California Water Service Group

California Water Service Group      2000 Annual Report

SEVENTY-
FIVE 
YEARS OF 
SERVICE

California Water Service Group      2000 Annual Report

California Water Service Group  3

2 Letter to Stockholders

5 About the Company

18 Ten-Year Financial Review

20 Management’s Discussion and Analysis of Results of Operations and Financial Condition

28 Consolidated Balance Sheet

30 Consolidated Statement of Income

31 Consolidated Statement of Common Stockholders’ Equity and Comprehensive Income

32 Consolidated Statement of Cash Flows

33 Notes to Consolidated Financial Statements

43 Independent Auditors’ Report

44 Corporate Information and Officers

Inside Back Cover Board of Directors

California Water Service Group provides high-quality water

utility services to 2 million people through four subsidiaries:

California Water Service Company, Washington Water Service

Company, New Mexico Water Service Company, and CWS

Utility Services. The three water service companies are 

regulated by state public utilities commissions; CWS Utility

Services provides non-regulated contract services, including

meter reading, billing, and full-system operations.

Financial Highlights

In thousands, except per share amounts

Year ended December 31

2000

1999

1998

1997

1996

Book value*

Market price at year-end

Earnings per share*

Dividends 

Revenue*

Net income*

$

13.13

$

12.89

$

12.49

$

12.15

$

11.47

27.00

1.31

1.10

30.31

1.44

1.085

31.31

1.31

1.07

29.53

1.71

1.055

21.00

1.42

1.04

244,806

234,937

214,926

225,165

210,258

19,963

21,971

19,860

25,757

21,400

* Restated to reflect Dominguez and Washington acquisitions, which were accounted for as poolings of interest.

To Our Stockholders

In  2001,  California  Water  Service

earnings were $1.31 per share, compared

Company,  our  largest  subsidiary,  cele-

to  $1.44  per  share  in  1999.  The  decline

brates its 75th year. That means we were

in  net  income  and  earnings  was  due  pri-

in  business  a  year  before  Charles

marily  to  one-time  costs  associated  with

Lindbergh’s  historic  flight  across  the

the completion of the Dominguez Services

Atlantic  Ocean!  As  those  who  have  cele-

Corporation merger, and to higher costs of

brated milestone birthdays know, such an

purchased  water,  purchased  power,  and

occasion  causes  one  to  reflect  on  accom-

labor.  Revenues  were  positively  impacted

plishments and to evaluate plans for meet-

by a 3 percent increase in water sales, the

ing ambitious new goals. Our introspection

addition  of  5,200  regulated  customers,

has  brought  to  light  some  amazing  facts,

and  rate  increases  in  California.  The  dif-

which  we  share  with  you  throughout  this

ference  between  1999  and  2000  results

report.  The  bottom  line  is  that  working

is  attributable  in  part  to  the  one-time

together, we have built a Company that is

merger  costs  recorded  in  2000  and  $1.3

known  for  its  financial  stability,  customer

million in pre-tax real estate sales in 1999.

focus, dedicated employees, and commit-

Annual  dividends  increased  to  $1.10  in

ment to quality. And we keep on building,

2000, and were paid for the 56th consec-

having  grown  our  customer  base  by  16

utive year.  

percent in the last two years alone. 

What  our  financial  results  do  not  yet

Our  financial  results  for  2000  reflect

reflect  is  the  great  progress  we  made  in

this  growth.  Operating  revenues  rose  to

2000  toward  growing  the  Company.  In

$244.8 million, compared to $234.9 mil-

May,  we  received  long-awaited  approval

lion in 1999. 

from 

the  California  Public  Utilities

Net  income  dipped  to  $19.9  million,

Commission 

on 

our  merger  with

compared  to  $21.9  million  last  year,  and

Dominguez  and  set  about  integrating

40,000  new  service  connections  into  our

Robischon  Engineers,  Inc.,  gives  us  a

operations. As anticipated, we already are

Washington-based,  in-house  engineering

capturing  synergies  by  combining  opera-

capability  that  lowers  costs  and  positions

tions  and  expect  the  transaction  to  be

us  better  to  capitalize  on  the  state’s

Dominguez systems. 

We  continued  to  integrate  our  new

accretive to our stockholders during 2001.

expertise of 75 new employees and evalu-

The intangible benefits of the merger have

ate  growth  opportunities  surrounding

also  become  evident,  as  we  enjoy  the

OUR
DIVIDEND HAS
INCREASED
EVERY YEAR
SINCE THE
BEATLES’ HIT
“HEY JUDE”
TOPPED THE
CHARTS. 

due  in  part  to  our  new  service  contract

2000,  and  watched  that  subsidiary  grow

business  in  Washington  also  prospered,

metered connections through our acquisi-

County  and  Lacamas  Farmsteads  Water

Company in Pierce County. Non-regulated

companies  in  the  state  of  Washington  in

by  5  percent  with  the  addition  of  800

tion of Mirrormount Water Services in King

with  the  Miller  Brewery  in  Tumwater.

growth opportunities.   

The year 2000 also saw us establish a

foothold  for  regulated  operations 

in

another  western  state,  as  we  signed  an

agreement to acquire the water and waste-

water  assets  of  the  Rio  Grande  Utility

Corporation,  which  serves  2,300  water

and 1,600 wastewater customers in unin-

corporated  areas  of  Valencia  County,  New

Mexico,  30  miles  south  of  Albuquerque.

The  Rio  Grande  transaction  is  contingent

upon  approval  of  the  New  Mexico  Public

Regulation  Commission,  expected  in  the

third  quarter  of  2001.  Prior  to  securing

this agreement, we expanded our existing

non-regulated  New  Mexico  business  by

entering  into  a  five-year  meter-reading

Opportunities  abound  in  the  Evergreen

contract with Los Alamos County.

State, which has a favorable regulatory cli-

Throughout  the  Company,  we  have

mate  and  many  small  water  systems.  Our

continued  to  implement  customer-driven

second-quarter  purchase  of  the  assets  of

initiatives  developed  by  our  employees

2  California Water Service Group 

California Water Service Group  3

To Our Stockholders

In  2001,  California  Water  Service

earnings were $1.31 per share, compared

Company,  our  largest  subsidiary,  cele-

to  $1.44  per  share  in  1999.  The  decline

brates its 75th year. That means we were

in  net  income  and  earnings  was  due  pri-

in  business  a  year  before  Charles

marily  to  one-time  costs  associated  with

Lindbergh’s  historic  flight  across  the

the completion of the Dominguez Services

Atlantic  Ocean!  As  those  who  have  cele-

Corporation merger, and to higher costs of

brated milestone birthdays know, such an

purchased  water,  purchased  power,  and

occasion  causes  one  to  reflect  on  accom-

labor.  Revenues  were  positively  impacted

plishments and to evaluate plans for meet-

by a 3 percent increase in water sales, the

ing ambitious new goals. Our introspection

addition  of  5,200  regulated  customers,

has  brought  to  light  some  amazing  facts,

and  rate  increases  in  California.  The  dif-

which  we  share  with  you  throughout  this

ference  between  1999  and  2000  results

report.  The  bottom  line  is  that  working

is  attributable  in  part  to  the  one-time

together, we have built a Company that is

merger  costs  recorded  in  2000  and  $1.3

known  for  its  financial  stability,  customer

million in pre-tax real estate sales in 1999.

focus, dedicated employees, and commit-

Annual  dividends  increased  to  $1.10  in

ment to quality. And we keep on building,

2000, and were paid for the 56th consec-

having  grown  our  customer  base  by  16

utive year.  

percent in the last two years alone. 

What  our  financial  results  do  not  yet

Our  financial  results  for  2000  reflect

reflect  is  the  great  progress  we  made  in

this  growth.  Operating  revenues  rose  to

2000  toward  growing  the  Company.  In

$244.8 million, compared to $234.9 mil-

May,  we  received  long-awaited  approval

lion in 1999. 

from 

the  California  Public  Utilities

Net  income  dipped  to  $19.9  million,

compared  to  $21.9  million  last  year,  and

Commission 

on 
Peter C. Nelson
President and CEO

Dominguez  and  set  about  integrating

our  merger  with

Robert W. Foy 
Chairman

40,000  new  service  connections  into  our

Robischon  Engineers,  Inc.,  gives  us  a

operations. As anticipated, we already are

Washington-based,  in-house  engineering

capturing  synergies  by  combining  opera-

capability  that  lowers  costs  and  positions

tions  and  expect  the  transaction  to  be

us  better  to  capitalize  on  the  state’s

accretive to our stockholders during 2001.

growth opportunities.   

The intangible benefits of the merger have

The year 2000 also saw us establish a

also  become  evident,  as  we  enjoy  the

foothold  for  regulated  operations 

in

expertise of 75 new employees and evalu-

another  western  state,  as  we  signed  an

ate  growth  opportunities  surrounding

agreement to acquire the water and waste-

Dominguez systems. 

water  assets  of  the  Rio  Grande  Utility

We  continued  to  integrate  our  new

Corporation,  which  serves  2,300  water

companies  in  the  state  of  Washington  in

and 1,600 wastewater customers in unin-

2000,  and  watched  that  subsidiary  grow

corporated  areas  of  Valencia  County,  New

by  5  percent  with  the  addition  of  800

Mexico,  30  miles  south  of  Albuquerque.

metered connections through our acquisi-

The  Rio  Grande  transaction  is  contingent

tion of Mirrormount Water Services in King

upon  approval  of  the  New  Mexico  Public

County  and  Lacamas  Farmsteads  Water

Regulation  Commission,  expected  in  the

Company in Pierce County. Non-regulated

third  quarter  of  2001.  Prior  to  securing

business  in  Washington  also  prospered,

this agreement, we expanded our existing

due  in  part  to  our  new  service  contract

non-regulated  New  Mexico  business  by

with  the  Miller  Brewery  in  Tumwater.

entering  into  a  five-year  meter-reading

Opportunities  abound  in  the  Evergreen

contract with Los Alamos County.

State, which has a favorable regulatory cli-

Throughout  the  Company,  we  have

mate  and  many  small  water  systems.  Our

continued  to  implement  customer-driven

second-quarter  purchase  of  the  assets  of

initiatives  developed  by  our  employees

2  California Water Service Group 

California Water Service Group  3

through  our  Continuous  Improvement

have on our business, and we are. From a

Process (CIP). Every one of our employees

financial standpoint, we track higher elec-

in our 25 districts, working in teams, con-

tric and gas prices through regulatory bal-

tributes 

to 

improving 

the  business

ancing  accounts  for  recovery  in  future

processes that we use to serve customers.

rates. From an operational standpoint, we

Providing  excellent  customer  service

are  equipped  with  strategically-located

remains  our  top  priority.  This  principle

backup  power  generators  to  allow  contin-

drives  everything  we  do,  from  improving

ued water production during interruptions

our water system infrastructure to upgrad-

in our power supply.  

ing our computer software.  

As we move forward, we will continue

Our  capital 

investment 

in  2000

to  pursue  growth  opportunities  in  the

totaled  $37  million,  a  number  we  expect

western  United  States  while  we  work  to

to  increase  to  $54  million  in  2001—our

enhance  existing  operations  by  improving

largest  capital  expenditure  budget  ever.

customer  service  and  increasing  our  effi-

The  increase  is  largely  attributable  to  the

ciency.  As  the  water  industry  experiences

surface water treatment plant that we plan

continued  consolidation  and  change,  we

to  construct  in  Bakersfield,  California

believe  we  have  what  it  takes  to  be  the

beginning  in  2001.  The  plant  will  enable

leader  in  providing  our  communities  and

our  Bakersfield  District  to  serve  a  rapidly

customers  with  traditional  and  innovative

growing  population  and  meet  anticipated

utility services. This optimism is cause for

new  Environmental  Protection  Agency

celebration as we commemorate 75 years

water  quality  standards.  Additionally,  we

of outstanding water service with a look at

are  building  operations  centers  in  our

some amazing facts about California Water

Chico  and  Stockton  districts  that  will

Service Group.

replace inadequate existing facilities and

one  in  our  Rancho  Dominguez  district

Sincerely,

that will house our newly combined South

Bay  operations.  Because  our  return  is

based  upon  invested  equity  capital,  we

view  this  upward  trend  as  a  positive  one

for our stockholders.

