California Water Service Group
Annual Report 1999

Plain-text annual report

c a l i f o r n i a w a t e r s e r v i c e g r o u p 1 9 9 9 a n n u a l r e p o r t t h e r i g h t place t h e r i g h t time t h e r i g h t company c o r p o r a t e profile f i n a n c i a l highlights california water service group 1999 annual report 1999 1998 1997 1996 1995 1 Book value Market price Earnings per share Dividends per share Revenue (in thousands) Net income (in thousands) $ 13.70 $ 13.27 $ 12.84 $ 12.10 $ 11.58 30.31 1.53 1.085 206,440 19,919 31.31 1.45 1.07 189,659 18,936 29.53 1.82 1.055 198,347 23,736 21.00 1.49 1.04 185,553 19,419 16.38 1.16 1.02 167,616 15,015 California Water Service Group (the Company) provides high-quality water utility services to 1.5 million people through its three subsidiaries: California Water Service Company (Cal Water), Washington Water Service Company (Washington Water) and CWS Utility Services. Regulated by state utility commissions, Cal Water and Washington Water provide water utility services to customers in 60 communities. Formed in 1926, Cal Water is the largest investor-owned water utility west of the Mississippi River and the fourth largest in the nation, with 21 district offices located throughout California. The Company’s newest subsidiary, Washington Water, is the largest investor-owned water utility in the state of Washington, with operations near Olympia and Tacoma. CWS Utility Services conducts the Company’s non-regulated business, which includes providing billing and meter reading services, as well as full-system water operations, for cities and companies in California, Washington and New Mexico. Known for its dedicated workforce, excellent customer service and efficient operations, California Water Service Group is committed to being THE industry leader in providing communities and customers with traditional and innovative utility services. On the cover: The Tacoma Narrows Bridge leads to Gig Harbor, one of the communities served by the Company’s newest subsidiary, Washington Water. t o o u r stockholders At the dawn of this new century, we have an opportunity to see our Company from a unique perspective. Considering all that we have achieved since our formation in 1926— particularly our accomplishments in the past two years—we believe that we are well posi- tioned for growth in the 21st century. Hence, the theme for this year’s report: the right place, the right time, the right company. To us, that means whether you are a stockholder, a customer, an employee or a partner to whom we provide contract services, you have a winner with Cal Water. From a financial perspective, 1999 was another good year for the Company. Operating rev- enues rose nine percent to $206.4 million, and net income climbed five percent to $19.9 mil- lion. Earnings per share increased to $1.53, compared to $1.45 in 1998, and dividends were paid for the 55th consecutive year, increasing 1.5 cents to $1.085 per share. Earnings were positively impacted by higher sales, customer growth and rate increases authorized by the California Public Utilities Commission (CPUC). Dry weather conditions boosted sales, as did the addition of customers inside and outside of our existing service areas. In fact, in absolute terms, 1999 was our best year of internal growth since 1990, as developer-financed main extensions added a total of 3,264 new service connections in our existing districts. Our strategy for continued financial success is twofold. We focus on operating efficiently california water service group 1999 annual report 2 p i c t u r e d l e f t t o r i g h t : peter c. nelson P r e s i d e n t a n d C h i e f E x e c u t i v e O f f i c e r robert w. foy C h a i r m a n o f t h e B o a r d california water service group 1999 annual report 3 while taking a deliberate and disciplined approach to growth. In evaluating growth oppor- In 1999, we also purchased the assets of the Olcese Water District, located adjacent to our tunities, we consider several factors. Will the transaction increase stockholder value? Will existing operations in Bakersfield. Although a smaller transaction, the Olcese purchase it result in greater efficiency and better customer service? Will it enhance our ability to com- expands our presence in a city that is projected to triple in size over the next 45 years. Cal pete for other growth opportunities? And, is it a good fit culturally and operationally? Water also entered into a short-term agreement to operate a small investor-owned water sys- Applying this rigorous test to potential acquisitions helps us identify and pursue opportuni- ties that give us a strategic advantage. tem serving 1,100 customers contiguous to our Visalia District. The agreement is a prelude to our acquisition of the system, which is expected to close in mid-2000 after CPUC approval. This transaction is the type of “in-fill” acquisition that frequently comes our way Our acquisitions of Harbor Water and South Sound Utility in Washington are good examples because of our geographic dispersion throughout California. of growth targets that pass this test. Washington Water Service Company, the largest in- vestor-owned water utility in Washington, is our newest subsidiary. Its formation will enable And, the largest transaction in the Company’s history, the merger with Dominguez Services us to capitalize on future growth opportunities in a state that is characterized by a favorable Corporation will enable us to operate more efficiently and compete more aggressively for regulatory environment and an abundance of water systems. We owe much of our success growth opportunities in the Los Angeles area. Dominguez also brings with it expertise in the in Washington to the efforts of our first Pacific Northwest Marketing Manager, Steve Toovey, water rights brokering market and a proven strategy for acquiring and operating smaller sys- who passed away unexpectedly in 1999. Steve will be sorely missed by all. To ensure that his good work is continued, we have appointed James Smith, a 25-year Company veteran, to this key role. Prior to this appointment, Jim managed our Salinas District. tems. Because this is the largest merger of California-based investor-owned water utilities in the state’s history, and the first large-scale transaction affected by legislation allowing the california water service group 1999 annual report 4 CPUC to consider fair market value in establishing rates, the CPUC has taken longer to con- As you