from
time to time;
(c) made in immediately available funds, or such other type of funds
selected by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at
its discretion, require the Borrower to sign one or more promissory
notes.
4.3 Telephone and Telefax Authorization.
(a) The Bank may honor telephone or telefax instructions for advances or
repayments given by any one of the individuals authorized to sign loan
agreements on behalf of the Borrower, or any other individual
designated by any one of such authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from the
Borrower's account number 14872-00230, or such other of the Borrower's
accounts with the Bank as designated in writing by the Borrower.
(c) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in
connection with any act resulting from telephone or telefax
instructions the Bank reasonably believes are made by any individual
authorized by the Borrower to give such instructions. This indemnity
and excuse will survive this Agreement's termination.
4.4 Direct Debit.
(a) The Borrower agrees that interest and any fees will be deducted
automatically on the due date from the Borrower's account number
14872-00230, or such other of the Borrower's accounts with the Bank as
designated in writing by the Borrower.
(b) The Bank will debit the account on the dates the payments become due. If
a due date does not fall on a banking day, the Bank will debit the
account on the first banking day following the due date.
(c) The Borrower will maintain sufficient funds in the account on the dates
the Bank enters debits authorized by this Agreement. If there are
insufficient funds in the account on the date the Bank enters any debit
authorized by this Agreement, the debit will be reversed.
- --------------------------------------------------------------------------------
4.5 Banking Days. Unless otherwise provided in this Agreement, a banking
day is a day other than a Saturday or a Sunday on which the Bank is open for
business in California. All payments and disbursements which would be due on a
day which is not a banking day will be due on the next banking day. All payments
received on a day which is not a banking day will be applied to the credit on
the next banking day.
4.6 Taxes. If any payments to the Bank under this Agreement are made from
outside the United States, the Borrower will not deduct any foreign taxes from
any payments it makes to the Bank. If any such taxes are imposed on any payments
made by the Borrower (including payments under this paragraph), the Borrower
will pay the taxes and will also pay to the Bank, at the time interest is paid,
any additional amount which the Bank specifies as necessary to preserve the
after-tax yield the Bank would have received if such taxes had not been imposed.
The Borrower will confirm that it has paid the taxes by giving the Bank official
tax receipts (or notarized copies) within 30 days after the due date.
4.7 Additional Costs. The Borrower will pay the Bank, on demand, for the
Bank's costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a
21
<PAGE>
class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitments
for credit.
4.8 Interest Calculation. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher fee
than if a 365-day year is used. Installments of principal which are not paid
when due under this Agreement shall continue to bear interest until paid.
4.9 Default Rate. Upon the occurrence and during the continuation of any
default under this Agreement, principal amounts outstanding under this Agreement
will at the option of the Bank bear interest at a rate which is 2 percentage
point(s) higher than the rate of interest otherwise provided under this
Agreement. This will not constitute a waiver of any default.
4.10 Interest Compounding. At the Bank's sole option in each instance, any
interest, fees or costs which are not paid when due under this Agreement shall
bear interest from the due date at the Bank's Reference Rate minus 0.5
percentage points. This may result in compounding of interest.
5. CONDITIONS
The Bank must receive the following items, in form and content acceptable to the
Bank, before it is required to extend any credit to the Borrower under this
Agreement:
5.1 Authorizations. Evidence that the execution, delivery and performance
by the Borrower and each guarantor of this Agreement and any instrument or
agreement required under this Agreement have been duly authorized.
5.2 Governing Documents. A copy of the Borrower's articles of
incorporation.
5.3 Guaranty. A guaranty signed by California Water Service Group in the
amount of Thirty Million Dollars ($30,000,000).
5.4 Other Items. Any other items that the Bank reasonably requires.
6. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation:
6.1 Organization of Borrower. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
6.2 Authorization. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
6.3 Enforceable Agreement. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
- --------------------------------------------------------------------------------
6.4 Good Standing. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
6.5 No Conflicts. This Agreement does not conflict with any law, agreement,
or obligation by which the Borrower is bound.
22
<PAGE>
6.6 Financial Information. All financial and other information that has
been or will be supplied to the Bank is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrower's (and any guarantor's) financial condition, including all
material contingent liabilities.
(b) in compliance with all government regulations that apply.
6.7 Lawsuits. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, except as have been disclosed
in writing to the Bank.
6.8 Permits, Franchises. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
6.9 Other Obligations. The Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
6.10 Income Tax Matters. The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year.
6.11 No Event of Default. There is no event which is, or with notice or
lapse of time or both would be, a default under this Agreement.
6.12 Location of Borrower. The Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this Agreement.
6.13 Year 2000 Compliance. The Borrower has conducted a comprehensive review
and assessment of the Borrower's systems and equipment applications and made
inquiry of the Borrower's key suppliers, vendors and customers with respect to
the "year 2000 problem" (that is, the inability of computers, as well as
embedded microchips in non-computing devices, to properly perform date-sensitive
functions with respect to certain dates prior to and after December 31, 1999).