ROBERT W. FOY

As the last regulated utility, the water

CHAIRMAN OF THE BOARD

industry  has  not  faced  the  deregulation

challenges  confronting  electric  and  natu-

ral gas utilities. However, we do need to be

prepared  for  the  impacts  that  power 

PETER C. NELSON

supply  shortages  and  higher  costs  could

PRESIDENT AND CHIEF EXECUTIVE OFFICER

4  California Water Service Group 

IN 75 YEARS,
WE HAVE BUILT A
COMPANY THAT IS
KNOWN FOR ITS 
FINANCIAL STABILITY,
CUSTOMER FOCUS,
DEDICATED
EMPLOYEES, AND
COMMITMENT TO
QUALITY.

OUR
CUSTOMER
SATISFACTION
RATING IS
HIGHER THAN
MICHAEL
JORDAN’S
84% CAREER 
FREE THROW
PERCENTAGE. 

(Left) Desalination Plant - Torrance, CA

There is a reason we have “service” in our name —it is

because  we  are  committed  to  providing  excellent  cus-

tomer service. Our efforts to improve service are guided

by  the  “Voice  of  the  Customer,”  a  tool  that  lets  our

employees know what customers want and need in the

customers’ own words. This information determines the

types  of  projects  we  undertake  in  our  Continuous

Improvement  Process.  Our  approach  to  the  business,

inspired  by  those  of  industrial  giants  Hewlett-Packard

and  General  Electric,  enables  every  employee  in  the

Company to play an integral role in enhancing customer

service  and  improving  operating  efficiency.  Does  it

work?  Yes.  At  last  count,  89  percent  of  our  customers

ranked our service as “very good” or “excellent.”  

WE
CONDUCT
MORE WATER
QUALITY
TESTS IN A
DAY THAN
THERE ARE
DAYS IN THE
YEAR.

(Left) Water Quality Lab - San Jose, CA

Our customers rely on us to provide high-quality water,

and  we  take  that  responsibility  very  seriously.  Working

in  our  certified,  state-of-the-art  laboratory  under  the

direction  of  the  American  Water  Works  Association

2000 George Warren Fuller Award winner, Chet Auckly,

our  chemists  and  technicians  work  tirelessly  to  ensure

that the water we provide meets or surpasses state and

federal  water  quality  standards.  As 

technology

advances,  enabling  us  to  detect  progressively  more

minute  quantities  of  constituents  in  the  water,  we

expect  water  quality  standards  to  become  increasingly

stringent. As they do, we stand ready to invest the time

and resources necessary to meet them. Our team of 11

experts,  who  have  completed  a  combined  total  of  66

years of advanced water quality education, will do what

it  takes  to  keep  us  on  the  leading  edge  of  a  field  that

presents new challenges every year. 

LAID 
END TO END,
OUR
PIPELINES
WOULD
REACH FROM
CALIFORNIA
TO NEW YORK
AND BACK
AGAIN.

(Left) Water Main Repair - Gig Harbor, WA

Providing water utility services to 2 million people in 96

communities  in  California,  Washington,  and  New

Mexico, we supply enough water every day to fill a glass

of water for every person in the world. Serving a range

of  communities—from  large  to  small,  urban  to  rural,

wet to dry—has given us an invaluable breadth of oper-

ational  experience.  When  we  face  a  challenge  in  one

district,  chances  are  that  we  have  overcome  similar

challenges in another. And having proven experience in

operating  a  variety  of  systems  and  treatment  facilities

makes us an attractive business partner to neighboring

water providers who need assistance meeting the needs

of their customers. To ensure that our extensive network

of  water  systems  is  well  maintained,  our  San  Jose-

based  engineering  team  plans  and  oversees  capital

projects throughout the Company. 

A FAMILY WHO
SWITCHES
FROM BOTTLED
WATER TO OUR
WATER COULD
SAVE ENOUGH
MONEY IN ONE
YEAR TO BUY
800 LOAVES
OF BREAD AND
615 GALLONS
OF MILK. 

(Left) Water Tower - Chico, CA

As an investor-owned water utility, we must balance our

customers’  need  for  reasonable  water  rates  with  our

stockholders’ desire to earn a fair rate of return on their

investment.  One  way  we  do  that  is  by  operating  effi-

ciently  and  holding  down  expenses,  responsibility  for

which  is  borne  by  every  employee  in  our  Company.

Another way we do it is by growing our Company prof-

itably  to  achieve  economies  of  scale  and  spread  fixed

costs  over  a  larger  number  of  customers.  Considering

the range of services we provide for just a fraction of a

penny  per  gallon—from  maintaining  and  upgrading

water system infrastructure to testing and treating water

supplies—our life-sustaining, irreplaceable product just

might be the bargain of the century.   

THE NUMBER
OF NEW 
PEOPLE THAT
WE’VE BEGUN
TO SERVE IN
THE PAST 2
YEARS COULD
FILL THE
ROSE BOWL
TWICE. 

(Left) Engineering Department - Olympia, WA

Consolidation  continues  in  the  water  industry,  as

smaller  providers  opt  out  of  a  business  that  is  becom-

ing more complex and capital intensive every year. Our

Company has taken its place as a leading consolidator

in  the  western  United  States,  having  completed  the

largest merger in California’s history and established a

presence  in  two  new  states.  We  also  have  grown  our

non-regulated  business  by  entering  into  a  number  of

innovative  partnerships  that  provide  utility  services  to

neighboring cities and agencies. Having districts strate-

gically  located  in  California,  Washington,  and  New

Mexico  positions  us  well  for  future  growth,  as  we  con-

tinue to execute our strategy of pursuing opportunities

that  add  to  stockholder  value  and  enhance  service  to

the customer. 

Harbor
South Sound

Washington

California

Chico
Willows

Oroville
Marysville
Redwood Valley

Dixon

Stockton

Salinas
King City

Selma

Visalia

Westlake

Hermosa-Redondo

Palos Verdes

Dominguez

South San Francisco
Mid-Peninsula
Bear Gulch
Los Altos
Livermore
Headquarters (General Office)

Kern River Valley

Bakersfield

Antelope Valley
Hawthorne

East Los Angeles

Customers

District Name

California

Antelope Valley

Bakersfield

Bear Gulch

Chico †

Dixon

Dominguez 

King City †

Livermore

Los Altos

Marysville †

Including

Regulated

Non-regulated

Fremont Valley, Lake Hughes, Lancaster and Leona Valley; 
numerous operating agreements

O&M contracts for the City of Bakersfield and Spicer City 

Atherton, Woodside, Portola Valley, portions of Menlo Park 
and City of Menlo Park service contract

Hamilton City

Carson and portions of Compton, Harbor City, Long Beach,  
Los Angeles and Torrance

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; meter reading for Manhattan Beach 

Kern River Valley

Bodfish, Kernville, Lakeland, Mountain Shadows, Onyx, Squirrel Valley,
South Lake and Wofford Heights; numerous operating contracts

O&M contracts for Castlewood Country Club and Crane Ridge MWC

16,800

400

Portions of Cupertino, Los Altos Hills, Mountain View and Sunnyvale

18,300

Subtotal

425,800

55,000

Stockton

Visalia †

Westlake

Willows †

New Mexico

Los Alamos

Santa Fe

Washington

Harbor

Four O&M contracts

A portion of Thousand Oaks

Meter-reading contract

Meter-reading contract

Subtotal

Numerous O&M contracts

South Sound

Numerous O&M contracts

Subtotal

Total

1,300

400

57,500

17,500

23,300

2,800

32,800

26,400

25,800

4,000

2,700

6,100

25,600

13,400

4,100

500

2,200

3,800

35,800

3,500

23,800

1,900

26,700

5,200

16,300

41,700

29,300

6,900

2,300

300

300

1,100

22,200

26,300

48,500

1,400

1,000

2,400

9,700

2,800

12,500

438,300

105,900

New Mexico

Los Alamos

Sante Fe

Mid-Peninsula

San Mateo and San Carlos

Oroville

Palos Verdes

Redwood Valley

Salinas

Selma

Palos Verdes Estates, Rancho Palos Verdes, Rolling Hills Estates 
and Rolling Hills

Lucerne, Duncans Mills, Guerneville, Dillion Beach and a portion
of Santa Rosa

O&M contracts for Foothill Estates and Spreckels Water Co.

South San Francisco

Colma and Broadmoor

California Water Service Company

Washington Water Service Company

New Mexico Water Service Company

MWC = Mutual Water Company    |

O&M = Operations and Maintenance    |

† = Indicates Billing Contract

California Water Service Group  17

Ten-Year Financial Review

Dollars in thousands, except common share data

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

Summary of Operations
Operating revenue
Residential
Business
Industrial
Public authorities
Other

Total operating revenue

Operating expenses
Interest expense, other income and expenses, net

$171,234
44,211
11,014
11,609
6,738

244,806
211,610
13,233

$163,681
41,246
12,695
10,898
6,417

234,937
201,890
11,076

$150,491
38,854
10,150
9,654
5,777

214,926
183,245
11,821

$158,210
40,520
10,376
11,173
4,886

225,165
188,020
11,388

$148,313
37,605
9,748
10,509
4,083

210,258
177,356
11,502

$132,859
35,873
9,952
9,585
4,833

193,102
164,958
11,176

$127,228
33,712
9,080
9,397
3,767

183,184
155,012
11,537

$122,585
31,360
8,415
8,535
4,985

175,880
145,517
12,785

$111,353
29,208
7,905
7,899
7,104

163,469
137,401
11,794

$ 95,393
25,490
7,037
6,754
12,799

147,473
121,179
10,769

Net income

$  19,963

$ 21,971

$ 19,860

$ 25,757

$ 21,400

$ 16,968

$ 16,635

$ 17,578

$  14,274

$ 15,525

Common Share Data
Earnings per share — diluted
Dividend 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

Balance Sheet Data
Net utility plant
Utility plant expenditures
Total assets
Long-term debt including current portion
Capitalization ratios:

Common stockholders’ equity
Preferred stock
Long-term debt

Other Data
Water production (million gallons)

Wells
Purchased

Total water production

Metered customers
Flat-rate customers

Customers at year-end, including Hawthorne

New customers added
Revenue per customer
Utility plant per customer
Employees at year-end