can appreciate, a process like this could not work without a dedicated and able group sider our application than first expected. Dominguez and Cal Water management teams of employees. At Cal Water, we have the best. From our well-trained and committed field have worked diligently with CPUC staff during its deliberation, winning support for the crews, to our dedicated and friendly office staff, to our experienced and highly-qualified man- merger from the Ratepayer Representation Branch of the CPUC in early December. We agement team, we simply have the best. expect to receive final approval in the first quarter of 2000. Yes, we accomplished much in 1999. In addition to integrating our new companies, working Clearly, these acquisitions make sense for the Company because they increase stock- with the CPUC on the Dominguez merger, securing our new service contracts and imple- holder value and enhance our ability to compete in an increasingly competitive industry. menting numerous continuous improvement projects, we installed a new integrated account- More important, they establish the Company as a leading consolidator in the western ing software package, started construction on a desalination facility in southern California United States. and completed the design of a new water system for the Rural North Vacaville Water District. We also completed our reincorporation in the state of Delaware. We commend our hard- We also increased our non-regulated business in 1999, securing billing service contracts with working team of employees for achieving all this while continuing to provide excellent water the California cities of Vista and El Segundo and an operations and maintenance agreement service to our customers and partners. for the Rural North Vacaville Water District in Solano County, California. Additionally, marking our entry into a third western state, we made an investment in a firm that provides We also thank our Directors for their invaluable leadership. We are pleased to report that in meter reading services in New Mexico. In total, we now provide billing, meter reading and January 2000, the Board voted to raise the dividend on common stock from $1.085 to $1.10 per operational services to an additional 170,000 people through 78 service contracts in share, marking the 33rd consecutive annual dividend increase. California, Washington and New Mexico. Like regulated acquisitions, non-regulated business opportunities undergo intense scrutiny, tomer expectations will continue to challenge us to be the leader in providing traditional and which is why all of our service contracts add to the bottom line. Financial gain isn’t the only innovative utility services, as expressed in our vision statement. We believe we have the driver for our partnerships with cities and companies; we also look for opportunities that strategy and the expertise to meet this challenge, and that for us, this is the right place, the An increasingly competitive environment, stricter water-quality standards and higher cus- result in better customer service, increased efficiency and mutual benefit for our partners. right time and the right company. Our partners know they can depend on us to provide friendly, reliable and cost-effective serv- ices, which is why all existing service contracts have always been renewed. We thank you for your continued confidence and investment in California Water To ensure provision of the highest levels of customer service, we have conducted research to determine what our customers expect and value in their water service. The results have been Sincerely, Service Group. summarized and distributed to every single employee. But it doesn’t end there. We have also made these expectations the basis for an ongoing continuous improvement process, enabling all employees to identify and complete projects that enhance customer service and improve efficiency. robert w. foy peter c. nelson Chairman of the Board President and Chief Executive Officer california water service group 1999 annual report 5 the right p l a c e The Dominguez Seminary is located on the site of the original Rancho San Pedro, Dominguez’ first customer back in 1911. Dominguez’ illustrious history is one of the many intangible benefits of the merger. Everybody knows the importance of being at the right place at the right time. But how do we know the Company is in the right place? First, consider California. The Golden State boasts a diversified economy and the highest Gross State Product in the nation. Californians need our product — whether they are refining oil, growing lettuce, producing computer chips, making movies or raising a family. Additionally, there are more Californians to serve every day; the state gains about 450,000 new residents per year. Having operations through- out the state, and an established reputation for excellence, we are well positioned to serve this thriving state, where only 15 to 20 percent of the population is served by investor-owned water utility companies. The Olcese acquisition and Dominguez merger further strengthen our California position, located as they are in key regions of growth. Opportunities also abound in the state of Washington, where the regulatory climate is favorable and smaller sys- tems needing additional resources are plentiful. Washingtonians face some of the same chal- lenges we have met in California, such as new water-quality issues and higher costs of serv- ice. Having operated successfully in California for over 70 years, Cal Water brings valuable expertise to its newest service area. california water service group 1999 annual report 7 The Company is well positioned to grow from existing operations, having 23 efficient, locally managed districts in California and Washington. With the Dominguez, Olcese and Washington acquisitions, we will be even better able to capitalize on the unique growth opportunities in each region. the right t i m e Not too long ago, the water utility industry was known as the “silent service.” It was con- sidered staid. Boring. Predictable. That time has passed. Today, water is an exciting, com- petitive business where the larger firms grow and the smaller ones are acquired. Increasingly strict water-quality standards, higher customer expectations and competition are driving con- solidation in the industry. Small water providers do not have the resources to make neces- sary infrastructure upgrades, and cities are looking for ways to make money, not spend it. So this is a time