Based on that review and inquiry, the Borrower does not believe the year 2000
problem, including costs of remediation, will result in a material adverse
change in the Borrower's business condition (financial or otherwise),
operations, properties or prospects, or ability to repay the credit. The
Borrower has developed adequate contingency plans to ensure uninterrupted and
unimpaired business operation in the event of a failure of its own or a third
party's systems or equipment due to the year 2000 problem, including those of
vendors, customers, and suppliers, as well as a general failure of or
interruption in its communications and delivery infrastructure.
7. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
7.1 Use of Proceeds. To use the proceeds of the credit only for short term
operating capital, bridge financing for capital expenditures and issuing standby
letters of credit.
7.2 Financial Information. To provide the following financial information
and statements in form and content acceptable to the Bank, and such additional
information as requested by the Bank from time to time:
(a) Within 90 days of the Borrower's fiscal year end, the Borrower's annual
financial statements. These financial statements must be audited (with
an unqualified opinion) by a Certified Public Accountant ("CPA")
acceptable to the Bank.
(b) Within 60 days of the period's end, the Borrower's quarterly financial
statements. These financial statements may be Borrower prepared.
(c) Within 90 days of its fiscal year end, California Water Service Group's
annual financial
23
<PAGE>
statements. These financial statements must be audited (with an
unqualified opinion) by a CPA acceptable to the Bank. The statements
shall be prepared on a consolidated basis.
- --------------------------------------------------------------------------------
(f) Within 60 days of the period's end, California Water Service Group's
quarterly financial statements including supplemental schedules. These
financial statements may be company prepared. The statements shall be
prepared on a consolidated and consolidating basis.
(e) Within 90 days of its fiscal year end, copies of California Water
Service Group's Form 1 O-K Annual Report and Form 8-K Current Report
(if applicable).
(f) Within 60 days of the period's end, copies of California Water Service
Group's Form 10-Q Quarterly Report and Form 8-K Current Report.
(g) Within 90 days of its fiscal year end, CWS Utility Services' annual
financial statements. These financial statements may be company
prepared.
(h) Within 60 days of the period's end, CWS Utility Services' quarterly
financial statements. These financial statements may be company
prepared.
(i) By April 30 of each year, CWS Utility Services' narrative business
plan.
7.3 Other Debts. Not to have outstanding or incur any direct or contingent
liabilities (other than those to the Bank), or become liable for the liabilities
of others, without the Bank's written consent, which will not be unreasonably
withheld. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
(d) Liabilities in existence on the date of this Agreement disclosed in
writing to the Bank.
(e) First mortgage bonds and/or unsecured senior notes currently
outstanding or subsequently issued.
7.4 Other Liens. Not to create, assume, or allow any security interest or
lien (including judicial liens) on property the Borrower now or later owns,
except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due. ,
(c) Liens outstanding on the date of this Agreement disclosed in writing to
the Bank.
(d) Liens securing first mortgage bonds currently outstanding or
subsequently issued.
7.5 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 in each line-year. "Line-year" means the period between the
date of this Agreement and December 31, 1999, and each subsequent one-year
period (if any). For the purposes of this paragraph, "advances" does not include
undrawn amounts of outstanding letters of credit.
7.6 Notices to Bank. To promptly notify the Bank in writing of:
(a) any lawsuit over One Million Dollars ($1,000,000) against the Borrower
(or any guarantor).
(b) any substantial dispute between the Borrower (or any guarantor) and any
government authority.
(c) any failure to comply with this Agreement.
24
<PAGE>
(d) any material adverse change in the Borrower's (or any guarantor's)
business condition (financial or otherwise), operations, properties or
prospects, or ability to repay the credit.
(e) any change in the Borrower's name, legal structure, place of business,
or chief executive office if the Borrower has more than one place of
business.
7.7 Books and Records. To maintain adequate books and records.
- --------------------------------------------------------------------------------
7.8 Audits. To allow the Bank and its agents to inspect the Borrower's
properties and examine, audit, and make copies of books and records at any
reasonable time. If any of the Borrowees properties, books or records are in the
possession of a third party, the Borrower authorizes that third party to permit
the Bank or its agents to have access to perform inspections or audits and to
respond to the Bank's requests for information concerning such properties, books
and records.
7.9 Compliance with Laws. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.
7.10 Preservation of Rights. To maintain and preserve all rights,
privileges, and franchises the Borrower now has.
7.11 Maintenance of Properties. To make any repairs, renewals, or
replacements to keep the Borrower's properties in good working condition.
7.12 Cooperation. To take any action reasonably requested by the Bank to
carry out the intent of this Agreement.