$     1.31
1.100

84%

$   13.13
27.00
15,146

10.1%
3.58

$ 

$

1.44 
1.085 

75%

12.89 
30.31
15,094

11.5%
3.73 

$

$

1.31 
1.070 

82%

12.49 
31.31
15,015

10.8%
3.64 

$582,008
37,161
666,605
189,979

$564,390
48,599
645,507
171,613

$538,741
41,061
613,143
152,674

51.1%
0.9%
48.0%

53.0%
0.9%
46.1%

54.6%
1.0%
44.4%

65,408
62,237

127,645

366,242
78,104

$  

444,346
5,219
551
1,916
797

65,144
58,618

123,762

361,235
77,892

$ 

439,127
6,727
535 
1,851
790

57,482
54,661

112,143

354,832
77,568

$

432,400
4,383
497 
1,768
759

$ 

$

1.71 
1.055 

62%

12.15 
29.53
15,015

14.5%
4.37 

$ 

1.42 
1.040 

73%

$  11.47 
21.00
15,015

12.8%
3.81 

$

$

1.13 
1.020 

90%

10.97 
16.38
14,934

10.6%
3.41 

$

1.17 
0.990 

$

1.26 
0.960 

$ 

1.02 
0.930 

$  

1.12 
0.900 

85%

76%

91%

80%

$  10.72 
16.00
14,890

11.1%
3.49 

$   10.03 
20.00
13,773

12.6%
3.34 

$  

9.65 
16.50
13,773

10.7%
3.21 

$ 

9.48 
14.00
13,773

11.8%
3.33 

$515,917
37,511
594,444
153,271

$495,985
40,310
569,745
151,725

$471,994
31,031
553,027
154,416

$455,769
32,435
516,507
138,628

$437,065
31,097
497,717
138,863

$419,194
37,698
451,754
130,971

$389,965
37,935
440,294
108,572

53.8%
1.0%
45.2%

52.7%
1.1%
46.2%

50.9%
1.1%
48.0%

52.9%
1.2%
45.9%

49.3%
1.2%
49.5%

49.7%
1.3%
49.0%

53.9%
1.4%
44.7%

63,736
59,646

123,382

350,139
77,878

$

428,017
4,719
526 
1,694
752

60,964
56,769

117,733

345,307
77,991

$

423,298
9,730
497 
1,632
740

54,818
57,560

112,378

335,238
78,330

$

413,568
2,263
467 
1,580
738

53,274
59,850

113,124

332,146
79,159

$ 

411,305
3,325
445 
1,520
729

48,598
59,103

107,701

326,564
81,416

$

407,980
2,906
431 
1,459
717

55,641
49,303

104,944

322,457
82,617

$ 

405,074
3,769
404 
1,400
706

52,944
44,457

97,401

318,275
83,030

401,305
6,301
367 
1,327
689

$

18 California Water Service Group 

California Water Service Group  19

Management’s Discussion and Analysis of
Results of Operations and Financial Condition

California Water Service Group (Company) is a holding company with four operating subsidiaries:

California Water Service Company (Cal Water), CWS Utility Services (Utility Services), New Mexico

Water Service Company (New Mexico Water) and Washington Water Service Company (Washington

Water). Cal Water and Washington Water are regulated public utilities. Their assets and operating

revenues  currently  comprise  the  majority  of  the  Company’s  assets  and  revenues.  New  Mexico

Water is a new subsidiary formed in 2000 to provide regulated water services. Utility Services pro-

vides non-regulated water operations and related services to other private companies and munic-

ipalities. The following discussion and analysis provides information regarding the Company, its

assets, operations and financial condition.

Forward-Looking Statements
This annual report, including the Letter to Stockholders and Management’s Discussion and Analysis, contains for-
ward-looking  statements  within  the  meaning  of  the  federal  securities  laws.  Such  statements  are  based  on  cur-
rently available information, expectations, estimates, assumptions and projections, and management’s judgment
about the Company, the water utility industry and general economic conditions. Such words as expects, intends,
plans, believes, estimates, anticipates or variations of such words or similar expressions are intended to identify
forward-looking  statements.  The  forward-looking  statements  are  not  guarantees  of  future  performance.  Actual
results  may  vary  materially  from  what  is  contained  in  a  forward-looking  statement.  Factors  which  may  cause  a
result different than expected or anticipated include governmental and regulatory commissions’ decisions, new
legislation, increases in suppliers’ prices and the availability of supplies, changes in environmental compliance
requirements, acquisitions, the ability to successfully implement business plans, changes in customer water use
patterns and the impact of weather on operating results. The Company assumes no obligation to provide public
updates of forward-looking statements.

Business
Cal  Water  is  a  public  utility  supplying  water  service  to  431,900  customers  in  75  California  communities
through 25 separate water systems or districts. Cal Water’s 24 regulated systems, which are subject to regu-
lation  by  the  California  Public  Utilities  Commission  (CPUC)  serve  425,800  customers.  An  additional  6,100
customers receive service through a long-term lease of the City of Hawthorne’s water system, which is not sub-
ject to CPUC regulation.

Washington Water’s utility operations are regulated by the Washington Utilities and Transportation Commission
(WUTC).  Washington  Water  provides  domestic  water  service  to  12,500  customers  in  the  Tacoma  and  Olympia
areas. An additional 2,400 customers are served under operating agreements with private owners.

New Mexico Water was organized in 2000. It currently provides meter reading services for 48,500 accounts
in Santa Fe and Los Alamos. In November, the Company entered an agreement to acquire the water and waste-
water assets of Rio Grande Utility Corporation. Rio Grande has annual revenue of $1.2 million and serves 2,300
water and 1,600 wastewater customers south of Albuquerque. The acquisition is contingent on approval of the
state’s Public Regulation Commission, which is expected in the third quarter of 2001.

Utility Services derives non-regulated income from contracts with other private companies and municipalities
to operate water systems and provide meter reading and billing services for 105,900 customers. It also leases
communication  antenna  sites,  operates  recycled  water  systems,  provides  meter  reading  and  customer  services,
and conducts real estate sales.

Rates and operations for regulated customers are subject to the jurisdiction of the respective state’s regula-
tory  commission.  The  commissions  require  that  water  rates  for  each  regulated  district  be  independently 
determined. Rates for the City of Hawthorne system are established in accordance with an operating agreement
and are subject to ratification by the City Council. Fees for other operating agreements are based on contracts
negotiated among the parties. 

Results of Operations
RESTATEMENT. During 2000, the Company issued 2,210,000 shares of common stock in exchange for all of the
outstanding shares of Dominguez Services Corporation. The acquisition, which was accounted for as a pooling of
interests, was completed on May 25, 2000. The accompanying financial statements have been restated to include
the Dominguez accounts in the current and prior periods. 

EARNINGS  AND  DIVIDENDS. Net  income  in  2000  was  $19,963,000  compared  to  $21,971,000  in  1999  and
$19,860,000 in 1998. Diluted earnings per common share were $1.31 in 2000, $1.44 in 1999 and $1.31 in
1998. The weighted average number of common shares outstanding was 15,173,000 in 2000, 15,142,000 in
1999 and 15,061,000 in 1998.

At its January 2000 meeting, the Board of Directors increased the common stock dividend for the 33rd con-
secutive year. 2000 also marked the 56th consecutive year that a dividend had been paid on the Company’s com-
mon stock. The annual dividend paid in 2000 was $1.10, a 1.4% increase over the $1.085 paid in 1999, which
was an increase of 1.4% over the $1.07 paid in 1998. The dividend increases were based on projections that
the  higher  dividend  could  be  sustained  while  still  providing  the  Company  with  adequate  financial  flexibility.
Earnings not paid as dividends are reinvested in the business for the benefit of stockholders. The dividend pay-
out ratio was 84% in 2000, 75% in 1999 and 82% in 1998, an average of 80% during the three-year period. 

OPERATING REVENUE. Operating revenue, including revenue from the City of Hawthorne lease, was $244.8 million,
$9.9 million or 4% more than the $234.9 million recorded last year. Revenue in 1998 was $214.9 million. The
source of changes in operating revenue were:

Dollars in millions

Customer water usage
Rate increases
Usage by new customers

Net change

Average revenue per customer (in dollars)
Average metered customer usage (Ccf)
New customers added

2000

1999

1998

$   4.8
3.0
2.1
$   9.9

$ 551
317
5,200

$  14.0
3.2
2.8
$  20.0

$ 535
305
6,700

$ (14.4)
2.1
2.1
$ (10.2)

$   497
284
4,400

Weather always has an important influence on water revenues. The first quarter of 2000 was wetter than in
the previous year, causing a reduction in customer usage. Second and third quarter weather was normal; however,
rains in the early part of the fourth quarter negatively affected usage. The year-end customer count was 444,000,
an increase of 1.0%.

Weather in the first half of 1999 was normal, while in the prior year it was cooler and wetter; as a result, cus-
tomer usage and revenue were higher in 1999. Third quarter weather in both years was normal. Fourth quarter
1999 weather was mild and drier than 1998, causing an increase in customer usage and an increase in revenue.
The year-end customer count was 439,000, an increase of 1.6%.

20 California Water Service Group 

California Water Service Group  21

Management’s Discussion and Analysis (continued)

During the first half of 1998, weather in our service areas was wet and cool, very much the reverse of 1997’s
favorable weather pattern. Weather in the second half of the year returned to a more normal pattern. However, the
wet, cool weather in the early part of the year resulted in an overall 9% decrease in 1998 water usage, negatively
impacting revenue. The year-end customer count was 432,000, a 1.0% increase.

OPERATING  AND  INTEREST  EXPENSES. Total operating expenses, including those for the Hawthorne operation, were
$211.6 million in 2000, $201.9 million in 1999 and $183.2 million in 1998. 

Wells  provided  50.7%  of  water  requirements  in  2000  and  purchased  water  provided  48.7%,  with  0.6%
obtained from surface supplies. In 1999 the corresponding percentages were 52.4%, 47.2% and 0.4%, and in
1998,  50.8%,  48.7%  and  0.5%.  The  table  below  provides  information  regarding  water  production  costs  con-
sisting of purchased water, purchased power and pump taxes:

Dollars in millions

Purchased water
Purchased power
Pump taxes

Total water production costs

Change from prior year

2000

$73.8
15.1
6.3
$95.2

1999

$69.4
14.4
6.9
$90.7

1998

$61.0
12.5
5.2
$78.7

5%

15%

(5)%

Water production (billion gallons)

128

124

112

Change from prior year

3%

10%

(9)%

The year-to-year water production cost changes are influenced by weather patterns and sources of supply. In
each  of  the  three  years,  purchased  water  expense,  the  largest  component  of  annual  operating  expense,  was
affected  by  wholesale  suppliers’  rate  increases.  During  2000,  seven  districts  experienced  wholesale  price
increases ranging from 2% to 7%. Water production costs in 1999 reflect an increase in customer usage and sig-
nificant purchased water price increases for the San Francisco Peninsula districts where the wholesale supplier’s
rates  increased  37%.  Despite  some  wholesale  price  increases  in  1998,  overall  water  production  expenses
declined. Well production decreased due to the decline in water sales and because several wells were out of ser-
vice for maintenance. With reduced well production, purchased power and pump tax expenses declined. 

During the last three years, the Company has not been subject to significant energy rate increases. However,
as has been widely publicized, California energy costs are expected to rise significantly. In January 2001, the
CPUC approved temporary energy surcharges that the Company estimates may increase its power costs by 10%.
The  Company  believes  that  energy  cost  increases  are  recoverable  from  consumers  through  established  CPUC
procedures, although on a short-term basis the regulatory lag in recovering higher energy costs will negatively
impact earnings. 

Employee payroll and benefits charged to operations and maintenance expense was $43.9 million for 2000,
$43.0 million in 1999 and $38.8 million in 1998. The increases in payroll and related benefits are attributable
to general wage increases effective at the start of each year and additional hours worked. At year-end 2000, 1999
and 1998, there were 797, 790 and 759 employees, respectively. 

During 2000, a curtailment of the Dominguez pension plan was recorded resulting in a gain of $1.2 million
which was offset against operating expenses. The curtailment occurred because the Dominguez plan was frozen
at  the  merger  date  and  its  participants  became  participants  in  the  Company  pension  plan.  Previous  amounts
expensed by Dominguez but not funded to the plan comprise the curtailment amount. This amount is not included
in the $43.9 million reported for payroll and benefits charged to operations and maintenance expense.

Income  tax  expense  was  $11.6  million  in  2000,  $13.5  million  in  1999  and  $11.4  million  in  1998.  The
changes in taxes are generally due to variations in taxable income. There is no state income tax in Washington.
In 2000, interest on long-term debt was unchanged from 1999. In October, $20 million, Series C, 8.15%
senior notes were issued. The added interest expense was offset by sinking fund reductions of outstanding bonds
and  interest  capitalized  on  constructed  assets.  Long-term  debt  interest  expense  increased  $1  million  in  1999
because of the issue of Series B, 6.77% senior notes in March. 