of extraordinary opportunity for a company such as ours, which has a distin- guished reputation for service and the resources to meet these new challenges. As party to the largest merger of California-based investor-owned water utilities in the state’s history, and having recently become the largest investor-owned water utility in the state of Washington, the Company has emerged as a leading consolidator in the western states. To ensure con- tinued success, we intend to pursue a disciplined and deliberate approach to growth through acquisitions and mutually beneficial partnerships, surpassing the competition for targeted opportunities by providing friendly, high-quality water service at a fair price. california water service group 1999 annual report 8 Increasingly strict water-quality standards, higher customer expectations and new competition have spurred consolidation in the industry. As the fourth largest investor-owned water utility in the country, we have the resources and the growth strategy to become the leading consolidator in the western United States. Management at the Company’s San Jose headquarters meets to review a growth opportunity. the right c o m pa n y What makes the California Water Service Group the right company? Certainly our financial strength, our ability to meet the cost and service needs of our partners and our well-devel- oped growth strategy are all critical to our continued success. But it is our 700 dedicated employees and their commitment to excellence that really distinguish us from our competition. This commitment is evidenced by the success of our continuous improvement process, an ongoing effort by every employee to identify opportunities to enhance customer service and improve efficiency. The projects vary in scope and size. Note these examples of recent achievements: In Bakersfield, our team identified the need for enhanced treatment on one well; installation of the treatment resulted in a significant and measurable improvement in the taste and odor of the water. A team in Stockton tackled the problem of cleaning out valve casings in older systems, so difficult to access once they are excavated. The result: we invest- ed in a Vactor, which vacuums water and mud out of the way, reducing water loss and injuries that occur when it is necessary to shovel in confined spaces. And, at the recommendation of a team in Los Altos, we installed large safety arrow lights on our trucks, protecting em- ployees while they make repairs in streets. These are but a few of our many continuous improvement process accomplishments in 1999. By providing excellent customer service, our employees enable us to grow and prosper in an increasingly competitive industry. california water service group 1999 annual report 11 Our employees’ commitment to being the leader in providing communities and customers with traditional and innovative utility services is evidenced by their successful efforts to improve customer service and increase efficiency. Certified Pump Operator Ray Dillingham draws a sample at the Hawthorne Treatment Plant. regulated and non-regulated customers service areas including regulated non-regulated key detail san francisco bay area 24,900 4,000 2,700 6,100 400 300 1,100 district name c a l i f o r n i a Bakersfield Bear Gulch Chico† Dixon O&M contracts for the City of Bakersfield and Spicer City 56,700 and Rancho Verdugo MWC Atherton, Woodside, Portola Valley, portions of Menlo Park and City of Menlo Park service contract Hamilton City East Los Angeles O&M contracts for cities of Commerce and Montebello Hawthorne 15-year lease — full service water operations Hermosa-Redondo† a portion of Torrance King City† Livermore california water Los Altos service group 1999 annual report 12 O&M contracts for Castlewood Country Club and Crane Ridge MWC portions of Cupertino, Los Altos Hills, Mountain View and Sunnyvale Marysville† Mid-Peninsula San Mateo and San Carlos Oroville Palos Verdes† Salinas Selma Palos Verdes Estates, Rancho Palos Verdes, Rolling Hills Estates and Rolling Hills O&M contracts for Country Meadows MWC and Spreckels Water Co. South San Francisco Colma and Broadmoor 17,500 22,800 2,800 26,400 25,400 2,200 16,500 18,300 3,700 35,700 3,500 23,700 25,600 5,100 16,200 41,600 28,600 6,900 2,300 Stockton Visalia† Westlake Willows† w a s h i n g t o n four O&M contracts a portion of Thousand Oaks Subtotal 381,500 39,500 Harbor numerous O&M contracts South Sound numerous O&M contracts Subtotal Current Total d o m i n g u e z * Antelope Valley Fremont Valley, Lake Hughes, Lancaster and Leona Valley Dominguez Kern River Valley Carson and portions of Compton, Harbor City, Long Beach and Torrance Bodfish, Kernville, Lakeland, Mountain Shadows, Onyx, Squirrel Valley, South Lake and Wofford Heights Redwood Valley Lucerne, Duncans Mills and Guerneville Subtotal Total with Dominguez 9,300 2,700 12,000 393,500 1,300 32,500 4,100 1,900 39,800 433,300 1,700 1,100 2,800 42,300 300 700 1,000 43,300 mwc = mutual water company | o&m = operations and maintenance | † = indicates billing contract california water service company dominguez services corporation* washington water service company other contract South San Francisco Livermore Mid-Peninsula Bear Gulch Los Altos Headquarters (General Office) Harbor South Sound washington california Oroville Marysville Dixon Stockton Selma Visalia Bakersfield Kern River Valley Antelope Valley Hawthorne East Los Angeles Chico Willows Redwood Valley Salinas King City Westlake Hermosa-Redondo Palos Verdes Dominguez * cpuc approval of the merger is expected in the first quarter of 2000. california water service group 1999 annual report 13 Santa Fe new mexico (cid:2) (cid:2) ✦ ✱ f i n a n c i a l section Ten-Year Financial Review Management’s Discussion and Analysis of Financial Condition and Results of Operations Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Common Stockholders’ Equity Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Independent Auditors’ Report Corporate Information 15 16 23 24 25 26 27 35 36 Board of Directors inside back cover Officers inside back cover t e n - y e a r financial review Dollars in thousands, except common share data california water service group 1999 annual report 15 Summary of Operations: Operating revenue Residential Business Industrial Public authorities Other Total operating revenue Operating expenses Interest expense, other income and expenses, net Net income Common Share Data* Earnings per share Dividends