7.13 General Business Insurance. To maintain insurance as is usual for the
business it is in.
7.14 Additional Negative Covenants. Not to, without the Bank's written
consent, which will not be unreasonably withheld:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, or other combination, or become a
partner in a partnership, a member of a joint venture, or a member of a
limited liability company where any single transaction exceeds Two
Million Five Hundred Thousand Dollars ($2,500,000).
(d) sell, assign, lease, transfer or otherwise dispose of any assets for
less than fair market value, or enter into any agreement to do so.
(e) sell, assign, lease, transfer or otherwise dispose of all or a
substantial part of the Borrower's business or the Borrower's assets.
enter into any sale and leaseback agreement covering any of its fixed
assets.
(g) acquire or purchase a business or its assets for a consideration,
including assumption of direct or contingent debt, where any single
transaction exceeds Two Million Five Hundred Thousand Dollars
($2,500,000).
7.15 Bond Rating. To maintain an investment grade bond rating on its rated
securities as defined by Moody's Investors Service, Inc. and Standard & Poor's
Rating Group.
8. DEFAULT
If any of the following events occurs, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its
25
<PAGE>
entire debt immediately and without prior notice. If an event of default occurs
under the paragraph entitled "Bankruptcy," below, with respect to the Borrower,
then the entire debt outstanding under this Agreement will automatically be due
immediately.
8.1 Failure to Pay. The Borrower fails to make a payment under this
Agreement when due.
8.2 False Information. The Borrower (or any guarantor) has given the Bank
false or misleading information or representations.
8.3 Bankruptcy. The Borrower (or any guarantor) files a bankruptcy
petition, a bankruptcy petition is filed against the Borrower (or any guarantor)
or the Borrower (or any guarantor) makes a general assignment for the benefit of
creditors.
8.4 Receivers. A receiver or similar official is appointed for the
Borrower's (or any guarantor's) business, or the business is terminated.
8.5 Lawsuits. Any lawsuit or lawsuits are filed against the Borrower (or
any guarantor) in an aggregate amount of One Million Dollars ($1,000,000) or
more in excess of any insurance coverage.
- --------------------------------------------------------------------------------
8.6 Judgments. Any judgments or arbitration awards are entered against the
Borrower (or any guarantor), or the Borrower (or any guarantor) enters into any
settlement agreements with respect to any litigation or arbitration, in an
aggregate amount of One Million Dollars ($1,000,000) or more in excess of any
insurance coverage.
8.7 Government Action. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's (or any guarantor's)
financial condition or ability to repay.
8.8 Material Adverse Change. A material adverse change occurs, or is
reasonably likely to occur, in the Borrower's (or any guarantor's) business
condition (financial or otherwise), operations, properties or prospects, or
ability to repay the credit.
8.9 Cross-default. Any default occurs under any agreement in connection
with any credit the Borrower (or any guarantor) or any of the Borrower's related
entities or affiliates has obtained from anyone else or which the Borrower (or
any guarantor) or any of the Borrower's related entities or affiliates has
guaranteed, if the default consists of failing to make a payment when due or
gives other lender the right to accelerate the obligations.
8.10 Default under Related Documents. Any guaranty, subordination agreement,
security agreement, deed of trust, or other document required by this Agreement
is violated or no longer in effect.
8.11 Other Bank Agreements. The Borrower (or any guarantor) fails to meet
the conditions of, or fails to perform any obligation under any other agreement
the Borrower (or any guarantor) has with the Bank or any affiliate of the Bank.
8.12 Other Breach Under Agreement. The Borrower fails to meet the conditions
of, or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article. This includes any failure or
anticipated failure by the Borrower to comply with any financial covenants set
forth in this Agreement, whether such failure is evidenced by financial
statements delivered to the Bank or is otherwise known to the Borrower or the
Bank.
8.13 Guarantor's Covenant. California Water Service Group fails to comply
with the following covenant:
(a) Dividends. Not to enter into any agreement which would restrict the
Borrower's ability to declare and pay dividends to California Water
Service Group, without the Bank's written consent.
26
<PAGE>
9. ENFORCING THIS AGREEMENT; MISCELLANEOUS
9.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
9.2 California Law. This Agreement is governed by California law.
9.3 Successors and Assigns. This Agreement is binding on the Borrower's and
the Bank's successors and assignees. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the right
of set-off against the Borrower.
9.4 Arbitration.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those
that arise from:
(i) This Agreement (including any renewals, extensions or
modifications of this Agreement);
(ii) Any document, agreement or procedure related to or delivered in
connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted
between the Borrower and the Bank, including claims for injury to
persons, property or business interests (torts).
(b) At the request of the Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United
States Arbitration Act. The United States Arbitration Act will apply
even though this Agreement provides that it is governed by California
law.