Short-term bank borrowing interest expense increased in 2000 by $0.7 million because of higher borrowings
to meet operating and interim construction funding needs. Bank borrowings were reduced when Series C senior
notes were issued. In 1999, other interest expense decreased $0.4 million. Short-term borrowings were reduced
after the issue of Series B senior notes and by strong cash flow from operations. Interest coverage of long-term
debt before income taxes was 3.6 times in 2000, 3.7 times in 1999 and 3.6 times in 1998. There was $14.6
million in short-term borrowings at the end of 2000, $14.0 million at the end of 1999 and $22.9 million at the
end of 1998.

OTHER INCOME AND EXPENSES. Other income is derived from management contracts whereby the Company operates
private and municipally owned water systems, agreements for operation of two recycled water systems, contracts
for meter reading and billing services to various cities, leases of communication antenna sites, surplus property
sales, other non-utility sources and interest on short-term investments. Total other income was $1.8 million in
2000,  $3.6  million  in  1999  and  $2.1  million  in  1998.  During  1999,  $1.3  million  in  pre-tax  profits  were
recorded from properties sold as part of the Real Estate Program that is described in more detail in the “Liquidity
and Capital Resources” section of this report. There were no property sales in 2000 or 1998. 

Rates and Regulation
The Company’s regulatory staff reviewed 15 Cal Water districts that were eligible for general rate filings in 2000.
Based  on  current  earnings  levels,  projected  expense  increases  and  expected  capital  expenditures,  applications
were  filed  in  July  2000  for  three  districts  representing  about  25%  of  Cal  Water  customers.  The  applications
request a 10.75% return on equity and would provide $3.4 million in new revenue in 2001 and $7.2 million in
2002.  A  CPUC  decision  is  expected  during  the  second  quarter  of  2001.  There  can  be  no  assurance  that  the
increases will be granted as requested.

Step rate increases of $0.8 million for 2001 from prior general rate decisions were effective in January. 
New water rates for the City of Hawthorne water system, which the Company operates under a long-term lease,
became effective in early August 2000. The rates are designed to add $0.3 million in annual revenue in their
first full year. Step rate increases of $0.2 million will be effective on July 1, 2001 and 2002. Additionally, there
will be a surcharge added to customer bills for a two-year period starting in August 2001 designed to produce
$0.5 million in annual revenue.

Effective  in  August  2000,  offset  rate  increases  to  recover  increases  in  water  production  expenses  became
effective  in  four  Cal  Water  districts.  The  rates  generated  $1.6  million  in  additional  2000  revenue  and  are
expected to add $1.8 million in 2001.

Prior to and unrelated to the merger with the Company, Dominguez Services Corporation filed a general rate
increase application with the CPUC. A CPUC decision was issued in October 2000 authorizing an increase in cus-
tomer rates and granting a return on equity of 9.95%. For 2000, $0.2 million in new revenue was received from
the rate increase and for the full year 2001, $1.7 million is expected. 

During 1999, the Company’s regulatory staff completed a review of 14 Cal Water districts that were eligible
for general rate application filings. Based on existing earnings levels, projected expense increases and expected
capital expenditures, a determination was made that no general rate increase applications were necessary. 

In May 1999, the CPUC authorized general rate increases for the rate applications filed in July 1998 affect-
ing four districts representing about 25% of Cal Water’s customers. The decision generated $4.1 million in new
revenue during the twelve months following the mid-June effective date. The decision’s 9.55% authorized return
on equity provided $1.9 million in new annual revenue. In addition, the decision provided another $2.2 million
in  annual  revenue  for  environmental  compliance,  specific  capital  budget  expenditures  and  recovery  of  General
Office expenses. The $2.2 million is not reflected in the 9.55% return on equity calculation.

22 California Water Service Group 

California Water Service Group  23

Management’s Discussion and Analysis (continued)

CPUC decisions were received in July 1998 for the general rate applications filed in July 1997. Additional
annual revenue from these decisions was $0.3 million in 1998, $0.3 million in 1999 and $0.1 million in 2000,
with $0.1 million expected in 2001. In a variance from its past practice, future rate increases for operating costs
and capital requirements over the next five years in the Oroville and Selma districts are tied to changes in a price
index. The decision maintained the Return on Equity (ROE) at 10.35%.

Water Supply
The Company’s source of supply varies among its operating districts. Certain districts obtain all of their supply
from wells, some districts purchase all of their supply from wholesale suppliers and other districts obtain their
supply from a combination of well and purchased sources. A small portion of the supply is from surface sources.
On average, approximately half of the water is provided from wells and about half purchased. 

California’s  normal  weather  pattern  yields  little  precipitation  between  mid-spring  and  mid-fall.  The
Washington service areas receive precipitation in all seasons with the heaviest amounts during the winter. Water
usage is highest during the warm summers and declines in the cool winter months. Rain and snow during the win-
ter months replenish underground water basins and fill reservoirs providing the water supply for subsequent deliv-
ery to customers. To date, snow and rainfall accumulation during the 2000-2001 water year has been less than
normal; however, the prior four years were at or exceeded normal levels. Water storage in California’s reservoirs at
the end of 2000 was at 107% of historic average, so the state will enter 2001 with ample storage. The Company
believes that its supply from underground aquifers and purchased sources should be adequate to meet customer
demand during 2001.

Environmental Matters
The Company is subject to regulations of the United States Environmental Protection Agency (EPA), state health
service departments and various local health departments concerning water quality matters. It is also subject to
the jurisdiction of various state and local regulatory agencies relating to environmental matters, including han-
dling and disposal of hazardous materials. The Company strives for complete compliance with all requirements
set forth by the various agencies.

The Safe Drinking Water Act (SDWA) was amended in 1996 to provide a new process for the EPA to select
and regulate waterborne contaminants. The EPA can now regulate only contaminants that are known or likely to
occur at levels expected to pose a risk to public health when regulation would provide a meaningful opportunity
to reduce a health risk. New drinking water regulations will be based primarily on risk assessment and measure-
ment of cost/benefit considerations for minimizing overall health risk. The amended SDWA allows EPA to require
monitoring of up to 30 contaminants in any five-year cycle. Also, every five years the EPA must select at least
five listed contaminants and determine if they should be regulated. 

The Company has an established water supply monitoring program to test for contaminants in accordance with
SDWA requirements. Water pumped from underground sources is treated as necessary or required by regulations.
The  Company  owns  and  operates  three  surface  water  treatment  plants.  The  cost  of  existing  treatment  is  being
recovered in customer rates as authorized by the regulatory authorities. Water purchased from wholesale suppli-
ers is treated before delivery to the Company’s systems.

Enforcement of the EPA standards is the responsibility of individual states. The states can impose more strin-
gent regulation than mandated by EPA. In addition to the EPA’s requirements, various regulatory agencies could
require increased monitoring and possibly require additional treatment of water supplies. 

In January 2001, EPA released a new, lower regulatory limit for arsenic, a naturally-occurring element, that
is sometimes present in groundwater. It is anticipated that EPA will issue other regulations that will require fur-
ther monitoring and possible treatment for specific contaminants. Depending on the action levels contained in
the regulations, the cost of compliance with the new regulations could be significant in certain Company districts.
The Company intends to request recovery for capital investments and additional treatment costs needed to remain
in compliance with established health standards through the ratemaking process. 

Liquidity and Capital Resources
LIQUIDITY.  The  Company’s  liquidity  is  provided  by  bank  lines  of  credit  and  internally  generated  funds.  The
Company has a $50 million line of credit with a bank, of which $20 million is designated for the parent and $30
million is available to Cal Water. The $20 million portion may be drawn on for use by the Company, including
funding of its subsidiaries’ operations. Cal Water’s $30 million portion can be used solely for purposes of the
regulated utility.

The Company has committed $7.6 million of the $20 million credit line to a contractor who is constructing
a combined customer/operation center to serve the South Bay Los Angeles operations. When complete in the fall
of 2001, the Company will exchange real property on a tax-free basis with the contractor for the customer/oper-
ation center. At December 31, 2000, $3.5 million had been drawn to acquire land and commence construction.
Washington Water has loan commitments from two banks to meet its operating and capital equipment pur-
chase  requirements.  At  December  31,  2000,  the  total  available  under  these  commitments  was  $0.4  million.
Generally,  short-term  borrowings  under  the  commitments  are  converted  annually  to  long-term  borrowings  with
repayment terms tied to system and equipment acquisitions. 

The water business is seasonal. Revenue is lower in the winter months when water usage declines from the
higher-use summer period. During the winter period, the need for short-term borrowings under the bank lines of
credit increases. The larger summer cash flow allows short-term borrowings to be paid down. Short-term borrow-
ings that remain outstanding more than one year have generally been converted to long-term debt. The Company
believes  that  long-term  financing  is  available  to  it  through  debt  and  equity  markets.  Standard  &  Poor’s  and
Moody’s have maintained their ratings of Cal Water’s first mortgage bonds at AA- and Aa3, respectively. These are
the highest ratings for senior debt in the water industry. Long-term financing, which includes common stock, first
mortgage bonds, senior notes and other debt securities has been used to replace short-term borrowings and fund
construction.  Developer  contributions  in  aid  of  construction  and  refundable  advances  for  construction  are  also
sources of funds for various construction projects. Internally generated funds come from retention of earnings not
paid  out  as  dividends,  depreciation  and  deferred  income  taxes.  Additional  information  regarding  the  bank  bor-
rowings and long-term debt is presented in notes 7 and 8 to the financial statements. 

In October 2000, Series C, 8.15%, 30-year senior notes were issued and in March 1999, Series B, 6.77%,
30-year senior notes were issued. Each issue is for $20 million. During the four years prior to the Series B issue,
the  Company’s  operating  and  capital  requirements  were  met  by  borrowings  under  the  bank  short-term  line  of
credit and internally generated funds. 

The  Company  has  a  Dividend  Reinvestment  Plan  and  Stock  Purchase  Plan  (Plan).  Under  the  Plan,  stock-
holders  may  reinvest  dividends  to  purchase  additional  Company  common  stock.  The  Plan  also  allows  existing
stockholders and other interested investors to purchase Company common stock through the transfer agent. The
Plan provides that shares required for the Plan may be purchased on the open market or be newly issued shares.
Therefore, the Plan provides the Company with an alternative means of developing additional equity if new shares
were  issued.  During  2000  and  1999  shares  were  purchased  on  the  open  market.  At  this  time,  the  Company
intends  to  continue  purchasing  shares  required  for  the  Plan  on  the  open  market.  However,  if  new  shares  were
issued to satisfy future Plan requirements, the impact on earnings per share could be dilutive because of the
additional shares outstanding. Also, stockholders may experience dilution of their ownership percentage.

CAPITAL REQUIREMENTS. Capital requirements consist primarily of new construction expenditures for expanding and
replacing  the  Company’s  utility  plant  facilities  and  the  acquisition  of  new  water  properties.  They  also  include
refunds of advances for construction and retirement of bonds.

The 2000 utility plant expenditures totaled $37.1 million. During 1999, total utility plant expenditures were
$48.6 compared to $41.1 million in 1998. The 2000 expenditures included $33.5 million provided by Company
funds and $3.6 million received from developers for contributions in aid of construction and refundable advances
for construction. Company projects were funded by internally generated funds, borrowings under bank credit lines
and commitments, and issuance of the $20 million Series C senior notes. 