declared Dividend payout ratio Book value Market price at year-end Common shares outstanding at year-end (in thousands) Return on average common stockholders’ equity Long-term debt interest coverage B a l a n c e S h e e t D a t a Net utility plant Utility plant expenditures Total assets Long-term debt including current portion Capitalization ratios: Common stockholders’ equity Preferred stock Long-term debt O t h e r D a t a Water production (million gallons) Wells Purchased Total water production Metered customers Flat-rate customers Customers at year-end New customers added Revenue per customer Utility plant per customer Employees at year-end 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 $150,326 34,219 6,947 9,501 5,447 206,440 175,830 $139,018 31,591 6,239 8,368 4,443 189,659 159,120 $146,246 32,916 6,282 9,636 3,267 198,347 163,431 $136,747 30,924 6,150 9,023 2,709 185,553 154,849 $122,275 28,230 5,836 8,149 3,126 167,616 141,950 $117,032 27,023 5,478 7,995 2,087 159,615 133,821 $113,445 25,247 5,123 7,397 2,475 153,687 125,729 $103,644 23,670 4,925 6,892 2,525 141,656 117,646 $ 89,108 20,759 4,490 5,734 8,676 128,767 104,372 $ 91,595 20,910 5,145 6,412 1,782 125,844 102,350 10,691 $ 19,919 11,603 $ 18,936 11,180 $ 23,736 11,285 $ 19,419 10,651 $ 15,015 11,091 $ 14,703 12,386 $ 15,572 11,276 $ 12,734 10,204 $ 14,191 8,963 $ 14,531 $ 1.53 $ 1.085 $ $ 71% 1.45 1.07 74% 1.82 $ $ 1.055 $ $ 1.49 1.04 $ $ 58% 70% 1.16 1.02 88% $ $ 1.21 0.99 $ $ 1.32 0.96 $ $ 1.08 0.93 $ $ 1.20 0.90 82% 73% 86% 75% $ 13.70 30.31 $ 13.27 31.31 $ 12.84 29.53 $ 12.10 21.00 $ 11.58 16.38 $ 11.36 16.00 $ 10.68 20.00 $ 10.31 16.50 $ 10.16 14.00 $ $ $ 1.23 0.87 71% 9.83 13.38 12,936 12,936 12,936 12,936 12,855 12,811 11,694 11,694 11,694 11,694 11.4% 11.3% 14.7% 12.8% 10.3% 10.8% 12.3% 10.5% 11.8% 12.5% 3.5 3.5 4.1 3.6 3.1 3.2 3.1 3.0 3.2 3.6 $515,354 44,493 587,618 $489,017 35,878 560,508 $469,897 33,931 542,783 $452,441 36,820 522,870 $430,636 28,409 507,732 $415,747 29,117 471,855 $399,088 29,445 455,055 $381,683 36,275 411,479 $356,172 $331,352 27,402 375,746 34,994 400,698 159,223 141,401 142,013 143,840 147,062 130,983 131,199 123,445 104,494 105,948 52.1% 1.0% 46.9% 54.2% 1.1% 44.7% 53.3% 1.1% 45.6% 51.5% 1.1% 47.4% 49.7% 1.2% 49.1% 52.0% 1.2% 46.8% 48.1% 1.3% 50.6% 48.7% 1.4% 49.9% 52.4% 1.5% 46.1% 51.3% 1.5% 47.2% 57,934 52,340 110,274 322,478 77,091 399,569 5,051 517 1,845 708 51,139 49,436 100,575 317,178 77,340 394,518 4,137 481 1,764 689 57,652 53,190 110,842 312,732 77,649 390,381 3,965 508 1,694 679 54,457 51,700 106,157 308,455 77,961 386,416 9,587 480 1,633 663 50,688 49,068 99,756 298,730 78,099 376,829 1,895 445 1,582 660 51,352 49,300 100,652 295,831 79,103 374,934 3,061 426 1,520 653 48,012 48,089 96,101 290,513 81,360 371,873 2,842 413 1,460 642 52,909 40,426 93,335 286,465 82,566 369,031 3,675 384 1,399 637 49,692 36,686 86,378 282,377 82,979 365,356 4,996 352 1,320 618 52,272 45,431 97,703 278,639 81,721 360,360 1,251 349 1,247 605 *Common share data is restated to reflect the effective two-for-one stock split on December 31, 1997. management’s discussion and analysis of financial condition and results of operations california water service group 1999 annual report 16 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 major- ity of the Company’s assets and revenues. Services provides non-regulated water operations and related services to other pri- vate companies and municipalities. The following discussion and analysis provides information regarding the Company and its assets, operations and financial condition. Fo r w a r d - L o o k i n g S t a t e m e n t s 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 vari- ations 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 state- ment. 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. B u s i n e s s 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 serv- ice 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 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 com- mission. 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. R e s u l t s o f O p e r a t i o n R e s t a t e m e n t 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. E a r n i n g s a n d D i v i d e n d s 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 annu- al 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 divi- dend 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. california water service group 1999 annual report 17 O p e r a t i n g R e v e n u e 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: Customer water usage General and step rate increases Offset rate increases – water production costs Usage by new customers Net change Average revenue per customer Average metered customer usage (ccf) New customers added dollars in millions $ $ $ 1998 (12.6) 1.9 0.2 1.9 (8.6) 481 284 4,100 $ $ $ 1997 3.9 6.4 0.2 2.3 12.8 508 315 4,000 $ $ $ 1999 11.8 3.0 0.2 1.8 16.8 517 305 5,000 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 con- sumption 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. O p e r a t i n g a n d I n t e r e s t E x p e n s e s Operating expenses, including those for the Hawthorne operation, were $175.8 mil- lion 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 sur- face 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: Purchased water Purchased power Pump taxes Total water production costs Change from prior year Water production (billion gallons) Change from prior year dollars in millions 1998 50.4 11.4 3.8 65.6 $ $ 1997 52.2 12.7 4.3 69.2 $ $ (5)% 101 (9)% 2% 111 5% $ $ 1999 58.1 13.0 4.5 75.6 15% 110 10% 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 sup- pliers’ 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%. management’s discussion and analysis of financial condition and results of operations Production levels in 1998 decreased from 1997 due to lower customer usage in response to weather conditions. Despite some wholesaler price increases, overall water production expenses declined. Well production decreased due to the decline in water sales and because several wells were out of service for maintenance. With reduced well production, purchased power and pump tax expenses declined. 