- --------------------------------------------------------------------------------
(c) Arbitration proceedings will be administered by the American Arbitration
Association and will be subject to its commercial rules of arbitration.
(d) For purposes of the application of the statute of limitations, the
filing of an arbitration pursuant to this paragraph is the equivalent of
the filing of a lawsuit, and any claim or controversy which may be
arbitrated under this paragraph is subject to any applicable statute of
limitations. The arbitrators will have the authority to decide whether
any such claim or controversy is barred by the statute of limitations
and, if so, to dismiss the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the
arbitrators will have the authority to resolve, any such dispute.
The decision that results from an arbitration proceeding may be submitted to any
authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy or
claim, at the time of the proposed submission to arbitration, arises
from or relates to an obligation to the Bank secured by real property
located in California. In this case, both the Borrower and the Bank
must consent to submission of the claim or controversy to arbitration.
If both parties do not consent to arbitration, the controversy or claim
will be settled as follows:
(i) The Borrower and the Bank will designate a referee (or a panel
of referees) selected under the auspices of the American
Arbitration Association in the same manner as arbitrators are
selected in Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be
appointed by a court as provided in California Code of Civil
]Procedure Section 638 and the following related sections;
27
<PAGE>
(iii) The referee (or the presiding referee of the panel) will be an
active attorney or a retired judge; and
(iv) The award that results from the decision of the referee (or
the panel) will be entered as a judgment in the court that
appointed the referee, in accordance with the provisions of
California Code of Civil Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrower or the Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property
collateral; or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower or the Bank, including
the suing party, to submit the controversy or claim to arbitration if
the other party contests the lawsuit. However, if the controversy or
claim arises from or relates to an obligation to the Bank which is
secured by real property located in California at the time of the
proposed submission to arbitration, this right is limited according to
the provision above requiring the consent of both the Borrower and the
Bank to seek resolution through arbitration.
(0) If the Bank forecloses against any real property securing this
Agreement, the Bank has the option to exercise the power of sale under
the deed of trust or mortgage, or to proceed by judicial foreclosure.
9.5 Severability; Waivers. If any part of this Agreement is not
enforceable, the rest of the Agreement may be enforced. The Bank retains all
rights, even if it makes a loan after default. If the Bank waives a default, it
may enforce a later default. Any consent or waiver under this Agreement must be
in writing.
9.6 Administration Costs. The Borrower shall pay the Bank for all
reasonable costs incurred by the Bank in connection with administering this
Agreement.
9.7 Attorneys' Fees. The Borrower shall reimburse the Bank for any
reasonable costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and in
connection with any amendment, waiver, "workout" or restructuring under this
Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing
party is entitled to
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
recover costs and reasonable attorneys' fees incurred in connection with the
lawsuit or arbitration proceeding, as determined by the court or arbitrator. In
the event that any case is commenced by or against the Borrower under the
Bankruptcy Code (Title 1 1, United States Code) or any similar or successor
statute, the Bank is entitled to recover costs and reasonable attorneys' fees
incurred by the Bank related to the preservation, protection, or enforcement of
any rights of the Bank in such a case. As used in this paragraph, "attorneys'
fees" includes the allocated costs of the Bank's in-house counsel.
9.8 One Agreement. This Agreement and any related security or other
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank
and the Borrower concerning this credit;
28
<PAGE>
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
9.9 Notices. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrower may specify from time to time in writing.
9.10 Headings. Article and paragraph headings are for reference only and
shall not affect the interpretation or meaning of any provisions of this
Agreement.
9.11 Counterparts. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the
different parties on separate counterparts each of which, when so executed,
shall be deemed an original but all such counterparts shall constitute but one
and the same agreement.
9.12 Prior Agreement Superseded. This Agreement supersedes the Business Loan
Agreement entered into as of April 4, 1997, between the Bank and the Borrower,
and any credit outstanding thereunder shall be deemed to be outstanding under
this Agreement.
This Agreement is executed as of the date stated at the top of the first page.
Bank of America
National Trust and Savings Association California Water Service Company
By: Jeffrey Perkins, Vice President By: Gerald F. Feeney,
Vice President, CFO and
Treasurer
Address where notices to the Bank are to be sent: Address for Notices:
San Jose Commercial Banking Office #01487
101 Park Center Plaza P.O. Box 1150
San Jose, CA 95113 San Jose, CA 95108
29
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,437
<SECURITIES> 0
<RECEIVABLES> 15,574
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<PP&E> 737,352
<DEPRECIATION> 221,998
<TOTAL-ASSETS> 587,618
<CURRENT-LIABILITIES> 55,511
<BONDS> 156,572
0
3,475
<COMMON> 177,182
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<TOTAL-LIABILITY-AND-EQUITY> 587,618
<SALES> 0
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