24 California Water Service Group 

California Water Service Group  25

Management’s Discussion and Analysis (continued)

Several major projects account for an increase in the 2001 construction budget to $53.9 million. In 2001,
construction will commence on a three-year project to construct a treatment plant to accommodate growth and
meet water quality standards in the Bakersfield district. $10.8 million is budgeted for this project in 2001. Over
the three-year period, the plant and related pumping and pipeline facilities are estimated to cost $45 million.
Also in the 2001 budget is $4.6 million for construction of office/operation centers in the Chico and Stockton
districts. These facilities will replace existing office/operation centers that have become inadequate due to age
and  district  growth.  The  budget  will  be  funded  by  operations,  bank  borrowings  and  long-term  debt  and  equity
financing. New subdivision construction will be financed by developers’ contributions and refundable advances
for  construction.  The  Company-funded  construction  budgets  over  the  next  five  years  are  projected  to  be  about
$275 million.

CAPITAL STRUCTURE. Common stockholders’ equity increased by the amount of earnings not paid out for dividends.
New equity issued in 1999 and 1998 was to acquire water systems. The long-term debt portion of the capital
structure increased due to the issuance of Series B and C senior notes. It was reduced by first mortgage bond
sinking fund payments.

The Company’s total capitalization at December 31, 2000, was $389.4 million and at the end of 1999 was

$366.9 million.

Capital ratios were:

Common equity 
Preferred stock 
Long-term debt 

2000

1999

51.1%
0.9%
48.0%

53.0%
0.9%
46.1%

The 2000 return on average common equity was 10.1% compared to 11.5% in 1999 and 10.8% in 1998. 

OTHER ACQUISITIONS. On January 25, 2001, the CPUC approved the Company’s acquisition of the Nish water sys-
tems in Visalia. The four systems serve 1,100 customers and have annual revenue of $1.2 million. The Company
will issue common stock valued at $0.8 million and assume debt of $0.2 million to complete the transaction.

On April 12, 2000, Washington Water received approval from the WUTC to purchase the assets of Mirrormount
Water  Services  and  Lacamas  Farmsteads  Water  Company.  The  acquisitions  were  completed  in  April  2000.
Together  the  companies  serve  almost  800  customers  and  produce  annual  revenue  of  about  $250,000.
Washington Water also purchased the assets of Robischon Engineers, Inc. in April 2000. This acquisition added
in-house engineering capabilities to the Washington operation, enabling Washington Water to provide water sys-
tem design services to other water providers.

During 1999 the Company invested in a firm that provides meter-reading services in Santa Fe, New Mexico
and assumed responsibility for this contract in April 2000. The Company’s agreement is with Avistar, a subsidiary
of Public Service of New Mexico, which operates the 26,000-account water system for the city. The acquisition
of the Rio Grande Utility Corporation, which serves 2,300 water and 1,600 wastewater customers, for $2.3 mil-
lion in cash and assumed debt of $3.1 million is expected to be completed in the third quarter of 2001.

REAL ESTATE PROGRAM. The Company’s subsidiaries own more than 900 real estate parcels. Certain parcels are not
necessary for or used in water utility operations. Most surplus properties have a low cost basis. A program has
been developed to realize the value of certain surplus properties through sale or lease of those properties. The
program will be ongoing for a period of several years. During the next four years, the Company estimates that gross
property transactions totaling over $10 million dollars could be completed. In 1999, $1.3 million in pretax sales
were completed. No transactions were completed during 2000; however, $4 million in pretax property sales are
anticipated to close during 2001. 

STOCKHOLDER  RIGHTS  PLAN. As explained in Note 6 to the Consolidated Financial Statements, in January 1998,
the Board of Directors adopted a Stockholder Rights Plan (Plan). In connection with the Plan, a dividend distri-
bution  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 unso-
licited takeover proposal by encouraging a prospective acquirer to negotiate with the Board.

Financial Risk Management
The Company does not participate in hedge arrangements, such as forward contracts, swap agreements, options
or other contractual agreements relative to the impact of market fluctuations on its assets, liabilities, production
or contractual commitments. The Company operates only in the United States, and therefore, is not subject to
foreign currency exchange rate risks.

INTEREST  RATE  RISK. The  Company  does  have  exposure  to  market  risk  that  includes  changes  in  interest  rates.
Interest  rate  risk  exists  because  the  Company’s  financing  includes  the  use  of  long-term  debt  obligations  with
maturity dates up to 30 years from the date of issue and during the outstanding period interest rates are subject
to fluctuation. The Company’s long-term obligations are first mortgage bonds and senior note obligations that are
generally placed with insurance companies. Washington Water’s long-term obligations are for periods of up to 10
years and are placed with two banks. During 2000, the Company issued a single series of $20 million, 30-year
senior notes at 8.15%. To expand access to capital debt markets, the Company may investigate the use of pri-
vate and public markets for future debt issues. It may also consider financing on a company-wide basis, rather
than on a subsidiary-by-subsidiary basis. 

The Company’s short-term financing is provided by bank lines of credit that are discussed under the “Liquidity
and Capital Resources” section of this report. Short-term borrowings that are not repaid from operating cash or
funded by retained earnings are generally converted to long-term debt issues. The Company plans to continue  the
financing of its construction program in this manner. Financing of acquisitions have been done using Company
common stock or through the debt financing vehicles available to the subsidiary companies.

VALUE RISK. Because the Company operates primarily in a regulated industry, its value risk is somewhat lessened;
however, regulated parameters also can be recognized as limitations to operations and earnings, and the ability
to respond to certain business condition changes. Non-regulated operations are subject to risk of contract con-
straints  and  performance  by  the  Company  in  achieving  its  objectives.  Value  risk  management  is  accomplished
using various financial models that consider changing business parameters. It is also supplemented by consider-
ing various risk control processes that may be available as circumstances warrant.

EQUITY RISK. The Company does not have equity investments, therefore, it does not have equity risks.

New Accounting Standard
In  1998,  the  Financial  Accounting  Standards  Board  issued  Statement  of  Financial  Accounting  Standards
(“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The statement as amended,
establishes new accounting and reporting standards for derivative financial instruments and hedging activities.
The Company adopted the standard on January 1, 2001. Its adoption is not anticipated to have a material impact
on the Company’s results of operations or financial position.

26 California Water Service Group 

California Water Service Group  27

Consolidated Balance Sheet

In thousands, except per share data

December 31, 2000 and 1999

Assets

Utility plant:

Land
Depreciable plant and equipment
Construction work in progress
Intangible assets

Total utility plant

Less accumulated 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

2000

1999

December 31, 2000 and 1999

2000

1999

In thousands, except per share data

$  10,641
797,403
31,400
11,837

851,281
269,273

582,008

$  10,440 
776,795
14,661
10,790

812,686
248,296

564,390

3,241

1,655

15,163
5,450
7,964
2,718
6,257

40,793

38,133
3,817
1,854

43,804

14,333
4,777
8,199
2,247
7,140

38,351

37,441
3,503
1,822

42,766

Capitalization and Liabilities

Capitalization:

Common stock, $.01 par value; 25,000 shares authorized, 

15,146 and 15,094 shares outstanding in 2000 and 1999, respectively

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

$      151
49,984
149,185
(486)

$      151
49,340
145,610
(517)

198,834

194,584

3,475
187,098

389,407

3,475
168,866

366,925

2,881
14,598
26,493
3,976
2,579
13,209

63,736

2,989
25,620
20,316
105,562
58,975

2,747
13,999
26,748
3,556
2,092
13,569

62,711

3,096
25,796
22,544
105,556
58,879

$666,605

$645,507

$666,605

$645,507 

See accompanying notes to consolidated financial statements.

28 California Water Service Group 

California Water Service Group  29

Consolidated Statement of Income

Consolidated Statement of Common Stockholders’ Equity 
and Comprehensive Income

In thousands, except per share data

In thousands

Common

For the years ended December 31, 2000, 1999 and 1998 

2000

1999

1998

For the years ended December 31, 2000, 1999 and 1998

Stock

Accumulated

Additional

Paid-in

Capital 

Other 

Total

Total

Retained

Comprehensive

Stockholders’

Comprehensive

Earnings

Income (Loss)

Equity

Income

$244,806

$234,937 

$214,926 

Balance at December 31, 1997

$ 150 

$ 48,372  $ 134,236

$ — $ 182,758 

$

—

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

73,768
15,136
6,275
32,974
32,308
11,592
18,368
11,571
9,618

69,351
14,355
6,856
32,266
28,963
10,200
17,246
13,515
9,138

60,958
12,541
5,162
29,784
28,131
10,191
16,309
11,425
8,744

211,610

201,890

183,245

Net operating income

33,196

33,047

31,681

Other income and expenses, net

Income before interest expense

1,413

34,609

3,089

36,136

1,746

33,427

Interest expense:

Long-term debt interest
Other interest

Total interest expense

Net income

Earnings per share:

Basic

Diluted

Weighted average number of common shares outstanding:

Basic

Diluted

See accompanying notes to consolidated financial statements.

12,901
1,745

14,646

13,084
1,081

14,165

12,125
1,442

13,567

$  19,963

$ 21,971 

$ 19,860 

$

$

1.31

1.31

$ 

$  

1.45 

1.44 

$  

$  

1.31 

1.31 

15,126

15,173

15,090

15,142

15,014

15,061

Net income
Dividends paid:

Preferred stock
Common stock

Total dividends paid

Income reinvested in business

Balance at December 31, 1998

Issuance of common stock

Net income
Dividends paid:

Preferred stock
Common stock

Total dividends paid

Income reinvested in business

Other comprehensive loss

—

—   
—   

—   

—

150

1

—   

—
—   

—   

—   

—   

—

19,860

—

19,860

19,860

—   
—   

—   

—

153
14,889

15,042

4,818

—   
—   

—   

—

153
14,889

15,042

4,818

—
—

—

—

48,372

139,054

—    187,576

19,860

968

—  

—

969

—

—   

21,971

—   

21,971

21,971

—   
—   

—   

—   

—   

153
15,262

15,415

6,556

—   

—   
—   

—   

—   

153
15,262

15,415

6,556

—
—

—

—

(517)

(517)

(517)

(517)

194,584

21,454

Balance at December 31, 1999

151

49,340

145,610

Issuance of common stock

Net income
Dividends paid:

Preferred stock
Common stock

Total dividends paid

Income reinvested in business

Other comprehensive income
Balance at December 31, 2000 

—   

—   

—   
—   

—   

—   

—   

644

—   

—   

19,963

—   
—   

—   

—   

—   

152
16,236

16,388

3,575

—   

$151

$49,984  $149,185 

—   

—   

—   
—   

—   

—   

644

—

19,963

19,963

152
16,236

16,388

3,575

—
—

—

—

31

31
$(486) $198,834 

31
$19,994

See accompanying notes to consolidated financial statements.

30 California Water Service Group 

California Water Service Group  31

Consolidated Statement of Cash Flows

Notes to Consolidated Financial Statements

In thousands

For the years ended December 31, 2000, 1999 and 1998 

2000

1999

1998

December 31, 2000, 1999, and 1998

NOTE 1. 

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

Receivables
Unbilled revenue
Accounts payable
Other current assets and liabilities
Other changes, net

Net adjustments

Net cash provided by operating activities

Investing activities:

Utility plant expenditures

Company funded
Developer advances and contributions in aid of construction

Other investments

Net cash used in investing activities

Financing activities:

Net short-term borrowings
Issuance of common stock
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

$ 19,963

$ 21,971

$ 19,860 

18,368

17,246

16,309

(3,203)

1,360

503

(1,503)
235
(255)
1,093
(71)

14,664

34,627

(33,540)
(3,621)
— 

(37,161)

599
644
20,326
3,846
(3,870)
1,883
(2,920)
(16,388)

4,120
1,586
1,655

(2,324)
(1,187)
7,623
(649)
3,334

25,403

47,374

(35,535)
(12,984)
(80)

(48,599)

(8,951)
46
20,062
7,480
(4,056)
4,814
(2,318)
(15,415)

1,662
437
1,218

2,224
(780)
332
2,272
892

21,752

41,612

(35,963)
(5,098)
— 

(41,061)

8,450
— 
—
3,972
(3,939)
3,982
(785)
(15,042)

(3,362)
(2,811)
4,029

Cash and cash equivalents at end of year

$   3,241

$   1,655 

$   1,218 

Supplemental disclosures of cash flow information:

Cash paid during the year for:

Interest (net of amounts capitalized)
Income taxes

$ 14,785
11,775

Non-cash financing activity - common stock issued in acquisitions

—

$ 13,796 
11,499

923

$ 11,922 
9,501

— 

See accompanying notes to consolidated financial statements.