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 pur- chased 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 california water service group 1999 annual report 18 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 mil- lion in short-term borrowings at the end of 1999, and $22.5 million at the end of 1998. O t h e r I n c o m e Other income is derived from management contracts by which the Company operates private and munic- ipally-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 inter- est 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 inter- est income, was $2.5 million in 1999 and $1.3 million in 1998 and 1997. R a t e s a n d R e g u l a t i o n 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 determi- nation 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. 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 pro- vided 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 vari- ance 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. california water service group 1999 annual report 19 Wa t e r S u p p l y 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. E n v i r o n m e n t a l M a t t e r s 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 health when such regulation would provide a meaningful opportunity to reduce a health risk. New drinking water reg- ulations 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 regula- tion. 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. L i q u i d i t y a n d C a p i t a l R e s o u r c e s L i q u i d i t y 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 mil- lion. 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 require- ments. 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 pre- sented 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 gener- ally 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. california water service group 1999 annual report 20 management’s discussion and analysis of financial condition and results of operations 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, 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. C a p i t a l R e q u i r e m e n t s Capital requirements consist primarily of new construction expenditures for expanding and replac- ing 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 mil- lion 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 pro- vided 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. C a p i t a l S t r u c t u r e 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: Common equity Preferred stock Long-term debt 1999 1998 52.1% 1.0% 46.9% 54.2% 1.1% 44.7% The 1999 return on average common equity was 11.4%, compared with 11.3% in 1998 and 14.7% in 1997. Refer to the dis- cussion of authorized return on equity in the “Rates and Regulation” section. R e a l E s t a t e P r o g r a m The Company’s subsidiaries own more than 900 real estate parcels. Certain parcels are not nec- essary for or used in water utility operations. A program has been developed to realize the value of certain surplus proper- ties through sale or lease of those properties. Most surplus properties have a low cost basis. The program, which com- menced 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. S t o c k h o l d e r R i g h t s P l a n 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. california water service group 1999 annual report 21 D o m i n g u e z M e r g e r On November 13, 1998, the boards of the Company and Dominguez Services Corporation (Dominguez) agreed to the merg- er 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 oper- ation 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 out- standing 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. Wa s h i n g t o n A c q u i s i t i o n s 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. N e w A c c o u n t i n g S t a n d a r d 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. Ye a r 2 0 0 0 U p d a t e R e a d i n e s s 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 ven- dors, 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 test- ing was completed and new information received that could affect the Y2K transition. management’s discussion and analysis of financial condition and results of operations c o n s o l i d a t e d balance sheet December 31, 1999 and 1998 C o s t s The estimated remediation cost for Y2K preparedness was about $500,000. This includes the cost of an outside con- sultant, vendors and computer programming time. The costs of a new computer system and software package are not includ- ed since their 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 out- age, with a capitalized cost of about $400,000. R i s k s In a worst case scenario, the Company could have been unable to deliver water to some or all of its customers if whole- sale 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. C o n t i n g e n c y P l a n s 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 inter- rupted. 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 expe- rience 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; schedul- ing 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 hos- pitals; 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 avail- able for duty as needed. california water service group 1999 annual report 22 A S S E T S Utility plant: Land Depreciable plant and equipment Construction work in progress Intangible assets Total utility plant Less depreciation and amortization Net utility plant Current assets: Cash and cash equivalents Receivables: Customers Other Unbilled revenue Materials and supplies at average cost Taxes and other prepaid expenses Total current assets Other assets: Regulatory assets Unamortized debt premium and expense Other Total other assets C A P I T A L I Z A T I O N A N D L I A B I L I T I E S Capitalization: Common stock, $.01 par value; 25,000 share authorized, 12,936 shares outstanding Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total common stockholders’ equity Preferred stock without mandatory redemption provision, $25 par value; 380 shares authorized, 139 shares outstanding Long-term debt, less current maturities Total capitalization Current liabilities: Current maturities of long-term debt Short-term borrowings Accounts payable Accrued taxes Accrued interest Other accrued liabilities Total current liabilities Unamortized investment tax credits Deferred income taxes Regulatory and other liabilities Advances for construction Contributions in aid of construction See accompanying notes to consolidated financial statements. california water service group 1999 annual report 23 In thousands 1999 1998 $ $ $ $ 9,424 704,009 13,740 10,179 737,352 221,998 515,354 1,437 12,533 3,041 7,145 2,229 4,437 30,822 36,458 3,503 1,481 41,442 587,618 129 44,881 132,689 (517) 177,182 3,475 156,572 337,229 2,651 13,599 23,707 3,556 2,092 9,906 55,511 2,842 21,427 18,001 99,991 52,617 587,618 $ $ $ $ 8,221 667,902 10,829 8,807 695,759 206,742 489,017 1,051 10,700 3,436 5,958 2,235 4,512 27,892 39,538 3,556 505 43,599 560,508 129 44,881 126,687 — 171,697 3,475 138,758 313,930 2,643 22,500 16,010 4,726 1,944 9,428 57,251 2,937 27,200 12,697 95,917 50,576 560,508 c o n s o l i d a t e d s t a t e m e n t of income For the years ended December 31, 1999, 1998 and 1997 c o n s o l i d a t e d s t a t e m e n t of common stockholders’ equity For the years ended December 31, 1999, 1998 and 1997 Operating revenue Operating expenses: Operations: Purchased water Purchased power Pump taxes Administrative and general Other Maintenance Depreciation and amortization Income taxes Property and other taxes Total operating expenses Net operating income california water service group 1999 annual report 24 Other income and expenses, net Income before interest expense Interest expense: Long-term debt interest Other interest Total interest expense Net income Basic earnings per share of common stock Average number of common shares outstanding See accompanying notes to consolidated financial statements. In thousands, except per share data 1999 1998 1997 $ 206,440 $ 189,659 $ 198,347 58,132 13,033 4,537 27,987 26,425 9,183 15,802 12,176 8,555 175,830 30,610 2,510 33,120 12,144 1,057 13,201 19,919 1.53 12,936 $ $ 50,378 11,389 3,850 25,418 25,065 9,164 14,870 10,808 8,178 159,120 30,539 1,094 31,633 11,259 1,438 12,697 18,936 1.45 12,936 $ $ 52,155 12,679 4,302 24,566 24,505 9,445 13,959 14,057 7,763 163,431 34,916 949 35,865 11,405 724 12,129 23,736 1.82 12,936 $ $ Common Stock Additional Paid-in Capital In thousands Accumulated Other Comprehensive Loss Retained Earnings Total Balance at December 31, 1996 $ 129 $ 44,881 $ 111,137 $ — $ 156,147 Net income Dividends paid: Preferred stock Common stock Total dividends paid Income reinvested in business Balance at December 31, 1997 Net income Dividends paid: Preferred stock Common stock Total dividends paid Income reinvested in business Balance at December 31, 1998 Net income Dividends paid: Preferred stock Common stock Total dividends paid Income reinvested in business Comprehensive loss Balance at December 31, 1999 129 44,881 129 44,881 23,736 153 13,313 13,466 10,270 121,407 18,936 153 13,503 13,656 5,280 126,687 19,919 153 13,764 13,917 6,002 — — $ 129 $ 44,881 $ 132,689 $ (517) (517) $ california water service group 1999 annual report 25 23,736 153 13,313 13,466 10,270 166,417 18,936 153 13,503 13,656 5,280 171,697 19,919 153 13,764 13,917 6,002 (517) 177,182 See accompanying notes to consolidated financial statements. c o n s o l i d a t e d s t a t e m e n t of cash flows For the years ended December 31, 1999, 1998 and 1997 n o t e s t o consolidated financial statements December 31, 1999, 1998, and 1997 Operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Deferred income taxes, investment tax credits, and regulatory assets and liabilities, net Changes in operating assets and liabilities: california water service group 1999 annual report Receivables Unbilled revenue Accounts payable Other current liabilities Other changes, net Net adjustments Net cash provided by operating activities 26 Investing activities: Utility plant expenditures: Company funded Developer advances and contributions in aid of construction Net cash used in investing activities Financing activities: Net short-term borrowings Issuance of long-term debt Advances for construction Refunds of advances for construction Contributions in aid of construction Retirement of long-term debt Dividends paid Net cash provided (used) in financing activities Change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amounts capitalized) Income taxes See accompanying notes to consolidated financial statements. In thousands 1999 1998 1997 $ 19,919 $ 18,936 $ 23,736 15,802 1,056 (1,438) (1,187) 7,697 (544) 1,352 22,738 42,657 (31,509) (12,984) (44,493) (8,901) 20,062 7,435 (3,902) 3,685 (2,240) (13,917) 2,222 386 1,051 1,437 12,900 10,849 $ $ 14,870 273 1,013 (780) 374 2,726 805 19,281 38,217 (30,780) (5,098) (35,878) 8,000 — 3,737 (3,760) 2,746 (733) (13,656) (3,666) (1,327) 2,378 1,051 11,319 8,851 $ $ 13,959 1,072 (1,855) 399 739 365 1,507 16,186 39,922 (26,153) (7,778) (33,931) 6,900 — 4,559 (3,701) 2,770 (2,324) (13,466) (5,262) 729 1,649 2,378 11,976 14,666 $ $ N o t e 1 . O r g a n i z a t i o n A n d O p e r a t i o n s 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. N o t e 2 . S u m m a r y o f S i g n i f i c a n t A c c o u n t i n g Po l i c i e s The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The finan- cial statements give retroactive effect to acquisitions, which were accounted for as poolings of interests. Intercompany trans- actions 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. R e v e n u e 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. U t i l i t y P l a n t 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 util- ity plant accounts and such costs are charged against accumulated depreciation. Maintenance of utility plant is charged pri- marily 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 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. D e p r e c i a t i o n 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 depreci- ation 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. C a s h E q u i v a l e n t s 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. california water service group 1999 annual report 27 n o t e s t o consolidated financial statements December 31, 1999, 1998, and 1997 california water service group 1999 annual report 28 L o n g - Te r m D e b t P r e m i u m , D i s c o u n t a n d E x p e n s e 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 con- junction with the early redemption. A c c u m u l a t e d O t h e r C o m p r e h e n s i v e L o s s 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 com- ponent of Stockholders’ Equity. A d v a n c e s f o r C o n s t r u c t i o n Advances for Construction consist of payments received from developers for installa- tion 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. C o n t r i b u t i o n s i n A i d o f C o n s t r u c t i o n Contributions in Aid of Construction represent payments received from developers, primarily for fire protection purposes, which are not subject to refunds. Facilities funded by contributions are included in