32 California Water Service Group 

Organization and Operations
California Water Service Group (Company) is a holding company that through its wholly owned subsidiaries pro-
vides  water  utility  and  other  related  services  in  California,  Washington  and  New  Mexico.  During  1999,  the
Company reincorporated as a Delaware corporation. California Water Service Company (Cal Water) and Washington
Water Service Company (Washington Water) provide regulated utility services under the rules and regulations of
their respective regulatory commissions (jointly referred to as Commissions). CWS Utility Services provides non-
regulated  water  utility  and  utility-related  services  in  all  three  states.  New  Mexico  Water  Service  Company  was
formed in 2000 to provide regulated utility services.

The Company operates primarily in one business segment, providing water and related utility services. 

NOTE 2. 

Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
The financial statements give retroactive effect to acquisitions, which were accounted for as pooling of interests.
Accordingly,  the  Company’s  consolidated  financial  statements  and  footnotes  have  been  restated  to  include
Dominguez  Services  Corporation  and  subsidiaries  (Dominguez)  as  if  the  merger  had  been  completed  as  of  the
beginning of the earliest period presented. Intercompany transactions and balances have been eliminated.

The accounting records of the Company are maintained in accordance with the uniform system of accounts
prescribed by the Commissions. Certain prior years’ amounts have been reclassified, where necessary, to conform
to the current presentation. 

The preparation of consolidated financial statements in conformity with generally accepted accounting princi-
ples requires management to make estimates and assumptions that affect the reported amounts of assets and lia-
bilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

REVENUE Revenue consists of monthly cycle customer billings for regulated water service at rates authorized by
the  Commissions  and  billings  to  certain  non-regulated  customers.  Revenue  from  metered  accounts  includes
unbilled amounts based on the estimated usage from the latest meter reading to the end of the accounting period.
Flat-rate accounts, which are billed at the beginning of the service period, are included in revenue on a pro rata
basis for the portion applicable to the current accounting period.

UTILITY PLANT Utility plant is carried at original cost when first constructed or purchased, except for certain minor
units of property recorded at estimated fair values at dates of acquisition. Cost of depreciable plant retired is elim-
inated from utility plant accounts and such costs are charged against accumulated depreciation. Maintenance of
utility plant is charged primarily to operation expenses. Interest is capitalized on plant expenditures during the
construction period and amounted to $703,000 in 2000, $324,000 in 1999 and $224,000 in 1998.

Intangible  assets  acquired  as  part  of  water  systems  purchased  are  stated  at  amounts  as  prescribed  by  the
Commissions. All other intangibles have been recorded at cost. Included in intangible assets is $6,500,000 paid
to the City of Hawthorne to lease the city’s water system and associated water rights. The lease payment is being
amortized on a straight-line basis over the 15-year life of the lease. The Company continually evaluates the recov-
erability of utility plant by assessing whether the amortization of the balance over the remaining life can be recov-
ered through the expected and undiscounted future cash flows.

DEPRECIATION Depreciation  of  utility  plant  for  financial  statement  purposes  is  computed  on  the  straight-line
remaining life method at rates based on the estimated useful lives of the assets, ranging from 5 to 65 years. The
provision  for  depreciation  expressed  as  a  percentage  of  the  aggregate  depreciable  asset  balances  was  2.4%  in
2000 and 2.5% in 1999 and 1998. For income tax purposes, as applicable, the Company computes deprecia-
tion using the accelerated methods allowed by the respective taxing authorities. Plant additions since June 1996
are depreciated on a straight-line basis for tax purposes in accordance with tax regulations.

California Water Service Group  33

Notes (continued)

CASH  EQUIVALENTS Cash  equivalents  include  highly  liquid  investments,  primarily  U.S.  Treasury  and  U.S.
Government agency interest bearing securities, stated at cost with original maturities of three months or less.

RESTRICTED  CASH Restricted cash represents proceeds collected through a surcharge on certain customers’ bills
plus interest earned on the proceeds. The restricted cash is to service California Safe Drinking Water Bond obli-
gations  and  is  classified  in  other  prepaid  expenses.  At  December  31,  2000  and  1999,  the  amounts  restricted
were $755,000 and $724,000, respectively.

LONG-TERM DEBT PREMIUM, DISCOUNT AND EXPENSE The discount and issuance expense on long-term debt is amor-
tized  over  the  original  lives  of  the  related  debt  issues.  Premiums  paid  on  the  early  redemption  of  certain  debt
issues and unamortized original issue discount and expense of such issues are amortized over the life of new debt
issued in conjunction with the early redemption.

ACCUMULATED  OTHER  COMPREHENSIVE  LOSS The  Company  has  an  unfunded  Supplemental  Executive  Retirement
Plan.  The unfunded accumulated benefit obligation of the plan exceeds the accrued benefit cost.  This amount
exceeds the unrecognized prior service cost; therefore accumulated other comprehensive loss has been recorded
as a separate component of Stockholders’ Equity.

ADVANCES  FOR  CONSTRUCTION Advances for Construction consist of payments received from developers for instal-
lation of water production and distribution facilities to serve new developments. Advances are excluded from rate
base for rate setting purposes. Annual refunds are made to developers without interest over a 20-year or 40-year
period.  Refund  amounts  under  the  20-year  contracts  are  based  on  annual  revenues  from  the  extensions.
Unrefunded balances at the end of the contract period are credited to Contributions in Aid of Construction and
are no longer refundable. Refunds on contracts entered into since 1982 are made in equal annual amounts over
40  years.  At  December  31,  2000,  the  amounts  refundable  under  the  20-year  contracts  were  $8,688,000  and
under 40-year contracts were $96,874,000. Estimated refunds for 2001 for all water main extension contracts
are $4,100,000.

CONTRIBUTIONS  IN  AID  OF  CONSTRUCTION Contributions  in  Aid  of  Construction  represent  payments  received  from
developers, primarily for fire protection purposes, which are not subject to refunds. Facilities funded by contri-
butions are included in utility plant, but excluded from rate base. Depreciation related to contributions is charged
to Contributions in Aid of Construction. 

INCOME  TAXES The Company accounts for income taxes using the asset and liability method. Deferred tax assets
and  liabilities  are  recognized  for  the  future  tax  consequences  attributable  to  differences  between  the  financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Measurement of the
deferred tax assets and liabilities is at enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabil-
ities of a change in tax rates is recognized in the period that includes the enactment date.

It  is  anticipated  that  future  rate  action  by  the  Commissions  will  reflect  revenue  requirements  for  the  tax

effects of temporary differences recognized, which have previously been flowed through to customers.

The Commissions have granted the Company customer rate increases to reflect the normalization of the tax
benefits  of  the  federal  accelerated  methods  and  available  Investment  Tax  Credits  (ITC)  for  all  assets  placed  in
service after 1980. ITC are deferred and amortized over the lives of the related properties for book purposes.

Advances for Construction and Contributions in Aid of Construction received from developers subsequent to
1986 were taxable for federal income tax purposes and subsequent to 1991 were subject to California income
tax. In 1996 the federal tax law, and in 1997 the California tax law, changed and only deposits for new services
were taxable. In late 2000, federal regulations were further modified to exclude fire services from tax. 

EARNINGS PER SHARE Basic earnings per share (EPS) is calculated by dividing income available to common stock-
holders by the weighted average shares outstanding during the year. Diluted EPS is calculated by dividing income
available to common stockholders by the weighted average shares outstanding and potentially dilutive shares. 

STOCK-BASED  COMPENSATION The  Company  adopted  Statement  on  Financial  Accounting  Standard  No.  123,
“Accounting for Stock-Based Compensation.” The Company elected to adopt the provision of the statement that

allows the continuing practice of not recognizing compensation expense related to the granting of employee stock
options to the extent that the option price of the underlying stock was equal to or greater than the market price
on the date of the option grant.

NOTE 3.

Merger with Dominguez Services Corporation
The Merger between the Company and Dominguez was completed on May 25, 2000. On the merger date, each
outstanding Dominguez common share was exchanged for 1.38 shares of Company common stock. The Company
issued  2,210,254  new  common  shares  in  exchange  for  the  1,601,679  outstanding  Dominguez  shares.
Dominguez  provided  water  service  to  about  40,000  customers  in  21  California  communities.  The  former
Dominguez operations became districts within Cal Water.

The Merger was accounted for as a pooling of interests. There were no intercompany transactions as a result
of  the  Merger.  Certain  reclassifications  were  made  to  the  historic  financial  statements  of  the  companies  to
conform presentation.

For the periods indicated below, the Company and Dominguez reported the following items:

Unaudited – In thousands

Revenue:

Company
Dominguez

Net income:
Company
Dominguez

6 Months
Ended
6-30-00

Year
Ended
12-31-99

Year
Ended
12-31-98

$ 98,428
14,232
$112,660

$206,440
28,497
$234,937

$189,659
25,267
$214,926

$ 6,139
1,147
$ 7,286

$  19,919
2,052
$  21,971

$  18,936
924
$  19,860

Dominguez  previously  reported  net  of  tax  extraordinary  items  related  to  merger  transaction  expenses.  The
Company reclassified the extraordinary items into “Operating expenses” in the income statement. The reclassi-
fied amounts were for the six months ended June 30, 2000, $167,000; for the year ended December 31, 1999,
$190,000; and for the year ended December 31, 1998, $499,000.

No adjustments were made to the Dominguez net assets in applying the accounting practices of the Company.
Dominguez previously reported common stock of $1,542,000 that was reclassified by the Company to “Paid-in-
Capital” in accordance with the Company’s financial statement presentation. The Company and Dominguez each
had December 31 year-ends; therefore no adjustment was required to retained earnings due to a change in fiscal
year-ends.

NOTE 4.

Other Acquisitions
In 1999, the Company acquired all of the outstanding stock of Harbor Water Company and South Sound Utility
Company,  which  form  the  operations  of  Washington  Water,  serving  14,900  regulated  and  non-regulated  cus-
tomers. The acquisitions were accounted for as pooling of interests in exchange for 316,472 shares of Company
stock and assumption of long-term debt of $2,959,000. The results of operations previously reported by the sep-
arate entities are included in the accompanying consolidated financial statements. 

During  1998,  the  Company  purchased  the  assets  of  Lucerne  Water  Company,  Rancho  del  Paradiso  Water
Company and Armstrong Valley Water Company. These investor-owned systems serve 1,624 accounts. The acqui-
sitions were completed effective January 1, 1999, in exchange for the equivalent of 75,164 shares of Company
common stock. The acquisitions were accounted for under purchase accounting. The purchases were completed
on a non-cash basis in which the Company issued common stock valued at $922,000 and assumed debt obliga-
tions of $1,108,000.

Two other water company asset acquisitions were completed in 1999. The acquired companies served 288

customers. The acquisitions were accounted for under purchase accounting. 

34 California Water Service Group 

California Water Service Group  35

Notes (continued)

On  April  12,  2000,  Washington  Water  received  approval  from  the  Washington  Utilities  and  Transportation
Commission to purchase the assets of Mirrormount Water Services and Lacamas Farmsteads Water Company. The
acquisitions  were  completed  in  April  2000  for  $639,000  in  cash  and  assumed  debt.  Together  the  companies
serve almost 800 customers and produce annual revenue of about $250,000. To provide in-house engineering,
Washington Water also purchased the assets of Robischon Engineers, Inc. in April 2000 for $70,000 in cash.
The acquisitions were accounted for by purchase accounting.

During 1999 the Company invested in a firm that provides meter-reading services in Santa Fe, New Mexico.
In April 2000, the Company assumed responsibility for this contract. The Company’s agreement is with Avistar,
a subsidiary of Public Service of New Mexico, which operates the 26,000-account water system for the city. New
Mexico  Water  has  agreed  to  acquire  the  Rio  Grande  Utility  Corporation,  which  serves  2,300  water  and  1,600
wastewater customers, for $2.3 million in cash and assumed debt of $3.1 million. The acquistion is expected to
be completed in the third quarter of 2001 after approval of the state’s regulatory authority is received.

NOTE 5. 

Preferred Stock
As  of  December  31,  2000  and  1999,  380,000  shares  of  preferred  stock  were  authorized.  Dividends  on  out-
standing 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 con-
vertible to common stock. A premium of $243,250 would be due upon voluntary liquidation of Series C. There
is no premium in the event of an involuntary liquidation.

NOTE 6.

Common Stockholders’ Equity
The Company is authorized to issue 25,000,000 shares of $.01 par value common stock. As of December 31,
2000  and  1999,  15,145,866  and  15,093,627  shares  of  common  stock  were  issued  and  outstanding, 
respectively. All shares of common stock are eligible to participate in the Company’s dividend reinvestment plan.
Approximately 10% of the outstanding shares participate in the plan. 

STOCKHOLDER RIGHTS PLAN The Company’s Stockholder Rights Plan (the Plan) is designed to provide stockholders
protection and to maximize stockholder value by encouraging a prospective acquirer to negotiate with the Board.
The Plan was adopted in 1998 and authorized a dividend distribution of one right (Right) to purchase 1/100th
share  of  Series  D  Preferred  Stock  for  each  outstanding  share  of  Common  Stock  in  certain  circumstances.  The
Rights are for a ten-year period that expires in February 2008. 

Each Right represents a right to purchase 1/100th share of Series D Preferred Stock at the price of $120,
subject to adjustment (the Purchase Price). Each share of Series D Preferred Stock is entitled to receive a divi-
dend equal to 100 times any dividend paid on common stock and 100 votes per share in any stockholder elec-
tion. The Rights become exercisable upon occurrence of a Distribution Date. A Distribution Date event occurs if
(a) any person accumulates 15% of the then outstanding Common Stock, (b) any person presents a tender offer
which causes the person’s ownership level to exceed 15% and the Board determines the tender offer not to be
fair to the Company’s stockholders, or (c) the Board determines that a stockholder maintaining a 10% interest in
the Common Stock could have an adverse impact on the Company or could attempt to pressure the Company to
repurchase the holder’s shares at a premium. 

Until the occurrence of a Distribution Date, each Right trades with the Common Stock and is not separately
transferable. When a Distribution Date occurs: (a) the Company would distribute separate Rights Certificates to
Common Stockholders and the Rights would subsequently trade separate from the Common Stock; and (b) each
holder of a Right, other than the acquiring person (whose Rights would thereafter be void), would have the right
to receive upon exercise at its then current Purchase Price that number of shares of Common Stock having a mar-
ket 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 redemp-
tion price of $.001 per Right. 

NOTE 7. 

Short-term Borrowings
As of December 31, 2000, the Company maintained a bank line of credit providing unsecured borrowings of up
to $20,000,000 at the prime lending rate or lower rates as quoted by the bank. $7,562,000 of the line is com-
mitted to a contractor for construction of an office complex for combined Los Angeles South Bay operations. When
completed, the office complex will be exchanged with the contractor for surplus company land on a tax-free basis.
Cal Water maintained a bank line of credit for an additional $30,000,000 on the same terms as the Company.
The line of credit agreements, which expire April 2001 and which the Company expects to renew, do not require
minimum or specific compensating balances.

The following table represents borrowings under the bank lines of credit:

Dollars in thousands

2000

1999

1998

Maximum short-term borrowings
Average amount outstanding
Weighted average interest rate
Interest rate at December 31

NOTE 8. 

$26,750
16,810

7.77%
7.88%

$25,500
9,093

$25,700
15,755

6.52%
7.11%

7.09%
6.97%

Long-term Debt
As of December 31, 2000 and 1999, long-term debt outstanding was:

In thousands

Series

J 
K
P
S
BB
CC
DD
EE
FF
GG

A
B
C

First Mortgage Bonds:

Senior Notes:

California Department of
Water Resources loans

Other long-term debt

Total long-term debt
Less current maturities

Interest
Rate

8.86%
6.94%
7.875%
8.50%
9.48%
9.86%
8.63%
7.90%
6.95%
6.98%

7.28%
6.77%
8.15%

3.0% to
7.4%

Maturity
Date

2023
2012
2002
2003
2008
2020
2022
2023
2023
2023

2025
2028
2030

2011-32

2000

1999

$    4,000
5,000
2,580
2,595
13,230
18,600
19,200
19,300
19,300
19,300
123,105

20,000
20,000
20,000

$    4,000
5,000
2,595
2,610
14,940
18,700
19,300
19,400
19,400
19,400
125,345

20,000
20,000
—

3,176

3,698

3,236

3,032

189,979
2,881

171,613
2,747

Long-term debt excluding current maturities

$187,098

$168,866

36 California Water Service Group 

California Water Service Group  37

Notes (continued)

The first mortgage bonds are obligations of Cal Water. All bonds are held by institutional investors and secured
by substantially all of Cal Water’s utility plant. The unsecured senior notes are also obligations of Cal Water. They
are  held  by  institutional  investors  and  require  interest-only  payments  until  maturity.  The  Department  of  Water
Resources (DWR) loans were financed under the California Safe Drinking Water Bond Act. Repayment of princi-
pal  and  interest  on  the  DWR  loans  is  through  a  surcharge  on  customer  bills.  Other  long-term  debt  is  primarily
equipment and system acquisition financing arrangements with other financial institutions. Aggregate maturities
and  sinking  fund  requirements  for  each  of  the  succeeding  five  years  (2001  through  2005)  are  $2,881,000,
$5,381,000, $5,283,000, $2,663,000, and $2,669,000.

NOTE 9. 

Income Taxes
Income tax expense consists of the following:

In thousands

2000

1999

1998

Current
Deferred
Total

Current
Deferred
Total

Current
Deferred
Total

Federal

State

Total

$ 7,961
1,554
$ 9,515

$ 8,291
2,769
$11,060

$ 6,667
2,679
$ 9,346

$2,519
(463)
$2,056

$2,560
(105)
$2,455

$2,388
(309)
$2,079

$10,480
1,091
$11,571

$10,851
2,664
$13,515

$  9,055
2,370
$11,425

Income tax expense computed by applying the current federal 35% tax rate to pretax book income differs from

the amount shown in the Consolidated Statement of Income. The difference is reconciled in the table below:

In thousands

2000

1999

1998

Computed “expected” tax expense
Increase (reduction) in taxes due to:

State income taxes net of federal tax benefit
Investment tax credits
Other

Total income tax

$11,037

$12,420

$10,950

1,336
(155)
(647)
$11,571

1,624
(184)
(345)
$13,515

1,442
(167)
(800)
$11,425

The components of deferred income tax expense were:

In thousands

2000

1999

1998

Depreciation
Developer advances and contributions
Bond redemption premiums
Investment tax credits
Other
Total deferred income tax expense

$2,031
(814)
(61)
(61)
(4)
$1,091

$2,974
(749)
(62)
(94)
595
$2,664

$3,007
(798)
(62)
(93)
316
$2,370

The tax effects of differences that give rise to significant portions of the deferred tax assets and deferred tax

liabilities at December 31, 2000 and 1999 are presented in the following table:

In thousands

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
Pension plan
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

2000

1999

$40,458
5,648
1,765
632
736
4,860
54,099

78,894
825
79,719
$25,620

$40,595
6,040
1,679
821
794
2,886
52,815

77,520
1,091
78,611
$25,796

A valuation allowance was not required during 2000 and 1999. Based on historic taxable income and future
taxable income projections over the period in which the deferred assets are deductible, management believes it
is more likely than not that the Company will realize the benefits of the deductible differences.

NOTE 10. 

Employee Benefit Plans
PENSION PLAN The Company provides a qualified defined benefit, non-contributory pension plan for substantially
all employees. The cost of the plan was charged to expense and utility plant. The Company makes annual con-
tributions to fund the amounts accrued for pension cost. Plan assets are invested in mutual funds, pooled equity,
bonds and short-term investment accounts. The data below includes the unfunded, non-qualified, supplemental
executive retirement plan.

Benefits  earned  by  Dominguez  employees  under  the  Dominguez  pension  plan  were  frozen  as  of  the  merger
date  and  future  pension  benefits  to  those  employees  will  be  provided  under  the  Company  pension  plan.  The
Dominguez  plan  was  curtailed.  The  Dominguez  plan  was  fully  funded  and  additional  contributions  to  the  plan
could not be funded, although plan annual expense was recorded. As a result of the curtailment, accrued pen-
sion liability of $1,218,000 that had been expensed by Dominguez in prior years was reversed by the Company
in 2000. The amount was offset against other operations expense. 

SAVINGS  PLAN The Company sponsors a 401(k) qualified, defined contribution savings plan that allowed partici-
pants  to  contribute  up  to  15%  of  pre-tax  compensation  in  1999,  increasing  to  18%  in  2000.  The  Company
matches  fifty  cents  for  each  dollar  contributed  by  the  employee  up  to  a  maximum  Company  match  of  4.0%.
Company contributions were $1,298,000, $1,126,000, and $1,078,000 for the years 2000, 1999 and 1998.

OTHER POSTRETIREMENT PLANS The Company provides substantially all active employees with medical, dental and
vision benefits through a self-insured plan. Employees retiring at or after age 58 with 10 or more years of ser-
vice are offered, along with their spouses and dependents, continued participation in the plan by payment of a
premium. Retired employees are also provided with a $5,000 life insurance benefit. Plan assets are invested in
a mutual fund, short-term money market instruments and commercial paper.

The Company records the costs of postretirement benefits during the employees’ years of active service. The
Commissions have issued decisions that authorize rate recovery of tax deductible funding of postretirement ben-
efits and permit recording of a regulatory asset for the portion of costs that will be recoverable in future rates.