utility plant, but excluded from rate base. Depreciation related to contributions is charged to Contributions in Aid of Construction. I n c o m e Ta x e s 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 carry- ing amounts of existing assets and liabilities and their respective tax bases. Measurement of the deferred tax assets and lia- bilities 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 tem- porary 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. E a r n i n g s p e r S h a r e 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. N o t e 3 . A c q u i s i t i o n s 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 sepa- rate entities and included in the accompanying financial statements are not significant. california water service group 1999 annual report 29 N o t e 4 . P r e f e r r e d S t o c k 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 com- mon stock. A premium of $243,250 would be due upon voluntary liquidation of Series C. There is no premium in the event of an involuntary liquidation. N o t e 5 . C o m m o n S t o c k h o l d e r s ’ E q u i t y 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. S t o c k h o l d e r R i g h t s P l a n 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 out- standing 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 adjust- ment (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 out- standing 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. N o t e 6 . S h o r t - Te r m B o r r o w i n g s 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 expire April 2001, do not require min- imum or specific compensating balances. The following table represents borrowings under these bank lines of credit. Maximum short-term borrowings Average amount outstanding Weighted average interest rate Interest rate at December 31 Dollars in Thousands 1999 1998 1997 $ 24,000 9,084 6.52% 7.11% $ 24,000 15,750 7.09% 6.97% $ 14,500 5,164 7.22% 7.29% n o t e s t o consolidated financial statements December 31, 1999, 1998, and 1997 N o t e 7 . L o n g - Te r m D e b t As of December 31, 1999 and 1998, long-term debt outstanding was: 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: First Mortgage Bonds: california water service group 1999 annual report 30 Senior Notes: Other long-term debt Total long-term debt Less current maturities Series P Series S Series BB Series CC Series DD Series EE Series FF Series GG 7.875% 8.50% 9.48% 9.86% 8.63% 7.90% 6.95% 6.98% due 2002 due 2003 due 2008 due 2020 due 2022 due 2023 due 2023 due 2023 Series A Series B 7.28% 6.77% due 2025 due 2028 In Thousands 1999 1998 $ 2,595 2,610 14,940 18,700 19,300 19,400 19,400 19,400 $ 2,610 2,625 16,650 18,800 19,400 19,500 19,500 19,500 116,345 118,585 20,000 20,000 20,000 — 2,878 2,816 159,223 2,651 141,401 2,643 $ 156,572 $ 138,758 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 sink- ing 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. N o t e 8 . I n c o m e Ta x e s Income tax expense consists of the following: 1999 1998 1997 Current Deferred Total Current Deferred Total Current Deferred Total In Thousands Federal State Total $ 7,476 2,524 $ 10,000 $ 6,368 2,515 $ 8,883 $ 9,118 2,239 $ 11,357 $ $ $ $ 2,351 (175) 2,176 2,281 (356) 1,925 $ 9,827 2,349 $ 12,176 $ 8,649 2,159 $ 10,808 $ 2,894 (194) $ 12,012 2,045 $ 2,700 $ 14,057 Computed “expected” tax expense Increase (reduction) in taxes due to: State income taxes net of federal tax benefit Investment tax credits Other Total income tax The components of deferred income tax expense were: Depreciation Developer advances and contributions Bond redemption premiums Investment tax credits Other Total deferred income tax expense In Thousands 1999 1998 1997 $ 11,233 $ 10,410 $ 13,228 1,414 (173) (298) 1,251 (156) (697) 1,755 (152) (774) $ 12,176 $ 10,808 $ 14,057 california water service group 1999 annual report 31 In Thousands $ 1998 2,691 (798) (62) (93) 421 1999 $ 2,629 (749) (62) (94) 625 1997 $ 2,457 (334) (62) (93) 77 $ 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: Deferred tax assets: Developer deposits for extension agreements and contributions in aid of construction Federal benefit of state tax deductions Book plant cost reduction for future deferred ITC amortization Insurance loss provisions Other Total deferred tax assets Deferred tax liabilities: Utility plant, principally due to depreciation differences Premium on early retirement of bonds Total deferred tax liabilities Net deferred tax liabilities In Thousands 1999 1998 $ 40,595 6,040 1,679 821 2,856 51,991 $ 42,251 2,524 1,727 271 1,365 48,138 72,327 1,091 73,418 $ (21,427) 74,186 1,152 75,338 $ (27,200) 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. n o t e s t o consolidated financial statements December 31, 1999, 1998, and 1997 N o t e 9 . E m p l o y e e B e n e f i t P l a n s P e n s i o n P l a n 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. S a v i n g s P l a n 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 employ- ee 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. california water service group 1999 annual report O t h e r P o s t r e t i r e m e n t P l a n s 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 per- mit recording of a regulatory asset for the portion of costs that will be recoverable in future rates. The following table reconciles the funded status of the plans with the accrued pension liability and the net postretirement 32 benefit liability as of December 31, 1999 and 1998: Change in benefit obligation: Beginning of year Service cost Interest cost Assumption change Plan amendment Experience (gain) or loss Benefits paid End of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Retiree contributions Benefits paid Fair value of plan assets at end of year Funded status Unrecognized actuarial (gain) or loss Unrecognized prior service cost Unrecognized transition obligation Unrecognized net initial asset Net amount recognized In Thousands Pension Benefits Other Benefits 1999 1998 1999 1998 $ 49,934 2,339 3,149 (6,669) 744 (2,378) (2,204) $ 44,915 $ 44,946 5,110 177 — (2,204) $ 48,029 $ 3,114 (12,332) 4,828 — 572 $ 44,576 1,899 3,011 2,313 — 220 (2,085) $ 49,934 $ 42,390 2,433 2,208 — (2,085) $ 44,946 $ (4,988) (1,708) 4,758 — 858 $ 9,221 456 646 (929) — 507 (368) $ 9,533 $ 8,230 370 577 303 1,101 (872) (488) 9,221 $ $ $ 1,214 136 — 343 (711) 982 $ $ 936 131 635 357 (845) 1,214 $ (8,551) 964 959 3,228 — $ (8,007) 1,485 1,030 3,476 — $ (3,818) $ (1,080) $ (3,400) $ (2,016) Amounts recognized on the balance sheet consist of: Accrued benefit costs Additional minimum liability Intangible asset Accumulated other comprehensive loss Net amount recognized Weighted-average assumptions as of December 31: Discount rate Long-term rate of return on plan assets Rate of compensation increases In Thousands Pension Benefits Other Benefits 1999 1998 1999 1998 $ (3,818) (1,460) 943 517 $ (3,818) $ (1,080) $ (3,400) $ (2,016) — — — $ ( 1,080) — — — $ (3,400) — — — $ (2,016) Pension Benefits Other Benefits 1999 1998 1999 1998 7.50% 8.0% 4.5% 6.75% 8.0% 4.5% 7.50% 8.0% — 6.75% 8.0% — california water service group 1999 annual report Net periodic benefit costs for the pension and other postretirement plans for the years ending December 31, 1999, 1998 33 and 1997 included the following components: Service cost Interest cost Expected return on plan assets Net amortization and deferral In Thousands Pension Plan Other Benefits 1999 1998 1997 $ 2,339 3,149 (3,542) 969 $ 1,899 3,011 (3,320) 823 $ 1,545 2,805 (2,876) 768 $ $ 1999 456 646 (107) 389 $ 1998 370 577 (83) 346 1997 280 549 (52) 338 Net periodic benefit cost $ 2,915 $ 2,413 $ 2,242 $ 1,384 $ 1,210 $ 1,115 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 con- tributions 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: Effect on total service and interest costs Effect on accumulated postretirement benefit obligation In Thousands 1-percentage Point Increase $ $ 250 1,378 1-percentage Point Decrease $ (166) $ (1,121) n o t e s t o consolidated financial statements December 31, 1999, 1998, and 1997 i n d e p e n d e n t auditors’ report T h e S t o c k h o l d e r s a n d B o a r d o f D i r e c t o r s C a l i f o r n i a Wa t e r S e r v i c e G r o u p : 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 misstate- ment. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial state- ments. 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 finan- cial 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. Mountain View, California January 21, 2000 california water service group 1999 annual report 35 N o t e 1 0 . A g r e e m e n t O f M e r g e r W i t h D o m i n g u e z S e r v i c e s C o r p o r a t i o n 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 mil- lion 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 1,506,512 shares of Dominguez common stock outstanding. The Company also expects to assume approximately $12.0 mil- lion 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 california in March of 2000. water service group 1999 annual report 34 N o t e 1 1 . Fa i r Va l u e O f F i n a n c i a l I n s t r u m e n t s 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. N o t e 1 2 . Q u a r t e r l y F i n a n c i a l A n d C o m m o n S t o c k M a r k e t D a t a ( U n a u d i t e d ) The Company’s common stock is traded on the New York Stock Exchange under the symbol “CWT.” There were approxi- mately 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. Operating revenue Net operating income Net income Basic earnings per share Common stock market price range: High Low Dividends paid Operating revenue Net operating income Net income Basic earnings per share Common stock market price range: High Low Dividends paid 1999 - in thousands except per share amounts first second third fourth $ 39,853 4,862 2,621 .20 31.25 23.38 .27125 $ 52,112 8,062 5,649 .43 $ 64,021 11,051 8,020 .62 $ 50,454 6,635 3,629 .28 27.63 22.69 .27125 31.88 25.88 .27125 32.00 24.13 .27125 1998 - in thousands except per share amounts first second third fourth $ 35,920 4,598 1,709 .13 $ 45,275 6,660 3,638 .28 $ 63,380 12,273 9,662 .74 $ 45,084 7,008 3,927 .30 33.75 24.31 .2675 30.19 21.50 .2675 27.69 20.75 .2675 33.13 21.25 .2675 c o r p o r a t e information board of directors California Water Service Group, California Water Service Company, CWS Utility Services Annual Report for 1999 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 408.367.8200 or 800.750.8200 http://www.calwater.com 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 Stock- holders will be held on Wednesday, April 19, 2000 at 10 a.m. at the Company’s Executive Office, locat- ed 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. 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 california To Transfer Stock water service group 1999 annual report 36 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 cer- tificate 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 asso- ciations and credit unions with membership in approved signature medallion programs) pursuant to SEC Rule 17AD-15. A notary’s ac- knowledgement is not acceptable. This certificate should then be sent to Boston EquiServe, Stockholder Services, by registered or certified mail with complete transfer instructions. Peter C. Nelson* Robert W. Foy* C.H. Stump*‡ President and Chief Executive Officer Chairman of the Board Former Chairman of the Board and former CEO of California Water Service Company Linda R. Meier †‡ George A. Vera† J.W. Weinhardt †* Member, National Advisory Board, Haas Public Service Center; Member of the Board of Directors, Comerica Bank-California Chief Financial Officer, the David & Lucile Packard Foundation Chairman of SJW Corp. and Chairman of its subsidiary, San Jose Water Company Edward D. Harris, jr., m.d.†* Richard P. Magnuson ‡ Robert K. Jaedicke †‡ George DeForest Barnett Professor of Medicine, Stanford University Medical Center Private Venture Capital Investor 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 Gerald F. Feeney (1,2,3) Vice President, Chief Financial Officer and Treasurer Francis S. Ferraro Vice President, Regulatory Matters James L. Good (2) 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 Vice President, Corporate Communications and Marketing Assistant Secretary, Manager of New Business Robert R. Guzzetta (2) Vice President, Engineering and Water Quality Christine L. McFarlane Vice President, Human Resources Washington Water Service Company Michael P. Ireland President † Member of the Audit Committee ‡ Member of the Compensation Committee * Member of the Executive Committee 1 Holds the same position with California Water Service Group 2 Holds the same position with CWS Utility Services 3 Also an officer of Washington Water Service Company C a l i f o r n i a Wa t e r S e r v i c e G r o u p 1720 North First Street San Jose, California 95112-4598 408.367.8200 www.calwater.com 

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