38 California Water Service Group 

California Water Service Group  39

Notes (continued)

The following table reconciles the funded status of the plans with the accrued pension liability and the net

Net periodic benefit costs for the pension and other postretirement plans for the years ending December 31,

postretirement benefit liability as of December 31, 2000 and 1999:

2000, 1999 and 1998 included the following components:

In thousands

2000

1999

2000

1999

In thousands

2000

1999

1998

2000

1999

1998

Pension Benefits

Other Benefits

Pension Plan

Other Benefits

Change in benefit obligation:
Beginning of year
Service cost 
Interest cost
Assumption change
Plan amendment
Experience (gain) or loss
Curtailment gain
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

$  55,692
2,846
4,079
825
1,215
(34)
(1,347)
(4,178)
$  59,098

$  61,008
3,140
3,678
—
(4,178)
$  63,648

$   4,550
(13,534)
5,279
—
228
$  (3,477)

$ 61,396
2,899
3,894
(6,669)
744
(3,900)
—
(2,672)
$ 55,692

$ 57,050
6,453
177
—
(2,672)
$ 61,008

$   5,317
(16,204)
4,971
—
455
$ (5,461)

$10,195
544
790
394
—
558
—
(429)
$12,052

$  1,561
228
707
370
(799)
$  2,067

$ (9,985)
1,422
888
3,597
(276)
$ (4,354)

$  9,900
498
689
(929)
—
433
—
(396)
$10,195

$  1,723
206
28
343
(739)
$  1,561

$ (8,634)
556
959
3,228
369
$ (3,522)

Amounts recognized on the balance sheet consist of:

In thousands

2000

1999

2000

1999

Pension Benefits

Other Benefits

Accrued benefit costs
Additional minimum liability
Intangible asset
Accumulated other comprehensive loss
Net amount recognized

$  (3,477)
(1,363)
877
486
$  (3,477)

$ (5,461)
(1,460)
943
517
$ (5,461)

$ (4,354)
—
—
—
$ (4,354)

$ (3,522)
—
—
— 
$ (3,522)

Pension Benefits

Other Benefits

2000

1999

2000

1999

Weighted average assumptions as of December 31:

Discount rate
Long-term rate of return on plan assets
Rate of compensation increases

7.25%
8.00%
4.50%

7.50%
8.00%
4.50%

7.25%
8.00%
—

7.50%
8.00%
— 

Service cost
Interest cost
Expected return on plan assets
Net amortization and deferral
Net periodic benefit cost

$2,846
4,079
(4,498)
486
$2,913

$2,899
3,894
(4,450)
871
$3,214

$2,399
3,747
(4,199)
683
$2,630

$   544
790
(152)
357
$1,539

$ 498
689
(144)
401
$1,444

$ 405
623
(117)
360
$1,271

Postretirement  benefit  expense  recorded  in  2000,  1999,  and  1998  was  $781,000,  $1,064,000,  and
$666,000 respectively. $3,437,000, which is recoverable through future customer rates, is recorded as a regu-
latory asset. The Company intends to make annual contributions to the plan up to the amount deductible for tax
purposes. 

For 2000 measurement purposes, the Company assumed a 5% annual rate of increase in the per capita cost
of covered benefits with the rate remaining at that level thereafter. The health care cost trend rate assumption
has  a  significant  effect  on  the  amounts  reported.  A  one-percentage  point  change  in  assumed  health  care  cost
trends is estimated to have the following effect:

In thousands

Effect on total service and interest costs
Effect on accumulated postretirement benefit obligation

NOTE 11. 

1-percentage
Point Increase

1-percentage
Point Decrease

$   269
$1,815

$   (166)
$(1,471)

Stock-Based Compensation Plans
At the Company’s 2000 annual meeting, stockholders approved a Long-Term Incentive Plan that allows for the
granting  of  nonqualified  stock  options,  performance  shares  and  dividend  units.    Under  the  plan,  a  total  of
1,500,000 common shares are authorized for option grants.  Options are granted at an exercise price that is not
less than the per share common stock market price on the date of grant.  The options vest at a 25% rate on their
anniversary date over their first four years and are exercisable over a ten-year period.  No options were vested at
December 31, 2000.

Certain key Dominguez executives participated in the Dominguez 1997 Stock Incentive Plan which was ter-
minated at the time Dominguez merged with the Company.  The plan provided that in the event of a merger of
Dominguez  into  another  entity,  granted  but  unexercised  stock  options  issued  became  exercisable.    Prior  to  the
Merger,  all  outstanding  Dominguez  options  were  exercised  and  converted  into  Dominguez  shares  and  subse-
quently converted to 52,357 shares of Company common stock. 

Under SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company elected to apply the provi-
sions of APB Opinion No. 25, “Accounting for Stock Issued to Employees.”  Accordingly, no compensation cost
has  been  recognized  in  the  consolidated  financial  statements  for  stock  options  that  have  been  granted.  If  the
Company had elected to adopt the optional recognition provisions of SFAS 123 for its stock option plans, basic
and diluted earnings per share would be unchanged from the amounts reported, except for 2000 diluted earnings
per share which was reported as $1.31, but on a pro forma basis would be $1.30.  Net income for the years ended
December 31, 2000, 1999 and 1998 would be as presented in the following table:

In thousands

As reported
Pro forma

2000

1999

1998

$19,963
19,939

$21,971
21,937

$19,860
19,825

40 California Water Service Group 

California Water Service Group  41

Notes (continued)

Independent Auditors’ Report

The fair value of stock options used to compute pro forma net income and earnings per share disclosures is the
estimated fair value at grant date using the Black-Scholes option-pricing model with the following assumptions:

The Board of Directors 
California Water Service Group:

Expected dividend
Expected volatility
Risk-free interest rate
Expected holding period in years

2000

1999

1998

4.3%
22.0%
4.9%
5.0

4.3%
22.6%
6.2%

10.0

4.3%
22.6%
5.7%

10.0

The following table summarizes the activity for the stock option plans: 

Weighted
Average
Exercise
Price

$22.54
24.84
23.38
22.54
23.45
23.06
23.45
23.06

Weighted
Average
Remaining
Contractual Life

—

—

—

Options
Exercisable

—

8,901

19,092

9.5

—

Shares

35,604
20,617
56,221
(3,864)
52,357
53,500
(52,357)
53,500

Weighted
Average
Fair
Value

—
$5.15
—

—
3.74

—

Outstanding at January 1, 1998
Granted
Outstanding at December 31, 1998
Exercised
Outstanding at December 31, 1999
Granted
Exercised 
Outstanding at December 31, 2000

NOTE 12.

Fair Value of Financial Instruments
For  those  financial  instruments  for  which  it  is  practicable  to  estimate  a  fair  value,  the  following  methods  and
assumptions were used. For cash equivalents, the carrying amount approximates fair value because of the short-
term maturity of the instruments. The fair value of the Company’s long-term debt is estimated at $199,890,000
as of December 31, 2000, and $189,400,000 as of December 31, 1999, using a discounted cash flow analy-
sis, based on the current rates available to the Company for debt of similar maturities. The fair value of advances
for  construction  contracts  is  estimated  at  $27,000,000  as  of  December  31,  2000,  and  $33,000,000  as  of
December 31, 1999, based on data provided by brokers.

NOTE 13.

Quarterly Financial Data (Unaudited)
The Company’s common stock is traded on the New York Stock Exchange under the symbol “CWT.” Quarterly div-
idends have been paid on common stock for 224 consecutive quarters and the quarterly rate has been increased
each year since 1968. 

2000 – in thousands except per share amounts

First

Second

Third

Fourth

Operating revenue
Net operating income 
Net income
Diluted earnings per share

$46,694
4,902
1,533
.10

$65,966
8,977
5,753
.38

$76,580
12,782
9,205
.60

$55,566
6,535
3,472
.23

1999 – in thousands except per share amounts

First

Second

Third

Fourth

Operating revenue
Net operating income
Net income
Diluted earnings per share

42 California Water Service Group 

$45,628
4,777
2,868
.19

$59,232
8,440
6,089
.40

$72,280
11,922
8,706
.57

$57,797
7,908
4,308
.28

We  have  audited  the  accompanying  consolidated  balance  sheet  of  California  Water  Service  Group  and  sub-
sidiaries  as  of  December  31,  2000  and  1999,  and  the  related  consolidated  statements  of  income,  common
stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period
ended  December  31,  2000.  These  consolidated  financial  statements  are  the  responsibility  of  the  Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on
our audits.

The consolidated financial statements of California Water Service Group as of and for each of the years ended
December 31, 1999 and 1998, have been restated to reflect the pooling-of-interests transaction with Dominguez
Services Corporation and subsidiaries as described in Note 3 to the consolidated financial statements. We did not
audit the consolidated financial statements of Dominguez Services Corporation and subsidiaries, which financial
statements reflect total assets constituting 9.0 percent as of December 31, 1999 and total revenue constituting
12.1 percent and 11.8 percent, in 1999 and 1998 respectively, of the related consolidated totals. Those finan-
cial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as
it relates to the amounts included for Dominguez Services Corporation and subsidiaries as of December 31, 1999,
and for the years ended December 31, 1999 and 1998, is based solely on the report of the other auditors.

We conducted our audits in accordance with auditing standards generally accepted in the United States of
America.  Those  standards  require  that  we  plan  and  perform  the  audit  to  obtain  reasonable  assurance  about
whether the financial statements are free of material misstatement. An audit includes, examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of the other auditors provide a rea-
sonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements
referred to in the first paragraph present fairly, in all material respects, the financial position of California Water
Service Group and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with account-
ing principles generally accepted in the United States of America. 

Mountain View, California
January 22, 2001

California Water Service Group  43

Corporate Information

Officers

Board of Directors

Stock Transfer, Dividend Disbursing and
Reinvestment Agent
Fleet National Bank
c/o EquiServe L.P.
P.O. Box 43010
Providence, RI 02940-3010
800.736.3001

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
Vice President, Corporate Communications and Marketing

Robert R. Guzzetta 2
Vice President, Engineering and Water Quality

Christine L. McFarlane
Vice President, Human Resources

Raymond H. Taylor
Vice President, Operations

Raymond L. Worrell
Vice President, Chief Information Officer

Calvin L. Breed 1
Controller, Assistant Secretary and Assistant Treasurer

Paul G. Ekstrom 1,2,3
Corporate Secretary

John S. Simpson
Assistant Secretary, Manager of New Business

Washington Water Service Company

Michael P. Ireland
President

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 and 

New Mexico Water Service Company

To Transfer Stock
A  change  of  ownership  of  shares  (such  as  when  stock  is
sold or gifted or when owners are deleted from or added
to stock certificates) requires a transfer of stock. To trans-
fer stock, the owner must complete the assignment on the
back  of  the  certificate  and  sign  it  exactly  as  his  or  her
name appears on the front. This signature must be guar-
anteed  by  an  eligible  guarantor  institution  (banks,  stock
brokers, savings and loan associations and credit unions
with  membership  in  approved  signature  medallion  pro-
grams)  pursuant  to  SEC  Rule  17AD-15.  A  notary’s
acknowledgement  is  not  acceptable.  This  certificate
should  then  be  sent  to  Boston  EquiServe,  Stockholder
Services,  by  registered  or  certified  mail  with  complete
transfer instructions.  

Bond Registrars
US Bank Trust, N.A.
One California Street
San Francisco, CA 
94111-5402
415.273.4580

Chase Manhattan Bank and Trust
101 California Street
San Francisco, CA
94111-5830
415.954.9526

Executive Office
California Water Service Group
1720 North First Street
San Jose, CA  95112-4598
408.367.8200

Annual Meeting
The  Annual  Meeting  of  Stockholders  will  be  held  on
Wednesday, April 18, 2001, at 10 a.m. at the Company’s
Executive  Office,  located  at  1720  North  First  Street  in
San Jose, California. Details of the business to be trans-
acted  during  the  meeting  will  be  contained  in  the  proxy
material, which will be mailed to stockholders on or about
March 16, 2001.

Annual Report for 2000 on Form 10-K
A  copy  of  the  Company’s  report  for  2000  filed  with  the
Securities and Exchange Commission on Form 10-K will
be  available  in  April  2001  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

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Peter C. Nelson *
President and 
Chief Executive Officer

Robert W. Foy *
Chairman of the Board

C.H. Stump ‡*
Former Chairman of the Board
and former CEO of California Water
Service Company

Linda R. Meier †‡
Member, National Advisory Board,
Haas Public Service Center;
Member of the Board of Directors,
Greater Bay Bancorp

Langdon W. Owen†
President, Don Owen & Associates;
Member of the Board of Directors,
Metropolitan Water District of
Southern California

George A. Vera †
Chief Financial Officer,
the David & Lucile Packard
Foundation

Edward D. Harris, Jr., M.D. ‡*
George DeForest Barnett
Professor of Medicine,
Stanford University Medical Center

Richard P. Magnuson †‡
Private Venture Capital Investor

Robert K. Jaedicke †‡*
Professor Emeritus of Accounting
and former Dean, Stanford
Graduate School of Business

† Member of the Audit Committee       
‡ Member of the Compensation Committee 
* Member of the Executive Committee

 
 
 
 
 
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California Water Service Group

1720 North First Street
San Jose, California 95112-4598
408.367.8200
www.calwater.com